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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31, 2005
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or
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TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For transition period
from to
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COMMISSION FILE NUMBER 0-5734
AGILYSYS, INC.
(Exact name of registrant as specified in its
charter)
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OHIO
(State or other jurisdiction of
incorporation or organization)
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34-0907152
(I.R.S. employer identification number)
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6065 Parkland
Boulevard,
Mayfield Heights, Ohio
(Address of principal executive offices)
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44124
(Zip Code)
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Registrant’s telephone number, including
area code: (440) 720-8500
Securities traded pursuant to Section 12(b) of
the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
Common Shares, without par value
Common Share Purchase Rights
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 x No o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be
contained, to the best of Registrant’s knowledge, in the
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K Annual Report
or any amendment to this
Form 10-K. o
Indicate by check mark
whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange
Act). Yes x No o
The aggregate market
value of Common Shares held by non-affiliates as of
September 30, 2004 (the last business day of the
registrant’s most recently completed second fiscal quarter)
was $479,229,575 computed on the basis of the last reported sale
price per share ($17.29) of such shares on the NASDAQ National
Market.
As of June 24, 2005,
the Registrant had the following number of Common Shares
outstanding: 30,418,714
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Registrant’s definitive Proxy Statement to be used in
connection with its Annual Meeting of Shareholders to be held on
July 28, 2005 are incorporated by reference into
Part III of this Form 10-K.
Except as otherwise
stated, the information contained in this Annual Report on
Form 10-K is as of March 31, 2005.
AGILYSYS, INC.
ANNUAL REPORT ON FORM 10-K
Year Ended March 31, 2005
TABLE OF CONTENTS
1
Part I
Item 1. Business.
Reference herein to any particular year or
quarter generally refers to the company’s fiscal year
periods ended March 31. For example, 2005 refers to the fiscal
year ended March 31, 2005.
Overview
Agilysys, Inc. (the “company” or
“Agilysys”) is a leading distributor and premier
reseller of enterprise computer technology solutions. Enterprise
computer technology solutions are an important part of the
information technology (“IT”) of medium to large
corporations and have a significant influence on the performance
and efficiency of those organizations. Agilysys offers
technology solutions to address strategic business needs of
these end-users through the distribution and reselling of
complex servers and storage hardware, software and services.
Agilysys strives to be the preferred strategic
link between its suppliers and customers by providing
differentiated value that is rewarded. The company’s role
is to provide customers with solutions to integrate their
systems, improve the efficiency of their business and solve
information technology challenges. Headquartered in Mayfield
Heights, Ohio, the company has sales offices throughout North
America and maintains strategic investments in the United States
and Europe.
During 2004, the company completed two
acquisitions, enhancing its core enterprise computer solutions
business. Agilysys now provides its customers software
applications and services focused on the retail and hospitality
markets.
History and Significant
Events
Agilysys was organized as an Ohio corporation in
1963. While originally focused on electronic components
distribution, the company grew to become a leading distributor
in both electronic components and enterprise computer systems
products and solutions.
Prior to February 2003, the company was
structured into two divisions, which were classified into two
reportable operating segments, the Computer Systems Division
(“CSD”), which focused on the distribution and
reselling of enterprise computer systems products and solutions,
and the Industrial Electronics Division (“IED”), which
focused on the distribution of electronic components. Each
division represented, on average, approximately one-half of the
company’s total revenues. The company’s third
reportable segment contained corporate costs and the results of
operations of Aprisa, Inc., the company’s majority-owned
software business, which focused on creating software for the
electronic components market. On February 28, 2003, the
company completed the sale of substantially all of the assets
and liabilities of IED for $240 million, of which
$13 million and $227 million were collected in 2004
and 2003, respectively. The company also announced its strategic
transformation to focus solely on its enterprise computer
solutions business and, as a result, became one reportable
business segment. The proceeds from the sale have increased the
company’s financial flexibility and have been used to
reduce debt and fund growth of the company’s enterprise
computer solutions business, both organically and through
acquisition. As a result of the sale, the company’s
financial statements for 2003 have been restated to reflect the
assets and liabilities and the operating results of IED as
discontinued operations.
In September 2003, shareholders of the former
Pioneer-Standard Electronics, Inc. approved an amendment to the
company’s amended Articles of Incorporation to change the
name of the company from Pioneer-Standard Electronics, Inc. to
Agilysys, Inc. Following the approval of the name change, the
company launched a new identity branding campaign, positioning
the Agilysys name with employees, customers, suppliers,
shareholders and industry analysts.
On September 30, 2003, Agilysys completed
the first of two acquisitions in 2004. The company acquired
Kyrus Corporation, an IBM® Master Distributor and Premier
Business Partner in retail sales solutions. The purchase price
was $29.6 million, which was funded by cash. With this
acquisition, Agilysys is the leading provider of IBM retail
solutions and services, across four major market segments:
supermarket, chain drug, general retail and hospitality.
Agilysys now offers a wide range of services and solutions
nationwide, including hardware and software products and
extensive professional services that ensure
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continuous retail operations. Professional
services include technology consulting, software customization,
staging, implementation, hardware and software maintenance and
24/7 support service capabilities. Agilysys also makes these
products and services available to its existing partners and
customers.
On February 18, 2004, Agilysys completed its
second 2004 acquisition. The company acquired substantially all
of the assets of Inter-American Data, Inc. (“IAD”).
The purchase price was $38.0 million, and was funded by
cash. As with the Kyrus acquisition, the addition of IAD opened
up a new market, broadened the company’s customer base, and
increased its services and product offerings. With this
acquisition Agilysys is the leading developer and provider of
technology solutions for property and inventory management in
the casino and destination resort segments of the hospitality
industry in the United States. Most of the major casinos and
many of the largest resorts use Agilysys to design, implement
and support their property management systems (“PMS”)
for the hotel front office, management accounting, customer
service and housekeeping functions.
Lodging Management Systems (“LMS”) by
Agilysys is the hospitality industry’s leading property
management software solution. Designed specifically to meet the
unique needs of the hospitality industry, the comprehensive
solution automates every aspect of hotel operations, allowing
properties to provide a higher level of service more efficiently
and more cost-effectively.
Agilysys supplements its LMS offering with a
Materials Management System (“MMS”) that enables the
tracking and replenishment of food, beverage and other
perishable and non-perishable inventory. In addition to gaming
customers, the market for the MMS products includes restaurant
chains and public arenas.
With the acquisition of IAD, the company also
develops and markets proprietary document management solutions,
DataMagine, with a focus on the hospitality, health care, retail
and government markets. DataMagine enables the capture, storage,
control, manipulation and distribution of scanned and
electronically originated images.
On May 31, 2005, the company acquired The
CTS Corporations (“CTS”), a leading, independent
services organization, specializing in information technology
storage solutions for large and medium-sized corporate customers
and public-sector clients. CTS has annual revenues of
approximately $35 million and, based on the timing of the
close of the transaction, is expected to contribute
approximately $30 million to 2006 revenues. The purchase
price was $27.5 million, which included $2.6 million
in assumed debt, and was funded by cash. In addition, the
company will pay an earn-out to CTS shareholders based on the
acquired business achieving specific financial performance
targets. The addition of CTS enhances the company’s
offering of comprehensive storage solutions.
Industry
The worldwide IT products and services industry
generally consists of (1) manufacturers and suppliers which
sell directly to distributors, resellers and end-users,
(2) distributors, which sell to resellers and,
(3) resellers, which sell directly to end-users.
A variety of reseller categories exist, including
value-added resellers (“VARs”), corporate resellers,
systems integrators, original equipment manufacturers
(“OEMs”), direct marketers and independent dealers.
The large number of resellers makes it cost-efficient for
suppliers to rely on a small number of distributors to serve
this diverse customer base. Similarly, due to the large number
of suppliers and products, resellers often cannot or choose not
to establish direct purchasing relationships. As a result, many
of these resellers are heavily dependent on distribution
partners, such as Agilysys, that possess the necessary systems
infrastructure, capital, inventory availability, and
distribution and integration facilities to provide fulfillment
and other services, such as financing, logistics, marketing and
technical support. These services allow resellers to reduce or
eliminate their inventory and warehouse requirements, and reduce
their staffing needs for marketing and systems integration,
thereby reducing their costs.
Enterprise computer products distribution
continues to perform a vital role in delivering IT products to
market in an efficient, cost-effective manner. Manufacturers are
pursuing strategies to outsource functions such as logistics,
order management and technical support to supply chain partners
as they look to minimize costs and investments in pre- and
post-sales support and focus on their core competencies.
Distribution plays an important role in this
outsource strategy by allowing the manufacturers to decrease
variable costs as the distributors deliver a streamlined
approach to an extended customer base through their technically
skilled sales organization. The company also believes that
suppliers will continue to embrace the
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distribution channel for enterprise computer
solutions in order to maintain sales, marketing and technical
expertise in key markets such as the mid-market sector through
distribution and the extended reseller network. The economies of
scale and reach of large industry-leading enterprise computer
solutions providers are expected to continue to be significant
competitive advantages in this marketplace.
Fiscal 2005 results were favorably impacted by
aggressive marketing by Agilysys of hardware, software and
services, combined with improving U.S. capital spending in
information technology. According to information published in
March 2005 by IDC, a leading provider of technology intelligence
and market data, U.S. IT spending is projected to grow at
approximately 5 to 6 percent in 2006. Since Agilysys
is well entrenched in the server, storage and software markets,
the company expects to benefit from the projected growth in the
overall industry. However, a slowdown in this market could have
a negative effect on the company’s revenues and results of
operations.
Products and Services Distributed and
Sources of Supply
Agilysys focuses on the distribution and
reselling of three specific product areas — server and
storage hardware, software and services. The company offers
mid-range enterprise servers, comprehensive storage solutions
including hardware and software, and database, Internet and
systems management software. These products are packaged
together as new systems or to enhance existing systems,
depending on the customer’s needs. The company also resells
supplier-provided services and sells its own proprietary
services.
Through its acquisition of Kyrus, Agilysys offers
specific retail hardware and software products and extensive
professional services that ensure continuous retail operations.
The professional services include technology consulting,
software customization, staging, implementation, hardware and
software maintenance and 24/7 support service capabilities.
Through its acquisition of IAD, Agilysys offers technology
solutions consisting of hardware, software and services for
property and inventory management within the hospitality
industry. The offerings include Agilysys proprietary MMS and LMS
software applications. Also, as a result of this acquisition,
the company offers proprietary document management software
solutions.
The company sells products supplied by five
primary suppliers. During 2005, 2004 and 2003, products
purchased from the company’s two largest suppliers
accounted for 88%, 88% and 83%, respectively, of the
company’s sales volume. The company’s largest
supplier, IBM, supplied 72%, 72% and 63% of the company’s
sales volumes in 2005, 2004 and 2003, respectively. Sales of HP
products accounted for 16%, 16% and 20% in 2005, 2004 and 2003,
respectively.
The loss of either of the top two suppliers or a
combination of certain other suppliers could have a material
adverse effect on the company’s business, results of
operations and financial condition unless alternative products
manufactured by others are available to the company. In
addition, although the company believes that its relationships
with suppliers are good, there can be no assurance that the
company’s suppliers will continue to supply products on
terms acceptable to the company. Through distributor agreements
with its suppliers, Agilysys is authorized to sell all or some
of the suppliers’ products. The authorization with each
supplier is subject to specific terms and conditions regarding
such items as product return privileges, price protection
policies, purchase discounts and supplier incentive programs
such as sales volume incentives and cooperative advertising
reimbursements. A substantial portion of the company’s
profitability results from these supplier incentive programs.
These incentive programs are at the discretion of the supplier.
From time to time, suppliers may terminate the right of the
company to sell some or all of their products or change these
terms and conditions or reduce or discontinue the incentives or
programs offered. Any such termination or implementation of such
changes could have a material negative impact on the
company’s results of operations.
Inventory
The company maintains certain levels of inventory
in order to ensure that the lead times to its customers remain
competitive. The majority of the products sold by Agilysys are
purchased pursuant to distributor agreements, which generally
provide for inventory return privileges by the company upon
cancellation of a distributor agreement. The distributor
agreements also typically provide protection to the company for
product obsolescence and price erosion. Along with the
company’s inventory management policies and practices,
these provisions reduce the company’s risk of loss due to
slow-moving inventory, supplier price reductions, product
updates or obsolescence.
4
In some cases, the industry practices discussed
above are not embodied in agreements and do not protect the
company in all cases from declines in inventory value. However,
the company believes that these practices provide a significant
level of protection from such declines, although no assurance
can be given that such practices will continue or that they will
adequately protect Agilysys against declines in inventory value.
In addition, the company’s results of operations depend in
part on successful management of the challenges of rapidly
changing technology.
Customers
Agilysys serves customers in most major and
secondary markets of North America. The company’s customer
base includes VARs, which often are privately held with annual
sales that range from approximately $10 million to
$400 million, and corporate end-users, which range from
medium to large corporations, as well as the public sector. A
substantial amount of the company’s business, whether
through resellers or direct to end-users, is in the mid-market
customer segment, which is currently the fastest-growing segment
in the industry. No single customer accounted for more than
10 percent of Agilysys total sales during 2005, 2004, or
2003.
Uneven Sales Patterns and
Seasonality
The company experiences a disproportionately
large percentage of quarterly sales in the last month of its
fiscal quarters. In addition, the company experiences a seasonal
increase in sales during its fiscal third quarter ending in
December. Third quarter sales were 32%, 33% and 32% of annual
revenues for 2005, 2004, and 2003, respectively. Agilysys
believes that this sales pattern is industry-wide. Although the
company is unable to predict whether this uneven sales pattern
will continue over the long term, the company anticipates that
this trend will remain the same in the foreseeable future.
Backlog
The company historically has not had a
significant backlog of orders. There was no significant backlog
at March 31, 2005.
Competition
The distribution and reselling of enterprise
computer technology solutions is competitive, primarily with
respect to price, but also with respect to service levels. The
company faces competition with respect to developing and
maintaining relationships with customers. Agilysys competes for
customers with other distributors and resellers and occasionally
with some of its suppliers. Several of the company’s
largest distribution competitors are significantly larger;
whereas, the company’s reseller competitors are typically
smaller. Also, it is possible that certain suppliers may decide
to distribute products directly, which would further heighten
competitive pressures.
Growth through Acquisitions
With the divestiture of IED and cash generated
through operations, Agilysys has the flexibility to make
acquisitions without immediately increasing leverage or diluting
the holdings of existing shareholders. The company reviews
acquisition prospects that could accelerate the growth of the
business by expanding the company’s customer base,
extending the company’s reach into new markets and/or
broadening the range of solutions offered by the company. The
company’s continued growth depends in part on its ability
to find suitable acquisition candidates and to consummate and
integrate acquisitions. To proceed, the prospect must have an
appropriate valuation based on financial performance relative to
acquisition price. However, acquisitions always present risks
and uncertainties that could have a material adverse impact on
the company’s business and results of operations.
Employees
As of March 31, 2005, Agilysys had 1,386
employees. The company is not a party to any collective
bargaining agreements, has had no strikes or work stoppages and
considers its employee relations to be excellent.
5
Markets
Agilysys sells its products principally in the
United States and Canada. Sales to customers outside of the
United States and Canada are not a significant portion of the
company’s sales.
Access to Information
Agilysys makes its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to these reports
available free of charge through its Internet site
(http://www.agilysys.com) as soon as reasonably practicable
after such material is electronically filed with, or furnished
to, the Securities and Exchange Commission (“SEC”).
The information posted on the company’s Internet site is
not incorporated into this Annual Report on Form 10-K. In
addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC.
Item 2. Properties.
The company’s principal corporate offices
are located in a 60,450 square foot facility in Mayfield
Heights, Ohio. As of March 31, 2005, the company owned or
leased a total of approximately 803,000 square feet of space for
its continuing operations, of which approximately 703,000 square
feet is devoted to product distribution and sales offices. The
company’s major leases contain renewal options for periods
of up to 10 years. For information concerning the
company’s rental obligations, see the discussion of
contractual obligations under Item 7 as well as note 7
to the consolidated financial statements contained in
Part IV hereof. The company believes that its distribution
and office facilities are well maintained, are suitable and
provide adequate space for the operations of the company.
The company’s facilities of 100,000 square
feet or larger, as of March 31, 2005, are set forth in the
table below.
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Type of | |
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Leased or | |
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facility | |
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square footage | |
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owned | |
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Solon, Ohio
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Distribution |
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224,600 |
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Leased |
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Solon, Ohio
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Office facility |
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102,500 |
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Owned |
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Item 3. Legal
Proceedings.
The company is not a party to any material
pending legal proceedings other than ordinary routine litigation
incidental to its business.
Item 4. Submission
of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the
company’s security holders during the last quarter of the
fiscal year ended March 31, 2005.
Item 4A. Executive
Officers of the Registrant.
The information provided below is furnished
pursuant to Instruction 3 to Item 401(b) of
Regulation S-K. The following table sets forth the name,
age, current position and principal occupation and employment
during the past five years through June 3, 2005 of the
company’s executive officers.
There is no relationship by blood, marriage or
adoption among the listed officers. Mr. Rhein holds office
until terminated as set forth in his employment agreement. All
other executive officers serve until his or her successor is
elected and qualified.
6
Executive Officers of the Registrant
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Current Position |
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Other Positions |
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Arthur Rhein
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Chairman of the Board,
President and Chief Executive Officer of the company since
April 30, 2003.
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President and Chief
Executive Officer of the company from April 2002 to April 2003.
Prior to 2001 to March 31, 2002, President and Chief
Operating Officer.
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Robert J. Bailey
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Executive Vice President
since May 2002.
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Prior to 2001 to May 2002,
Senior Vice President, Marketing of the company’s Computer
Systems Division.
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Peter J. Coleman
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Executive Vice President
since May 2002.
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Prior to 2001 to May 2002,
Senior Vice President, Sales of the company’s Computer
Systems Division.
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Martin F. Ellis
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Executive Vice President,
Treasurer and Chief Financial Officer since June 3, 2005
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Executive Vice President,
Corporate Development and Investor Relations from July 2003 to
June 3, 2005. Prior to July 2003, Senior Vice President,
Principal, and Head of Corporate Finance for Stern
Stewart & Co.
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Edward J. Gaio
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Vice President and
Controller of the company since April 2001.
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Prior to 2001 to April
2001, Controller.
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Richard A. Sayers II
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Executive Vice President,
Chief Human Resources Officer since May 2002.
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Prior to 2001 to May 2002,
Senior Vice President, Corporate Services.
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Kathryn K. Vanderwist
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Vice President, General
Counsel and Assistant Secretary since April 2001.
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Prior to 2001 to April
2001, General Counsel and Assistant Secretary.
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Lawrence N. Schultz
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Secretary of the company
since 1999.
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Prior to 2001 to present,
Partner of the law firm of Calfee, Halter & Griswold
LLP. (1)
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The law firm of Calfee, Halter &
Griswold LLP serves as counsel to the company.
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7
Part II
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| Item 5. |
Market for Registrant’s Common Equity,
Related Shareholder Matters and Issuer Purchases of Equity
Securities. |
The company’s common shares, without par
value, are traded on the NASDAQ National Market. Common share
prices are quoted daily under the symbol “AGYS.” Prior
to September 16, 2003, the company traded under the symbol
“PIOS.” The high and low market prices and dividends
per share for the common shares for each quarter during the past
two years are presented in the table below.
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Year ended March 31, 2005 |
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Second | |
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Third | |
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Fourth | |
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quarter | |
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quarter | |
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quarter | |
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Year | |
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Dividends declared per
common share
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$0.03 |
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$0.03 |
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$0.03 |
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$0.03 |
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$0.12 |
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Price range per common
share
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$11.32-$13.87 |
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$10.75-$17.29 |
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$15.72-$17.93 |
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$15.94-$20.05 |
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$10.75-$20.05 |
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Closing price on last day
of period
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$13.79 |
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$17.29 |
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$17.14 |
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$19.66 |
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$19.66 |
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Year ended March 31, 2004 |
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First | |
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Second | |
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Third | |
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Fourth | |
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quarter | |
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quarter | |
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quarter | |
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quarter | |
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Year | |
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Dividends declared per
common share
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$0.03 |
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$0.03 |
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$0.03 |
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$0.03 |
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$0.12 |
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Price range per common
share
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$7.31-$10.41 |
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$8.25-$9.97 |
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$9.16-$11.50 |
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$11.18-$13.81 |
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$7.31-$13.81 |
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Closing price on last day
of period
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$8.45 |
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$8.77 |
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$11.15 |
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$11.79 |
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$11.79 |
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As of June 24, 2005, there were 30,418,714
common shares of Agilysys, Inc. outstanding, and there were
2,432 shareholders of record. The closing price of the common
shares on June 7, 2005, was $16.03.
Cash dividends on common shares are payable
quarterly upon authorization by the Board of Directors. Regular
payment dates are the first day of August, November, February
and May. The company expects to pay comparable cash dividends on
its common shares. The company also made quarterly distributions
on its 6.75% Mandatorily Redeemable Convertible
Trust Preferred Securities (the “Trust Preferred
Securities”) to shareholders of record on the fifteenth day
preceding the distribution date. However, on June 15, 2005,
the company completed the redemption of its Trust Preferred
Securities.
The company maintains a Dividend Reinvestment
Plan whereby cash dividends and additional monthly cash
investments up to a maximum of $5,000 per month may be invested
in the company’s common shares at no commission cost.
In 2005, the company issued 6,831 common shares
upon conversion of 2,152 Trust Preferred Securities. The
common shares were not registered under the Securities Act of
1933 (the “Securities Act”) in reliance on an
exemption from registration afforded by Section 3(a)(9) of
the Securities Act.
On April 27, 1999, the company adopted a
Shareholder Rights Plan. For further information about the
Shareholder Rights Plan, see note 14 to the consolidated
financial statements contained in Part IV hereof.
8
Item 6. Selected
Financial Data.
The following selected consolidated financial and
operating data has been derived from the audited consolidated
financial statements of the company and should be read in
conjunction with the company’s consolidated financial
statements and notes thereto, and Item 7 —
Management’s Discussion and Analysis of Financial Condition
and Results of Operations, which are included in this Annual
Report on Form 10-K.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31 |
| (In thousands, except per share data and number of employees) |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
| |
|
Operating
results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing
operations (a)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net sales
|
|
$ |
1,622,925 |
|
|
$ |
1,403,216 |
|
|
$ |
1,171,631 |
|
|
$ |
1,294,322 |
|
|
$ |
1,431,838 |
|
| |
|
Income (loss) before
income taxes (c)(d)(e)
|
|
$ |
41,240 |
|
|
$ |
26,708 |
|
|
$ |
(31,484 |
) |
|
$ |
4,944 |
|
|
$ |
(15,724 |
) |
| |
|
Provision for income taxes
|
|
$ |
15,725 |
|
|
$ |
9,684 |
|
|
$ |
(11,739 |
) |
|
$ |
1,618 |
|
|
$ |
(3,713 |
) |
| |
|
Income (loss) from
continuing operations
|
|
$ |
20,362 |
|
|
$ |
11,524 |
|
|
$ |
(26,060 |
) |
|
$ |
(2,911 |
) |
|
$ |
(18,316 |
) |
| |
|
(Loss) income from
discontinued operations, net of taxes
|
|
$ |
(877 |
) |
|
$ |
(2,861 |
) |
|
$ |
18,777 |
|
|
$ |
(4,136 |
) |
|
$ |
52,892 |
|
| |
|
Cumulative effect of
change in accounting principle, net of taxes (f)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(34,795 |
) |
|
$ |
— |
|
|
$ |
— |
|
| |
|
Net income
(loss) (a)(b)(c)(d)(e)(f)
|
|
$ |
19,485 |
|
|
$ |
8,663 |
|
|
$ |
(42,078 |
) |
|
$ |
(7,047 |
) |
|
$ |
34,576 |
|
|
Per share
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from
continuing operations (a)(b)(c)(d)(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
0.72 |
|
|
$ |
0.42 |
|
|
$ |
(0.96 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.68 |
) |
| |
|
Diluted
|
|
$ |
0.69 |
|
|
$ |
0.41 |
|
|
$ |
(0.96 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.68 |
) |
| |
Cash dividends per share
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
| |
Book value per
share (g)
|
|
$ |
11.54 |
|
|
$ |
11.14 |
|
|
$ |
10.88 |
|
|
$ |
12.56 |
|
|
$ |
13.18 |
|
| |
Price range of common
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
High
|
|
$ |
20.05 |
|
|
$ |
13.81 |
|
|
$ |
15.50 |
|
|
$ |
14.94 |
|
|
$ |
16.13 |
|
| |
|
Low
|
|
$ |
10.75 |
|
|
$ |
7.31 |
|
|
$ |
5.40 |
|
|
$ |
7.40 |
|
|
$ |
9.13 |
|
| |
Weighted average shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
|
28,101 |
|
|
|
27,744 |
|
|
|
27,292 |
|
|
|
27,040 |
|
|
|
26,793 |
|
| |
|
Diluted
|
|
|
36,990 |
|
|
|
27,956 |
|
|
|
27,292 |
|
|
|
27,040 |
|
|
|
26,793 |
|
|
Financial
position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets
|
|
$ |
815,158 |
|
|
$ |
759,662 |
|
|
$ |
773,883 |
|
|
$ |
916,937 |
|
|
$ |
1,183,610 |
|
| |
Long-term obligations
|
|
$ |
59,624 |
|
|
$ |
59,503 |
|
|
$ |
130,995 |
|
|
$ |
179,000 |
|
|
$ |
390,999 |
|
| |
Mandatorily Redeemable
Convertible Trust Preferred Securities (h)
|
|
$ |
125,317 |
|
|
$ |
125,425 |
|
|
$ |
143,675 |
|
|
$ |
143,675 |
|
|
$ |
143,750 |
|
| |
Shareholders’ equity
|
|
$ |
332,453 |
|
|
$ |
308,990 |
|
|
$ |
298,550 |
|
|
$ |
340,697 |
|
|
$ |
354,257 |
|
|
Other comparative
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Average total number of
employees (a)
|
|
|
1,386 |
|
|
|
1,365 |
|
|
|
1,126 |
|
|
|
1,253 |
|
|
|
1,314 |
|
| |
Net sales per
employee (a)
|
|
$ |
1,171 |
|
|
$ |
1,028 |
|
|
$ |
1,041 |
|
|
$ |
1,033 |
|
|
$ |
1,090 |
|
| |
Gross margin percent of
net sales (a)
|
|
|
12.8% |
|
|
|
12.9% |
|
|
|
12.7% |
|
|
|
13.2% |
|
|
|
12.4% |
|
| |
Operating expense percent
of net sales (a)(b)(c)
|
|
|
10.2% |
|
|
|
10.3% |
|
|
|
13.4% |
|
|
|
12.0% |
|
|
|
12.4% |
|
| |
Net income
(loss) percent of net sales (a)(b)(c)(d)(e)(f)
|
|
|
1.2% |
|
|
|
0.6% |
|
|
|
-3.6% |
|
|
|
-0.5% |
|
|
|
2.4% |
|
|
|
|
|
|
(a)
|
|
The sale of the company’s Industrial
Electronics Division (“IED”) and the related
discontinuation of the operations of Aprisa, Inc. in February
2003 represent a disposal of a “component of an
entity” as defined in FASB Statement 144, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. Accordingly, 2001 and 2002 have been
restated to reflect the results of operations of IED and Aprisa,
Inc. as discontinued operations, and to exclude employees that
were related to these businesses. (See note 3 to the
consolidated financial statements contained in Part IV
hereof.)
|
|
(b)
|
|
In 2004, the company included the results of
operations of both Kyrus Corporation and Inter-American Data,
Inc. from their respective dates of acquisition.
|
|
(c)
|
|
In 2005, the company recorded restructuring
charges of $0.5 million ($0.3 million, after taxes)
primarily for ongoing accretion of lease expense for facilities
closed in earlier years. In 2004, the company recorded
restructuring charges of $2.5 million ($1.6 million,
after taxes) for facility closures, change in company name, and
other costs associated with the 2003 reorganization. In March
2003, the company recorded restructuring charges of
$20.7 million ($13.0 million, after taxes) for the
impairment of facilities and other assets and for severance
costs incurred in connection with downsizing the company’s
corporate structure. In 2001, the company recognized a non-cash
write-down of $14.2 million ($10.8 million, after
taxes) for the abandonment of certain information technology
system assets.
|
|
(d)
|
|
In March 2003, the company recognized an
impairment charge of $14.6 million ($9.2 million,
after taxes) on an available-for-sale investment.
|
|
(e)
|
|
In 2004 and 2003, the company repurchased certain
of its Senior Notes, which resulted in a pre-tax charge of
$8.5 million ($5.4 million, after taxes) and
$1.2 million ($0.7 million, after taxes),
respectively, associated with the premium paid and the write-off
of related financing costs.
|
|
(f)
|
|
On April 1, 2002, the company adopted FASB
Statement 142, Goodwill and Other Intangible Assets,
which requires that amortization of goodwill be replaced with an
annual test for goodwill impairment (more often if indicators of
impairment exist). The adoption of Statement 142 resulted
in a charge of $34.8 million, net of taxes, which was
recorded as a cumulative effect of a change in accounting
principle. (See note 5 to the consolidated financial
statements contained in Part IV hereof.)
|
|
(g)
|
|
Book value per share is determined by dividing
shareholders’ equity by shares outstanding less
subscribed-for shares and unvested restricted shares.
|
|
(h)
|
|
On June 15, 2005, the company completed the
redemption of its Mandatorily Redeemable Convertible Trust
Preferred Securities (“Securities”). Securities with a
carrying value of $105.4 million were redeemed for cash at
a total cost of $109.0 million. In addition, 398,324
Securities with a carrying value of $19.9 million were
converted into common shares of the company.
|
9
|
|
| Item 7. |
Management’s Discussion and Analysis of
Financial Condition and Results of Operations. |
The following discussion should be read in
conjunction with the consolidated financial statements and
related notes that appear elsewhere in this document.
Overview
Agilysys, Inc. (the “company”) is one
of the foremost distributors and premier resellers of enterprise
computer technology solutions. The company sells complex
servers, software, storage and services to resellers and
corporate customers across a diverse set of industries. The
company also provides customer-centric software applications and
services focused on the retail and hospitality markets. As an
integrator of server, storage, software and services needs, the
company is able to partner with its customers to become a single
solutions provider for enterprise computing requirements.
Net sales grew by 15.7% in 2005. Information
technology spending continued to improve during the year,
despite a softening in demand in the fourth quarter.
Additionally, the successful integration of the 2004 business
acquisitions into the company’s enterprise computer
technology solutions offerings resulted in the two acquisitions
contributing 36.3% of the overall increase in year-over-year
sales.
Net income increased to $19.5 million in
2005, compared with net income of $8.7 million last year.
In addition to the impact of the sales increases noted above,
several other factors contributed to the improvement in net
income. Operating expenses decreased as a percentage of sales
from 10.3% in 2004 to 10.2% in 2005. Lower interest expense and
the absence of a loss on the retirement of debt in 2005 also
contributed to the improved results, offset by a reduction in
other income during the current year. Additionally, the
company’s loss from discontinued operations decreased by
approximately $2.0 million in 2005, as activities
associated with the company’s discontinued operations
continues to lessen.
During 2005, the company’s operating
activities generated cash of $91.9 million. The positive
operating cash flow experienced during the year has improved the
company’s financial flexibility. As discussed in more
detail below, subsequent to March 31, 2005, the company
announced the acquisition of The CTS Corporations and the
redemption of its Mandatorily Redeemable Convertible Trust
Preferred Securities, both actions funded by existing cash.
These actions are part of the company’s strategy to enhance
its competitive position and increase shareholder value.
The following discussion of the company’s
results of operations and financial condition is intended to
provide information that will assist in understanding the
company’s financial statements, including key changes in
financial statement components and the primary factors that
accounted for those changes.
Results of Operations
2005 Compared with
2004
Net Sales and Operating
Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31 |
|
Increase (decrease) |
| (Dollars in thousands) |
|
2005 |
|
2004 |
|
$ |
|
% |
|
|
|
Net sales
|
|
$ |
1,622,925 |
|
|
$ |
1,403,216 |
|
|
$ |
219,709 |
|
|
|
15.7 % |
|
|
Cost of goods sold
|
|
|
1,415,477 |
|
|
|
1,222,314 |
|
|
|
193,163 |
|
|
|
15.8 % |
|
|
| |
Gross margin
|
|
|
207,448 |
|
|
|
180,902 |
|
|
|
26,546 |
|
|
|
14.7 % |
|
| |
Gross margin percentage
|
|
|
12.8 |
% |
|
|
12.9 |
% |
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling, general, and
administrative expenses
|
|
|
164,470 |
|
|
|
142,436 |
|
|
|
22,034 |
|
|
|
15.5 % |
|
| |
Restructuring charges
|
|
|
515 |
|
|
|
2,516 |
|
|
|
(2,001 |
) |
|
|
(79.5)% |
|
|
| |
|
Operating income
|
|
$ |
42,463 |
|
|
$ |
35,950 |
|
|
$ |
6,513 |
|
|
|
18.1 % |
|
| |
|
Operating income percentage
|
|
|
2.6 |
% |
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
10
Net sales. Of the
$219.7 million increase in net sales, $79.7 million is
attributable to incremental solutions offerings from the two
business acquisitions made during 2004. IAD was acquired on
February 17, 2004; thus, it marginally impacted prior year
results. In addition, Kyrus only contributed six months of sales
activity in 2004 as the business was acquired on
September 30, 2003. The remaining $140.0 million
increase can be attributed to higher sales volume through the
company’s distribution business. As discussed below, the
sale of server and storage hardware to the company’s
reseller partners during 2005 reflected the strong demand for
information technology by end-user customers. Demand for the
products we provide softened, however, towards the end of 2005
resulting in a 4.0% decrease in hardware sales for the quarter
ended March 31, 2005 compared with the comparable period
last year.
The increase in full year net sales was
attributed to the following changes in net sales by product
category compared with the same period last year: hardware sales
increased $187.1 million, software sales increased
$9.7 million, and services revenue increased
$22.9 million.
Despite a slight decrease in hardware sales
during the fourth quarter of 2005, annual hardware sales were
favorably impacted by higher server and storage sales primarily
through the company’s distribution business. The increase
in software sales was mainly the result of proprietary software
revenue generated from IAD, which was acquired during the fourth
quarter of 2004. Thus, 2005 was favorably impacted by a full
year of IAD revenue. The increase in services revenue can be
attributed to incremental solutions offerings from the
company’s two acquisitions made last year.
Gross Margin. The
$26.5 million increase in gross margin is mainly attributed
to incremental sales generated from the two 2004 business
acquisitions, which increased gross margin by $24.7 million
in 2005. The increase in sales volume in the company’s
business, excluding the two 2004 business acquisitions, resulted
in higher gross margin dollars as well; however, these gains
were negatively impacted by a reduction in gross margin
percentage year-over-year. The lower levels of gross margin
percentage were mainly due to a decrease in gross margin
realized on the sale of hardware products, fundamentally the
sale of IBM Intel-architecture products.
A significant component of gross margin is the
realization and timing of incentive payments from the
company’s suppliers. Incentive programs are principally
designed to reward sales performance. The decrease in fourth
quarter sales in 2005 compared with 2004 resulted in lower
incentive payments recognized in the fourth quarter of 2005
versus 2004, which negatively impacted gross margin in the
current year.
Operating Expenses.
The company experienced a
$20.0 million increase in operating expenses compared with
last year. Operating expenses includes selling, general and
administrative (“SG&A”) expenses and restructuring
charges. The increase was primarily caused by higher
compensation and benefits costs, which increased
$15.4 million, mainly resulting from the two 2004 business
acquisitions having a full-year impact in 2005. The higher
compensation and benefits also reflect a $3.0 million
increase in the company’s Supplemental Executive Retirement
Plan expense during 2005 as well as a $1.5 million expense
to accrue for a long-term incentive plan. Additionally, the
company incurred $2.8 million in amortization of intangible
assets during 2005 compared with zero in 2004. The intangible
assets were recognized in 2005 as the purchase accounting
adjustments were finalized for the two business acquisitions
made in 2004. Further, professional fees were $2.6 million
higher in the current year as a result of acquisition
exploration activities and Sarbanes-Oxley Section 404
professional services. Other activity in operating costs
resulted in an overall decrease of $0.8 million during the
year compared with last year.
Other (Income) Expenses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Favorable |
|
|
March 31 |
|
(Unfavorable) |
| (Dollars in thousands) |
|
2005 |
|
2004 |
|
$ |
|
% |
|
|
|
Other (income) expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other income, net
|
|
$ |
(1,984 |
) |
|
$ |
(6,687 |
) |
|
$ |
(4,703 |
) |
|
|
(70.3)% |
|
| |
Interest income
|
|
|
(3,310 |
) |
|
|
(2,250 |
) |
|
|
1,060 |
|
|
|
47.1% |
|
| |
Interest expense
|
|
|
6,517 |
|
|
|
10,318 |
|
|
|
3,801 |
|
|
|
36.8% |
|
| |
Loss on retirement of
debt, net
|
|
|
— |
|
|
|
7,861 |
|
|
|
7,861 |
|
|
|
100.0% |
|
|
| |
|
Total other (income)
expenses
|
|
$ |
1,223 |
|
|
$ |
9,242 |
|
|
$ |
8,019 |
|
|
|
86.8% |
|
|
11
The 70.3% decrease in other income, net is
explained by a favorable litigation settlement of
$5.0 million received in 2004.
The 47.1% increase in interest income reflects
higher yields earned on the company’s short term
investments due to a rising interest rate environment
experienced during the year. The 36.8% decrease in interest
expense is attributable to lower average debt levels in 2005
compared to prior year, as the interest rates applicable to the
company’s long-term debt are fixed. The company’s
average long-term debt was $59.6 million in the current
year versus $95.2 million last year.
The loss on retirement of debt, net of
$7.9 million in 2004 relates to the premiums paid, as well
as the write-off of other deferred financing fees associated
with the company’s repurchase of approximately
$71.6 million of its Senior Notes, offset by a gain
relative to the company’s repurchase of approximately
$17.0 million of Convertible Trust Preferred
Securities. No such repurchases occurred during 2005.
Income Taxes
The company recorded an income tax provision from
continuing operations at an effective tax rate of 38.1% in 2005
compared with an income tax provision at an effective rate of
36.3% in 2004. The change in rate from 2005 to 2004 was the net
sum of the increase in the valuation allowance for Canadian
deferred tax assets, the increase in state income tax expense,
the decrease in the valuation allowance for state net operating
loss carryforwards, and the favorable settlement of state income
tax audits in 2004.
In 2005, the company recognized a tax benefit of
$3.5 million for state income tax net operating loss
carryforwards more likely than not to be realized. The benefit
is based on management’s forecasted taxable income for the
3-year period ending March 31, 2008, significantly
discounted to reflect the uncertainty of projecting future
events. These net operating loss carryforwards expire, if
unused, in years 2008 through 2019.
In 2005, the company established a
$2.5 million valuation allowance for the Canadian
subsidiary deferred tax assets, including net operating losses,
because it is more likely than not that the deferred tax assets
will not be realized.
In 2005, the company established a $45,000
valuation allowance for Federal net operating loss carryforwards
of a non-consolidated affiliated subsidiary. The valuation
allowance was established because it is more likely than not
that the net operating loss carryforwards will not be utilized.
2004 Compared with
2003
Net Sales and Operating
Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase | |
|
|
Year ended March 31 |
|
|
|
(decrease) | |
| (Dollars in thousands) |
|
2004 | |
|
2003 | |
|
$ |
|
% | |
|
|
|
Net sales
|
|
$ |
1,403,216 |
|
|
$ |
1,171,631 |
|
|
$ |
231,585 |
|
|
|
19.8% |
|
|
Cost of goods sold
|
|
|
1,222,314 |
|
|
|
1,022,378 |
|
|
|
199,936 |
|
|
|
19.6% |
|
|
| |
Gross margin
|
|
|
180,902 |
|
|
|
149,253 |
|
|
|
31,649 |
|
|
|
21.2% |
|
| |
Gross margin percentage
|
|
|
12.9 |
% |
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling, general, and
administrative expenses
|
|
|
142,436 |
|
|
|
135,991 |
|
|
|
6,445 |
|
|
|
4.7% |
|
| |
Restructuring charges
|
|
|
2,516 |
|
|
|
20,697 |
|
|
|
(18,181 |
) |
|
|
-87.8% |
|
|
| |
|
Operating income (loss)
|
|
$ |
35,950 |
|
|
$ |
(7,435 |
) |
|
$ |
43,385 |
|
|
|
583.5% |
|
| |
|
Operating income percentage
|
|
|
2.6 |
% |
|
|
-0.6 |
% |
|
|
|
|
|
|
|
|
|
Net sales. The 19.8%
increase in net sales from the prior year was primarily
attributable to the volume increase in our core business of
$164.2 million as well as the impact of our two
acquisitions during 2004. Sales volumes were favorably impacted
in 2004 by improved general economic conditions which resulted
in higher levels of capital spending by the company’s
end-user customers. More specifically, the improvement in sales
from our core business was largely due to increased sales of IBM
pSeries and xSeries products to resellers during 2004. The two
acquisitions made in 2004 added $70.7 million of additional
sales.
12
Gross margin. The
21.2% increase in gross margin was primarily attributable to the
increase in core business volume, which also resulted in a
higher rate of vendor incentives compared with the 2003. Higher
sales volumes in the core business resulted in a gross margin
increase of $20.9 million. This increase was partially
offset by a $2.8 million decrease largely due to a change
in sales mix that resulted from an increase in sales volume
through distribution to resellers. In addition, the two
acquisitions made during 2004 contributed $13.8 million to
gross margin, which favorably impacted the overall gross margin
percentage.
Operating expenses.
The 4.7% increase in selling, general
and administrative (“SG&A”) expense was
attributable primarily to the two acquisitions made in 2004,
which added $10.7 million of SG&A expense. SG&A
expense in the company’s core business was
$4.2 million lower compared with 2003, which can be
credited to the $9.5 million cost savings estimate
associated with the restructuring activity in 2003, which was
offset by an increase in variable costs related to a 13.7%
increase in core business sales volume. Overall, the company was
able to reduce SG&A as a percentage of sales from 11.6% to
10.1% by leveraging existing infrastructure while increasing
sales volume year over year.
In 2003, the company recorded a charge of
$20.7 million relating to the sale of the company’s
Industrial Electronics Division. As a result of this sale, the
company restructured its remaining business and facilities to
reduce overhead and eliminate assets that were inconsistent with
the company’s strategic plan and were no longer required.
During 2004, additional restructuring costs of $2.5 million
were incurred as a result of facility closures, the change in
the company’s name, and other costs associated with the
2003 reorganization.
Other (Income) Expenses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Favorable |
|
|
March 31 |
|
(unfavorable) |
| (Dollars in thousands) |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
|
|
Other (income) expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other income, net
|
|
$ |
(6,687 |
) |
|
$ |
(966 |
) |
|
$ |
5,721 |
|
|
|
592.2% |
|
| |
Interest income
|
|
|
(2,250 |
) |
|
|
(1,205 |
) |
|
|
1,045 |
|
|
|
86.7% |
|
| |
Interest expense
|
|
|
10,318 |
|
|
|
10,456 |
|
|
|
138 |
|
|
|
1.3% |
|
| |
Loss on retirement of
debt, net
|
|
|
7,861 |
|
|
|
1,164 |
|
|
|
(6,697 |
) |
|
|
-575.3% |
|
| |
Investment impairment
|
|
|
— |
|
|
|
14,600 |
|
|
|
14,600 |
|
|
|
100.0% |
|
|
| |
|
Total other
(income) expenses
|
|
$ |
9,242 |
|
|
$ |
24,049 |
|
|
$ |
14,807 |
|
|
|
61.6% |
|
|
In 2004, other income, net primarily consisted of
a favorable litigation settlement of $5.0 million during
the fourth quarter; $1.0 million in equity and dividend
income earned from affiliates; and a $0.9 million gain
realized on the sale of the company’s investment in Eurodis
Electron PLC (“Eurodis”). In 2003 other income, net
primarily consisted of $1.7 million of equity and dividend
income earned from the company’s investments in affiliates,
partially offset by foreign currency exchange losses.
Interest income increased by $1.0 million,
mainly due to a higher balance of short term investments in 2004
compared with the previous year.
The investment impairment in 2003 represents a
non-cash charge of $14.6 million to reduce the carrying
value of the company’s investment in Eurodis to market
value as of March 31, 2003. As a result of the
company’s sale of IED and subsequent change in business
focus, Agilysys intent concerning this investment changed. The
investment no longer held strategic value and it was not the
company’s intent to retain the investment for a long period
of time. Therefore, the decline in market value was deemed to be
other than temporary and the company recognized a charge.
The loss on retirement of debt, net of
$7.9 million in 2004 relates to the premiums paid, as well
as the expensing of other deferred financing fees associated
with the company’s repurchase of its Senior Notes, offset
by a gain relative to the company’s repurchase of
Convertible Trust Preferred Securities. The company
repurchased Senior Notes approximating $71.6 million. In
2003, the $1.2 million expense relates to the repurchase of
approximately $19.0 million of Senior Notes.
Income Taxes
The company recorded an income tax provision from
continuing operations at an effective tax rate of 36.3% in 2004
compared with an income tax benefit from continuing operations
at an effective tax rate of 37.3% in
13
2003. The change in rate from 2003 to 2004 was
mainly the result of the settlement of several state income tax
audits in 2004.
Off-Balance Sheet
Arrangements
The company has not entered into any off-balance
sheet arrangements that have or are reasonably likely to have a
current or future effect on the company’s financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or
capital resources.
Contractual Obligations
The following table provides aggregated
information regarding the company’s contractual obligations
as of March 31, 2005. These obligations are discussed in
detail in the preceding paragraphs and notes 7, 8, and 9 to the
consolidated financial statements.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by fiscal year |
|
|
|
|
|
|
|
|
More | |
| (Dollars in thousands) |
|
|
|
Less than | |
|
1 to 3 | |
|
3 to 5 | |
|
than | |
| Contractual obligations |
|
Total | |
|
1 year | |
|
years | |
|
years | |
|
5 years | |
|
|
|
Senior Notes
|
|
$ |
59,388 |
|
|
$ |
— |
|
|
$ |
59,388 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Mandatorily Redeemable
Convertible Trust Preferred Securities(1)
|
|
|
125,317 |
|
|
|
125,317 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Capital leases
|
|
|
528 |
|
|
|
272 |
|
|
|
256 |
|
|
|
— |
|
|
|
— |
|
|
Operating leases(2)
|
|
|
39,895 |
|
|
|
7,301 |
|
|
|
9,695 |
|
|
|
6,991 |
|
|
|
15,908 |
|
|
|
Total contractual
obligations
|
|
$ |
225,128 |
|
|
$ |
132,890 |
|
|
$ |
69,339 |
|
|
$ |
6,991 |
|
|
$ |
15,908 |
|
|
|
|
| (1) |
The Mandatorily Redeemable Convertible Trust
Preferred Securities (“Securities”) had an initial due
date of March 31, 2028. However, on June 15, 2005, the
company completed the redemption of its Securities. Since the
entire security obligation was settled in 2006, the
March 31, 2005 outstanding balance has been classified as
“less than 1 year.”
|
|
|
| (2) |
Lease obligations are presented net of
contractually binding sub-lease arrangements.
|
The company anticipates that cash on hand, funds
from continuing operations, the revolving credit agreement, and
access to capital markets will provide adequate funds to finance
acquisitions, capital spending and working capital needs and to
service its obligations and other commitments arising during the
foreseeable future.
Liquidity and Capital
Resources
Overview
The company’s operating cash requirements
consist primarily of working capital requirements, scheduled
payments of principal and interest on indebtedness outstanding
and capital expenditures. The company believes that cash flow
from operating activities, cash on hand, available borrowings
under its credit facility, and access to capital markets will
provide adequate funds to meet its short and long-term liquidity
requirements.
The company’s total debt consists of Senior
Notes, Convertible Trust Preferred Securities (the
“Securities”), and capital lease obligations. Total
debt at March 31, 2005 and 2004 was $185.2 million.
The consistency in debt between periods reflects modest software
and equipment acquisitions through capital leases made in the
current year, offset by ongoing payment of capital lease
obligations. Total debt was also reduced by the conversion of
approximately $0.1 million of the company’s Securities
to 6,831 common shares of the company during the current year.
The company did not voluntarily repurchase Senior Notes or
Securities during 2005. However, on June 15, 2005, the
company completed the redemption of its Securities. Accordingly,
the company’s total debt will reduce significantly in 2006.
The Senior Notes are due in August 2006. In
addition, there were no borrowings outstanding under the
company’s revolving credit facility at March 31, 2005,
with unused availability of $100 million as of
March 31, 2005. The company was compliant with all
financial covenants contained in its revolving credit facility
at March 31, 2005 and anticipates that it will continue to
comply with such covenants in the foreseeable future.
14
Mandatorily Redeemable Convertible Trust
Preferred Securities
On June 15, 2005, the company completed the
redemption of its 6.75% Mandatorily Redeemable Convertible Trust
Preferred Securities (the “Securities”). The carrying
value of the Securities as of March 31, 2005 was
$125.3 million. Securities with a carrying value of
$105.4 million were redeemed for cash at a total cost of
$109.0 million. The company funded the redemption with
existing cash. In addition, 398,324 Securities with a carrying
value of $19.9 million were converted into common shares of
the company. The Securities were converted at the conversions
rate of 3.1746 to 1,264,505 common shares of the company. As a
result of the redemption, the company will write-off deferred
financing fees of $3.2 million in the first quarter of
fiscal 2006. The financing fees, incurred at the timing of
issuing the Securities, were being amortized over a 30-year
period ending on March 31, 2028.
The Securities were non-voting (except in limited
circumstances) and paid quarterly distributions at an annual
rate of 6.75%. The Securities were convertible into common
shares at the rate of 3.1746 common shares for each Security
(equivalent to a conversion price of $15.75 per common share).
Approximately $0.1 million of the Securities debt was
converted to 6,831 common shares of the company during the
current year.
Senior Notes
The principal amount of Senior Notes outstanding
at March 31, 2005 was $59.4 million. The Senior Notes
pay interest semi-annually on February 1 and August 1
at an annual rate of 9.5%. Interest accrued on the Senior Notes
as of March 31, 2005 was approximately $1.0 million.
The indenture under which the Senior Notes were issued limits
the creation of liens, sale and leaseback transactions,
consolidations, mergers and transfers of all or substantially
all of the company’s assets, and indebtedness of the
company’s restricted subsidiaries. The Senior Notes are
subject to mandatory repurchase by the company at the option of
the holders in the event of a change in control of the company.
Revolving Credit Facility
The company maintains a revolving credit
agreement (“Revolver”), which provides the ability to
borrow up to $100 million, limited to certain borrowing
base calculations, and allows for increases under certain
conditions up to $150 million during the life of the
facility. Advances on the Revolver bear interest at various
levels over LIBOR, and a facility fee is required, both of which
are determined based on the company’s leverage ratio. The
Revolver does not contain a pre-payment penalty. There were no
amounts outstanding under the Revolver at March 31, 2005.
Cash Flow
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
Year ended March 31 |
|
(decrease) |
| (Dollars in Thousands) |
|
2005 |
|
2004 |
|
$ |
|
|
|
Net cash provided by (used
for) continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating activities
|
|
$ |
91,888 |
|
|
$ |
(21,962 |
) |
|
$ |
113,850 |
|
| |
Investing activities
|
|
|
(1,846 |
) |
|
|
(52,118 |
) |
|
|
50,272 |
|
| |
Financing activities
|
|
|
302 |
|
|
|
(100,041 |
) |
|
|
100,343 |
|
|
|
Cash flows provided by
(used for) continuing operations
|
|
|
90,344 |
|
|
|
(174,121 |
) |
|
|
264,465 |
|
|
Net cash provided by
discontinued operations
|
|
|
1,633 |
|
|
|
5,481 |
|
|
|
(3,848 |
) |
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
$ |
91,977 |
|
|
$ |
(168,640 |
) |
|
$ |
260,617 |
|
|
Cash flow provided by (used for) operating
activities. The increase in operating
cash flow can be attributed to higher earnings and working
capital improvements in 2005. Most notably, improvements in
customer repayment patterns and collection efforts resulted in a
decrease in accounts receivable, despite a 15.7% increase in
sales year-over-year. A portion of the improvement in accounts
receivable during 2005 can be attributed to an unusually high
balance at the beginning of the year. The higher beginning
balance was mainly caused by the increase in fourth quarter 2004
sales volume of 42.1% compared with 2003. The company also
recognized a slight decline in customer payment patterns during
2004.
15
Cash flow used for investing activities.
Cash used for investing activities
during 2005 was for capital expenditures primarily related to
information technology infrastructure and facility construction
costs. In the comparable period last year, cash used for
investing activities included the acquisitions of Kyrus
Corporation for approximately $28.7 million (net of cash
acquired) and Inter-American Data, Inc. for approximately
$38.0 million, and capital expenditures of
$1.6 million; offset by proceeds of $12.7 million
received in 2004 from the sale of IED in 2003 as well as
proceeds of $3.3 million from the sale of the
company’s investment in Eurodis Electron PLC
(“Eurodis”). The company recognized a gain of
approximately $1.0 million from the sale of its investment
in Eurodis, which was recorded as an adjustment to reconcile
income from continuing operations to net cash used for operating
activities.
The estimated capital expenditures for 2006 are
expected to be between $2.0 and $4.0 million and primarily
relate to information systems and facility projects. Capital
expenditures are expected to be funded by existing cash.
Cash flow provided by (used for) financing
activities. During 2005, the company
paid dividends of approximately $3.3 million. Cash was also
used for payments under the company’s capital lease
obligations, which were $0.4 million in 2005 and classified
within the “other” category. This activity was offset
primarily by proceeds of $4.0 million received from the
issuance of common stock under the company’s stock-based
compensation plans.
During 2004, cash used for financing activities
was mainly used for the repurchase of Securities for
approximately $17.0 million, the repurchase of Senior Notes
for approximately $79.8 million, and dividend payments of
approximately $3.5 million.
As noted above, on June 15, 2005 the company
completed the redemption of its Securities. Securities with a
carrying value of $105.4 million were redeemed for cash at a
total cost of $109.0 million. In addition, 398,324 Securities
with a carrying value of $19.9 million were converted into
common shares of the company. The carrying value of the
Securities was $125.3 million at March 31, 2005.
Critical Accounting Policies, Estimates
& Assumptions
The company’s discussion and analysis of its
financial condition and results of operations are based upon the
company’s consolidated financial statements, which have
been prepared in accordance with U.S. generally accepted
accounting policies. The preparation of these financial
statements requires the company to make significant estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, the
company evaluates its estimates, including those related to bad
debts, inventories, investments, intangible assets, income
taxes, restructuring and contingencies and litigation. The
company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
The company’s most significant accounting
policies relate to the sale, purchase, distribution and
promotion of its products. The policies discussed below are
considered by management to be critical to an understanding of
the company’s consolidated financial statements because
their application places the most significant demands on
management’s judgment, with financial reporting results
relying on estimation about the effect of matters that are
inherently uncertain. No material adjustments to the
company’s accounting policies were made in 2005. Specific
risks for these critical accounting policies are described in
the following paragraphs.
For all of these policies, management cautions
that future events rarely develop exactly as forecast, and the
best estimates routinely require adjustment.
Revenue recognition.
The company derives revenue from three
primary sources: server and storage hardware, software, and
services. Revenue is recorded in the period in which the goods
or services are rendered and when the following criteria are
met: persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the sales price to the
customer is fixed or determinable, and collectibility is
reasonably assured. The company reduces revenue for discounts,
sales incentives, estimated customer returns and other
allowances. Discounts are offered based on the volume of
products and services purchased. Shipping and handling fees
billed to customers are recognized as revenue and the related
costs are recognized in cost of goods sold.
16
Regarding hardware sales, revenue is generally
recognized when the product is shipped to the customer and when
there are not unfulfilled obligations that affect the
customer’s final acceptance of the arrangement. A portion
of the company’s hardware sales involves shipment directly
from its suppliers to the end-user customers. In such
transactions, the company is responsible for negotiating price
both with the supplier and the customer, payment to the
supplier, establishing payment terms with the customer, product
returns, and bears credit risk if the customer does not pay for
the goods. As the principal with the customer, the company
recognizes revenue and cost of goods sold when it is notified by
the supplier that the product has been shipped. In certain
limited instances, as shipping terms dictate, revenue is
recognized at the point of destination.
Regarding software sales, the company offers
proprietary software as well as remarketed software to its
customers. Generally, software sales do not require significant
production, modification, or customization at the time of
shipment (physically or electronically) to the customer. As
such, revenue from both proprietary and remarketed software
sales is generally recognized when the software has been
shipped. For software delivered electronically, delivery is
considered to have occurred when the customer either takes
possession of the software via downloading or has been provided
with the requisite codes that allow for immediate access to the
software.
Regarding sales of services, the company offers
proprietary and third-party services to its customers.
Proprietary services generally are as follows: consulting,
installation, integration, and maintenance. Revenue relating to
consulting, installation, and integration services is recognized
when the service is performed. Revenue relating to maintenance
services is recognized evenly over the coverage period of the
underlying agreement. In addition to proprietary services, the
company offers third-party service contracts to its customers.
In such instances, the supplier is the primary obligor in the
transaction and the company bears credit risk in the event of
nonpayment by the customer. Since the company is acting as an
agent or broker with respect to such sales transactions, the
company reports revenue at the time of executing the transaction
in the amount of the “commission” (equal to the
selling price less the cost of sale) received rather than
reporting revenue in the full amount of the selling price with
separate reporting of the cost of sale.
Allowance for Doubtful Accounts.
The company maintains allowances for
doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. These
allowances are based on both recent trends of certain customers
estimated to be a greater credit risk as well as historical
trends of the entire customer pool. If the financial condition
of the company’s customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional
allowances may be required. To mitigate this credit risk the
company performs frequent credit evaluations of its customers.
Inventories.
Inventories are stated at the lower of
cost or market, net of related reserves. The cost of inventory
is computed using a weighted-average method. The company’s
inventory is monitored to ensure appropriate valuation.
Adjustments of inventories to lower of cost or market, if
necessary, are based upon contractual provisions governing price
protection, stock rotation (right of return status), and
technological obsolescence, as well as turnover and assumptions
about future demand and market conditions. If assumptions about
future demand change and/or actual market conditions are less
favorable than those projected by management, additional
adjustments to inventory valuations may be required. The company
provides a reserve for obsolescence, which is calculated based
on several factors including an analysis of historical sales of
products, the age of the inventory and return provisions
provided by the distribution agreements. Actual amounts could be
different from those estimated.
Deferred Taxes. The
carrying value of the company’s deferred tax assets is
dependent upon the company’s ability to generate sufficient
future taxable income in certain tax jurisdictions. Should the
company determine that it would not be able to realize all or
part of its deferred tax assets in the future, an adjustment to
the deferred tax assets would be expensed in the period such
determination was made. The company presently records a
valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While the
company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event that the company were to
determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount
(including valuation allowance), an adjustment to the deferred
tax asset would decrease tax expense in the period such
determination was made.
17
Goodwill and Long-Lived Assets.
In assessing the recoverability of the
company’s goodwill and other long-lived assets, significant
assumptions regarding the estimated future cash flows and other
factors to determine the fair value of the respective assets
must be made, as well as the related estimated useful lives. The
fair value of goodwill is estimated using a discounted cash flow
valuation model. If these estimates or their related assumptions
change in the future as a result of changes in strategy or
market conditions, the company may be required to record
impairment charges for these assets in the period such
determination was made. For further information concerning the
company’s calculation of impairment, see notes 1 and 5
in the accompanying consolidated financial statements.
Restructuring and Other Special Charges.
The company has recorded a reserve in
connection with reorganizing its ongoing business subsequent to
its sale of IED in 2003. This reserve principally includes
estimates related to employee separation costs, the
consolidation and impairment of facilities and other assets
deemed inconsistent with continuing operations. Actual amounts
could be different from those estimated. Determination of the
impairment of assets is discussed above in Goodwill and
Long-Lived Assets. Facilities reserves are calculated using
a probability-weighted present value of future minimum lease
payments, offset by an estimate for future sublease income
provided by external brokers. Present value is calculated using
a risk-free Treasury rate with a maturity equivalent to the
lease term.
Valuation of Accounts Payable.
The company’s accounts payable
has been reduced by amounts claimed to vendors for returns,
price protection and other amounts related to incentive
programs. Amounts related to price protection and other
incentive programs are recorded as adjustments to cost of goods
sold or operating expenses, depending on the nature of the
program. There is a time delay between the submission of a claim
by the company and confirmation of agreement by our vendors.
Historically, the company’s estimated claims have
approximated amounts agreed to by vendors.
Supplier Programs.
The company receives funds from
suppliers for price protection, product sales incentives and
marketing and training programs, which are generally recorded,
net of direct costs, as adjustments to cost of goods sold or
operating expenses according to the nature of the program. The
product sales incentives are generally based on a particular
quarter’s sales activity and are primarily formula-based.
Some of these programs may extend over one or more quarterly
reporting periods. The company accrues supplier sales incentives
and other supplier incentives as earned based on sales of
qualifying products or as services are provided in accordance
with the terms of the related program. Actual supplier sales
incentives may vary based on volume or other sales achievement
levels, which could result in an increase or reduction in the
estimated amounts previously accrued, and can, at times, result
in significant earnings fluctuations on a quarterly basis.
Recently Issued Accounting
Standard
In December 2004, the FASB issued
Statement 123 (revised 2004), Share Based Payment,
which is a revision of Statement 123. Statement 123(R)
supersedes APB Opinion No. 25 and amends Statement 95,
Statement of Cash Flows. Generally, the approach in
Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in operating results based on
their fair values. Pro forma disclosure is no longer an
alternative. Statement 123(R) will be effective for the
company at the beginning of the first fiscal year beginning
after June 15, 2005, or the beginning of the company’s
fiscal 2007.
Statement 123(R) permits public companies to
adopt its requirements using one of two methods: (1) a
“modified prospective” method in which compensation
cost is recognized beginning with the effective date
(a) based on the requirements of Statement 123(R) for
all share-based payments granted after the effective date and
(b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of
Statement 123(R) that remain unvested on the effective
date, or (2) a “modified retrospective” method
which includes the requirements of the modified prospective
method described above, but also permits entities to restate
based on the amounts previously recognized under
Statement 123 for purposes of pro forma disclosures either
(a) all prior periods presented or (b) prior interim
periods of the year of adoption. The company has not yet
determined which of the two methods it will use to adopt the
provisions of Statement 123(R).
As permitted by Statement 123, the company
currently accounts for share-based payments to employees using
APB Opinion No. 25’s intrinsic value method and, as
such, recognizes no compensation cost for
18
employee stock options. Accordingly, the adoption
of Statement 123(R)’s fair value method will have an
impact on the company’s operating results. The impact of
adoption of Statement 123(R) cannot be predicted at this
time because it will depend on levels of share-based payments
granted in the future. However, had the company adopted
Statement 123(R) in prior periods, the impact would have
approximated the impact of Statement 123 as described in
the disclosure of pro forma net income and earnings per share in
note 1 to the accompanying consolidated financial
statements. Statement 123(R) also requires the benefits of
tax deductions in excess of recognized compensation cost to be
reported as financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While the company cannot
estimate what those amounts will be in the future (because they
depend on, among other things, when employees exercise stock
options), the amount of operating cash flows recognized in prior
periods for such excess tax deductions have not been significant.
Cancellation of Subscribed-for
Shares
In July 1996, the company entered into a Share
Subscription Agreement and Trust (the “Trust”) with
Wachovia Bank of North Carolina. The Trust had subscribed for
5,000,000 common shares of the company which were to be paid for
over the 15 year term of the Trust. Proceeds from the sale
of the common shares were to be used to fund company obligations
under various employee benefit plans, to pay cash bonuses and
other similar employee related company obligations. The
company’s Board of Directors and its various Committees
carefully reconsidered the role of the Trust in connection with
the company and its compensation and benefit programs and
concluded that the Trust no longer served its intended purpose
for the company and its shareholders. As a result, the Trust was
terminated in December 2004. Upon termination, the remaining
3.6 million common shares subject to the Trust were
dissolved with the related common shares cancelled and retired.
This activity reduced the stated value of common shares by
$1.1 million, capital in excess of stated value by
$41.6 million and unearned employee benefits by
$42.7 million; thus having no net impact on
shareholders’ equity.
Business Combinations
Kyrus Corporation (“Kyrus”).
Kyrus was acquired on
September 30, 2003. Kyrus was an IBM Master Distributor and
Premier Business Partner in retail sales solutions. The
acquisition expands the company’s operations to include a
wide range of services and solutions, including hardware and
software products and extensive professional services to
customers in the retail industry. The purchase price was
$29.6 million, offset by approximately $0.9 million of
cash acquired. In 2005, sales generated from the acquisition
were $116.8 million, or 7.2% of consolidated sales. In
2004, the partial-year sales generated from the acquisition were
$66.1 million, or 4.7% of consolidated sales.
Inter-American Data, Inc. (“IAD”).
IAD was acquired on February 17,
2004. IAD was a leading developer and provider of software and
services to hotel casinos and major resorts in the United
States. The acquisition provides significant opportunities for
growth in the hospitality industry. The purchase price was
$38.0 million. In 2005, sales generated from the
acquisition were $32.8 million, or 2.0% of consolidated
sales. In 2004, the partial-year sales generated from the
acquisition were $3.7 million, or less than 1% of
consolidated sales.
The CTS Corporations (“CTS”).
On May 31, 2005, the company
acquired CTS, a leading, independent services organization,
specializing in information technology storage solutions for
large and medium-sized corporate customers, and public-sector
clients. The acquisition of CTS initiates a relationship with
EMC Corporation and will position the company as a leading
provider of storage services. CTS works closely with corporate
and public sector end-users to help optimize the value and
performance of their IT storage systems, implementing storage
solutions around major storage providers. The purchase price was
$27.5 million, which included $2.6 million in assumed
debt, and was funded by cash. In addition, the company will pay
an earn-out to CTS shareholders based on the acquired business
achieving specific financial performance targets. CTS has annual
revenues of approximately $35.0 million and, based on the
timing of the close of the transaction, contribution to 2006
revenues is expected to be approximately $30.0 million.
19
Discontinued Operations
During 2003, the company announced its strategic
transformation to focus solely on its enterprise computer
systems business. The transformation included the sale of
substantially all of the assets and liabilities of the
company’s Industrial Electronics Division
(“IED”), which distributed semiconductors,
interconnect, passive and electromechanical components, power
supplies and embedded computer products in North America and
Germany. Cash proceeds from the sale were approximately
$240 million. The assets sold consisted primarily of
accounts receivable and inventories and the company’s
shares of common stock in World Peace Industrial Co., Ltd., an
Asian distributor of electronic components. The buyer also
assumed certain liabilities.
In connection with the sale of IED, the company
discontinued the operations of Aprisa, Inc.
(“Aprisa”), which was an internet-based start up
corporation that created customized software for the electronic
components market. The disposition of IED and discontinuance of
Aprisa represented a disposal of a component of an entity. The
company continues to incur certain costs related to IED and
Aprisa, which are reported as loss from discontinued operations.
Restructuring Charges
Discontinued operations.
In connection with the sale of IED in
2003, the company recognized a restructuring charge of
$28.7 million. Of the total charge, $5.9 million
related to severance and other employee benefit costs to be paid
to approximately 525 employees previously employed by IED and
not hired by the acquiring company; $5.0 million related to
facilities costs for approximately 30 vacated locations no
longer required as a result of the sale that were determined as
the present value of qualifying exit costs offset by an estimate
for future sublease income; and $17.4 million related to
the write down of assets to fair value that were abandoned or
classified as “held for sale,” as a result of the
disposition and discontinuance of IED and Aprisa, respectively.
During 2005, the restructuring reserve was primarily reduced by
ongoing payment of facilities obligations and minor adjustments
to remaining facility obligations. As of March 31, 2005,
$1.6 million of the restructuring charge remained, all of
which relates to facilities obligations. Approximately
$0.4 million is expected to be paid during 2006 for
facilities obligations, representing accretion expense and the
absence of sub-lease income that was assumed when the
restructuring charge was initially recorded. Facilities
obligations are anticipated to continue until 2010.
Continuing operations.
In the fourth quarter of 2003,
concurrent with the sale of IED, the company announced the
restructuring of its remaining enterprise computer solutions
business and facilities to reduce overhead and eliminate assets
that were inconsistent with the company’s strategic plan
and were no longer required. In connection with this
reorganization, the company recorded restructuring charges
totaling $20.7 million for the impairment of facilities and
other assets no longer required as well as severance,
incentives, and other employee benefit costs for personnel whose
employment was involuntarily terminated. During 2005, the
restructuring reserve was reduced mainly by ongoing payment of
facility obligations. As of March 31, 2005,
$5.5 million of the restructuring charge remained, all of
which relates to facilities obligations. Approximately
$0.6 million is expected to be paid during 2006 for
facilities obligations, which represents accretion expense and
the absence of sub-lease income that was assumed when the
restructuring charge was initially recorded. Facilities
obligations are anticipated to continue until 2017.
Goodwill
On April 1, 2002, the company adopted FASB
Statement 142, Goodwill and Other Intangible Assets.
Statement 142 addresses the accounting for goodwill and other
intangible assets after an acquisition. Goodwill and other
intangibles that have indefinite lives are no longer amortized,
but are subject to annual impairment tests. All other intangible
assets continue to be amortized over their estimated useful
lives. Effective April 1, 2002, the company discontinued
amortization of its goodwill in accordance with
Statement 142.
Under the required transitional provisions of
Statement 142, the company identified and evaluated its
reporting units for impairment as of April 1, 2002, the
first day of the company’s fiscal year 2003, using a
two-step process. The first step involved identifying the
reporting units with carrying values, including goodwill, in
excess of fair value. The fair value of goodwill was estimated
using a combination of a discounted cash flow valuation model,
incorporating a discount rate commensurate with the risks
involved for each reporting unit, and a market approach of
guideline companies in similar transactions. As a result of
completing the first step
20
of the process, it was determined that there was
an impairment of goodwill at the date of adoption. This was due
primarily to market conditions and relatively low levels of
sales. In the second step of the process, the implied fair value
of the affected reporting unit’s goodwill was compared with
its carrying value in order to determine the amount of
impairment, that is, the amount by which the carrying amount
exceeded the fair value.
As a result of the transitional impairment test,
the company recorded an impairment charge of $36.7 million,
before tax, which was recorded as a cumulative effect of change
in accounting principle in the first quarter of 2003 and is
reflected in the accompanying consolidated statement of
operations for the year ended March 31, 2003. The goodwill
impairment was comprised of $25.7 million for the
Industrial Electronics Division and $11.0 million for the
operations of Aprisa which were sold and discontinued,
respectively, in the fourth quarter of 2003. As reflected in the
accompanying consolidated statement of cash flows for 2003, the
charge resulting from the cumulative effect of change in
accounting principle did not impact cash flow.
The company performed its latest annual
impairment test as of February 1, 2005. The company
concluded that the fair value of its two reporting units
exceeded their carrying value, including goodwill. As such, step
two of the goodwill impairment test was not necessary and no
impairment loss was recognized. As of March 31, 2005, the
company was not aware of any circumstances or events requiring
an interim impairment of goodwill.
Investments
During 2004, the company sold its investment in
Eurodis Electron PLC (“Eurodis”), a publicly traded
European enterprise computer systems distributor. The realized
gain was determined on the basis of specific identification of
securities sold since the company liquidated its entire
securities holding. Sales proceeds and realized gain on the sale
were $3.3 million and $0.9 million, respectively.
Management continually monitored the change in
the value of its investment to determine whether declines in
market value below cost were other-than-temporary. The company
made such a determination based upon criteria that included the
extent to which cost exceeded market value, the duration of the
market decline, and the financial condition of and specific
prospects of the issuer. In addition, the company evaluated its
intent to retain the investment over a period of time which
would be sufficient to allow for any recovery in market value.
In 2003, as a result of the company’s sale of IED and
subsequent change in business focus, the company’s intent
concerning its investment changed. The investment no longer held
strategic value and it was not the company’s intent to
retain the investment for a long period of time. Therefore, the
decline in market value was deemed to be other than temporary,
and in 2003 the company recognized a $14.6 million
impairment charge to reduce the carrying value (cost basis) to
market value.
Risk Control and Effects of Foreign
Currency and Inflation
The company extends credit based on
customers’ financial condition and, generally, collateral
is not required. Credit losses are provided for in the
consolidated financial statements when collections are in doubt.
The company sells internationally and enters into
transactions denominated in foreign currencies. As a result, the
company is subject to the variability that arises from exchange
rate movements. The effects of foreign currency on operating
results did not have a material impact on the company’s
results of operations for the 2005, 2004 or 2003 fiscal years.
The company believes that inflation has had a
nominal effect on its results of operations in fiscal 2005, 2004
and 2003 and does not expect inflation to be a significant
factor in fiscal 2006.
Risks Relating to the Company
The company is highly dependent on its key
suppliers and supplier programs.
The company depends on a small number of key
suppliers. During fiscal 2005, products purchased from IBM and
HP, the company’s two largest suppliers, accounted for 72%
and 16%, respectively, of the company’s sales volume. The
loss of either of these suppliers or a combination of certain
other suppliers could have a material adverse effect on the
company’s business, results of operations and financial
condition. From time to time, a supplier may terminate the
company’s right to sell some or all of a supplier’s
products or change the terms and conditions of the supplier
relationship or reduce or discontinue the incentives or programs
21
offered. Any such termination or implementation
of such changes could have a material negative impact on the
company’s results of operations.
Risks associated with the indirect
distribution of the company’s products and services may
materially adversely affect the company’s financial
results.
In addition to direct sales, the company markets
and sells products and services indirectly through systems
integrators, resellers and original equipment manufacturers. The
company derives a significant percentage of its revenues from
sales through these reseller partners. The company’s
financial results could be materially adversely affected if the
company’s agreements with its reseller partners were
terminated, if the company’s relationships with its
reseller partners were to deteriorate or if the financial
condition of its reseller partners were to weaken. In addition,
as the company’s market opportunities change, the company
may have an increased reliance on its reseller partners, which
may negatively impact the company’s gross margins. There
can be no assurance that the company will be successful in
maintaining or expanding the sales revenue generated by the
indirect distribution of its products and services. If the
company is not successful, the company may lose sales
opportunities, customers and market share. In addition, there
can be no assurance that the company’s reseller partners
will not develop, market or sell products or services in
competition with the company in the future.
The market for the company’s products and
services is affected by rapidly changing technology and
inventory obsolescence and if the company fails to anticipate
and adapt to such changes and protect against inventory
obsolescence, the company’s results of operations may
suffer.
The markets in which the company competes are
characterized by rapid technological change, frequent new
product introductions, evolving industry standards and changing
needs of customers. The company’s future success will
depend on its ability to adapt to changes in technology and
industry standards. In addition, because the company maintains
certain levels of inventory in order to ensure that the lead
times to customers remain competitive, the company is subject to
the risk of inventory obsolescence. If the company fails to
successfully manage the challenges of rapidly changing
technology and inventory obsolescence risks, the company’s
results of operations may suffer.
Market factors could cause a decline in
spending for information technology, adversely affecting our
financial results.
Our revenue and profitability depend on the
overall demand for our products and services. Delays or
reductions in information technology by end users could
materially adversely affect the demand for our products and
services. If the markets for our products and services soften or
continue to soften, our business, results of operations or
financial condition could be materially adversely affected.
The company’s business could be
materially adversely affected as a result of the risks
associated with acquisitions and investments.
As part of the company’s business strategy,
the company seeks acquisition prospects that could accelerate
the growth of its business by expanding its customer base,
extending its reach into new markets and/or broadening the range
of solutions it offers. However, acquisitions always present
risks and uncertainties. These factors could have a material
adverse effect on the company’s business, results of
operations or financial condition.
Management has identified material weaknesses
in the company’s disclosure controls and procedures and its
internal control over financial reporting, which, if not
remedied effectively, could result in a material misstatement of
the company’s reported results.
As discussed elsewhere in this report, management
has concluded that the company’s disclosure controls and
procedures and internal control over financial reporting had
material weaknesses as of March 31, 2005. The company has
taken certain actions to begin to address these material
weaknesses. The company’s inability to remediate these
material weaknesses promptly and effectively could have a
material impact on the reported results of operations and
financial condition, as well as impair its ability to meet its
quarterly and annual reporting requirements in a timely manner.
These effects could in turn adversely affect the trading
22
price of the company’s common shares. Prior
to the remediation of these material weaknesses, there remains
the risk that the transitional controls on which the company
currently relies will not be sufficiently effective, which could
result in a material misstatement of the company’s
financial position or results of operations and require a
restatement.
Forward Looking Information
Portions of this report contain current
management expectations, which may constitute forward-looking
information. When used in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations and
elsewhere throughout this Annual Report on Form 10-K, the
words “believes,” “anticipates,”
“plans,” “expects” and similar expressions
are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934 and the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect management’s current
opinions and are subject to certain risks and uncertainties that
could cause actual results to differ materially from those
stated or implied.
Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the
date hereof. The company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Risks and
uncertainties include, but are not limited to: competition,
dependence on the IT market, softening in the computer network
and platform market, rapidly changing technology and inventory
obsolescence, dependence on key suppliers and supplier programs,
risks and uncertainties involving acquisitions, instability in
world financial markets, downward pressure on gross margins, the
ability to meet financing obligations based on the impact of
previously described factors and uneven patterns of quarterly
sales.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk.
The company has assets, liabilities and cash
flows in foreign currencies, primarily the Canadian dollar,
creating foreign exchange risk. Systems are in place for
continuous measurement and evaluation of foreign exchange
exposures so that timely action can be taken when considered
desirable. Reducing exposure to foreign currency fluctuations is
an integral part of the company’s risk management program.
Financial instruments in the form of forward exchange contracts
are employed, when deemed necessary, as one of the methods to
reduce such risk. There were no foreign currency exchange
contracts held by the company at March 31, 2005 or 2004.
The company is currently exposed to interest rate
risk from the floating-rate pricing mechanisms on its revolving
credit facility; however, at March 31, 2005 or 2004, there
were no borrowings outstanding.
Item 8. Financial
Statements and Supplementary Data.
The information required by this item is set
forth beginning at page 28 of this Annual Report on
Form 10-K.
|
|
| Item 9. |
Change in and Disagreements With Accountants
on Accounting and Financial Disclosures. |
None.
Item 9A. Controls
and Procedures.
(a) Evaluation of disclosure controls and
procedures. The company’s management, with the
participation of the company’s Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the
company’s disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this report.
The company’s disclosure controls and procedures are
designed to provide reasonable assurance that information
required to be disclosed in the company’s Exchange Act
reports is recorded, processed, summarized, and reported within
the time periods specified by the Securities and Exchange
Commission’s rules and forms, and that such information is
accumulated and communicated to management, including the
company’s Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely
23
decisions regarding required disclosure. The
company’s disclosure controls and procedures include
components of the company’s internal control over financial
reporting.
Based upon, and as of the date of, this
evaluation, the company’s Chief Executive Officer and Chief
Financial Officer concluded that the company’s disclosure
controls and procedures were not effective solely because of the
material weaknesses relating to the company’s internal
control over financial reporting as described in
“Management’s Report on Internal Control Over
Financial Reporting” contained elsewhere in this report. In
light of these material weaknesses, the Company performed
additional analysis and post-closing procedures to ensure the
consolidated financial statements were prepared in accordance
with U.S. generally accepted accounting principles. Accordingly,
management believes that the consolidated financial statements
included in this report present fairly in all material respects
the company’s financial condition, results of operations
and cash flows for the period presented.
(b) Internal control over financial
reporting. See, “Management’s Report on Internal
Control Over Financial Reporting” contained elsewhere in
this report.
(c) Changes in internal control over
financial reporting. There has been no change in the
company’s internal control over financial reporting during
the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the company’s
internal control over financial reporting. However, during the
first quarter of fiscal 2006, the company began implementing the
remedial measures described in, “Management’s Report
on Internal Control Over Financial Reporting.”
Item 9B. Other
Information.
None.
24
Part III
Item 10. Directors
and Executive Officers of the Registrant.
Information required by this Item as to the
Directors of the company appearing under the caption
“Election of Directors” in the company’s Proxy
Statement to be used in connection with the company’s 2005
Annual Meeting of Shareholders to be held on July 28, 2005
(the “2005 Proxy Statement”) is incorporated herein by
reference. Information with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 by the
company’s Directors, executive officers, and holders of
more than five percent of the company’s equity securities
will be set forth in the 2005 Proxy Statement under the heading
“Section 16 (a) Beneficial Ownership Reporting
Compliance.” Information required by this Item as to the
executive officers of the company is included as Item 4A in
Part I of this Annual Report on Form 10-K as permitted
by Instruction 3 to Item 401(b) of Regulation S-K.
The company has adopted a code of ethics that
applies to the Chief Executive Officer, Chief Financial Officer,
and Controller known as the “Code of Ethics for Senior
Financial Officers” as well as a code of business conduct
that applies to all employees of the company known as the
“Code of Business Conduct.” Each of these documents is
available on the company’s website at
http://www.agilysys.com.
Item 11. Executive
Compensation.
The information required by this Item is set
forth in the company’s 2005 Proxy Statement under the
heading, “Election of Directors,” under the
sub-heading “Information Regarding Meetings and Committees
of the Board of Directors and Compensation of Directors,”
and under the heading “Compensation of Executive
Officers” under the sub-headings “Summary Compensation
Table,” “Option Grants in Last Fiscal Year,”
“Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values,” “Long-Term Incentive Plans —
Awards in Last Fiscal Year,” “Supplemental Executive
Retirement Plan,” and “Employment Agreements,”
which information is incorporated herein by reference. The
information set forth in the 2005 Proxy Statement under the
subheadings, “Shareholder Return Performance
Presentation,” “Compensation Committee Report on
Executive Compensation,” and “Audit Committee
Report” is not incorporated herein by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial
Owners and Management and Related Shareholder Matters. |
The information required by this Item is set
forth in the company’s 2005 Proxy Statement under the
heading “Share Ownership,” and under the heading
“Compensation of Executive Officers” under the
sub-heading “Equity Compensation Plan Information,”
which information is incorporated herein by reference.
Item 13. Certain
Relationships and Related Transactions.
None.
Item 14. Principal
Accountant Fees and Services.
The information required by this Item is set
forth in the company’s 2005 Proxy Statement under the
heading “Independent Registered Public Accounting
Firm,” which information is incorporated herein by
reference.
25
Part IV
Item 15. Exhibits,
Financial Statement Schedules.
(a)(1) Financial statements. The
following consolidated financial statements are included in this
Annual Report on Form 10-K beginning on page 31:
|
|
| |
Report of Independent Registered Public
Accounting Firm
|
| |
Report of Independent Registered Public
Accounting Firm on Internal Control Over Financial Reporting
|
| |
Consolidated Statements of Operations for the
years ended March 31, 2005, 2004, and 2003
|
| |
Consolidated Balance Sheets as of March 31,
2005 and 2004
|
| |
Consolidated Statements of Cash Flows for the
years ended March 31, 2005, 2004, and 2003
|
| |
Consolidated Statements of Shareholders’
Equity for the years ended March 31, 2005, 2004, and 2003
|
| |
Notes to the Consolidated Financial Statements
|
(a)(2) Financial statement schedule.
The following financial statement schedule is included in this
Annual Report on Form 10-K on page 60:
Schedule II — Valuation and
Qualifying Accounts
All other schedules have been omitted since the
required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements or notes thereto.
(a)(3) Exhibits. See the Index
to Exhibits beginning at page 61 of this Annual Report on
Form 10-K.
26
Signatures
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, Agilysys, Inc.
has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cleveland, State of Ohio, on
June 29, 2005.
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AGILYSYS, INC.
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| |
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/s/ ARTHUR RHEIN
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| |
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Arthur Rhein
|
| |
Chairman, President, Chief Executive |
| |
Officer and Director |
Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities as of June 29, 2005.
| |
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| Signature |
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Title |
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| |
/s/ ARTHUR RHEIN
Arthur Rhein
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Chairman, President, Chief
Executive Officer and Director (Principal Executive Officer)
|
| |
/s/ MARTIN F. ELLIS
Martin F. Ellis
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|
Executive Vice President,
Treasurer and Chief Financial Officer (Principal Financial and
Accounting Officer)
|
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/s/ CHARLES F. CHRIST
Charles F. Christ
|
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Director
|
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/s/ CURTIS J. CRAWFORD
Curtis J. Crawford
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Director
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/s/ THOMAS A. COMMES
Thomas A. Commes
|
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Director
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/s/ HOWARD V. KNICELY
Howard V. Knicely
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Director
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/s/ KEITH M. KOLERUS
Keith M. Kolerus
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Director
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/s/ ROBERT A. LAUER
Robert A. Lauer
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Director
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/s/ ROBERT G. MCCREARY,
III
Robert G. McCreary, III
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Director
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/s/ THOMAS C. SULLIVAN
Thomas C. Sullivan
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Director
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27
AGILYSYS, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Year Ended March 31, 2005
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
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37 |
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38 |
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60 |
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28
Report of Management
The consolidated financial statements of
Agilysys, Inc. and subsidiaries have been prepared by the
company, which is responsible for their integrity and
objectivity. These statements have been prepared in accordance
with U.S. generally accepted accounting principles and
include amounts that are based on informed judgments and
estimates. The company also prepared the other information in
the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
The company’s ethics policy, communicated
throughout the organization, requires adherence to high ethical
standards in the conduct of the company’s business.
The company’s system of internal controls is
designed to provide reasonable assurance that company assets are
safeguarded from loss or unauthorized use or disposition and
that transactions are executed in accordance with
management’s authorization and are properly recorded. In
establishing the basis for reasonable assurance, management
balances the costs of the internal controls with the benefits
they provide. The system contains self-monitoring mechanisms,
and compliance is tested through an extensive program of site
visits and audits by the company’s internal auditors.
The company’s independent registered public
accounting firm, Ernst & Young LLP, audited the consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). These
standards include obtaining an understanding of internal
controls sufficient to plan the audit and to determine the
nature, timing and extent of testing performed.
The Audit Committee of the Board of Directors,
consisting of independent directors, meets regularly with the
company’s management, internal auditors and independent
registered public accounting firm and reviews audit plans and
results, as well as management’s actions taken in
discharging its responsibilities for accounting, financial
reporting, and internal controls. Members of management, the
internal auditors, and the independent auditors have direct and
confidential access to the Audit Committee at all times.
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/s/ ARTHUR RHEIN
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Arthur Rhein
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Chairman, President and Chief
Executive |
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Officer |
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/s/ MARTIN F. ELLIS
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Martin F. Ellis
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Executive Vice President, Treasurer
and |
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Chief Financial Officer |
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29
Management’s Report on Internal Control Over Financial
Reporting
The management of Agilysys Inc. is responsible
for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision of our
Chief Executive Officer and Chief Financial Officer, management
conducted an evaluation of the effectiveness of the
company’s internal control over financial reporting as of
March 31, 2005 based on the framework in Internal
Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, management has concluded that the
company did not maintain effective internal control over
financial reporting as a result of the two material weaknesses
discussed below.
|
|
|
| |
• |
Vendor Debits Process — Inadequate
controls over the preparation and review of the reconciliation
of the subsidiary ledger to the general ledger for vendor debits
combined with inadequate controls over determining the
appropriate reserve for collectibility of vendor debits resulted
in a material weakness in internal control over the vendor
debits process. These control deficiencies resulted in
adjustments impacting the vendor debit and vendor debit reserve
accounts. Vendor debits are transactional discounts on purchases
from major suppliers. The vendor debit process is manually
intensive, involves thousands of individual transactions and the
vendor debit subsidiary ledger does not interface with the
general ledger.
|
| |
| |
|
Management has performed a review of its internal
control processes and procedures surrounding the Vendor Debits
Process. As a result of this review, management is in the
process of remediating the deficiencies described above.
Additional review and approval of the vendor debit
reconciliation and reserve analysis has been added. Furthermore,
management is evaluating all systems and procedures relative to
the vendor debit process with the objective of implementing
automated and preventive controls and other process improvements.
|
| |
| |
• |
Financial Statement Close Process —
Inadequate controls over the Financial Statement Close Process
resulted in several control deficiencies that, when aggregated,
constitute a material weakness in internal control over the
Financial Statement Close Process. The control deficiencies
resulted from inadequate controls over the reconciliation of
vendor rebates, recognition of equity income related to an
unconsolidated entity, recognition of revenue, accrual of
liabilities for employee incentives, valuation of service parts
inventory within the retail hardware services business, amounts
due to vendors within the retail hardware services business,
accrual of liabilities for the long-term incentive compensation
plan and accrual of the obligation for the supplemental
executive retirement plan (“SERP”). These control
deficiencies resulted in adjustments impacting the related
accounts.
|
| |
| |
|
Management has performed a review of the
company’s internal control processes and procedures
surrounding the Financial Statement Close Process. As a result
of this review, the company will be taking the following steps
to remediate the deficiencies:
|
|
|
|
| |
1. |
To address inadequate controls over the
reconciliation of vendor rebates, recognition of equity income
related to an unconsolidated entity, recognition of revenue, and
accrual of liabilities for employee incentives, a more
comprehensive reconciliation and review process will be
implemented to ensure the related controls, as designed, are
operating effectively and the related financial statement
accounts are accurately stated.
|
| |
2. |
To address inadequate controls over the valuation
of service parts inventory and amounts due to vendors within the
retail hardware services business, management has conducted a
comprehensive review of the company’s hardware services
business’s accounting processes and systems and is
currently designing and implementing systems and procedures with
the objective of implementing automated and preventive controls
to mitigate the risk of control deficiencies.
|
| |
3. |
To address the inadequate controls over the
accrual of liabilities for the long-term incentive compensation
plan, management will review on a monthly basis actual operating
performance versus plan requirements and record an additional
accrual as required. For the accrual of the obligation for the
SERP, management will provide to the Finance department written
communication of any changes to the SERP. Such communications
will be reviewed and assessed for the appropriate accounting and
reporting requirements. The company will maintain evidence as to
|
30
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| |
|
the effective operation of the new processes and
controls so that management is able to assess the operating
effectiveness of the company’s controls.
|
Management’s assessment of the effectiveness
of the company’s internal control over financial reporting
as of March 31, 2005 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated
in their report which is included elsewhere herein.
31
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Agilysys, Inc. and Subsidiaries
We have audited the accompanying consolidated
balance sheets of Agilysys, Inc. and subsidiaries as of
March 31, 2005 and 2004, and the related consolidated
statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended March 31,
2005. Our audits also included the financial statement schedule
listed in the Index at Item 15 (a). These financial
statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Agilysys, Inc.
and subsidiaries at March 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended March 31,
2005, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
As discussed in Note 5 to the consolidated
financial statements, in 2003, Agilysys, Inc. and subsidiaries
changed their method of accounting for goodwill.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Agilysys, Inc. and
subsidiaries’ internal control over financial reporting as
of March 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated June 23, 2005 expressed an unqualified opinion
on management’s assessment that it did not maintain
effective internal control over financial reporting as of
March 31, 2005 and an adverse opinion on the effectiveness
of internal control over financial reporting as of
March 31, 2005 because of the effect of inadequate controls
over the Vendor Debits Process and inadequate controls over the
Financial Statement Close Process.
/S/ ERNST & YOUNG LLP
Cleveland, Ohio
June 23, 2005
32
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of
Agilysys, Inc. and Subsidiaries
We have audited management’s assessment,
included in the accompanying Management’s Report on
Internal Control Over Financial Reporting included elsewhere
herein, that Agilysys, Inc. and subsidiaries did not maintain
effective internal control over financial reporting as of
March 31, 2005, because of the material weaknesses
identified in management’s assessment, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Agilysys, Inc. and
subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on management’s assessment and an opinion on the
effectiveness of the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
The following material weaknesses have been identified and
included in management’s assessment:
|
|
|
| |
• |
Vendor Debits Process — Inadequate
controls over the preparation and review of the reconciliation
of the subsidiary ledger to the general ledger for vendor debits
combined with inadequate controls over determining the
appropriate reserve for collectibility of vendor debits resulted
in a material weakness in internal control over the vendor
debits process. These control deficiencies resulted in
adjustments impacting the vendor debit and vendor debit reserve
accounts. Vendor debits are transactional discounts on purchases
from major suppliers. The vendor debit process is manually
intensive, involves thousands of individual transactions and the
vendor debit subsidiary ledger does not interface with the
general ledger.
|
| |
• |
Financial Statement Close Process —
Inadequate controls over the Financial Statement Close Process
resulted in several control deficiencies that, when aggregated,
constitute a material weakness in internal control over the
Financial Statement Close Process. The control deficiencies
resulted from
|
33
|
|
|
| |
|
inadequate controls over the reconciliation of
vendor rebates, recognition of equity income related to an
unconsolidated entity, valuation of service parts inventory
within the retail hardware services business, accrual of
liabilities for employee incentives, amounts due to vendors
within the retail hardware services business, accrual of
liabilities for the long-term incentive compensation plan,
accrual of the obligation for the supplemental executive
retirement plan, and recognition of revenue. These control
deficiencies resulted in adjustments impacting the related
accounts.
|
These material weaknesses were identified by
management subsequent to March 31, 2005. The material
weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2005
financial statements, and this report does not affect our report
dated June 23, 2005 on those financial statements.
In our opinion, management’s assessment that
Agilysys, Inc. and subsidiaries did not maintain effective
internal control over financial reporting as of March 31,
2005, is fairly stated, in all material respects, based on the
COSO control criteria. Also, in our opinion, because of the
effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, Agilysys,
Inc. and subsidiaries has not maintained effective internal
control over financial reporting as of March 31, 2005,
based on the COSO control criteria.
We do not express an opinion or any other form of
assurance on management’s statements referring to the
remediation of the material weaknesses or the implementation of
new controls.
/S/ ERNST & YOUNG LLP
Cleveland, Ohio
June 23, 2005
34
Consolidated Statements of Operations
Agilysys, Inc. and Subsidiaries
| |
|
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|
|
Year ended March 31 |
| (In thousands, except share and per share data) |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
Net sales
|
|
$ |
1,622,925 |
|
|
$ |
1,403,216 |
|
|
$ |
1,171,631 |
|
|
Cost of goods sold
|
|
|
1,415,477 |
|
|
|
1,222,314 |
|
|
|
1,022,378 |
|
|
| |
Gross margin
|
|
|
207,448 |
|
|
|
180,902 |
|
|
|
149,253 |
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling, general, and
administrative expenses
|
|
|
164,470 |
|
|
|
142,436 |
|
|
|
135,991 |
|
| |
Restructuring charges
|
|
|
515 |
|
|
|
2,516 |
|
|
|
20,697 |
|
|
|
Operating income (loss)
|
|
|
42,463 |
|
|
|
35,950 |
|
|
|
(7,435 |
) |
|
Other
(income) expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other income, net
|
|
|
(1,984 |
) |
|
|
(6,687 |
) |
|
|
(966 |
) |
| |
Interest income
|
|
|
(3,310 |
) |
|
|
(2,250 |
) |
|
|
(1,205 |
) |
| |
Interest expense
|
|
|
6,517 |
|
|
|
10,318 |
|
|
|
10,456 |
|
| |
Loss on retirement of
debt, net
|
|
|
— |
|
|
|
7,861 |
|
|
|
1,164 |
|
| |
Investment impairment
|
|
|
— |
|
|
|
— |
|
|
|
14,600 |
|
|
|
Income (loss) before
income taxes
|
|
|
41,240 |
|
|
|
26,708 |
|
|
|
(31,484 |
) |
|
Provision for income taxes
|
|
|
15,725 |
|
|
|
9,684 |
|
|
|
(11,739 |
) |
|
Distributions on
Mandatorily Redeemable Convertible Trust Preferred
Securities, net of taxes
|
|
|
5,153 |
|
|
|
5,500 |
|
|
|
6,315 |
|
|
|
Income (loss) from
continuing operations
|
|
|
20,362 |
|
|
|
11,524 |
|
|
|
(26,060 |
) |
|
(Loss) income from
discontinued operations, net of taxes
|
|
|
(877 |
) |
|
|
(2,861 |
) |
|
|
18,777 |
|
|
|
Income (loss) before
cumulative effect of change in accounting principle
|
|
|
19,485 |
|
|
|
8,663 |
|
|
|
(7,283 |
) |
|
Cumulative effect of
change in accounting principle, net of $1,900 in taxes
|
|
|
— |
|
|
|
— |
|
|
|
(34,795 |
) |
|
|
Net income (loss)
|
|
$ |
19,485 |
|
|
$ |
8,663 |
|
|
$ |
(42,078 |
) |
|
|
Earnings per
share — basic
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from
continuing operations
|
|
$ |
0.72 |
|
|
$ |
0.42 |
|
|
$ |
(0.96 |
) |
| |
(Loss) income from
discontinued operations
|
|
|
(0.03 |
) |
|
|
(0.10 |
) |
|
|
0.69 |
|
|
| |
Income (loss) before
cumulative effect of change in accounting principle
|
|
|
0.69 |
|
|
|
0.32 |
|
|
|
(0.27 |
) |
| |
Cumulative effective of
change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
(1.27 |
) |
|
| |
Net income (loss)
|
|
$ |
0.69 |
|
|
$ |
0.32 |
|
|
$ |
(1.54 |
) |
|
|
Earnings per
share — diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from
continuing operations
|
|
$ |
0.69 |
|
|
$ |
0.41 |
|
|
$ |
(0.96 |
) |
| |
(Loss) income from
discontinued operations
|
|
|
(0.02 |
) |
|
|
(0.10 |
) |
|
|
0.69 |
|
|
| |
Income (loss) before
cumulative effect of change in accounting principle
|
|
|
0.67 |
|
|
|
0.31 |
|
|
|
(0.27 |
) |
| |
Cumulative effective of
change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
(1.27 |
) |
|
| |
Net income (loss)
|
|
$ |
0.67 |
|
|
$ |
0.31 |
|
|
$ |
(1.54 |
) |
|
|
Weighted average shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
28,100,612 |
|
|
|
27,743,769 |
|
|
|
27,291,683 |
|
| |
Diluted
|
|
|
36,989,981 |
|
|
|
27,955,865 |
|
|
|
27,291,683 |
|
See accompanying notes to the consolidated
financial statements.
35
Consolidated Balance Sheets
Agilysys, Inc. and Subsidiaries
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
| (In thousands, except share and per share data) |
|
2005 | |
|
2004 | |
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
241,880 |
|
|
$ |
149,903 |
|
| |
Accounts receivable, net
of allowance of $5,867 in 2005 and $3,829 in 2004
|
|
|
263,986 |
|
|
|
295,272 |
|
| |
Inventories, net of
allowance of $4,686 in 2005 and $8,425 in 2004
|
|
|
47,305 |
|
|
|
52,236 |
|
| |
Deferred income taxes
|
|
|
9,379 |
|
|
|
9,255 |
|
| |
Prepaid expenses
|
|
|
1,991 |
|
|
|
2,234 |
|
| |
Assets of discontinued
operations
|
|
|
702 |
|
|
|
5,451 |
|
|
| |
|
Total current assets
|
|
|
565,243 |
|
|
|
514,351 |
|
|
Goodwill
|
|
|
173,774 |
|
|
|
179,975 |
|
|
Intangible assets, net of
amortization of $2,864 in 2005
|
|
|
5,796 |
|
|
|
— |
|
|
Investments
|
|
|
19,785 |
|
|
|
18,819 |
|
|
Other assets
|
|
|
20,241 |
|
|
|
11,396 |
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
| |
Land
|
|
|
480 |
|
|
|
480 |
|
| |
Buildings and building
improvements
|
|
|
12,742 |
|
|
|
12,502 |
|
| |
Furniture and equipment
|
|
|
58,016 |
|
|
|
56,486 |
|
| |
Software
|
|
|
32,743 |
|
|
|
31,845 |
|
| |
Leasehold improvements
|
|
|
7,099 |
|
|
|
7,591 |
|
|
| |
|
|
111,080 |
|
|
|
108,904 |
|
| |
Accumulated depreciation
and amortization
|
|
|
80,761 |
|
|
|
73,783 |
|
|
| |
|
|
Property and equipment, net
|
|
|
30,319 |
|
|
|
35,121 |
|
|
| |
|
|
Total assets
|
|
$ |
815,158 |
|
|
$ |
759,662 |
|
|
| |
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
228,775 |
|
|
$ |
208,115 |
|
| |
Accrued liabilities
|
|
|
38,178 |
|
|
|
39,047 |
|
| |
Mandatorily Redeemable
Convertible Trust Preferred Securities
|
|
|
125,317 |
|
|
|
— |
|
| |
Liabilities of
discontinued operations
|
|
|
1,767 |
|
|
|
4,006 |
|
|
| |
|
|
Total current liabilities
|
|
|
394,037 |
|
|
|
251,168 |
|
|
Long-term debt
|
|
|
59,624 |
|
|
|
59,503 |
|
|
Deferred income taxes
|
|
|
11,657 |
|
|
|
4,426 |
|
|
Other non-current
liabilities
|
|
|
17,389 |
|
|
|
10,150 |
|
|
Mandatorily Redeemable
Convertible Trust Preferred Securities
|
|
|
— |
|
|
|
125,425 |
|
| |
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
| |
Serial preferred shares,
without par value; authorized 5,000,000; issued and
outstanding — zero
|
|
|
— |
|
|
|
— |
|
| |
Common shares, without par
value, at $0.30 stated value; authorized 80,000,000 shares;
28,820,531 and 32,115,614 shares outstanding in 2005 and 2004,
respectively, including zero and 3,589,940 subscribed-for shares
in 2005 and 2004, and net of 46,442 and 53,273 shares in
treasury in 2005 and 2004, respectively
|
|
|
8,564 |
|
|
|
9,553 |
|
| |
Capital in excess of
stated value
|
|
|
88,927 |
|
|
|
126,070 |
|
| |
Retained earnings
|
|
|
235,749 |
|
|
|
219,594 |
|
| |
Unearned employee benefits
|
|
|
— |
|
|
|
(42,325 |
) |
| |
Unearned compensation on
restricted stock awards
|
|
|
(873 |
) |
|
|
(2,499 |
) |
| |
Accumulated other
comprehensive income (loss)
|
|
|
84 |
|
|
|
(1,403 |
) |
|
| |
|
Total shareholders’
equity
|
|
|
332,451 |
|
|
|
308,990 |
|
|
| |
|
Total liabilities and
shareholders’ equity
|
|
$ |
815,158 |
|
|
$ |
759,662 |
|
|
See accompanying notes to the consolidated
financial statements.
36
Consolidated Statements of Cash Flows
Agilysys, Inc. and Subsidiaries
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31 |
| (In thousands) |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
19,485 |
|
|
$ |
8,663 |
|
|
$ |
(42,078 |
) |
| |
Loss (gain) from
discontinued operations
|
|
|
877 |
|
|
|
2,861 |
|
|
|
(18,777 |
) |
| |
Cumulative effect of
change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
34,795 |
|
|
| |
|
Income (loss) from
continuing operations
|
|
|
20,362 |
|
|
|
11,524 |
|
|
|
(26,060 |
) |
| |
Adjustments to reconcile
income (loss) from continuing operations to net cash
provided by (used for) operating activities (net of effects from
business acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gain on buyback of
Convertible Trust Preferred Securities
|
|
|
— |
|
|
|
(734 |
) |
|
|
— |
|
| |
|
Gain on sale of investments
|
|
|
— |
|
|
|
(906 |
) |
|
|
— |
|
| |
|
Loss on buyback of Senior
Notes
|
|
|
— |
|
|
|
8,595 |
|
|
|
1,788 |
|
| |
|
Investment impairment
|
|
|
— |
|
|
|
— |
|
|
|
14,600 |
|
| |
|
Gain on disposal of
property and equipment
|
|
|
(12 |
) |
|
|
(59 |
) |
|
|
— |
|
| |
|
Depreciation
|
|
|
4,178 |
|
|
|
4,617 |
|
|
|
8,829 |
|
| |
|
Amortization
|
|
|
7,417 |
|
|
|
5,329 |
|
|
|
7,994 |
|
| |
|
Deferred income taxes
|
|
|
5,157 |
|
|
|
284 |
|
|
|
(5,545 |
) |
| |
|
Changes in working capital
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Accounts receivable
|
|
|
31,179 |
|
|
|
(93,895 |
) |
|
|
37,036 |
|
| |
|
|
Inventory
|
|
|
4,931 |
|
|
|
2,762 |
|
|
|
25,860 |
|
| |
|
|
Accounts payable
|
|
|
20,660 |
|
|
|
44,526 |
|
|
|
1,941 |
|
| |
|
|
Accrued liabilities
|
|
|
(1,131 |
) |
|
|
(4,163 |
) |
|
|
(6,098 |
) |
| |
|
|
Other working capital
|
|
|
36 |
|
|
|
(515 |
) |
|
|
1,607 |
|
| |
|
Other
|
|
|
(889 |
) |
|
|
673 |
|
|
|
1,374 |
|
|
| |
|
Total adjustments
|
|
|
71,526 |
|
|
|
(33,486 |
) |
|
|
89,386 |
|
| |
|
Net cash provided by (used
for) operating activities
|
|
|
91,888 |
|
|
|
(21,962 |
) |
|
|
63,326 |
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Acquisition of businesses,
less cash acquired
|
|
|
— |
|
|
|
(66,653 |
) |
|
|
— |
|
| |
Proceeds from sale of
business
|
|
|
— |
|
|
|
12,670 |
|
|
|
226,649 |
|
| |
Purchases of property and
equipment
|
|
|
(1,951 |
) |
|
|
(1,555 |
) |
|
|
(8,404 |
) |
| |
Proceeds from sale of
property and equipment
|
|
|
105 |
|
|
|
111 |
|
|
|
1,389 |
|
| |
Proceeds from sale of
investments
|
|
|
— |
|
|
|
3,309 |
|
|
|
— |
|
|
| |
|
Net cash (used for)
provided by investing activities
|
|
|
(1,846 |
) |
|
|
(52,118 |
) |
|
|
219,634 |
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Buyback of Convertible
Trust Preferred Securities
|
|
|
— |
|
|
|
(16,973 |
) |
|
|
— |
|
| |
Buyback of Senior Notes
|
|
|
— |
|
|
|
(79,800 |
) |
|
|
(19,942 |
) |
| |
Dividends paid
|
|
|
(3,330 |
) |
|
|
(3,517 |
) |
|
|
(3,350 |
) |
| |
Issuance of common stock
|
|
|
4,006 |
|
|
|
869 |
|
|
|
2,151 |
|
| |
Repurchase of common stock
|
|
|
— |
|
|
|
(480 |
) |
|
|
— |
|
| |
Revolving credit borrowings
|
|
|
— |
|
|
|
— |
|
|
|
7,780 |
|
| |
Revolving credit payments
|
|
|
— |
|
|
|
— |
|
|
|
(7,780 |
) |
| |
Accounts receivable
securitization financing borrowings
|
|
|
— |
|
|
|
— |
|
|
|
17,600 |
|
| |
Accounts receivable
securitization financing payments
|
|
|
— |
|
|
|
— |
|
|
|
(46,600 |
) |
| |
Other
|
|
|
(374 |
) |
|
|
(140 |
) |
|
|
(653 |
) |
|
| |
|
Net cash provided by (used
for) financing activities
|
|
|
302 |
|
|
|
(100,041 |
) |
|
|
(50,794 |
) |
|
Cash flows provided by
(used for) continuing operations
|
|
|
90,344 |
|
|
|
(174,121 |
) |
|
|
232,166 |
|
|
Cash flows provided by
discontinued operations
|
|
|
1,633 |
|
|
|
5,481 |
|
|
|
64,977 |
|
|
|
Net increase (decrease) in
cash and cash equivalents
|
|
|
91,977 |
|
|
|
(168,640 |
) |
|
|
297,143 |
|
|
Cash and cash equivalents
at beginning of year
|
|
|
149,903 |
|
|
|
318,543 |
|
|
|
21,400 |
|
|
|
Cash and cash equivalents
at end of year
|
|
$ |
241,880 |
|
|
$ |
149,903 |
|
|
$ |
318,543 |
|
|
|
Supplemental disclosures
of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash payments for interest
|
|
$ |
14,507 |
|
|
$ |
19,659 |
|
|
$ |
15,145 |
|
| |
Cash payments for income
taxes, net of refunds received
|
|
$ |
7,205 |
|
|
$ |
1,329 |
|
|
$ |
3,614 |
|
| |
Distributions on
Convertible Trust Preferred Securities
|
|
$ |
8,463 |
|
|
$ |
8,466 |
|
|
$ |
12,123 |
|
| |
Change in value of
available-for-sale securities, net of taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(955 |
) |
See accompanying notes to the consolidated
financial statements.
37
Consolidated Statements of Shareholders’ Equity
Agilysys, Inc. and Subsidiaries
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated | |
|
Capital in | |
|
|
|
|
|
Unearned | |
|
Accumulated | |
|
|
|
|
|
|
value of | |
|
excess of | |
|
|
|
Unearned | |
|
compensation | |
|
other | |
|
|
|
|
Common | |
|
common | |
|
stated | |
|
Retained | |
|
employee | |
|
on restricted | |
|
comprehensive | |
|
|
| (In thousands, except per share data) |
|
shares | |
|
shares | |
|
value | |
|
earnings | |
|
benefits | |
|
stock | |
|
income (loss) | |
|
Total | |
|
|
Balance at April 1,
2002
|
|
|
31,782 |
|
|
|
$9,452 |
|
|
|
$133,932 |
|
|
$ |
259,876 |
|
|
$ |
(56,115 |
) |
|
$ |
(3,289 |
) |
|
$ |
(3,159 |
) |
|
$ |
340,697 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42,078 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42,078 |
) |
|
Unrealized translation
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(100 |
) |
|
|
(100 |
) |
|
Unrealized loss on
securities, net of $6.1 million in taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,968 |
) |
|
|
(10,968 |
) |
|
Reclassification of
unrealized losses into earnings, net of $5.4 million in
taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,013 |
|
|
|
10,013 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,133 |
) |
|
Shares transferred from
Trust
|
|
|
(376 |
) |
|
|
(113 |
) |
|
|
(3,085 |
) |
|
|
— |
|
|
|
3,198 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Value change in
subscribed-for shares
|
|
|
— |
|
|
|
— |
|
|
|
(22,618 |
) |
|
|
— |
|
|
|
22,618 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Cash dividends ($0.12 per
share)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,350 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,350 |
) |
|
Shares issued upon
exercise of stock options
|
|
|
275 |
|
|
|
83 |
|
|
|
2,068 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,151 |
|
|
Tax benefit related to
exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
273 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
273 |
|
|
Restricted stock awards
|
|
|
376 |
|
|
|
113 |
|
|
|
3,085 |
|
|
|
— |
|
|
|
— |
|
|
|
(3,198 |
) |
|
|
— |
|
|
|
— |
|
|
Amortization of unearned
compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,912 |
|
|
|
— |
|
|
|
1,912 |
|
|
|
Balance at March 31,
2003
|
|
|
32,057 |
|
|
|
9,535 |
|
|
|
113,655 |
|
|
|
214,448 |
|
|
|
(30,299 |
) |
|
|
(4,575 |
) |
|
|
(4,214 |
) |
|
|
298,550 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,663 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,663 |
|
|
Unrealized translation
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,811 |
|
|
|
2,811 |
|
|
Unrealized gain on
securities, net of $1.0 million in taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,894 |
|
|
|
1,894 |
|
|
Reclassification of
unrealized gains into earnings, net of $1.0 million in taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,894 |
) |
|
|
(1,894 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,474 |
|
|
Value change in
subscribed-for shares
|
|
|
— |
|
|
|
— |
|
|
|
12,026 |
|
|
|
— |
|
|
|
(12,026 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Cash dividends ($0.12 per
share)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,517 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,517 |
) |
|
Shares issued upon
exercise of stock options
|
|
|
112 |
|
|
|
34 |
|
|
|
835 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
869 |
|
|
Tax benefit related to
exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
Purchase of treasury shares
|
|
|
(53 |
) |
|
|
(16 |
) |
|
|
(464 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(480 |
) |
|
Amortization of unearned
compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,076 |
|
|
|
— |
|
|
|
2,076 |
|
|
|
Balance at March 31,
2004
|
|
|
32,116 |
|
|
|
9,553 |
|
|
|
126,070 |
|
|
|
219,594 |
|
|
|
(42,325 |
) |
|
|
(2,499 |
) |
|
|
(1,403 |
) |
|
|
308,990 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,485 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,485 |
|
|
Unrealized translation
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,487 |
|
|
|
1,487 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,972 |
|
|
Shares returned to Trust
|
|
|
39 |
|
|
|
12 |
|
|
|
318 |
|
|
|
— |
|
|
|
(330 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Retirement of
subscribed-for shares
|
|
|
(3,629 |
) |
|
|
(1,089 |
) |
|
|
(41,566 |
) |
|
|
— |
|
|
|
42,655 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Cash dividends ($0.12 per
share)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,330 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,330 |
) |
|
Shares issued upon
exercise of stock options
|
|
|
327 |
|
|
|
98 |
|
|
|
3,908 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,006 |
|
|
Tax benefit related to
exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
295 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
295 |
|
|
Forfeiture of restricted
stock award
|
|
|
(39 |
) |
|
|
(12 |
) |
|
|
(319 |
) |
|
|
— |
|
|
|
— |
|
|
|
331 |
|
|
|
— |
|
|
|
— |
|
|
Tax benefit related to
forfeiture of restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
115 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
115 |
|
|
Issuance of treasury shares
|
|
|
7 |
|
|
|
2 |
|
|
|
106 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
108 |
|
|
Amortization of unearned
compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,295 |
|
|
|
— |
|
|
|
1,295 |
|
|
|
Balance at
March 31, 2005
|
|
|
28,821 |
|
|
|
$8,564 |
|
|
|
$88,927 |
|
|
|
$235,749 |
|
|
$ |
— |
|
|
$ |
(873 |
) |
|
$ |
84 |
|
|
$ |
332,451 |
|
|
See accompanying notes to the consolidated
financial statements.
38
Notes to Consolidated Financial Statements
Agilysys, Inc. and Subsidiaries
(Table amounts in thousands, except per share
data and note 16)
1.
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Operations.
Agilysys, Inc. and its
subsidiaries (the “company” or “Agilysys”)
distributes and resells a broad range of enterprise computer
systems products, including servers, storage, software and
services. These products are sold to resellers and commercial
end-users. The company has operations in North America and
strategic investments in the United States and Europe.
The company’s fiscal year ends on
March 31. References to a particular year refer to the
fiscal year ending in March of that year. For example, 2005
refers to the fiscal year ended March 31, 2005.
Principles of consolidation.
The consolidated financial
statements include the accounts of the company. Investments in
affiliated companies are accounted for by the equity or cost
method, as appropriate. All inter-company accounts have been
eliminated. Unless otherwise indicated, amounts in the notes to
the consolidated financial statements refer to continuing
operations.
Use of estimates.
Preparation of consolidated
financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from
those estimates.
Revenue recognition.
The company derives revenue from
three primary sources: server and storage hardware, software,
and services. Revenue is recorded in the period in which the
goods or services are rendered and when the following criteria
are met: persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the sales price to
the customer is fixed or determinable, and collectibility is
reasonably assured. The company reduces revenue for discounts,
sales incentives, estimated customer returns and other
allowances. Discounts are offered based on the volume of
products and services purchased. Shipping and handling fees
billed to customers are recognized as revenue and the related
costs are recognized in cost of goods sold.
Regarding hardware sales, revenue is generally
recognized when the product is shipped to the customer and when
there are not unfulfilled obligations that affect the
customer’s final acceptance of the arrangement. A majority
of the company’s hardware sales involves shipment directly
from its suppliers to the end-user customers. In such
transactions, the company is responsible for negotiating price
both with the supplier and the customer, payment to the
supplier, establishing payment terms with the customer, product
returns, and bears credit risk if the customer does not provide
payment for the goods. As the principal with the customer, the
company recognizes revenue and cost of goods sold when it is
notified by the supplier that the product has been shipped. In
certain limited instances, as shipping terms dictate, revenue is
recognized at the point of destination.
Regarding software sales, the company offers
proprietary software as well as remarketed software to its
customers. Generally, software sales do not require significant
production, modification, or customization at the time of
shipment (physically or electronically) to the customer. As
such, revenue from both proprietary and remarketed software
sales is generally recognized when the software has been
shipped. For software delivered electronically, delivery is
considered to have occurred when the customer either takes
possession of the software via downloading or has been provided
with the requisite codes that allow for immediate access to the
software.
Regarding sales of services, the company offers
proprietary and third-party services to its customers.
Proprietary services generally are as follows: consulting,
installation, integration, and maintenance. Revenue relating to
consulting, installation, and integration services is recognized
when the service is performed. Revenue relating to maintenance
services is recognized evenly over the coverage period of the
underlying agreement. In addition to proprietary services, the
company offers third-party service contracts to its
39
customers. In such instances, the supplier is the
primary obligor in the transaction and the company bears credit
risk in the event of nonpayment by the customer. Since the
company is acting as an agent or broker with respect to such
sales transactions, the company reports revenue only in the
amount of the “commission” (equal to the selling price
less the cost of sale) received rather than reporting revenue in
the full amount of the selling price with separate reporting of
the cost of sale.
Supplier programs.
Agilysys participates in certain
programs provided by various suppliers that enable it to earn
volume incentives. These incentives are generally earned by
achieving quarterly sales targets. The amounts earned under
these programs are recorded as a reduction of cost of sales when
earned. In addition, the company receives incentives from
suppliers related to cooperative advertising allowances, price
protection and other programs. These incentives generally relate
to agreements with the suppliers and are recorded, when earned,
as adjustments to gross margin or net advertising expense, as
appropriate. All costs associated with advertising and promoting
products are expensed in the year incurred. Cooperative
reimbursements from suppliers, which are earned and available,
are recorded in the period the related advertising expenditure
is incurred.
Valuation of accounts payable.
The company’s accounts
payable has been reduced by amounts claimed to vendors for
returns, price protection and other amounts related to incentive
programs. Amounts related to price protection and other
incentive programs are recorded as adjustments to cost of goods
sold or operating expenses, depending on the nature of the
program. There is a time delay between the submission of a claim
by the company and confirmation of the claim by our vendors.
Historically, the company’s estimated claims have
approximated amounts agreed to by vendors.
Income taxes.
Income tax expense includes U.S.
and foreign income taxes and is based on reported income before
income taxes. Deferred income taxes reflect the effect of
temporary differences between assets and liabilities that are
recognized for financial reporting purposes and the amounts that
are recognized for income tax purposes. These deferred taxes are
measured by applying currently enacted tax laws. Valuation
allowances are recognized to reduce the deferred tax assets to
an amount that is more likely than not to be realized. In
determining whether it is more likely than not that deferred tax
assets will be realized, the company considers such factors as
(a) expectations of future taxable income,
(b) expectations of material changes in the present
relationship between income reported for financial and tax
purposes, and (c) tax-planning strategies.
Foreign currency.
The functional currency of the
company’s Canadian subsidiary is its local currency. For
this foreign operation, the assets and liabilities are
translated into U.S. dollars at the exchange rates in effect at
the balance sheet dates. Statement of operations accounts are
translated at the monthly average exchange rates prevailing
during the year. The gains or losses resulting from these
translations are recorded as a separate component of
shareholders’ equity. Foreign currency gains and losses
from changes in exchange rates have not been material to the
consolidated operating results.
Cash and cash equivalents.
The company considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Other highly liquid
investments considered cash equivalents with no established
maturity date are fully redeemable on demand (without penalty)
with settlement of principal and accrued interest on the
following business day after instruction to redeem. Such
investments are readily convertible to cash with no penalty.
Fair value of financial instruments.
Estimated fair value of the
company’s financial instruments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
Carrying | |
|
Fair | |
|
Carrying | |
|
Fair | |
|
|
value | |
|
value | |
|
value | |
|
value | |
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
241,880 |
|
|
$ |
241,880 |
|
|
$ |
149,903 |
|
|
$ |
149,903 |
|
| |
Accounts receivable
|
|
|
263,986 |
|
|
|
263,986 |
|
|
|
295,272 |
|
|
|
295,272 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
228,775 |
|
|
$ |
228,775 |
|
|
$ |
208,115 |
|
|
$ |
208,115 |
|
| |
Senior Notes
|
|
|
59,388 |
|
|
|
62,004 |
|
|
|
59,388 |
|
|
|
65,500 |
|
| |
Mandatorily Redeemable
Convertible Trust Preferred Securities
|
|
|
125,317 |
|
|
|
150,381 |
|
|
|
125,425 |
|
|
|
123,500 |
|
|
40
The carrying amounts for cash and cash
equivalents, accounts receivable and accounts payable
approximate fair value due to the short term nature of these
instruments. The fair value of the company’s Senior Notes
is estimated using rates currently available for securities with
similar terms and remaining maturities. The fair value of the
Mandatorily Redeemable Convertible Trust Preferred Securities
represents market value as determined in the over the counter
market.
Investments in affiliated companies.
The company enters into certain
investments for the promotion of business and strategic
objectives, and typically does not attempt to reduce or
eliminate the inherent market risks on these investments. The
company has investments in affiliates accounted for using the
equity method and the cost method. For those investments
accounted for under the equity method, the company’s
proportionate share of income or losses from affiliated
companies is recorded in other (income) expense.
Concentrations of credit risk.
Financial instruments that
potentially subject the company to concentrations of credit risk
consist principally of accounts receivable. Concentration of
credit risk on accounts receivable is mitigated by the
company’s large number of customers and their dispersion
across many different industries and geographies. The company
extends credit based on customers’ financial condition and
generally, collateral is not required. To further reduce credit
risk associated with accounts receivable, the company also
performs periodic credit evaluations of its customers.
Allowance for Doubtful Accounts.
The company maintains allowances
for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. These
allowances are based on both recent trends of certain customers
estimated to be a greater credit risk as well as other trends of
the entire customer pool. If the financial condition of the
company’s customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required. To mitigate this credit risk the
company performs frequent credit evaluations of its customers.
Concentrations of supplier risk.
The company sells products
supplied by five primary suppliers. The company’s largest
supplier, IBM, supplied 72%, 72% and 63% of the company’s
sales volume in 2005, 2004 and 2003, respectively. Sales of
products sourced by HP accounted for 16%, 16% and 20% of the
company’s sales volume in 2005, 2004, and 2003,
respectively. The loss of either of the top two suppliers or a
combination of certain other suppliers could have a material
adverse effect on the company’s business, results of
operations and financial condition unless alternative products
manufactured by others are available to the company. In
addition, although the company believes that its relationships
with suppliers are good, there can be no assurance that the
company’s suppliers will continue to supply products on
terms acceptable to the company.
Inventories.
Inventories are stated at the
lower of cost or market, net of related reserves. The cost of
inventory is computed using a weighted-average method on a
first-in, first-out basis. The company’s inventory is
monitored to ensure appropriate valuation. Adjustments of
inventories to the lower of cost or market, if necessary, are
based upon contractual provisions governing price protection,
stock rotation (right of return status), and technological
obsolescence, as well as turnover and assumptions about future
demand and market conditions. Reserves for slow-moving and
obsolete inventory were $4.7 million and $8.4 million
at March 31, 2005 and 2004, respectively.
Intangible assets.
Purchased intangible assets with
finite lives are primarily amortized using the straight-line
method over the estimated economic lives of the assets.
Purchased intangible assets relating to customer relationships
are being amortized using an accelerated method, which reflects
the period the asset is expected to contribute to the future
cash flows of the company. The company’s finite-lived
intangible assets are being amortized over periods ranging from
three to eight years. The company has an indefinite-lived
intangible asset relating to purchased trade names. The
indefinite-lived intangible asset is not amortized; rather, it
is tested for impairment at least annually by comparing the
carrying amount of the asset with the fair value. An impairment
loss is recognized if the carrying amount is greater than fair
value.
Goodwill.
Goodwill represents the excess
purchase price paid over the fair value of the net assets of
acquired companies. Effective April 1, 2002, the company
adopted Financial Accounting Standards Board (“FASB”)
Statement 142, Goodwill and Other Intangible Assets.
Under Statement 142, goodwill is no longer subject to
amortization; rather, is subject to periodic impairment testing
at least annually.
Statement 142 required that goodwill be
tested for impairment upon adoption (the transition impairment
test) and at least annually, thereafter. Impairment exists when
the carrying amount of goodwill exceeds its fair
41
value. Upon adoption of Statement 142, the
company performed valuations of its reporting units for
transitional purposes and, based on these valuations, concluded
that goodwill was impaired. Accordingly, the company recorded an
impairment charge of $36.7 million, before taxes, which was
recorded as a cumulative effect of change in accounting
principle in 2003. The company conducted its annual goodwill
impairment test as of February 1, 2005 and 2004 and, based
on the analyses, concluded that goodwill was not impaired.
Goodwill will also be tested as necessary if changes in
circumstances or the occurrence of certain events indicate
potential impairment. Prior to adoption of Statement 142 in
2003, the company regularly evaluated its goodwill for
impairment, considering such factors as historical and future
profitability.
Long-lived assets.
Property and equipment are
recorded at cost. Major renewals and improvements are
capitalized, as are interest costs on capital projects. Minor
replacements, maintenance, repairs and reengineering costs are
expensed as incurred. When assets are sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated
from the accounts and any resulting gain or loss is recognized.
Depreciation and amortization are provided in
amounts sufficient to amortize the cost of the assets, including
assets recorded under capital leases, which make up a negligible
portion of total assets, over their estimated useful lives using
the straight-line method. The estimated useful lives for
depreciation and amortization are as follows: buildings and
building improvements — 7 to 30 years;
furniture — 7 to 10 years; equipment —
3 to 10 years; software — 3 to 10 years; and
leasehold improvements over the shorter of the economic life or
the lease term. Internal use software costs are expensed or
capitalized depending on the project stage. Amounts capitalized
are amortized over the estimated useful lives of the software,
ranging from 3 to 10 years, beginning with the
project’s completion. Total depreciation and amortization
expense on property and equipment was $7.0 million,
$7.8 million and $14.8 million during 2005, 2004 and
2003, respectively.
The company evaluates the recoverability of its
long-lived assets whenever changes in circumstances or events
may indicate that the carrying amounts may not be recoverable.
An impairment loss is recognized in the event the carrying value
of the assets exceeds the future undiscounted cash flows
attributable to such assets.
Stock-based compensation.
The company applies the
recognition and measurement provisions of Accounting Principles
Board (“APB”) Opinion No. 25, Accounting for
Stock Issued to Employees, to account for employee stock
compensation costs, which is referred to as the intrinsic value
method. Since the exercise price of the company’s employee
stock options equals the market price of the underlying stock on
the date of grant, no compensation cost is recognized for the
company’s stock option plans. The company has adopted the
disclosure provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, as amended by
FASB Statement 148, Accounting for Stock-Based
Compensation — Transition and Disclosure.
The following table shows the effects on net
income (loss) and earnings (loss) per share had
compensation cost been measured on the fair value method
pursuant to Statement 123. The pro forma expense determined
under the fair value method presented in the table below relates
only to stock options that were granted as of March 31,
2005, 2004 and 2003. Accordingly, the impact of applying the
fair value method is not indicative of future amounts.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31 |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
Net income (loss), as
reported
|
|
$ |
19,485 |
|
|
$ |
8,663 |
|
|
$ |
(42,078 |
) |
|
Compensation cost based on
fair value method, net of taxes
|
|
|
(1,908 |
) |
|
|
(3,564 |
) |
|
|
(3,365 |
) |
|
|
Pro forma net income (loss)
|
|
$ |
17,577 |
|
|
$ |
5,099 |
|
|
$ |
(45,443 |
) |
|
|
Earnings (loss) per
share — basic
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.69 |
|
|
$ |
0.32 |
|
|
$ |
(1.54 |
) |
| |
Pro forma
|
|
|
0.63 |
|
|
|
0.19 |
|
|
|
(1.67 |
) |
|
Earnings (loss) per
share — diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.67 |
|
|
$ |
0.31 |
|
|
$ |
(1.54 |
) |
| |
Pro forma
|
|
|
0.61 |
|
|
|
0.18 |
|
|
|
(1.67 |
) |
|
Earnings per share.
Basic earnings (loss) per
share is computed by dividing net income (loss) available
to common shareholders by the weighted average number of common
shares outstanding.
42
Diluted earnings (loss) per share is
computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period
and adjusting income available to common shareholders for the
assumed conversion of all potentially dilutive securities, as
necessary. The dilutive common equivalent shares outstanding is
computed by sequencing each series of issues of potential common
shares from the most dilutive to the least dilutive. Diluted
earnings (loss) per share is determined as the lowest
earnings (loss) per incremental share in the sequence of
potential common shares.
Comprehensive income (loss).
Comprehensive income
(loss) is defined as net income (loss) plus the
aggregate change in shareholders’ equity, excluding changes
in ownership interests, referred to as accumulated other
comprehensive income (loss). At March 31, 2005 and 2004,
accumulated other comprehensive income (loss) included in
shareholders’ equity consisted of foreign currency
translation adjustments of $84,000 and $(1.4) million,
respectively.
Segment reporting.
Operating segments are defined as
components of an enterprise for which separate financial
information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and in assessing performance. Operating segments can
be aggregated for segment reporting purposes so long as certain
aggregation criteria are met. The company has concluded that its
two operating segments meet the necessary aggregation criteria
for reporting one consolidated business segment. See
note 13 for a discussion of the company’s segment
reporting.
Related party transactions.
The Secretary of the company is
also a partner of the law firm Calfee, Halter & Griswold LLP
(“Calfee”), which provides legal services to the
company. Legal costs paid to Calfee by the company are not
material to operating results.
Recent Accounting Standards.
In June 2002, the FASB issued
Statement 146, Accounting for Exit or Disposal
Activities. Statement 146 is effective for exit or
disposal activities initiated after December 31, 2002.
Statement 146 requires that liabilities for one-time
termination benefits that will be incurred over future service
periods should be measured at the fair value as of the
termination date and recognized over the future service period.
This statement also requires that liabilities associated with
disposal activities should be recorded when incurred. These
liabilities should be adjusted for subsequent changes resulting
from revisions to either the timing or amount of estimated cash
flows, discounted at the original credit-adjusted risk-free
rate. Interest on the liability would be accreted and charged to
expense as an operating item. The company adopted this Statement
effective January 1, 2003 and used the guidelines as a
basis for reporting exit and disposal activities related to the
company’s discontinued operations and restructuring. See
further discussion of the impact on the company’s financial
position and results of operations in note 4.
In April 2003, the EITF reached consensus on
Issue No. 01-03, Accounting in a Purchase Business
Combination for Deferred Revenue of an Acquiree.
EITF 01-03 provides guidance regarding the recognition of
deferred revenue as a liability with respect to business
combinations. The Task Force concluded that an acquiring entity
should recognize a liability related to a revenue arrangement of
an acquired entity only if it has assumed a legal obligation to
provide goods, services, or other consideration to a customer.
The amount assigned to the liability should be based on its fair
value at the date of acquisition.
The company adopted the guidance set forth in
EITF 01-03 to record deferred revenues purchased in
connection with the acquisitions of Inter-American Data, Inc.
and Kyrus Corporation in 2004, which resulted in liabilities of
$3.8 million and $3.5 million, respectively.
In May 2003, the FASB issued Statement 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
Statement establishes standards for how a company classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that a company classify
certain financial instruments, such as instruments in the form
of shares that are mandatorily redeemable, as a liability (or an
asset in some circumstances). Many of the instruments were
previously classified as equity. This Statement was effective
for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003.
The company evaluated the requirements of this Statement and
concluded that the Statement does not apply to the
company’s 6.75% Mandatorily Redeemable Convertible
Trust Preferred Securities since they are convertible into
the company’s common shares.
In December 2004, the FASB issued
Statement 123 (revised 2004), Share Based Payment,
which is a revision of Statement 123.
Statement 123(R) supersedes APB Opinion No. 25 and
amends Statement 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar
to the approach described
43
in Statement 123. However,
Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in operating results based on their fair values. Pro
forma disclosure is no longer an alternative.
Statement 123(R) will be effective for the company at the
beginning of the first fiscal year beginning after June 15,
2005, or the beginning of the company’s fiscal 2007.
Statement 123(R) permits public companies to
adopt its requirements using one of two methods: (1) a
“modified prospective” method in which compensation
cost is recognized beginning with the effective date
(a) based on the requirements of Statement 123(R) for
all share-based payments granted after the effective date and
(b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of
Statement 123(R) that remain unvested on the effective
date, or (2) a “modified retrospective” method
which includes the requirements of the modified prospective
method described above, but also permits entities to restate
based on the amounts previously recognized under
Statement 123 for purposes of pro forma disclosures either
(a) all prior periods presented or (b) prior interim
periods of the year of adoption. The company has not yet
determined which of the two methods it will use to adopt the
provisions of Statement 123(R).
As permitted by Statement 123, the company
currently accounts for share-based payments to employees using
APB Opinion No. 25’s intrinsic value method and, as
such, recognizes no compensation cost for employee stock
options. Accordingly, the adoption of
Statement 123(R)’s fair value method will have an
impact on the company’s operating results. The impact of
adoption of Statement 123(R) cannot be predicted at this
time because it will depend on levels of share-based payments
granted in the future. However, had the company adopted
Statement 123(R) in prior periods, the impact would have
approximated the impact of Statement 123 as described in
the disclosure of pro forma net income and earnings per share in
note 1. Statement 123(R) also requires the benefits of
tax deductions in excess of recognized compensation cost to be
reported as financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While the company cannot
estimate what those amounts will be in the future (because they
depend on, among other things, when employees exercise stock
options), the amount of operating cash flows recognized in prior
periods for such excess tax deductions have not been significant.
Reclassifications.
Certain amounts in the prior
periods’ Consolidated Financial Statements have been
reclassified to conform to the current period’s
presentation.
2.
RECENT ACQUISITIONS
In accordance with FASB Statement 141,
Business Combinations, the company allocates the purchase
price of its acquisitions to the assets acquired and liabilities
assumed based on their estimated fair values. The excess
purchase price over the fair values of the net assets acquired
is recorded as goodwill. In 2004, the company acquired two
businesses, Kyrus Corporation (“Kyrus”) and
Inter-American Data, Inc. (“IAD”).
Kyrus Corporation
Kyrus was acquired on September 30, 2003.
The results of Kyrus’ operations have been included in the
company’s consolidated financial statements since that
date. Kyrus was an IBM Master Distributor and Premier Business
Partner in retail sales solutions. The acquisition expands the
company’s operations to include a wide range of services
and solutions, including hardware and software products and
extensive professional services to customers in the retail
industry. The purchase price was $29.6 million, offset by
approximately $0.9 million of cash acquired. Approximately
$26.6 million of the purchase price was assigned to
goodwill in 2004 based on the estimated fair values of the net
assets acquired.
During 2005, the company finalized its purchase
price allocation and made several adjustments to the fair value
assigned to the net assets acquired. The company recorded an
additional $26,700 of costs that were directly associated with
the Kyrus acquisition, resulting in an increase to goodwill. The
company also received $50,000 upon settlement of monies in
escrow, resulting in a decrease to goodwill. In addition, the
company lowered the estimated fair value of certain liabilities
assumed by approximately $0.2 million, resulting in a
decrease to goodwill. Finally, the company recorded a liability
of $1.4 million relating to tax
44
uncertainties existing at the date of
acquisition, which increased goodwill. The company may have to
record additional amounts for similar tax uncertainties in the
future; however such amounts cannot be estimated at this time.
Any additional amounts recorded by the company for tax
uncertainties that existed at the date of acquisition will
result in a change to goodwill.
In addition to the above, the company recorded
approximately $1.9 million of intangible assets acquired,
resulting in a decrease to goodwill. Of the intangible assets
acquired, $1.7 million was assigned to customer
relationships, which is being amortized over five years using an
accelerated method; $210,000 was assigned to non-competition
agreements, which is being amortized over six years using the
straight-line method; and $30,000 was assigned to developed
technology, which is being amortized over eight years using the
straight-line method. It is not anticipated that such assets
will have significant residual values.
At March 31, 2005, $25.8 million of the
purchase price had been assigned to goodwill. None of the
goodwill is expected to be deductible for income tax purposes.
Inter-American Data, Inc.
IAD was acquired on February 17, 2004. The
results of IAD’s operations have been included in the
company’s consolidated financial statements since that
date. IAD was a leading developer and provider of software and
services to hotel casinos and major resorts in the United
States. The acquisition provides significant opportunities for
growth in the hospitality industry. The purchase price was
$38.0 million, with approximately $35.7 million
assigned to goodwill in 2004 based on the estimated fair values
of assets acquired and liabilities assumed.
During 2005, the company finalized its purchase
price allocation and made several adjustments to the fair value
assigned to the net assets acquired. The company recorded an
additional liability of $0.2 million assumed in the
acquisition, with a corresponding increase to goodwill. The
liability related to one-time involuntary termination costs for
employees of IAD whose job functions were terminated during the
integration of IAD. Termination benefits are expected to
continue through the current fiscal year. The company also
lowered the estimated fair value of certain assets acquired by
$1.0 million, resulting in an increase to goodwill.
During 2005, the company also recorded
$6.7 million of intangible assets acquired, resulting in a
decrease to goodwill. Of the intangible assets acquired,
$3.6 million was assigned to customer relationships, which
is being amortized over five years using an accelerated method;
$1.4 million was assigned to developed technology, which is
being amortized over six years using the straight-line method;
$690,000 was assigned to non-competition agreements, which are
being amortized over seven to eight years using the
straight-line method; $80,000 was assigned to patented
technology, which is being amortized over three years using the
straight-line method; and $900,000 was assigned to trade names,
which have been assigned indefinite useful lives and will be
tested for impairment at least annually. It is not anticipated
that such assets will have significant residual values.
At March 31, 2005, $30.2 million of the
purchase price had been assigned to goodwill. Goodwill relating
to the purchase of IAD is deductible for income tax purposes.
3.
DISCONTINUED OPERATIONS
During 2003, the company announced its strategic
transformation to focus solely on its enterprise computer
systems business. The transformation included the sale of
substantially all of the assets and liabilities of the
company’s Industrial Electronics Division
(“IED”), which distributed semiconductors,
interconnect, passive and electromechanical components, power
supplies and embedded computer products in North America. In
connection with the sale of IED, the company discontinued the
operations of Aprisa, Inc. (“Aprisa”), which was an
internet-based start up corporation that created customized
software for the electronic components market. The disposition
of IED and discontinuance of Aprisa represented a disposal of a
component of an entity as defined by FASB Statement 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. The company continues to incur certain costs related
to IED and Aprisa, which are reported as loss from discontinued
operations.
45
For the years ended March 31, 2005 and 2004,
the company realized a loss from discontinued operations of
$0.9 million (net of $0.5 million in taxes) and
$2.9 million (net of $2.7 million in taxes),
respectively. For the year ended March 31, 2003, the
company realized income from discontinued operations of
$18.8 million (net of $9.3 million in taxes). The loss
from discontinued operations for the year ended March 31,
2005 included the sale of a vacant distribution facility and
adjacent vacant land. Proceeds from the sale of the distribution
facility and land were approximately $3.3 million,
resulting in a loss on sale of $0.3 million.
At March 31, 2005, the assets of
discontinued operations were $0.7 million and related to
accounts receivable and deferred taxes. The liabilities of
discontinued operations were $1.8 million and related to
restructuring liabilities for ongoing lease commitments and
deferred taxes.
4.
RESTRUCTURING CHARGES
Continuing Operations
In the fourth quarter of 2003, concurrent with
the sale of IED, the company announced the restructuring of its
remaining enterprise computer solutions business and facilities
to reduce overhead and eliminate assets that were inconsistent
with the company’s strategic plan and were no longer
required. In connection with this reorganization, the company
recorded restructuring charges totaling $20.7 million for
the impairment of facilities and other assets no longer required
as well as severance, incentives, and other employee benefit
costs for personnel whose employment was involuntarily
terminated. The charges were classified as restructuring charges
in the consolidated statement of operations. During 2004,
additional restructuring costs of $2.5 million were
incurred as a result of facility closures, the change in the
company’s name, and other costs associated with the 2003
reorganization.
Severance, incentives, and other employee benefit
costs were to be paid to approximately 110 personnel. Facilities
costs represent the present value of qualifying exit costs,
offset by an estimate for future sublease income for a vacant
warehouse that represents excess capacity as a result of the
sale of IED.
Following is a reconciliation of the beginning
and ending balances of the restructuring liability:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance | |
|
|
|
|
|
|
and other | |
|
|
|
|
|
|
employment | |
|
|
|
|
|
|
costs | |
|
Facilities | |
|
Total | |
|
|
Balance at April 1,
2003
|
|
$ |
5,731 |
|
|
$ |
6,097 |
|
|
$ |
11,828 |
|
| |
Additions
|
|
|
— |
|
|
|
2,066 |
|
|
|
2,066 |
|
| |
Accretion of lease
obligations
|
|
|
— |
|
|
|
450 |
|
|
|
450 |
|
| |
Payments
|
|
|
(5,706 |
) |
|
|
(2,819 |
) |
|
|
(8,525 |
) |
|
|
Balance at March 31,
2004
|
|
|
25 |
|
|
|
5,794 |
|
|
|
5,819 |
|
| |
Accretion of lease
obligations
|
|
|
— |
|
|
|
427 |
|
|
|
427 |
|
| |
Payments
|
|
|
(25 |
) |
|
|
(851 |
) |
|
|
(876 |
) |
| |
Adjustments
|
|
|
— |
|
|
|
88 |
|
|
|
88 |
|
|
|
Balance at
March 31, 2005
|
|
$ |
— |
|
|
|
$5,458 |
|
|
|
$5,458 |
|
|
Of the remaining $5.5 million liability at
March 31, 2005, approximately $0.6 million is expected
to be paid during 2006 for ongoing obligations of a vacated
facility. Facility obligations are expected to continue until
2017.
Discontinued Operations
In connection with the sale of IED in 2003, the
company recognized a restructuring charge of $28.7 million.
The significant components of the charge were as follows:
$5.9 million related to severance and other employee
benefit costs to be paid to approximately 525 employees
previously employed by IED and not hired by the acquiring
company; $5.0 million related to facilities costs for
approximately 30 vacated locations no longer required as a
result of the sale that were determined as the present value of
qualifying exit costs offset
46
by an estimate for future sublease income; and
$17.4 million related to the write down of assets to fair
value that were abandoned or classified as “held for
sale,” as a result of the disposition and discontinuance of
IED and Aprisa, respectively.
Following is a reconciliation of the beginning
and ending balances of the restructuring liability related to
discontinued operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance | |
|
|
|
|
|
|
|
|
and other | |
|
|
|
|
|
|
|
|
employment | |
|
|
|
|
|
|
|
|
costs | |
|
Facilities | |
|
Other | |
|
Total | |
|
|
|
Balance at April 1,
2003
|
|
$ |
7,332 |
|
|
$ |
5,785 |
|
|
$ |
274 |
|
|
$ |
13,391 |
|
| |
Additions
|
|
|
— |
|
|
|
545 |
|
|
|
— |
|
|
|
545 |
|
| |
Accretion of lease
obligations
|
|
|
— |
|
|
|
162 |
|
|
|
— |
|
|
|
162 |
|
| |
Payments
|
|
|
(7,308 |
) |
|
|
(3,232 |
) |
|
|
(219 |
) |
|
|
(10,759 |
) |
|
|
Balance at March 31,
2004
|
|
|
24 |
|
|
|
3,260 |
|
|
|
55 |
|
|
|
3,339 |
|
| |
Accretion of lease
obligations
|
|
|
— |
|
|
|
96 |
|
|
|
— |
|
|
|
96 |
|
| |
Payments
|
|
|
(24 |
) |
|
|
(1,295 |
) |
|
|
— |
|
|
|
(1,319 |
) |
| |
Adjustments
|
|
|
— |
|
|
|
(422 |
) |
|
|
(55 |
) |
|
|
(477 |
) |
|
|
Balance at
March 31, 2005
|
|
$ |
— |
|
|
|
$1,639 |
|
|
$ |
— |
|
|
$ |
1,639 |
|
|
Of the remaining $1.6 million reserve at
March 31, 2005, approximately $0.4 million is expected
to be paid during 2006 for ongoing obligations of vacated
facilities. Facilities obligations are expected to continue
until 2010.
5.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill
for the years ended March 31, 2005 and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
|
Beginning of year
|
|
$ |
179,975 |
|
|
$ |
117,545 |
|
| |
Goodwill
adjustment — Kyrus (note 2)
|
|
|
(753 |
) |
|
|
26,557 |
|
| |
Goodwill
adjustment — IAD (note 2)
|
|
|
(5,547 |
) |
|
|
35,742 |
|
| |
Impact of foreign currency
translation
|
|
|
99 |
|
|
|
131 |
|
|
|
End of year
|
|
$ |
173,774 |
|
|
$ |
179,975 |
|
|
In accordance with FASB Statement 142,
Goodwill and Other Intangible Assets, the company does
not amortize goodwill; rather, goodwill is tested for impairment
on an annual basis, or more often if conditions exist which
indicate potential impairment. The company uses a measurement
date of February 1 for its annual impairment test of
goodwill. Goodwill is tested for impairment at the reporting
unit level. Statement 142 describes a reporting unit as an
operating segment or one level below the operating segment
(depending on whether certain criteria are met), as that term is
used in FASB Statement 131, Disclosures About Segments
of an Enterprise and Related Information. Goodwill has been
allocated to the company’s reporting units that are
anticipated to benefit from the synergies of the business
combinations generating the underlying goodwill.
As of February 1, 2005, which was the latest
annual impairment test performed, the company concluded that the
fair value of its two reporting units exceeded their carrying
value, including goodwill. As such, step two of the goodwill
impairment test was not necessary and no impairment loss was
recognized. As of March 31, 2005, the company was not aware
of any circumstances or events requiring an interim impairment
test of goodwill.
Under the required transitional provisions of
Statement 142, the company identified and evaluated its
reporting units for impairment as of April 1, 2002, the
first day of the company’s fiscal year 2003, using the
two-step process prescribed by the Statement. The first step
involved identifying the reporting units with carrying values,
including goodwill, in excess of fair value. The fair value of
goodwill was estimated using a
47
combination of a discounted cash flow valuation
model, incorporating a discount rate commensurate with the risks
involved for each reporting unit, and a market approach of
guideline companies in similar transactions. As a result of
completing the first step of the process, it was determined that
there was an impairment of goodwill at the date of adoption.
This was due primarily to market conditions and relatively low
levels of sales. In the second step of the process, the implied
fair value of the affected reporting unit’s goodwill was
compared with its carrying value in order to determine the
amount of impairment, that is, the amount by which the carrying
amount exceeded the fair value. As a result, the company
recorded an impairment charge of $36.7 million, before tax,
which was recorded as a cumulative effect of change in
accounting principle in the first quarter of 2003. The goodwill
impairment was comprised of $25.7 million for IED and
$11.0 million for the operations of Aprisa. Both of these
businesses are reported as discontinued operations.
Intangible Assets
The following table summarizes the company’s
intangible assets at March 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
|
Net | |
|
|
carrying | |
|
Accumulated | |
|
carrying | |
|
|
amount | |
|
amortization | |
|
amount | |
|
|
|
Amortized intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer relationships
|
|
$ |
5,300 |
|
|
$ |
(2,418 |
) |
|
$ |
2,882 |
|
| |
Non-competition agreements
|
|
|
910 |
|
|
|
(151 |
) |
|
|
759 |
|
| |
Developed technology
|
|
|
1,470 |
|
|
|
(266 |
) |
|
|
1,204 |
|
| |
Patented technology
|
|
|
80 |
|
|
|
(29 |
) |
|
|
51 |
|
|
| |
|
|
7,760 |
|
|
|
(2,864 |
) |
|
|
4,896 |
|
|
Unamortized intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Trade names
|
|
|
900 |
|
|
|
NA |
|
|
|
900 |
|
|
|
Total intangible assets
|
|
$ |
8,660 |
|
|
$ |
(2,864 |
) |
|
$ |
5,796 |
|
|
There were no intangible assets at March 31,
2004. Amortization expense relating to intangible assets for the
years ended March 31, 2005 and 2004 was $2.9 million
and zero, respectively. The estimated amortization expense
relating to intangible assets for each of the five succeeding
fiscal years is as follows: 2006 - $2.0 million,
2007 - $1.2 million, 2008 - $0.7 million,
2009 - $0.5 million, and 2010 - $0.3 million.
6.
INVESTMENTS
At March 31, 2005 and 2004, the
company’s investments consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
|
Magirus AG
|
|
$ |
14,737 |
|
|
$ |
13,771 |
|
|
Other non-marketable
equity securities
|
|
|
5,048 |
|
|
|
5,048 |
|
|
| |
Total
|
|
$ |
19,785 |
|
|
$ |
18,819 |
|
|
Magirus AG
The company maintains an equity interest in
Magirus AG (“Magirus”), a privately-owned European
enterprise computer systems distributor headquartered in
Stuttgart, Germany. The company has a 20% interest in Magirus
and accounts for the investment under the equity method.
Accordingly, the investment was initially recorded at cost and
the carrying amount has been subsequently adjusted to reflect
the company’s share of operating results as well as
dividends received from Magirus, foreign currency translation
and additional contributions made by the company.
Other Non-Marketable Equity
Securities
Other non-marketable equity securities consist of
capital stock ownership in a privately held company where a
market value is not readily available and the company does not
exercise significant influence over its
48
operating and financial policies. As such, the
investment is stated at cost, which does not exceed estimated
net realizable value. The fair value of the company’s cost
method investment is not estimated if there are no identified
events or changes in circumstances that may have a significant
adverse effect on the fair value of the investment.
Sale of Investment
During 2004, the company sold its investment in
Eurodis Electron PLC (“Eurodis”), a publicly traded
European enterprise computer systems distributor. The realized
gain was determined on the basis of specific identification of
securities sold since the company liquidated its entire
securities holding. Sales proceeds and realized gain on the sale
were $3.3 million and $0.9 million, respectively.
Management continually monitored the change in
the value of its investment to determine whether declines in
market value below cost were other-than-temporary. The company
made such a determination based upon criteria that included the
extent to which cost exceeded market value, the duration of the
market decline, and the financial condition of and specific
prospects of the issuer. In addition, the company evaluated its
intent to retain the investment over a period of time which
would be sufficient to allow for any recovery in market value.
When it was concluded that the market value decline was
temporary, the changes in market value were included in
accumulated other comprehensive loss in the shareholders’
equity section of the consolidated balance sheet. In 2003, as a
result of the company’s sale of IED and subsequent change
in business focus, the company’s intent concerning its
investment changed. The investment no longer held strategic
value and it was not the company’s intent to retain the
investment for a long period of time. Therefore, the decline in
market value was deemed to be other than temporary, and in 2003
the company recognized a $14.6 million impairment charge to
reduce the carrying value (cost basis) to market value. This
non-cash charge was included as investment impairment in other
(income) expense in the consolidated statement of
operations in 2003.
7.
LEASE COMMITMENTS
Capital Leases
The company is the lessee of certain equipment
under capital leases expiring in various years through 2008. The
assets and liabilities under capital leases are recorded at the
lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive
lives. Depreciation of assets under capital leases is included
in depreciation expense.
Minimum future lease payments under capital
leases as of March 31, 2005 for each of the next five years
and in the aggregate are:
| |
|
|
|
|
|
|
|
Amount |
|
|
|
Year ending March 31:
|
|
|
|
|
| |
2006
|
|
$ |
272 |
|
| |
2007
|
|
|
178 |
|
| |
2008
|
|
|
78 |
|
| |
2009
|
|
|
— |
|
| |
2010
|
|
|
— |
|
|
|
Total minimum lease
payments
|
|
|
528 |
|
|
Less: amount representing
interest
|
|
|
(26 |
) |
|
|
Present value of minimum
lease payments
|
|
$ |
502 |
|
|
Interest rates on capitalized leases vary from
5.2% to 9.5% and are imputed based on the lower of the
company’s incremental borrowing rate at the inception of
each lease or the lessor’s implicit rate of return.
49
Operating Leases
The company leases certain office and warehouse
facilities and equipment under non-cancelable operating leases
which expire at various dates through 2017. Certain facilities
and equipment leases contain renewal options for periods up to
10 years. In most cases, management expects that in the
normal course of business, leases will be renewed or replaced by
other leases.
The following is a schedule by years of future
minimum rental payments required under operating leases,
excluding real estate taxes and insurance, which have initial or
remaining non-cancelable lease terms in excess of a year as of
March 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing | |
|
Discontinued | |
|
|
|
|
operations | |
|
operations | |
|
Total | |
|
|
|
Year ending March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2006
|
|
$ |
6,359 |
|
|
$ |
942 |
|
|
$ |
7,301 |
|
| |
2007
|
|
|
4,659 |
|
|
|
625 |
|
|
|
5,284 |
|
| |
2008
|
|
|
3,938 |
|
|
|
473 |
|
|
|
4,411 |
|
| |
2009
|
|
|
3,301 |
|
|
|
466 |
|
|
|
3,767 |
|
| |
2010
|
|
|
2,785 |
|
|
|
439 |
|
|
|
3,224 |
|
| |
Thereafter
|
|
|
15,739 |
|
|
|
169 |
|
|
|
15,908 |
|
|
|
Total minimum lease
payments
|
|
$ |
36,781 |
|
|
$ |
3,114 |
|
|
$ |
39,895 |
|
|
Total minimum future rental payments have been
reduced by $2.7 million of sublease rentals to be received
in the future under non-cancelable subleases. Rental expense for
all non-cancelable operating leases amounted to
$8.1 million, $7.0 million, and $11.8 million for
2005, 2004, and 2003, respectively.
8.
FINANCING ARRANGEMENTS
The following is a summary of long-term
obligations at March 31, 2005 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 |
|
|
|
Senior Notes, due August
2006
|
|
$ |
59,388 |
|
|
$ |
59,388 |
|
|
Capital lease obligations
|
|
|
502 |
|
|
|
399 |
|
|
| |
|
|
59,890 |
|
|
|
59,787 |
|
|
Less: current maturities
of long-term obligations
|
|
|
(266 |
) |
|
|
(284 |
) |
|
| |
|
$ |
59,624 |
|
|
$ |
59,503 |
|
|
The company’s debt outstanding at
March 31, 2005 consists primarily of $59.4 million
principal amount of 9.5% Senior Notes (the “Notes”)
due August 2006. Interest is payable semi-annually. The
indenture under which the Notes were issued limits the creation
of liens, sale and leaseback transactions, consolidations,
mergers and transfers of all or substantially all of the
company’s assets, and indebtedness of the company’s
restricted subsidiaries. The Notes are subject to mandatory
repurchase by the company at the option of the holders in the
event of a change in control of the company. The fair value of
the Notes was $62.0 million and $65.5 million at
March 31, 2005 and 2004, respectively.
During 2004, the company repurchased Notes for
cash at prices ranging from $1,025 to $1,113 per $1,000
principal amount. The company repurchased Notes approximating
$71.6 million. The premium paid, as well as the disposition
of other financing fees, resulted in a charge of approximately
$8.6 million, which is included in other
(income) expense.
Revolving Credit Agreement
In April 2003, the company entered into an
unsecured, three-year revolving credit agreement (the
“Revolver”) with a consortium of six banks. The
Revolver provides the company with the ability to borrow up to
$100 million, limited to certain borrowing base
calculations, and allows for increases, under certain
conditions, up to $150 million during the life of the
facility. Advances on the Revolver bear interest at various
levels over LIBOR, and a facility fee is required, both of which
are determined based on the company’s leverage
50
ratio. The Revolver does not contain a
pre-payment penalty. There were no amounts outstanding under the
Revolver at March 31, 2005 or 2004.
The Revolver contains certain restrictive and
financial covenants including limitations on other borrowings,
investment expenditures and the maintenance of certain financial
ratios, such as leverage, fixed charge coverage and net worth,
among other restrictions. The company is in compliance with all
covenants.
9.
MANDATORILY REDEEMABLE CONVERTIBLE
TRUST PREFERRED SECURITIES
In 1998, Pioneer-Standard Financial Trust (the
“Pioneer-Standard Trust”) issued 2,875,000 shares
relating to $143.7 million of 6.75% Mandatorily Redeemable
Convertible Trust Preferred Securities (the
“Trust Preferred Securities”). The
Pioneer-Standard Trust, a statutory business trust, is a
wholly-owned consolidated subsidiary of the company, with its
sole asset being $148.2 million aggregate principal amount
of 6.75% Junior Convertible Subordinated Debentures of Agilysys,
Inc. due March 31, 2028 (the
“Trust Debentures”). The company has executed a
guarantee with regard to the Trust Preferred Securities.
The guarantee, when taken together with the company’s
obligations under the Trust Debentures, the indenture
pursuant to which the Trust Debentures were issued and the
applicable trust document, provide a full and unconditional
guarantee of the Pioneer-Standard Trust’s obligations under
the Trust Preferred Securities. The Trust Preferred
Securities are non-voting (except in limited circumstances), pay
quarterly distributions at an annual rate of 6.75%, carry a
liquidation value of $50 per share and are convertible at the
option of the holder into the company’s Common Shares at
any time prior to the close of business on March 31, 2028.
After March 31, 2003, the Trust Preferred Securities
were redeemable, at the option of the company, for a redemption
price of 103.375% of par reduced annually by 0.675% to a minimum
of $50 per Trust Preferred Security. As of March 31,
2005, the Trust Preferred Securities were redeemable at the
option of the company for a redemption price of 102.025%. The
redemption price will be reduced to 100% of par by
March 31, 2008.
In 2005, 2,152 Trust Preferred Securities
were converted into 6,831 shares of the company’s common
stock. The conversion reduced the carrying value of the
Trust Preferred Securities to $125.3 million. As of
March 31, 2005, a total of 368,652 Trust Preferred
Securities had been redeemed or converted by the company. See
Note 18 for a discussion of the company’s redemption
of the Trust Preferred Securities subsequent to year-end.
In 2004, the company repurchased 365,000
Trust Preferred Securities, approximating
$18.3 million face value, for a cash purchase price of
approximately $17.0 million. The difference between the
face value and cash paid, partially offset by the expensing of
related deferred financing fees, resulted in a net gain of
$0.7 million, which is included in the other (income)
expense in 2004. As of March 31, 2004, a total of 366,500
Trust Preferred Securities had been redeemed.
At March 31, 2005 and 2004, the fair market
value of the Trust Preferred Securities was $150.4 million
and $123.5 million, respectively.
51
10.
INCOME TAXES
The components of income (loss) before income
taxes from continuing operations and income tax provision are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
Income (loss) before
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Domestic
|
|
$ |
41,346 |
|
|
$ |
27,257 |
|
|
$ |
(29,381 |
) |
| |
Foreign
|
|
|
(106 |
) |
|
|
(549 |
) |
|
|
(2,103 |
) |
|
| |
|
Total
|
|
$ |
41,240 |
|
|
$ |
26,708 |
|
|
$ |
(31,484 |
) |
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal
|
|
$ |
9,362 |
|
|
$ |
7,886 |
|
|
$ |
(3,510 |
) |
| |
|
State and local
|
|
|
889 |
|
|
|
60 |
|
|
|
131 |
|
| |
|
Foreign
|
|
|
121 |
|
|
|
127 |
|
|
|
180 |
|
|
| |
|
|
Total
|
|
|
10,372 |
|
|
|
8,073 |
|
|
|
(3,199 |
) |
| |
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal
|
|
|
6,325 |
|
|
|
856 |
|
|
|
(6,949 |
) |
| |
|
State and local
|
|
|
(3,216 |
) |
|
|
992 |
|
|
|
(380 |
) |
| |
|
Foreign
|
|
|
2,244 |
|
|
|
(237 |
) |
|
|
(1,211 |
) |
|
| |
|
|
Total
|
|
|
5,353 |
|
|
|
1,611 |
|
|
|
(8,540 |
) |
|
|
Provision for income taxes
|
|
$ |
15,725 |
|
|
$ |
9,684 |
|
|
$ |
(11,739 |
) |
|
A reconciliation of the federal statutory rate to
the company’s effective income tax rate for continuing
operations is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
Statutory rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
(35.0 |
)% |
|
Provision
(benefit) for state taxes
|
|
|
4.8 |
|
|
|
(1.3 |
) |
|
|
(6.5 |
) |
|
Change in valuation
allowance
|
|
|
(3.0 |
) |
|
|
3.9 |
|
|
|
3.6 |
|
|
Settlement of income tax
audits
|
|
|
(0.5 |
) |
|
|
(2.4 |
) |
|
|
— |
|
|
Foreign rate differential
|
|
|
— |
|
|
|
0.3 |
|
|
|
(0.9 |
) |
|
Meals &
entertainment
|
|
|
1.4 |
|
|
|
1.6 |
|
|
|
0.7 |
|
|
Equity investment and
other, net
|
|
|
0.4 |
|
|
|
(0.8 |
) |
|
|
0.8 |
|
|
|
Effective rate
|
|
|
38.1 |
% |
|
|
36.3 |
% |
|
|
(37.3 |
)% |
|
52
Deferred tax assets and liabilities as of
March 31, 2005 and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Capitalized inventory costs
|
|
$ |
291 |
|
|
$ |
257 |
|
| |
Accrued liabilities
|
|
|
4,433 |
|
|
|
1,615 |
|
| |
Allowance for doubtful
accounts
|
|
|
2,055 |
|
|
|
1,415 |
|
| |
Inventory valuation reserve
|
|
|
3,618 |
|
|
|
3,581 |
|
| |
Restructuring reserve
|
|
|
2,052 |
|
|
|
2,212 |
|
| |
Federal domestic net
operating losses
|
|
|
1,119 |
|
|
|
8,841 |
|
| |
Foreign net operating
losses
|
|
|
1,696 |
|
|
|
1,370 |
|
| |
Property and equipment
|
|
|
2,240 |
|
|
|
1,181 |
|
| |
State net operating losses
|
|
|
7,188 |
|
|
|
8,363 |
|
| |
Other
|
|
|
626 |
|
|
|
461 |
|
|
| |
|
|
25,318 |
|
|
|
29,296 |
|
| |
Less: valuation allowance
|
|
|
(7,309 |
) |
|
|
(8,363 |
) |
|
| |
|
Total
|
|
$ |
18,009 |
|
|
$ |
20,933 |
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Deferred revenue
|
|
$ |
203 |
|
|
$ |
331 |
|
| |
Software amortization
|
|
|
2,719 |
|
|
|
3,044 |
|
| |
Goodwill and other
intangible assets
|
|
|
15,826 |
|
|
|
12,460 |
|
| |
Other
|
|
|
349 |
|
|
|
270 |
|
|
| |
|
Total
|
|
$ |
19,097 |
|
|
$ |
16,105 |
|
|
|
Total deferred tax assets
(liabilities)
|
|
$ |
(1,088 |
) |
|
$ |
4,828 |
|
|
Long term deferred tax assets of approximately
$1.2 million are included in other assets at March 31,
2005.
At March 31, 2005, the Company had
$3.2 million of federal net operating loss carryforwards
that expire, if unused, in years 2023 through 2025.
Approximately $130,000 of this is related to a non-consolidated
affiliated subsidiary. A valuation allowance of $45,000 has been
recognized to offset the deferred tax asset related to that
subsidiary’s net operating loss.
At March 31, 2005, the Company had
$4.7 million of foreign net operating loss carryforwards
that expire, if unused, in years 2007 through 2011.
Additionally, a valuation allowance of $2.5 million has
been recognized because it is more likely than not that foreign
deferred tax assets, including carryforwards noted above, will
not be utilized.
At March 31, 2005, the Company had
$206 million of state net operating loss carryforwards that
expire, if unused, in years 2008 through 2019. The valuation
allowance has been reduced by $3.5 million to properly
reflect the tax benefit of net operating losses more likely than
not to be utilized. Of the total state net operating losses,
$11.0 million resulted from the Company’s 2004
acquisition of Kyrus Corporation. In the current year, the
Company recognized tax expense and reduced goodwill for the tax
benefit of $94,000 related to the valuation allowance on
acquired state net operating losses. When realized in future
years, $461,000 of the valuation allowance related to the Kyrus
Corporation state net operating losses will be applied to reduce
goodwill.
11.
EMPLOYEE BENEFIT PLANS
The company maintains profit-sharing and 401(k)
plans for employees meeting certain service requirements.
Generally, the plans allow eligible employees to contribute a
portion of their compensation, with the company matching a
percentage thereof. The company may also make discretionary
contributions each year for the benefit of all eligible
employees under the plans. Total profit sharing and company
matching contributions were $2.9 million,
$2.2 million, and $2.3 million for 2005, 2004, and
2003, respectively.
The company also provides a non-qualified benefit
equalization plan covering certain employees, which provides for
employee deferrals and company retirement deferrals so that the
total retirement deferrals equal
53
amounts that would have been contributed to the
company’s 401(k) plan if it were not for limitations
imposed by income tax regulations. Contribution expense for the
benefit equalization plan was $0.1 million in 2005, 2004,
and 2003.
The company also provides a supplemental
executive retirement plan (“SERP”) for certain
officers of the company. The SERP is a non-qualified plan
designed to provide retirement benefits and life insurance for
the plan participants. The projected benefit obligation related
to the SERP was $11.9 million at March 31, 2005, of
which $8.8 million has been accrued in accordance with FASB
Statement 87, Employers Accounting for Pensions. The
company also recognized an intangible asset of $2.9 million
in 2005 in accordance with Statement 87. The projected
benefit obligation related to the SERP was $8.8 million at
March 31, 2004, of which $2.4 million had been accrued
at March 31, 2004. The annual expense for the SERP was
$3.6 million, $0.6 million, and $0.6 million in
2005, 2004, and 2003, respectively.
In conjunction with the benefit equalization plan
and SERP, the company has invested in life insurance policies
related to certain employees to satisfy future obligations of
the plans. The cash surrender value of the policies was
$6.3 million and $4.7 million at March 31, 2005
and 2004, respectively.
12.
CONTINGENCIES
The company is the subject of various threatened
or pending legal actions and contingencies in the normal course
of conducting its business. The company provides for costs
related to these matters when a loss is probable and the amount
can be reasonably estimated. The effect of the outcome of these
matters on the company’s future results of operations and
liquidity cannot be predicted because any such effect depends on
future results of operations and the amount or timing of the
resolution of such matters. While it is not possible to predict
with certainty, management believes that the ultimate resolution
of such matters will not have a material adverse effect on the
consolidated financial position, results of operations or cash
flows of the company.
13.
BUSINESS SEGMENTS
The company is a leading distributor and premier
reseller of enterprise computer technology solutions. The
company is principally engaged in the distribution and reselling
of three specific product areas: server and storage hardware,
software, and services. These technology solutions are offered
to two primary customer groups, value-added resellers, which
often are privately held with annual sales ranging from
approximately $10 million to $400 million, and
end-user customers, which range from medium to large
corporations as well as the public sector.
The company’s chief operating decision maker
(i.e., chief executive officer) reviews financial information
presented at varying levels of detail for purposes of making
operating decisions and assessing financial performance. The
chief operating decision maker’s primary review, however,
focuses on the company’s two primary customer groups. In
accordance with FASB Statement 131, Disclosures about
Segments of an Enterprise and Related Information, the
company has two operating segments separated between the
customer group focus. Given the similar economic characteristics
between the two operating segments and the other aggregation
criteria established by Statement 131, the company’s
two operating segments have been combined into one reportable
business segment. Reporting segment information as a
consolidated entity is consistent with the company’s focus
on providing enterprise computer technology solutions to its
customers.
54
The company’s assets are primarily located
in the United States. Further, revenues attributable to
customers outside the United States accounted for less than 5%
of total revenues for 2005, 2004, and 2003. Total revenues for
the company’s three specific product areas are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31 |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
Hardware
|
|
$ |
1,321,831 |
|
|
$ |
1,134,762 |
|
|
$ |
969,629 |
|
|
Software
|
|
|
221,718 |
|
|
|
211,974 |
|
|
|
172,558 |
|
|
Services
|
|
|
79,376 |
|
|
|
56,480 |
|
|
|
29,444 |
|
|
|
Total
|
|
$ |
1,622,925 |
|
|
$ |
1,403,216 |
|
|
$ |
1,171,631 |
|
|
14.
SHAREHOLDERS’ EQUITY
Capital Stock
Holders of the company’s common shares are
entitled to one vote for each share held of record on all
matters to be submitted to a vote of the shareholders. At
March 31, 2005 and 2004, there were no shares of preferred
stock outstanding.
Subscribed-for Shares
In July 1996, the company entered into a Share
Subscription Agreement and Trust (the “Trust”) with
Wachovia Bank of North Carolina. The Trust had subscribed for
5,000,000 common shares of the company which were to be paid for
over the 15 year term of the Trust. Proceeds from the sale
of the common shares were to be used to fund company obligations
under various employee benefit plans, to pay cash bonuses and
other similar employee related company obligations. The
subscribed-for common shares were deemed to be issued and
outstanding for voting and dividend purposes, but were not fully
paid and non-assessable until payment for such common shares was
received as provided in the Trust. In accordance with U.S.
generally accepted accounting principles, none of the
subscribed-for shares were deemed outstanding for purposes of
calculating earnings per share until payment was received for
the common shares as provided in the Trust.
In December 2004, the company terminated the
Trust. Upon termination, the remaining 3.6 million common
shares subject to the Trust were dissolved with the related
common shares cancelled and retired. This activity reduced the
stated value of common shares by $1.1 million, capital in
excess of stated value by $41.6 million and unearned
employee benefits by $42.7 million.
The shares subscribed for by the Trust were
recorded in unearned employee benefits, which was a contra
equity account, and adjusted to market value at each reporting
period with an offsetting adjustment to capital in excess of
stated value. There were 1.4 million shares released from
the Trust prior to 2005. During 2005, 39 shares were returned
back to the Trust prior to its termination.
Shareholder Rights Plan
On April 27, 1999, the company’s Board
of Directors approved a new Shareholder Rights Plan, which
became effective upon expiration of the existing plan on
May 10, 1999. A dividend of one Right per common share was
distributed to shareholders of record as of May 10, 1999.
Each Right, upon the occurrence of certain events, entitles the
holder to buy from the company one-tenth of a common share at a
price of $4.00, or $40.00 per whole share, subject to
adjustment. The Rights may be exercised only if a person or
group acquires 20% or more of the company’s common shares,
or announces a tender offer for at least 20% of the
company’s common shares. Each Right will entitle its holder
(other than such acquiring person or members of such acquiring
group) to purchase, at the Right’s then-current exercise
price, a number of the company’s common shares having a
market value of twice the Right’s then-exercise price. The
Rights trade with the company’s common shares until the
Rights become exercisable.
If the company is acquired in a merger or other
business combination transaction, each Right will entitle its
holder to purchase, at the Right’s then-exercise price, a
number of the acquiring company’s common
55
shares (or other securities) having a market
value at the time of twice the Right’s then-current
exercise price. Prior to the acquisition by a person or group of
beneficial ownership of 20% or more of the company’s Common
Shares, the Rights are redeemable for $0.001 per Right at the
option of the company’s Board of Directors. The Rights will
expire May 10, 2009.
15.
EARNINGS (LOSS) PER SHARE
The following data show the amounts used in
computing earnings (loss) per share from continuing operations
and the effect on income (loss) and the weighted average number
of shares of dilutive potential common stock.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31 |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from
continuing operations — basic
|
|
$ |
20,362 |
|
|
$ |
11,524 |
|
|
$ |
(26,060 |
) |
| |
Distributions on
convertible preferred shares, net of taxes
|
|
|
5,153 |
|
|
|
— |
|
|
|
— |
|
|
| |
Income (loss) from
continuing operations — diluted
|
|
$ |
25,515 |
|
|
$ |
11,524 |
|
|
$ |
(26,060 |
) |
| |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average shares
outstanding — basic
|
|
|
28,101 |
|
|
|
27,744 |
|
|
|
27,292 |
|
| |
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock options and unvested
restricted stock
|
|
|
928 |
|
|
|
212 |
|
|
|
— |
|
| |
|
Convertible preferred
shares
|
|
|
7,961 |
|
|
|
— |
|
|
|
— |
|
|
| |
Weighted average shares
outstanding — diluted
|
|
|
36,990 |
|
|
|
27,956 |
|
|
|
27,292 |
|
| |
|
Earnings (loss) per
share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
0.72 |
|
|
$ |
0.42 |
|
|
$ |
(0.96 |
) |
| |
|
Diluted
|
|
$ |
0.69 |
|
|
$ |
0.41 |
|
|
$ |
(0.96 |
) |
|
Diluted earnings (loss) per share is computed by
sequencing each series of potential issuance of common shares
from the most dilutive to the least dilutive. Diluted earnings
(loss) per share is determined as the lowest earnings or highest
(loss) per incremental share in the sequence of potential common
shares.
For the years ended March 31, 2004, and
2003, 8.1 million, and 9.1 million common shares
issuable upon conversion of the Convertible Trust Preferred
Securities (i.e., convertible debt), respectively, were not
included in the computation of diluted earnings (loss) per share
because to do so would have been anti-dilutive.
For the years ended March 31, 2005, 2004,
and 2003, options on 0.7 million, 2.2 million, and
3.5 million shares of common stock, respectively, were not
included in computing diluted earnings per share because their
effects were anti-dilutive.
As discussed under note 18, subsequent to
year end the company announced that it would exercise its option
to redeem the entire balance of issued and outstanding
Convertible Trust Preferred Securities. Holders of the
Securities were required to accept a cash payment for each
Security or convert the Securities into common shares of the
company by the redemption date. Had the redemption taken place
during 2005, the number of shares used in the computation of
earnings per share would have changed.
16.
STOCK-BASED COMPENSATION
The company has a stock incentive plan. Under the
plan, the company may grant stock options, stock appreciation
rights, restricted shares, restricted share units, and
performance shares for up to 3.2 million shares of common
stock. For stock option awards, the exercise price is equal to
the market price of the company’s stock on the date of
grant. The maximum term of the options is 10 years, and
they vest ratably
56
over 3 years. Stock appreciation rights may
be granted in conjunction with a stock option granted under the
plan. Stock appreciation rights are exercisable only to the
extent that the stock option to which it relates is exercisable
and terminate upon the termination or exercise of the related
stock option. Restricted shares and restricted share units may
be issued at no cost or at a purchase price which may be below
their fair market value but which are subject to forfeiture and
restrictions on their sale or other transfer.
Performance share awards may be granted, where
the right to receive shares in the future is conditioned upon
the attainment of specified performance objects and such other
conditions, restrictions and contingencies. The exercise price
of performance share awards would be equal to the market price
of the company’s stock on the date of grant.
As of March 31, 2005, there were no stock
appreciation rights, restricted share units, or performance
shares awarded from the plan.
Stock Options
The following table summarizes stock option
activity during 2005, 2004, and 2003 for stock options awarded
by the company under the stock incentive plan and prior plans.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31 |
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
average | |
|
|
|
average | |
|
|
|
average | |
|
|
Number of | |
|
exercise | |
|
Number of | |
|
exercise | |
|
Number of | |
|
exercise | |
|
|
shares | |
|
price | |
|
shares | |
|
price | |
|
shares | |
|
price | |
|
| |
|
Outstanding at April 1
|
|
|
3,306,195 |
|
|
$ |
12.35 |
|
|
|
3,464,832 |
|
|
$ |
12.23 |
|
|
|
3,861,534 |
|
|
$ |
12.00 |
|
|
Granted
|
|
|
593,500 |
|
|
|
13.76 |
|
|
|
295,900 |
|
|
|
7.93 |
|
|
|
874,000 |
|
|
|
14.29 |
|
|
Exercised
|
|
|
(326,826 |
) |
|
|
12.26 |
|
|
|
(111,937 |
) |
|
|
7.76 |
|
|
|
(275,274 |
) |
|
|
8.12 |
|
|
Cancelled/expired
|
|
|
(50,736 |
) |
|
|
12.88 |
|
|
|
(328,235 |
) |
|
|
12.96 |
|
|
|
(616,014 |
) |
|
|
12.85 |
|
|
Forfeited
|
|
|
— |
|
|
|
— |
|
|
|
(14,365 |
) |
|
|
14.09 |
|
|
|
(379,414 |
) |
|
|
13.17 |
|
|
|
Outstanding at
March 31
|
|
|
3,522,133 |
|
|
$ |
12.59 |
|
|
|
3,306,195 |
|
|
$ |
12.35 |
|
|
|
3,464,832 |
|
|
$ |
12.23 |
|
|
|
Options exercisable at
March 31
|
|
|
2,581,904 |
|
|
$ |
12.58 |
|
|
|
2,336,059 |
|
|
$ |
12.51 |
|
|
|
2,063,592 |
|
|
$ |
12.07 |
|
|
Weighted average fair
value of options granted
|
|
$ |
6.09 |
|
|
|
|
|
|
$ |
3.84 |
|
|
|
|
|
|
$ |
6.94 |
|
|
|
|
|
The fair market value of each option granted is
estimated on the grant date using the Black-Scholes method. The
following assumptions were made in estimating fair value:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31 |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
| |
|
Dividend yield
|
|
|
0.9% |
|
|
|
1.0% |
|
|
|
1.0% |
|
|
Risk-free interest rate
|
|
|
3.7% |
|
|
|
3.3% |
|
|
|
3.8% |
|
|
Expected life
|
|
|
5.8 years |
|
|
|
6 years |
|
|
|
6 years |
|
|
Expected volatility
|
|
|
45.9% |
|
|
|
48.4% |
|
|
|
48.4% |
|
|
57
The following table summarizes the status of
stock options outstanding at March 31, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
Weighted | |
|
|
|
|
|
|
Weighted | |
|
average |
|
|
|
Weighted | |
|
|
|
|
average |
|
remaining | |
|
|
|
average |
| Exercise price range |
|
Number | |
|
exercise price | |
|
contractual life | |
|
Number | |
|
exercise price | |
|
|
|
$ 6.15 -
$ 7.69
|
|
|
13,500 |
|
|
$ |
7.02 |
|
|
|
4.3 |
|
|
|
13,167 |
|
|
$ |
7.02 |
|
|
$ 7.69 -
$ 9.23
|
|
|
603,166 |
|
|
|
8.38 |
|
|
|
5.2 |
|
|
|
394,401 |
|
|
|
8.56 |
|
|
$ 9.23 - $10.76
|
|
|
52,500 |
|
|
|
9.31 |
|
|
|
7.3 |
|
|
|
52,500 |
|
|
|
9.31 |
|
|
$10.76 - $12.30
|
|
|
325,500 |
|
|
|
12.08 |
|
|
|
2.7 |
|
|
|
313,200 |
|
|
|
12.07 |
|
|
$12.30 - $13.84
|
|
|
1,879,800 |
|
|
|
13.45 |
|
|
|
6.4 |
|
|
|
1,344,800 |
|
|
|
13.35 |
|
|
$13.84 - $15.38
|
|
|
647,667 |
|
|
|
14.64 |
|
|
|
6.4 |
|
|
|
463,836 |
|
|
|
14.65 |
|
|
| |
|
|
3,522,133 |
|
|
|
|
|
|
|
|
|
|
|
2,581,904 |
|
|
|
|
|
|
Restricted Shares
The following table summarizes restricted share
activity during 2005, 2004, and 2003 for restricted shares
awarded by the company under the stock incentive plan and prior
plans.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31 |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
Outstanding at April 1
|
|
|
579,655 |
|
|
|
783,511 |
|
|
|
648,978 |
|
|
Awarded
|
|
|
— |
|
|
|
— |
|
|
|
375,800 |
|
|
Vested
|
|
|
(203,856 |
) |
|
|
(203,856 |
) |
|
|
(241,267 |
) |
|
Canceled
|
|
|
(38,800 |
) |
|
|
— |
|
|
|
— |
|
|
|
Outstanding at March 31
|
|
|
336,999 |
|
|
|
579,655 |
|
|
|
783,511 |
|
|
During 2003, restricted share awards for
375,800 shares of the company’s common stock were
granted at a market value of $8.51 per share to certain
officers. These shares are subject to certain terms and
conditions and cliff-vest over a three-year period. Restrictions
lapse three years after the date of the award. The cost of these
awards, determined as the market value of the shares at the date
of grant, is being amortized over the restriction period.
Compensation cost charged to operations for the
restricted share awards was as follows: 2005 —
$1.3 million; 2004 — $2.1 million; and
2003 — $1.9 million.
58
17.
QUARTERLY RESULTS (UNAUDITED)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2005 |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
|
|
quarter | |
|
quarter | |
|
quarter | |
|
quarter | |
|
Year | |
|
|
|
Net sales
|
|
$ |
386,672 |
|
|
$ |
364,410 |
|
|
$ |
515,684 |
|
|
$ |
356,159 |
|
|
$ |
1,622,925 |
|
|
Gross margin
|
|
|
48,665 |
|
|
|
48,340 |
|
|
|
65,804 |
|
|
|
44,639 |
|
|
|
207,448 |
|
|
Income (loss) from
continuing operations
|
|
$ |
4,014 |
|
|
$ |
3,837 |
|
|
$ |
14,458 |
|
|
$ |
(1,947 |
) |
|
$ |
20,362 |
|
|
Loss from discontinued
operations
|
|
|
(164 |
) |
|
|
(96 |
) |
|
|
(229 |
) |
|
|
(388 |
) |
|
|
(877 |
) |
|
|
Net income (loss)
|
|
$ |
3,850 |
|
|
$ |
3,741 |
|
|
$ |
14,229 |
|
|
$ |
(2,335 |
) |
|
$ |
19,485 |
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) from
continuing operations
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.51 |
|
|
$ |
(0.07 |
) |
|
$ |
0.72 |
|
| |
|
Loss from discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
(0.03 |
) |
|
| |
|
Net income (loss)
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.51 |
|
|
$ |
(0.08 |
) |
|
$ |
0.69 |
|
|
| |
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) from
continuing operations
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.42 |
|
|
$ |
(0.07 |
) |
|
$ |
0.69 |
|
| |
|
Loss from discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
| |
|
Net income (loss)
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.42 |
|
|
$ |
(0.08 |
) |
|
$ |
0.67 |
|
|
Because quarterly reporting of per share data
stands on its own, the sum of per share amounts for the four
quarters in the fiscal year will not necessarily equal annual
per share amounts. FASB Statement 128, Earnings Per
Share, prohibits retroactive adjustment of quarterly per
share amounts so that the sum of those amounts equals amounts
for the full year.
The company experiences a seasonal increase in
sales during its fiscal third quarter ending in December. Third
quarter sales were 32% of annual revenues for 2005. The company
believes that this sales pattern is industry-wide. Although the
company is unable to predict whether this uneven sales pattern
will continue over the long term, the company anticipates that
this trend will remain the same in the foreseeable future.
Included in the fourth quarter of 2005 is a
$2.7 million charge for employee incentive and retirement
plans.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2004 |
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
|
|
quarter | |
|
quarter | |
|
quarter | |
|
quarter | |
|
Year | |
|
|
|
Net sales
|
|
$ |
279,593 |
|
|
$ |
292,683 |
|
|
$ |
459,363 |
|
|
$ |
371,577 |
|
|
$ |
1,403,216 |
|
|
Gross margin
|
|
|
34,927 |
|
|
|
34,714 |
|
|
|
59,426 |
|
|
|
51,835 |
|
|
|
180,902 |
|
|
(Loss) income from
continuing operations
|
|
$ |
(708 |
) |
|
$ |
(3,046 |
) |
|
$ |
9,120 |
|
|
$ |
6,158 |
|
|
$ |
11,524 |
|
|
Loss from discontinued
operations
|
|
|
(749 |
) |
|
|
(333 |
) |
|
|
(458 |
) |
|
|
(1,321 |
) |
|
|
(2,861 |
) |
|
|
Net (loss) income
|
|
$ |
(1,457 |
) |
|
$ |
(3,379 |
) |
|
$ |
8,662 |
|
|
$ |
4,837 |
|
|
$ |
8,663 |
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(Loss) income from
continuing operations
|
|
$ |
(0.02 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.33 |
|
|
$ |
0.22 |
|
|
$ |
0.42 |
|
| |
|
Loss from discontinued
operations
|
|
|
(0.03 |
) |
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(0.05 |
) |
|
|
(0.10 |
) |
|
| |
|
Net (loss) income
|
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
$ |
0.31 |
|
|
$ |
0.17 |
|
|
$ |
0.32 |
|
|
| |
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(Loss) income from
continuing operations
|
|
$ |
(0.02 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.29 |
|
|
$ |
0.21 |
|
|
$ |
0.41 |
|
| |
|
Loss from discontinued
operations
|
|
|
(0.03 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
(0.04 |
) |
|
|
(0.10 |
) |
|
| |
|
Net (loss) income
|
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
$ |
0.28 |
|
|
$ |
0.17 |
|
|
$ |
0.31 |
|
|
Because quarterly reporting of per share data
stands on its own, the sum of per share amounts for the four
quarters in the fiscal year will not necessarily equal annual
per share amounts. FASB Statement 128, Earnings Per
Share, prohibits retroactive adjustment of quarterly per
share amounts so that the sum of those amounts equals amounts
for the full year.
59
The company experiences a seasonal increase in
sales during its fiscal third quarter ending in December. Third
quarter sales were 33% of annual revenues for 2004. The company
believes that this sales pattern is industry-wide. Although the
company is unable to predict whether this uneven sales pattern
will continue over the long term, the company anticipates that
this trend will remain the same in the foreseeable future.
Included in the results of the fourth quarter of
2004 is a $5.0 million ($3.2 million after taxes)
favorable litigation settlement and a $7.9 million
($5.1 million after taxes) loss on retirement of debt
relating to the repurchase of Senior Notes and Securities.
18.
SUBSEQUENT EVENTS
Acquisition of The CTS
Corporations
On May 31, 2005, the company acquired The
CTS Corporations (“CTS”), a leading, independent
services organization, specializing in information technology
storage solutions for large and medium-sized corporate customers
and public-sector clients. CTS has annual revenues of
approximately $35 million and, based on the timing of the
close of the transaction, is expected to contribute
approximately $30 million to the company’s 2006
revenues. The purchase price of $27.5 million, which
included $2.6 million in assumed debt, was funded by cash.
In addition, the company will pay an earn-out to CTS
shareholders based on the acquired business achieving specific
financial performance targets. The acquisition will be accounted
for as a purchase, with the purchase price allocated to the
assets acquired and liabilities assumed based on their
respective fair values. Any excess of the purchase price over
the fair value of the net assets acquired will be allocated to
goodwill.
Redemption of Mandatorily Redeemable
Convertible Trust Preferred Securities
On June 15, 2005, the company completed the
redemption of its 6.75% Mandatorily Redeemable Convertible Trust
Preferred Securities (the “Securities”). The carrying
value of the Securities as of March 31, 2005 was
$125.3 million. Securities with a carrying value of
$105.4 million were redeemed for cash at a total cost of
$109.0 million. The company funded the redemption with
existing cash. In addition, 398,324 Securities with a carrying
value of $19.9 million were converted into common shares of
the company. The Securities were converted at the conversion
rate of 3.1746 common shares for each share of the Securities
converted resulting in the issuance of 1,264,505 common shares
of the company. As a result of the redemption, the company will
write-off deferred financing fees of $3.2 million in the
first quarter of fiscal 2006. The financing fees, incurred at
the timing of issuing the Securities, were being amortized over
a 30-year period ending on March 31, 2028.
60
Agilysys, Inc.
Schedule II — Valuation and Qualifying Accounts
Years Ended March 31, 2005, 2004 and 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Charged to | |
|
Deductions — | |
|
|
|
|
beginning of | |
|
costs and | |
|
net write-offs/ | |
|
Balance at | |
| Classification |
|
period | |
|
expenses | |
|
payments | |
|
end of period | |
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$ |
3,829 |
|
|
$ |
4,262 |
|
|
$ |
(2,224 |
) |
|
$ |
5,867 |
|
|
Inventory valuation
reserve
|
|
$ |
8,425 |
|
|
$ |
3,878 |
|
|
$ |
(7,617 |
) |
|
$ |
4,686 |
|
|
Restructuring
reserves
|
|
$ |
5,819 |
|
|
$ |
515 |
|
|
$ |
(876 |
) |
|
$ |
5,458 |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$ |
2,969 |
|
|
$ |
3,364 |
|
|
$ |
(2,504 |
) |
|
$ |
3,829 |
|
|
Inventory valuation reserve
|
|
$ |
4,525 |
|
|
$ |
5,930 |
|
|
$ |
(2,030 |
) |
|
$ |
8,425 |
|
|
Restructuring reserves
|
|
$ |
11,828 |
|
|
$ |
2,516 |
|
|
$ |
(8,525 |
) |
|
$ |
5,819 |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$ |
3,156 |
|
|
$ |
3,709 |
|
|
$ |
(3,896 |
) |
|
$ |
2,969 |
|
|
Inventory valuation reserve
|
|
$ |
5,097 |
|
|
$ |
3,224 |
|
|
$ |
(3,796 |
) |
|
$ |
4,525 |
|
|
Restructuring reserves
|
|
$ |
1,473 |
|
|
$ |
20,697 |
|
|
$ |
(10,342 |
) |
|
$ |
11,828 |
|
61
Exhibit Index
Agilysys, Inc.
| |
|
|
| Exhibit No. |
|
Description |
|
|
|
3(a)
|
|
Amended Articles of
Incorporation of Pioneer-Standard Electronics, Inc., which is
incorporated by reference to Exhibit 3.1 to the
company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003,
(File No. 000-05734).
|
|
3(b)
|
|
Amended Code of
Regulations, as amended, of Agilysys, Inc., which is
incorporated by reference to Exhibit 3.1 to the
company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004
(File No. 000-05734).
|
|
4(a)
|
|
Rights Agreement, dated as
of April 27, 1999, by and between the company and National
City Bank, which is incorporated herein by reference to
Exhibit 1 to the company’s Registration Statement on
Form 8-A (File No. 000-05734).
|
|
4(b)
|
|
Indenture, dated as of
August 1, 1996, by and between the company and Star Bank,
N.A., as Trustee, which is incorporated herein by reference to
Exhibit 4(g) to the company’s Annual Report on
Form 10-K for the year ended March 31, 1997 (File
No. 000-05734).
|
|
4(c)
|
|
Share Subscription
Agreement and Trust, effective July 2, 1996, by and between
the company and Wachovia Bank of North Carolina, N.A., which is
incorporated herein by reference to Exhibit 10.1 to the
company’s Registration Statement on Form S-3 (Reg.
No. 333-07665).
|
|
4(d)
|
|
Certificate of Trust of
Pioneer-Standard Financial Trust, dated March 23, 1998,
which is incorporated herein by reference to Exhibit 4(l)
to the company’s Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 000-05734).
|
|
4(e)
|
|
Amended and Restated Trust
Agreement among Pioneer-Standard Electronics, Inc., as
Depositor, Wilmington Trust company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein,
dated as of March 23, 1998, which is incorporated herein by
reference to Exhibit 4(m) to the company’s Annual
Report on Form 10-K for the year ended March 31, 1998
(File No. 000-05734).
|
|
4(f)
|
|
Junior Subordinated
Indenture, dated March 23, 1998, between the company and
Wilmington Trust, as trustee, which is incorporated herein by
reference to Exhibit 4(n) to the company’s Annual
Report on Form 10-K for the year ended March 31, 1998
(File No. 000-05734).
|
|
4(g)
|
|
First Supplemental
Indenture, dated March 23, 1998, between the company and
Wilmington Trust, as trustee, which is incorporated herein by
reference to Exhibit 4(o) to the company’s Annual
Report on Form 10-K for the year ended March 31, 1998
(File No. 000-05734).
|
|
4(h)
|
|
Form of 6 3/4%
Convertible Preferred Securities, which is incorporated herein
by reference to Exhibit 4(m) to the company’s Annual
Report on Form 10-K for the year ended March 31, 1998
(File No. 000-05734).
|
62
| |
|
|
| Exhibit No. |
|
Description |
|
|
|
4(i)
|
|
Form of Series A 6
3/4% Junior Convertible Subordinated Debentures, which is
incorporated herein by reference to Exhibit 4(o) to the
company’s Annual Report on Form 10-K for the year
ended March 31, 1998 (File No. 000-05734).
|
|
4(j)
|
|
Guarantee Agreement, dated
March 23, 1998, between the company and Wilmington Trust,
as guarantee trustee, which is incorporated herein by reference
to Exhibit 4(r) to the company’s Annual Report on
Form 10-K for the year ended March 31, 1998 (File
No. 000-05734).
|
|
*10(a)
|
|
Amended and Restated
Employment Agreement, dated April 27, 1999, by and between
the company and John V. Goodger, which is incorporated herein by
reference to Exhibit 10.4 to the company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999 (File No. 000-05734).
|
|
*10(b)
|
|
The company’s 1982
Incentive Stock Option Plan, as amended, which is incorporated
by reference to Exhibit 10(e) to the company’s Annual
Report on Form 10-K for the year ended March 31, 1997
(File No. 000-05734).
|
|
*10(c)
|
|
The company’s Amended
and Restated 1991 Stock Option Plan, which is incorporated
herein by reference to Exhibit 4.1 to the company’s
Form S-8 Registration Statement
(Reg. No. 033-53329).
|
|
*10(d)
|
|
The company’s Amended
1995 Stock Option Plan for Outside Directors, which is
incorporated herein by reference to Exhibit 99.1 to the
company’s Form S-8 Registration Statement
(Reg. No. 333-07143).
|
|
*10(e)
|
|
Pioneer-Standard
Electronics, Inc. 1999 Stock Option Plan for Outside Directors,
which is incorporated herein by reference to Exhibit 10.5
to the company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (File No. 000-05734).
|
|
*10(f)
|
|
Pioneer-Standard
Electronics, Inc. 1999 Restricted Stock Plan, which is
incorporated herein by reference to Exhibit 10.6 to the
company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (File No. 000-05734).
|
|
*10(g)
|
|
Pioneer-Standard
Electronics, Inc. Supplemental Executive Retirement Plan, which
is incorporated herein by reference to Exhibit 10(o) to the
company’s Annual Report on Form 10-K for the year
ended March 31, 2000 (File No. 000-05734).
|
|
*10(h)
|
|
Pioneer-Standard
Electronics, Inc. Benefit Equalization Plan, which is
incorporated herein by reference to Exhibit 10(p) to the
company’s Annual Report on Form 10-K for the year
ended March 31, 2000 (File No. 000-05734).
|
|
*10(i)
|
|
Form of Option
Agreement between Pioneer-Standard Electronics, Inc. and the
optionees under the Pioneer-Standard Electronics, Inc. 1999
Stock Option Plan for Outside Directors, which is incorporated
herein by reference to Exhibit 10.7 to the company’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 (File No. 000-05734).
|
63
| |
|
|
| Exhibit No. |
|
Description |
|
|
|
*10(j)
|
|
Employment agreement,
effective April 24, 2000, between Pioneer-Standard
Electronics, Inc. and Steven M. Billick, which is incorporated
herein by reference to Exhibit 10.3 to the company’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 000-05734).
|
|
*10(k)
|
|
Five-Year Credit
Agreement, dated as of September 15, 2000, among
Pioneer-Standard Electronics, Inc., the Foreign Subsidiary
Borrowers, the Lenders, and Bank One, Michigan as Agent, Banc
One Capital Markets, Inc. as Lead Arranger and Sole Book Runner,
KeyBank National Association as Syndication Agent, and ABN AMRO
Bank, N.V., as Documentation Agent, which is incorporated herein
by reference to Exhibit 10.4 to the company’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 000-05734).
|
|
10(l)
|
|
364-Day Credit Agreement,
dated as of September 15, 2000, among Pioneer-Standard
Electronics, Inc., the Lenders, Bank One, Michigan as Agent,
Banc One Capital Markets, Inc. as Lead Arranger and Sole Book
Runner, KeyBank National Association, as Syndication Agent, and
ABN AMRO Bank, N.V., as Documentation Agent, which is
incorporated herein by reference to Exhibit 10.5 to the
company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000
(File No. 000-05734).
|
|
*10(m)
|
|
Pioneer-Standard
Electronics, Inc. Senior Executive Disability Plan, effective
April 1, 2000, which is incorporated herein by reference to
Exhibit 10(v) to the company’s Annual Report on
Form 10-K for the year ended March 31, 2001
(File No. 000-05734).
|
|
*10(n)
|
|
Non-Competition Agreement,
dated as of February 25, 2000, between Pioneer-Standard
Electronics, Inc. and Robert J. Bailey, which is incorporated
herein by reference to Exhibit 10(w) to the company’s
Annual Report on Form 10-K for the year ended
March 31, 2001 (File No. 000-05734).
|
|
*10(o)
|
|
Change of Control
Agreement, dated as of February 25, 2000, between
Pioneer-Standard Electronics, Inc. and Robert J. Bailey, which
is incorporated herein by reference to Exhibit 10(x) to the
company’s Annual Report on Form 10-K for the year
ended March 31, 2001 (File No. 000-05734).
|
|
*10(p)
|
|
Non-Competition Agreement,
dated as of February 25, 2000, between Pioneer-Standard
Electronics, Inc. and Peter J. Coleman, which is incorporated
herein by reference to Exhibit 10(y) to the company’s
Annual Report on Form 10-K for the year ended
March 31, 2001 (File No. 000-05734).
|
|
*10(q)
|
|
Change of Control
Agreement, dated as of February 25, 2000, between
Pioneer-Standard Electronics, Inc. and Peter J. Coleman, which
is incorporated herein by reference to Exhibit 10(z) to the
company’s Annual Report on Form 10-K for the year
ended March 31, 2001 (File No. 000-05734).
|
|
10(r)
|
|
Receivables Purchase
Agreement, dated as of October 19, 2001, among
Pioneer-Standard Electronics Funding Corporation, as the Seller,
Pioneer-Standard Electronics, Inc., as the Servicer, Falcon
Asset Securitization Corporation and Three Rivers Funding
Corporation, as Conduits, Bank One, NA and Mellon Bank, N.A., as
Managing Agents and the Committed purchasers from time to time
parties hereto and Bank One, NA as Collateral Agent, which is
incorporated herein by reference to Exhibit 10.1 to the
company’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2001 (File No. 000-05734).
|
64
| |
|
|
| Exhibit No. |
|
Description |
|
|
|
10(s)
|
|
Receivables Sales
Agreement, dated as of October 19, 2001, among
Pioneer-Standard Electronics, Inc., Pioneer-Standard Minnesota,
Inc., Pioneer-Standard Illinois, Inc. and Pioneer-Standard
Electronics, Ltd., as Originators and Pioneer-Standard Funding
Corporation, as Buyer, which is incorporated herein by reference
to Exhibit 10.2 to the company’s Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001
(File No. 000-05734).
|
|
10(t)
|
|
Amendment No. 1 to
Receivables Purchase Agreement, dated as of January 29, 2002, by
and among Pioneer-Standard Funding Corporation, as Seller,
Pioneer-Standard Electronics, Inc. as Servicer, Falcon Asset
Securitization Corporation and Three Rivers Funding Corporation,
as Conduits, certain Committed Purchasers, Bank One, NA and
Mellon Bank, N.A. as Managing Agents, and Bank One, as
Collateral Agent, which is incorporated herein by reference to
Exhibit 10.3 to the company’s Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001
(File No. 000-05734).
|
|
10(u)
|
|
Third Amendment to
Five-Year Credit Agreement, dated as of January 29, 2002,
by and among Pioneer-Standard Electronics, Inc., the Foreign
Subsidiary Borrowers, the various lenders and Bank One, Michigan
as Agent, which is incorporated herein by reference to
Exhibit 10.4 to the company’s Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001
(File No. 000-05734).
|
|
*10(v)
|
|
Amendment to the
Pioneer-Standard Electronics, Inc. Supplemental Executive
Retirement Plan dated January 29, 2002, which is incorporated
herein by reference to Exhibit 10(x) to the company’s
Annual Report on Form 10-K for the year ended
March 31, 2002 (File No. 000-05734).
|
|
10(w)
|
|
Fourth Amendment to
Five-Year Credit Agreement, dated as of May 6, 2002, by and
among Pioneer-Standard Electronics, Inc., the Foreign Subsidiary
Borrowers, the various lenders and Bank One, Michigan as LC
Issuer and Agent, which is incorporated herein by reference to
Exhibit 10(y) to the company’s Annual Report on
Form 10-K for the year ended March 31, 2002
(File No. 000-05734).
|
|
*10(x)
|
|
Amended and Restated
Employment agreement, effective April 1, 2002, between
Pioneer-Standard Electronics, Inc. and James L. Bayman which is
incorporated herein by reference to Exhibit 10(z) to the
company’s Annual Report on Form 10-K for the year
ended March 31, 2002 (File No. 000-05734).
|
|
*10(y)
|
|
Employment agreement,
effective April 1, 2002, between Pioneer-Standard
Electronics, Inc. and Arthur Rhein which is incorporated herein
by reference to Exhibit 10(aa) to the company’s Annual
Report on Form 10-K for the year ended March 31, 2002
(File No. 000-05734).
|
|
10(z)
|
|
Fifth Amendment to
Five-Year Credit Agreement, Dated as of December 20, 2002,
by and among Pioneer-Standard Electronics, Inc., the Foreign
Subsidiary Borrowers, the various lenders and Bank One, N.A., as
successor by merger to Bank One, Michigan as LC Issuer and as
Agent, which is incorporated herein by reference to
Exhibit 10.1 to the company’s Quarterly Report on
Form 10-Q for the quarter ended December 31, 2002
(File No. 000-05734).
|
65
| |
|
|
| Exhibit No. |
|
Description |
|
|
|
10(aa)
|
|
Purchase Agreement dated
as of January 13, 2003 by and between Arrow Electronics,
Inc., Arrow Europe GmbH, Arrow Electronics Canada Ltd., and
Pioneer-Standard Electronics, Inc., Pioneer-Standard Illinois,
Inc., Pioneer-Standard Minnesota, Inc., Pioneer-Standard
Electronics, Ltd., Pioneer-Standard Canada Inc, which is
incorporated herein by reference to Exhibit 2.1 to the
company’s Form 8-K, filed March 17, 2003
(File No. 000-05734).
|
|
10(bb)
|
|
Three Year Credit
Agreement among Pioneer-Standard Electronics, Inc., as
Borrower, various financial institutions, as Lenders, Key
Corporate Capital, Inc., as Lead Arranger, Book Runner and
Administrative Agent, U.S. Bank National Association, as
Syndication Agent, and Harris Trust and Savings Bank, as
Documentation Agent dated as of April 16, 2003, which is
incorporated by reference to Exhibit 10(bb) to the
company’s Annual Report on Form 10-K for the year
ended March 31, 2003 (File No. 000-05734).
|
|
*10(cc)
|
|
Amended and Restated
Employment Agreement between Pioneer-Standard Electronics, Inc.
and Arthur Rhein, effective April 1, 2003, which is
incorporated by reference to Exhibit 10(cc) to the
Company’s Annual Report on Form 10-K for the year
ended March 31, 2003 (File No. 000-05734).
|
|
*10(dd)
|
|
Amendment No. 1 to
Employment Agreement, between Pioneer-Standard Electronics, Inc.
and Steven M. Billick, effective April 1, 2002, which is
incorporated by reference to Exhibit 10(dd) to the
Company’s Annual Report on Form 10-K for the year
ended March 31, 2003 (File No. 000-05734).
|
|
*10(ee)
|
|
Amendment No. 1 to
Change of Control Agreement and Non-Competition Agreement, dated
as of January 30, 2003, between Pioneer-Standard
Electronics, Inc. and Robert J. Bailey, which is incorporated by
reference to Exhibit 10(ee) to the Company’s Annual
Report on Form 10-K for the year ended March 31, 2003
(File No. 000-05734).
|
|
*10(ff)
|
|
Amendment No. 1 to
Change of Control Agreement and Non-Competition Agreement, dated
as of January 30, 2003, between Pioneer-Standard Electronics,
Inc. and Peter J. Coleman, which is incorporated by reference to
Exhibit 10(ff) to the Company’s Annual Report on
Form 10-K for the year ended March 31, 2003
(File No. 000-05734).
|
|
*10(gg)
|
|
Employment Agreement dated
June 30, 2003 between Martin F. Ellis and Pioneer-Standard
Electronics (n/k/a Agilysys, Inc.), which is incorporated by
reference to Exhibit 10(gg) to the Company’s Annual
Report on Form 10-K for the year ended March 31, 2004
(File No. 000-05734).
|
|
*10(hh)
|
|
Change of Control
Agreement dated June 30, 2003 by and between Martin F.
Ellis and Pioneer-Standard Electronics (n/k/a Agilysys, Inc.),
which is incorporated by reference to Exhibit 10(hh) to the
Company’s Annual Report on Form 10-K for the year ended
March 31, 2004 (File No. 000-05734).
|
|
21
|
|
Subsidiaries of the
Registrant.
|
|
23
|
|
Consent of Ernst &
Young LLP, Independent Registered Public Accounting Firm.
|
|
31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
|
66
| |
|
|
| Exhibit No. |
|
Description |
|
|
|
32.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 906 of Sarbanes-Oxley
Act of 2002.
|
|
32.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 906 of Sarbanes-Oxley
Act of 2002.
|
|
99(a)
|
|
Certificate of Insurance
Policy, effective November 1, 1997, between Chubb Group of
Insurance Companies and Pioneer-Standard Electronics, Inc.,
which is incorporated herein by reference to Exhibit 99(a)
to the company’s Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 000-05734).
|
|
99(b)
|
|
Forms of Amended and
Restated Indemnification Agreement entered into by and between
the company and each of its Directors and Executive Officers,
which are incorporated herein by reference to Exhibit 99(b)
to the company’s Annual Report on Form 10-K for the
year ended March 31, 1994 (File No. 000-05734).
|
* Denotes a management contract or
compensatory plan or arrangement.