Agilysys, Inc. 10-Q
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 0-5734
AGILYSYS, INC.
(Exact name of registrant as specified in its charter)
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| Ohio
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34-0907152 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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| 2255 Glades Road, Suite 425W, Boca Raton, Florida
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33431 |
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| (Address of principal executive offices)
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(ZIP Code) |
(561) 999-8700
(Registrant’s telephone number, including area code)
6065 Parkland Boulevard, Mayfield Heights, Ohio 44124
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of Common Shares of the registrant outstanding as of July 31, 2006 was 30,584,498.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AGILYSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended |
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June 30 |
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| (In thousands, except share and per share data) |
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2006 |
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2005 |
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Net sales |
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$ |
388,351 |
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$ |
409,954 |
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Cost of goods sold |
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332,604 |
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359,196 |
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Gross margin |
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55,747 |
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50,758 |
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Operating expenses |
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Selling, general and administrative expenses |
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43,687 |
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41,239 |
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Restructuring charges |
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(34 |
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2,424 |
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Operating income |
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12,094 |
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7,095 |
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Other (income) expenses |
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Other expense (income), net |
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774 |
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(362 |
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Interest income |
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(1,725 |
) |
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(1,471 |
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Interest expense |
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1,584 |
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1,607 |
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Loss on redemption of Mandatorily Redeemable Convertible
Trust Preferred Securities |
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— |
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4,811 |
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Income before income taxes |
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11,461 |
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2,510 |
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Provision for income taxes |
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4,724 |
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1,177 |
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Distributions on Mandatorily Redeemable Convertible Trust
Preferred Securities, net of taxes |
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— |
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900 |
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Income from continuing operations |
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6,737 |
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433 |
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Income (loss) from discontinued operations, net of taxes |
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14 |
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(143 |
) |
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Net income |
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$ |
6,751 |
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$ |
290 |
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Earnings per share — basic and diluted |
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Income from continuing operations |
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$ |
0.22 |
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$ |
0.01 |
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Income (loss) from discontinued operations |
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— |
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— |
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Net income |
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$ |
0.22 |
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$ |
0.01 |
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Weighted average shares outstanding |
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Basic |
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30,524,983 |
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28,901,927 |
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Diluted |
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30,992,359 |
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29,827,852 |
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Cash dividends per share |
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$ |
0.03 |
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$ |
0.03 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
AGILYSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts at June 30, 2006 are Unaudited)
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June 30 |
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March 31 |
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| (In thousands, except share and per share data) |
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2006 |
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2006 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
122,683 |
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$ |
147,850 |
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Accounts receivable, net |
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264,171 |
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267,916 |
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Inventories, net |
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67,647 |
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53,004 |
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Deferred income taxes |
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8,228 |
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10,418 |
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Prepaid expenses and other current assets |
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3,889 |
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3,447 |
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Assets of discontinued operations |
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463 |
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437 |
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Total current assets |
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467,081 |
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483,072 |
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Goodwill |
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191,847 |
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191,854 |
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Intangible assets, net |
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11,020 |
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11,854 |
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Investments in affiliated companies |
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17,404 |
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18,821 |
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Other non-current assets |
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29,047 |
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28,311 |
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Property and equipment, net |
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27,300 |
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27,928 |
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Total assets |
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$ |
743,699 |
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$ |
761,840 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
220,856 |
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$ |
238,493 |
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Accrued liabilities |
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33,634 |
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40,901 |
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Current portion of long-term debt |
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59,586 |
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59,587 |
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Liabilities of discontinued operations |
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817 |
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872 |
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Total current liabilities |
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314,893 |
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339,853 |
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Long-term debt |
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57 |
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99 |
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Deferred income taxes |
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15,953 |
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16,059 |
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Other non-current liabilities |
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21,768 |
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20,653 |
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Shareholders’ equity |
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Common shares, without par value, at $0.30 stated value; authorized
80,000,000 shares; 30,584,498 and 30,526,505 shares
outstanding at June 30, 2006 and March 31, 2006, respectively,
net of 54,025 shares in treasury at both June 30, 2006 and
March 31, 2006 |
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9,081 |
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9,076 |
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Capital in excess of stated value |
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114,354 |
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113,972 |
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Retained earnings |
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266,091 |
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260,255 |
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Unearned compensation on restricted stock awards |
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— |
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(168 |
) |
Accumulated other comprehensive income |
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1,502 |
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2,041 |
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Total shareholders’ equity |
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391,028 |
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385,176 |
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Total liabilities and shareholders’ equity |
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$ |
743,699 |
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$ |
761,840 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
AGILYSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three months ended |
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June 30 |
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2006 |
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2005 |
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| (In thousands) |
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(Revised) |
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Operating activities: |
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Net income |
|
$ |
6,751 |
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$ |
290 |
|
Add: Income (loss) from discontinued operations |
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|
14 |
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(143 |
) |
|
|
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|
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Income from continuing operations |
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6,737 |
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|
|
433 |
|
Adjustments to reconcile income from continuing
operations to net cash (used for) provided by
operating activities (net of effects from business
acquisition): |
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Loss on redemption of Mandatorily Redeemable
Convertible Trust Preferred Securities |
|
|
— |
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|
4,811 |
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Loss on disposal of plant and equipment |
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1 |
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|
1 |
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Depreciation |
|
|
738 |
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|
971 |
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Amortization |
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|
1,677 |
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|
1,269 |
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Deferred income taxes |
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|
2,084 |
|
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(1,150 |
) |
Stock based compensation |
|
|
287 |
|
|
|
— |
|
Excess tax benefit from exercise of stock options |
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(44 |
) |
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— |
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Changes in working capital: |
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|
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Accounts receivable |
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3,817 |
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(16,040 |
) |
Inventories |
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(14,643 |
) |
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(5,914 |
) |
Accounts payable |
|
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(17,637 |
) |
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|
43,577 |
|
Accrued liabilities |
|
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(7,223 |
) |
|
|
2,302 |
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Other changes, net |
|
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(442 |
) |
|
|
818 |
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Other non-cash adjustments |
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1,025 |
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(286 |
) |
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Total adjustments |
|
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(30,360 |
) |
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30,359 |
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Net cash (used for) provided by operating activities |
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(23,623 |
) |
|
|
30,792 |
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|
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|
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Investing activities: |
|
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|
|
|
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Acquisition of business, net of cash acquired |
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|
— |
|
|
|
(27,784 |
) |
Acquisition of property and equipment |
|
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(859 |
) |
|
|
(310 |
) |
|
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|
|
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Net cash used for investing activities |
|
|
(859 |
) |
|
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(28,094 |
) |
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|
|
|
|
|
|
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Financing activities: |
|
|
|
|
|
|
|
|
Redemption of Mandatorily Redeemable Convertible
Trust Preferred Securities |
|
|
— |
|
|
|
(107,536 |
) |
Dividends paid |
|
|
(916 |
) |
|
|
(866 |
) |
Proceeds from issuance of common stock |
|
|
201 |
|
|
|
3,843 |
|
Principal payment under long term obligations |
|
|
(43 |
) |
|
|
(78 |
) |
Excess tax benefit from exercise of stock options |
|
|
44 |
|
|
|
— |
|
|
|
|
|
|
|
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Net cash used for financing activities |
|
|
(714 |
) |
|
|
(104,637 |
) |
|
|
|
|
|
|
|
|
|
Effect of foreign currency fluctuations on cash |
|
|
96 |
|
|
|
(201 |
) |
|
|
|
|
|
|
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Cash flows used for continuing operations |
|
|
(25,100 |
) |
|
|
(102,140 |
) |
Cash flows of discontinued operations
|
|
|
|
|
|
|
|
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Operating cash flows |
|
|
(67 |
) |
|
|
(478 |
) |
Investing cash flows |
|
|
— |
|
|
|
— |
|
Financing cash flows |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
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Net decrease in cash |
|
|
(25,167 |
) |
|
|
(102,618 |
) |
Cash at beginning of period |
|
|
147,850 |
|
|
|
241,880 |
|
|
|
|
|
|
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Cash at end of period |
|
$ |
122,683 |
|
|
$ |
139,262 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
AGILYSYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands, except per share data)
1. Financial Statement Presentation
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Agilysys, Inc. and its subsidiaries (the “company”). Investments in affiliated companies are
accounted for by the equity or cost method, as appropriate, under U.S. generally accepted
accounting principles (“GAAP”). All inter-company accounts have been eliminated. 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, 2007 refers to the fiscal year ending March 31, 2007.
The unaudited interim financial statements of the company are prepared in accordance with GAAP for
interim financial information and pursuant to the instructions for Form 10-Q under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and Article 10 of Regulation S-X under the
Exchange Act. Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules
and regulations relating to interim financial statements.
The condensed consolidated balance sheet as of June 30, 2006, as well as the condensed consolidated
statements of operations and condensed consolidated statements of cash flows for the three-months
ended June 30, 2006 and 2005 have been prepared by the company without audit. However, the
financial statements have been prepared on the same basis as those in the audited annual financial
statements. In the opinion of management, all adjustments necessary to fairly present the results
of operations, financial position, and cash flows have been made. Such adjustments were of a normal
recurring nature.
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. Accordingly, the results of operations for the
three-month period ended June 30, 2006 are not necessarily indicative of the operating results for
the full fiscal year or any future period.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current presentation. For the
quarter ended June 30, 2006, the company has separately disclosed the operating, investing and
financing portions of the cash flow attributable to its discontinued operations, which in prior
periods were reported on a combined basis as a single amount.
2. Summary of Significant Accounting Policies
A detailed description of the company’s significant accounting policies can be found in the audited
financial statements for the fiscal year ended March 31, 2006, included in the company’s Annual
Report on Form 10-K, filed with the Securities and Exchange Commission. Except for the company’s
adoption of FASB Statement 123 (revised 2004), Share-Based Payment, on April 1, 2006, which is
discussed
6
below, there have been no material changes in the company’s significant accounting policies and
estimates from those disclosed therein.
Accounting for Stock Based Compensation
The company has a stock incentive plan under which it may grant non-qualified stock options,
incentive stock options, time-vested restricted shares, performance-vested restricted shares, and
performance shares. Shares issued pursuant to awards under the plan may be made out of treasury or
authorized but unissued shares. The company also has an employee stock purchase plan.
Prior to the April 1, 2006 adoption of FASB Statement No. 123 (revised 2004), Share-Based Payment,
(“Statement 123R”), the company accounted for stock based compensation using the intrinsic value
method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, (“APB 25”), as permitted by FASB Statement No. 123, Share-Based Payment (“Statement
123”). No stock based employee compensation cost was recognized by the company for stock option
awards, as all options granted to employees had an exercise price equal to the market value of the
underlying stock on the date of grant. Effective April 1, 2006, the company adopted the fair value
recognition provisions of Statement 123R using the modified prospective transition method. Under
this transition method, compensation cost recognized in the current quarter includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of April 1,
2006, based on the grant date fair value estimated in accordance with the original provisions of
Statement 123, and (b) compensation cost for all share-based payments granted subsequent to April
1, 2006, based on the grant-date fair value estimated in accordance with the provisions of
Statement 123R. Results for prior periods have not been restated.
As a result of adopting Statement 123R on April 1, 2006, the company’s income before income taxes,
income from continuing operations and net income for the three-month period ended June 30, 2006,
are $0.3 million, $0.2 million and $0.2 million lower, respectively, than if it had continued to
account for share-based compensation under APB 25. Basic and diluted earnings per share for the
quarter-ended June 30, 2006 are both $0.01 lower than if the company had continued to account for
share-based compensation under APB 25.
Prior to the adoption of Statement 123R, the company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the Statement of Cash
Flows. Statement 123R requires the cash flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options (excess tax benefits) to
be classified as financing cash flows. Excess tax benefits recognized by the company during the
quarter ended June 30, 2006 were $44,000.
7
The following table presents pro forma information to illustrate the effect on net income and
earnings per share for the period ended June 30, 2005 if the company had applied the fair value
recognition provisions of Statement 123 to options granted under the company’s stock incentive
plans prior to the adoption of Statement 123R on April 1, 2006:
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|
|
|
| |
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June 30 |
|
| (Three-months ended) |
|
2005 |
|
Net income, as reported (a) |
|
$ |
290 |
|
Compensation cost based on fair value method,
net of taxes |
|
|
170 |
|
|
|
|
|
Pro forma net income |
|
$ |
120 |
|
|
|
|
|
|
|
|
|
|
Earnings per share — basic and diluted |
|
|
|
|
As reported |
|
$ |
0.01 |
|
Pro forma |
|
|
— |
|
|
|
|
| (a) |
|
Includes stock compensation expense, net of taxes, for restricted stock awards of $47,000. |
Pro forma disclosures for the three-month period ended June 30, 2006 are not presented because
the charges required by Statement 123R are already recognized in the condensed consolidated
statement of operations. See Note 10 for continued discussion of stock based compensation and the
company’s stock incentive plan.
Recently Issued Accounting Pronouncement
In June 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of SFAS No. 109. FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. The pronouncement prescribes a recognition threshold and measurement
attributable to financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The company is currently evaluating the effect the adoption of FIN No. 48 will have on its
financial position or results of operations.
3. Recent Acquisitions
In accordance with FASB Statement 141, Business Combinations, the company allocates the cost of its
acquisitions to the assets acquired and liabilities assumed based on their estimated fair values.
The excess of the cost over the fair value of the net assets acquired is recorded as goodwill.
Mainline China and Hong Kong
In December 2005, the company acquired the China and Hong Kong operations of Mainline Information
Systems, Inc. Accordingly, the results of operations for the China and Hong Kong operations have
been included in the accompanying consolidated financial statements from that date forward. The
business specializes in IBM information technology enterprise solutions for large and medium-sized
businesses and banking institutions in the China market, and has sales offices in Beijing,
Guangzhou, Shanghai and Hong Kong. The business provides the company the opportunity to begin
operations in China with a nucleus of local workforce. The acquisition price for the China and
Hong Kong operations was $0.8 million, which included $0.3 million of direct acquisition costs.
Based on management’s allocation of the acquisition cost to the net assets acquired, approximately
$0.8 million was assigned to goodwill in 2006.
8
Goodwill resulting from the China and Hong Kong operations of Mainline Information Systems, Inc.
acquisitions will not be deductible for income tax purposes.
The CTS Corporations
In May 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. Accordingly, the results of operations for CTS have
been included in the accompanying consolidated financial statements from that date forward. The
addition of CTS enhances the company’s offering of comprehensive storage solutions. The
acquisition price was $27.8 million, which included repayment of $2.6 million of CTS debt and $0.2
million of direct acquisition expenses. Based on management’s allocation of the acquisition cost
to the net assets acquired, approximately $17.6 million was assigned to goodwill in 2006. During
the first quarter of 2007, the company adjusted the estimated fair value of acquired tax assets by
approximately $72,000, with a corresponding decrease to goodwill. Goodwill resulting from the CTS
acquisition will not be deductible for income tax purposes.
4. Discontinued Operations
During 2003, the company sold substantially all of the assets and liabilities of its 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 in the consolidated statement of operations as income (loss)
from discontinued operations.
For the three-months ended June 30, 2006 and 2005, the company realized a gain from discontinued
operations of $14,000 (net of $9,000 of income taxes) and a loss of $143,000 (net of $93,000 of
income taxes), respectively. Ongoing expenses mainly relate to sub-lease occupancy costs
associated with exited facilities.
At June 30, 2006, the assets of discontinued operations were $0.5 million and related to accounts
receivable and deferred income taxes. The liabilities of discontinued operations were $0.8 million
and related to liabilities for ongoing lease commitments and deferred income taxes.
5. Restructuring Charges
Continuing Operations
2006 Restructuring. During 2006, the company consolidated a portion of its operations to reduce
costs and increase operating efficiencies. As part of that restructuring effort, the company shut
down certain leased facilities and reduced the workforce of its KeyLink Systems Group and
professional services business. The company also executed a senior management realignment and
consolidation of responsibilities. Costs incurred in connection with the restructuring comprise
one-time termination benefits and other associated costs resulting from workforce reductions as
well as facilities’ costs relating to the exit of certain leased facilities. Facilities’ costs
represent the present value of qualifying exit costs, offset by an estimate for future sublease
income. The charges were classified as restructuring charges in the consolidated statement of
operations.
9
2003 Restructuring. In the fourth quarter of 2003, concurrent with the sale of IED, the company
announced it would restructure 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. Severance, incentives, and other employee
benefit costs were 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 |
|
|
|
|
|
|
|
| |
|
employee |
|
|
|
|
|
|
|
| |
|
costs |
|
|
Facilities |
|
|
Total |
|
Balance at April 1, 2006 |
|
$ |
130 |
|
|
$ |
6,246 |
|
|
$ |
6,376 |
|
Accretion of lease obligations |
|
|
— |
|
|
|
113 |
|
|
|
113 |
|
Payments |
|
|
(120 |
) |
|
|
(353 |
) |
|
|
(473 |
) |
Adjustments |
|
|
(10 |
) |
|
|
(355 |
) |
|
|
(365 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
$ |
— |
|
|
$ |
5,651 |
|
|
$ |
5,651 |
|
|
|
|
|
|
|
|
|
|
|
The $0.4 million adjustment to facilities represents adjustments to the remaining facility
obligations for sublease agreements and early termination agreements, with an offset to the
restructuring charges in the consolidated statement of operations.
Included in the consolidated statement of operations is $34,000 of restructuring income for the
first quarter of 2007, which is comprised of the following: $0.1 million accretion of lease
obligations, $0.2 million relating to the write-off of leasehold improvements and differences
between actual and accrued sub-lease income and common area costs, offset by $0.4 million of
adjustments to the remaining facility obligations in the restructuring.
Of the remaining $5.7 million liability at June 30, 2006, approximately $0.7 million is expected to
be paid during the remainder of 2007 for ongoing facility obligations. 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 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.
10
Of the remaining $0.9 million reserve at June 30, 2006, approximately $0.3 million is expected to
be paid during the remainder of 2007 for ongoing obligations of vacated facilities. Facilities
obligations are expected to continue until 2010.
6. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill during the three-months ended June 30, 2006 are
summarized in the following table:
| |
|
|
|
|
| |
|
2007 |
|
First quarter beginning balance |
|
$ |
191,854 |
|
Goodwill adjustment — CTS |
|
|
(72 |
) |
Impact of foreign currency translation |
|
|
65 |
|
|
|
|
|
First quarter ending balance |
|
$ |
191,847 |
|
|
|
|
|
Intangible Assets
The following table summarizes the company’s intangible assets at June 30, 2006 and March 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2006 |
|
|
March 31, 2006 |
|
| |
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
| |
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
| |
|
amount |
|
|
amortization |
|
|
amount |
|
|
amount |
|
|
amortization |
|
|
amount |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
14,700 |
|
|
$ |
(6,390 |
) |
|
$ |
8,310 |
|
|
$ |
14,700 |
|
|
$ |
(5,680 |
) |
|
$ |
9,020 |
|
Non-competition
agreements |
|
|
1,310 |
|
|
|
(418 |
) |
|
|
892 |
|
|
|
1,310 |
|
|
|
(361 |
) |
|
|
949 |
|
Developed technology |
|
|
1,470 |
|
|
|
(570 |
) |
|
|
900 |
|
|
|
1,470 |
|
|
|
(509 |
) |
|
|
961 |
|
Patented technology |
|
|
80 |
|
|
|
(62 |
) |
|
|
18 |
|
|
|
80 |
|
|
|
(56 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,560 |
|
|
|
(7,440 |
) |
|
|
10,120 |
|
|
|
17,560 |
|
|
|
(6,606 |
) |
|
|
10,954 |
|
Unamortized intangible
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
900 |
|
|
|
N/A |
|
|
|
900 |
|
|
|
900 |
|
|
|
N/A |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
18,460 |
|
|
$ |
(7,440 |
) |
|
$ |
11,020 |
|
|
$ |
18,460 |
|
|
$ |
(6,606 |
) |
|
$ |
11,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships are being amortized over an estimated useful life between five and ten
years; non-competition agreements are being amortized over an estimated useful life between four
and eight years; developed technology is being amortized over an estimated useful life between six
and eight years; and patented technology is being amortized over an estimated useful life of three
years.
Amortization expense relating to intangible assets for the three months ended June 30, 2006 and
2005 was $0.8 million and $0.6 million, respectively. The estimated amortization expense relating
to intangible assets for the remainder of fiscal year 2007 and each of the five succeeding fiscal
years is as follows: 2007 — $2.3 million, 2008 — $2.6 million, 2009 — $1.7 million, 2010 — $1.3
million, 2011 — $1.0 million, and 2012 — $0.5 million.
7. 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 “Securities”).
11
During 2006, the company completed the redemption of its 6.75% 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, which included accrued interest of $1.5
million and a 2.025% premium of $2.1 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. Approximately $0.5 million of deferred financing fees were applied
against capital in excess of stated value in connection with the conversion. 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 wrote off deferred financing fees of $2.7 million in the
first quarter of 2006. The financing fees, incurred at the time of issuing the Securities, were
being amortized over a 30-year period ending on March 31, 2028, which was the initial maturity date
of the Securities. The write-off of deferred financing fees, along with the premium payment
discussed above, resulted in a loss on retirement of debt of $4.8 million.
8. 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.
9. Comprehensive Income
Comprehensive income is the total of net income plus all other changes in net assets arising from
non-owner sources, which are referred to as other comprehensive income. Changes in the components
of other comprehensive income and in accumulated other comprehensive income for the three months
ended June 2006 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Foreign |
|
|
Unrealized |
|
|
Accumulated |
|
| |
|
currency |
|
|
gains |
|
|
other |
|
| |
|
translation |
|
|
(losses) on |
|
|
comprehensive |
|
| |
|
adjustment |
|
|
securities |
|
|
income |
|
Balance at April 1, 2006 |
|
$ |
2,032 |
|
|
$ |
9 |
|
|
$ |
2,041 |
|
Change during first quarter |
|
|
(488 |
) |
|
|
(51 |
) |
|
|
(539 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
$ |
1,544 |
|
|
$ |
(42 |
) |
|
$ |
1,502 |
|
|
|
|
|
|
|
|
|
|
|
10. 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. The maximum aggregate number of restricted shares, restricted
share units and performance shares that may be granted under the plan is 1.6 million. For stock
option awards, the exercise price must be set at least equal to the market price of the company’s
stock on the date of grant. The maximum term of option awards is 10 years from the date of grant.
Stock option awards vest over a period established by the Compensation Committee of the Board of
Directors. Stock appreciation rights
12
may be granted in conjunction with, or independently from, a stock option granted under the plan.
Stock appreciation rights, granted in connection with a stock option, 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, restricted share units and performance
shares 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. As of June 30, 2006, 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 the quarter ended June 30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
average |
|
|
Aggregate |
|
| |
|
|
|
|
|
average |
|
|
remaining |
|
|
intrinsic |
|
| |
|
|
|
|
|
exercise |
|
|
contractual |
|
|
value |
|
| |
|
Shares |
|
|
price |
|
|
term |
|
|
($000) |
|
Outstanding at April 1, 2006 |
|
|
3,289,999 |
|
|
$ |
12.84 |
|
|
|
|
|
|
|
|
|
Awarded |
|
|
302,500 |
|
|
|
15.41 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(57,993 |
) |
|
|
13.40 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(16,000 |
) |
|
|
13.76 |
|
|
|
|
|
|
|
|
|
Cancelled/expired |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
3,518,506 |
|
|
$ |
13.05 |
|
|
|
6.1 |
|
|
$ |
17,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
3,009,929 |
|
|
$ |
12.83 |
|
|
|
5.7 |
|
|
$ |
15,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair market value of each option granted is estimated on the grant date using the
Black-Scholes-Merton valuation model. The following assumptions were made in estimating the fair
market value of stock options awarded during the three-months ended June 30, 2006:
| |
|
|
Dividend yield
|
|
0.73% – 0.76% |
Risk-free interest rate
|
|
4.72% – 4.76% |
Expected term
|
|
4 – 6 years |
Expected volatility
|
|
43.56% – 44.98% |
The dividend yield reflects the company’s historical dividend yield on the date of award. The
risk-free interest rate is based on the yield of a zero-coupon U.S. Treasury bond whose maturity
period equals the option’s expected term. The expected term reflects employee-specific future
exercise expectations and historical exercise patterns, as appropriate. The expected volatility is
based on historical volatility of the company’s common stock. The fair market value of options
granted during the three-months ended June 30, 2006 was $5.75 and $7.74.
Compensation cost charged to operations during the three-month period ended June 30, 2006 relating
to stock options was $0.3 million. The total income tax benefit recognized in operations during
the three-month period ended June 30, 2006 was $0.1 million. As of June 30, 2006, total
unrecognized stock based compensation expense related to nonvested stock options was $2.0 million,
which is expected to be
13
recognized over 21 months. During the three-months ended June 30, 2006, the total intrinsic value
of stock options exercised was $0.2 million.
Non-vested Shares
The following table summarizes non-vested shares activity during the quarter ended June 30, 2006:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
average |
|
| |
|
|
|
|
|
grant date |
|
| |
|
Shares |
|
|
fair value |
|
Nonvested at April 1, 2006 |
|
|
25,000 |
|
|
$ |
13.57 |
|
Granted |
|
|
— |
|
|
|
|
|
Vested |
|
|
(6,250 |
) |
|
|
13.57 |
|
Forfeited |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2006 |
|
|
18,750 |
|
|
$ |
13.57 |
|
|
|
|
|
|
|
|
The fair market value of nonvested shares is determined based on the trading price of the
company’s shares on the grant date. Compensation cost related to non-vested share awards is
recognized over the restriction period. Compensation cost charged to operations for non-vested
share awards was $32,000 and $81,000 for the three-month periods ended June 30, 2006 and 2005,
respectively. As of June 30, 2006, there was $0.1 million of total unrecognized compensation cost
related to nonvested share awards. That cost is expected to be recognized over 22 months.
11.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
June 30 |
|
| |
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Income from continuing operations — basic and
diluted |
|
$ |
6,737 |
|
|
$ |
433 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic |
|
|
30,525 |
|
|
|
28,902 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
Stock options and unvested restricted stock |
|
|
467 |
|
|
|
926 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted |
|
|
30,992 |
|
|
|
29,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations —
basic and diluted |
|
$ |
0.22 |
|
|
$ |
0.01 |
|
Options on 6.6 million shares issuable upon conversion of the Securities were not included in
computing diluted earnings per share for the three months ended June 30, 2005, because their
effects were anti-dilutive.
12. Subsequent Event
On August 1, 2006, the company’s 9.5% Senior Notes matured and were retired at a total cost of
$62.2 million, of which $59.4 million was principle and $2.8 million was accrued interest. The
company used existing cash to fund the retirement.
14
Item 2. 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 the related notes that appear elsewhere in this document as well as the company’s Annual Report
on Form 10-K for the year ended March 31, 2006.
Overview
Agilysys, Inc. (the “company” or “Agilysys”) 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 is a critical link in the information technology supply chain and is operated through
two routes to market. The Agilysys Enterprise Solutions Group (ESG) delivers tailored solutions
consisting of suppliers’ products and services, combined with proprietary software and services,
directly to end-user customers. The Agilysys KeyLink Systems Group (KSG) links reseller partners
with leading suppliers of server and storage hardware, software and services and offers a wide
range of programs and services to help these reseller partners grow their businesses, compete
successfully and serve their customers.
Consolidated sales for the first quarter were $388.4 million, a decrease of 5.3% compared with
sales of $410.0 million for the first quarter last year. The decrease in sales was due to
lower-than-expected sales of hardware products, which was partially offset by strong performance in
software sales and services revenue. Despite the decline in hardware sales in the current quarter,
growth in software and services continued to provide differentiated value and increased gross
margin, which increased from 12.4% of sales last year to 14.4% of sales in the current quarter.
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
Net Sales and Operating Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Increase |
|
| |
|
June 30 |
|
|
(decrease) |
|
| (Dollars In Thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Net sales |
|
$ |
388,351 |
|
|
$ |
409,954 |
|
|
$ |
(21,603 |
) |
|
|
(5.3 |
)% |
Cost of goods sold |
|
|
332,604 |
|
|
|
359,196 |
|
|
|
(26,592 |
) |
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
55,747 |
|
|
|
50,758 |
|
|
|
4,989 |
|
|
|
9.8 |
|
Gross margin percentage |
|
|
14.4 |
% |
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
43,687 |
|
|
|
41,239 |
|
|
|
2,448 |
|
|
|
5.9 |
|
Restructuring charges |
|
|
(34 |
) |
|
|
2,424 |
|
|
|
(2,458 |
) |
|
|
(101.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
12,094 |
|
|
$ |
7,095 |
|
|
$ |
4,999 |
|
|
|
70.5 |
% |
Operating income percentage |
|
|
3.1 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
Net Sales. The decline in net sales was primarily due to lower sales volume in each of the
company’s routes to market. Sales from the company’s KeyLink Systems Group, which is the company’s
primary connection with its reseller partners, decreased $20.9 million. Sales from the company’s
Enterprise Solutions Group (“ESG”), which serves large and medium-sized corporations across many
industries,
15
decreased $0.7 million in the quarter ended June 30, 2006 as compared to the same period in 2005.
However, excluding the incremental sales generated from the company’s two acquisitions completed
last year, ESG sales decreased $17.3 million in the first quarter of 2007 compared with the same
period of the prior year. The China and Hong Kong operations of Mainline Information Systems, Inc.
were not acquired until the third fiscal quarter of 2006, and thus are completely accretive in the
current quarter. The CTS Corporations was acquired on May 31,
2005, and thus is partially accretive
in the current quarter. A decline in sales volume from ESG’s retail solutions group accounted for
the majority of the remaining decrease in ESG sales.
Changes in sales by major product category were as follows: hardware sales decreased $33.2 million,
or 10.1%, software sales increased $5.7 million, or 9.7%, and services revenue increased $5.9
million, or 27.7%. The decline in hardware sales was mainly due to lower sales volume of midrange
servers. The increase in software sales was mainly due to higher sales volume of remarketed
software in each of the company’s routes to market. The increase in services revenue equally
contributed to higher sales of proprietary and remarketed services.
The company anticipates net sales for the full year to increase approximately 4% to 6% compared
with the prior year. Additionally, the company generally experiences a seasonal increase in sales
during its fiscal third quarter ending in December. Accordingly, the results of operations for the
three-months ended June 30, 2006 are not necessarily indicative of the operating results for the
full year 2007.
Gross Margin. The $5.0 million increase in gross margin was mainly due to strong sales growth in
software and services, which traditionally result in higher gross margin, as well as the
realization of incentive payments and a higher than anticipated discount from suppliers of $2.4
million. The company anticipates gross margin to be approximately 13.2% of net sales for 2007.
Operating Expenses. The company’s operating expenses consist of selling, general, and
administrative (“SG&A”) expenses and restructuring charges. The $2.5 million period to period
increase in first quarter 2007 SG&A expenses was due to higher compensation and benefits costs,
intangible asset amortization expense, and marketing costs; offset by lower bad debt expense and
other miscellaneous operating costs of the company. Compensation and benefits costs increased
$2.6 million. Compensation and benefits costs attributed to the addition of employees from the two
acquisitions made last year accounted for approximately $1.5 million of the increase, as they had a
full-quarter impact in the current quarter. Intangible asset amortization expense increased $0.3
million, which was due to the acquisition of intangible assets in connection with the purchase of
The CTS Corporations in 2006. The company’s valuation of the intangible assets was not completed
until the third fiscal quarter of 2006. Internal marketing costs increased $0.7 million, mainly
due to a decline in co-operative advertising funds for internal marketing activities. These
increases were offset by a $1.8 million reduction in bad debt expense and $0.7 million decrease in
other operating costs of the company. The company records a provision for uncollectible accounts
based on customer-specific information as well as the overall mix of customer receivables
outstanding.
Restructuring charges decreased $2.5 million during the current quarter compared with the first
quarter last year, which reflects restructuring efforts executed by the company during the first
quarter of fiscal year 2006. In the prior year, the company initiated a plan to consolidate a
portion of its operations to reduce costs and increase future operating efficiencies. As part of
that restructuring effort, the company initiated the shut-down of certain leased facilities and
reduced the workforce of its Keylink Systems Group. The company also executed a senior management
realignment and consolidation of responsibilities. Costs incurred for one-time termination benefits
and other associated costs resulting from workforce reductions amounted to $2.3 million, which were
recorded as a component of restructuring charges in the accompanying condensed consolidated
statement of operations. These termination benefits
16
were paid over the subsequent twelve months. The company did not record a liability for contract
termination costs relating to the exit of certain leased facilities until the second quarter of
fiscal 2006 since the company had not ceased using the properties as of June 30, 2005. The company
also incurred an additional workforce reduction during the second quarter of 2006 as certain
synergies from the integration of CTS into the company’s professional services business were
realized. There were no such charges in the current quarter.
Other (Income) Expense
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Favorable |
|
| |
|
June 30 |
|
|
(unfavorable) |
|
| (In Thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income), net |
|
$ |
774 |
|
|
$ |
(362 |
) |
|
$ |
(1,136 |
) |
|
|
(313.8 |
)% |
Interest income |
|
|
(1,725 |
) |
|
|
(1,471 |
) |
|
|
254 |
|
|
|
17.3 |
|
Interest expense |
|
|
1,584 |
|
|
|
1,607 |
|
|
|
23 |
|
|
|
1.4 |
|
Loss on redemption of
Mandatorily Redeemable
Convertible Trust
Preferred Securities |
|
|
— |
|
|
|
4,811 |
|
|
|
4,811 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense |
|
$ |
633 |
|
|
$ |
4,585 |
|
|
$ |
3,952 |
|
|
|
86.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income) net. The unfavorable change in other expense (income), net was mainly
due to the change in quarterly earnings from the company’s equity investment in Magirus AG.
Loss on redemption of Mandatorily Redeemable Convertible Trust Preferred Securities. In connection
with the company’s redemption of its 6.75% Mandatorily Redeemable Convertible Trust Preferred
Securities (“Securities”) in the first fiscal quarter of 2006, the company wrote off deferred
financing fees of $2.7 million. The financing fees, incurred at the time of issuing the
Securities, were being amortized over a 30-year period ending on March 31, 2028, which was the
initial maturity date of the Securities. The write off of deferred financing fees, along with the
$2.1 million premium payment made with the redemption, resulted in a loss of $4.8 million in the
quarter ended June 30, 2005.
Income Tax Expense
The effective tax rate for continuing operations for the three-months ended June 30, 2006 was 41.2%
compared with 46.9% for the first quarter in the prior year. The decrease in the effective tax
rate primarily reflects the impact of tax legislation enacted by the State of Ohio during the
quarter ended June 30, 2005. The impact of this legislation on existing deferred tax assets,
including state net operating losses and related valuation allowance, resulted in additional income
tax expense of $168,000 in the quarter ended June 30, 2005. Excluding the one-time impact of tax
legislation enacted by the State of Ohio, the company’s effective tax rate for continuing
operations for the three months ended June 30, 2005 was 40.6%.
Recently Issued Accounting Pronouncement
In June 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of SFAS No. 109. FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. The pronouncement prescribes a recognition threshold and measurement
attributable to financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The company is
17
currently evaluating the effect the adoption of FIN No. 48 will have on its financial position or
results of operations.
Business Combinations
Mainline China and Hong Kong
In December 2005, the company acquired the China and Hong Kong operations of Mainline Information
Systems, Inc. The business specializes in IBM information technology enterprise solutions for
large and medium-sized businesses and banking institutions in the China market, and has sales
offices in Beijing, Guangzhou, Shanghai and Hong Kong. The business provides the company the
opportunity to begin operations in China with a nucleus of local workforce. The acquisition price
for the China and Hong Kong operations was $0.8 million, which included $0.3 million of direct
acquisition costs.
The CTS Corporations
In May 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. The addition of CTS enhances the company’s offering
of comprehensive storage solutions. The acquisition price was $27.8 million, which included
repayment of $2.6 million of CTS debt and $0.2 million of direct acquisition expenses.
Restructuring Charges
Continuing Operations. During 2006, the company recorded restructuring charges of $4.2 million to
consolidate a portion of its operations in order to reduce costs and increase operating
efficiencies. Costs incurred in connection with the restructuring comprised one-time termination
benefits and other associated costs resulting from workforce reductions as well as facilities costs
relating to the exit of certain leased facilities. Facilities costs represented the present value
of qualifying exit costs, offset by an estimate for future sublease income. As part of the
restructuring effort, the company incurred costs of $1.7 million to shut down certain leased
facilities. The remaining $2.5 million of the restructuring charge was incurred to reduce the
workforce of its KeyLink Systems Group, professional services business and to execute a senior
management realignment and consolidation of responsibilities. The charges were classified as
restructuring charges in the consolidated statement of operations.
In the fourth quarter of 2003, concurrent with the sale of IED, the company announced it would
restructure 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. Severance, incentives, and other employee benefit costs were paid to
approximately 110 personnel. Facilities costs represented 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.
Approximately $0.5 million was paid during the current quarter for severance costs and ongoing
facility costs included in the restructuring charges discussed above. The company expects to pay
$0.7 million during the remainder of 2007 for ongoing facility obligations. Facilities obligations
are expected to continue to 2017.
18
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 of 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
2006, the restructuring reserve was reduced by ongoing payments of facilities obligations.
Approximately $0.2 million was paid during the current quarter for ongoing facility costs. The
company expects to pay $0.3 million during the remainder of 2007 for ongoing facility costs.
Facilities obligations are anticipated to continue until 2010.
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.
As of June 30, 2006 and March 31, 2006, the company’s total debt balance was $59.6 million and
$59.7 million, respectively. In each period, total debt consisted of Senior Notes and capital
lease obligations.
Senior Notes
The principal amount of Senior Notes outstanding at June 30, 2006 and March 31, 2006 was $59.4
million, which are due August 2006. Given the maturity date of the Senior Notes, they have been
classified as a current liability in the accompanying condensed consolidated balance sheet. 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 June 30, 2006 and March 31, 2006 was approximately $2.4
million and $0.9 million, respectively. 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.
On August 1, 2006, the Senior Notes matured at a total cost of $62.2 million, which was comprised
of the $59.4 million principal amount outstanding and $2.8 million accrued interest. The company
used existing cash to fund the maturity.
Revolving Credit Facility
The company maintains a $200 million five-year unsecured credit facility (“Facility”). The
Facility includes a $20 million sub-facility for letters of credit and a $20 million sub-facility
for swingline loans. The Facility is available to refinance existing debt and to provide for
working capital requirements, capital expenditures and general corporate purposes of the company
including acquisitions. Borrowings under the Facility generally bear interest at various levels
over LIBOR. The company did not borrow against the Facility during the current quarter, nor were
there any amounts outstanding under the Facility at June 30, 2006.
19
Mandatorily Redeemable Convertible Trust Preferred Securities
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 expense of $109.0 million, which included accrued interest of $1.5
million and a premium of $2.1 million. The company funded the redemption with existing cash. In
addition to the redemption, 398,324 Securities with a carrying value of $19.9 million were
converted into common shares of the company at the option of the holder. 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 wrote off deferred financing fees of $2.7 million, which were being
amortized over the life of the Securities prior to their redemption. The $2.7 million write off of
deferred financing fees, along with the $2.1 million premium incurred in connection with the
redemption, resulted in a $4.8 million loss on redemption of Securities during the quarter ended
June 30, 2005.
Cash Flow
The following table presents cash flow results from operating activities, investing activities, and
financing activities for the three-months ended June 30, 2006 and 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Increase |
|
| |
|
June 30 |
|
|
(decrease) |
|
| (In Thousands) |
|
2006 |
|
|
2005 |
|
|
$ |
|
Net cash (used for) provided by continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(23,623 |
) |
|
$ |
30,792 |
|
|
$ |
(54,415 |
) |
Investing activities |
|
|
(859 |
) |
|
|
(28,094 |
) |
|
|
27,235 |
|
Financing activities |
|
|
(714 |
) |
|
|
(104,637 |
) |
|
|
103,923 |
|
Effect of foreign currency fluctuations on cash |
|
|
96 |
|
|
|
(201 |
) |
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for continuing operations |
|
|
(25,100 |
) |
|
|
(102,140 |
) |
|
|
77,040 |
|
Net cash used for discontinued operations |
|
|
(67 |
) |
|
|
(478 |
) |
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(25,167 |
) |
|
$ |
(102,618 |
) |
|
$ |
77,451 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flow (Used for) Provided by Operating Activities. The decrease in operating cash flow
was mainly due to an increase in working capital in the current quarter compared with last year.
The timing of supplier payments in the current quarter was a significant use of cash compared with
last year. Additionally, the decline in net sales year-over-year lead to an increase in
inventories and a decrease in trade accounts receivable. Moreover, the $4.8 million non-cash
expense recorded in the quarter ended June 30, 2005 relating to the redemption of Securities was
not recurring in the current year.
Cash Flow Used for Investing Activities. The decline in cash used for investing activities is
directly related to last year’s acquisition of The CTS Corporations, which was funded by cash for
$27.8 million. There were no business combinations in the current quarter, nor were there any
other significant investing activities.
Cash Flow Used for Financing Activities. The decline in cash used for financing activities is
directly related to last year’s redemption of the company’s Securities for $107.5 million. This
improvement in financing cash flow was offset by a $3.6 million decrease in proceeds from the
issuance of common stock as a result of stock option exercises.
20
Contractual Obligations
The company has contractual obligations for long-term debt, capital leases and operating leases
that were summarized in a table of contractual obligations in the company’s Annual Report on Form
10-K for the year ended March 31, 2006 (“Annual Report”). There have been no material changes to
the contractual obligations summarized in the table included in the Annual Report outside the
ordinary course of business. As noted in the table included in the Annual Report, the company’s
$59.4 million Senior Notes are due August 1, 2006, or during the company’s second fiscal quarter in
the current year. The company used cash on hand to settle the Senior Notes.
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.
Critical Accounting Policies
A detailed description of the company’s critical accounting policies can be found in the company’s
Annual Report. There have been no significant changes to those critical accounting policies.
Stock Based Compensation
The company accounts for stock based compensation in accordance with the fair value recognition
provisions of Statement 123R, which was adopted on April 1, 2006. The company adopted the
provisions of Statement 123R using the modified prospective application and, accordingly, results
for prior periods have not been restated. Prior to April 1, 2006, the company accounted for stock
based compensation in accordance with the intrinsic value method. As such, no stock based employee
compensation cost was recognized by the company for stock option awards, as all options granted to
employees had an exercise price equal to the market value of the underlying stock on the date of
grant.
Compensation cost charged to operations during the three-month period ended June 30, 2006 relating
to stock options was $0.3 million. As of June 30, 2006, total unrecognized stock based
compensation expense related to nonvested stock options was $2.0 million, which is expected to be
recognized over the next 21 months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting the company, see Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk,” of the company’s Annual Report.
There have been no material changes in the company’s market risk exposures since March 31, 2006.
Item 4. Controls and Procedures
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
21
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 decisions regarding required disclosure. The company’s disclosure
controls and procedures include components of the company’s internal control over financial
reporting.
Based upon this evaluation, the company’s Chief Executive Officer and Chief Financial Officer , as
of June 30, 2006, concluded that the company’s disclosure controls and procedures were effective
for the purpose of ensuring that material information required to be in this quarterly report was
made known to them by others on a timely basis.
Changes in internal control over financial reporting. There were no changes 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
A detailed description of the company’s risk factors can be found in the company’s Annual Report.
There have been no material changes from the risk factors summarized in our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
| 31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
| |
| 31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| |
| 32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
| |
| 32.2 |
|
Certification of Chief Financial Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of Sarbanes-Oxley Act of 2002. |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
AGILYSYS, INC. |
|
|
|
Date: August 4, 2006
|
|
/s/ Arthur Rhein |
|
|
|
|
|
Arthur Rhein |
|
|
Chairman, President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
Date: August 4, 2006
|
|
/s/ Martin F. Ellis |
|
|
|
|
|
Martin F. Ellis |
|
|
Executive Vice President, Treasurer and Chief |
|
|
Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
23