UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
Amendment 1
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the fiscal year ended March 31, 20092013 |
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o | ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For 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 | | 34-0907152 |
| State or other jurisdiction of incorporation or organization | | (I.R.S. Employer Identification No.) |
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| 425 Walnut Street, Suite 1800, Cincinnati, Ohio | 45202 |
28925 Fountain Parkway, Solon, Ohio
(Address of principal executive offices) | | 44139
(Zip Code) |
Registrant’sRegistrant's telephone number, including area code:(440) 519-8700
(770) 810-7800
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Common Shares, without par value | | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o¨ No þ
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oþ No o¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. þ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
(DoLarge accelerated filer ¨ Accelerated filer þNon-accelerated filer ¨Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o¨ No þ
The aggregate market value of Common Shares held by non-affiliates as of September 30, 20082012 was $124,082,511. As of May 31, 2013, 22,147,165 shares of the registrant's common stock were outstanding.
EXPLANATORY NOTE
Agilysys, Inc. (the second“Company,” “we,” “us” or “our”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend our Annual Report on Form 10-K for the year ended March 31, 2013, originally filed with the Securities and Exchange Commission (the “SEC”) on June 14, 2013 (the “Original Filing”), to include the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced items to be incorporated in the Form 10-K by reference from our definitive proxy statement if such statement is filed no later than 120 days after our fiscal quarteryear-end. We are filing this Amendment to include Part III information in which thisour Form 10-K relates) was $139,709,258 computed because a definitive proxy statement containing such information may not be filed by the Company within 120 days after the end of the fiscal year covered by the Form 10-K. The reference on the basiscover of the last reported sale price per share ($10.09)Original Filing to the incorporation by reference to portions of such shares on the Nasdaq Stock Market LLC.
As of June 1, 2009, the Registrant had the following number of Common Shares outstanding: 22,639,773, of which 5,666,343 were held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’sour definitive Proxy Statement to be used in connection with its Annual Meeting of Shareholders to be held on July 31, 2009 are incorporated by referenceproxy statement into Part III of thisForm 10-K.the Original Filing is hereby deleted.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Part III, Items 10 through 14 of the Original Filing are hereby amended and restated in their entirety, and Part IV, Item 15 of the Original Filing is hereby amended and restated in its entirety, with the only changes being the addition of Exhibits 31.3 and 31.4 filed herewith and related footnotes. The number of shares of the registrant's common stock outstanding as of May 31, 2013, as stated on the cover page to the Original Filing, is hereby amended and restated to 22,147,765. Except as described above, this Amendment No. 1 does not amend or otherwise stated,update any other information in the Original Filing and does not purport to reflect any information containedor events subsequent to the filing thereof. Accordingly, this Amendment should be read in this Annual Report onForm 10-K is as of March 31, 2009.conjunction with the Original Filing and with our filings with the SEC subsequent to the Original Filing.
AGILYSYS, INC.
ANNUAL REPORT ONFORM 10-K
Year Ended March 31, 2009
TABLE OF CONTENTS
Item 1. Business.
Reference herein to any particular year or quarter refers to periods within the company’s fiscal year ended March 31. For example, 2009 refers to the fiscal year ended March 31, 2009.
Overview
Agilysys, Inc. (“Agilysys” or the “company”) is a leading provider of innovative IT solutions to corporate and public-sector customers, with special expertise in select markets, including retail and hospitality. The company develops technology solutions — including hardware, software and services — to help customers resolve their most complicated IT needs. The company possesses expertise in enterprise architecture and high availability, infrastructure optimization, storage and resource management, and business continuity, and provides industry-specific software, services and expertise to the retail and hospitality markets. Headquartered in Solon, Ohio, Agilysys operates extensively throughout North America, with additional sales offices in the United Kingdom and in Asia. Agilysys has three reportable segments: Hospitality Solutions Group (“HSG”), Retail Solutions Group (“RSG”), and Technology Solutions Group (“TSG”).
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.
As of the fiscal year ended March 31, 2002, the company was structured into two divisions, 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.
In 2002, the company conducted a review of strategic alternatives and developed a long-term strategic plan designed to increase the intrinsic value of the company. The company’s strategic transformation began with its divestiture of IED, to focus solely on the computer systems business. The sale of the electronic components business meant that the company was less dependent on the more cyclical markets in the components business. In addition, this allowed the company to invest more in the computer systems business, which offered greater potential for sustainable growth at higher levels of profitability. The remaining CSD business consisted of the KeyLink Systems Distribution Business (“KSG”) and the IT Solutions Business. KSG operated as a distributor of enterprise computing products selling to resellers, which then sold directly to end-user customers. The IT Solutions Business operated as a reseller providing enterprise servers, software, storage and services and sold directly to end-user customers. Overall, the company was a leading distributor and reseller of enterprise computer systems, software, storage and services from HP, IBM, Intel, Enterasys, Hitachi Data Systems, Oracle, EMC, and other leading manufacturers.
The proceeds from the sale of the electronic components distribution business, combined with cash generated from the company’s ongoing operations, were used to retire long-term debt and accelerate the growth of the company, both organically and through a series of acquisitions. The growth of the company has been supported by a series of acquisitions that strategically expanded the company’s range of solutions and markets served, including:
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— | The September 2003 acquisition of Kyrus Corporation, a leading provider of retail store solutions and services with a focus on the supermarket, chain drug and general retail segments of the retail industry. |
— | The February 2004 acquisition ofInter-American Data, Inc., a leading developer and provider of property management, materials management and document management software and related proprietary services to the hotel casino and destination resort segments of the hospitality industry. |
— | The May 2005 acquisition of The CTS Corporations (“CTS”), a services organization specializing in IT storage solutions for large and medium-sized corporate and public-sector customers. |
— | The December 2005 acquisition of a competitor’s operations in China. This provided Agilysys entry into the enterprise IT solutions market in Hong Kong and China serving large and medium-sized businesses in those growing markets. |
— | The January 2007 acquisition of Visual One Systems Corporation (“Visual One”), which provided Agilysys with expertise around the marketing, development and sale of Microsoft® Windows®-based software for the hospitality industry, including additional applications in property management, condominium, golf course, spa,point-of-sale, and catering management. Visual One was integrated into the company’s existing hospitality solutions business. |
In March 2007, the company completed its transformation with the sale of the assets and operations of KSG. This final event completed the Agilysys multi-year transformation to move closer to the customer and higher up the IT value scale, effectively positioning
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the company to focus on its higher-growth IT Solutions Business. As a result of the divestiture, the company freed itself from the increasing channel conflict and marketplace restrictions that existed in the business. The divestiture also provided the company with the financial flexibility to grow through the pursuit of additional acquisitions, including:
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— | The April 2007 acquisition of Stack Computer (“Stack”), a technology integrator with a strong focus in high availability storage solutions. Stack has a significant relationship with EMC2, and also does business with Cisco, Veritas, and other suppliers. Stack’s customers, primarily located on the west coast, include leading corporations in the financial services, healthcare, and manufacturing industries. |
— | The June 2007 acquisition of InfoGenesis, Inc. (“InfoGenesis”), a solutions provider for the food and beverage markets serving casinos, hotels and resorts, cruise lines, stadiums and food service. An independent solution provider, InfoGenesis offers enterprise-class,point-of-sale solutions that provide end users an intuitive, secure and easy way to process customer transactions across multiple departments or locations, including comprehensive corporate and store reporting. |
— | The July 2007 acquisition of Innovative Systems Design, Inc. (“Innovative”), an integrator and value-added reseller of servers, enterprise storage management products and professional services. Innovative is the largest U.S. commercial reseller of Sun Microsystems servers and storage products. |
— | The February 2008 acquisition of Eatec Corporation (“Eatec”), which enhanced the company’s standing as a leading inventory and procurement solution provider to the hospitality and food service markets. Eatec’s customers include well-known restaurants, hotels, stadiums, and entertainment venues in North America and around the world as well as many public service institutions. |
— | The April 2008 acquisition of Triangle Hospitality Solutions Limited (“Triangle”), a European reseller ofpoint-of-sale software and solutions for InfoGenesis. The acquisition expanded Agilysys’ European footprint in the hospitality, stadium and arena markets. |
Today, Agilysys offers diversified products and solutions from leading IT vendors such as HP, Sun, EMC, Oracle, and IBM. The company is a leading systems integrator of retailpoint-of-sale, self-service and wireless solutions with proprietary business consulting, implementation and hardware maintenance services. HSG offers property, activity, material, and inventory management software applications to automate functions for the hotel casino and destination resort segments of the hospitality industry. In addition, HSG provides Microsoft Windows-based software solutions as well as IBM servers and storage products.
During fiscal 2009, the company took aggressive action to reduce its cost structure and improve profitability. Specifically, the company executed the following restructuring actions over the past year:
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— | restructured thego-to-market strategy for TSG’s professional services offering; |
— | exited the Asian operations of TSG; |
— | reduced corporate overhead and realigned executive management; |
— | closed corporate offices in Boca Raton, Florida and relocated headquarters back to Solon, Ohio; and |
— | realigned certain operational and administrative departments and streamlined certain processes to reduce costs and drive efficiencies. |
Industry
According to information published in May 2009 by International Data Corporation (“IDC”), a leading provider of technology intelligence and market data, IT spending in the United States was estimated at $490 billion in calendar year 2008. The global IT market has been softening, according to IDC figures. In 2009, IDC projects hardware sales to decline by 16% in the United States and 3.6% globally, while software and services are projected to increase modestly at 4% and 3%, respectively. The recent slowdown in this market negatively affected the company’s revenues and results of operations for fiscal 2009.
The non-consumer IT industry consists of a supply chain made up of suppliers, distributors, resellers, and corporate and public-sector customers. Agilysys operates in the reseller category as a solution provider, as well as an independent software vendor (“ISV”) in the hospitality industry and system integrator in the retail industry.
In recent years, the role of solution providers in the industry has become more important as suppliers have shifted an increasing portion of their business away from direct sales, and many end-users are working more with solution providers to develop, implement and integrate comprehensive and increasingly complex solutions.
To ensure the efficient and cost-effective delivery of products and services to market, IT suppliers are increasingly outsourcing functions such as logistics, order management, sales and technical support. Solution providers play crucial roles in this outsourcing strategy by offering customers technically skilled and market-focused sales and services organizations. Certain solution providers, such as Agilysys, offer additional proprietary products and services that complement a total, customer-focused solution.
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Products and Services
Within the solutions segment in which Agilysys operates, product sets include enterprise servers, data storage hardware, systems infrastructure software, networking equipment and IT services related to implementation and support. IDC estimates United States spending in these product sets was $490 billion in calendar year 2008, and is not expected to return to an annual growth rate of 6% until calendar year 2012.
Total revenues from continuing operations for the company’s three specific product areas are as follows:
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| (In thousands) | | 2009 | | | 2008 | | | 2007 | |
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| Hardware | | $ | 508,704 | | | $ | 562,314 | | | $ | 328,435 | |
| Software | | | 76,998 | | | | 71,900 | | | | 32,866 | |
| Services | | | 145,018 | | | | 125,954 | | | | 92,439 | |
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| Total | | $ | 730,720 | | | $ | 760,168 | | | $ | 453,740 | |
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During 2009, 2008, and 2007, sales of the company’s three largest suppliers’ products and services accounted for 65%, 65%, and 69%, respectively, of the company’s sales volume. Sales of HP products and services accounted for 22%, 27%, and 49% of the company’s sales volumes in 2009, 2008, and 2007, respectively. Sales of IBM products and services accounted for 12%, 15%, and 20% in 2009, 2008, and 2007, respectively. Sales of Sun products and services through Innovative, which was purchased in July 2007, accounted for 31% and 23% of the sales volume in 2009 and 2008, respectively.
The loss of any of the top three 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 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 purchase discounts and supplier incentive programs including 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 adverse impact on the company’s results of operations.
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 determining how to allocate resources and in assessing performance. Operating segments can be aggregated for segment reporting purposes so long as certain economic and operating aggregation criteria are met. With the divestiture of KSG in 2007, the continuing operations of the company represented one business segment that provided IT solutions to corporate and public-sector customers. In 2008, the company evaluated its business groups and developed a structure to support the company’s strategic direction as it has transformed to a pervasive solution provider largely in the North American IT market. With this transformation, the company now has three reportable segments: HSG, RSG, and TSG. See Note 13 to Consolidated Financial Statements titled,Business Segments, for a discussion of the company’s segment reporting.
Customers
Agilysys’ customers include large and medium-sized companies, divisions or departments of corporations in theFortune 1000, and public-sector institutions. The company serves customers in a wide range of industries, including telecommunications, education, finance, government, healthcare, hospitality, manufacturing and retail. In 2009, Verizon Communications, Inc. represented approximately 22.7% of Agilysys’ total sales and 32.6% of TSG’s total sales. In 2008, Verizon Communications, Inc. represented approximately 11.7% of the company’s total sales and 16.3% of TSG’s total sales. No single customer accounted for more than 10% of Agilysys’ total sales or the total sales of any reporting business segment during 2007.
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, TSG experiences a seasonal increase in sales during its fiscal third quarter ending December 31st. Third quarter sales were 31%, 33%, and 33% of annual revenues for 2009, 2008, and 2007, respectively. Agilysys believes that this sales pattern is industry-wide. Although the company
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is unable to predict whether this uneven sales pattern will continue over the long term, the company anticipates that this trend will remain in the foreseeable future.
Backlog
The company historically has not had a significant backlog of orders. There was no significant backlog at March 31, 2009.
Competition
The reselling of innovative 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 solution providers and occasionally with some of its suppliers.
There are very few large, public enterprise product reseller companies in the IT solution provider market. As such, Agilysys’ competition is typically small or regional, privately held technology solution providers with $50 million to $200 million in revenues. The company competes with large companies such as Berbee Information Networks Corporation (a division of CDW Corporation), Forsythe Solutions Group, Inc., and Logicalis Group within TSG, and Micros Systems, Inc. and Radiant Systems, Inc. within HSG.
Employees
As of June 1, 2009, Agilysys had approximately 1,250 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.
Markets
Agilysys sells its products principally in the United States and Canada and entered the China, Hong Kong and U.K. markets through acquisitions. Sales to customers outside of the United States and Canada are not a significant portion of the company’s sales. In January 2009, the company sold the stock of TSG’s operations in China and certain assets of TSG’s Hong Kong operations. However, HSG still continues to operate and grow in Asia, specifically in Hong Kong, Macau, and Singapore.
Access to Information
Agilysys’ annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, and any amendments to these reports are 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 onForm 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 1A. Risk Factors.
Our business could be materially adversely affected if we cannot successfully implement changes to our information technology to support a changed business.
Our current information systems environment was principally designed for the distribution business. We are in the process of converting legacy business information systems to a single Enterprise Resource Planning system. We committed significant resources to this conversion, which began in fiscal 2009 and is expected to be completed in fiscal 2010. This conversion is complex and while we are using a controlled project plan, we may not be able to successfully implement changes to and manage our internal systems, procedures and controls. If we are unable to successfully complete this implementation in an efficient or timely manner, it could materially adversely affect our business.
Our profitability is partly dependent upon restructuring and executing planned cost savings.
Recently, we initiated actions intended to reduce our cost structure and improve profitability. Specifically, we implemented the following restructuring actions over the past year:
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— | restructured thego-to-market strategy for TSG’s professional services offering; |
— | exited Asian operations of TSG; |
— | reduced corporate overhead and realigned executive management; |
— | closed corporate offices in Boca Raton, Florida and relocated corporate headquarters back to Solon, Ohio; and |
— | realigned certain operational and administrative departments and streamlined certain processes to reduce costs and drive efficiencies. |
If our cost reduction efforts are ineffective or our estimates of cost savings are inaccurate, our revenues and profitability could be negatively impacted. We may not be successful in achieving the operating efficiencies and operating cost reductions expected from these
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efforts, and may experience business disruptions associated with the restructuring and cost reduction activities. These efforts may not produce the full efficiency and cost reduction benefits that we expect. Further, such benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated.
We are dependent on a single customer for a significant portion of our revenues.
In 2009 and 2008 more than 10% of our revenues were derived from Verizon Communications, Inc. (“Verizon”). If we were to lose Verizon as a customer, or if Verizon was to become insolvent or otherwise unable to pay for products and services, or was to become unwilling or unable to make payments in a timely manner, it could have a material adverse effect on the company’s business, results of operations, financial condition or liquidity. A further or extended economic downturn could reduce profitability and cash flow.
We are highly dependent on key suppliers and supplier programs.
We presently depend on a small number of key suppliers, including IBM, HP and Sun Microsystems. Our contracts with these suppliers vary in duration and are generally terminable by either party at will upon notice. The loss of any 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 offered. Any termination or the implementation of these changes could have a material negative impact on the company’s results of operations.
We are dependent on a long-term product procurement agreement with Arrow Electronics, Inc.
We have entered into a long-term product procurement agreement to purchase a wide variety of products totaling a minimum of $330 million per year until 2012 from Arrow Electronics, Inc. Our success will be dependent on competitive pricing, the availability of products on a timely basis and maintenance of certain service levels by Arrow.
Prolonged economic weakness causes 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 and continued growth in the use of technology in business by our customers, their customers, and suppliers. In challenging economic environments, our customers may reduce or defer their spending on new technologies. At the same time, many companies have already invested substantial resources in their current technological resources, and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel, processes and infrastructures. Delays or reductions in demand for information technology by end users could have a material adverse effect on the demand for our products and services. In the last year, we have experienced weakening in the demand for our products and services. If the markets for our products and services continue to soften, our business, results of operations or financial condition could be materially adversely affected.
If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or timely or detect fraud, which could have a material adverse effect on our business. While we believe that our plans to remediate our 2009 material weakness in internal controls over financial reporting, discussed in Item 9A of this report, will return us to the status of having adequate internal controls over financial reporting, we continue to be exposed to risks that those internal controls may be inadequate and we may have difficulty accurately reporting our financial results on a timely basis.
An effective internal control environment is necessary for the company to produce reliable financial reports and is an important part of its effort to prevent financial fraud. Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements and to remediate internal control deficiencies and material weaknesses.
While management evaluates the effectiveness of the company’s internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure in human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks. In the event that our chief executive officer, chief financial officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we may be unable to produce reliable financial reports or prevent fraud, which could materially adversely affect our business. In addition, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC or NASDAQ. Any such actions could affect investor perceptions of the company and result in an adverse reaction in the
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financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or limit our access to capital.
We make estimates and assumptions in connection with the preparation of the company’s Consolidated Financial Statements, and any changes to those estimates and assumptions could have a material adverse effect on our results of operations.
In connection with the preparation of the company’s Consolidated Financial Statements, we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report and we describe other significant accounting policies in Note 1 to Consolidated Financial Statements titled,Operations and Summary of Significant Accounting Policies, which are included in Part II, Item 15 of this Annual Report. In addition, as discussed in Note 12 to Consolidated Financial Statements titled,Commitments and Contingencies, we make certain estimates under the provisions of SFAS No. 5 “Accounting for Contingencies,” including decisions related to provisions for legal proceedings and other contingencies. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material adverse effect on our results of operations.
The market for our products and services is affected by changing technology and if we fail to anticipate and adapt to such changes, our results of operations may suffer.
The markets in which the company competes are characterized by ongoing technological change, new product introductions, evolving industry standards and changing needs of customers. Our competitive position and future success will depend on our ability to anticipate and adapt to changes in technology and industry standards. If we fail to successfully manage the challenges of rapidly changing technology, the company’s results of operations could be materially adversely affected.
Our profitability could suffer if we are not able to maintain favorable pricing.
Our profitability is dependent on the rates we are able to charge for our services. If we are not able to maintain favorable pricing for our services, our profit margin and our profitability could suffer. The rates we are able to charge for our services are affected by a number of factors, including:
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— | our customers’ perceptions of our ability to add value through our services; |
— | competition; |
— | introduction of new services or products by us or our competitors; |
— | our competitors’ pricing policies; |
— | our ability to charge higher prices where market demand or the value of our services justifies it; |
— | our ability to accurately estimate, attain and sustain contract revenues, margins and cash flows over long contract periods; |
— | procurement practices of our customers; and |
— | general economic and political conditions. |
Capital markets are currently experiencing a period of dislocation and instability, which has had and could continue to have a negative impact on our business and operations.
The general disruption in the U.S. capital markets has impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole. These conditions could persist for a prolonged period of time or worsen in the future. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations and our ability to obtain and manage our liquidity. Any such developments could have a material adverse impact on our business, financial condition and results of operations.
Credit market developments may adversely affect our business and results of operations by reducing availability under our credit agreement.
In the current volatile state of the credit markets, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capitaland/or honoring loan commitments. On May 5, 2009, we entered into a new credit facility, as discussed in Item 7 of this Annual Report titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the subsection titled, “Liquidity and Capital Resources” and in Note 8 to Consolidated Financial Statements titled,Financing Arrangements. Although we do not intend to borrow in the near term, if our lender fails to honor its legal commitments under our credit facility, it could be difficult in
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the current environment to replace this facility on similar terms. The failure of the lender under the company’s credit facility may impact the company’s ability to borrow money to finance its operating activities.
Disruptions in the financial and credit markets may adversely impact the spending of our customers, which could adversely affect our business, results of operations and financial condition.
Demand for our products and services depends in large part upon the level of capital of our customers. Decreased customer spending could have a material adverse effect on the demand for our services and our business, results of operations and financial condition. In addition, the disruptions in the financial markets may also have an adverse impact on regional economies or the world economy, which could negatively impact the capital and maintenance expenditures of our customers. There can be no assurance that government responses to the disruptions on the financial markets will restore confidence, stabilize markets or increase liquidity and the availability of credit. These conditions may reduce the willingness or ability of our customers and prospective customers to commit funds to purchase our products and services, or their ability to pay for our products and services after purchase.
When we make acquisitions, we may not be able to successfully integrate them or attain the anticipated benefits.
As part of our operating history and growth strategy, we have acquired other businesses. In the future, we may continue to seek acquisition candidates in selected markets and from time to time engage in exploratory discussions with suitable candidates. We can provide no assurance that we will be able to identify and acquire targeted businesses or obtain financing for such acquisitions on satisfactory terms. The process of integrating acquired businesses into our operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention. In particular, the integration of acquired technologies with our existing products could cause delays in the introduction of new products. In connection with future acquisitions, we may incur significant charges to earnings as a result of, among other things, the write-off of purchased research and development.
Future acquisitions may be financed through the issuance of common stock, which may dilute the ownership of our shareholders, or through the incurrence of additional indebtedness. Furthermore, we can provide no assurance that competition for acquisition candidates will not escalate, thereby increasing the costs of making acquisitions or making suitable acquisitions unattainable. Acquisitions involve numerous risks, including the following:
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— | problems combining the acquired operations, technologies or products; |
— | unanticipated costs or liabilities; |
— | diversion of management’s attention; |
— | adverse effects on existing business relationships with suppliers and customers; |
— | risks associated with entering markets in which we have limited or no prior experience; and |
— | potential loss of key employees, particularly those of the acquired organizations. |
For example, until we actually assume operating control of the business assets and operations, it is difficult to ascertain with precision the actual value or the potential liabilities of our acquisitions. If we are unsuccessful in integrating our acquisitions, or if the integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our business or the acquisition. In addition, we may not realize all of the anticipated benefits from our acquisitions, which could result in an impairment of goodwill or other intangible assets.
Consolidation in the industries that we serve could adversely affect our business.
Customers that we serve may seek to achieve economies of scale and other synergies by combining with or acquiring other companies. If two or more of our current customers combine their operations, it may decrease the amount of work that we perform for these customers. If one of our current clients merges or consolidates with a company that relies on another provider for its consulting, systems integration and technology, or outsourcing services, we may lose work from that client or lose the opportunity to gain additional work. If two or more of our suppliers merge or consolidate operations, the increased market power of the larger company could also increase our product costs and place competitive pressures on us. Any of these possible results of industry consolidation could adversely affect our business.
We May Incur Additional Goodwill and Intangible Asset Impairment Charges that Adversely Affect Our Operating Results.
We review goodwill for impairment annually and more frequently if events and circumstances indicate that our goodwill and other indefinite-lived intangible assets may be impaired and that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative
7
industry or economic trends, a significant decline in our stock price for a sustained period, and decreases in our market capitalization below the recorded amount of our net assets for a sustained period.
As a result of significant declines in macroeconomic conditions, there has been a decline in global equity valuations since April 2008 that impacted our market capitalization. Based upon the results of impairment tests performed during fiscal 2009, we concluded that a portion of our goodwill and identifiable intangible assets were impaired. As such, we recognized total non-cash impairment charges in the first, second, and fourth quarters of 2009 for goodwill and intangible assets of $231.9 million, not including $20.6 million that related to the CTS business acquired in May 2005 that was classified as restructuring charges, as of March 31, 2009. The impairment charge did not impact our consolidated cash flows, liquidity, or capital resources. See Note 1 to Consolidated Financial Statements titled,Operations and Summary of Significant Accounting Policies and the subsection titled, “Critical Accounting Policies, Estimates & Assumptions” in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) for further discussion of the impairment testing of goodwill and identifiable intangible assets.
A continued decline in general economic conditions or global equity valuations, could impact the judgments and assumptions about the fair value of our businesses and we could be required to record additional impairment charges in the future, which would impact our consolidated balance sheet, as well as our consolidated statement of operations. If we were required to recognize an additional impairment charge in the future, the charge would not impact our consolidated cash flows, current liquidity, or capital resources.
We are subject to litigation, which may be costly.
As a company that does business with many customers, employees and suppliers, we are subject to a variety of legal and regulatory actions, including, but not limited to, claims made by or against us relating to taxes, health and safety, employee benefit plans, employment discrimination, contract compliance, intellectual property rights, and intellectual property licenses. The results of such legal and regulatory actions are difficult to predict. Although we are not aware of any instances of non-compliance with laws, regulations, contracts, or agreements and we do not believe that any of our products and services infringe any property rights or licenses, we may incur significant legal expenses if any such claim were filed. If we are unsuccessful in defending a claim, it could have a material adverse effect on our business, financial condition, or results of operations.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations and the operations of our significant suppliers could be subject to power shortages, telecommunications failures, fires, extreme weather conditions, medical epidemics, and other natural or manmade disasters or business interruptions. The occurrence of any of these business disruptions could have a material adverse effect on our results of operations. While we maintain disaster recovery plans and insurance with coverages we believe to be adequate, claims may exceed insurance coverage limits, may not be covered by insurance, or insurance may not continue to be available on commercially reasonable terms.
We may be unable to hire enough qualified employees or we may lose key employees.
We rely on the continued service of our senior management, including our Chief Executive Officer, members of our executive team and other key employees and the hiring of new qualified employees. In the technology services industry, there is substantial and continuous competition for highly-skilled personnel. We also may experience increased compensation costs that are not offset by either improved productivity or higher prices. We may not be successful in recruiting new personnel and in retaining and motivating existing personnel. With rare exceptions, we do not have long-term employment or non-competition agreements with our employees. Members of our senior management team have left the company recently, and we cannot assure you that there will not be additional departures, which may be disruptive to our operations.
Part of our total compensation program includes share-based compensation. Share-based compensation is an important tool in attracting and retaining employees in our industry. If the market price of our stock declines or remains low, it may adversely affect our ability to retain or attract employees. In addition, because we expense all share-based compensation, we may in the future change our share-based and other compensation practices. Some of the changes we consider from time to time include the reduction in the number of employees granted options, a reduction in the number of options granted per employee and a change to alternative forms of share-based compensation. Any changes in our compensation practices or changes made by competitors could affect our ability to retain and motivate existing personnel and recruit new personnel.
As a publicly traded company, our stock price is subject to certain market trends that are out of our control and that may not reflect our actual intrinsic value.
We can experience short-term increases and declines in our stock price due to factors other than those specific to our business, such as economic news or other events generally affecting the trading markets. These fluctuations could favorably or unfavorably impact our
8
business, financial condition, or results of operations. Our ownership base has been and may continue to be concentrated in a few shareholders, which could increase the volatility of our stock price over time.
We may be required to adopt International Financial Reporting Standards (“IFRS”). The ultimate adoption of such standards could negatively impact our business, financial condition or results of operations.
Although not yet required, we could be required to adopt IFRS which is different from accounting principles generally accepted in the United States of America for our accounting and reporting standards. The implementation and adoption of new standards could favorably or unfavorably impact our business, financial condition, or results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The company’s principal corporate offices are located in a 100,000 square foot facility in Solon, Ohio. As of March 31, 2009, the company owned or leased a total of approximately 353,266 square feet of space for its continuing operations, of which approximately 332,307 square feet is devoted to product warehouse and sales offices. The company’s major leases contain renewal options for periods of up to 8 years. On December 2, 2008, the Boca Raton, Florida facility was closed and the company is looking for a tenant to sublease the facility. For information concerning the company’s rental obligations, see the discussion of contractual obligations under Item 7 contained in Part II, as well as Note 7 to Consolidated Financial Statements contained in Part IV, of this Annual Report onForm 10-K. The company believes that its product warehouse and office facilities are well maintained, are suitable and provide adequate space for the operations of the company.
The company’s materially important facilities as of March 31, 2009, are set forth in the table below:
| | | | | | | | |
LocationSIGNATURES |
| Type of facility | | Approximate square footage | | Segment | | Leased or owned |
|
Solon, Ohio | | Warehouse and administrative offices | | 100,000 | | Corporate | | Leased |
Alpharetta, Georgia | | Administrative offices | | 29,500 | | HSG | | Leased |
Las Vegas, Nevada | | Administrative offices | | 26,665 | | HSG | | Leased |
Edison, New Jersey | | Administrative offices | | 21,500 | | TSG | | Leased |
Taylors, South Carolina | | Warehouse and administrative offices | | 77,500 | | RSG | | Leased |
|
Item 3. Legal Proceedings.
In 2006, the company filed a lawsuit against the former shareholders of CTS, a company that was purchased by Agilysys in May 2005. In the lawsuit, Agilysys alleged that principals of CTS failed to disclose pertinent information during the acquisition, representing a material breach in the representations of the acquisition purchase agreement. On January 30, 2009, a jury ruled in favor of the company, finding the former shareholders of CTS liable for breach of contract, and awarded damages in the amount of $2.3 million. The jury also awarded to Agilysys its reasonable attorney’s fees in an amount to be determined at a later hearing. Judgment will be entered upon an award of attorney’s fees, at which time the parties have thirty days to file an appeal. No amounts have yet been accrued or received from the former shareholders of CTS or their insurance company.
Item 4. Submission of Matters to a Vote of Security Holders.
The 2008 Annual Meeting of Shareholders of Agilysys, Inc. (“2008 Annual Meeting”) was held on March 26, 2009. The following Directors were re-elected to serve until the annual meeting in 2011:
| | | | | | | |
| Director | | For | | Against | | Withheld |
|
| Thomas A. Commes | | 16,926,138 | | — | | 1,106,358 |
| R. Andrew Cueva | | 17,799,059 | | — | | 233,437 |
| Howard M. Knicely | | 16,982,761 | | — | | 1,049,735 |
|
9
On March 11, 2009, the company and Ramius LLC and its affiliates entered into an agreement (the “Settlement Agreement”) to settle the proxy contest regarding the election of Directors at the company’s 2008 Annual Meeting. For information regarding the Settlement Agreement and the company’s expenses related to the solicitation, please refer to the company’s Schedule 14A filed with the SEC on March 17, 2009.
The term of office for the following Directors continued after the 2008 Annual Meeting: Martin F. Ellis, Keith M. Kolerus, Robert A. Lauer, Robert G. McCreary, III, John Mutch, and Steve Tepedino. Effective May 21, 2009, Steve Tepedino tendered his resignation from the company’s Board of Directors for professional reasons.
Also at the 2008 Annual Meeting, shareholders voted to ratify the appointment of Ernst & Young LLP as the company’s independent registered public accounting firm for the fiscal year ended March 31, 2009. Shareholders voted as follows:
| | | | | | | | | |
| For | | Against | | Abstentions | | Broker Non-Votes |
|
| 18,752,711 | | 57,990 | | 40,611 | | | — | |
|
Item 4A. Executive Officers of the Registrant.
The information provided below is furnished pursuant to Instruction 3 to Item 401(b) ofRegulation S-K. The following table sets forth the name, age, current position and principal occupation and employment during the past five years through June 1, 2009, of the company’s executive officers.
There is no relationship by blood, marriage or adoption among the listed officers. Mr. Ellis holds office until terminated as set forth in his employment agreement. All other executive officers serve until terminated.
Executive Officers of the Registrant
| | | | | | | | |
Name | | Age | | Current Position at June 1, 2009 | | Other Positions |
|
Martin F. Ellis | | | 44 | | | President and Chief Executive Officer of the company since October 2008. | | Executive Vice President, Treasurer and Chief Financial Officer from June 2005 to October 2008. Executive Vice President, Corporate Development and Investor Relations from July 2003 to June 2005. Prior to July 2003, Senior Vice President, Principal, and Head of Corporate Finance for Stern Stewart & Co. |
Paul A. Civils | | | 58 | | | Senior Vice President and General Manager since November 2008. | | Vice President and General Manager, Retail Solutions from October 2003 to November 2008. Prior to October 2003, Vice President, Retail Direct Sales for Kyrus Corporation. |
John T. Dyer | | | 34 | | | Vice President and Controller since November 2008. | | Director of Internal Audit from March 2007 to November 2008. Prior to 2004 and to March 2007, various progressive positions in finance, accounting, internal audit, and management with The Sherwin-Williams Company. |
10
| | | | | | | | |
Name | | Age | | Current Position at June 1, 2009 | | Other Positions |
Part III
Item 10. Directors, Executive Officers andCorporate Governance.
DIRECTORS
A biography for each of our directors and, if applicable, arrangements under which a director was appointed to the board of directors or information regarding any involvement in certain legal or administrative proceedings is provided. Additional information about the experiences, qualifications, attributes, or skills of each director in support of his service on the board of directors is also provided.
Class A Directors
(Term to Expire in 2013)
|
Kenneth J. Kossin, Jr. | | |
| R. Andrew Cueva | 44Age 42 | Director since 2008 |
Managing Director of MAK Capital Fund, L.P., a value-oriented hedge fund, since 2005. Portfolio manager and analyst at Green Cay Asset Management from 2002 to 2004. As Managing Director of MAK Capital, the Company’s largest shareholder, Mr. Cueva is uniquely qualified to represent the interests of the Company’s shareholders. Additionally, Mr. Cueva’s qualifications and experience include capital markets, investment strategy, and financial management.
|
| | |
| Keith M. Kolerus | Age 67 | Director since 1998 |
Chairman of the Board of Directors of the Company since October 2008. Retired Vice President, American Division, National Semiconductor, a producer of semiconductors and a leader in analog power management technology, from 1996 to February 1998. Mr. Kolerus served as Chairman of the Board of Directors of National Semiconductor Japan Ltd., from 1995 to 1998, and Chairman of the Board of Directors of ACI Electronics, LLC, from 2004 to 2008. Mr. Kolerus has extensive experience in engineering, global operations, private and public companies, software and hardware technology companies, government contracting, capital markets, financial management, and the technology industry. Mr. Kolerus’ prior experiences as a board chairman uniquely qualify him to lead the board of directors as its Chairman.
|
| | |
| Robert A. Lauer | Age 69 | Director since 2001 |
Retired from Accenture, a consulting firm (formerly known as Andersen Consulting), in August 2000. Mr. Lauer held numerous operational positions covering regional, national, and global responsibilities during his 31-year career, most recently serving as Managing Partner Global Human Performance Services and Managing Partner Change Management Global Communications and High Tech Industries. Mr. Lauer’s career in the information technology industry provided him with extensive experience and qualifications in global business operations, corporate and organizational restructurings, management of professional services personnel, and the development, implementation and deployment of large-scale business application software solutions in numerous industry verticals.
|
| | |
| Robert G. McCreary III | Age 61 | Director since 2001 |
Founder and currently a principal of CapitalWorks, LLC, a private equity group, since 1999. Mr. McCreary has served in numerous managing partner positions in investment banking firms and as a partner in a large regional corporate law firm. Mr. McCreary has extensive experience and qualifications in law, corporate governance, financial strategy, capital markets, investment strategy and mergers and acquisitions, and governance of portfolio companies.
Class B Directors
(Term to Expire in 2014)
|
| | |
| James H. Dennedy | Age 47 | Director since 2009 |
President and Chief Executive Officer of the Company since October 2011. Interim President and Chief Executive Officer since May 2011. Principal and Chief Investment Officer with Arcadia Capital Advisors, LLC, an investment management company making active investments in public companies, from April 2008 to May 2011. President and Chief Executive Officer of Engyro Corporation, an enterprise software company offering solutions in systems management, from January 2005 to August 2007. Previously a director of Entrust, Inc., I-many, Inc., and NaviSite, Inc. As a former President of a division of a publicly-held software company and as a Chief
Executive Officer of a private software company, Mr. Dennedy has experience in the technology industry. In addition, Mr. Dennedy has extensive experience in investment strategy, capital structure, financial strategy, mergers and acquisitions, and significant public company leadership and board experience.
|
| | |
| Jerry C. Jones | Age 57 | Director since 2012 |
Chief Ethics and Legal Officer, Executive Vice-President of Acxiom Corporation, a marketing technology and services company, since 1999. Prior to joining Acxiom, Mr. Jones was a partner with the Rose Law Firm in Little Rock, Arkansas, where he specialized in problem solving and business litigation for 19 years, representing a broad range of business interests. Previously he was a director of Entrust, Inc. He is a 1980 graduate of the University of Arkansas School of Law and holds a bachelor's degree in public administration from the University of Arkansas. As the Chief Legal Officer of a technology company, Mr. Jones has extensive experience with legal, privacy, and security matters. He has also led the strategy and execution of mergers and alliances and international expansion efforts.
|
| | |
| John Mutch | Age 56 | Director since 2009 |
Chief Executive Officer of BeyondTrust, a security software company, since October 2008. Founder and a Managing Partner of MV Advisors, LLC, a strategic block investment firm that provides focused investment and strategic guidance to small and mid-cap technology companies, from 2006 to 2008. Director of Steel Excel Inc., and previously Director of Edgar Online, Inc. and Aspyra, Inc. Mr. Mutch has been an operating executive and investor in the technology industry for over 25 years and has a long, sustained track record of creating shareholder value through both activities. As a Chief Executive Officer of an IT company, Mr. Mutch has extensive experience in the technology industry, restructuring, financial management and strategy, capital markets, sales management, and marketing.
EXECUTIVE OFFICERS
The following are biographies for each of our current, non-director executive officers. The biography for Mr. Dennedy, our President and Chief Executive Officer, and a director, is provided above.
|
| | | |
| Name | Age | Current Position | Previous Positions |
| Robert R. Ellis | 39 | Senior Vice President and Chief Financial Officer since October 2008. | 2011, Treasurer since January 2012, and Chief Operating Officer since October 2012. | Vice President of Accounting and ControllerFinancial Operations and Principal Accounting Officer at Radiant Systems, Inc. from October 20052007 to October 20, 2008. Assistant2011. Corporate Controller and director at Radiant from April 20042003 to October 2005. Prior to April 2004, Director of General Accounting for Roadway, Express, Inc.2007. |
Anthony MellinaKyle C. Badger | | | 53 | | 45 | Senior Vice President, and General Manager since November 2008. | | Senior Vice President, Sun Technology Solutions from October 2007 to November 2008. Prior to October 2007, Chief Executive Officer for Innovative Systems Design, Inc. from July 2003. |
Tina Stehle | | | 52 | | | Senior Vice President and General Manager since November 2008. | | Senior Vice President Hospitality Solutions from July 2007 to November 2008. Vice President and General Manager, Hospitality Solutions from August 2006 to July 2007. Vice President, Software Sales from February 2004 to August 2006. Prior to February 2004, Vice President of Software Services for Inter-American Data, Inc. |
Curtis C. Stout | | | 38 | | | Vice President and Treasurer since November 2008. | | Vice President, Corporate Development and Planning from April 2007 to November 2008. Director, Business Planning and Development from April 2004 to March 2007. From July 2000 to April 2004, various roles in corporate development. |
Kathleen A. Weigand | | | 50 | | | General Counsel and Senior Vice President, Human ResourcesSecretary since March 2009. | October 2011. | Executive Vice President, General Counsel and Secretary for U-Store It Trustat Richardson Electronics, Ltd. from January2007 to October 2011. Senior Counsel at Ice Miller LLP from 2006 to December 2008. Deputy General Counsel and Assistant Secretary for Eaton Corporation2007. Partner at McDermott, Will & Emery LLP from 2003 to 2005. Prior to 2003,2006. |
| Larry Steinberg | 45 | Senior Vice President Assistant General Counsel, and Assistant SecretaryChief Technology Officer since June 2012. | Senior Vice President, Technology for TRW Inc.us in May 2012. Principal Development Manager, Microsoft Corporation from August 2009 to April 2012, and Principal Architect from June 2007 to July 2009. Founder and Chief Technology Officer of Engyro Corporation from March 1995 to May 2007.
|
| Janine K. Seebeck | 37 | Vice President and Controller since November 2011. | Vice President of Finance, Asia Pacific, at Premiere Global Services, Inc. from 2008 to April 2011. Vice President, Corporate Controller at Premiere from 2002 to 2008. |
11
CORPORATE GOVERNANCE
Code of Business Conduct
The Code of Business Conduct adopted by our board of directors applies to all directors, officers, and employees of the Company and incorporates additional ethics standards applicable to our Chief Executive Officer, Chief Financial Officer, and other senior financial officers of the Company, and any person performing a similar function. The Code of Business Conduct is reviewed annually by the Audit Committee, and recommendations for change are submitted to the board of directors for approval. The Code of Business Conduct is available on our website at www.agilysys.com, under Investor Relations. The Company has in place a hotline available for use by all employees, as described in the Code of Business Conduct. Any employee can anonymously report potential violations of the Code of Business Conduct through the hotline, which is managed by an independent third party. Reported violations are promptly reported to and investigated by the Company. Reported violations are addressed by the Company and, if related to accounting, internal accounting controls, or auditing matters, the Audit Committee. In addition, we intend to post on our website all disclosures that are required by law or NASDAQ listing standards concerning any amendments to, or waivers from, any provision of the Code of Business Conduct.
Audit Committee
The board of directors has a standing Audit Committee. The Audit Committee held eight meetings during fiscal year 2013. The Audit Committee reviews with our independent registered public accounting firm the proposed scope of our annual audits and audit results, as well as interim reviews of quarterly reports; reviews the adequacy of internal financial controls; reviews internal audit functions; is directly responsible for the appointment, determination of compensation, retention, and general oversight of our independent registered public accounting firm; reviews related person transactions; oversees the Company’s implementation of its Code of Business Conduct; and reviews any concerns identified by either the internal or external auditors. The board of directors determined that all Audit Committee members are financially literate and independent under NASDAQ listing standards for audit committee members. The board of directors also determined that Messrs. Lauer and Mutch each qualify as an “audit committee financial expert” under SEC rules.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act requires the Company’s directors and certain of its executive officers and persons who beneficially own more than 10% of the Company’s common shares to file reports of and changes in ownership with the SEC. Based solely on the Company’s review of copies of SEC filings it has received or filed, the Company believes that each of its directors, executive officers, and beneficial owners of more than 10% of the shares satisfied the Section 16(a) filing requirements during fiscal year 2013, with one exception: on July 31, 2012, Mr. Jones was granted 8,055 shares of restricted stock following his election to the board of directors. The Form 4 to report such grant was inadvertently filed one day late on August 3, 2012.
part IIItem 11. Executive Compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee during fiscal year 2013 or as of the date of this report is or has been an officer or employee of the Company, and none of our executive officers served on the compensation committee (or other committee serving an equivalent function) or board of any company that employed any member of our Compensation Committee or our directors.
DIRECTOR COMPENSATION
During fiscal year 2013, compensation for non-employee directors consisted of the following:
$25,000 annual cash retainer for each non-employee director;
$35,000 additional cash retainer for the chairman of the board;
$7,500 additional cash retainer for the chairmen of each of the Compensation and Nominating & Corporate Governance Committees;
$10,000 additional cash retainer for the chairman of the Audit Committee;
$10,000 additional cash retainer for each member of the Audit, Nominating & Corporate Governance, and Compensation Committees, including each chairman; and
An award of restricted shares to each non-employee director valued at $70,000 on the grant date.
We also reimburse our directors for reasonable out-of-pocket expenses in connection with attendance at board of directors and committee meetings.
The fiscal year 2013 equity award for each director, other than Mr. Jones, consisted of 9,383 restricted shares, based on a $7.46 grant date price, and was granted under the 2011 Stock Incentive Plan. The restricted shares vested on March 31, 2013 and provided for pro-rata vesting upon retirement prior to March 31, 2013. The grant was made in June 2012, to the then current non-employee directors; however, Mr. Cueva declined the award given the significant ownership in the Company by his firm, MAK Capital. The award for Mr. Jones consisted of 8,055 restricted shares, based on a $8.69 grant date price, and was made in July 2012 at the time of his first election to the board. Mr. Jones’ restricted shares also vested on March 31, 2013.
Our directors are subject to share ownership guidelines that require ownership of either (i) three times the director’s respective annual cash retainer within two years of service and six times the director’s respective annual cash retainer within four years of service; or (ii) 15,000 shares within the first two years following the director’s election to the board of directors and 45,000 shares within four years of election. We pay no additional fees for board or committee meeting attendance. Mr. Dennedy ceased receiving compensation for his service as a director upon his appointment as an executive officer in July 2011, and all compensation received by Mr. Dennedy thereafter was for his service as an executive officer.
Director Compensation for Fiscal Year 2013
|
| | | | | | |
Director | Fees Earned or Paid in Cash ($)(1) |
Stock Awards ($)(2) |
Total ($) |
| R. Andrew Cueva | 50,000 |
| — |
| 50,000 |
|
| Jerry Jones | 35,000 |
| 70,000 |
| 105,000 |
|
| Keith M. Kolerus | 82,500 |
| 70,000 |
| 152,500 |
|
| Robert A. Lauer | 55,000 |
| 70,000 |
| 125,000 |
|
| Robert G. McCreary, III | 35,000 |
| 70,000 |
| 105,000 |
|
| John Mutch | 47,500 |
| 70,000 |
| 117,500 |
|
| |
Item 5. (1) | Market for Registrant’s Common Equity, Related Shareholder MattersFees are paid quarterly. |
| |
| (2) | Amounts in this column represent the grant date fair value of the restricted shares computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. As of March 31, 2013, the aggregate number of unexercised stock options held by each non-employee director was as follows: Mr. Kolerus, 22,500; Mr. Lauer, 22,500; and Issuer
Purchases of Equity Securities.Mr. McCreary, 22,500. |
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
This Compensation Discussion and Analysis (the “CD&A”) describes our executive compensation philosophy and programs during fiscal year 2013. Executive compensation arrangements with our Named Executive Officers are governed by the Compensation Committee (the “Committee”). In this CD&A, you will find detailed compensation information for our Named Executive Officers, which consist of our Chief Executive Officer (“CEO”), our Chief Financial Officer (“CFO”), and our three other most highly compensated executive officers during fiscal year 2013, as listed below:
James Dennedy, President and Chief Executive Officer
Robert Ellis, Senior Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer
Kyle Badger, Senior Vice President, General Counsel and Secretary
Paul Civils, Senior Vice President, General Manager, Retail Solutions Group (“RSG”)
Larry Steinberg, Senior Vice President, Chief Technology Officer
On July 1, 2013, the Company completed the sale of the Retail Solutions Group to Kyrus Solutions, Inc. As a result of the sale, Mr. Civils became an employee of Kyrus Solutions, Inc. and is no longer an employee of the Company.
As discussed in the CD&A contained in the Proxy Statement for our 2012 Annual Meeting of Shareholders, in fiscal year 2012 the Company substantially reduced compensation costs for key executive positions following the sale of its Technology Services Group business unit (“TSG”) in August 2011, which resulted in a smaller, refocused Company and new leadership in key executive positions with comparatively lower compensation arrangements to reflect the smaller, refocused Company. In fiscal year 2013, the Committee continued the compensation programs put in place in fiscal year 2012 with even more emphasis on pay for financial performance for the CEO and CFO.
Compensation Highlights
Compensation Focus for Fiscal Year 2013. In response to current executive compensation trends, and after considering the results of our 2012 vote on Named Executive Officer compensation, which confirmed the Company’s philosophy and objectives relative to our executive compensation program, the Compensation Committee continued efforts to maintain reduced compensation expense and link executive pay to performance by:
Establishing minimal base salary increases;
Focusing annual incentive on significant improvements over fiscal year 2012 results; and
Structuring long-term incentives to reward increases in shareholder value.
Performance Linked Compensation. Our Compensation Committee set fiscal year 2013 compensation, including financial and business targets for performance-based compensation, for our Named Executive Officers to continue to emphasize pay for performance by comprising the fiscal year’s total compensation opportunity of 22%, on average, of annual cash incentive based on goals focused on significant improvements over fiscal year 2012 results for revenue, gross profit and adjusted operating income.
Our CEO's targeted pay was approximately 74% performance-based, and between 50% and 60% for each of our other Named Executive Officers targeted pay was performance-based, tied directly to annual goals or long-term equity awards, the value of which is tied directly to an increase in share price. As discussed below, targeted annual goals were primarily based on improvements over fiscal year 2012 results for revenue, gross profit and adjusted operating income, and, for Mr. Civils, significant business unit improvements.
Our operating results for fiscal year 2013 significantly outperformed our plan. Total net revenue increased 13%, and adjusted operating income increased $15.6 million year over year to $7.6 million from an adjusted operating loss of $7.9 million in fiscal year 2012. As a result, annual incentive payouts ranged from 123% to 146% of target for the Named Executive Officers.
Chief Executive Officer Compensation. Mr. Dennedy became our CEO in May 2011 with a compensation package that included a base salary that was set significantly lower, 26%, than his predecessor’s salary and an annual incentive target that was set at a significantly higher percentage, at 100% percent of salary versus 85%. His compensation remained unchanged in fiscal year 2012.
Mr. Dennedy’s compensation package for fiscal year 2013 continued to reflect the Compensation Committee’s ongoing commitment to link pay to performance and to maintain reduced compensation costs, as evidence by the following for Mr. Dennedy:
Base salary was increased by 14% over the prior year's base salary;
Annual incentive was set at a lower percentage, 88% of salary versus 100% in the prior year;
50% of long-term incentive award, granted as stock-settled appreciation rights, is based entirely on share price improvement, and the balance, granted as restricted stock, is tied to share price;
Annual incentive payout of 146% of targeted payout was earned based on the Company's results; and
74% of targeted compensation was variable pay, tied either to performance or share price improvement.
Chief Financial Officer Compensation. Mr. Ellis was appointed our CFO during fiscal year 2012 and his initial compensation package was similarly set to achieve the Compensation Committee’s goals of reducing compensation cost and emphasizing by for performance with a base salary that was set 8% lower than his predecessor’s salary and an annual incentive target that was set at a higher percentage, 60% percent of salary versus 50%. In October 2012, Mr. Ellis was appointed to the additional office of Chief Operating Officer, and the Compensation Committee increased his base salary and target annual incentive to reflect his additional responsibilities.
Mr. Ellis’ compensation package for fiscal year 2013, including the compensation related to his additional role as Chief Operating Officer, continued to reflect the Compensation Committee’s ongoing commitment to link pay to performance and to maintain reduced compensation costs, as evidence by the following for Mr. Ellis:
Base salary was increased by 9% over the prior year's base salary, primarily due to his increased responsibilities as Chief Operating Officer;
Annual incentive was set at a higher percentage, 75% of salary versus 60% in the prior year after his appointment to the additional office of Chief Operating Officer;
50% of long-term incentive award, granted as stock-settled appreciation rights, is based entirely on share price improvement, and the balance, granted as restricted stock, is tied to share price;
Annual incentive payout of 146% of targeted payout was earned based on the Company's results; and
57% of targeted compensation was variable pay, tied either to performance or share price improvement
Compensation Philosophy, Objectives, and Structure
Our Compensation Committee adopted its pay philosophy, objectives, and structure for Named Executive Officers to achieve financial and business goals and create long-term shareholder value. Our Compensation Committee reaffirmed the pay philosophy, objectives, and structure for fiscal year 2013.
Compensation Philosophy and Objectives. Our Compensation Committee’s pay philosophy is to pay a base salary and provide target annual cash incentives and long-term equity incentives, each at the 50th percentile of comparative peer group compensation, and to annually review these compensation components based on peer group comparisons and tie compensation to our business strategy. The Compensation Committee’s objective is to establish an overall compensation package to:
Reward the achievement of business objectives approved by our board of directors;
Tie a significant portion of compensation to the long-term performance of our common shares;
Provide a rational, consistent, and competitive executive compensation program that is well understood by those to whom it applies; and
Attract, retain, and motivate executives who can significantly contribute to our success.
Compensation Structure. Our compensation structure is comprised of:
Base Salary — Base salary provides fixed pay levels aimed to attract and retain executive talent. Variations in salary levels among Named Executive Officers are based on each executive’s roles and responsibilities, experience, functional expertise, relation to peer pay levels, competitive assessments, individual performance, and changes in salaries in the overall general market and for all employees of the Company. Salaries are reviewed annually by our Compensation Committee, and changes in salary are based on these factors and input from our CEO, other than for himself. None of the factors are weighted according to any specific formula. New salaries generally are based on the Compensation Committee’s discretion and judgment but may be based on any of the above-mentioned relevant factors.
Annual Incentives — Annual incentives provide cash variable pay for achievement of the Company’s financial, strategic, and operational goals and individual goals, with target incentives set as a percentage of salary, designed to reward achievement of goals with an annual cash payment. Variations in incentive components and mix among Named Executive Officers are determined by our Compensation Committee and based on each executive’s respective business unit or corporate goals and each executive’s individual goals and corporate-wide initiatives, as well as market data, length of time in current role or similar role at another company, and recommendations from our CEO, other than for himself.
Long-Term Incentives — Long-term incentives are variable, equity incentives designed to drive improvements in performance that build wealth and create long-term shareholder value by tying the value of earned incentives to the long-term performance of our common shares. Target incentives are set as a percentage of salary. Variations in awards among Named Executive Officers are determined by our Compensation Committee after a review of various factors, including
recommendations based on market data, individual ability to influence results, length of time in current role or similar role at another company, and recommendations from our CEO, other than for himself.
Compensation Key Considerations
Annual Goal Setting. Annual goals for our Named Executive Officers are tied to our financial, strategic, and operational goals and include business specific financial targets relating to our goals. Each Named Executive Officer’s annual incentive goals are established by our Compensation Committee, with input from our CEO (other than for himself). At fiscal year-end, the Compensation Committee evaluates the performance of each Named Executive Officer and determines an appropriate award based on established goals, with input from our CEO (other than for himself) on individual goals. Our Compensation Committee establishes our CEO’s annual incentive goals and determines his appropriate award based on established goals.
Variable Pay at Risk. Our philosophy drives the provision of greater at-risk pay to our Named Executive Officers, and variable pay at risk comprised approximately 74% of target annual compensation for our CEO and between 50% and 60% for other Named Executive Officers. Our Named Executive Officers have significant opportunities for long-term, equity-based incentive compensation, higher than for annual cash incentive compensation in most cases, as our philosophy is to tie a significant portion of compensation to the long-term performance of our common shares. As a result, significant emphasis is placed on long-term shareholder value creation, thereby minimizing excessive risk taking by our executives.
Competitive Market Assessments. During fiscal year 2012, Towers Watson provided the Compensation Committee with two competitive market assessments, one in March and one in August, which updated the March assessment to adjust for expected revenues of the smaller Company after the closing of the TSG sale. The assessments evaluated compensation levels for the Company’s top eight executive positions, including the Named Executive Officers. The assessments compared published survey compensation data for both general industry and the high technology services industry to current compensation levels for the Company’s executives. Competitive compensation levels in these industries were gathered for base salary, annual incentive, total cash compensation, long-term incentive, and total direct compensation. The purpose of the assessments was to compare current market data to our current compensation, which was based on prior benchmarking performed by the Company, where compensation levels were benchmarked to separate, defined peer group companies for corporate executives and each business unit executive. Towers advised that an assessment using the general and high technology services industries data provides more representative and relevant comparisons given the size of the Company. As further detailed below, the assessments showed that all elements of the Company’s overall compensation fell between the 25th and 50th percentiles within both the general and high technology services industries. Typically, an individual position is considered to be paid at market if it is within 15% (above or below) the competitive median and the assessments showed that the Company had individuals above, within, and below that range.
During fiscal year 2013, the Compensation Committee believed that the Towers Watson assessments performed in fiscal year 2012, without any update, remained useful for purposes of determining Named Executive Officer compensation, and, as a result, the Compensation Committee did not request or review any additional assessments in fiscal year 2013.
Tally Sheets. Our Compensation Committee analyzes tally sheets at the beginning of the fiscal year to review overall compensation and pay mix for each Named Executive Officer. Tally sheets include a three-year look-back of total compensation, including annual cash compensation, long-term incentive awards granted and earned, and benefits and perquisites. Tally sheets also include a cumulative inventory of equity grants by fiscal year, including the value of outstanding equity at the Company’s current stock price and the value received for prior vesting and exercises of equity. The tally sheets bring together, in one place, all elements of Named Executive Officers’ actual compensation and information about wealth accumulation so that our Compensation Committee can analyze the individual elements and mix of compensation and the aggregate total amount of annual and accumulated compensation. Tally sheets are also used by the Compensation Committee to evaluate internal pay equity among the Named Executive Officers and to determine the impact of employment termination or change of control events. In support of the philosophy of rewarding future performance, the Compensation Committee does not consider prior pay outcomes in setting future pay levels. Rather, tally sheets are used by the Compensation Committee to review compensation as compared to expectations, and our Compensation Committee determined that annual compensation set for our Named Executive Officers for fiscal year 2013 was consistent with expectations and with the established compensation philosophy and pay mix guidelines driven by that philosophy.
Fiscal Year 2013 Compensation
Salary. For fiscal year 2013, salary comprised 27% of total target compensation for our CEO and between 40% and 50% for our other Named Executive Officers. Since all of the Named Executive Officers, other than Mr. Dennedy and Mr. Civils, had been first hired by the Company during fiscal year 2012 or 2013, the Compensation Committee considered the competitive market assessments provided by Towers Watson in fiscal year 2012 in determining the initial salaries for the newly hired Named Executive Officers, as well as their previous salary levels and prior experience. The Compensation Committee further considered the competitive market assessments provided by Towers Watson in determining fiscal year 2013 salaries for all the Named Executive Officers. For purposes of the assessments, Mr. Civils was matched to survey benchmarks based upon responsibilities, and market-competitive salaries were determined by regressing the benchmark to Mr. Civil's business unit revenue responsibilities.
The survey data included values at the 25th, 50th (market median), and 75th percentiles. Based on the assessment, at the beginning of fiscal year, salaries for the Named Executive Officers ranged between 27% below and 2% above median, which was considered competitive. As such, salary increases for fiscal year 2013 were made based on individual responsibilities and performance, and increases averaged 6%, ranging from 2% to 14%.
Mr. Ellis' annual salary was increased from $285,000 to $300,000 in November 2012 following his appointment to the additional office of Chief Operating Officer based on the Compensation Committees assessment of the additional responsibilities required by his new position.
Annual Incentives. For fiscal year 2013, annual goals were set at the beginning of the fiscal year. The discussion below, which specifically relates to the table below under “Fiscal Year 2013 Payouts,” provides details regarding fiscal year 2013 annual incentive performance metrics, levels, and payouts for the Named Executive Officers. As discussed below, annual goals for Mr. Civils were changed during the fiscal year as a result of the Company's decision to sell the RSG business.
Performance Metrics. The Compensation Committee set corporate performance metrics for fiscal year 2013 annual incentives to require target level improvements over fiscal year 2012 results of 138% for adjusted operating income, 3.4% for gross profit and 8.2% for revenue. These levels were set based on the Company's overall operating plan and expected growth and operating improvements in the two business units. Target level improvements for RSG, which Mr. Civils managed, were set at 64% for adjusted operating income. Target level improvements over fiscal year 2012 results for adjusted operating income were significant because the Company had negative adjusted operating income in fiscal year 2012. Adjusted operating income is calculated as operating income excluding amortization of intangibles, stock based compensation expense and non-recurring charges. The Company believes adjusted operating income is a profitability measure and a key driver of value, focusing on sales, product mix, margins, and expense management. Adjusted operating income was selected as an annual goal component for all Named Executive Officers given the desire to balance sales and margins, as both are manageable by our Named Executive Officers, and replaced the EBITDA component used in prior fiscal years.
For the corporate Named Executive Officers, including Messrs. Dennedy, Ellis, Badger and Steinberg, adjusted operating income goals related to the consolidated Company results, and for Mr. Civils, the adjusted operating income goal related to RSG. The Compensation Committee believed that revenue and gross profit goals were less important for Mr. Civils as long as the adjusted operating income goal was achieved, and, accordingly, Mr. Civils only performance metric was achievement of targeted adjusted operating income for RSG.
Performance percentages for payouts (with proportionate payouts between the target and maximum achievement levels) were based on varying levels of achievement of fiscal year 2013 budgeted results, as set forth below. Additional detail about threshold and maximum incentives are disclosed in the Grants of Plan-Based Awards for Fiscal Year 2013 table.
|
| | | | | | |
Component | Threshold | Maximum |
Payout (% of target incentive) |
Required Achievement of Performance Measures (%) |
Payout (% of target incentive) |
Required Achievement of Performance Measures (%) |
| Revenue | 90 | 97.7 |
| 150 | 108.3 |
|
| Gross Profit | 90 | 92.6 |
| 150 | 101.9 |
|
| Adjusted Operating Income | 90 | 83.3 |
| 150 | 283.3 |
|
| Adjusted Operating Income-RSG | 90 | 83.3 |
| 150 | 283.3 |
|
The company’s common shares, without parCompensation Committee believed that the plan involved moderate difficulty at the threshold level, a high degree of difficulty at the 100% target level, given continuing competition and pricing pressure in the market, and significant difficulty at the maximum level, requiring significant improvement over fiscal year 2012 results, in each case relative to future expectations at the time the levels were set. Threshold levels were based on achievement necessary to successfully execute a minimum level of the operating plan.
MBO’s. In addition to objective performance metrics, management by objective goals (“MBOs”) comprised from 25% to 50% of the annual incentive of Named Executive Officers other than Messrs. Dennedy and Ellis. However, MBOs could only be earned in the event that threshold adjusted operating income targets were achieved in order to place greater weight on objective performance metrics. MBOs represent individual performance-based goals, with both quantitative and qualitative measures, relative to individual responsibilities and emphasize the importance of specific tasks and company-wide initiatives. The Compensation Committee believed that MBOs were appropriate for executives whose impact on shareholder value was less direct than the CEO and CFO. The Compensation Committee has discretion in deciding whether each MBO was achieved and in determining the level of achievement, and thus payout, for the MBO components. Achievement of MBOs results in a payout ranging from a minimum of 80% for partial achievement to 100% for maximum achievement, and Named Executive Officers are tradedeligible for proportionate payouts between the minimum and maximum achievement levels, and there is no payout for MBOs below the minimum achievement level. Consistent with the other elements of compensation, MBOs were established at the beginning of year when the outcome for the fiscal year was substantially uncertain. Fiscal year 2013 MBO goals and payout allocations for the Name Executive Officers were as follows:
|
| | |
Executive | MBO | % of MBOs |
| Kyle C. Badger | Process improvements and efficiency gains with respect to customer contract creation | 20
|
| and review process | |
| Review, update and implement the Company’s records retention policy | 20 |
| Review and update the Company’s intellectual property strategy | 20 |
| Complete new master agreements for certain major customers | 20 |
| Complete new agreements for certain key vendors | 20 |
| Paul A. Civils | Cooperate with the RSG sale process | 100 |
| Larry Steinberg | Accomplish development objectives for property management system (PMS) software
| 26
|
| Remain within PMS software development budget | 26 |
| Meet product development schedule for certain point of sale product improvements | 20 |
| Improve in-market product quality by establishing a new product engineering process | 18 |
| Implement customer advisory boards for certain products | 10 |
Weight differences between initiatives among the Named Executive Officers corresponded to importance of each initiative in respect of the overall Company operating plan.
Mr. Civils’ MBOs were changed during the fiscal year when the Company decided to implement a process to sell the RSG business. Given the significant amount of time and effort required by Mr. Civils in connection with the sale of RSG, the Compensation Committee concluded that it was in the Company’s best interest to focus his incentives towards successful completion of the sale.
Annual Incentive Levels. For all Named Executive Officers, fiscal year 2013 target annual incentives were set as a percentage of salary, with the percentage correlating to the overall competitive total target compensation level for each executive. Target annual incentives were set at 88% of salary for Mister. Dennedy and 75% for Mr. Ellis, as opposed to approximately 50-75% of salary for other executives, to increase the performance-based nature of their total compensation due to their greater ability to influence corporate goals and initiatives. Annual incentives comprised 23% of total target compensation for Mr. Dennedy and 32% for Mr. Ellis, and approximately 25% for our other Named Executive Officers. As with salaries, the Compensation Committee considered the competitive market assessments provided by Towers Watson in fiscal year 2012 in evaluating current annual incentive levels and for determining fiscal year 2013 levels. Target levels were based on survey data from companies of comparable revenue and were interpolated for each executive based on calculated competitive salaries, as described above.
The survey data included values at the 25th, 50th (market median), and 75th percentiles and, on average, current target annual incentive percentages of salary were aligned with market median, and total target cash compensation (salary and annual incentive) was in the competitive range for the positions evaluated, ranging from 21% below to 16% above market median. As such, increased annual incentive opportunities for Named Executive Officers other than Messrs. Dennedy and Ellis were a factor of increased salary, as discussed above, as annual incentives as a percentage of salary approximated current levels. Mr. Dennedy's annual incentive as a percentage of salary was reduced from 100% to 88% to set his total target cash compensation in line with market median. Mr. Ellis' annual incentive as a percentage of salary was set higher than market median to heavily weight performance, given his ability to influence corporate goals and initiatives.
Mr. Ellis target annual incentive as a percentage of his salary was increased from 60% to 75% in October 2012 when he was appointed to the additional office of Chief Operating Officer based on the NASDAQ Stock Market LLC. Common share prices are quoted daily underCompensation Committees assessment of the symbol “AGYS.”scope and amount of additional responsibilities required by his new position and to further weight performance given his additional ability to influence corporate goals and initiatives.
Fiscal Year 2013 Payouts. The high and low market prices and dividends per share forchart below sets forth the common sharesfiscal year 2013 annual incentive opportunity for each quarter duringNamed Executive and the past two fiscal years are presentedcomponents, weightings, and actual annual incentive payouts based on the Compensation Committee’s review of the achievement of the performance measures. At the corporate level, target levels of revenue, gross profit and adjusted operating income were substantially exceeded, resulting in corresponding payouts for those components. At the business segment level, Mr. Civils exceeded the target levels of adjusted operating income. The attainment by each Named Executive Officer of their respective MBOs is reflected in the table below.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended March 31, 2009 | |
| | | First quarter | | | Second quarter | | | Third quarter | | | Fourth quarter | | | Year | |
| |
| Dividends declared per common share | | | $0.03 | | | | $0.03 | | | | $0.03 | | | | $0.03 | | | | $0.12 | |
| Price range per common share | | | $9.65-$12.64 | | | | $10.09-$13.34 | | | | $2.09-$9.48 | | | | $3.26-$4.93 | | | | $2.09-$13.34 | |
| Closing price on last day of period | | | $11.34 | | | | $10.09 | | | | $4.29 | | | | $4.30 | | | | $4.30 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended March 31, 2008 | |
| | | First quarter | | | Second quarter | | | Third quarter | | | Fourth quarter | | | Year | |
| |
| Dividends declared per common share | | | $0.03 | | | | $0.03 | | | | $0.03 | | | | $0.03 | | | | $0.12 | |
| Price range per common share | | | $21.03-$23.45 | | | | $14.50-$23.46 | | | | $12.68-$18.53 | | | | $11.13-$15.30 | | | | $11.13-$23.46 | |
| Closing price on last day of period | | | $22.50 | | | | $16.90 | | | | $15.12 | | | | $11.60 | | | | $11.60 | |
|
|
| | | | | | | | | | |
| | Performance Metrics | Annual Incentive |
| Target Incentive as a % of salary | Component | Weight | Target | Actual | Target (1) |
| Payout (1) |
|
| James H. Dennedy – 88% | Revenue: AGYS | 25% | $216.0M | $234.2M |
| $87,500 |
|
| $131,250 |
|
| | Gross Profit: AGYS | 40% | $86.4M | $89.3M |
| $140,000 |
|
| $210,000 |
|
| | AOI: AGYS | 35% | $3.0M | $6.6M |
| $122,500 |
|
| $168,534 |
|
| Total | | | | |
| $350,000 |
|
| $509,784 |
|
| | | | | | | |
| Robert R. Ellis – 75% | Revenue: AGYS | 25% | $216.0M | $234.2M | $56,250 | $84,375 |
| | Gross Profit: AGYS | 40% | $86.4M | $89.3M | $90,000 | $135,000 |
| | AOI: AGYS | 35% | $3.0M | $6.6M | $78,750 | $108,343 |
| Total | | | | | $225,000 | $327,718 |
| | | | | | | |
| Kyle C. Badger– 50% | Revenue: AGYS | 15% | $216.0M | $234.2M | $18,750 | $28,125 |
| | Gross Profit: AGYS | 20% | $86.4M | $89.3M | $25,000 | $37,500 |
| | AOI: AGYS | 15% | $3.0M | $6.6M | $18,750 | $25,796 |
| | MBO | 50% | | | $62,500 | $62,500 |
| Total | | | | | $125,000 | $153,921 |
| | | | | | | |
| Paul A. Civils – 55% | AOI: RSG | 75% | $11.0M | $11.0M | $107,250 | $144,720 |
| | MBO | 25% | | | $35,750 | $35,750 |
| Total | | | | | $143,000 | $180,470 |
| | | | | | | |
| Larry Steinberg - 60% | Revenue: AGYS | 15% | $216.0M | $234.2M | $18,147 | $27,221 |
| | Gross Profit: AGYS | 20% | $86.4M | $89.3M | $24,196 | $36,294 |
| | AOI: AGYS | 15% | $3.0M | $6.6M | $18,147 | $24,967 |
| | MBO | 50% | | | $60,490 | $60,490 |
| Total | | | | | $120,980 | $148,972 |
| |
| (1) | Pro-rated from hire date for Mr. Steinberg. See Grants of Plan-Based Awards table for annualized award amounts. |
Long-Term Incentives. As with the annual incentives, the Compensation Committee approved fiscal year 2013 long-term incentive (“LTI”) awards at the beginning of May 29, 2009, thereyear when the outcome for the fiscal year was substantially uncertain. LTI awards to Named Executive Officers consisted of stock-settled appreciation rights (“SSARs”) and restricted shares, both with three-year vesting schedules, pursuant to the Company's shareholder-approved 2011 Stock Incentive Plan. The Committee considered various LTI award alternatives. While annual incentives targeted specific performance goals, the focus on LTI awards was to link compensation directly to shareholder gains and to improve retention of key management during the Company's time of transition. SSARs provided the direct link between compensation and shareholder gains in a less dilutive manner than with stock options, and the three-year vesting schedule also enhances retention. Restricted shares also tie compensation to shareholder gains and highly bolster retention over the vesting period.
LTI awards comprised 50% of total target compensation for Mr. Dennedy to directly link a significant portion of his pay, when combined with his annual incentive, to performance and comprised between 25% and 35% for our other Named Executive. As with salaries and annual incentives, the Compensation Committee considered the competitive market assessments provided by Towers Watson in fiscal year 2012 in evaluating current LTI levels and for determining fiscal year 2013 LTI levels. The Compensation Committee also received input and recommendations from our CEO regarding each Named Executive Officer's relative ability to influence results in a business segment or in the corporate office. Target levels were 22,639,773 commonbased on survey data from companies of comparable revenue, as described above. The data included LTI values at the 25th, market median, and 75th percentiles, and LTI's as a percentage of base salary at those values. Other than for the CEO, current LTI values and as a percentage of salary were in the competitive range for the positions evaluated, ranging from 8% below to 15% above market median. Mr. Dennedy's LTI as a percentage of base salary was 25% lower than market, which the Compensation Committee viewed as outside the competitive range and inconsistent with our goal to heavily link Mr. Dennedy's compensation to shareholder gains. In addition, Mr. Dennedy's total target compensation, having been largely determined at the time of his prior appointment as interim CEO, was below the market median, and thus the Committee increased Mr. Dennedy's LTI as a percentage of salary to overweight his LTI but still keep his total target compensation at the market median.
The Compensation Committee also set Mr. Steinberg's LTI as a percentage of salary higher than the market median in order to place significant emphasis on long-term shareholder value creation given his role as Chief Technology Officer in developing the Company's next generation of products and solutions.
Based on the competitive assessments, input and recommendations, the Compensation Committee set the 2013 LTI awards for each Named Executive Officer as follows:
|
| | | | | | | |
Name | Percent of Salary (%) | Total LTIP Value ($) | SSARs Granted (#) | Restricted Shares Granted (#) |
| James H. Dennedy | 190 | 760,000 |
| 78,350 |
| 50,938 |
|
| Robert R. Ellis | 60 | 171,000 |
| 17,628 |
| 11,461 |
|
| Kyle C. Badger | 50 | 125,000 |
| 12,886 |
| 8,378 |
|
| Paul A. Civils | 65 | 169,000 |
| 17,422 |
| 11,327 |
|
| Larry Steinberg | 85 | 191,279 |
| 17,513 |
| 11,067 |
|
All SSARs and restricted shares of the company outstanding,vest in one-third increments on March 31, 2013, 2014 and there2015. The SSARs were 2,156 shareholders of record. However, the company believes that there is a larger number of beneficial holders of its common shares. Thegranted at an exercise price $7.46 per share, and $8.64 for Mr. Steinberg (the closing price of the common shares on the grant date), have a seven-year term, and are settled in common shares upon exercise.
In addition to the restricted shares granted to Mr. Steinberg as part of his annual compensation, upon his initial hiring by the Company in May 29, 2009, was $6.46 per share.2012, Mr. Steinberg received additional grants of 55,455 shares of restricted stock as a sign-on bonus and to replace unvested equity lost by him upon leaving his prior employer. 20,000 of such shares vest in one- third increments on March 31, 2013, 2014 and 2015; 16,840 of such share vest on on the second anniversary of his date of hire; 887 of such shares vest on the third anniversary of his date of hire; and 17,728 of such shares vest upon the successful development and sale of our next generation property management system.
Additional Compensation – Executive Benefits. We provide executive benefits to our Named Executive Officers including additional life and long-term disability insurance plans. From time to time, Named Executive Officers also may participate in supplier sponsored events. Executive benefits are further described in the Summary Compensation Table. We believe these benefits enhance the competitiveness of our overall executive compensation package. We have, however, limited executive benefits offered to reduce compensation costs. Additionally, welfare benefits offered to our Named Executive Officers are the same level of benefits offered to all Company employees, except that we pay for the cost of physicals to promote the health and well-being of our executives.
Employment Agreements and Change of Control
The company pays cash dividends on common shares quarterly upon authorizationmaterial termination and change of control provisions of various agreements are summarized below for each Named Executive Officer and are covered in more detail in the Termination and Change of Control table and accompanying discussion.
Employment Agreements. All of the Named Executive Officers entered into an employment agreement with the Company, all with substantially the same terms except as described below. Upon termination without cause, we must pay severance equal to one year's salary and target annual incentive, and continue health benefits for the severance period. If the executive's position is changed such that his or her responsibilities are substantially lessened or, for Mr. Civils, if the executive is required to relocate to a facility more than 50 miles away (a “change in position”), the executive may terminate his or her employment within 30 days of the change in position, and the termination will be deemed to be a termination without cause and the executive is entitled to his or her severance benefits. None of the Named Executive Officers is entitled to excise tax gross-up payments. In consideration of the severance benefits, each employment agreement contains a 12-month non-solicitation provision, an indefinite confidentiality provision, and a 12-month non-compete provision that is automatically triggered if termination is for cause or voluntary and may be enforced by the BoardCompany if termination is without cause or for a change in position. Our Compensation Committee believes that the terms of Directors. Regular payment dates have beenthese employment agreements enhance our ability to retain our executives and contain severance costs by providing reasonable severance benefits competitive with market practice. Severance costs are contained by limiting pay to one year, limiting personal benefits, not providing accelerated vesting for awards under the first day of August, November, Februaryagreements, and May.
The company maintainsnarrowly defining 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.
The company adopted a Shareholder Rights Plan in 1999voluntary termination that expired on May 10, 2009. For further information about the Shareholder Rights Plan, see Note 14 to Consolidated Financial Statements titled,Shareholders’ Equityand contained in Part IV hereof.
No repurchases of common shares were made by or on behalf oftriggers severance benefits. Additionally, the Company during the fourth quarter of fiscal 2009.
12
Shareholder Return Performance Presentation
The following chart compares the value of $100 invested in the company’s common shares, including reinvestment of dividends, with a similar investment in the Russell 2000 Index (the “Russell 2000”) and the companies listed in the SIC Code 5045-Computer and Computer Peripheral Equipment and Software (the company’s “Peer Group”) for the period March 31, 2004, through March 31, 2009:
Comparison of Cumulative Five Year Total Return
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Indexed returns | |
| | | | | | Fiscal years ending | |
| Company Name / Index | | Base period March 2004 | | | March 2005 | | | March 2006 | | | March 2007 | | | March 2008 | | | March 2009 | |
| |
| Agilysys, Inc. | | | 100.00 | | | | 168.11 | | | | 129.71 | | | | 195.42 | | | | 101.56 | | | | 38.45 | |
| Russell 2000 | | | 100.00 | | | | 105.41 | | | | 132.66 | | | | 140.50 | | | | 122.23 | | | | 76.39 | |
| Peer Group | | | 100.00 | | | | 102.32 | | | | 113.88 | | | | 118.59 | | | | 96.29 | | | | 65.61 | |
|
13
Item 6. Selected Financial Data.
The following selected consolidated financial and operating data was derivedbenefits greatly from the audited consolidated financial statements of the companynon-competition, non-disclosure, and should be read in conjunction with the company’s Consolidated Financial Statements and Notes thereto, and Item 7 contained in part II of this Annual Report onForm 10-K.
| | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended March 31 | |
| (In thousands, except per share data) | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| |
Operating results (a)(b)(c)(d)(e) | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 730,720 | | | $ | 760,168 | | | $ | 453,740 | | | $ | 463,375 | | | $ | 377,029 | |
| Restructuring charges (credits) | | $ | 40,801 | | | $ | (75 | ) | | $ | (2,531 | ) | | $ | 5,337 | | | $ | 515 | |
| Asset impairment charges | | $ | 231,856 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| (Loss) income from continuing operations, net of taxes | | $ | (282,187 | ) | | $ | 1,858 | | | $ | (9,927 | ) | | $ | (20,541 | ) | | $ | (25,118 | ) |
| (Loss) income from discontinued operations, net of taxes | | | (1,947 | ) | | | 1,801 | | | | 242,782 | | | | 48,655 | | | | 44,603 | |
|
| Net (loss) income | | $ | (284,134 | ) | | $ | 3,659 | | | $ | 232,855 | | | $ | 28,114 | | | $ | 19,485 | |
|
Per share data (a)(b)(c)(d)(e) | | | | | | | | | | | | | | | | | | | | |
| (Loss) income from continuing operations — basic and diluted | | $ | (12.49 | ) | | $ | 0.07 | | | $ | (0.32 | ) | | $ | (0.69 | ) | | $ | (0.89 | ) |
| (Loss) income from discontinued operations — basic and diluted | | | (0.09 | ) | | | 0.06 | | | | 7.91 | | | | 1.63 | | | | 1.58 | |
|
| Net income — basic and diluted | | $ | (12.58 | ) | | $ | 0.13 | | | $ | 7.59 | | | $ | 0.94 | | | $ | 0.69 | |
|
| Weighted-average shares outstanding | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 22,586,603 | | | | 28,252,137 | | | | 30,683,766 | | | | 29,935,200 | | | | 28,100,612 | |
| Diluted | | | 22,586,603 | | | | 28,766,112 | | | | 30,683,766 | | | | 29,935,200 | | | | 28,100,612 | |
Financial position | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 374,436 | | | $ | 695,871 | | | $ | 893,716 | | | $ | 760,940 | | | $ | 818,492 | |
| Long-term obligations (f) | | $ | 157 | | | $ | 255 | | | $ | 3 | | | $ | 99 | | | $ | 59,624 | |
| Mandatorily redeemable convertible trust preferred securities (g) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 125,317 | |
| Total shareholders’ equity | | $ | 192,717 | | | $ | 479,465 | | | $ | 626,844 | | | $ | 385,176 | | | $ | 332,451 | |
|
| | |
(a) | | In 2008, the company acquired Stack, InfoGenesis, Innovative and Eatec. Accordingly, the results of operations for these acquisitions are included in the accompanying consolidated financial statements since the acquisition date. See Note 2 to Consolidated Financial Statements titled,Acquisitions, for additional information. |
(b) | | In 2007, the company sold the assets and operations of KSG. The operating results of KSG are classified as discontinued operations for all periods presented. See Note 3 to Consolidated Financial Statements titled,Discontinued Operations, for additional information regarding the company’s sale of KSG’s assets and operations. |
(c) | | In 2007, the company included the operating results of Visual One in the results of operations from the date of acquisition. In 2006, the company included the results of operations of CTS from its date of acquisition. |
14
| | |
(d) | | In 2008, an impairment charge of $4.9 million was recognized on the company’s equity investment in Magirus AG (“Magirus”). In 2007, the company recognized an impairment charge of $5.9 million ($5.1 million after taxes) on its equity method investment in Magirus. See Note 6 to Consolidated Financial Statements titled,Investment in Magirus — Sold in November 2008, for further information regarding this investment. |
(e) | | In 2009 and 2008, discontinued operations primarily represents TSG’s China and Hong Kong operations and the resolution of certain contingencies. The company sold the stock of TSG’s China operations and certain assets of TSG’s Hong Kong operations in January 2009. In 2007 and 2006 discontinued operations primarily represents TSG’s China and Hong Kong operations and the company’s KSG business that was sold in 2007. In 2005, discontinued operations primarily represents the company’s KSG business and certain continuing occupancy costs related to the IED business that was sold in 2003. |
(f) | | The company’s Senior Notes matured in 2007. In 2006, the company’s Senior Notes were reclassified from long-term obligations to a current liability. |
(g) | | In 2006, the company completed the redemption of its 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (“Trust Preferred Securities”). Trust Preferred Securities with a carrying value of $105.4 million were redeemed for cash at a total expense of $109.0 million. In addition, Trust Preferred Securities with a carrying value of $19.9 million were converted into common shares of the company. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (“MD&A”), management explains the general financial condition and results of operations for Agilysys, Inc. and its subsidiaries including:
| |
— | what factors affect the company’s business; |
— | what the company’s earnings and costs were; |
— | why those earnings and costs were different from the year before; |
— | where the earnings came from; |
— | how the company’s financial condition was affected; and |
— | where the cash will come from to fund future operations. |
The MD&A analyzes changes in specific line items in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding the company’s consolidated financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements and related Notes that appear in Item 15 of this Annual Report onForm 10-K titled, “Financial Statements and Supplementary Data.” Information provided in the MD&A may include forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to be materially different from thosenon-solicitation clauses contained in the forward-looking statements. See “Forward-Looking Information” belowemployment agreements. Except for Messrs. Dennedy and Item 1A “Risk Factors”Badger, the employment agreements do not contain a change of control provision. For each of Messrs. Dennedy and Badger, if there is a change of control within two years after April 1, 2012, and October 31, 2011, respectively,(the dates of their employment agreements), and within the same two-year period his employment with the Company or its successor is terminated without cause, then he will be paid severance equal to two years of each of his base salary and target annual incentive. This change in Part Icontrol benefit enhances our ability to maintain a shareholder focused approach to change of this Annual Report oncontrol situations and provides these executives reasonable support following both a change of control and termination (commonly called a “double trigger” requirement). The Compensation Committee
believes these payments are reasonable, particularly in light of the double trigger requirement, and consistent with market practice for such positions.
Form 10-KAccelerated Vesting. None of the employment agreements discussed above provide for additional information concerning these items. Managementaccelerated vesting of equity. Under our 2011 Stock Incentive Plan, the only plan for which any of the Named Executive Officers have unvested equity, vesting is accelerated upon the actual occurrence of a change in control for all stock options, SSARs, and restricted shares (including performance shares). The Compensation Committee believes that this information, discussion, and disclosureduring a change of control situation, a stable business environment is important in making decisions about investing in the company.shareholders’ best interests, and accelerated vesting provisions provide stability. The accelerated vesting provisions are applicable to all employees who receive equity awards, not just executive management.
OverviewAdditional Compensation Policies
Agilysys, Inc. (“Agilysys”Clawback – Recoupment of Bonuses, Incentives, and Gains. Under the Company’s “clawback” policy, if the board of directors determines that our financial statements are restated due directly or indirectly to fraud, ethical misconduct, intentional misconduct, or a breach of fiduciary duty by one or more executive officers or vice presidents, then the “company”) isboard of directors will have the sole discretion to cancel any stock-based awards granted and to take such action, as permitted by law, as it deems necessary to recover all or a leading provider of innovative IT solutions to corporate and public-sector customers, with special expertise in select markets, including retail and hospitality. The company uses technology — including hardware, software and services — to help customers resolve their most complicated IT needs. The company possesses expertise in enterprise architecture and high availability, infrastructure optimization, storage and resource management, and business continuity, and provides industry-specific software, services and expertise to the retail and hospitality markets. Headquartered in Solon, Ohio effective October 2008, Agilysys operates extensively throughout North America, with additional sales offices in the United Kingdom and Hong Kong. Agilysys has three reportable segments: Hospitality Solutions (“HSG”), Retail Solutions (“RSG”), and Technology Solutions (“TSG”). See Note 13 to Consolidated Financial Statements titled,Business Segments, which is included in Item 15, for additional discussion.
In July 2008, the company decided to exit TSG’s portion of the Hong Kongany bonus or incentive compensation paid and China businesses. HSG continues to operaterecoup any gains realized in Hong Kong. In January 2009, the company closed the salerespect of equity-based awards, provided recoveries cannot extend back more than three years. Additionally, under Section 304 of the stock of TSG’s China operations and certain assets of TSG’s Hong Kong operations, receiving proceeds of $1.4 million. As disclosed in previous filings, the company sold KSG in March 2007 and now operates solely as an IT solutions provider. The following long-term goals were established by the companySarbanes-Oxley Act, if we are required to restate our financial statements due to material noncompliance with the divestiture of KSG:
| |
— | Target gross margin in excess of 20% and earnings before interest, taxes, depreciation and amortization of 6% within three years. |
— | While in the near term return on invested capital will be diluted due to acquisitions and legacy costs, the company continues to target long-term return on invested capital of 15%. |
As a result of the decline in GDP growth, a weak macroeconomic environment, significant risk in the credit markets, and changes in demand for IT products, the company will not achieve its long-term revenue goals announced in early 2007, and is re-evaluating itslong-term revenue goals and acquisition strategy. The company remains committed to its gross margin, earnings before interest, taxes, depreciation and amortization margins and target long-term return on invested capital goals. Given the current economic conditions, the company is focused on aligning cost structure with current and expected revenue levels, improving efficiencies, and increasing cash flows.
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Fiscal 2009 was a transitional year for the company, as the company’s headquarters were relocated back to Ohio and new leaders stepped into the company’s executive officer roles. In fiscal 2009, the company experienced a slowdown in salesany financial reporting requirements as a result of misconduct, our CEO and CFO must reimburse us for any bonus or other incentive-based or equity-based compensation received during the softening12 months following the first public issuance of the IT marketnon-complying document, and any profits realized from the sale of our securities during those 12 months.
Stock Ownership Guidelines. To underscore the importance of strong alignment between the interests of management and shareholders, the board of directors approved stock ownership guidelines for directors and executives, with our CEO having the highest ownership requirement. Director and executive compensation is designed to provide a significant opportunity to tie individual rewards to long-term Company performance. The objective of our stock ownership guidelines is to support this overall philosophy of alignment and to send a positive message to our shareholders, customers, suppliers, and employees of our commitment to shareholder value. Each director and executive officer is expected to maintain minimum share ownership of either: (i) a multiple of base salary or director annual retainer listed below, or (ii) the number of shares listed below:
|
| | | | |
Title | Multiple of Director
Annual Retainer and
Executive Base Salary | Number of Shares |
| 2 Years | 4 Years | 2 Years | 4 Years |
| Director | 3x | 6x | 15,000 | 45,000 |
| CEO | 2.5x | 5x | 125,000 | 250,000 |
| Senior Vice President | 0.5x | 2x | 15,000 | 75,000 |
| LTIP Participants | — | 0.5x | 2,500 | 15,000 |
Stock ownership that is included toward attainment of the guidelines includes (i) shares held of record or beneficially owned, either directly or indirectly; (ii) shares acquired upon exercise of stock options or SSARs; (iii) vested restricted or deferred shares; (iv) phantom or deferred share units held in North America,a deferred compensation plan; and (v) shares or deferred shares acquired by dividend reinvestment. Directors and executives are expected to attain the specified target ownership levels within both two and four years from the later of the effective date of this policy or becoming a director or an executive, and remain at or above that level until retirement. Annually, the board of directors reviews progress toward achieving these ownership levels. Director and executives who have not attained the specified ownership guidelines will be required to hold 75% of shares acquired upon exercise of stock options and SSARs or vesting of performance or restricted shares until they meet their target ownership level. If ownership guidelines are not met within two and four years, our Compensation Committee has the right to pay an executive’s annual incentives in shares until ownership guidelines are achieved.
Impact of Tax and Accounting Considerations. In general, the Compensation Committee considers the various tax and accounting implications of the pay mechanisms used to provide pay to our Named Executive Officers, including the accounting cost associated with net sales decreasing 3.9%year-over-year. The decline in net sales was tempered bylong-term incentive grants, when determining compensation. Section 162(m) of the Internal Revenue Code generally prohibits any publicly held corporation from taking a contribution of $72.2 million in incremental sales duringfederal income tax deduction for pay to the year from recently acquired businesses. Gross margin as a percentage of sales increased 370 basis pointsyear-over-year to 27.2% at March 31, 2009 versus 23.5% at March 31, 2008, which exceededchief executive officer and the company’s long-term goal of achieving gross marginsthree other highest compensated executive officers (other than the chief financial officer) in excess of 20% within three years.
For financial reporting purposes, the current and prior period operating results of KSG and TSG’s Hong Kong and China businesses have been classified within discontinued operations for all periods presented. Accordingly, the discussion and analysis presented below, including the comparison to prior periods, reflects the continuing business of Agilysys.
Results of Operations
2009 Compared with 2008
Net Sales and Operating Loss
| | | | | | | | | | | | | |
| | | Year ended March 31 | | Increase (decrease) |
| (Dollars in thousands) | | 2009 | | 2008 | | $ | | % |
|
| Net Sales | | | | | | | | | | | | |
| Product | | $ | 585,702 | | $ | 634,214 | | $ | (48,512) | | | (7.6)% |
| Service | | | 145,018 | | | 125,954 | | | 19,064 | | | 15.1% |
|
| Total | | | 730,720 | | | 760,168 | | | (29,448) | | | (3.9)% |
| Cost of goods sold | | | | | | | | | | | | |
| Product | | | 456,779 | | | 539,496 | | | (82,717) | | | (15.3)% |
| Service | | | 75,263 | | | 42,181 | | | 33,082 | | | 78.4% |
|
| Total | | | 532,042 | | | 581,677 | | | (49,635) | | | (8.5)% |
|
| Gross margin | | | 198,678 | | | 178,491 | | | 20,187 | | | 11.3% |
Gross margin percentage | | | 27.2% | | | 23.5% | | | | | | |
| Operating expenses | | | | | | | | | | | | |
| Selling, general, and administrative expenses | | | 206,075 | | | 196,422 | | | 9,653 | | | 4.9% |
| Asset impairment charges | | | 231,856 | | | — | | | 231,856 | | | nm |
| Restructuring charges (credits) | | | 40,801 | | | (75) | | | 40,876 | | | nm |
|
| Operating loss | | $ | (280,054) | | $ | (17,856) | | $ | (262,198) | | | nm |
Operating loss percentage | | | (38.3)% | | | (2.3)% | | | | | | |
|
nm — not meaningful.
Net sales. The $29.4 million decrease in net sales was driven by a decline in hardware revenues resulting from lower volumes. These lower volumes were attributable to a general decrease in IT spending as a result of weakening macroeconomic conditions, which particularly affected TSG. Hardware revenue decreased $53.6 millionyear-over-year. The decrease in hardware revenue was partially offset by increases of $5.1 million and $19.1$1 million in softwareany taxable year. Exceptions are made for certain qualified performance-based pay. It is the Compensation Committee’s objective to maximize the effectiveness of our executive pay plans in this regard. The pay instruments used, including salaries, annual incentives, and services revenues, respectively.
TSG’s sales decreased $36.7 million primarily due to lower hardware volumes, primarily due to lower hardware sales volumes. RSG’s sales decreased $7.6 million primarily due to a large single customer sale in 2008 that did not repeat in 2009. HSG’s sales increased $14.8 million driven by the incremental sales attributableequity, are tax deductible to the InfoGenesisextent that they are performance-based or less than $1 million for such Named Executive Officer in a given year.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and Eatec acquisitions, which contributed $12.5 milliondiscussed the Compensation Discussion and $4.6 million, respectively.
Gross margin. The $20.2 million increase in gross margin was drivenAnalysis required by a favorable product mixItem 402(b) of Regulation S-K with the Company’s management. Based on that review and vendor rebates. The decrease in product gross margin reflectsdiscussion, the lower volumes of hardware sales combined with a higher proportion of proprietary software sales, which carry lower costs for the company, and a change in customer mix. The decrease in service gross margin reflects the integration of InfoGenesis, including conformity with HSG’s practices, as well as a change in the TSG service model as a result of the 2009 restructuring actions.
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TSG’s gross margin increased $5.2 million driven by the Innovative acquisition, which incrementally contributed $17.6 million. RSG’s gross margin increased $3.1 million, which is attributable to a favorable mix of service revenues. HSG’s gross margin increased $13.3 million primarily dueCompensation Committee recommended to the InfoGenesis and Eatec acquisitions, which contributed $12.1 million and $3.3 million, respectively.
Operating Expenses. The company’s operating expenses consistboard of selling, general, and administrative (“SG&A”) expenses, asset impairment charges, and restructuring charges (credits). SG&A expenses increased $9.7 million attributable to increases of $9.4 million, $1.3 million, and $2.6 million in HSG, RSG, and TSG, respectively, partially offset by a reduction in corporate SG&A expenses of $3.6 million. The increase in HSG’s operating expenses is primarily a result of the acquisitions of InfoGenesis, Eatec, and Triangle which contributed $2.4 million, $3.7 million, and $1.5 million in incremental expenses, respectively, with the remainder of the increase due to salaries and wages expenses for the segment’s organic business. The increase in RSG’s SG&A expenses is primarily related to an increase in salaries and wages expenses of $1.9 million. The increase in TSG’s operating expenses is primarily due to incremental expenses incurred with respect to Innovative, which was acquired in the second quarter of 2008. The reduction in corporate operating expenses is a direct result of the restructuring actions taken in 2009. From March 31, 2008 to March 31, 2009, the Company reduced it’s total workforce by approximately 9%. In addition, the Company suspended wage increases for fiscal 2010.
The company’s asset impairment charges consist of goodwill impairment charges of $229.5 million, not including goodwill impairment of $16.8 million and a $3.8 million in finite-lived intangible asset impairment charges classified within restructuring charges, and an indefinite-lived intangible asset impairment charge of $2.4 million. The goodwill and intangible asset impairment charges are discussed further in Note 4 to Consolidated Financial Statements titled,Restructuring Charges (Credits)and in Note 5 to Consolidated Financial Statements titled,Goodwill and Intangible Assets.
The company recorded restructuring charges of $40.8 million during 2009. The restructuring charges consist of $23.5 million recorded during the first two quarters of 2009 related to the professional services restructuring actions, $13.4 million recorded during the third quarter of 2009 related to the third quarter management restructuring actions and relocation of the company’s headquarters from Boca Raton, Florida to Solon, Ohio, and $3.9 million recorded during the fourth quarter of 2009 related to both the third and the fourth quarter management restructuring actions. The restructuring credits in 2008 resulted from an adjustment to previously accrued severance amounts and a write-off of certain leasehold improvements, net of adjustments related to actual and accruedsub-lease income and common area costs. The company’s restructuring actions in 2009 and 2008 are discussed further in theRestructuring Charges(Credits) subsection of this MD&A and in Note 4 to Consolidated Financial Statements titled,Restructuring Charges (Credits).
Other Expenses (Income)
| | | | | | | | | | | | | | | | |
| | | Year ended March 31 | | | Favorable (unfavorable) |
| (Dollars in thousands) | | 2009 | | | 2008 | | | $ | | | % |
|
| Other expenses (income) | | | | | | | | | | | | | | | |
| Other expenses (income), net | | $ | 2,570 | | | $ | (6,566 | ) | | $ | (9,136 | ) | | | (139.1)% |
| Interest income | | | (524 | ) | | | (13,101 | ) | | | (12,577 | ) | | | (96.0)% |
| Interest expense | | | 1,183 | | | | 875 | | | | (308 | ) | | | (35.2)% |
|
| Total other expenses (income), net | | $ | 3,229 | | | $ | (18,792 | ) | | $ | (22,021 | ) | | | (117.2)% |
|
Other expenses (income), net. In 2009, the $2.6 million in other expenses primarily included $3.0 million in impairment charges recorded for the company’s investment in The Reserve Fund’s Primary Fund. These impairment charges are discussed further in the subsection of this MD&A below titled,Investments, and in Note 1 to Consolidated Financial Statements titled,Operations and Summary of Significant Accounting Policies. In 2008, the $6.6 million in other income primarily included a $15.1 million gain on the sale of the Magirus investment, which was partially offset by the company’s share of Magirus’ annual operating losses of $6.2 million and an impairment charge of $4.9 million recorded to write down the company’s equity method investment in Magirus to fair value. Other income in 2008 also included $1.4 million gain the company recognized on the redemption of an investment in an affiliated company.
Interest income. The $12.6 million unfavorable change in interest income was due to a lower average cash and cash equivalent balances in 2009 compared to 2008. The higher cash and cash equivalent balance in 2008 was driven by the sale of KSG for $485.0 million on March 31, 2007. However, the company’s cash and cash equivalent balance declined during 2008 and 2009, as the company used the cash to acquire businesses and purchase its common shares for treasury.
Interest expense. Interest expense increased $0.3 million in 2009 compared to 2008 due to a non-cash charge for unamortized deferred financing fees recorded in the third quarter of 2009 as a result of the termination of the company’s then existent revolving credit facility, as discussed inLiquidity and Capital Resourcesbelow.
17
Income Taxes
The company recorded an income tax benefit from continuing operations at an effective tax rate of 0.4% in 2009 compared with an income tax benefit at an effective rate of 381.1% in 2008. The effective tax rate for 2009 is lower than the statutory rate primarily due to the impairment of nondeductible goodwill and an increase in the valuation allowance for federal and state deferred tax assets. The effective tax rate for 2008 was higher than the statutory rate principally due to the reversal of the valuation allowance associated with Magirus, the settlement of an IRS audit, and other changes in liabilities related to state taxes that were partially offset by higher meals and entertainment expenses incurred in marketing the company’s products.
2008 Compared with 2007
Net Sales and Operating Loss
| | | | | | | | | | | | | |
| | | Year ended March 31 | | Increase (decrease) |
| (Dollars in thousands) | | 2008 | | 2007 | | $ | | % |
|
| Net Sales | | | | | | | | | | | | |
| Product | | $ | 634,214 | | $ | 361,301 | | $ | 272,913 | | | 75.5% |
| Service | | | 125,954 | | | 92,439 | | | 33,515 | | | 36.3% |
|
| Total | | | 760,168 | | | 453,740 | | | 306,428 | | | 67.5% |
| Cost of goods sold | | | | | | | | | | | | |
| Product | | | 539,496 | | | 310,329 | | | 229,167 | | | 73.8% |
| Service | | | 42,181 | | | 24,662 | | | 17,519 | | | 71.0% |
|
| Total | | | 581,677 | | | 334,991 | | | 246,686 | | | 73.6% |
|
| Gross margin | | | 178,491 | | | 118,749 | | | 59,742 | | | 50.3% |
Gross margin percentage | | | 23.5% | | | 26.2% | | | | | | |
| Operating expenses | | | | | | | | | | | | |
| Selling, general, and administrative expenses | | | 196,422 | | | 129,611 | | | 66,811 | | | 51.5% |
| Restructuring credits | | | (75) | | | (2,531) | | | 2,456 | | | (97.0)% |
|
| Operating loss | | $ | (17,856) | | $ | (8,331) | | $ | (9,525) | | | 114.3% |
Operating loss percentage | | | (2.3)% | | | (1.8)% | | | | | | |
|
Net sales. The $306.4 million increase in net sales was largely driven by an increase in hardware revenue. Hardware revenue increased $233.9 millionyear-over-year. The increase in hardware revenue was principally due to higher revenues generated from the acquisitions which contributed $205.7 million. Innovative contributed $162.0 million of the $205.7 million.
TSG’s sales increased $222.9 million primarily due to the Innovative and Stack acquisitions, which contributed $175.3 million and $46.2 million, respectively. HSG’s sales increased $46.9 million primarily due to the InfoGenesis and Eatec acquisitions, which contributed $30.9 and $0.8 million respectively. RSG’s sales increased $37.0 million primarily due to sales volume increases.
Gross Margin. The $59.7 million increase in gross margin was driven by the overall increase in sales. Changes in product mix, pricing under our procurement agreement with Arrow and margins of our acquisitions all contributed to the lower gross margin percentage.
TSG’s gross margin increased $32.5 million primarily due to the Innovative and Stack acquisitions, which contributed $35.6 million and $6.1 million, respectively. HSG’s gross margin increased $24.1 million primarily due to the InfoGenesis and Eatec acquisitions, which contributed $15.0 and $0.7 million, respectively. RSG’s gross margin increased $5.1 million, which can be directly attributable to the increase in sales.
Operating Expenses. The company’s operating expenses consist of selling, general, and administrative (“SG&A”) expenses and restructuring credits. The $66.8 million increase in SG&A expenses was mainly driven by the following key factors: incremental operating expenses of $0.4 million, $23.3 million, $16.4 million, and $8.3 million related to the acquisitions of Eatec, Innovative, InfoGenesis, and Stack, respectively, outside services expense of $4.3 million, and rental expense of $2.6 million. The remaining increase in SG&A was principally due to higher stock-based compensation and benefits costs in 2008.
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Restructuring credits decreased $2.5 million during 2008. The decline was principally due to the $4.9 million reversal of the remaining restructuring liability that was initially recognized in 2003 for an unutilized leased facility. In connection with the sale of KSG, management determineddirectors that the company would utilizeCompensation Discussion and Analysis be included the formerly abandoned leased facility to house the majority of its remaining IT Solutions Business and corporate personnel. Accordingly, the reversal of the remaining restructuring liability was classified as a restructuring credit in the consolidated statement of operations in 2007. The 2007 restructuring credit was offset by a charge of approximately $1.7 million for the termination of a facility lease that was previously exited as part of a prior restructuring effort and a $0.5 million charge for one-time termination benefits resulting from a workforce reduction that was executed in connection with the sale of KSG.
Other (Income) Expenses
| | | | | | | | | | | | | | | | |
| | | Year ended March 31 | | | Favorable (unfavorable) |
| (Dollars in thousands) | | 2008 | | | 2007 | | | $ | | | % |
|
| Other (income) expenses | | | | | | | | | | | | | | | |
| Other (income) expense, net | | $ | (6,566 | ) | | $ | 6,008 | | | $ | 12,574 | | | | 209.3% |
| Interest income | | | (13,101 | ) | | | (5,133 | ) | | | 7,968 | | | | 155.2% |
| Interest expense | | | 875 | | | | 2,656 | | | | 1,781 | | | | 67.1% |
|
| Total other (income) expense | | $ | (18,792 | ) | | $ | 3,531 | | | $ | 22,323 | | | | 632.2% |
|
Other (income) expense, net. The $12.6 million favorable change in other (income) expense, net, was due to a $1.4 million gain recognized on the redemption of the company’s investment in an affiliated company in the first quarter of 2008. The company recognized a $1.4 million increase in foreign currency transaction gains during 2008 compared with 2007 due to changes in exchange rates. Additionally, there was a $9.8 millionyear-over-year increase in earnings from the company’s equity method investment that included a 2008 fourth quarter gain of $15.1 million as a result of the sale by Magirus the investment of a portion of its distribution business. In the fourth quarter of 2008, the company recognized a $4.9 million impairment charge to write down the company’s equity method investment to its fair value compared to a $5.9 million impairment charge for the write down of the company’s equity method investment to its estimated realizable value in 2007. The write-down was driven by changing market conditions and the equity method investee’s recent operating losses that indicated another-than-temporary loss condition and the eventual sale of the investment in 2009.
Interest income. The $8.0 million favorable change in interest income was due to higher average cash and cash equivalent balance in 2008 compared with 2007. The higher cash and cash equivalent balance was driven by the sale of KSG for $485.0 million on March 31, 2007. However, the company’s cash and cash equivalent balance has declined during 2008 as the company has used cash to acquire several businesses and purchase common shares for treasury.
Income Taxes
The company recorded an income tax benefit from continuing operations at an effective tax rate of 381.1% in 2008 compared with an income tax benefit at an effective rate of 14.3% in 2007. The increase in the effective tax rate is primarily attributable to the reversal of the valuation allowance associated with Magirus, the settlement of an IRS audit, and other changes in liabilities related to state taxes which were partially offset by higher meals and entertainment expenses incurred in marketing the company’s products.
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.
19
Contractual Obligations
The following table provides aggregate information regarding the company’s contractual obligations as of March 31, 2009.
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by fiscal year | |
| | | | | | Less than
| | | 1 to 3
| | | 3 to 5
| | | More than
| |
| (Dollars in thousands) | | Total | | | 1 year | | | Years | | | Years | | | 5 years | |
| |
| Capital leases (1) | | $ | 444 | | | $ | 268 | | | $ | 172 | | | $ | 4 | | | $ | — | |
| Operating leases (2) | | | 18,675 | | | | 4,986 | | | | 6,157 | | | | 3,700 | | | | 3,832 | |
| SERP liability (3) | | | 18,286 | | | | 11,103 | | | | 4,816 | | | | — | | | | 2,367 | |
| Other benefits (4) | | | 980 | | | | 881 | | | | — | | | | — | | | | 99 | |
| Purchase obligations (5) | | | 990,000 | | | | 330,000 | | | | 660,000 | | | | — | | | | — | |
| Restructuring liabilities (6) | | | 9,927 | | | | 7,901 | | | | 1,663 | | | | 363 | | | | — | |
| Unrecognized tax positions (7) | | | 5,651 | | | | 1,200 | | | | — | | | | — | | | | — | |
|
| Total contractual obligations | | $ | 1,043,963 | | | $ | 356,339 | | | $ | 672,808 | (8) | | $ | 4,067 | (8) | | $ | 6,298 | (8) |
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(1) | | Additional information regarding the company’s capital lease obligations is contained in Note 7 to Consolidated Financial Statements titled,Financing Arrangements. |
(2) | | Lease obligations are presented net of contractually bindingsub-lease arrangements. Additional information regarding the company’s operating lease obligations is contained in Note 7 to Consolidated Financial Statements titled,Lease Commitments. |
(3) | | On April 1, 2000, the company implemented a nonqualified defined benefit pension plan for certain of its executive officers, including its current CEO (the “SERP”). The SERP provides retirement benefits for the participants. The projected benefit obligation recognized by the company for this plan was $18.3 million at March 31, 2009. With the exception of the company’s current CEO, the remaining participants have separated from employment as of March 31, 2009. Therefore, the timing of the payments due has been determined based on the actual retirement date selected by the former executive, or, for the current CEO and others who were not eligible for retirement at the time of their separation, based on the normal retirement date as defined by the plan. See Note 9 to Consolidated Financial Statements titled,Additional Balance Sheet Informationand Note 11 to Consolidated Financial Statements titled,Employee Benefit Plans, for additional information regarding the SERP. |
(4) | | The company entered into agreements with two former executives, providing each with additional years of service for purposes of calculating benefits under the SERP. Since these agreements were executed outside the SERP, the company recorded the benefit obligation attributable to the additional service awarded under these agreements as a separate liability. The projected benefit liability recognized by the company was approximately $1.0 million at March 31, 2009. Both former executives have separated from employment as of March 31, 2009. Therefore, the timing of the payments due has been determined based on the actual retirement date selected by one former executive and based on the normal retirement date as defined by the SERP for the other former executive. |
(5) | | In connection with the sale of KSG, the company entered into a product procurement agreement (“PPA”) with Arrow Electronics, Inc. Under the PPA, the company is required to purchase a minimum of $330 million worth of products each year through the fiscal year ending March 31, 2012, adjusted for product availability and other factors. |
(6) | | The company has recorded restructuring liabilities primarily related to the restructuring actions taken in 2009. See the section to the MD&A titled,Restructuring Charges (Credits), and Note 4 to Consolidated Financial Statements titled,Restructuring Charges (Credits), for additional information regarding these restructuring liabilities. |
(7) | | The company has accrued a liability for unrecognized positions at March 31, 2009 in accordance with the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). See Note 10 to Consolidated Financial Statements titled,Income Taxes, for further information regarding unrecognized tax positions. The timing of certain potential cash outflows related to these unrecognized tax positions is not reasonably determinable and therefore are not scheduled. |
(8) | | The amount of total contractual obligations with maturities greater than one year is not reasonably determinable, as discussed in note (7) above. |
The company anticipates that cash on hand, funds from continuing operations, and access to capital markets will provide adequate funds to finance 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 needs, operating expenses, capital expenditures and payments of principal and interest on indebtedness outstanding, which primarily consists of lease and rental obligations at March 31, 2009. The company believes that cash flow from operating activities, cash on hand, availability under the credit facility as discussed below, and access to capital markets will provide adequate funds to meet its short-and long-term liquidity requirements. Additional information regarding the company’s financing arrangements is provided in Note 8 to Consolidated Financial Statements titled,Financing Arrangements.
As of March 31, 2009 and 2008, the company’s total debt was approximately $0.4 million and $0.5 million, respectively, comprised of capital lease obligations in both periods.
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Revolving Credit Facility
As of January 20, 2009, the company terminated its $200 million unsecured credit facility with Bank of America, N.A. (as successor to LaSalle Bank National Association), as lead arranger, book runner and administrative agent, and certain other lenders party thereto (the “Credit Facility”). The Credit Facility included a $20 millionsub-facility for letters of credit issued by Bank of America, N.A., or one of its affiliates, and a $20 millionsub-facility for swingline loans, which are short-term loans generally used for working capital requirements. The Credit Facility was available to the company for refinancing debt existing at the time, providing for working capital requirements, capital expenditures and general corporate purposes of the company, including acquisitions. As of October 17, 2008, the company’s ability to borrow under its Credit Facility was suspended due to the company’s failure to timely file itsCompany’s 2013 Annual Report onForm 10-K for the fiscal year ended March 31, 2008,2013 and other technical defaults. the Proxy Statement for its 2013 Annual Meeting of Shareholders.
The company had not borrowed under the Credit Facility since it was entered into in October of 2005. The company decided to terminate the Credit Facility in January 2009. There were no penalties associated with early terminationCompensation Committee of the Credit Facility, however $0.4 millionBoard of deferred debtDirectors
R. Andrew Cueva, Chairman
Keith M. Kolerus
Robert A. Lauer
John Mutch
RELATIONSHIP WITH COMPENSATION COMMITTEE CONSULTANT
During fiscal year 2012, the Compensation Committee retained Towers Watson as compensation consultant for executive compensation matters. All fees paid to Towers Watson in fiscal year 2012 were immediately expensed during the third quarter asfor executive compensation consultation. The Compensation Committee did not retain a result of the termination.
The company executed a Loan and Security Agreement dated May 5, 2009 (the “New Credit Facility”) with Bank of America, N.A., as agent for the lenders from time to time party thereto (“Lenders”). The company’s obligations under the New Credit Facility are secured by the company’s assets (as defined in the new Credit Facility). This New Credit Facility replaces the company’s previous credit facility, which was terminated on January 20, 2009. The company also maintained an unsecured inventory financing agreement (the “Floor Plan Financing Facility”) with International Business Machines. This Floor Plan Financing Facility was terminated on May 4, 2009, and the company will primarily fund working capital through open accounts payable provided by its trade vendors.
The May 5, 2009 New Credit Facility provides $50 million of credit (which may be increased to $75 million by a $25 million “accordion provision”) for borrowings and letters of credit and will mature May 5, 2012. The New Credit Facility establishes a borrowing base for availability of loans predicated on the level of the company’s accounts receivable meeting banking industry criteria. The aggregate unpaid principal amount of all borrowings, to the extent not previously repaid, is repayable at maturity. Borrowings also are repayable at such other earlier times as may be required under or permitted by the terms of the New Credit Facility. LIBOR Loans bear interest at LIBOR for the applicable interest period plus an applicable margin ranging from 3.0% to 3.5%. Base rate loans (as defined in the New Credit Facility) bear interest at the Base Rate (as defined in the New Credit Facility) plus an applicable margin ranging from 2.0% to 2.5%. Interest is payable on the first of each month in arrears. There is no premium or penalty for prepayment of borrowings under the New Credit Facility.
The New Credit Facility contains normal mandatory repayment provisions, representations, and warranties and covenants for a secured credit facility of this type. The New Credit Facility also contains customary events of default upon the occurrence of which, among other remedies, the Lenders may terminate their commitments and accelerate the maturity of indebtedness and other obligations under the New Credit Facility.
As of June 5, 2009, the company had no amounts outstanding under the New Credit Facility and $50.0 million was available for future borrowings. The company has no intention to borrow amounts under the New Credit Facility in the near term.
Cash Flow
| | | | | | | | | | | | | | | | | |
| | | Year ended March 31 | | | Increase (decrease) | | | Year ended March 31 | |
| (Dollars in thousands) | | 2009 | | | 2008 | | | $ | | | 2007 | |
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| Net Cash (used for) provided by continuing operations: | | | | | | | | | | | | | | | | |
| Operating activities | | $ | (86,078 | ) | | $ | (159,544 | ) | | $ | 73,466 | | | $ | 153,990 | |
| Investing activities | | | (5,440 | ) | | | (240,654 | ) | | | 235,214 | | | | 469,976 | |
| Financing activities | | | 56,822 | | | | (137,391 | ) | | | 194,213 | | | | (51,287 | ) |
| Effect of foreign currency fluctuations on cash | | | 911 | | | | 1,314 | | | | (403 | ) | | | (97 | ) |
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| Cash flows used for (provided by) continuing operations | | | (33,785 | ) | | | (536,275 | ) | | | 502,490 | | | | 572,582 | |
| Net operating and investing cash flows provided by (used for) discontinued operations | | | 94 | | | | 1,995 | | | | (1,901 | ) | | | (115,388 | ) |
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| Net (decrease) increase in cash and cash equivalents | | $ | (33,691 | ) | | $ | (534,280 | ) | | $ | 500,589 | | | $ | 457,194 | |
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Cash flow (used for) provided by operating activities. The $86.1 million in cash used for operating activities in 2009 included funds used for the $35.0 million payment of the Innovative earn-out that reduced accrued liabilities, a decrease in accounts payable of $74.5 million due to the establishment of the IBM floor plan financing agreement in February 2008, which was recorded as a financing activity, and was partially offset by a $14.9 million reduction in accounts receivable and other changes in working capital. The $159.5 million in cash used for operating activities in 2008 included $123.4 million used for federal income taxes paid primarily for the gain on the sale of KSG, with the remainder used for changes in working capital.
Cash flow (used for) provided by investing activities. In 2009, the $5.4 million in cash used for investing activities primarily represents $5.2 million that was reclassified from cash equivalents to long-term investments for the company’s remaining claim on The Reserve Fund’s Primary Fund, $2.4 million paid for the acquisition of Triangle, and $7.1 million for the purchase of property, plant, and equipment, partially offset by $9.5 million received from the sale of the Magirus investment. The 2008 investing activities principally reflect the $236.2 million in cash (net of cash acquired) that the company paid for the acquisitions of Eatec, Innovative, InfoGenesis, and Stack. In 2007, cash provided by investing activities of $470.0 million was attributable to the $485.0 million in proceeds received from the sale of KSG, partially offset by $10.6 million paid for the acquisition of Visual One.
Cash flow provided by (used for) financing activities. The $56.8 million in cash provided by financing activities in 2009 resulted from $59.6 million in proceeds related to the company’s floor plan financing agreement, partially offset by $2.7 million in dividends paid. The $137.4 million in cash used by financing activities in 2008 was principally driven by the $150.0 million repurchase of the company’s common shares and $3.4 million in dividends paid, partially offset by $14.6 million in proceeds related to the floor plan financing agreement and $1.4 million in proceeds from stock options exercised. The 2007 cash used for financing activities primarily was attributable to $59.6 million in principal payments under long term obligations, including $59.4 million related to retiring the company’s senior notes, partially offset by $10.1 million in proceeds from stock options exercised.
Critical Accounting Policies, Estimates & Assumptions
MD&A is based upon the company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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. The company regularly evaluates its estimates, including those related to bad debts, inventories, investments, intangible assets, income taxes, restructuring and contingencies, litigation and supplier incentives. 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, 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 significant adjustments to the company’s accounting policies were made in 2009. 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 forecasted, and the best estimates routinely require adjustment.
Revenue recognition. The company derives revenue from three primary sources: server, storage and point of sale hardware, software, and services. Revenue is recorded in the period in which the goods are delivered 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 estimated discounts, sales incentives, estimated customer returns and other allowances. Discounts are offered based on the volume of products and services purchased by customers. Shipping and handling fees billed to customers are recognized as revenue and the related costs are recognized in cost of goods sold.
Revenue for hardware sales is recognized when the product is shipped to the customer and when obligations that affect the customer’s final acceptance of the arrangement have been fulfilled. 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 and product returns with the customer, and bears credit risk if the customer does not pay for the goods. As the principal contact 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 upon receipt at the point of destination.
The company offers proprietary software as well as remarketed software for sale to its customers. A majority of the company’s software sales do not require significant production, modification, or customization at the time of shipment (physically or electronically) to
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the customer. Substantially all of the company’s software license arrangements do not include acceptance provisions. As such, revenue from both proprietary and remarketed software sales is 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 based on the U.S Eastern time zone time stamp.
The company also offers proprietary and third-party services to its customers. Proprietary services generally include: consulting, installation, integration, training, and maintenance. Revenue relating to maintenance services is recognized evenly over the coverage period of the underlying agreement. Many of the company’s software arrangements include consulting services sold separately under consulting engagement contracts. When the arrangements qualify as service transactions as defined in AICPA Statement of PositionNo. 97-2(“SOP 97-2”), “Software Revenue Recognition,” consulting revenues from these arrangements are accounted for separately from the software revenues. The significant factors considered in determining whether the revenues should be accounted for separately include the nature of the services (i.e., consideration of whether the services are essential to the functionality of the software), degree of risk, availability of services from other vendors, timing of payments, and the impact of milestones or other customer acceptance criteria on revenue realization. If there is significant uncertainty about the project completion or receipt of payment for consulting services, the revenues are deferred until the uncertainty is resolved.
For certain long-term proprietary service contracts with fixed or “not to exceed” fee arrangements, the company estimates proportional performance using the hours incurred as a percentage of total estimated hours to complete the project consistent with thepercentage-of-completion method of accounting. Accordingly, revenue for these contracts is recognized based on the proportion of the work performed on the contract. If there is no sufficient basis to measure progress toward completion, the revenues are recognized when final customer acceptance is received. Adjustments to contract price and estimated service hours are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of billings on uncompleted contracts in excess of related costs is shown as a current asset.
If an arrangement does not qualify for separate accounting of the software and consulting services, then the software revenues are recognized together with the consulting services using thepercentage-of-completion or completed contract method of accounting. Contract accounting is applied to arrangements that include: milestones or customer-specific acceptance criteria that may affect the collection of revenues, significant modification or customization of the software, or provisions that tie the payment for the software to the performance of consulting services.
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 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.
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 periodic 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 turnover and assumptions about future demand and market conditions. If assumptions about future demand changeand/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 and the age of the inventory. Actual amounts could be different from those estimated.
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. 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 is not able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets is expensed in the period such determination is made to an amount that is more likely than not to be realized. 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
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excess of its net recorded amount (including valuation allowance), an adjustment to the tax valuation allowance would decrease tax expense in the period such determination was made.
In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” (“FAS 109”). FIN 48 provides guidance for the accounting for uncertainty in income taxes recognized in our financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The determination of whether or not it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, management presumes that the position will be examined by the appropriate tax authority and that the tax authority will have full knowledge of all relevant information. The second step is measurement: A tax position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to recognize in the financial statements. The measurement process requires the determination of the range of possible settlement amounts and the probability of achieving each of the possible settlements. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do not meet the more-likely-than-not threshold. Tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which the threshold is no longer met. In addition, FIN 48 requires the cumulative effect of adoption to be recorded as an adjustment to the opening balance of retained earnings. FIN 48 is effectivecompensation consultant for fiscal years beginning after December 15, 2006. The company adopted FIN 48 effective April 1, 2007, as required and recognized a cumulative effect of accounting change of approximately $2.9 million, which decreased beginning retained earnings in the accompanying Consolidated Statements of Shareholders’ Equity for the year ended March 31, 2008 and increased accrued liabilities in the accompanying Consolidated Balance Sheets as of March 31, 2008. The company’s income taxes and the impact of adopting FIN 48 are described further in Note 10 to Consolidated Financial Statements,Income Taxes.2013.
Goodwill and Long-Lived Assets. Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. Goodwill is subject to impairment testing at least annually. Goodwill is also subject to testing as necessary, if changes in circumstances or the occurrence of certain events indicate potential impairment. In assessing the recoverability of the company’s goodwill, identified intangibles, 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 and long-lived assets 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.
Restructuring and Other Special Charges. The company records reserves in connection with the reorganization of its ongoing business. The reserves principally include estimates related to employee separation costs and the consolidation and impairment of facilities that will no longer be used in continuing operations. Actual amounts could be different from those estimated. Determination of the asset impairments is discussed above inGoodwill and Long-Lived Assets. Facility reserves are calculated using a 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 credit-adjusted risk-free rate with a maturity equivalent to the lease term.
Valuation of Accounts Payable. The company’s accounts payable has been reduced by amounts claimed by vendors for amounts related to incentive programs. Amounts related to 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.EXECUTIVE COMPENSATION
Supplier Programs. The company receives funds from suppliers for 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.
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Recently Issued Accounting Pronouncements
In December 2008, the FASB issued Staff Position No. 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets” an amendment of SFAS 132(R)(“FSP FAS 132(R)-1”). This standard requires disclosure about an entity’s investment policies and strategies, the categories of plan assets, concentrations of credit risk and fair value measurements of plan assets. The standard is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The company is currently evaluating the impact, if any, that the adoption of FSP FAS 132(R)-1 will have on its financial position, results of operations, or cash flows.Summary Compensation Table
In November 2008, the FASB’s Emerging Issues Task Force published IssueNo. 08-6,Equity Method Investment Accounting Considerations(“EITF 08-06”). This issue addresses the impact that FAS 141(R) and FAS 160 might have on the accounting for equity method investments, including how the initial carrying value of an equity method investment should be determined, how it should be tested for impairment, and how changes in classification from equity method to cost method should be treated.EITF 08-06 is to be implemented prospectively and is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The standard will have an impact on the company only for acquisitions and investments in noncontrolling interests made after April 1, 2009. The company is currently evaluating the impact, if any, the adoption ofEITF 08-06 will have on its financial position, results of operations, or cash flows.
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). FAS 162 directs the U.S. GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with U.S. GAAP. FAS 162 is effective November 15, 2008. The adoption of FAS 162 did not have a significant impact on the company’s financial position, results of operations, or cash flows.
In April 2008, the FASB issued Staff PositionNo. 142-3,Determination of the Useful Life of Intangible Assets(“FSPFAS 142-3”). This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142,Goodwill and Other Intangible Assets. FSPFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within that fiscal year, or fiscal 2010 for the company. Early adoption is prohibited.FSP 142-3 applies prospectively to intangible assets acquired after adoption. The company does not expect the adoption of FSPFAS 142-3 to have a significant impact on its financial position, results of operations, or cash flows.
In December 2007, the FASB issued Statement No. 141(R),Business Combinations(“Statement 141(R)”). Statement 141(R) significantly changes the accounting for and reporting of business combination transactions. Statement 141(R) is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The standard will have an impact on the company only for acquisitions made after April 1, 2009. The company is currently evaluating the impact that Statement 141(R) will have on its financial position, results of operations and cash flows.
In December 2007, the FASB issued Statement No. 160,Accounting and Reporting for Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“Statement 160”). Statement 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Statement 160 is effective for the first annual reporting period beginning after December 15, 2008, or fiscal 2010 for the company. The company is currently evaluating the impact that Statement 160 will have on its financial position, results of operations and cash flows.
Business Combinations
2009 Acquisition
Triangle Hospitality Solutions Limited
On April 9, 2008, the company acquired all of the shares of Triangle Hospitality Solutions Limited (“Triangle”), the UK-based reseller and specialist for the company’s InfoGenesis products and services for $2.7 million, comprised of $2.4 million in cash and $0.3 million of assumed liabilities. Accordingly, the results of operations for Triangle have been included in the accompanying Consolidated Financial Statements from that date forward. Triangle enhanced the company’s international presence and growth strategy in the UK, as well as solidified the company’s leading position in the hospitality and stadium and arena markets without increasing InfoGenesis’ ultimate customer base. Triangle added to the company’s hospitality solutions suite with the ability to offer customers the Triangle mPOS solution, which is a handheldpoint-of-sale solution which seamlessly integrates with InfoGenesis products. Based on management’s preliminary allocation of the acquisition cost to the net assets acquired (accounts receivable, inventory, and accounts payable), approximately $2.7 million was originally assigned to goodwill. Due to a purchase price adjustment during the third quarter of fiscal 2009 of $0.4 million,
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the goodwill attributed to the Triangle acquisition is $3.1 million at March 31, 2009. Goodwill resulting from the Triangle acquisition will be deductible for income tax purposes.
2008 Acquisitions
Eatec
On February 19, 2008, the company acquired all of the shares of Eatec Corporation (“Eatec”), a privately held developer and marketer of inventory and procurement software. Accordingly, the results of operations for Eatec have been included in the accompanying Consolidated Financial Statements from that date forward. Eatec’s software, EatecNetX (now called Eatec Solutions by Agilysys), is a recognized leading, open architecture-based, inventory and procurement management system. The software provides customers with the data and information necessary to enable them to increase sales, reduce product costs, improve back-office productivity and increase profitability. Eatec customers include well-known restaurants, hotels, stadiums and entertainment venues in North America and around the world as well as many public service institutions. The acquisition further enhances the company’s position as a leading inventory and procurement solution provider to the hospitality and foodservice markets. Eatec was acquired for a total cost of $25.0 million. Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $18.3 million was assigned to goodwill.
During the second quarter of 2009, management completed its purchase price allocation and assigned $6.2 million of the acquisition cost to identifiable intangible assets as follows: $1.4 million to non-compete agreements, which will be amortized between two and seven years; $2.2 million to customer relationships, which will be amortized over seven years; $1.8 million to developed technology, which will be amortized over five years; and $0.8 million to trade names, which has an indefinite life.
During the first, second and fourth quarters of 2009, goodwill impairment charges were taken relating to the Eatec acquisition in the amounts of $1.3 million, $14.4 million, and $3.4 million, respectively. As of March 31, 2009, $1.7 million remains on the company’s balance sheet in goodwill relating to the Eatec acquisition.
Innovative Systems Design, Inc.
On July 2, 2007, the company acquired all of the shares of Innovative Systems Design, Inc. (“Innovative”), the largest U.S. commercial reseller of Sun Microsystems servers and storage products. Accordingly, the results of operations for Innovative have been included in the accompanying Consolidated Financial Statements from that date forward. Innovative is an integrator and solution provider of servers, enterprise storage management products and professional services. The acquisition of Innovative establishes a new and significant relationship between Sun Microsystems and the company. Innovative was acquired for an initial cost of $108.6 million. Additionally, the company was required to pay an earn-out of two dollars for every dollar of earnings before interest, taxes, depreciation, and amortization, or EBITDA, greater than $50.0 million in cumulative EBITDA over the first two years after consummation of the acquisition. The earn-out was limited to a maximum payout of $90.0 million. As a result of existing and anticipated EBITDA, during the fourth quarter of 2008, the company recognized $35.0 million of the $90.0 million maximum earn-out, which was made in April 2008. In addition, due to certain changes in the sourcing of materials, the company amended its agreement with the Innovative shareholders whereby the maximum payout available to the Innovative shareholders was limited to $58.65 million, inclusive of the $35.0 million paid. The EBITDA target required for the shareholders to be eligible for an additional payout is now $67.5 million in cumulative EBITDA over the first two years after the close of the acquisition. No amounts have been accrued as of March 31, 2008, as it is not probable that any additional payout will be made.
During the fourth quarter of 2008, management completed its purchase price allocation and assigned $29.7 million of the acquisition cost to identifiable intangible assets as follows: $4.8 million to non-compete agreements, $5.5 million to customer relationships, and $19.4 million to supplier relationships which will be amortized over useful lives ranging from two to five years.
Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $97.8 million was assigned to goodwill. Goodwill resulting from the Innovative acquisition will be deductible for income tax purposes. During the fourth quarter of 2009, a goodwill impairment charge was taken relating to the Innovative acquisition for $74.5 million. As of March 31, 2009, $23.3 million remains on the company’s balance sheet as goodwill relating to the Innovative acquisition.
InfoGenesis
On June 18, 2007, the company acquired all of the shares of IG Management Company, Inc. and its wholly-owned subsidiaries, InfoGenesis and InfoGenesis Asia Limited (collectively, “InfoGenesis”), an independent software vendor and solution provider to the hospitality market. Accordingly, the results of operations for InfoGenesis have been included in the accompanying Consolidated Financial Statements from that date forward. InfoGenesis offers enterprise-classpoint-of-sale solutions that provide end users a highly intuitive, secure and easy way to process customer transactions across multiple departments or locations, including comprehensive corporate and store reporting. InfoGenesis has a significant presence in casinos, hotels and resorts, cruise lines, stadiums and foodservice. The acquisition provides the
26
company a complementary offering that extends its reach into new segments of the hospitality market, broadens its customer base and increases its software application offerings. InfoGenesis was acquired for a total acquisition cost of $90.6 million.
InfoGenesis had intangible assets with a net book value of $15.9 million as of the acquisition date, which were included in the acquired net assets to determine goodwill. Intangible assets were assigned values as follows: $3.0 million to developed technology, which will be amortized between six months and three years; $4.5 million to customer relationships, which will be amortized between two and seven years; and $8.4 million to trade names, which have an indefinite life. Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $71.8 million was assigned to goodwill. Goodwill resulting from the InfoGenesis acquisition will not be deductible for income tax purposes. During the first, second, and fourth quarters of 2009, goodwill impairment charges were taken relating to the InfoGenesis acquisition in the amounts of $3.9 million, $57.4 million, and $3.8 million, respectively. As of March 31, 2009, $6.7 million remains on the company’s balance sheet as goodwill relating to the InfoGenesis acquisition.
Pro Forma Disclosure of Financial Information
The following table summarizes the company’s unaudited consolidated results of operations as if the InfoGenesis and Innovative acquisitions occurred on April 1:
| | | | | | | | | | | | | |
| | | Year Ended March 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Net sales | | $ | 730,720 | | | $ | 841,101 | | | $ | 729,851 | |
| (Loss) income from continuing operations | | $ | (282,187 | ) | | $ | 7,068 | | | $ | 4,556 | |
| Net (loss) income | | $ | (284,134 | ) | | $ | 8,908 | | | $ | 241,541 | |
| (Loss) earnings per share — basic income from continuing operations | | $ | (12.49 | ) | | $ | 0.25 | | | $ | 0.15 | |
| Net (loss) income | | $ | (12.58 | ) | | $ | 0.32 | | | $ | 7.87 | |
| (Loss) earnings per share — diluted income from continuing operations | | $ | (12.49 | ) | | $ | 0.25 | | | $ | 0.15 | |
| Net (loss) income | | $ | (12.58 | ) | | $ | 0.31 | | | $ | 7.87 | |
|
Stack Computer, Inc.
On April 2, 2007, the company acquired all of the shares of Stack Computer, Inc. (“Stack”). Stack’s customers include leading corporations in the financial services, healthcarerelated notes provide information regarding fiscal year 2013 compensation for our Named Executive Officers, including our CEO and manufacturing industries. Accordingly, the results of operations for Stack have been included in the accompanying Consolidated Financial Statements from that date forward. Stack also operates a highly sophisticated solution center, which is used to emulate customer IT environments, train staff and evaluate technology. The acquisition of Stack strategically provides the company with product solutions and services offerings that significantly enhance its existing storage and professional services business. Stack was acquired for a total acquisition cost of $25.2 million.
Management made an adjustment of $0.8 million to the fair value of acquired capital equipment and assigned $11.7 million of the acquisition cost to identifiable intangible assets as follows: $1.5 million to non-compete agreements, which will be amortized over five years using the straight-line amortization method; $1.3 million to customer relationships, which will be amortized over five years using an accelerated amortization method; and $8.9 million to supplier relationships, which will be amortized over ten years using an accelerated amortization method.
Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $13.3 million was assigned to goodwill. Goodwill resulting from the Stack acquisition is deductible for income tax purposes. During the first and second quarters of 2009, goodwill impairment charges were taken relating to the Stack acquisition in the amounts of $7.8 million and $2.1 million, respectively. As of March 31, 2009, $3.4 million remains on the company’s balance sheet as goodwill relating to the Stack acquisition.
2007 Acquisition
Visual One Systems Corporation
On January 23, 2007, the company acquired all the shares of Visual One, a leading developer and marketer of Microsoft® Windows®-based software for the hospitality industry. Accordingly, the results of operations for Visual One have been included in the accompanying Consolidated Financial Statements from that date forward. The acquisition provides the company additional expertise around the development, marketing and sale of software applications for the hospitality industry, including property management, condominium, golf course, spa,point-of-sale, and sales and catering management applications. Visual One’s customers include well-known North American
27
and international full-service hotels, resorts, conference centers and condominiums of all sizes. The aggregate acquisition cost was $14.4 million.
During the second quarter of 2008, management assigned $4.9 million of the acquisition cost to identifiable intangible assets as follows: $3.8 million to developed technology, which will be amortized over six years using the straight-line method; $0.6 million to non-compete agreements, which will be amortized over eight years using the straight-line amortization method; and $0.5 million to customer relationships, which will be amortized over five years using an accelerated amortization method.
Based on management’s allocation of the acquisition cost to the net assets acquired, including identified intangible assets, approximately $9.4 million was assigned to goodwill. Goodwill resulting from the Visual One acquisition is not deductible for income tax purposes. During the first, second, and fourth quarters of 2009, goodwill impairment charges were taken relating to the Visual One acquisition in the amounts of $0.5 million, $7.5 million, and $0.5 million, respectively. As of March 31, 2009, $0.9 million remains on the company’s balance sheet as goodwill relating to the Visual One acquisition.
Discontinued Operations
China and Hong Kong Operations
In July, 2008, the company met the requirements of FASB issued Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”)to classify TSG’s China and Hong Kong operations asheld-for-sale and discontinued operations, and began exploring divestiture opportunities for these operations. Agilysys acquired TSG’s China and Hong Kong businesses in December 2005. During January 2009, the company sold the stock related to TSG’s China operations and certain assets of TSG’s Hong Kong operations, receiving proceeds of $1.4 million, which resulted in a pre-tax loss on the sale of discontinued operations of $0.8 million. The assets and liabilities of these operations are classified as discontinued operations on the company’s Consolidated Balance Sheets,CFO and the operations are reported as discontinued operations for the periods presented in accordance with Statement 144. The remaining unsold assets and liabilities of TSG’s China and Hong Kong operations have been classified as discontinued operations on the company’s balance sheet as of March 31, 2009 and 2008.
Sale of Assets and Operations of KeyLink Systems Distribution Business
During 2007, the company sold the assets and operations of KSG for $485.0 million in cash, subject to a working capital adjustment. At March 31, 2007, the final working capital adjustment was $10.8 million. Through the sale of KSG, the company exited all distribution-related businesses and now exclusively sells directly to end-user customers. By monetizing the value of KSG, the company significantly increased its financial flexibility and has redeployed the proceeds to accelerate the growth of its ongoing business both organically and through acquisition. The sale of KSG represented a disposal of a component of an entity. As such, the operating results of KSG, along with the gain on sale, have been reported as a component of discontinued operations.
Restructuring Charges (Credits)
2009 Restructuring Activity
Fourth Quarter Management Restructuring. During the fourth quarter of 2009, the company took additional steps to realign its cost and management structure. During the quarter, an additional four company vice presidents were terminated, as well as other support and sales personnel. These actions resulted in a restructuring charge of $3.7 million during the quarter, comprised mainly of termination benefits for the above-mentioned management changes. Also included in the restructuring charges was a non-cash charge for a curtailment loss of $1.2 million under the company’s SERP. These restructuring charges are included in the Corporate segment.
Third Quarter Management Restructuring. During the third quarter of 2009, the company took steps to realign its cost and management structure. During October 2008, the company’s former Chairman, President and CEO announced his retirement, effective immediately. In addition, four company vice presidents were terminated, as well as other support personnel. The company also relocated its headquarters from Boca Raton, Florida, to Solon, Ohio, where the company has a facility with a large number of employees, and cancelled the lease on its financial interests in two airplanes. These actions resulted in a restructuring charge of $13.4 million as of December 31, 2008, comprised mainly of termination benefits for the above-mentioned management changes and the costs incurred to relocate the corporate headquarters. Also included in the restructuring charges was a non-cash charge for a curtailment loss of $4.5 million under the company’s SERP. An additional $0.2 million expense was incurred in the fourth quarter of 2009 as a result of an impairment to the leasehold improvements at the company’s former headquarters in Boca Raton. These restructuring charges are included in the Corporate segment.
First Quarter Professional Services Restructuring. During the first quarter of 2009, the company performed a detailed review of the business to identify opportunities to improve operating efficiencies and reduce costs. As part of this cost reduction effort, management reorganized the professional servicesgo-to-market strategy by consolidating its management and delivery groups. The company will continue to offer specific proprietary professional services, including identity management, security, and storage virtualization; however, it
28
will increase the use of external business partners. The cost reduction resulted in a $2.5 million and $0.4 million charge for one-time termination benefits relating to a workforce reduction in the first and second quarters of 2009, respectively. The workforce reduction was comprised mainly of service delivery personnel. Payment of these one-time termination benefits was substantially complete in 2009. This restructuring also resulted in a $20.6 million impairment to goodwill and intangible assets in the first quarter of 2009, related to the company’s 2005 acquisition of CTS. The entire $23.5 million restructuring charge relates to TSG.
The three restructuring actions discussed above resulted in a $40.8 million restructuring charge for the year ended March 31, 2009.
2007 Restructuring Activity
During 2007, the company recorded a restructuring charge of approximately $0.5 million for one-time termination benefits resulting from a workforce reduction that was executed in connection with the sale of KSG. The workforce reduction was comprised mainly of corporate personnel. Payment of the one-time termination benefits was substantially complete in 2008.
Investments
The Reserve Fund’s Primary Fund
At September 30, 2008, the company had $36.2 million invested in The Reserve Fund’s Primary Fund. Due to liquidity issues associated with the bankruptcy of Lehman Brothers, Inc., The Primary Fund temporarily ceased honoring redemption requests, but the Board of Trustees of The Primary Fund subsequently voted to liquidate the assets of the fund and approved a distribution of cash to the investors. As of March 31, 2009, the company has received $31.0 million of the investment, with $5.2 million remaining in The Primary Fund. As a result of the delay in cash distribution, we have reclassified the remaining $5.2 million from cash and cash equivalents to investments in other non-current assets on the balance sheet, and, accordingly, have presented the reclassification as a cash outflow from investing activities in the consolidated statements of cash flows. In addition, as of March 31, 2009, the company estimated and recorded a loss on its investment in the fund. The loss was estimated as 8.3% of the company’s original investment in the fund, resulting in a $3.0 million charge to other expense. In April 2009, the company received an additional distribution of $1.6 million from The Primary Fund. The company is unable to estimate the timing of future distributions, which are expected to aggregate to approximately $0.6 million.
This investment is a financial instrument that falls within the scope of FASB Statement No. 157,Fair Value Measurements(“FAS 157”), and accordingly, was measured at its fair value of $2.2 million at March 31, 2009, which is net of the impairment charges recorded during 2009. FAS 157 classifies the inputs used to measure fair value into three levels as follows:
— Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities;
| | |
| — | Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and |
— Level 3: Unobservable inputs for the asset or liability.
The company’s investment in The Primary Fund was classified as a Level 2 financial instrument at March 31, 2009, as its fair value was determined using information other than quoted prices that is available on The Reserve Fund’s website.
Investment in Marketable Securities
The company invests in marketable securities to satisfy future obligations of its employee benefit plans. The marketable securities are held in a Rabbi Trust and are classified within “Other non-current assets” on the company’s Consolidated Balance Sheets. The company’s investment in marketable equity securities are held for an indefinite period and thus are classified as available for sale. The aggregate fair value of the securities was $37,000 and $0.1 million at March 31, 2009 and 2008, respectively. During 2009, sales proceeds and realized losses were $0.1 million and $24,000, respectively. During 2008, sale proceeds and realized gain were $6.1 million and $0.2 million, respectively. The company used the sale proceeds to fund corporate-owned life insurance policies.
Investment in Magirus — Sold in November 2008
In November 2008, the company sold its 20% ownership interest in Magirus, a privately owned European enterprise computer systems distributor headquartered in Stuttgart, Germany, for $2.3 million. In addition, the company received a dividend from Magirus (as a result of Magirus selling a portion of its distribution business in fiscal 2008) of $7.3 million in July 2008, resulting in $9.6 million ofmost highly compensated executive officers whose total proceeds received in fiscal 2009. The company adjusted the fair value of the investment as of March 31, 2008, to the net present value of the subsequent cash proceeds, resulting in fourth quarter 2008 charges of (i) a $5.5 million reversal of the cumulative currency translation adjustment in accordance withEITF 01-5,Application of FASB Statement No. 52 to an Investment Being Evaluated for Impairment That Will Be Disposed of,and (ii) an impairment charge of $4.9 million to write theheld-for-sale investment to its fair value less cost to sell.
The company had decided to sell its 20% investment in Magirus prior to March 31, 2008, and met the qualifications to consider the asset as held for sale. As a result, the company reclassified its Magirus investment to investment held for sale at March 31, 2008 in accordance with FAS 144.
29
Because of the company’s inability to obtain and include audited financial statements of Magiruscompensation exceeded $100,000 for fiscal years ended March 31, 2008 and 2007 as required byRule 3-09 ofRegulation S-X, the SEC has stated that it will not permit effectiveness of any new securities registration statements or post-effective amendments, if any, until such time as the company files audited financial statements that reflect the disposition of Magirus and the company requests and the SEC grants relief to the company from the requirements ofRule 3-09. As part of this restriction, the company is not permitted to file any new securities registration statements that are intended to automatically go into effect when they are filed, nor can the company make offerings under effective registration statements or under Rules 505 and 506 of Regulation D where any purchasers of securities are not accredited investors under Rule 501(a) of Regulation D. These restrictions do not apply to the following: offerings or sales of securities upon the conversion of outstanding convertible securities or upon the exercise of outstanding warrants or rights; dividend or interest reinvestment plans; employee benefit plans, including stock option plans; transactions involving secondary offerings; or sales of securities under Rule 144.year 2013.
On April 1, 2008, the company invoked FASB Interpretation No. 35,Criteria
Summary Compensation Table for Applying the Equity Method of Accounting for Investments in Common Stock (“FIN 35”),for its investment in Magirus. The invocation of FIN 35 required the company to account for its investment in Magirus via cost, rather than equity accounting. FIN 35 clarifies the criteria for applying the equity method of accounting for investments of 50% or less of the voting stock of an investee enterprise. The cost method was used by the company because management did not have the ability to exercise significant influence over Magirus, which is one of the presumptions in APB Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock,necessary to account for an investment in common stock under the equity method.Fiscal Year 2013
Investment in Affiliated CompaniesDuring 2008, the investment in an affiliated company was redeemed by the affiliated company for $4.8 million in cash, resulting in a $1.4 million gain on redemption of the investment. The gain was classified within “other income (expense), net” in the consolidated statement of operations. |
| | | | | | | | | | | | | | | | | |
Name and Principal Position |
Year |
Salary ($)(1) |
Bonus ($)(2) |
Stock Awards ($)(3) |
Option Awards ($)(3) |
Non-Equity Incentive Plan Compen-sation Earnings ($)(4) | Change in Pension Value and Non- qualified Deferred Compen- sation Earnings ($) |
All Other Compen- sation ($)(5) |
Total ($) |
| James H. Dennedy | FY13 | 400,000 |
| — |
| 379,997 |
| 380,309 |
| 509,784 |
| — |
| 20,481 |
| 1,690,571 |
|
| President and | FY12 | 309,928 |
| — |
| 311,640 |
| — |
| 369,045 |
| — |
| 10,780 |
| 1,001,393 |
|
| Chief Executive Officer | | | | | | | | | |
| | | | | | | | | | |
| Robert R. Ellis | FY13 | 290,934 |
| — |
| 85,499 |
| 85,566 |
| 327,718 |
| — |
| 11,186 |
| 800,903 |
|
| Senior Vice President, Chief Operating Officer, Chief | FY12 | 131,705 |
| — |
| 123,199 |
| 81,335 |
| 88,591 |
| — |
| 3,520 |
| 428,350 |
|
| Financial Officer and Treasurer | | | | | | | | | |
| | | | | | | | | | |
| Kyle C. Badger | FY13 | 250,000 |
| — |
| 62,500 |
| 62,548 |
| 153,921 |
| — |
| 37,796 |
| 566,765 |
|
| Senior Vice President, General | | | | | | | | | — |
|
| Counsel and Secretary | | | | | | | | | |
| | | | | | | | | | |
| Paul A. Civils | FY13 | 260,000 |
| — |
| 84,499 |
| 84,566 |
| 180,470 |
| — |
| 21,319 |
| 630,854 |
|
| Senior Vice President and | FY12 | 255,000 |
| — |
| 82,874 |
| 82,877 |
| 129,082 |
| — |
| 22,656 |
| 572,489 |
|
| General Manager | | | | | | | | | |
| | | | | | | | | | |
| Larry Steinberg | FY13 | 201,511 |
| 39,550 |
| 574,750 |
| 95,660 |
| 148,972 |
| — |
| 7,646 |
| 1,068,089 |
|
| Senior Vice President, Chief | | | | | | | | | |
| Technology Officer | | | | | | | | | |
Stock Based Compensation
The company accounts for stock based compensation in accordance with the fair value recognition provisions of FASB Statement 123R,Share-Based Payment(“FAS 123R”), which was adopted on April 1, 2006. The company adopted the provisions of FAS 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 relating to stock based compensation during 2009 was $0.5 million. This included $3.5 million in reversals of stock based compensation expense in 2009 due to actual forfeitures of non-vested shares and performance shares, and a change in the estimate of the forfeiture rate which was updated due to the management restructuring actions. As of March 31, 2009, total unrecognized stock based compensation expense related to unvested stock options was $0.5 million, which is expected to be recognized over a weighted-average period of 18 months. In addition, as of March 31, 2009, total unrecognized stock based compensation expense related to non-vested shares and performance shares was $0.1 million and $0.2 million, respectively, which is expected to be recognized over a weighted-average period of 12 months.
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 2009, 2008 or 2007 fiscal years.
The company believes that inflation has had a nominal effect on its results of operations in fiscal 2009, 2008 and 2007 and does not expect inflation to be a significant factor in fiscal 2010.
Forward Looking Information
This Annual Report onForm 10-K contains certain management expectations, which may constitute forward-looking information within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities and Exchange Act of 1934 and the Private Securities Reform Act of 1995. Forward-looking information speaks only as to the date of this presentation and may be identified by use of words such as “may,” “will,” “believes,” “anticipates,” “plans,” “expects,” “estimates,” “projects,” “targets,” “forecasts,” “continues,” “seeks,” or the negative of those terms or similar expressions. Many important factors could cause actual results to be materially different from those in forward-looking information including, without limitation, competitive factors, disruption of supplies, changes in market conditions, pending or future claims or litigation, or technology advances. No assurances can be provided as to the outcome of cost
30
reductions, business strategies, future financial results, unanticipated downturns to our relationships with customers, unanticipated difficulties integrating acquisitions, new laws and government regulations, interest rate changes, and unanticipated deterioration in economic and financial conditions in the United States and around the world. We do not undertake to update or revise any forward-looking information even if events make it clear that any projected results, actions, or impact, express or implied, will not be realized.
Other potential risks and uncertainties that may cause actual results to be materially different from those in forward-looking information are described in this Annual Report onForm 10-K filed with the SEC, under Item 1A, “Risk Factors.” Copies are available from the SEC or the Agilysys web site.
| |
Item 7A. (1) | QuantitativeFor Mr. Steinberg, salary is from start date through March 31, 2013. |
| |
| (2) | For Mr. Steinberg, amount consists of hiring bonus. |
| |
| (3) | Stock Awards include grants of restricted shares and Qualitative Disclosures About Market Risk.performance shares. Option Awards include SSAR grants. Amounts disclosed do not represent the economic value received by the Named Executive Officers. The value, if any, recognized upon the exercise of a SSAR will depend upon the market price of the shares on the date the SSAR is exercised. The value, if any, recognized for restricted and performance shares will depend upon the market price of the shares upon vesting. In accordance with SEC rules, the values for restricted and performance shares and SSARs are equal to the aggregate grant date fair value for each award computed in accordance with FASB ASC Topic 718. The values for restricted and performance shares are based on the closing price on the grant date. The values for SSARs are based on the Black-Scholes option pricing model. A discussion of the assumptions used in determining these valuations is set forth in Note 14 of the Notes to Consolidated Financial Statements of the Company’s 2013 Annual Report. For Stock Awards, the amounts shown represent grants of restricted shares to each Named Executive Officer as part of the executive's annual long-term equity grant and for Mr. Steinberg includes grants of restricted shares as a long-term inducement award upon his hire. |
| |
| (4) | Amounts represent annual incentive payments received in 2013 and 2012 based on pre-set incentive goals established at the beginning of each fiscal year and tied to the Company’s financial, strategic, and operational goals. |
| |
| (5) | All other compensation includes the following compensation, calculated based on the aggregate incremental cost to the Company of the benefits noted: |
All Other Compensation for Fiscal Year 2013
The company has assets, liabilities and cash flows in foreign currencies 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 executed by the company during 2009, 2008, or 2007.
As discussed withinLiquidity and Capital Resourcesin the MD&A, on January 20, 2009, the company terminated its five-year $200 million revolving credit facility. At the time of the termination, there were no amounts outstanding under this credit facility. Therefore, the company did not have a revolving credit facility in place at March 31, 2009. There were no amounts outstanding under this credit facility in 2009, 2008, or 2007. On May 5, 2009, the company entered into a new $50 million revolving credit facility. While the company is exposed to interest rate risk from the floating-rate pricing mechanisms on its new revolving credit facility, it does not expect interest rate risk to have a significant impact on its business, financial condition, or results of operations during 2010. |
| | | | | | | | | | | | | | |
Name | 401(k) Company Match ($) | Executive Life Insurance ($) |
Relocation ($)(a) |
Severance ($) |
Gross-ups ($) |
All Other ($)(b) |
Total ($) |
| J. Dennedy | 9,139 |
| 1,654 |
| 7,755 |
| — |
| — |
| 1,933 |
| 20,481 |
|
| R. Ellis | 8,931 |
| 754 |
| — |
| — |
| — |
| 1,501 |
| 11,186 |
|
| K. Badger | 8,891 |
| 909 |
| 27,149 |
| — |
| — |
| 847 |
| 37,796 |
|
| P. Civils | 6,514 |
| 6,295 |
| — |
| — |
| — |
| 8,510 |
| 21,319 |
|
| L. Steinberg | 5,771 |
| 993 |
| — |
| — |
| — |
| 882 |
| 7,646 |
|
| |
Item 8. (a) | Financial StatementsMessrs. Dennedy and Supplementary Data.Badger received travel and relocation assistance during their transition to the Company's corporate offices, including expenses for travel, temporary housing, car rental, moving, and incidentals. Amount disclosed represents actual cost to the Company, or amount reimbursed to the executive officer, for such expenses. |
(b) Includes executive long-term disability coverage for each executive and an auto allowance for Mr. Civils.
Grants of Plan-Based Awards
The information required by this item is set forth infollowing table and related notes summarize grants of equity and non-equity incentive compensation awards to our Named Executive Officers for fiscal year 2013. All equity awards were made under the Financial Statements and Supplementary Data contained in Part IVCompany’s 2011 Stock Incentive Plan.
Grants of this Annual Report onForm 10-K.Plan-Based Awards for Fiscal Year 2013
|
| | | | | | | | | | | | | | | |
Name |
Grant Date |
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards ($)(1) |
Estimated Future Payouts
Under Equity Incentive
Plan Awards ($) |
All Other
Stock
Awards
Number
of Shares
of Stock
(#)(2) | All Other Option Awards: Number of Securities Underlying Options (#)(3) |
Exercise
or Base
Price of Option Awards ($/share) |
Grant Date Fair Value of Stock and Option Awards ($)(4) |
Threshold ($) |
Target ($) |
Maximum ($) |
Threshold (#) |
Target (#) |
Maximum (#) |
James H. Dennedy
| 6/12/12 | | | | | | | 50,938 | 78,350 | 7.46 | 760,306 |
| | 3/20/12 | 315,000 | 350,000 | 525,000 | | | | | | | |
| | | | | | | | | | | | |
Robert R. Ellis
| 6/12/12 | | | | | | | 11,461 | 17,628 |
| 7.46 | 171,065 |
| | 3/20/12 | 153,900 | 171,000 | 256,500 | | | | | | | |
| | 11/8/12 | 202,500 | 225,000 | 337,500 | | | | | | | |
| | | | | | | | | | | | |
| Kyle C. Badger | 6/12/12 | | | | | | | 8,378 | 12,886 | 7.46 | 125,048 |
| 3/20/12 | 112,500 | 125,000 | 187,500 | | | | | | | |
| | | | | | | | | | | | |
| Paul A. Civils | 6/12/12 | | | | | | | 11,327 | 17,422 | 7.46 | 169,065 |
| | 3/20/12 | 128,700 | 143,000 | 214,500 | | | | | | | |
| | | | | | | | | | | | |
| Larry Steinberg (5) | 5/9/12 | | | | | | | 48,794 |
| 17,513 | 8.64 | 670,410 |
| | 5/9/12 | 108,882 | 120,980 | 181,470 | — |
| 17,728 |
| 17,728 | | | | |
| |
Item 9. (1) | ChangeAmounts shown in the columns under Estimated Future Payouts Under Non-Equity Incentive Plan Awards represent fiscal year 2013 annual threshold, target, and Disagreements With Accountantsmaximum cash-based annual incentives granted under the annual incentive plan. Total threshold, target, and maximum payouts were conditioned on Accountingachievement of weighted goals based on revenue, gross profit, adjusted operating income, and Financial Disclosures.achievement of individual MBOs as applicable for each Named Executive Officer. For Mr. Ellis, the non-equity incentive award on November 8, 2012 replaced the award o March 20, 2012, upon his being appointed to the additional office of Chief Operating Officer. Fiscal year 2013 payouts for each Named Executive Officer pursuant to these awards are shown in the Summary Compensation Table above in the column titled Non-Equity Incentive Plan Compensation. Threshold, target, and maximum amounts represent annualized award amounts. Actual payouts for fiscal year 2013 for Mr. Steinberg were pro-rated based on his hire date. Further explanation of potential and actual payouts by component is set forth in the Compensation Discussion and Analysis – Annual Incentives. |
| |
| (2) | The share amounts shown represent grants of restricted shares to each Named Executive Officer as part of the executive's annual long-term equity grant and for Mr. Steinberg includes grants of restricted shares as a long-term inducement award upon his hire. |
| |
| (3) | The share amounts represent SSARs granted at the fair market value of the shares on the grant date as fiscal year 2013 long-term incentive awards. The SSARs are exercisable in thirds beginning on March 31, 2013. All SSARs have a seven-year term. |
| |
| (4) | The dollar amount shown for each equity grant represents the grant date fair value of the SSARs and restricted shares, calculated in accordance with FASB ASC Topic 718. The actual value, if any, recognized upon the exercise of a SSAR or vesting of restricted shares will depend upon the market price of the shares on the date the SSAR is exercised or restricted shares vest. |
| |
| (5) | For Mr. Steinberg, grants were approved on March 29, 2012, effective as of his date of hire on May 9, 2012. |
None.Outstanding Equity Awards
The following table and related notes summarize the outstanding equity awards held by the Named Executive Officers as of March 31, 2013.
Outstanding Equity Awards at 2013 Fiscal Year-End
|
| | | | | | | | | | | | |
| Name (1) |
Grant
Date | Option Awards | Stock Awards |
Number of Securities Underlying
Unexercised Options (#) |
Option
Exercise
Price ($) |
Option Date
Expiration | Number of
Shares of Stock
That Have
Not
Vested (#)(3) | Market
Value of
Shares of
Stock That
Have Not
Vested ($)(4) |
Exercisable |
Unexercisable (2) |
| James H. Dennedy | 6/12/2012 | 26,116 |
| 52,234 (a) |
| 7.46 |
| 6/12/2019 | 33,959 (e) |
| 337,552 |
|
| | | | | | | | |
| Robert R. Ellis | 10/10/2011 | 10,700 |
| 5,350 (b) |
| 8.14 |
| 10/10/2018 | 5,379 (f) |
| 53,467 |
|
| | 6/12/2012 | 5,876 |
| 11,752 (b) |
| 7.46 |
| 06/12/2019 | 7,641 (f) |
| 75,952 |
|
| | | | | | | | |
| Kyle C. Badger | 10/31/2011 | 7,462 |
| 3,732 (c) |
| 8.49 |
| 10/31/2018 | 3,556 (g) |
| 35,347 |
|
| | 6/12/2012 | 4,295 |
| 8,591 (c) |
| 7.46 |
| 6/12/2019 | 5,586 (g) |
| 55,525 |
|
| | | | | | | | |
| Paul A. Civils | 7/28/2006 | 8,000 |
| | 15.85 |
| 7/28/2016 | | |
| | 5/21/2007 | 12,000 |
| | 22.21 |
| 5/21/2017 | | |
| | 5/23/2008 | 12,000 |
| | 9.82 |
| 5/23/2018 | | |
| | 11/13/2008 | 40,000 |
| | 2.51 |
| 11/13/2018 | | |
| | 5/22/2009 | 15,700 |
| | 6.83 |
| 5/22/2016 | | |
| | 6/7/2010 | 40,000 |
| | 6.20 |
| 6/7/2017 | | |
| | 8/11/2011 | 11,882 |
| 5,941 |
| 7.42 |
| 8/11/2018 | 3723 |
| 37,007 |
|
| | 6/12/2012 | 5,807 |
| 11,615 |
| 7.46 |
| 6/12/2019 | 7,552 |
| 75,067 |
|
| | | | | | | | |
| Larry Steinberg | 5/9/2012 | 5,837 |
| 11,676 (d) |
| 8.64 |
| 5/9/2019 | 56,167 (h) |
| 558,300 |
|
| |
Item 9A. (1) | ControlsFor Mr. Civils, all unvested SSARs were forfeited upon separation, and Procedures.unexercised SSARs expired 90 days after separation. |
| |
| (2) | As of March 31, 2013, the vesting schedule for the time-vested SSARs was as follows: |
| |
| (a) | 26,117 on March 31, 2014 and 2015 |
| |
| (b) | 11,226 on March 31, 2014 and 5,876 on March 31, 2015 |
| |
| (c) | 8,027 on March 31, 2014 and 4,296 on March 31, 2015 |
| |
| (d) | 5,838 on March 31, 2014 and 2015 |
| |
| (3) | As of March 31, 2013, the vesting schedule for the time-vested stock awards was as follows: |
| |
| (e) | 16,979 on March 31, 2014 and 16,980 March 31, 2015 |
| |
| (f) | 9,199 on March 31, 2014 and 3,821 on March 31, 2015 |
| |
| (g) | 6,349 on March 31, 2014 and 2,793 on March 31, 2015 |
| |
| (h) | 10,356 on March 31, 2014, 16,840 on May 9, 2014, 10,356 on March 31, 2015; 887 on May 9, 2015; and 17,728 upon the successful development and sale of our next generation property management system. |
| |
| (4) | Calculated based on the closing price of the shares on March 28, 2013 of $9.94 per share. |
Option Exercises and Stock Vested
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the material weakness related to the company’s hospitality and retail order processing operations, identified in 2008 has been remediated. In addition, the CEO and CFO concluded that our disclosure controls and procedures as of the end of the period covered by this report are not effective solely because of the material weakness relating to the company’s internal control over financial reporting as described below in “Management’s Report on Internal Controls Over Financial Reporting.” In light of the 2008 and 2009 material weaknesses, the company performed additional analysis and post-closing procedures to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Report on Internal Control Over Financial Reporting
The managementfollowing table and related notes summarize the exercise of stock options and/or SSARs and the company, under the supervisionvesting of the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and15d-15(f). Under the supervision of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2009 based on the framework in Internal Control — Integrated Framework issuedother stock awards by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, management has concludedNamed Executive Officers during fiscal year 2013.
31
that the company did not maintain effective internal control over financial reporting as of March 31, 2009, due to the material weakness discussed below.21
Option Exercises and Stock Vested for Fiscal Year 2013
Revenue Recognition Controls — The aggregation of several errors in the company’s revenue recognition cycle, primarily related to theset-up of specific customer terms and conditions, resulted in a material weakness in the operating effectiveness of revenue recognition controls.
Management has performed a review of the company’s internal control processes and procedures surrounding the revenue recognition cycle. As a result of this review, the company has taken and continues to implement the following steps to prevent future errors from occurring:1. The company will conduct a comprehensive review of all existing customer terms and conditions compared to existing customerset-up within the customer database. |
| | | | | | | | |
Name | Option Awards | Stock Awards |
Number of Shares
Acquired on Exercise (#) | Value Realized on
Exercise
($) | Number of Shares
Acquired on Vesting (#)(1) |
Value
Realized on
Vesting ($)(2) |
| James H. Dennedy | — |
| — |
| 23,979 |
| 224,911 |
|
| Robert R. Ellis | — |
| — |
| 9,198 |
| 91,428 |
|
| Kyle C. Badger | — |
| — |
| 6,348 |
| 63,099 |
|
| Paul A. Civils | — |
| — |
| 7,498 |
| 74,350 |
|
| Larry Steinberg | — |
| — |
| 10,355 |
| 102,929 |
|
2. Implement enhanced process and controls around new customerset-up and customer maintenance.
3. Increase quarterly sales cut-off testing procedures to include a review of terms and conditions of customer sales contracts.
4. Implement quarterly physical inventory counts at specific company warehouses to account for and properly reverse revenue relating to the consolidation and storage of customer owned product.
5. Implement a more extensive analysis and enhance the reconciliation and review process related to revenue and cost of goods sold accounts.
Ernst & Young LLP, our independent registered public accounting firm, has issued their report regarding the company’s internal control over financial reporting as of March 31, 2009, which is included elsewhere herein.
Change in Internal Control over Financial Reporting
In 2009, control improvements were implemented in an effort to remediate the errors in the company’s hospitality and retail segments’ order processing operations that resulted in a material weakness in the operating effectiveness of revenue recognition controls as of March 31, 2008. These control improvements included:
1. Mandatory ongoing training for sales operations personnel including procedure and process review, as well as the awareness and significance of key controls.
2. Sales Operations Management review and approval process for all transactions greater than $100,000.
3. Comprehensive documentation checklist that is required to be completed prior to the processing of a sales transaction.
4. Enhanced monthly sales cut-off testing by the company’s Internal Audit Department to ensure the proper and timely processing of a transaction.
5. Sales Operations Management personnel restructuring.
Also during 2009, in an effort to remediate the material weakness that was reported in the third quarter of 2009, control improvements were implemented over the calculation of stock based compensation and the recognition of expense for a defined benefit plan curtailment. These control improvements included:
1. Perform a secondary quarterly review of stock compensation and defined benefit plan activity, and the related accounting.
2. Upon the termination or retirement of an executive employee, perform an additional revaluation of the accounting for such defined benefit plans to determine propriety of accounting and expense recognition.
As a result of these control improvements and other measures the company has taken to date, management believes that the material weaknesses reported as of March 31, 2008, and December 31, 2008, have been remediated as of March 31, 2009.
The company continues to integrate each acquired entity’s internal controls over financial reporting into the company’s own internal controls over financial reporting, and will continue to review and, if necessary, make changes to each acquired entity’s internal controls over financial reporting until such time as integration is complete. Other than the items described above, no changes in our internal control over financial reporting occurred during the company’s last quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, during the first quarter of 2010, the company began implementing the remedial measures related to the material weakness identified as of March 31, 2009, described above.
| |
Item 9B. (1) | Other Information.Includes partial vesting of time-vested restricted shares granted in 2012 and 2013. |
| |
| (2) | The value realized on vesting of stock awards is determined by multiplying the number of shares underlying the stock awards by the closing price of the shares on the vesting date of the awards. |
None.Termination and Change of Control
32
The following table and discussion summarize certain information related to the total potential payments which would have been made to the Named Executive Officers in the event of termination of their employment with the Company, including in the event of a change of control, effective March 31, 2013, the last business day of fiscal year 2013.
Employment Agreements - Fiscal Year 2013 Active Named Executive Officers. The Named Executive Officers are each a party to an employment agreement with the Company. If we terminate any of the Named Executive Officers employment without cause, he will receive his base salary and applicable health benefits for 12 months and his target annual incentive following termination. If the Company changes his position such that his compensation or responsibilities are substantially lessened, or, for Mr. Civils, if he is required to relocate more than 50 miles away, he may terminate his employment within 30 days of the change in position and will receive his severance benefits. If he is terminated for cause or voluntarily terminates his employment for any reason other than a change in position, he is prohibited for a one-year period following termination (the “Noncompetition Period”) from being employed by, owning, operating, controlling, or being connected with any business that competes with the Company. If any of these executives is terminated without cause or terminates his employment due to change in position, we may, in our sole discretion, elect to pay his severance benefits for all or any part of the Noncompetition Period, which payments are in lieu of the severance payments and benefits coverage described above and, so long as we make such payments, he will be bound by the non-competition provisions described above. Each executive's agreement also contains an indefinite non-disclosure provision for the protection of the Company's confidential information and one-year non-solicitation and non-compete provisions. For each of Messrs. Dennedy and Badger, if there is a change of control within two years after April 1, 2012, and October 31, 2011, respectively, (the dates of their employment agreement), and within the same two-year period his employment with the Company or its successor is terminated without cause, then he will be paid severance equal to two years of each of his base salary and target annual incentive.
part IIITermination and Change of Control
|
| | | | | | | | | | |
| Voluntary Termination or Termination for Cause ($)(1) | James Dennedy | Robert Ellis | Kyle Badger | Paul Civils | Larry Steinberg |
| Base and Incentive | — | — | — | — | — |
| Accelerated Vesting | — | — | — | — | — |
| Termination without Cause or by Employee for Change in Position ($)(1) | | | | | |
| Base & Incentive | 750,000 |
| 525,000 |
| 375,000 |
| 403,000 |
| 360,000 |
|
| Health Insurance (2) | 12,955 |
| 13,149 |
| 12,955 |
| 8,714 |
| 11,015 |
|
| Accelerated Vesting | — |
| — |
| — |
| — |
| — |
|
| | _______ |
| _______ |
| _______ |
| _______ |
| _______ |
|
| Total | 762,955 | 538,149 | 387,955 | 411,714 | 371,015 |
Change of Control ($)(3)
| | | | | |
| Base & Incentive | 1,500,000 |
| — |
| 750,000 |
| — |
| — |
|
| Health Insurance | — |
| — |
| — |
| — |
| — |
|
| Accelerated Vesting/SSARs (4) | 129,540 |
| 38,775 |
| 26,717 |
| 43,777 |
| 15,179 |
|
| Accelerated Vesting/Stock (4) | 337,552 |
| 129,419 |
| 90,871 |
| 112,074 |
| 558,300 |
|
| | _______ |
| _______ |
| _______ |
| _______ |
| _______ |
|
| Total | 1,967,092 |
| 168,194 |
| 867,588 |
| 155,851 |
| 573,479 |
|
| Death or Disability ($)(5) | | | | | |
| Accelerated Vesting/SSARs (4) | 129,540 |
| 38,775 |
| 26,717 |
| 43,777 |
| 15,179 |
|
| Accelerated Vesting/Stock (4) | 337,552 |
| 129,419 |
| 90,871 |
| 112,074 |
| 558,300 |
|
| | _______ |
| _______ |
| _______ |
| _______ |
| _______ |
|
| Total | 467,092 |
| 168,194 |
| 117,588 |
| 155,851 |
| 573,479 |
|
| |
Item 10. (1) | Directors,“Cause” is defined as (i) breach of employment agreement or any other duty to the Company, (ii) dishonesty, fraud, or failure to abide by the published ethical standards, conflicts of interest, or material breach of Company policy, (iii) conviction of a felony crime or crime involving misappropriation of money or other Company property, (iv) misconduct, malfeasance, or insubordination, or (v) gross failure to perform (not including failure to achieve quantitative targets). Mr. Dennedy has 30 days to cure a breach of his employment agreement, any duty to the Company, or a material breach of Company policy. A “change in position” is the substantial lessening of compensation or responsibilities or, for Mr. Civils, the requirement to relocate to a facility more than 50 miles away. After a change in position, the executive has 30 days to notify the Company of his termination of employment. A “voluntary termination” includes death, disability, or legal incompetence. |
| |
| (2) | Health Insurance consists of health care and dental care benefits. The amount reflects 12 months of benefits for the Named Executive Officers that participate in the Company's plans. These benefits have been calculated based on actual cost to us for fiscal year 2013. |
| |
| (3) | Messrs. Dennedy and Corporate Governance.Badger are the only Named Executive Officers with change of control provisions. |
| |
| (4) | SSARs and restricted shares vest upon a change of control. For SSARs (except as qualified below) the value of accelerated vesting is calculated using the closing price of $9.94 per share on March 28, 2013 less the exercise price per share for the total number of SSARs accelerated. The potential payment from the accelerated SSARs includes only the proceeds from the exercise of SSARs with an exercise price less than $9.94 since there would be no proceeds upon the exercise of “underwater” SSARs. The value of restricted shares upon vesting reflects that same $9.94 closing price. Values represent potential vesting under a hypothetical change of control situation on March 31, 2013. |
| |
| (5) | All SSARs and restricted shares vest upon death or disability. |
Information required
Item 12. Security Ownership of CertainBeneficial Owners and Management and RelatedShareholder Matters.
BENEFICIAL OWNERSHIP OF COMMON SHARES
The following table shows the number of common shares beneficially owned as of July 19, 2013 by this Item(i) each current director; (ii) our Named Executive Officers; (iii) all directors and executive officers as a group; and (iv) each person who is known by us to beneficially own more than 5% of our common shares.
|
| | | | | | | | | |
Name |
Common Shares | Shares Subject to Exercisable Options |
Restricted Shares (1) | Total Shares Beneficially Owned (1) |
Percent of Class (2) |
| Directors | | | | | |
| R. Andrew Cueva (3) | 5,284,648 |
| — |
| — |
| 5,284,648 |
| 24.0 |
| Jerry C. Jones | 8,055 |
| — |
| 5,654 |
| 13,709 |
| * |
| Keith M. Kolerus | 112,348 |
| 22,500 |
| 5,654 |
| 140,502 |
| * |
| Robert A. Lauer | 69,441 |
| 22,500 |
| 5,654 |
| 97,595 |
| * |
| Robert G. McCreary, III (4) | 48,599 |
| 22,500 |
| 5,654 |
| 76,753 |
| * |
| John Mutch | 43,433 |
| — |
| 5,654 |
| 49,087 |
| * |
| Named Executive Officers | | | | | |
| Kyle C. Badger | 23,063 |
| 11,757 |
| 16,411 |
| 51,231 |
| |
| Paul A. Civils (4) | 11,941 |
| 145,389 |
| 11,275 |
| 168,605 |
| * |
| James H. Dennedy | 146,142 |
| 26,116 |
| 59,269 |
| 231,527 |
| 1.0 |
| Robert R. Ellis | 39,671 |
| 16,576 |
| 25,540 |
| 81,787 |
| * |
| Larry Steinberg | 10,355 |
| 5,837 |
| 68,283 |
| 84,475 |
| * |
| All directors and Executive Officers | 5,797,696 |
| 273,175 |
| 209,048 |
| 6,279,919 |
| |
| Other Beneficial Owners | | | | | |
MAK Capital One, LLC et al 590 Madison Avenue, 9th Floor New York, New York 10022 | 7,056,934 (4) |
| | | | 32.0 |
Dimensional Fund Advisors LP 6300 Bee Cave Road Palisades West, Building One Austin, Texas 78746 | 1,846,222 (5) |
| | | | 8.3 |
The Vanguard Group, Inc. 100 Vanguard Boulevard Malvern, Pennsylvania 19355 | 1,150,798 (6) |
| | | | 5.2 |
Black Rock, Inc. 40 East 52nd Street New York, New York 10022 | 1,222,240 (7) |
| | | | 5.5 |
| |
| (1) | Beneficial ownership of the shares comprises both sole voting and dispositive power, or voting and dispositive power that is shared with a spouse, except for restricted shares for which individual has sole voting power but no dispositive power until such shares vest. |
| |
| (2) | * indicates beneficial ownership of less than 1% on July 19, 2013. |
| |
| (3) | Comprised entirely of shares beneficially owned by MAK Capital Fund L.P. and excludes shares beneficially owned by Paloma International L.P. Mr. Cueva may be deemed to share beneficial ownership in shares that MAK Capital Fund L.P. may be deemed to beneficially own; however, Mr. Cueva disclaims beneficial ownership of the shares, except to the extent of his pecuniary interest in MAK Capital Fund L.P.’s interest in such shares. The inclusion in this table of the shares beneficially owned by MAK Capital Fund L.P. shall not be deemed an admission by Mr. Cueva of beneficial ownership of all of the reported shares. |
| |
(4) | For Mr. Civils, amounts are as of July 1, 2013. |
| |
(5) | As reported on a Schedule 13D/A dated May 31, 2011. MAK Capital One LLC has shared voting and dispositive power with respect to all of the shares. MAK Capital One LLC serves as the investment manager of MAK Capital Fund LP (“MAK Fund”). MAK GP LLC is the general partner of MAK Fund. Michael A. Kaufman, managing member and controlling person of MAK GP LLC and MAK Capital One LLC, has shared voting and dispositive power with respect to all of the shares. MAK Fund and R. Andrew Cueva have shared voting and dispositive power with respect to 5,284,648 shares. Paloma International L.P. (“Paloma”), through its subsidiary Sunrise Partners Limited Partnership, and S. Donald Sussman, controlling person of Paloma, have shared voting and dispositive power with respect to 1,772,286 shares. The principal business address of MAK Capital One LLC, MAK GP LLC and Messrs. Kaufman and Cueva is 590 Madison Avenue, 9th Floor, New York, New York 10022. The principal address of MAK Fund is c/o Dundee Leeds Management Services Ltd., 129 Front Street, Hamilton, HM 12, Bermuda. The principal address of Paloma and Sunrise Partners Limited Partnership is Two America Lane, Greenwich, Connecticut 06836-2571. The principal business address for Mr. Sussman is 6100 Red Hook Quarters, Suites C1-C6, St. Thomas, US Virgin Islands 00802-1348. |
On May 31, 2011, MAK Fund, Paloma and Computershare Trust Company, N.A. (the “Trustee”) entered into an Amended and Restated Voting Trust Agreement (the “Revised Voting Trust Agreement”) to clarify the effect on the voting trust created by the Voting Trust Agreement dated as of December 31, 2009, were the reporting persons (named above) to beneficially own one-third or more of the Company’s outstanding voting securities as a result of a decrease in the total number of voting securities outstanding. In such event, regardless of the reporting persons’ economic interest in the Company, its voting power will be effectively limited to no more than 23% or 27% of the voting securities in the event of a shareholder vote on (i) a merger, consolidation, conversion, sale or disposition of stock or assets or other business combination which requires approval of two-thirds of the Company’s voting power (a “Strategic Transaction”) or (ii) a transaction other than a Strategic Transaction which requires approval of two-thirds of the Company’s voting power (an “Other Transaction”), respectively. In connection with a Strategic Transaction or Other Transaction, the reporting persons would continue to possess the total voting power only over a number of voting securities that would equal the total voting power it would possess were it to hold only one-third of the voting securities. The Revised Voting Trust Agreement will become effective if and when the number of shares owned by the reporting persons equals or exceeds one-third of the voting securities then outstanding as a result of a decrease in the total number of voting securities outstanding. Until such time, the Voting Trust Agreement will remain in full force and effect.
The Voting Trust Agreement provides that, for transactions requiring at least two-thirds of the voting power to approve, Trustee will vote shares as follows: (i) for a Strategic Transaction, vote shares that exceed 20% of the outstanding shares in favor of, against, or abstaining from voting in the same proportion as all other shares voted by shareholders (including reporting persons’ shares that do not exceed the 20% threshold); and (ii) for Other Transactions, vote shares that exceed 25% of the outstanding shares in favor of, against, or abstaining from voting in the same proportion as all other shares voted by shareholders (including reporting persons’ shares that do not exceed the 25% threshold). The Voting Trust Agreement terminates (i) if the vote necessary to approve all forms of transactions is lowered to the Directorsaffirmative vote of holders of shares entitling them to exercise at least a majority of the company,voting power on the Audit Committeeproposal to approve such transactions (from two-thirds); (ii) if MAK Fund and the procedures by which shareholders may recommend nominations appearing under the headings “ElectionPaloma are no longer members of Directors” and “Corporate Governance and Related Matters” in the company’s Proxy Statement to be used in connection with the company’s 2009 Annual Meetinga “group” for purposes of Shareholders to be held on July 31, 2009 (the “2009 Proxy Statement”) is incorporated herein by reference. Information with respect to compliance with Section 16(a)13(d) of the Securities Exchange Act, then the Voting Trust Agreement terminates with respect to any of 1934 by the company’s Directors, executive officers,MAK Fund and holders ofPaloma that beneficially owns not more than five percent20% of the company’s equity securities will be set forth in the 2009 Proxy Statement under the heading “Section 16 (a) Beneficial Ownership Reporting Compliance.” Information required by this Item asoutstanding shares; (iii) on February 18, 2020, or February 18, 2025 if MAK Fund continues to the executive officershold 20% of the company is included as Item 4A in Part I of this Annual Report onForm 10-K as permitted by Instruction 3 to Item 401(b) ofRegulation 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 employeesoutstanding shares; or (v) if another person or entity holds greater than 20% of the company known as the “Code of Business Conduct.” Each of these documents is available on the company’s website athttp://www.agilysys.com.
outstanding shares that are not subject to a similar voting agreement.
| |
Item 11. (6) | Executive Compensation.As reported on a Schedule 13G/A dated February 8, 2013. Dimensional Fund Advisors LP has sole voting power with respect to 1,819,350 shares and sole dispositive power with respect to 1,846,222 shares. |
The information required by this Item is set forth in the company’s 2009 Proxy Statement under the headings, “Executive Compensation” and “Corporate Governance Related Matters,” which is incorporated herein by reference.
| |
Item 12. (7) | Security Ownership of Certain Beneficial OwnersAs reported on a Schedule 13G/A dated February 20, 2013. The Vanguard Group, Inc. has sole voting and Managementshared dispositive power with respect to 31,558 shares and Related Shareholder Matters.sole dispositive power with respect to 1,119,240 shares. |
The information required by this Item is set forth in the company’s 2009 Proxy Statement under the headings “Share Ownership,” and “Equity Compensation Plan Information,” which information is incorporated herein by reference.
| |
Item 13. (8) | Certain RelationshipsAs reported on a Schedule 13G/A dated February 4, 2013. BlackRock, Inc. has sole voting and Related Transactions, and Director Independence.dispositive power with respect to all of the shares. |
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information required by this item is set forthwith respect to all of the Company's equity compensation plans in the company’s 2009 Proxy Statement under the headings “Corporate Governance and Related Matters” and “Related Person Transactions,” which information is incorporated herein by reference.
| |
Item 14. | Principal Accountant Fees and Services. |
The information required by this Item is set forth in the company’s 2009 Proxy Statement under the heading “Independent Registered Public Accounting Firm,” which information is incorporated herein by reference.
part IV
| |
Item 15. | Exhibits, Financial Statement Schedules. |
(a)(1)Financial statements. The following consolidated financial statements are included herein and are incorporated by reference in Part II, Item 8 of this Annual Report onForm 10-K:
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Statements of Operations for the years ended March 31, 2009, 2008, and 2007
Consolidated Balance Sheetseffect as of March 31, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended March 31, 2009, 2008, and 2007
Consolidated Statements of Shareholders’ Equity for the years ended March 31, 2009, 2008, and 2007
Notes to Consolidated Financial Statements
(a)(2)Financial statement schedule. The following financial statement schedule is included herein and is incorporated by reference in Part II, Item 8 of this Annual Report onForm 10-K:
Schedule II — Valuation and Qualifying Accounts
All other schedules have been omitted since they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
(a)(3)Exhibits. Exhibits included herein and incorporated by reference are contained in the Exhibit Index of this Annual Report onForm 10-K.
33
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 onForm 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on June 5, 2009.
AGILYSYS, INC.
Martin F. Ellis
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 5, 2009.
| | | | |
Signature | | Title |
|
| | |
/s/ Martin F. Ellis
Martin F. Ellis | | President, Chief Executive Officer and Director
(Principal Executive Officer) |
| | |
/s/ Kenneth J. Kossin, Jr.
Kenneth J. Kossin, Jr. | | Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
| | |
/s/ Keith M. Kolerus
Keith M. Kolerus | | Chairman, Director |
| | |
/s/ Thomas A. Commes
Thomas A. Commes | | Director |
| | |
/s/ R. Andrew Cueva
R. Andrew Cueva | | Director |
| | |
/s/ Howard V. Knicely
Howard V. Knicely | | Director |
| | |
/s/ Robert A. Lauer
Robert A. Lauer | | Director |
| | |
/s/ Robert G. McCreary, III
Robert G. McCreary, III | | Director |
| | |
/s/ John Mutch
John Mutch | | Director |
34
agilysys, inc. and subsidiaries
ANNUAL REPORT ONFORM 10-K
Year Ended March 31, 2009
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
35
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, 2009 and 2008, and the related consolidated statements of operations, cash flows and shareholders’ equity for each of the three years in the period ended March 31, 2009. We have also audited the accompanying financial statement schedule listed in the index at Item 15(a)(2). 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Agilysys, Inc. and subsidiaries at March 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2009, 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 Notes 1, 10 and 11 to Consolidated Financial Statements, on April 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxesand on March 31, 2007, the Company adopted Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Agilysys, Inc.’s internal control over financial reporting as of March 31, 2009, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 8, 2009 expressed an adverse opinion thereon.2013.
|
| | | | | | |
| | | | | | | |
| | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans |
| Equity compensation plans approved by shareholders (2000 Stock Option Plan for Outside Directors and 2000, 2006, and 2011 Stock Incentive Plans) | | 1,432,619 | | $10.92 | | 3,004,302 |
| | | | |
| Equity compensation plans not approved by shareholders | | — | | — | | — |
| | | | | | | |
| Total | | 1,432,619 | | $10.92 | | 3,004,302 |
Cleveland, Ohio
June 8, 2009
36
The Board of Directors and Shareholders
of Agilysys, Inc. and Subsidiaries
We have audited Agilysys, Inc. and subsidiaries’ internal control over financial reporting as of March 31, 2009, 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 included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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 deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The aggregation of several errors in the Company’s customerset-up process for terms and conditions over new product sales of the retail and hospitality segments resulted in a material weakness in the operating effectiveness of revenue recognition controls.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 consolidated financial statements, and this report does not affect our report dated June 8, 2009, on those financial statements. In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Agilysys, Inc. and subsidiaries have not maintained effective internal control over financial reporting as of March 31, 2009, based on the COSO criteria.
We have also audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Agilysys, Inc. and Subsidiaries as of March 31, 2009 and 2008, and the related consolidated statements of operations shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2009 and our report dated June 8, 2009 expressed an unqualified opinion thereon.
Cleveland, Ohio
June 8, 2009
37
agilysys, inc. and subsidiaries
Item 13. Certain Relationships and RelatedTransactions, and DirectorIndependence.
Consolidated Statements of Operations
| | | | | | | | | | | | | |
| | | Year Ended March 31 | |
| (In thousands, except share and per share data) | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Net sales: | | | | | | | | | | | | |
| Products | | $ | 585,702 | | | $ | 634,214 | | | $ | 361,301 | |
| Services | | | 145,018 | | | | 125,954 | | | | 92,439 | |
|
| Total net sales | | | 730,720 | | | | 760,168 | | | | 453,740 | |
| Cost of goods sold: | | | | | | | | | | | | |
| Products | | | 456,779 | | | | 539,496 | | | | 310,329 | |
| Services | | | 75,263 | | | | 42,181 | | | | 24,662 | |
|
| Total cost of goods sold | | | 532,042 | | | | 581,677 | | | | 334,991 | |
| Gross margin | | | 198,678 | | | | 178,491 | | | | 118,749 | |
| Operating expenses | | | | | | | | | | | | |
| Selling, general, and administrative expenses | | | 206,075 | | | | 196,422 | | | | 129,611 | |
| Asset impairment charges | | | 231,856 | | | | — | | | | — | |
| Restructuring charges (credits) | | | 40,801 | | | | (75 | ) | | | (2,531 | ) |
|
| Operating loss | | | (280,054 | ) | | | (17,856 | ) | | | (8,331 | ) |
| Other expenses (income) | | | | | | | | | | | | |
| Other expenses (income), net | | | 2,570 | | | | (6,566 | ) | | | 6,008 | |
| Interest income | | | (524 | ) | | | (13,101 | ) | | | (5,133 | ) |
| Interest expense | | | 1,183 | | | | 875 | | | | 2,656 | |
|
| (Loss) income before income taxes | | | (283,283 | ) | | | 936 | | | | (11,862 | ) |
| Benefit for income taxes | | | (1,096 | ) | | | (922 | ) | | | (1,935 | ) |
|
| (Loss) income from continuing operations | | | (282,187 | ) | | | 1,858 | | | | (9,927 | ) |
| Discontinued operations | | | | | | | | | | | | |
| (Loss) income from operations of discontinued components, net of taxes | | | (1,464 | ) | | | 1,801 | | | | 47,053 | |
| (Loss) gain on disposal of discontinued component, net of taxes | | | (483 | ) | | | — | | | | 195,729 | |
|
| (Loss) income from discontinued operations | | | (1,947 | ) | | | 1,801 | | | | 242,782 | |
|
| Net (loss) income | | $ | (284,134 | ) | | $ | 3,659 | | | $ | 232,855 | |
|
| (Loss) earnings per share — basic and diluted | | | | | | | | | | | | |
| (Loss) income from continuing operations | | $ | (12.49 | ) | | $ | 0.07 | | | $ | (0.32 | ) |
| (Loss) income from discontinued operations | | | (0.09 | ) | | | 0.06 | | | | 7.91 | |
|
| Net (loss) income | | $ | (12.58 | ) | | $ | 0.13 | | | $ | 7.59 | |
|
| Weighted average shares outstanding | | | | | | | | | | | | |
| Basic | | | 22,586,603 | | | | 28,252,137 | | | | 30,683,766 | |
| Diluted | | | 22,586,603 | | | | 28,766,112 | | | | 30,683,766 | |
|
RELATED PERSON TRANSACTIONS
See accompanying notes to consolidated financial statements.
38
agilysys, inc. and subsidiaries
Consolidated Balance Sheets
| | | | | | | | | |
| | | March 31 | |
| (In thousands, except share and per share data) | | 2009 | | | 2008 | |
| |
| |
| ASSETS | | | | | | | | |
| Current assets | | | | | | | | |
| Cash and cash equivalents | | $ | 36,244 | | | $ | 69,935 | |
| Accounts receivable, net of allowance of $3,005 in 2009 and $2,392 in 2008 | | | 152,276 | | | | 166,900 | |
| Inventories, net of allowance of $2,411 in 2009 and $1,334 in 2008 | | | 27,216 | | | | 25,408 | |
| Deferred income taxes — current, net | | | 6,836 | | | | 3,788 | |
| Prepaid expenses and other current assets | | | 4,564 | | | | 2,756 | |
| Income taxes receivable | | | 3,539 | | | | 4,960 | |
| Assets of discontinued operations — current | | | 1,075 | | | | 5,026 | |
|
| Total current assets | | | 231,750 | | | | 278,773 | |
| Goodwill | | | 50,382 | | | | 297,560 | |
| Intangible assets, net of amortization of $47,413 in 2009 and $27,456 in 2008 | | | 35,699 | | | | 55,625 | |
| Investment in cost basis company — held for sale | | | — | | | | 9,549 | |
| Deferred income taxes — non-current, net | | | 511 | | | | — | |
| Other non-current assets | | | 29,008 | | | | 25,779 | |
| Assets of discontinued operations — non-current | | | 56 | | | | 1,013 | |
| Property and equipment | | | | | | | | |
| Building | | | — | | | | 57 | |
| Furniture and equipment | | | 39,610 | | | | 37,624 | |
| Software | | | 38,124 | | | | 37,514 | |
| Leasehold improvements | | | 8,380 | | | | 8,896 | |
| Project expenditures not yet in use | | | 8,562 | | | | 4,148 | |
|
| | | | 94,676 | | | | 88,239 | |
| Accumulated depreciation and amortization | | | 67,646 | | | | 60,667 | |
|
| Property and equipment, net | | | 27,030 | | | | 27,572 | |
|
| Total assets | | $ | 374,436 | | | $ | 695,871 | |
|
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 22,367 | | | $ | 96,199 | |
| Floor plan financing in default | | | 74,159 | | | | 14,552 | |
| Deferred revenue | | | 18,709 | | | | 16,232 | |
| Accrued liabilities | | | 43,482 | | | | 57,812 | |
| Long-term debt — current | | | 238 | | | | 305 | |
| Liabilities of discontinued operations — current | | | 1,176 | | | | 3,811 | |
|
| Total current liabilities | | | 160,131 | | | | 188,911 | |
| Other non-current liabilities | | | 21,588 | | | | 27,263 | |
| Liabilities of discontinued operations — non-current | | | — | | | | 232 | |
| Commitments and contingencies (see Note 12) | | | | | | | | |
| Shareholders’ equity | | | | | | | | |
| Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,523,218 shares issued; and 22,626,440 and 22,590,440 shares outstanding in 2009 and 2008, respectively | | | 9,366 | | | | 9,366 | |
| Capital in excess of stated value | | | (11,036 | ) | | | (11,469 | ) |
| Retained earnings | | | 199,947 | | | | 486,799 | |
| Treasury stock (8,896,778 in 2009 and 8,978,378 in 2008) | | | (2,670 | ) | | | (2,694 | ) |
| Accumulated other comprehensive loss | | | (2,890 | ) | | | (2,537 | ) |
|
| Total shareholders’ equity | | | 192,717 | | | | 479,465 | |
|
| Total liabilities and shareholders’ equity | | $ | 374,436 | | | $ | 695,871 | |
|
See accompanying notes to consolidated financial statements.
39
agilysys, inc. and subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | |
| | | Year Ended March 31 | |
| (In thousands) | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Operating activities | | | | | | | | | | | | |
| Net (loss) income | | $ | (284,134 | ) | | $ | 3,659 | | | $ | 232,855 | |
| Add: Loss (income) from discontinued operations | | | 1,947 | | | | (1,801 | ) | | | (242,782 | ) |
|
| (Loss) income from continuing operations | | | (282,187 | ) | | | 1,858 | | | | (9,927 | ) |
| Adjustments to reconcile (loss) income from continuing operations to net cash (used for) provided by operating activities (net of effects from business acquisitions): | | | | | | | | | | | | |
| Impairment of goodwill and intangible assets | | | 249,983 | | | | — | | | | — | |
| Impairment of investment in The Reserve Fund’s Primary Fund | | | 3,001 | | | | — | | | | — | |
| Impairment of investment in cost basis company | | | — | | | | 4,921 | | | | 5,892 | |
| (Gain) loss on cost investment | | | (56 | ) | | | (8,780 | ) | | | 970 | |
| Gain on redemption of cost investment | | | — | | | | (1,330 | ) | | | — | |
| Loss on disposal of property and equipment | | | 494 | | | | 12 | | | | 1,501 | |
| Depreciation | | | 4,032 | | | | 3,261 | | | | 2,507 | |
| Amortization | | | 23,651 | | | | 20,552 | | | | 6,283 | |
| Deferred income taxes | | | (7,035 | ) | | | (2,649 | ) | | | 2,178 | |
| Stock based compensation | | | 457 | | | | 6,039 | | | | 4,238 | |
| Excess tax benefit from exercise of stock options | | | — | | | | (97 | ) | | | (1,854 | ) |
| Changes in working capital: | | | | | | | | | | | | |
| Accounts receivable | | | 14,909 | | | | 24,794 | | | | (988 | ) |
| Inventories | | | (1,763 | ) | | | (5,713 | ) | | | 122 | |
| Accounts payable | | | (74,484 | ) | | | (53,144 | ) | | | 30,136 | |
| Accrued liabilities | | | (17,845 | ) | | | (11,675 | ) | | | (11,286 | ) |
| Income taxes payable | | | 14,483 | | | | (138,694 | ) | | | 132,771 | |
| Other changes, net | | | (1,808 | ) | | | 2,013 | | | | (1,316 | ) |
| Other non-cash adjustments, net | | | (11,910 | ) | | | (912 | ) | | | (7,237 | ) |
|
| Total adjustments | | | 196,109 | | | | (161,402 | ) | | | 163,917 | |
|
| Net cash (used for) provided by operating activities | | | (86,078 | ) | | | (159,544 | ) | | | 153,990 | |
| Investing activities | | | | | | | | | | | | |
| Claim on The Reserve Fund’s Primary Fund | | | (5,268 | ) | | | — | | | | — | |
| Change in cash surrender value of company owned life insurance policies | | | (248 | ) | | | (439 | ) | | | 269 | |
| Proceeds from redemption of cost basis investment | | | 9,513 | | | | 4,770 | | | | — | |
| Proceeds from sale of marketable securities | | | — | | | | — | | | | 1,147 | |
| Proceeds from sale of business | | | — | | | | — | | | | 485,000 | |
| Acquisition of business, net of cash acquired | | | (2,381 | ) | | | (236,210 | ) | | | (10,613 | ) |
| Purchase of property and equipment | | | (7,056 | ) | | | (8,775 | ) | | | (6,250 | ) |
| Proceeds from escrow settlement | | | — | | | | — | | | | 423 | |
|
| Net cash (used for) provided by investing activities | | | (5,440 | ) | | | (240,654 | ) | | | 469,976 | |
| Financing activities | | | | | | | | | | | | |
| Floor plan financing agreement, net | | | 59,607 | | | | 14,552 | | | | — | |
| Purchase of treasury shares | | | — | | | | (149,999 | ) | | | — | |
| Principal payment under long-term obligations | | | (67 | ) | | | (197 | ) | | | (59,567 | ) |
| Issuance of common shares | | | — | | | | 1,447 | | | | 10,101 | |
| Excess tax benefit from exercise of stock options | | | — | | | | 213 | | | | 1,854 | |
| Dividends paid | | | (2,718 | ) | | | (3,407 | ) | | | (3,675 | ) |
|
| Net cash provided by (used for) financing activities | | | 56,822 | | | | (137,391 | ) | | | (51,287 | ) |
| Effect of exchange rate changes on cash | | | 911 | | | | 1,314 | | | | (97 | ) |
|
| Cash flows (used for) provided by continuing operations | | | (33,785 | ) | | | (536,275 | ) | | | 572,582 | |
| Cash flows of discontinued operations | | | | | | | | | | | | |
| Operating cash flows | | | 94 | | | | 1,995 | | | | (115,315 | ) |
| Investing cash flows | | | — | | | | — | | | | (73 | ) |
|
| Net (decrease) increase in cash | | | (33,691 | ) | | | (534,280 | ) | | | 457,194 | |
| Cash at beginning of year | | | 69,935 | | | | 604,215 | | | | 147,021 | |
|
| Cash at end of year | | $ | 36,244 | | | $ | 69,935 | | | $ | 604,215 | |
|
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
| Cash payments for interest | | $ | 74 | | | $ | 618 | | | $ | 3,135 | |
| Cash payments for income taxes, net of refunds received | | $ | 339 | | | $ | 140,450 | | | $ | 22,978 | |
Change in value ofavailable-for-sale securities, net of taxes | | $ | (17 | ) | | $ | (169 | ) | | $ | 86 | |
|
See accompanying notes to consolidated financial statements.
40
agilysys, inc. and subsidiaries
Consolidated Statements of Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Stated
| | | Capital in
| | | | | | | | | Unearned
| | | Accumulated
| | | | |
| | | | | | | | | value of
| | | excess of
| | | | | | | | | compensation
| | | other
| | | | |
| | | Treasury
| | | Common
| | | common
| | | stated
| | | Treasury
| | | Retained
| | | on restricted
| | | comprehensive
| | | | |
| (In thousands, except per share data) | | shares | | | shares | | | shares | | | value | | | shares | | | earnings | | | stock | | | income (loss) | | | Total | |
| |
| |
| Balance at April 1, 2006 | | | (54 | ) | | | 30,527 | | | $ | 9,093 | | | $ | 113,972 | | | $ | (17 | ) | | $ | 260,255 | | | $ | (168 | ) | | $ | 2,041 | | | $ | 385,176 | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 232,855 | | | | — | | | | — | | | | 232,855 | |
| Unrealized translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (772 | ) | | | (772 | ) |
| Unrealized gain on securities net of $54 in taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 86 | | | | 86 | |
| Minimum pension liability, net of $477 in taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (753 | ) | | | (753 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 231,416 | |
| Reversal of unearned compensation in restricted stock award | | | — | | | | — | | | | — | | | | (168 | ) | | | — | | | | — | | | | 168 | | | | — | | | | — | |
| Adjustment to initially apply FASB Statement No. 158, net of $1,432 in taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,266 | ) | | | (2,266 | ) |
| Cash dividends ($0.12 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,675 | ) | | | — | | | | — | | | | (3,675 | ) |
| Non-cash stock based compensation expense | | | — | | | | — | | | | — | | | | 4,232 | | | | — | | | | — | | | | — | | | | — | | | | 4,232 | |
| Shares issued upon exercise of stock options | | | — | | | | 804 | | | | 241 | | | | 10,161 | | | | — | | | | — | | | | — | | | | — | | | | 10,402 | |
| Nonvested shares issued from treasury shares | | | 32 | | | | 32 | | | | — | | | | (10 | ) | | | 10 | | | | — | | | | — | | | | — | | | | — | |
| Tax benefit related to exercise of stock options | | | — | | | | — | | | | — | | | | 1,854 | | | | — | | | | — | | | | — | | | | — | | | | 1,854 | |
| Purchase of common shares for treasury | | | (13 | ) | | | (13 | ) | | | — | | | | (291 | ) | | | (4 | ) | | | — | | | | — | | | | — | | | | (295 | ) |
|
| Balance at March 31, 2007 | | | (35 | ) | | | 31,350 | | | $ | 9,334 | | | $ | 129,750 | | | $ | (11 | ) | | $ | 489,435 | | | $ | — | | | $ | (1,664 | ) | | $ | 626,844 | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,659 | | | | — | | | | — | | | | 3,659 | |
| Unrealized translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,503 | ) | | | (1,503 | ) |
| Unrealized loss on securities net of $8 in taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (169 | ) | | | (169 | ) |
| FASB Statement No. 158 net actuarial losses and prior service cost, net of $505 in taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 799 | | | | 799 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,786 | |
| Record cumulative effect — FIN 48 | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,888 | ) | | | — | | | | — | | | | (2,888 | ) |
| Cash dividends ($0.12 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,407 | ) | | | — | | | | — | | | | (3,407 | ) |
| Non-cash stock based compensation expense | | | — | | | | 76 | | | | — | | | | 5,332 | | | | — | | | | — | | | | — | | | | — | | | | 5,332 | |
| Shares issued upon exercise of stock options | | | — | | | | 110 | | | | 32 | | | | 1,414 | | | | — | | | | — | | | | — | | | | — | | | | 1,446 | |
| Self tender offer — buyback of common shares for treasury | | | (8,975 | ) | | | — | | | | — | | | | (147,305 | ) | | | (2,693 | ) | | | — | | | | — | | | | — | | | | (149,998 | ) |
| Self tender expenses | | | — | | | | — | | | | — | | | | (1,570 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,570 | ) |
| Nonvested shares issued from treasury shares | | | 32 | | | | 32 | | | | — | | | | 697 | | | | 10 | | | | — | | | | — | | | | — | | | | 707 | |
| Tax benefit related to exercise of stock options | | | — | | | | — | | | | — | | | | 213 | | | | — | | | | — | | | | — | | | | — | | | | 213 | |
|
| Balance at March 31, 2008 | | | (8,978 | ) | | | 31,568 | | | $ | 9,366 | | | $ | (11,469 | ) | | $ | (2,694 | ) | | $ | 486,799 | | | $ | — | | | $ | (2,537 | ) | | $ | 479,465 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (284,134 | ) | | | — | | | | — | | | | (284,134 | ) |
| Unrealized translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,741 | ) | | | (1,741 | ) |
| Unrealized loss on securities net of $(7) in tax benefits | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (17 | ) | | | (17 | ) |
| FASB Statement No. 158 net actuarial losses and prior service cost, net of $871 in taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,405 | | | | 1,405 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (284,487 | ) |
| Cash dividends ($0.12 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,718 | ) | | | — | | | | — | | | | (2,718 | ) |
| Non-cash stock based compensation expense | | | — | | | | (45 | ) | | | — | | | | 433 | | | | — | | | | — | | | | — | | | | — | | | | 433 | |
| Nonvested shares issued from treasury shares | | | 81 | | | | — | | | | — | | | | — | | | | 24 | | | | — | | | | — | | | | — | | | | 24 | |
|
| Balance at March 31, 2009 | | | (8,897 | ) | | | 31,523 | | | $ | 9,366 | | | $ | (11,036 | ) | | $ | (2,670 | ) | | $ | 199,947 | | | $ | — | | | $ | (2,890 | ) | | $ | 192,717 | |
|
See accompanying notes to consolidated financial statements
41
agilysys, inc. and subsidiaries
Notes to Consolidated Financial Statements
(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”) provides innovative IT solutions to corporate and public-sector customers with special expertise in select vertical markets, including retail, hospitality and technology solutions. The company operates extensively in North America and has sales offices in the United Kingdom and in Asia.
The company has three reportable segments: Hospitality Solutions Group (“HSG”), Retail Solutions Group (“RSG”), and Technology Solutions Group (“TSG”). Additional information regarding the company’s reportable segments is discussed in Note 13,Business Segments.
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, 2009 refers to the fiscal year ended March 31, 2009.
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 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.
Foreign currency translation. The financial statements of the company’s foreign operations are translated into U.S. dollars for financial reporting purposes. The assets and liabilities of foreign operations whose functional currencies are not in U.S. dollars are translated at the period-end exchange rates, while revenues and expenses are translated at weighted-average exchange rates during the fiscal year. The cumulative translation effects are reflected as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Gains and losses on monetary transactions denominated in other than the functional currency of an operation are reflected in other income (expense). Foreign currency gains and losses from changes in exchange rates have not been material to the consolidated operating results of the company.
Related party transactions. The Secretary of the company is also a partner in the law firm, Calfee, Halter & Griswold LLP (“Calfee”), which provides certain legal services to the company. Legal costs paid to Calfee by the company were $2.0 million for fiscal year 2009, $2.6 million for fiscal year 2008 and $1.0 million for fiscal year 2007.
In connection with the move of our headquarters from Ohio to Florida and then back to Ohio during fiscal years 2007, 2008, and 2009, we provided relocation assistance to our executive officers who were required to relocate. This relocation assistance included costs related to temporary housing, commuting expenses, sales and broker commissions, moving expenses, costs to maintain the executive’s former residence while it was on the market and the loss, if any, associated with the sale of the executive’s former residence. For more information, refer to the Summary Compensation Table for fiscal year 2007, 2008, and 2009, in the company’s 2009 Proxy Statement under the heading, “Executive Compensation.”
All related partyperson transactions with the companyCompany require the prior approval of or ratification by the company’sour Audit Committee. The company, through itsboard of directors adopted Related Person Transaction Procedures to formalize the procedures by which our Audit Committee reviews and approves or ratifies related person transactions. The procedures set forth the scope of transactions covered, the process for reporting such transactions, and the review process. Covered transactions include any transaction, arrangement, or relationship with the Company in which any director, executive officer, or other related person has a direct or indirect material interest, except for business travel and expense payments, share ownership, and executive compensation approved by the board of directors. Transactions are reportable to the Company’s General Counsel, who will oversee the initial review of the reported transaction and notify the Audit Committee of transactions within the scope of the procedures, and the Audit Committee will determine whether to approve or ratify the transaction. Through our Nominating and Corporate Governance Committee, also makeswe make a formal yearly inquiry of all of itsour executive officers and directors for purposes of disclosure of related person transactions, and any such newly revealed related person transactions are conveyed to the Audit Committee. All officers and directors are charged with updating this information with the company’s generalour internal legal counsel.
Segment reporting. Operating segments are defined as components of an enterprise for which separate financial information is available
DIRECTOR INDEPENDENCE
NASDAQ listing standards provide that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Operating segments may be aggregated for segment reporting purposes so long as certain aggregation criteria are met. With the divestiture of the company’s KeyLink Systems Distribution Business in 2007, the continuing operations of the company represented one business segment that provided IT solutions to corporate and public-sector customers. In 2008, the company evaluated its business groups and developedat least a structure to support the company’s strategic direction as it has transformed to a pervasive solution provider largely in the North American IT market. With this transformation, the company now has three reportable segments: HSG, RSG, and TSG. See Note 13 for a discussion of the company’s segment reporting.
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Revenue recognition. The company derives revenue from three primary sources: server, storage and point of sale hardware, software, and services. Revenue is recorded in the period in which the goods are delivered 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 estimated discounts, sales incentives, estimated customer returns and other allowances. Discounts are offered based on the volume of products and services purchased by customers. Shipping and handling fees billed to customers are recognized as revenue and the related costs are recognized in cost of goods sold.
Revenue for hardware sales is recognized when the product is shipped to the customer and when obligations that affect the customer’s final acceptance of the arrangement have been fulfilled. A majority of the company’s hardware sales involves shipment directly from its suppliers tomembers of the end-user customers. In such transactions, the company is responsible for negotiating price bothboard of directors must be independent, meaning free of any material relationship with the supplierCompany, other than his relationship as a director. The Guidelines state that the board of directors should consist of a substantial majority of independent directors. A director is not independent if he fails to satisfy the standards for director independence under NASDAQ listing standards, the rules of the SEC, and any other applicable laws, rules, and regulations. During the board of directors’ annual review of director independence, the board of directors considers transactions, relationships, and arrangements, if any, between each director or a director’s immediate family members and the customer, payment toCompany or its management. In June 2013, the supplier, establishing payment termsboard of directors performed its annual director independence review and product returns with the customer, and bears credit risk if the customer does not pay for the goods. As the principal contact 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 upon receipt at the point of destination.
The company offers proprietary software as well as remarketed software for sale to its customers. A majority of the company’s software sales do not require significant production, modification, or customization at the time of shipment (physically or electronically) to the customer. Substantially all of the company’s software license arrangements do not include acceptance provisions. As such, revenue from both proprietary and remarketed software sales is 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 based on the U.S. Eastern time zone time stamp.
The company also offers proprietary and third-party services to its customers. Proprietary services generally include: consulting, installation, integration, training, and maintenance. Revenue relating to maintenance services is recognized evenly over the coverage period of the underlying agreement. Many of the company’s software arrangements include consulting services sold separately under consulting engagement contracts. When the arrangements qualify as service transactions as defined in AICPA Statement of PositionNo. 97-2(“SOP 97-2”), “Software Revenue Recognition,” consulting revenues from these arrangements are accounted for separately from the software revenues. The significant factors considered in determining whether the revenues should be accounted for separately include the nature of the services (i.e., consideration of whether the services are essential to the functionality of the software), degree of risk, availability of services from other vendors, timing of payments, and the impact of milestones or other customer acceptance criteria on revenue realization. If there is significant uncertainty about the project completion or receipt of payment for consulting services, the revenues are deferred until the uncertainty is resolved.
For certain long-term proprietary service contracts with fixed or “not to exceed” fee arrangements, the company estimates proportional performance using the hours incurred as a percentage of total estimated hours to complete the project consistent with the percentage-of-completion method of accounting. Accordingly, revenue for these contracts is recognized based on the proportion of the work performed on the contract. If there is no sufficient basis to measure progress toward completion, the revenues are recognized when final customer acceptance is received. Adjustments to contract price and estimated service hours are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of billings on uncompleted contracts in excess of related costs is shown as a current asset.
If an arrangement does not qualify for separate accounting of the software and consulting services, then the software revenues are recognized together with the consulting services using the percentage-of-completion or completed contract method of accounting. Contract accounting is applied to arrangements that include: milestones or customer-specific acceptance criteria that may affect the collection of revenues, significant modification or customization of the software, or provisions that tie the payment for the software to the performance of consulting services.
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 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.
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.
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The company records compensation cost related to stock options, restricted shares, and performance shares granted to certain employees and non-employee directors in accordance with the fair value recognition provisions ofFASB Statement No. 123R, Share-Based Payment(“FAS 123R”). The company adopted FAS 123R effective April 1, 2006, using the modified prospective transition method. Under this transition method, compensation cost recognized since April 1, 2006 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 FAS 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 FAS 123R. Cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for options exercised (excess tax benefits) are classified as financing cash flows in the Statement of Cash Flows, in accordance with the provisions of FAS 123R. As no stock options were exercised during the year ended March 31, 2009, no excess tax benefits were recognized in fiscal 2009.
Earnings per share. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings 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 are computed by sequencing each series of issues of potential common shares from the most dilutive to the least dilutive. Diluted earnings per share is determined as the lowest earnings per incremental share in the sequence of potential common shares.
Comprehensive income (loss). Comprehensive income (loss) is the total of net (loss) income plus all other changes in net assets arising from non-owner sources, which are referred to as other comprehensive income (loss). Changes in the components of accumulated other comprehensive income (loss) for 2007, 2008, and 2009 are as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | FASB
| | | | |
| | | | | | | | | Statement No. 158
| | | | |
| | | | | | | | | net actuarial
| | | | |
| | | Foreign
| | | Unrealized
| | | gains,
| | | Accumulated
| |
| | | currency
| | | gain (loss)
| | | losses and
| | | other
| |
| | | translation
| | | on
| | | prior
| | | comprehensive
| |
| | | adjustment | | | securities | | | service cost | | | income (loss) | |
| |
| |
| Balance at April 1, 2006 | | $ | 2,032 | | | $ | 9 | | | $ | — | | | $ | 2,041 | |
| Change during 2007 | | | (772 | ) | | | 86 | | | | (3,019 | ) | | | (3,705 | ) |
|
| Balance at March 31, 2007 | | | 1,260 | | | | 95 | | | | (3,019 | ) | | | (1,664 | ) |
| Change during 2008 | | | (1,503 | ) | | | (169 | ) | | | 799 | | | | (873 | ) |
|
| Balance at March 31, 2008 | | | (243 | ) | | | (74 | ) | | | (2,220 | ) | | | (2,537 | ) |
| Change during 2009 | | | (1,741 | ) | | | (17 | ) | | | 1,405 | | | | (353 | ) |
|
| Balance at March 31, 2009 | | $ | (1,984 | ) | | $ | (91 | ) | | $ | (815 | ) | | $ | (2,890 | ) |
|
Fair value measurements. The company’s financial instruments include cash and cash equivalents, the cash surrender value of company-owed life insurance policies, marketable securities, accounts receivable, accounts payable, floor plan financing, and short-term and long-term debt. The carrying value of these financial instruments approximates their fair values at March 31, 2009 and 2008 due to short-term maturities. Long-term debt is comprised of capital lease obligations, valued at the lesser of the minimum lease payment or the fair value of the underlying asset in accordance with FASB Statement No. 13,Accounting for Leases.
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.
At September 30, 2008, the company had $36.2 million invested in The Reserve Fund’s Primary Fund. Due to liquidity issues associated with the bankruptcy of Lehman Brothers, Inc., The Primary Fund temporarily ceased honoring redemption requests, but the Board of Trustees of The Primary Fund subsequently voted to liquidate the assets of the fund and approved a distribution of cash to the investors. As of March 31, 2009, the company has received $31.0 million of the investment, with $5.2 million remaining in The Primary Fund. As a result of such review determined that each of R. Andrew Cueva, Jerry Jones, Keith M. Kolerus, Robert A. Lauer, Robert G. McCreary, III, and John Mutch qualify as independent directors. Mr. Dennedy is not independent because of his service as President and CEO.
Item 14. Principal Accountant Fees andServices.
The Audit Committee reviewed the delay in cash distribution, we have reclassifiedfees of Ernst & Young LLP (“E&Y”), our Independent Accountant for first two quarters of fiscal year 2012, and of PricewaterhouseCoopers LLP ("PwC"), our Independent Accountant for fiscal year 2013 and the remaining $5.2 million from cashthird quarter and cash equivalents to investments in other non-current assets onyear-end of fiscal year 2012. Fees for services rendered by E&Y and PwC for fiscal years 2013 and 2012 were:
|
| | | | | | | | |
| Fiscal Year | Audit Fees ($) | Audit-Related Fees ($) | Tax Fees ($) | All Other Fees ($) |
| 2013 | 633,400 |
| 103,000 |
| — |
| — |
|
| 2012 | 1,166,869 |
| 151,530 |
| 46,239 |
| — |
|
“Audit Fees” consist of fees billed for professional services provided for the balance sheet, and, accordingly, have presented the reclassification as a cash outflow from investing activities in the consolidatedannual audit of our financial statements, annual audit of cash flows. In addition, as of March 31, 2009, the company estimated and recorded a
44
loss on its investment in the fund. The loss was estimated as 8.3%internal control over financial reporting, review of the company’s original investmentinterim financial statements included in the fund, resulting in a $3.0 million charge to other expense. In April 2009, the company received an additional distribution of $1.6 million from the Primary Fund. The company is unable to estimate the timing of future distributions, whichquarterly reports, and services that are expected to aggregate to $0.6 million.
This investment is a financial instrument that falls within the scope of FASB Statement No. 157,Fair Value Measurements(“FAS 157”), and accordingly, was measured at its fair value of $2.2 million at March 31, 2009, which is net of the impairment charges recorded during 2009. FAS 157 classifies the inputs used to measure fair value into three levels as follows:
| | |
| — | Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities; |
| — | Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and |
| — | Level 3: Unobservable inputs for the asset or liability. |
The company’s investment in The Primary Fund was classified as a Level 2 financial instrument at March 31, 2009, as its fair value was determined using information other than quoted prices that is available on The Reserve Fund’s website.
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. In addition, the company does not expect any party to fail to perform according to the terms of its contract.
In 2009, Verizon Communications, Inc. represented approximately 22.7% of Agilysys total sales and 32.6% of the TSG segment’s total sales. In 2008, Verizon Communications, Inc. represented approximately 11.7% of the company’s total sales and 16.3% of the TSG segment’s total sales. No single customer accounted for more than 10% of Agilysys total sales during 2007.
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 historic 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. The company’s inventories are comprised of finished goods. 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 the lower of cost or market, if necessary, are based upon contractual provisions such as turnover and assumptions about future demand and market conditions. If assumptions about future demand changeand/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 and the age of the inventory. Actual amounts could be different from those estimated.
Investment in marketable securities. The company invests in marketable securities to satisfy future obligations of its employee benefit plans. The marketable securities are held in a Rabbi Trust. The company’s investment in marketable equity securities are held for an indefinite period and thus are classified as available for sale. The aggregate fair value of the securities at March 31, 2009, and 2008 were $37,000 and $0.1 million, respectively. Realized gains and losses are determined on the basis of specific identification. During 2009, securities with a fair value at the date of sale of $0.1 million were sold. The gross realized loss based on specific identification on such sales totaled $24,000. During 2008, sales proceeds and realized gain were $6.1 million and $0.2 million, respectively. The net adjustment to unrealized holding gains on available-for-sale securities in other comprehensive income totaled $23,000. At March 31, 2009, the gross unrealized loss on available-for-sale securities was $24,000 (before taxes).
Investments in affiliated companies. The company may periodically enter 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. During 2008, the investment in an affiliated company was redeemed by the affiliated company for $4.8 million in cash, resulting in a $1.4 million gain on redemption of the investment. The gain was classified within “other income (expense), net” in the Consolidated Statements of Operations.
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 and supplier relationships are being amortized using an accelerated or straight-line 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 six months to ten years.
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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.
During the first quarter of 2009, management took actions to realign its cost structure. These actions included a $3.8 million impairment charge related to the company’s customer relationship intangible asset that was classified within restructuring charges. The restructuring actions are described further in Note 4,Restructuring Charges (Credits). Then,normally provided in connection with the annual goodwill impairment test performed as of February 1, 2009 (discussed below), the indefinite-lived intangible asset was evaluatedstatutory and regulatory filings. “Audit-Related Fees” generally include fees for impairment, as required by FASB Statement No. 142,Goodwillemployee benefits plan audits, business acquisitions, and accounting consultations. “Tax Fees” include tax compliance and tax advice services. “All Other Intangible Assets(“FAS 142”). Based on this analysis, the company concluded that an impairment existed. As a result, in the fourth quarter of 2009, the company recorded an impairment charge of $2.4 million related to the indefinite-lived intangible asset.
Goodwill. Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. Goodwill is subject to impairment testing at least annually. Goodwill is also subject to testing as necessary, if changes in circumstances or the occurrence of certain events indicate potential impairment. In the first quarter of 2009, impairment indicators arose with respect to the company’s goodwill. Therefore, during the first quarter of 2009, the company initiated a “step-two” analysis in accordance with FAS 142. The “step-two” analysis consists of comparing the fair value of each reporting unit (calculated using discounted cash flow analyses and weighted average costs of capital of 15.5% to 23.5%, depending on the risks of the various reporting units), to the implied goodwill of the unit, in accordance with FAS 142. As the “step-two” analysis was not complete, the company recognized an estimated impairment charge of $33.6 million as of June 30, 2008, pending completion of the analysis. This amount did not include $16.8 million in goodwill impairment related to CTS that was recorded to restructuring charges in the first quarter of 2009. The “step-two” analysis was updated and completed in the second quarter of 2009, resulting in the company recognizing an additional goodwill impairment charge of $112.0 million.
The company conducted its annual goodwill impairment test as of February 1, 2009 and updated the analyses performed in the first and second quarters of 2009. Based on the analysis, the company concluded that a further impairment of goodwill had occurred. As a result, the company recorded an additional impairment charge of $83.9 million in the fourth quarter of 2009. Total goodwill impairment charges recorded during 2009 were $229.5 million, not including the $16.8 million recorded as restructuring charges in the first quarter of 2009. There were no new impairment indicators at March 31, 2009.
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. Capitalized project expenditures are not depreciated until the underlying assets are placed into service. Total depreciation expense on property and equipment was $4.0 million, $3.3 million and $2.5 million during 2009, 2008 and 2007, respectively. Total amortization expense on capitalized software was $3.1 million, $2.6 million, and $3.0 million during 2009, 2008, and 2007, 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. As of March 31, 2009, the company concluded that no impairment indicators existed.
Valuation of accounts payable. The company’s accounts payable has been reduced by amounts claimed to vendors for returns and other amounts related to incentive programs. Amounts related to 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.
Supplier programs. The company 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
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advertising allowances and other programs. These incentivesFees” generally relate to agreementsservices provided in connection with non-audit acquisition activities.
The Audit Committee adopted an Audit and Non-Audit Services Pre-Approval Policy (the “Policy”) to ensure compliance with SEC and other rules and regulations relating to auditor independence, with the suppliersgoal of safeguarding the continued independence of our independent registered public accounting firm (“Independent Accountant”). The Policy sets forth the procedures and conditions pursuant to which audit, review, and attest services and non-audit services to be provided to the Company by the our Independent Accountant may be pre-approved. The Audit Committee is required to pre-approve the audit and non-audit services performed by our Independent Accountant to assure that the provision of such services does not impair independence. Unless a type of service to be provided has received pre-approval as set forth in the Policy, it will require separate pre-approval by the Audit Committee before commencement of the engagement. Any proposed service that has received pre-approval but which will exceed pre-approved cost limits will require separate pre-approval by the Audit Committee. All audit, non-audit, and tax services were pre-approved by the Audit Committee during fiscal years 2013 and 2012.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial statements. The following consolidated financial statements are included herein and are recorded, when earned, as a reductionincorporated by reference in Part II, Item 8 of costthis Annual Report:
Report of sales or 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.PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm*
ConcentrationsReport of supplier risk. During 2009, 2008, and 2007, sales of the company’s three largest suppliers’ products and services accounted for 65%, 65%, and 69%, respectively, of the company’s sales volume. The company’s largest supplier, Sun, whose products are sold through Innovative, which was purchased in July 2007, accounted for 31% and 23% of the company’s sales volume in 2009 and 2008, respectively. Sales of products sourced through HP accounted for 22%, 27% and 49% of the company’s sales volume in 2009, 2008 and 2007, respectively. Sales of products sourced by IBM accounted for 12%, 15% and 20% of the company’s sales volume in 2009, 2008, and 2007, respectively. The loss of any of the top three 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.Ernst & Young LLP, Independent Registered Public Accounting Firm*
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.
In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” (“FAS 109”). FIN 48 provides guidance for the accounting for uncertainty in income taxes recognized in our financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The determination of whether or not it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, management presumes that the position will be examined by the appropriate tax authority and that the tax authority will have full knowledge of all relevant information. The second step is measurement: A tax position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to recognize in the financial statements. The measurement process requires the determination of the range of possible settlement amounts and the probability of achieving each of the possible settlements. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do not meet the more-likely-than-not threshold. Tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which the threshold is no longer met. In addition, FIN 48 requires the cumulative effect of adoption to be recorded as an adjustment to the opening balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. The company adopted FIN 48 effective April 1, 2007, as required and recognized a cumulative effect of accounting change of approximately $2.9 million, which decreased beginning retained earnings in the accompanying Consolidated Statements of Shareholders’ Equity for the year ended March 31, 2008 and increased accrued liabilities in the accompanying Consolidated Balance Sheets as of March 31, 2008. The company’s income taxes2013 and the impact of adopting FIN 48 are described further in Note 10.2012*
Non-cash investing activities. During 2008, the company’s investment in an affiliated company was redeemed by the affiliated company for $4.8 million in cash, resulting in a $1.4 million gain on redemption of the investment. The gain was classified within “other income (expense), net” in the Consolidated Statements of Operations.
Recently adopted accounting standards. In May 2008, the FASB issued Statement No. 162,The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). FAS 162 directs the U.S. GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with
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U.S. GAAP. FAS 162 is effective November 15, 2008. The adoption of FAS 162 did not have a significant impact on the company’s financial position, results of operations, or cash flows.
In March 2008, The FASB issued Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133(“FAS 161”). FAS 161 enhances the disclosures about an entity’s derivative and hedging activities. FAS 161 is effective for fiscal periods beginning after November 15, 2008. The company adopted FAS 161 on January 1, 2009, as required. The adoption of FAS 161 did not have a significant impact on the company’s financial position, results of operations and cash flows.
In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115(“FAS 159”). FAS 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item will be reported in current earnings at each subsequent reporting date. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the company elects for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. The company adopted FAS 159 on April 1, 2008, as required, but elected not to apply the fair value option to any of its financial instruments.
In September 2006, the FASB issued Statement No. 157,Fair Value Measurements(“FAS 157”). FAS 157 provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. FAS 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except for FAS 123R and its related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. FAS 157 is effective for fiscal years beginning after November 15, 2007. The company adopted FAS 157 on April 1, 2008 for its financial assets, as required. See also the discussion above under the caption,Fair value measurements. The adoption of FAS 157 did not have a significant impact on the company’s financial position, results of operations, or cash flows.
In February 2008, the FASB issued Staff PositionNo. 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which specifically excluded lease obligations accounted for under the provisions of FAS 13 from the scope of FAS 157. Also in February 2008, the FASB issued Staff PositionNo. 157-2, Effective Date of FASB Statement No. 157(“FSPFAS 157-2”), which delayed the effective date of FAS 157 with respect to nonfinancial assets and nonfinancial liabilities not remeasured at fair value on a recurring basis until fiscal years beginning after November 15, 2008, or fiscal 2010 for the company. Accordingly, the Company has not yet applied the requirements of FAS 157 to certain nonfinancial assets for which fair value measurements are determined only when there is an indication of potential impairment, primarily goodwill, intangible assets, non-financial assets and liabilities related to acquired businesses, and impairment and restructuring activities.
Recently issued accounting standards. In December 2008, the FASB issued Staff Position No. 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets, an amendment of SFAS 132(R)(“FSP FAS 132(R)-1”). This standard requires disclosure about an entity’s investment policies and strategies, the categories of plan assets, concentrations of credit risk and fair value measurements of plan assets. The standard is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The company is currently evaluating the impact, if any, that the adoption of FSP FAS 132(R)-1 will have on its financial position, results of operations, or cash flows.
In November 2008, the FASB’s Emerging Issues Task Force published IssueNo. 08-6,Equity Method Investment Accounting Considerations(“EITF 08-06”). This issue addresses the impact that FAS 141(R) and FAS 160 might have on the accounting for equity method investments, including how the initial carrying value of an equity method investment should be determined, how it should be tested for impairment, and how changes in classification from equity method to cost method should be treated.EITF 08-06 is to be implemented prospectively and is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The standard will have an impact on the company only for acquisitions and investments in noncontolling interests made after April 1, 2009. The company is currently evaluating the impact, if any, the adoption ofEITF 08-06 will have on its financial position, results of operations, or cash flows.
In April 2008, the FASB issued Staff PositionNo. 142-3,Determination of the Useful Life of Intangible Assets(“FSPFAS 142-3”). This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142,Goodwill and Other Intangible Assets. FSPFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within that fiscal year, or fiscal 2010 for the company. Early adoption is prohibited.FSP 142-3 applies prospectively to intangible assets acquired after adoption. The company does not expect the adoption of FSPFAS 142-3 to have a significant impact on its financial position, results of operations, or cash flows.
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In December 2007, the FASB issued Statement No. 141(R),Business Combinations(“Statement 141(R)”). Statement 141(R) significantly changes the accounting for and reporting of business combination transactions. Statement 141(R) is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The standard will have an impact on the company only for acquisitions made after April 1, 2009. The company is currently evaluating the impact that Statement 141(R) will have on its financial position, results of operations and cash flows.
In December 2007, the FASB issued Statement No. 160,Accounting and Reporting for Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“Statement 160”). Statement 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Statement 160 is effective for the first annual reporting period beginning after December 15, 2008, or fiscal 2010 for the company. The company is currently evaluating the impact that Statement 160 will have on its financial position, results of operations and cash flows.
Reclassifications. Certain amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current period’s presentation, primarily to reflect the results of discontinued operations of the KeyLink Systems Distribution Business and the TSG business segment’s China and Hong Kong operations (see Note 3).
2.
RECENT ACQUISITIONS
2009 Acquisition
Triangle Hospitality Solutions Limited
On April 9, 2008, the company acquired all of the shares of Triangle Hospitality Solutions Limited (“Triangle”), the UK-based reseller and specialist for the company’s InfoGenesis products and services for $2.7 million, comprised of $2.4 million in cash and $0.3 million of assumed liabilities. Accordingly, the results of operations for Triangle have been included in these Consolidated Financial Statements from that date forward. Triangle enhanced the company’s international presence and growth strategy in the UK, as well as solidified the company’s leading position in the hospitality and stadium and arena markets without increasing InfoGenesis’ ultimate customer base. Triangle added to the company’s hospitality solutions suite with the ability to offer customers the Triangle mPOS solution, which is a handheld point-of-sale solution which seamlessly integrates with InfoGenesis products. Based on management’s preliminary allocation of the acquisition cost to the net assets acquired (accounts receivable, inventory, and accounts payable), approximately $2.7 million was originally assigned to goodwill. Due to a purchase price adjustment during the third quarter of fiscal 2009 of $0.4 million, the goodwill attributed to the Triangle acquisition is $3.1 million at March 31, 2009. Goodwill resulting from the Triangle acquisition will be deductible for income tax purposes.
2008 Acquisitions
Eatec
On February 19, 2008, the company acquired all of the shares of Eatec Corporation (“Eatec”), a privately held developer and marketer of inventory and procurement software. Accordingly, the results of operations for Eatec have been included in these Consolidated Financial Statements from that date forward. Eatec’s software, EatecNetX (now called Eatec Solutions by Agilysys), is a recognized leading, open architecture-based, inventory and procurement management system. The software provides customers with the data and information necessary to enable them to increase sales, reduce product costs, improve back-office productivity and increase profitability. Eatec customers include well-known restaurants, hotels, stadiums and entertainment venues in North America and around the world as well as many public service institutions. The acquisition further enhances the company’s position as a leading inventory and procurement solution provider to the hospitality and foodservice markets. Eatec was acquired for a total cost of $25.0 million. Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $18.3 million was assigned to goodwill.
During the second quarter of 2009, management completed its purchase price allocation and assigned $6.2 million of the acquisition cost to identifiable intangible assets as follows: $1.4 million to non-compete agreements, which will be amortized between two and seven years; $2.2 million to customer relationships, which will be amortized over seven years; $1.8 million to developed technology, which will be amortized over five years; and $0.8 million to trade names, which has an indefinite life.
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During the first, second and fourth quarters of 2009, goodwill impairment charges were taken relating to the Eatec acquisition in the amounts of $1.3 million, $14.4 million, and $3.4 million, respectively. As of March 31, 2009, $1.7 million remains on the company’s balance sheet in goodwill relating to the Eatec acquisition.
Innovative Systems Design, Inc.
On July 2, 2007, the company acquired all of the shares of Innovative Systems Design, Inc. (“Innovative”), the largest U.S. commercial reseller of Sun Microsystems servers and storage products. Accordingly, the results of operations for Innovative have been included in these Consolidated Financial Statements from that date forward. Innovative is an integrator and solution provider of servers, enterprise storage management products and professional services. The acquisition of Innovative establishes a new and significant relationship between Sun Microsystems and the company. Innovative was acquired for an initial cost of $108.6 million. Additionally, the company was required to pay an earn-out of two dollars for every dollar of earnings before interest, taxes, depreciation, and amortization, or EBITDA, greater than $50.0 million in cumulative EBITDA over the first two years after consummation of the acquisition. The earn-out was limited to a maximum payout of $90.0 million. As a result of existing and anticipated EBITDA, during the fourth quarter of 2008, the company recognized $35.0 million of the $90.0 million maximum earn-out, which was made in April 2008. In addition, due to certain changes in the sourcing of materials, the company amended its agreement with the Innovative shareholders whereby the maximum payout available to the Innovative shareholders was limited to $58.65 million, inclusive of the $35.0 million paid. The EBITDA target required for the shareholders to be eligible for an additional payout is now $67.5 million in cumulative EBITDA over the first two years after the close of the acquisition. No amounts have been accrued as of March 31, 2009, as it is not probable that any additional payout will be made.
During the fourth quarter of 2008, management completed its purchase price allocation and assigned $29.7 million of the acquisition cost to identifiable intangible assets as follows: $4.8 million to non-compete agreements, $5.5 million to customer relationships, and $19.4 million to supplier relationships that will be amortized over useful lives ranging from two to five years.
Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $97.8 million was assigned to goodwill. Goodwill resulting from the Innovative acquisition will be deductible for income tax purposes. During the fourth quarter of 2009, a goodwill impairment charge was taken relating to the Innovative acquisition for $74.5 million. As of March 31, 2009, $23.3 million remains on the company’s balance sheet as goodwill relating to the Innovative acquisition.
InfoGenesis
On June 18, 2007, the company acquired all of the shares of IG Management Company, Inc. and its wholly-owned subsidiaries, InfoGenesis and InfoGenesis Asia Limited (collectively, “InfoGenesis”), an independent software vendor and solution provider to the hospitality market. Accordingly, the results of operations for InfoGenesis have been included in these Consolidated Financial Statements from that date forward. InfoGenesis offers enterprise-class point-of-sale solutions that provide end users a highly intuitive, secure and easy way to process customer transactions across multiple departments or locations, including comprehensive corporate and store reporting. InfoGenesis has a significant presence in casinos, hotels and resorts, cruise lines, stadiums and foodservice. The acquisition provides the company a complementary offering that extends its reach into new segments of the hospitality market, broadens its customer base and increases its software application offerings. InfoGenesis was acquired for a total acquisition cost of $90.6 million.
InfoGenesis had intangible assets with a net book value of $15.9 million as of the acquisition date, which were included in the acquired net assets to determine goodwill. Intangible assets were assigned values as follows: $3.0 million to developed technology, which will be amortized between six months and three years; $4.5 million to customer relationships, which will be amortized between two and seven years; and $8.4 million to trade names, which have an indefinite life. Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $71.8 million was assigned to goodwill. Goodwill resulting from the InfoGenesis acquisition will not be deductible for income tax purposes. During the first, second, and fourth quarters of 2009, goodwill impairment charges were taken relating to the InfoGenesis acquisition in the amounts of $3.9 million, $57.4 million, and $3.8 million, respectively. As of March 31, 2009, $6.7 million remains on the company’s balance sheet as goodwill relating to the InfoGenesis acquisition.
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Pro Forma Disclosure of Financial Information
The following table summarizes the company’s unaudited consolidated results of operations as if the InfoGenesis and Innovative acquisitions occurred on April 1:
| | | | | | | | | | | | | |
| | | Year Ended March 31
| |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Net sales | | $ | 730,720 | | | $ | 841,101 | | | $ | 729,851 | |
| (Loss) income from continuing operations | | $ | (282,187 | ) | | $ | 7,068 | | | $ | 4,556 | |
| Net (loss) income | | $ | (284,134 | ) | | $ | 8,908 | | | $ | 241,541 | |
| (Loss) earnings per share — basic income from continuing operations | | $ | (12.49 | ) | | $ | 0.25 | | | $ | 0.15 | |
| Net (loss) income | | $ | (12.58 | ) | | $ | 0.32 | | | $ | 7.87 | |
| (Loss) earnings per share — diluted income from continuing operations | | $ | (12.49 | ) | | $ | 0.25 | | | $ | 0.15 | |
| Net (loss) income | | $ | (12.58 | ) | | $ | 0.31 | | | $ | 7.87 | |
|
Stack Computer, Inc.
On April 2, 2007, the company acquired all of the shares of Stack Computer, Inc. (“Stack”). Stack’s customers include leading corporations in the financial services, healthcare and manufacturing industries. Accordingly, the results of operations for Stack have been included in these Consolidated Financial Statements from that date forward. Stack also operates a highly sophisticated solution center, which is used to emulate customer IT environments, train staff and evaluate technology. The acquisition of Stack strategically provides the company with product solutions and services offerings that significantly enhance its existing storage and professional services business. Stack was acquired for a total acquisition cost of $25.2 million.
Management made an adjustment of $0.8 million to the fair value of acquired capital equipment and assigned $11.7 million of the acquisition cost to identifiable intangible assets as follows: $1.5 million to non-compete agreements, which will be amortized over five years using the straight-line amortization method; $1.3 million to customer relationships, which will be amortized over five years using an accelerated amortization method; and $8.9 million to supplier relationships, which will be amortized over ten years using an accelerated amortization method.
Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $13.3 million was assigned to goodwill. Goodwill resulting from the Stack acquisition is deductible for income tax purposes. During the first and second quarters of 2009, goodwill impairment charges were taken relating to the Stack acquisition in the amounts of $7.8 million and $2.1 million, respectively. As of March 31, 2009, $3.4 million remains on the company’s balance sheet as goodwill relating to the Stack acquisition.
2007 Acquisition
Visual One Systems Corporation
On January 23, 2007, the company acquired all the shares of Visual One Systems Corporation (“Visual One”), a leading developer and marketer of Microsoft® Windows®-based software for the hospitality industry. Accordingly, the results of operations for Visual One have been included in these Consolidated Financial Statements from that date forward. The acquisition provides the company additional expertise around the development, marketing and sale of software applications for the hospitality industry, including property management, condominium, golf course, spa,point-of-sale, and sales and catering management applications. Visual One’s customers include well-known North American and international full-service hotels, resorts, conference centers and condominiums of all sizes. The aggregate acquisition cost was $14.4 million.
During the second quarter of 2008, management assigned $4.9 million of the acquisition cost to identifiable intangible assets as follows: $3.8 million to developed technology, which will be amortized over six years using the straight-line method; $0.6 million to non-compete agreements, which will be amortized over eight years using the straight-line amortization method; and $0.5 million to customer relationships, which will be amortized over five years using an accelerated amortization method.
Based on management’s allocation of the acquisition cost to the net assets acquired, including identified intangible assets, approximately $9.4 million was assigned to goodwill. Goodwill resulting from the Visual One acquisition is not deductible for income tax purposes. During the first, second, and fourth quarters of 2009, goodwill impairment charges were taken relating to the Visual One acquisition in the amounts of $0.5 million, $7.5 million, and $0.5 million, respectively. As of March 31, 2009, $0.9 million remains on the company’s balance sheet as goodwill relating to the Visual One acquisition.
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3.
DISCONTINUED OPERATIONS
China and Hong Kong Operations
In July, 2008, the company met the requirements of FASB issued Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”)to classify TSG’s China and Hong Kong operations asheld-for-sale and discontinued operations, and began exploring divestiture opportunities for these operations. Agilysys acquired TSG’s China and Hong Kong businesses in December 2005. During January 2009, the company sold the stock related to TSG’s China operations, and certain assets of TSG’s Hong Kong operations, receiving proceeds of $1.4 million, which resulted in a pre-tax loss on the sale of discontinued operations of $0.8 million. Therefore, the assets and liabilities of these operations were classified as discontinued operations on the company’s Consolidated Balance Sheets, and the operations were reported as discontinued operations on the company’s Consolidated Statements of Operations for the periods presented in accordance with FAS 144.
Sale of Assets and Operations of KeyLink Systems Distribution Business
During 2007, the company sold the assets and operations of KSG for $485.0 million in cash, subject to a working capital adjustment. At March 31, 2007, the final working capital adjustment was $10.8 million. Through the sale of KSG, the company exited all distribution-related businesses and now exclusively sells directly to end-user customers. By monetizing the value of KSG, the company significantly increased its financial flexibility and has redeployed the proceeds to accelerate the growth of its ongoing business both organically and through acquisition. The sale of KSG represented a disposal of a component of an entity. As such, the operating results of KSG, along with the gain on sale, have been reported as a component of discontinued operations.
In connection with the sale of KSG, the company entered into a product procurement agreement (“PPA”) with Arrow Electronics, Inc. Under the PPA, the company is required to purchase a minimum of $330 million worth of products each year during the term of the agreement (5 years), adjusted for product availability and other factors.
The income from discontinued operations for the year ended March 31, 2007, includes KSG net sales of $1.3 billion, pre-tax income of $79.2 million and net income of $48.6 million.
Income from discontinued operations for the year ended March 31, 2008, consists primarily of the settlement of obligations and contingencies of KSG that existed as of the date the assets and operations of KSG were sold.
Components of Results of Discontinued Operations
For the years ended March 31, 2009, 2008,2013, 2012, and 2007 the (loss) income from discontinued operations was comprised of the following:2011*
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Discontinued operations: | | | | | | | | | | | | |
| Income from operations of KSG | | $ | — | | | $ | — | | | $ | 80,178 | |
| Resolution of contingencies | | | (1,620 | ) | | | 4,664 | | | | — | |
| Loss from operations of IED | | | (11 | ) | | | (8 | ) | | | (827 | ) |
| Loss from operations of the TSG’s China and Hong Kong businesses | | | (752 | ) | | | (1,178 | ) | | | (1,708 | ) |
| Loss on sale of TSG’s China and Hong Kong businesses | | | (787 | ) | | | — | | | | — | |
| Gain on sale of KSG | | | — | | | | — | | | | 318,517 | |
|
| | | | (3,170 | ) | | | 3,478 | | | | 396,160 | |
| (Benefit) provision for income taxes | | | (1,223 | ) | | | 1,677 | | | | 153,378 | |
|
| (Loss) income from discontinued operations | | $ | (1,947 | ) | | $ | 1,801 | | | $ | 242,782 | |
|
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4.
RESTRUCTURING CHARGES (CREDITS)
2009 Restructuring Activity
Fourth Quarter Management Restructuring. During the fourth quarter of 2009, the company took additional steps to realign its cost and management structure. During the quarter, an additional four company vice presidents were terminated, as well as other support and sales personnel. These actions resulted in a restructuring charge of $3.7 million during the quarter, comprised mainly of termination benefits for the above-mentioned management changes. Also included in the restructuring charges was a non-cash charge for a curtailment loss of $1.2 million under the company’s Supplemental Executive Retirement Plan. These restructuring charges are included in the Corporate segment.
Third Quarter Management Restructuring. During the third quarter of 2009, the company took steps to realign its cost and management structure. During October 2008, the company’s former Chairman, President and CEO announced his retirement, effective immediately. In addition, four company vice presidents were terminated, as well as other support personnel. The company also relocated its headquarters from Boca Raton, Florida, to Solon, Ohio, where the company has a facility with a large number of employees, and cancelled the lease on its financial interests in two airplanes. These actions resulted in a restructuring charge of $13.4 million as of December 31, 2008, comprised mainly of termination benefits for the above-mentioned management changes and the costs incurred to relocate the corporate headquarters. Also included in the restructuring charges was a non-cash charge for a curtailment loss of $4.5 million under the company’s Supplemental Executive Retirement Plan. An additional $0.2 million expense was incurred in the fourth quarter of 2009 as a result of an impairment to the Leasehold Improvements at the company’s former headquarters in Boca Raton, Florida. These restructuring charges are included in the Corporate segment.
First Quarter Professional Services Restructuring. During the first quarter of 2009, the company performed a detailed review of the business to identify opportunities to improve operating efficiencies and reduce costs. As part of this cost reduction effort, management reorganized the professional servicesgo-to-market strategy by consolidating its management and delivery groups. The company will continue to offer specific proprietary professional services, including identity management, security, and storage virtualization; however, it will increase the use of external business partners. The cost reduction resulted in a $2.5 million and $0.4 million charge for one-time termination benefits relating to a workforce reduction in the first and second quarters of 2009, respectively. The workforce reduction was comprised mainly of service delivery personnel. Payment of these one-time termination benefits was substantially complete in 2009. This restructuring also resulted in a $20.6 million impairment to goodwill and intangible assets in the first quarter of 2009, related to the company’s 2005 acquisition of The CTS Corporations (“CTS”). The entire $23.5 million restructuring charge relates to the TSG business segment.
The three restructuring actions discussed above resulted in a $40.8 million restructuring charge for the year ending March 31, 2009.
2007 Restructuring Activity
During 2007, the company recorded a restructuring charge of approximately $0.5 million for one-time termination benefits resulting from a workforce reduction that was executed in connection with the sale of KSG. The workforce reduction was comprised mainly of corporate personnel. Payment of the one-time termination benefits was substantially complete in 2008.
53
Following is a reconciliation of the beginning and ending balances of the restructuring liability:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Severance
| | | | | | | | | Goodwill and
| | | | | | | |
| | | and Other
| | | | | | | | | Long Lived
| | | | | | | |
| | | Employment
| | | | | | Other
| | | Intangible
| | | SERP
| | | | |
| | | Costs | | | Facilities | | | Expenses | | | Assets | | | Curtailment | | | Total | |
| |
| |
| Balance at April 1, 2007 | | $ | 535 | | | $ | 100 | | | $ | — | | | $ | — | | | $ | — | | | $ | 635 | |
| Accretion of lease obligations | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | 7 | |
| Payments | | | (513 | ) | | | (70 | ) | | | — | | | | — | | | | — | | | | (583 | ) |
| Adjustments | | | (21 | ) | | | 6 | | | | — | | | | — | | | | — | | | | (15 | ) |
|
| Balance at March 31, 2008 | | $ | 1 | | | $ | 43 | | | $ | — | | | $ | — | | | $ | — | | | $ | 44 | |
| Additions | | | 12,919 | | | | 1,422 | | | | 171 | | | | 20,571 | | | | 5,664 | | | | 40,747 | |
| Accretion of lease obligations | | | — | | | | 54 | | | | — | | | | — | | | | — | | | | 54 | |
| Write off of intangibles | | | — | | | | — | | | | — | | | | (20,571 | ) | | | — | | | | (20,571 | ) |
| Curtailment of benefit plan obligations | | | — | | | | — | | | | — | | | | — | | | | (5,664 | ) | | | (5,664 | ) |
| Payments | | | (4,074 | ) | | | (477 | ) | | | (132 | ) | | | — | | | | — | | | | (4,683 | ) |
|
Balance at March 31, 2009 | | $ | 8,846 | | | $ | 1,042 | | | $ | 39 | | | $ | — | | | $ | — | | | $ | 9,927 | |
|
Of the remaining $9.9 million liability at March 31, 2009, $7.6 million of severance and other employment costs are expected to be paid during 2010, $1.0 million is expected to be paid in 2011, and $0.3 million is expected to be paid in fiscal year 2012. Approximately $0.3 million is expected to be paid during 2010 for ongoing facility obligations. Facility obligations are expected to continue through 2014.
Components of Restructuring Charges (Credits)
Included in the Consolidated Statements of Operations is a $40.8 million restructuring charge for 2009, which is comprised of the following: $54,000 for accretion expense, $12.9 million for severance adjustments, $20.6 million for CTS goodwill and intangible asset impairment, $5.7 million related to SERP and additional service credits liability curtailments, $1.4 million related to the Boca Raton, Florida facility, and $0.1 million related to the management transition and the buyout of the airplane lease.
In 2008, the $75,000 restructuring credits were primarily comprised of accretion expense for lease obligations, credits related to the difference between actual and accrued sublease income and common area costs, and a credit for severance adjustments. In 2007, the $2.5 million restructuring credits were primarily comprised of a $4.9 million credit for the remainder of a restructuring liability recognized in 2003 for an abandoned facility, partially offset by $1.7 million in expense related to the termination of a lease agreement and $0.4 million in expense related to the write-off of leasehold improvements.
5.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill is tested for impairment annually, or upon identification of impairment indicators, 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 discussed in Note 13, the company has three operating segments and five reporting units.
The company conducts its annual goodwill impairment test on February 1, and did so in 2008 without a need to expand the impairment test to step-two of FAS 142. However, during fiscal 2009, indictors of potential impairment caused the company to conduct interim impairment tests. Those indicators included the following: a significant decrease in market capitalization, a decline in recent operating results, and a decline in the company’s business outlook primarily due to the macroeconomic environment. In accordance with FAS 142, the company completed step one of the impairment analysis and concluded that, as of June 30, 2008, the fair value of three of its
54
reporting units was below their respective carrying values, including goodwill. The three reporting units that showed potential impairment were RSG, HSG, and Stack (a reporting unit within the TSG business segment). As such, step two of the impairment test was initiated in accordance with FAS 142. As of June 30, 2008, the step-two analysis had not been completed due to its time consuming nature. In accordance with paragraph 22 of FAS 142, the company recorded an estimate in the amount of $33.6 million as a non-cash goodwill impairment charge as of June 30, 2008. The step-two analysis was completed after updating the discounted cash flow analyses for changes occurring in the second quarter of 2009, resulting in an additional impairment charge of $112.0 million as of September 30, 2008. The annual goodwill impairment test was conducted as of February 1, 2009 and goodwill was determined to be impaired by an additional $83.9 million. In total, goodwill impairment charges recorded in 2009 were $229.5 million, excluding the $16.8 million classified as restructuring charges and discussed in Note 4,Restructuring Charges (Credits). Theyear-to-date goodwill impairment totals for each of the three reporting segments were $24.9 million for RSG, $120.1 million for HSG, and $84.5 million for TSG.
The changes in the carrying amount of goodwillComprehensive Loss for the years ended March 31, 20092013, 2012, and 2008 are as follows:2011*
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| |
| |
| Beginning of year | | $ | 297,560 | | | $ | 93,197 | |
| Goodwill acquired — Triangle (see note 2) | | | 3,051 | | | | — | |
| Goodwill (adjustment) acquired — Eatec (see note 2) | | | (3,953 | ) | | | 24,778 | |
| Goodwill acquired — Innovative (see note 2) | | | 56 | | | | 97,781 | |
| Goodwill acquired — InfoGenesis (see note 2) | | | 138 | | | | 71,662 | |
| Goodwill acquired — Stack (see note 2) | | | — | | | | 13,328 | |
| Goodwill adjustment — Visual One (see note 2) | | | — | | | | (2,507 | ) |
| Goodwill impairment classified as discontinued operations — China | | | — | | | | (586 | ) |
| Goodwill impairment classified as discontinued operations — Hong Kong | | | — | | | | (274 | ) |
| Goodwill impairment classified as restructuring — CTS | | | (16,811 | ) | | | — | |
| Goodwill impairment — Kyrus | | | (24,912 | ) | | | — | |
| Goodwill impairment — IAD | | | (27,363 | ) | | | — | |
| Goodwill impairment — Visual One | | | (8,524 | ) | | | — | |
| Goodwill impairment — Stack | | | (9,881 | ) | | | — | |
| Goodwill impairment — InfoGenesis | | | (65,065 | ) | | | — | |
| Goodwill impairment — Innovative | | | (74,575 | ) | | | — | |
| Goodwill impairment — Eatec | | | (19,135 | ) | | | — | |
| Impact of foreign currency translation | | | (204 | ) | | | 181 | |
|
| End of year | | $ | 50,382 | | | $ | 297,560 | |
|
55
Intangible Assets
The following table summarizes the company’s intangible assets at March 31, 2009, and 2008:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009
| | | 2008
| |
| | | Gross
| | | | | | Net
| | | Gross
| | | | | | Net
| |
| | | carrying
| | | Accumulated
| | | carrying
| | | carrying
| | | Accumulated
| | | carrying
| |
| | | amount | | | amortization | | | amount | | | amount | | | amortization | | | amount | |
| |
| |
| Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer relationships | | $ | 24,957 | | | $ | (18,341 | ) | | $ | 6,616 | | | $ | 26,526 | | | $ | (13,627 | ) | | $ | 12,899 | |
| Supplier relationships | | | 28,280 | | | | (19,094 | ) | | | 9,186 | | | | 28,280 | | | | (8,336 | ) | | | 19,944 | |
| Non-competition agreements | | | 9,610 | | | | (3,884 | ) | | | 5,726 | | | | 8,210 | | | | (2,015 | ) | | | 6,195 | |
| Developed technology | | | 10,085 | | | | (6,014 | ) | | | 4,071 | | | | 8,285 | | | | (3,398 | ) | | | 4,887 | |
| Patented technology | | | 80 | | | | (80 | ) | | | — | | | | 80 | | | | (80 | ) | | | — | |
|
| | | | 73,012 | | | | (47,413 | ) | | | 25,599 | | | | 71,381 | | | | (27,456 | ) | | | 43,925 | |
| Unamortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade names | | | 10,100 | | | | N/A | | | | 10,100 | | | | 11,700 | | | | N/A | | | | 11,700 | |
|
| Total intangible assets | | $ | 83,112 | | | $ | (47,413 | ) | | $ | 35,699 | | | $ | 83,081 | | | $ | (27,456 | ) | | $ | 55,625 | |
|
Customer relationships are being amortized over estimated useful lives between two and seven years; non-competition agreements are being amortized over estimated useful lives between two and eight years; developed technology is being amortized over estimated useful lives between three and eight years; supplier relationships are being amortized over estimated useful lives between two and ten years.
During the first quarterConsolidated Statements of 2009, the company recorded a $3.8 million impairment charge related to TSG’s customer relationship intangible asset that was classified within restructuring charges. The restructuring actions are described further in Note 4,Restructuring Charges (Credits). In the fourth quarter of 2009, in connection with the annual goodwill impairment test performed as of February 1, 2009, the company concluded that an impairment of its indefinite-lived intangible asset existed. As a result, the company recorded an impairment charge of $2.4 million related to the indefinite-lived intangible asset, which related to HSG.
Amortization expense relating to intangible assetsCash Flows for the years ended March 31, 2009, 20082013, 2012, and 2007 was $20.0 million, $17.7 million, and $3.1 million, respectively.2011*
The estimated amortization expense relating to intangible assets for each of the five succeeding fiscal years is as follows:
| | | | | |
| | | Amount | |
| |
| |
| Year ending March 31 | | | | |
| 2010 | | $ | 8,392 | |
| 2011 | | | 4,744 | |
| 2012 | | | 4,512 | |
| 2013 | | | 3,357 | |
| 2014 | | | 2,134 | |
|
| Total estimated amortization expense for the next five years | | $ | 23,139 | |
|
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6.
INVESTMENT IN MAGIRUS — SOLD IN NOVEMBER 2008
In November 2008, the company sold its 20% ownership interest in Magirus AG (“Magirus”), a privately owned European enterprise computer systems distributor headquartered in Stuttgart, Germany, for $2.3 million. In addition, the company received a dividend from Magirus (as a result of Magirus selling a portion of its distribution business in fiscal 2008) of $7.3 million in July 2008, resulting in $9.6 million of total proceeds received in fiscal 2009. The company adjusted the fair value of the investment as of March 31, 2008, to the net present value of the subsequent cash proceeds, resulting in fourth quarter 2008 charges of (i) a $5.5 million reversal of the cumulative currency translation adjustment in accordance withEITF 01-5,Application of FASB Statement No. 52 to an Investment Being Evaluated for Impairment That Will Be Disposed of,and (ii) an impairment charge of $4.9 million to write theheld-for-sale investment to its fair value less cost to sell.
The company had decided to sell its 20% investment in Magirus prior to March 31, 2008, and met the qualifications to consider the asset as held for sale. As a result, the company reclassified its Magirus investment to investment held for sale in accordance with Statement 144.
Because of the company’s inability to obtain and include audited financial statements of Magirus for fiscal years ended March 31, 2008 and 2007 as required byRule 3-09 ofRegulation S-X, the SEC has stated that it will not permit effectiveness of any new securities registration statements or post-effective amendments, if any, until such time as the company files audited financial statements that reflect the disposition of Magirus and the company requests and the SEC grants relief to the company from the requirements ofRule 3-09. As part of this restriction, the company is not permitted to file any new securities registration statements that are intended to automatically go into effect when they are filed, nor can the company make offerings under effective registration statements or under Rules 505 and 506 of Regulation D where any purchasers of securities are not accredited investors under Rule 501(a) of Regulation D. These restrictions do not apply to the following: offerings or sales of securities upon the conversion of outstanding convertible securities or upon the exercise of outstanding warrants or rights; dividend or interest reinvestment plans; employee benefit plans, including stock option plans; transactions involving secondary offerings; or sales of securities under Rule 144.
On April 1, 2008, the company invoked FASB Interpretation No. 35,Criteria for Applying the Equity Method of Accounting for Investments in Common Stock (“FIN 35”),for its investment in Magirus. The invocation of FIN 35 required the company to account for its investment in Magirus via cost, rather than equity accounting. FIN 35 clarifies the criteria for applying the equity method of accounting for investments of 50% or less of the voting stock of an investee enterprise. The cost method was used by the company because management did not have the ability to exercise significant influence over Magirus, which is one of the presumptions in APB Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock,necessary to account for an investment in common stock under the equity method.
7.
LEASE COMMITMENTS
Capital Leases
The company is the lessee of certain equipment under capital leases expiring in various years through 2013. 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.
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Minimum future lease payments under capital leases as of March 31, 2009, for each of the next five years and in the aggregate are:
| | | | | |
| | | Amount | |
| |
| |
| Year ending March 31 | | | | |
| 2010 | | $ | 268 | |
| 2011 | | | 101 | |
| 2012 | | | 71 | |
| 2013 | | | 4 | |
| 2014 | | | — | |
|
| Total minimum lease payments | | $ | 444 | |
| Less: amount representing interest | | | (49 | ) |
|
| Present value of minimum lease payments | | $ | 395 | |
|
Interest rates on capitalized leases vary from 7.3% to 14.4% 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.
Operating Leases
The company leases certain 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 ten 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 year 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, 2009:
| | | | | |
| | | Amount | |
| |
| |
| Year ending March 31 | | | | |
| 2010 | | $ | 4,986 | |
| 2011 | | | 3,758 | |
| 2012 | | | 2,399 | |
| 2013 | | | 2,089 | |
| 2014 | | | 1,611 | |
| Thereafter | | | 3,832 | |
|
| Total minimum lease payments | | $ | 18,675 | |
|
Total minimum future rental payments have been reduced by $16,000 of sublease rentals estimated to be received in the future under non-cancelable subleases. Rental expense for all non-cancelable operating leases amounted to $8.0 million, $7.9 million, and $4.5 million for 2009, 2008, and 2007, respectively.
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8.
FINANCING ARRANGEMENTS
The following is a summary of long-term obligations at March 31, 2009, and 2008:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| |
| |
| IBM floor plan agreement | | $ | 74,159 | | | $ | 14,552 | |
| Capital lease obligations | | | 395 | | | | 560 | |
|
| | | | 74,554 | | | | 15,112 | |
| Less: current maturities of long-term obligations | | | (74,397 | ) | | | (14,857 | ) |
|
| | | $ | 157 | | | $ | 255 | |
|
Revolving Credit Agreements
On January 20, 2009, the company terminated its $200 million unsecured credit facility with Bank of America, N.A. (as successor to LaSalle Bank National Association), as lead arranger, book runner and administrative agent, and certain other lenders party thereto (the “Credit Facility”). As of October 17, 2008, the company’s ability to borrow under this Credit Facility was suspended due to the company’s failure to timely file its Annual Report onForm 10-K for the fiscal year ended March 31, 2008, and other technical defaults. There were no amounts outstanding under this Credit Facility on the termination date and the company had never borrowed under the Credit Facility since it was entered into in October 2005. The company decided to terminate this Credit Facility to avoid paying additional fees associated with the facility. There were no penalties associated with the early termination of the Credit Facility, however $0.4 million of deferred financing fees were immediately expensed in the third quarter of 2009 as a result of the termination.
On May 5, 2009, the company executed a Loan and Security Agreement (the “New Credit Facility”) with Bank of America, N.A., as agent for the lenders from time to time party thereto, which replaced the previous Credit Facility that was terminated on January 20, 2009. The New Credit Facility provides $50 million of credit (which may be increased to $75 million by a $25 million “accordion provision”) for borrowings and letters of credit and will mature May 5, 2012. The company’s obligations under the New Credit Facility are secured by all of the company’s assets. The New Credit Facility establishes a borrowing base for availability of loans predicated on the level of the company’s accounts receivable meeting banking industry criteria. The aggregate unpaid principal amount of all borrowings, to the extent not previously repaid, is repayable at maturity. Borrowings also are repayable at such other earlier times as may be required under or permitted by the terms of the New Credit Facility. LIBOR Loans under this New Credit Facility bear interest at LIBOR for the applicable interest period plus an applicable margin ranging from 3.0% to 3.5%. Base rate loans (as defined in the New Credit Facility) bear interest at the Base Rate (as defined in the New Credit Facility) plus an applicable margin ranging from 2.0% to 2.5%. Interest is payable on the first of each month in arrears. There is no premium or penalty for prepayment of borrowings under the New Credit Facility.
The New Credit Facility contains normal mandatory repayment provisions, representations, and warranties and covenants for a secured credit facility of this type. The New Credit Facility also contains customary Events of Defaults upon the occurrence of which, among other remedies, the Lenders may terminate their commitments and accelerate the maturity of indebtedness and other obligations under the New Credit Facility.
As of June 5, 2009, the company had no amounts outstanding under the New Credit Facility and $50.0 million was available for future borrowings. The company has no intention to borrow amounts under the New Credit Facility in the near term.
IBM Floor Plan Agreement
On February 22, 2008, the company entered into the Fourth Amended and Restated Agreement for Inventory Financing (Unsecured) (“Inventory Financing Agreement”) with IBM Credit LLC, a wholly-owned subsidiary of International Business Machines Corporation (“IBM”). In addition to providing the Inventory Financing Agreement, IBM has engaged and may engage as a primary supplier to the company in the ordinary course of business. Under the Inventory Financing Agreement, the company may finance the purchase of products from authorized suppliers up to an aggregate outstanding amount of $145 million. The lender may, in its sole discretion,
59
temporarily increase the amount of the credit line but in no event shall the amount of the credit line exceed $250 million. Financing charges will only accrue on amounts outstanding more than 75 days. The company was in default of its covenants as a result of its failure to timely file its Annual Report onForm 10-K for March 31, 2008, and other technical requirements. As a result of these defaults, IBM could lower or cancel the company’s credit line; however, the credit line remained open and fully available through February 1, 2009. On February 2, 2009, the company was informed that IBM has lowered the credit line from $150 million to $100 million due to the loss of a significant syndicate partner in the credit line. Other than the lowering of the credit line, there have been no changes and both parties continued to operate under the existing terms. The company entered into the IBM flooring arrangement in February 2008 to realize the benefit of extended payment terms. This Inventory Financing Agreement provided the company 75 days of interest-free financing, which was better than the trade accounts payable terms provided by the company’s vendors. Prior to February 2008, the company solely utilized trade accounts payable to finance working capital.
The company was in discussions with IBM regarding an increase or overline component to the inventory financing agreement, whether through establishing a new comprehensive financing agreement or due to the passage of time as credit market conditions improve. However, on May 4, 2009, the company decided to terminate its Inventory Financing Agreement with IBM and will primarily fund working capital through open accounts payable provided by its trade vendors, or the New Credit Facility discussed above. At the time of the termination, there was $60.9 million outstanding under this Inventory Financing Agreement that the company subsequently repaid using cash on hand.
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9.
ADDITIONAL BALANCE SHEET INFORMATION
Additional information related to the company’s Consolidated Balance Sheets is as follows:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| |
| |
Other non-current assets: | | | | | | | | |
| Corporate-owned life insurance policies | | $ | 26,172 | | | $ | 25,024 | |
| Marketable securities | | | 37 | | | | 133 | |
| Investment in The Reserve Fund’s Primary Fund | | | 638 | | | | — | |
| Other | | | 2,161 | | | | 622 | |
|
| Total | | $ | 29,008 | | | $ | 25,779 | |
|
Accrued liabilities: | | | | | | | | |
| Salaries, wages, and related benefits | | $ | 9,575 | | | $ | 13,424 | |
| Employee benefit plan obligations | | | 12,113 | | | | — | |
| Restructuring liabilities | | | 7,901 | | | | 365 | |
| Other taxes payable | | | 5,016 | | | | 3,981 | |
| Income taxes payable | | | 855 | | | | — | |
| Innovative earn-out | | | — | | | | 35,000 | |
| Innovative accrued unvouchered liabilities | | | 5,675 | | | | 3,398 | |
| Other | | | 2,347 | | | | 1,644 | |
|
| Total | | $ | 43,482 | | | $ | 57,812 | |
|
Other non-current liabilities: | | | | | | | | |
| Employee benefit plan obligations | | $ | 11,078 | | | $ | 20,221 | |
| Income taxes payable | | | 7,168 | | | | 5,367 | |
| Restructuring liabilities | | | 2,026 | | | | — | |
| Long-term debt | | | 157 | | | | 255 | |
| Deferred income taxes | | | — | | | | 169 | |
| Other | | | 1,159 | | | | 1,251 | |
|
| Total | | $ | 21,588 | | | $ | 27,263 | |
|
Other non-current assets in the table above includes the cash surrender value of certain corporate-owned life insurance policies. These policies are maintained to informally fund the company’s obligations with respect to the employee benefit plan obligations included within accrued liabilities and other non-current liabilities in the table above. The company adjusts the carrying value of these contracts to the cash surrender value (which is considered fair value) at the end of each reporting period. Such periodic adjustments are included in selling, general and administrative expenses within the accompanying Consolidated Statements of Operations. Additional information with respect to the company’s corporate-owned life insurance policies and employee benefit plan obligations is provided in Note 11,Employee Benefit Plans.
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10.
INCOME TAXES
The components of income (loss) before income taxes from continuing operations and income tax provision are as follows:
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| (Loss) income before income taxes | | | | | | | | | | | | |
| Domestic | | $ | (283,732 | ) | | $ | 2,021 | | | $ | (12,991 | ) |
| Foreign | | | 449 | | | | (1,085 | ) | | | 1,129 | |
|
| Total | | $ | (283,283 | ) | | $ | 936 | | | $ | (11,862 | ) |
| Provision for income taxes | | | | | | | | | | | | |
| Current | | | | | | | | | | | | |
| Federal | | $ | 3,958 | | | $ | 2,632 | | | $ | (4,583 | ) |
| State and local | | | 1,813 | | | | (514 | ) | | | 196 | |
| Foreign | | | 168 | | | | (391 | ) | | | 274 | |
|
| Total | | $ | 5,939 | | | $ | 1,727 | | | $ | (4,113 | ) |
| Deferred | | | | | | | | | | | | |
| Federal | | $ | (7,526 | ) | | $ | (2,571 | ) | | $ | 2,563 | |
| State and local | | | 491 | | | | (250 | ) | | | 292 | |
| Foreign | | | — | | | | 172 | | | | (677 | ) |
|
| Total | | | (7,035 | ) | | | (2,649 | ) | | | 2,178 | |
|
| Benefit for income taxes | | $ | (1,096 | ) | | $ | (922 | ) | | $ | (1,935 | ) |
|
A reconciliation of the federal statutory rate to the company’s effective income tax rate for continuing operations is as follows:
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| Provision (benefit) for state taxes | | | 2.5 | | | | 205.5 | | | | (2.3 | ) |
| Impact of foreign operations | | | (0.3 | ) | | | (12.7 | ) | | | — | |
| Goodwill impairment | | | (16.7 | ) | | | — | | | | — | |
| Change in valuation allowance | | | (18.2 | ) | | | (113.5 | ) | | | 4.5 | |
| (Settlement) adjustment of income tax audits | | | (0.3 | ) | | | 339.8 | | | | 5.2 | |
| Meals & entertainment | | | (0.3 | ) | | | (488.1 | ) | | | (3.9 | ) |
| Equity investment — Magirus | | | — | | | | 702.0 | | | | (17.1 | ) |
| Compensation | | | (0.5 | ) | | | (203.2 | ) | | | (5.0 | ) |
| Other | | | (0.8 | ) | | | (83.7 | ) | | | (2.1 | ) |
|
| Effective rate | | | 0.4 | % | | | 381.1 | % | | | 14.3 | % |
|
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Deferred tax assets and liabilities as of March 31, 2009 and 2008 are as follows:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| |
| |
| Deferred tax assets: | | | | | | | | |
| Accrued liabilities | | $ | 2,765 | | | $ | 3,935 | |
| Allowance for doubtful accounts | | | 1,039 | | | | 852 | |
| Inventory valuation reserve | | | 1,254 | | | | 467 | |
| Restructuring reserve | | | 3,568 | | | | 121 | |
| Federal domestic net operating losses | | | — | | | | 107 | |
| Foreign net operating losses | | | 435 | | | | 502 | |
| Investment | | | — | | | | 365 | |
| State net operating losses | | | 1,017 | | | | 501 | |
| Deferred compensation | | | 8,150 | | | | 7,054 | |
| Deferred revenue | | | 778 | | | | (23 | ) |
| Goodwill and other intangible assets | | | 32,694 | | | | (8,914 | ) |
| Other | | | 8,919 | | | | 1,232 | |
|
| | | | 60,619 | | | | 6,199 | |
| Less: valuation allowance | | | (52,177 | ) | | | (999 | ) |
|
| Total | | $ | 8,442 | | | $ | 5,200 | |
| Deferred tax liabilities: | | | | | | | | |
| Property and equipment & software amortization | | $ | 1,037 | | | $ | 1,516 | |
| Other | | | 58 | | | | 65 | |
|
| Total | | | 1,095 | | | | 1,581 | |
|
| Total deferred tax assets | | $ | 7,347 | | | $ | 3,619 | |
|
At March 31, 2009, the company’s Hong Kong subsidiary had $2.4 million of net operating loss carryforwards that can be carried forward indefinitely. At March 31, 2009, the company also had $34.6 million of state net operating loss carryforwards that expire, if unused, in years 2010 through 2026.
At March 31, 2009, the total valuation allowance against deferred tax assets of $52.2 million was mainly comprised of a valuation allowance of $51.8 million for federal and state deferred tax assets, and a valuation allowance of $0.4 million associated with deferred tax assets in Hong Kong that will not be realized. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, the company will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax code. Based on the level of historical taxable income over the periods for which the deferred tax assets are deductible, management believes that it is more-likely-than-not that the company will not realize the benefits of these deductible differences.
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Effective April 1, 2007, the company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:
| | | | | |
|
| Balance at April 1, 2008 | | $ | 5,997 | |
| Additions: | | | | |
| Relating to positions taken during current year | | | 260 | |
| Relating to positions taken during prior year | | | 1,401 | |
| Reductions: | | | | |
| Relating to tax settlements | | | (964 | ) |
| Relating to positions taken during prior year | | | (588 | ) |
| Relating to lapse in statute | | | (353 | ) |
| Due to business acquisitions | | | (102 | ) |
|
| Balance at March 31, 2009 | | $ | 5,651 | |
|
The company recognizes interest accrued on any unrecognized tax benefits as a component of income tax expense. Penalties are recognized as a component of selling, general and administrative expenses. As of March 31, 2009 and 2008, the company had approximately $2.0 million and $1.7 million of interest and penalties accrued, respectively.
As of March 31, 2009, the company has a liability of $5.7 million related to uncertain tax positions, the recognition of which would affect the company’s effective income tax rate.
The company anticipates the completion of state income tax audits in the next 12 months which could reduce the accrual for unrecognized tax benefits by $1.2 million. The company believes that, other than the changes noted above, it is impractical to determine the positions for which it is reasonably possible that the total of uncertain tax benefits will significantly increase or decrease in the next twelve months.
The company is currently under examination by the Internal Revenue Service (IRS) for the tax year ended March 31, 2007. The examination commenced in the fourth quarter of 2009. The company is currently being audited by multiple state taxing jurisdictions. In material jurisdictions, the company has tax years open back to and including 2000.
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 $1.00 for every $1.00 on the first 1% of the employee’s pre-tax contributions and $0.50 for every $1.00 up to the next 5% of the employee’s pre-tax contributions. 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 $4.0 million, $3.2 million, and $3.0 million for 2009, 2008, and 2007, respectively.
The company also provides a non-qualified benefit equalization plan (“BEP”) covering certain employees, which provides for employee deferrals and company retirement deferrals so that the total retirement deferrals equal amounts that would have been contributed to the company’s 401(k) plan if it were not for limitations imposed by income tax regulations. The benefit obligation related to the BEP was $3.4 and $5.6 million at March 31, 2009 and 2008, respectively. Contribution expense for the BEP was $0.2 million, $0.1 million, and $0.4 million in 2009, 2008, and 2007, respectively.
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 for the plan participants. The projected benefit obligation recognized by the company related to the SERP was $18.3 and $14.0 million at March 31, 2009 and 2008, respectively. At March 31, 2009, the benefit obligation recognized by the company represents the projected benefit obligation, in accordance with Statement of Financial Accounting
64
Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans(“FAS 158”) adoption standards. The accumulated benefit obligation related to the SERP was $17.9 million and $12.5 million at March 31, 2009, and 2008, respectively. The annual expense for the SERP was $1.3 million, $1.3 million, and $1.1 million in 2009, 2008, and 2007, respectively.
In connection with the management restructuring actions taken in the third quarter of 2009, the company recorded non-cash curtailment charges of $4.5 million for the SERP, which are included within restructuring charges on the Consolidated Statements of Operations. The curtailment charges pertain to the retirement of the company’s former CEO and termination of certain officers. In connection with the management restructuring actions taken in the fourth quarter of 2009, the company recorded additional non-cash curtailment charges of $0.9 million and $0.3 million related to the SERP and the additional service credits liability curtailments, respectively, which are also included within restructuring charges on the Consolidated Statements of Operations. The 2009 fourth quarter charges relate to the termination of another officer. Total curtailment charges recorded as restructuring expenses for the SERP and the additional service liability curtailments in 2009 were $5.4 million and $0.3 million, respectively.
Certain participants in the SERP were eligible for early retirement under the terms of the SERP and have elected to receive lump sum distributions from the plan and the additional service credits liability in 2010. The company will fund the payments by taking loans against the cash surrender value of the life insurance policies that informally fund the SERP. Accordingly, the company has classified approximately $12.1 million of the projected benefit liability as a current accrued liability on the Consolidated Balance Sheets. Additional information related to the classification of the current and long-term portion of the SERP and additional service credits liability is presented in Note 9,Additional Balance Sheet Information.
In conjunction with the BEP and SERP, the company has invested in life insurance policies related to certain employees and marketable securities held in a Rabbi Trust to satisfy future obligations of the plans. The value of the policies was $23.4 million and $22.4 million at March 31, 2009, and 2008, respectively. The life insurance policies are valued at their cash surrender value and the marketable securities held in a Rabbi trust are valued at fair market value. At March 31, 2009, the marketable securities held in the Rabbi trust had a fair value of $37,000.
The following benefit payments are expected to be made to participants related to the SERP and additional service credits obligations:
| | | | | |
|
| 2010 | | $ | 11,984 | |
| 2011 | | | 2,384 | |
| 2012 | | | 2,432 | |
| 2013 | | | — | |
| 2014 | | | — | |
| Thereafter | | | 2,466 | |
|
| Total | | $ | 19,266 | |
|
Subsequent to March 31, 2009, the company took loans totaling $12.5 million against the cash surrender value of the corporate-owned life insurance policies. The proceeds were used and will be used to satisfy the SERP and additional service credits obligations related to two former executives who retired from the company during 2009. The company has no obligation to repay these loans and does not intend to repay them.
12.
COMMITMENTS AND 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 individual or aggregated matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the company.
65
In 2006, the company filed a lawsuit against the former shareholders of CTS, a company that was purchased by Agilysys in May 2005. In the lawsuit, Agilysys alleged that principals of CTS failed to disclose pertinent information during the acquisition, representing a material breach in the representations of the acquisition purchase agreement. On January 30, 2009, a jury ruled in favor of the company, finding the former shareholders of CTS liable for breach of contract, and awarded damages in the amount of $2.3 million. The jury also awarded to Agilysys its reasonable attorney’s fees in an amount to be determined at a later hearing. Judgment will be entered upon an award of attorney’s fees, at which time the parties have thirty days to file an appeal. No amounts have yet been accrued or received from the former shareholders of CTS or their insurance company.
As of March 31, 2009 and 2008, the company had minimum purchase commitments under a product procurement agreement with a supplier totaling $1.0 million and $1.3 million, respectively.
13.
BUSINESS SEGMENTS
Description of Business Segments
The company has three reportable business segments: Hospitality Solutions Group (“HSG”), Retail Solutions Group (“RSG”), and Technology Solutions Group (“TSG”). The reportable segments are each managed separately and are supported by various practices as well as company-wide functional departments. The segment information for 2007 that is provided below has been restated as a result of the 2008 change in the composition of the company’s reportable segments.
HSG is a leading technology provider to the hospitality industry, offering application software and services that streamline management of operations, property and inventory for customers in the gaming, hotel and resort, cruise lines, food management services, and sports and entertainment markets.
RSG is a leader in designing solutions that help make retailers more productive and provide their customers with an enhanced shopping experience. RSG solutions help improve operational efficiency, technology utilization, customer satisfaction and in-store profitability, including customized pricing, inventory and customer relationship management systems. The group also provides implementation plans and supplies the complete package of hardware needed to operate the systems, including servers, receipt printers,point-of-sale terminals and wireless devices for in-store use by the retailer’s store associates.
TSG is an aggregation of the company’s IBM, HP, and Sun reporting units due to the similarity of their economic and operating characteristics. During the fourth quarter of 2009, the Stack reporting unit was integrated into the HP reporting unit . TSG is a leading provider of HP, Sun, Oracle, IBM, and EMC2 enterprise IT solutions for the complex needs of customers in a variety of industries — including education, finance, government, healthcare and telecommunications, among others. The solutions offered include enterprise architecture and high availability, infrastructure optimization, storage and resource management, identity management and business continuity.
Measurement of Segment Operating Results and Segment Assets
The company evaluates performance and allocates resources to its reportable segments based on operating income and “adjusted EBITDA,” which is defined as operating (loss) income plus depreciation and amortization expense. Certain costs and expenses arising from the company’s functional departments are not allocated to the reportable segments for performance evaluation purposes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies elsewhere in the footnotes to the consolidated financial statements.
As a result of the March 2007 divestiture of KSG and acquisitions, and due to the debt covenant and Inventory Financing Agreement definitions, the company believes that adjusted EBITDA is a meaningful measure to the users of the financial statements and has been a required measurement in the company’s prior debt agreements to reflect another measure of the company’s performance. Adjusted EBITDA differs from U.S. GAAP and should not be considered an alternative measure to operating cash flows as required by U.S. GAAP. Management has reconciled adjusted EBITDA to operating (loss) income in the following chart.
Intersegment sales are recorded at pre-determined amounts to allow for intercompany profit to be included in the operating results of the individual reportable segments. Such intercompany profit is eliminated for consolidated financial reporting purposes.
The company’s chief operating decision maker does not evaluate a measurement of segment assets when evaluating the performance of the company’s reportable segments. As such, financial information relating to segment assets is not provided in the financial information below.
66
The following table presents segment profit and related information for each of the company’s reportable segments. As discussed in Note 1, Verizon Communications, Inc. represented approximately 32.6% and 16.3% of the TSG segment’s total sales in 2009 and 2008 respectively. No single customer accounted for more than 10% of a reporting business segment’s total sales in 2007. Please refer to Note 4 for further information on the TSG and Corporate restructuring charges, and Note 5 for the TSG, RSG, and HSG goodwill and intangible asset impairment charges:
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Hospitality | | | | | | | | | | | | |
| Total revenue | | $ | 99,826 | | | $ | 85,103 | | | $ | 37,875 | |
| Elimination of intersegment revenue | | | (190 | ) | | | (280 | ) | | | — | |
|
| Revenue from external customers | | $ | 99,636 | | | $ | 84,823 | | | $ | 37,875 | |
|
| Gross margin | | $ | 60,505 | | | $ | 47,193 | | | $ | 23,082 | |
|
| | | | 60.7% | | | | 55.6% | | | | 60.9% | |
| Depreciation and Amortization | | $ | 5,931 | | | $ | 4,865 | | | $ | 1,160 | |
| Operating (loss) income | | | (114,133 | ) | | | 4,125 | | | | 5,535 | |
|
| Adjusted EBITDA | | $ | (108,202 | ) | | $ | 8,990 | | | $ | 6,695 | |
|
| Goodwill and intangible asset impairment | | $ | 122,488 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Retail | | | | | | | | | | | | |
| Total revenue | | $ | 122,478 | | | $ | 130,223 | | | $ | 93,064 | |
| Elimination of intersegment revenue | | | (319 | ) | | | (493 | ) | | | (288 | ) |
|
| Revenue from external customers | | $ | 122,159 | | | $ | 129,730 | | | $ | 92,776 | |
|
| Gross margin | | $ | 27,659 | | | $ | 24,599 | | | $ | 19,491 | |
|
| | | | 22.6% | | | | 19.0% | | | | 21.0% | |
| Depreciation and Amortization | | $ | 129 | | | $ | 376 | | | $ | 503 | |
| Operating (loss) income | | | (17,055 | ) | | | 5,692 | | | | 2,559 | |
|
| Adjusted EBITDA | | $ | (16,926 | ) | | $ | 6,068 | | | $ | 3,062 | |
|
| Goodwill impairment | | $ | 24,912 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Technology | | | | | | | | | | | | |
| Total revenue | | $ | 512,108 | | | $ | 554,655 | | | $ | 330,610 | |
| Elimination of intersegment revenue | | | (3,183 | ) | | | (9,040 | ) | | | (7,934 | ) |
|
| Revenue from external customers | | $ | 508,925 | | | $ | 545,615 | | | $ | 322,676 | |
|
| Gross margin | | $ | 108,085 | | | $ | 102,843 | | | $ | 70,341 | |
|
| | | | 21.2% | | | | 18.8% | | | | 21.8% | |
| Depreciation and Amortization | | $ | 16,673 | | | $ | 14,491 | | | $ | 2,032 | |
| Operating (loss) income | | | (88,581 | ) | | | 14,296 | | | | 17,149 | |
|
| Adjusted EBITDA | | $ | (71,908 | ) | | $ | 28,787 | | | $ | 19,181 | |
|
| Goodwill impairment | | $ | 84,456 | | | $ | — | | | $ | — | |
| Restructuring charge | | $ | 23,573 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Corporate/Other | | | | | | | | | | | | |
| Revenue from external customers | | $ | — | | | $ | — | | | $ | 413 | |
|
| Gross margin | | $ | 2,429 | | | $ | 3,856 | | | $ | 5,835 | |
|
| Depreciation and Amortization(1) | | $ | 4,366 | | | $ | 3,855 | | | $ | 4,880 | |
| Operating loss | | | (60,285 | ) | | | (41,969 | ) | | | (33,574 | ) |
|
| Adjusted EBITDA | | $ | (55,919 | ) | | $ | (38,114 | ) | | $ | (28,694 | ) |
|
| Restructuring charge | | $ | 17,228 | | | $ | (75 | ) | | $ | (2,531 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Consolidated | | | | | | | | | | | | |
| Total revenue | | $ | 734,412 | | | $ | 769,981 | | | $ | 461,962 | |
| Elimination of intersegment revenue | | | (3,692 | ) | | | (9,813 | ) | | | (8,222 | ) |
|
| Revenue from external customers | | $ | 730,720 | | | $ | 760,168 | | | $ | 453,740 | |
|
| Gross margin | | $ | 198,678 | | | $ | 178,491 | | | $ | 118,749 | |
|
| | | | 27.2% | | | | 23.5% | | | | 26.2% | |
| Depreciation and Amortization(1) | | $ | 27,099 | | | $ | 23,587 | | | $ | 8,575 | |
| Operating loss | | | (280,054 | ) | | | (17,856 | ) | | | (8,331 | ) |
|
| Adjusted EBITDA | | $ | (252,955 | ) | | $ | 5,731 | | | $ | 244 | |
|
| Goodwill and intangible asset impairment | | $ | 231,856 | | | $ | — | | | $ | — | |
| Restructuring charge | | $ | 40,801 | | | $ | (75 | ) | | $ | (2,531 | ) |
|
| | |
(1) | | Does not include the amortization of deferred financing fees totaling $584, $226, and $215 in 2009, 2008, and 2007, respectively, which related to the Corporate/Other segment. |
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Enterprise-Wide Disclosures
The company’s assets are primarily located in the United States of America. Further, revenues attributable to customers outside the United States of America accounted for 4%, 5% and 8% of total revenues for 2009, 2008 and 2007, respectively. Total revenues for the company’s three specific product areas are as follows:
| | | | | | | | | | | | | |
| | | For the year ended March 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Hardware | | $ | 508,704 | | | $ | 562,314 | | | $ | 328,435 | |
| Software | | | 76,998 | | | | 71,900 | | | | 32,866 | |
| Services | | | 145,018 | | | | 125,954 | | | | 92,439 | |
|
| Total | | $ | 730,720 | | | $ | 760,168 | | | $ | 453,740 | |
|
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, 2009, and 2008, there were no shares of preferred stock outstanding.
Dividend Payments
Common share dividends were paid quarterly at the rate of $0.03 per share in 2009 and 2008 to shareholders of record.
Shareholder Rights Plan
In April 1999, the company’s Board of Directors approved a new Shareholder Rights Plan, which became effective upon expiration of the existing plan in May 1999. The Shareholder Rights Plan and the Rights expired on May 10, 2009. The following is a summary of the provisions of the Shareholder Rights Plan and the Rights prior to their expiration. 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 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.
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15.
(LOSS) EARNINGS PER SHARE
The following data show the amounts used in computing (loss) earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock.
| | | | | | | | | | | | | |
| | | For the year ended March 31 | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Numerator: | | | | | | | | | | | | |
| (Loss) income from continuing operations — basic and diluted | | $ | (282,187 | ) | | $ | 1,858 | | | $ | (9,927 | ) |
| (Loss) income from discontinued operations — basic and diluted | | | (1,947 | ) | | | 1,801 | | | | 242,782 | |
|
| Net (loss) income — basic and diluted | | $ | (284,134 | ) | | $ | 3,659 | | | $ | 232,855 | |
|
| Denominator: | | | | | | | | | | | | |
| Weighted average shares outstanding — basic | | | 22,587 | | | | 28,252 | | | | 30,684 | |
| Effect of dilutive securities — stock options and unvested restricted stock | | | — | | | | 514 | | | | — | |
|
| Weighted average shares outstanding — diluted | | | 22,587 | | | | 28,766 | | | | 30,684 | |
|
| (Loss) earnings per share — basic and diluted: | | | | | | | | | | | | |
| (Loss) income from continuing operations — basic and diluted | | $ | (12.49 | ) | | $ | 0.07 | | | $ | (0.32 | ) |
| (Loss) income from discontinued operations — basic and diluted | | | (0.09 | ) | | | 0.06 | | | | 7.91 | |
|
| Net (loss) income — basic and diluted | | $ | (12.58 | ) | | $ | 0.13 | | | $ | 7.59 | |
|
Diluted earnings per share is computed by sequencing each series of potential issuance of common shares from the most dilutive to the least dilutive. Diluted earnings 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, 2009, 2008, and 2007, options on 2.8 million, 1.0 million, and 3.4 million shares of common stock, respectively, were not included in computing diluted earnings per share because their effects were anti-dilutive.
16.
STOCK-BASED COMPENSATION
The company has a shareholder-approved 2006 Stock Incentive Plan (the “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 closing 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 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 the stock appreciation rights 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 that 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 objectives and such other conditions, restrictions and contingencies. The company generally issues authorized but unissued shares to satisfy share option exercises.
As of March 31, 2009, there were no stock appreciation rights or restricted share units awarded from the Plan.
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Stock Options
The following table summarizes stock option activity during 2009, 2008, and 2007 for stock options awarded by the company under the stock incentive plan and prior plans.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended March 31 | |
| | | 2009 | | |
2008 | | | 2007 | |
| | | | | | 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 | | | 3,526,910 | | | $ | 14.24 | | | | 3,394,748 | | | $ | 13.61 | | | | 3,289,999 | | | $ | 12.84 | |
| Granted | | | 783,500 | | | | 4.92 | | | | 280,000 | | | | 22.21 | | | | 997,500 | | | | 15.72 | |
| Exercised | | | — | | | | — | | | | (108,038 | ) | | | 13.38 | | | | (804,250 | ) | | | 12.93 | |
| Cancelled/expired | | | (1,920,840 | ) | | | 13.24 | | | | (11,800 | ) | | | 14.57 | | | | (76,669 | ) | | | 15.22 | |
| Forfeited | | | (232,405 | ) | | | 15.31 | | | | (28,000 | ) | | | 21.07 | | | | (11,832 | ) | | | 15.85 | |
|
| Outstanding at March 31 | | | 2,157,165 | | | $ | 11.63 | | | | 3,526,910 | | | $ | 14.24 | | | | 3,394,748 | | | $ | 13.63 | |
|
| Options exercisable at March 31 | | | 1,638,818 | | | $ | 13.41 | | | | 2,897,564 | | | $ | 13.58 | | | | 2,494,267 | | | $ | 13.04 | |
|
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 of the stock option grants:
| | | | | | | | | | | | | |
| | | For the year ended March 31 | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Dividend yield | | | 0.7 — 1.2% | | | | 0.70% | | | | 0.70% | |
| Risk-free interest rate | | | 2.2 — 4.3% | | | | 4.90% | | | | 4.70% | |
| Expected life | | | 6.0 years | | | | 6.0 years | | | | 5.0 years | |
| Expected volatility | | | 43.1 — 73.4% | | | | 43.80% | | | | 44.30% | |
|
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 company’s ownership base has been and may continue to be concentrated in a few shareholders, which has increased and could continue to increase the volatility of the company’s stock price over time. The fair market values of options granted during the year ended March 31, 2009, were 246,000 options at $4.39, 7,500 options at $5.31, 285,000 options at $1.44, 175,000 options at $1.26, 25,000 options at $1.99, and 45,000 options at $2.28.
Compensation expense charged to operations during the year ended March 31, 2009, 2008, and 2007 relating to stock options was $0.5 million, $3.5 million, and $3.6 million, respectively. This included a $1.5 million reversal in stock option expense in 2009 due to a change in the estimate of the forfeiture rate which was updated due to the management restructuring actions. Since no options were exercised during the year ended March 31, 2009, no income tax benefit was recognized in operations during the year. As of March 31, 2009, total unrecognized stock based compensation expense related to non-vested stock options was $0.5 million, which is expected to be recognized over a weighted-average period of 18 months. No stock options were exercised during the year ended March 31, 2009.
70
The following table summarizes the status of stock options outstanding at March 31, 2009.
| | | | | | | | | | | | | | | | | | | | | |
| | | Options outstanding | | | Options exercisable | |
| | | | | | | | | Weighted
| | | | | | Weighted
| |
| | | | | | Weighted
| | | average
| | | | | | average
| |
| | | | | | average
| | | remaining
| | | | | | exercise
| |
| Exercise price range | | Number | | | exercise price | | | contractual life | | | Number | | | price | |
| |
| |
| $2.19 — $6.63 | | | 530,000 | | | $ | 2.55 | | | | 9.66 | | | | 169,998 | | | $ | 2.39 | |
| $6.63 — $8.29 | | | 12,500 | | | | 7.00 | | | | 0.02 | | | | 12,500 | | | | 7.00 | |
| $8.29 — $9.95 | | | 270,166 | | | | 9.37 | | | | 6.97 | | | | 164,491 | | | | 9.07 | |
| $9.95 — $11.61 | | | 30,000 | | | | 11.17 | | | | 2.32 | | | | 30,000 | | | | 11.17 | |
| $11.61 — $13.26 | | | 47,500 | | | | 12.85 | | | | 3.33 | | | | 42,500 | | | | 12.95 | |
| $13.26 — $14.92 | | | 385,500 | | | | 13.79 | | | | 4.30 | | | | 385,500 | | | | 13.79 | |
| $14.92 — $16.58 | | | 722,167 | | | | 15.67 | | | | 7.07 | | | | 722,167 | | | | 15.67 | |
| $16.58 — $22.21 | | | 159,332 | | | | 22.21 | | | | 7.33 | | | | 111,662 | | | | 22.21 | |
|
| | | | 2,157,165 | | | $ | 11.63 | | | | 7.03 | | | | 1,638,818 | | | $ | 13.41 | |
|
Non-vested Shares
Compensation expense related to non-vested share awards is recognized over the restriction period based upon the closing market price of the company’s shares on the grant date. Compensation expense charged to operations for non-vested share awards was $0.6 million $1.5 million, and $0.6 million for the year ended March 31, 2009, 2008 and 2007, respectively. A credit of $0.6 million was recognized in 2009 relating to employee terminations. As of March 31, 2009, there was $0.1 million of total unrecognized compensation cost related to non-vested share awards, which is expected to be recognized over a weighted-average period of 12 months. Dividends are not awarded to non-vested shares.
The following table summarizes non-vested share activity during the years ended March 31, 2009, 2008, and 2007 for restricted shares awarded by the company under the stock incentive plan and prior plans.
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| |
| Outstanding at April 1 | | | 80,900 | | | | 18,750 | | | | 25,000 | |
| Granted | | | 81,600 | | | | 108,000 | | | | 32,000 | |
| Vested | | | (104,900 | ) | | | (45,850 | ) | | | (38,250 | ) |
| Forfeited | | | (45,600 | ) | | | — | | | | — | |
|
| Outstanding at March 31 | | | 12,000 | | | | 80,900 | | | | 18,750 | |
|
The fair market value of non-vested shares is determined based on the closing price of the company’s shares on the grant date.
Performance Shares
Net compensation cost charged to operations for performance share awards was a credit of $0.6 million and expense of $1.0 millionShareholders' Equity for the years ended March 31, 20092013, 2012, and 2008, respectively. A gross credit2011*
Notes to Consolidated Financial Statements*
(a)(2) Financial statement schedule. The following financial statement schedule is included herein and is incorporated by reference in Part II, Item 8 of $1.4 million was recognizedthis Annual Report:
Schedule II - Valuation and Qualifying Accounts*
All other schedules have been omitted since they are not applicable or the required information is included in 2009 relating to employee terminationsthe consolidated financial statements or notes thereto.
(a)(3) Exhibits. Exhibits included herein and those incorporated by reference are listed in the evaluationExhibit Index of performance goals. As of March 31, 2009, there was $0.2 million of total unrecognized compensation cost related to performance share awards,this Annual Report.
__________
* Previously filed with the Annual Report on Form 10-K filed with the SEC on June 24, 2013, which is expectedbeing amended hereby.
Signatures
Pursuant to be recognized over a weighted-average periodthe requirements of 12 months.
71
There were no performance shares issued in 2007. The following table summarizes performance share activity during year ended March 31, 2009 and 2008:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| |
| |
| Outstanding at April 1 | | | 152,000 | | | | — | |
| Granted | | | — | | | | 152,000 | |
| Vested | | | — | | | | — | |
| Forfeited | | | (122,000 | ) | | | — | |
|
| Outstanding at March 31 | | | 30,000 | | | | 152,000 | |
|
The company granted shares to certain executivesSection 13 or 15(d) of the company, the vesting of which is contingent upon meeting various company-wide performance goals. The performance shares contingently vest over three years. The fair value of the performance share grant is determined based on the closing market price of the company’s shares on the grant date and assumes that performance goals will be met. If such goals are not met, no compensation cost will be recognized and any compensation cost previously recognized during the vesting period will be reversed.
17.
CAPITAL STOCK
In August 2007, in fulfillment of the company’s previously disclosed intention to return capital to shareholders, the company announced a modified “Dutch Auction” tender offer for up to 6,000,000 of the company’s common shares. In September 2007, the company accepted for purchase 4,653,287 of the company’s common shares at a purchase price of $18.50 per share (considered a current market trading price), for a total cost of approximately $86.1 million, excluding related transaction costs. The tender offer was funded through cash on hand. The company uses the par value method to account for treasury stock. Accordingly, the treasury stock account is charged only for the aggregate stated value of the shares reacquired, or $0.30 per share. The capital in excess of stated value is charged for the difference between cost and stated value.
In September 2007, the company entered into a written trading plan that complies withRule 10b5-1 under the Securities Exchange Act of 1934, as amended, which provided forAgilysys, Inc. has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the purchaseundersigned, thereunto duly authorized, in the City of upCincinnati, State of Ohio, on July 29, 2013.
AGILYSYS, INC.
/s/ James H. Dennedy
James H. Dennedy
President, Chief Executive Officer and Director
Pursuant to 2,000,000the requirements of the company’s common shares. In December 2007,Securities Exchange Act of 1934, this Report has been signed below by the company announced it had completed the repurchasefollowing persons on behalf of the shares on the open market for a total cost of $30.4 million, excluding related transaction costs. Also in December 2007, the company entered into an additionalRule 10b5-1 plan that provided for the purchase of up to an additional 2,500,000 of the company’s common shares. The Board of Directors authorized a cash outlay of $150 millionRegistrant and in the aggregate for the tender offer and purchases pursuant toRule 10b5-1 plans, which also complied with the Credit Facility approval limit. By February 2008, 2,321,787capacities indicated as of the 2,500,000 shares were redeemed for a total cost of $33.5 million. The $150 million maximum cash outlay was achieved; therefore the purchase of common shares for treasury was completed.July 29, 2013.
QUARTERLY RESULTS (UNAUDITED)
Because quarterly reporting of per share data is used independently for each reporting period, 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.
72
The company experiences a seasonal increase in sales during its fiscal third quarter ending in December. 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.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended March 31, 2009
| |
| | | First
| | | Second
| | | Third
| | | Fourth
| | | | |
| | | quarter | | | quarter | | | quarter | | | quarter | | | Year | |
| |
| |
| Net Sales | | $ | 179,751 | | | $ | 171,438 | | | $ | 224,076 | | | $ | 155,455 | | | $ | 730,720 | |
| Gross margin | | | 47,778 | | | | 50,864 | | | | 59,778 | | | | 40,258 | | | | 198,678 | |
| Asset impairment charges | | | 33,623 | | | | 112,020 | | | | — | | | | 86,213 | | | | 231,856 | |
| Restructuring charges | | | 23,063 | | | | 510 | | | | 13,357 | | | | 3,871 | | | | 40,801 | |
| Loss from continuing operations | | | (60,075 | ) | | | (105,277 | ) | | | (2,243 | ) | | | (114,592 | ) | | | (282,187 | ) |
| Income (loss) from discontinued operations | | | 38 | | | | (1,312 | ) | | | (1,477 | ) | | | 804 | | | | (1,947 | ) |
|
| Net loss | | $ | (60,037 | ) | | $ | (106,589 | ) | | $ | (3,720 | ) | | $ | (113,788 | ) | | $ | (284,134 | ) |
|
| Per share data: | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted | | | | | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | $ | (2.66 | ) | | $ | (4.66 | ) | | $ | (0.10 | ) | | $ | (5.07 | ) | | $ | (12.49 | ) |
| (Loss) income from discontinued operations | | | — | | | | (0.06 | ) | | | (0.07 | ) | | | 0.04 | | | | (0.09 | ) |
|
| Net Loss | | $ | (2.66 | ) | | $ | (4.72 | ) | | $ | (0.17 | ) | | $ | (5.03 | ) | | $ | (12.58 | ) |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended March 31, 2008
| |
| | | First
| | | Second
| | | Third
| | | Fourth
| | | | |
| | | quarter | | | quarter | | | quarter | | | quarter | | | Year | |
| |
| |
| Net Sales | | $ | 125,635 | | | $ | 193,269 | | | $ | 247,912 | | | $ | 193,352 | | | $ | 760,168 | |
| Gross margin | | | 31,949 | | | | 42,351 | | | | 57,319 | | | | 46,872 | | | | 178,491 | |
| Restructuring charges (credits) | | | 26 | | | | 5 | | | | (3 | ) | | | (103 | ) | | | (75 | ) |
| Impairment of investment in cost basis | | | — | | | | — | | | | — | | | | 4,921 | | | | 4,921 | |
| Income (loss) from continuing operations | | | 3,011 | | | | 1,692 | | | | 1,443 | | | | (4,288 | ) | | | 1,858 | |
| (Loss) income from discontinued operations | | | (419 | ) | | | 1,748 | | | | 512 | | | | (40 | ) | | | 1,801 | |
|
| Net income (loss) | | $ | 2,592 | | | $ | 3,440 | | | $ | 1,955 | | | $ | (4,328 | ) | | $ | 3,659 | |
|
| Per share data: | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | 0.09 | | | $ | 0.05 | | | $ | 0.06 | | | $ | (0.18 | ) | | $ | 0.07 | |
| (Loss) income from discontinued operations | | | (0.01 | ) | | | 0.06 | | | | 0.02 | | | | — | | | | 0.06 | |
|
| Net income (loss) | | $ | 0.08 | | | $ | 0.11 | | | $ | 0.08 | | | $ | (0.18 | ) | | $ | 0.13 | |
|
The 2008 third quarter includes amortization of Innovative’s Intangibles of $3.1 million.
73
19.
SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 8,Financing Arrangements, on May 4, 2009 the company terminated its Inventory Financing Agreement with IBM. In addition, on May 5, 2009, the company executed the New Credit Facility for $50 million with Bank of America, N.A.
As discussed in Note 11,Employee Benefit Plans, subsequent to March 31, 2009, the company took loans totaling $12.5 million against the cash surrender value of certain company-owned life insurance policies. The proceeds were used and will be used to satisfy the SERP and additional service credits obligations for two former executives of the company who retired during 2009. The company has no obligation to repay these loans and does not intend to repay them.
74
Schedule II — Valuation and Qualifying Accounts Years ended March 31, 2009, 2008 and 2007
(In thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | Balance at
| | | Charged to
| | | Charged
| | | | | | Balance at
| |
| | | beginning of
| | | costs and
| | | to other
| | | | | | end of
| |
| Classification | | year | | | expenses | | | accounts | | | Deductions | | | year | |
| |
| |
2009 | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 2,392 | | | $ | 2,452 | | | $ | — | | | $ | (1,839 | ) | | $ | 3,005 | |
Inventory valuation reserve | | $ | 1,334 | | | $ | 1,361 | | | $ | — | | | $ | (284 | ) | | $ | 2,411 | |
Restructuring reserves | | $ | 44 | | | $ | 40,801 | | | $ | — | | | $ | (30,918 | ) | | $ | 9,927 | |
| 2008 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,147 | | | $ | 682 | | | $ | 1,411 | (a) | | $ | (848 | ) | | $ | 2,392 | |
| Inventory valuation reserve | | $ | 1,045 | | | $ | 670 | | | $ | — | | | $ | (381 | ) | | $ | 1,334 | |
| Restructuring reserves | | $ | 635 | | | $ | (8 | ) | | $ | — | | | $ | (583 | ) | | $ | 44 | |
| 2007 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 3,272 | | | $ | (1,547 | ) | | $ | — | | | $ | (578 | ) | | $ | 1,147 | |
| Inventory valuation reserve | | $ | 1,617 | | | $ | (103 | ) | | $ | — | | | $ | (469 | ) | | $ | 1,045 | |
| Restructuring reserves | | $ | 6,376 | | | $ | (4,665 | ) | | $ | — | | | $ | (1,076 | ) | | $ | 635 | |
|
|
| | |
(a)Signature | | The $1,411 represents allowance for doubtful accounts acquired in business combinations. |
75
agilysys, inc.
Exhibit Index
| | Title |
| | | |
Exhibit No./s/ James H. Dennedy | | DescriptionPresident, Chief Executive Officer and Director |
| James H. Dennedy | | (Principal Executive Officer) |
| | |
| /s/ Robert R. Ellis | | Senior Vice President, Chief Operating Officer, |
| Robert. R. Ellis | | Chief Financial Officer and Treasurer |
| | (Principal Financial Officer) |
| | |
| /s/ Janine K. Seebeck | | Vice President and Controller |
| Janine K. Seebeck | | (Principal Accounting Officer and Duly Authorized Officer) |
| | |
| /s/ Keith M. Kolerus | | Chairman and Director |
| Keith M. Kolerus | | |
| | 2 | |
| /s/ R. Andrew Cueva | | Director |
| R. Andrew Cueva | | |
Agreement and Plan of Merger by and among Agilysys, Inc., Agilysys NJ, Inc. and Innovative Systems Design, Inc., which is incorporated by reference to Exhibit 10.1 of the company’s Current Report on Form 8-K filed June 1, 2007 (File No.000-05734). | | |
| /s/ Gerald C. Jones | | Director |
| Gerald C. Jones | | |
| | 3 | (a) | |
| /s/ Robert A. Lauer | | Director |
| Robert A. Lauer | | |
| | |
| /s/ Robert G. McCreary, III | | Director |
| Robert G. McCreary, III | | |
| | |
| /s/ John Mutch | | Director |
| John Mutch | | |
| | |
Agilysys, Inc.
Exhibit Index
|
| |
| 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 3.13(a) to the company’sAgilysys, Inc.'s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20072011 (File No. 000-05734). |
| 3(b) | Amended Code of Regulations of Agilysys, Inc., which is incorporated by reference to Exhibit 3(ii) to Agilysys, Inc.'s Current Report on Form 8-K filed January 31, 2012 (File No. 000-05734). |
*10 | (a) | 10(a) | The company’s Executive OfficerCompany's Annual Incentive Plan, which is incorporated herein by reference to Exhibit B10(b) to the company’s definitiveAgilysys, Inc.'s Definitive Proxy Statement on Schedule 14A filed July 8, 2005June 28, 2011 (File No. 000-05734). |
| *10 | (b) | | 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 | (c) | | 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 | (d) | 10(b) | Pioneer-Standard Electronics, Inc. Supplemental Executive Retirement Plan, which is incorporated herein by reference to Exhibit 10(o) to the company’sAgilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2000 (File No. 000-05734). |
| *10 | (f) | 10(c) | Pioneer-Standard Electronics, Inc. Benefit Equalization Plan, which is incorporated herein by reference to Exhibit 10(p) to the company’sAgilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2000 (File No. 000-05734). |
| *10 | (g) | | 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). |
| *10 | (h) | | 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 | (i) | | 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 | (j) | | 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 | (k) | | 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 | (l) | | 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). |
76
| | | | |
Exhibit No. | | Description |
|
|
| *10 | (m) | | 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 | (n) | 10(d) | 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’sAgilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2002 (File No. 000-05734). |
| *10 | (o) | | 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 | (p) | | Amended and Restated Employment Agreement between Agilysys, Inc. and Arthur Rhein, effective December 23, 2005, which is incorporated herein by reference to Exhibit 10.1 to the company’s Current Report on Form 8-K filed December 30, 2005 (File No. 000-05734). |
| *10 | (q) | | Letter dated December 23, 2005 from Charles F. Christ to Arthur Rhein, which is incorporated herein by reference to Exhibit 10.2 to the company’s Current Report on Form 8-K filed December 30, 2005 (File No. 000-05734). |
| *10 | (r) | | 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 | (s) | | 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 | (t) | | 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 | (u) | | 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 | (v) | 10(e) | 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’sAgilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2004 (File No. 000-05734). |
| *10 | (w) | 10(f) | 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’sAgilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2004 (File No. 000-05734). |
| *10 | (x) | 10(g) | Forms of Amended and Restated Indemnification Agreement entered into by and between the companyAgilysys, Inc. and each of its Directors and Executive Officers, which are incorporated herein by reference to Exhibit 99(b) to the company’sAgilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 1994 (File No. 000-05734). |
77
| | | | |
Exhibit No. | | Description |
|
|
| *10 | (y) | 10(h) | Amendment No. 1 to Change of Control Agreement dated June 30, 2003 between Agilysys, Inc. and Martin F. Ellis, effective May 31, 2005, which is incorporated by reference to Exhibit 10.1 to the company’sAgilysys, Inc.'s Current Report on Form 8-K filed June 6, 2005 (File No. 000-05734). |
| *10 | (z) | 10(i) | Non-Competition Agreement between Agilysys, Inc. and Martin F. Ellis, effective May 31, 2005, which is incorporated by reference to Exhibit 10.2 to the company’sAgilysys, Inc.'s Current Report on Form 8-K filed June 6, 2005 (File No. 000-05734). |
| 10 | (aa) | | Asset Purchase Agreement between Agilysys, Inc. and its wholly-owned subsidiary, Agilysys Canada Inc., and Arrow Electronics, Inc. and its wholly-owned subsidiaries, Arrow Electronics Canada Ltd. And Support Net, Inc., which is incorporated by reference to Exhibit 10.1 of the company’s Current Report on Form 8-K filed January 5, 2007 (File No.000-05734) |
| *10 | (bb) | | Amendment and Extension Agreement between Agilysys, Inc. and Arthur Rhein, effective January 28, 2008, which is incorporated by reference to Exhibit 10.1 of the company’s Current Report on Form 8-K filed January 30, 2008 (File No.000-05734). |
| *10 | (cc) | | Amended and Restated Earnout Agreement among Agilysys, Inc., Agilysys NJ, Inc. Innovative Systems Design, Inc. Anthony Mellina, David Vogelzang, and Frank G. Batula, dated as of April 10, 2008, 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, 2008 (File No. 000-05734). |
| *10 | (dd) | | Separation Agreement by and between Agilysys, Inc. and Arthur Rhein dated as of October 20, 2008, which is incorporated herein by reference to Exhibit 10.1 to the company’s Current Report on Form 8-K filed October 24, 2008 (File No.000-05734). |
| *10 | (ee) | | Employment Agreement by and between Agilysys, Inc. and Kenneth J. Kossin effective April 1, 2008, which is incorporated herein by reference to Exhibit 99.1 to the company’s Current Report on Form 8-K filed November 19, 2008 (File No.000-05734). |
| *10 | (ff) | | Amendment to Change of Control Agreement and Non-Competition Agreement by and between Agilysys, Inc. and Robert J. Bailey dated December 17, 2008, which is incorporated herein by reference to Exhibit 10.1 to the company’s Current Report on Form 8-K filed December 23, 2008 (File No. 000-05734). |
| *10 | (gg) | | Amendment to Change of Control Agreement and Non-Competition Agreement by and between Agilysys, Inc. and Peter J. Coleman dated December 17, 2008, which is incorporated herein by reference to Exhibit 10.2 to the company’s Current Report on Form 8-K filed December 23, 2008 (File No. 000-05734). |
| *10 | (hh) | 10(j) | Amendment to Change of Control Agreement and Non-Competition Agreement by and between Agilysys, Inc. and Martin F. Ellis dated December 31, 2008, which is incorporated herein by reference to Exhibit 10.1 to the company’sCompany's Current Report on Form 8-K filed January 7, 2009 (File No. 000-05734). |
| *10 | (ii) | | Amendment to Change of Control Agreement and Non-Competition Agreement by and between Agilysys, Inc. and Richard A. Sayers II dated December 31, 2008, which is incorporated herein by reference to Exhibit 10.2 to the company’s Current Report on Form 8-K filed January 7, 2009 (File No. 000-05734). |
| *10 | (jj) | | Separation Agreement Amendment to Change of Control Agreement and Non-Competition Agreement by and between Agilysys, Inc. and Richard A. Sayers II effective March 15, 2009, which is incorporated herein by reference to Exhibit 10.1 to the company’s Current Report on Form 8-K filed March 12, 2009 (File No. 000-05734). |
| *10 | (kk) | 10(k) | Settlement Agreement by and among Agilysys, Inc. and the Ramius Group dated March 11, 2009, which is incorporated herein by reference to Exhibit 10.1 to the company’sAgilysys, Inc.'s Current Report on Form 8-K filed March 17, 2009 (File No. 000-05734). |
| 10(l) | Loan and Security Agreement among Agilysys, Inc., Agilysys NV, LLC, Agilysys NJ, Inc. and Bank of America, N.A., as agent for the Lenders dated May 5, 2009, which is incorporated herein by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed May 6, 2009 (File No. 000-05734). |
| *10(m) | Employment Agreement by and between Agilysys, Inc. and Kathleen A. Weigand effective March 4, 2009, which is incorporated herein by reference to Exhibit 10(mm) to Agilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2009 (File No. 000-05734). |
| *10(n) | Retention Agreement by and between Agilysys, Inc. and Kathleen A. Weigand effective March 9, 2009, which is incorporated herein by reference to Exhibit 10(nn) to Agilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2009 (File No. 000-05734). |
78
| | | | | |
| Exhibit No. | | Description |
|
| |
| | 10 | (ll) | | Loan and Security Agreement among Agilysys, Inc., Agilysys NV, LLC, Agilysys NJ, Inc. and Bank of America, N.A., as agent for the Lenders dated May 5, 2009, which is incorporated herein by reference to Exhibit 10.1 to the company’s current report on Form 8-K filed May 6, 2009 (File No. 000-05734). |
| | *10 | (mm) | | Employment Agreement by and between Agilysys, Inc. and Kathleen A. Weigand effective March 4, 2009. |
| | *10 | (nn) | | Retention Agreement by and between Agilysys, Inc. and Kathleen A. Weigand effective March 9, 2009. |
| | *10 | (oo) | | Agilysys, Inc. 2006 Stock Incentive Plan, Amended and Restated Effective May 22, 2009 |
| | *10 | (pp) | | Agilysys, Inc. 2010 Performance Share Plan |
| | *10 | (qq) | | Form of Performance Restricted Stock Award Agreement Agilysys, Inc. 2006 Stock Incentive Plan |
| | *10 | (rr) | | Form of Stock Appreciation Right Agreement Agilysys, Inc. 2006 Stock Incentive Plan |
| | 21 | | | Subsidiaries of the Registrant. |
| | 23 | | | Consent of 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. |
| | 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 andPioneer-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). |
|
|
| |
| *10(o) | Agilysys, Inc. 2006 Stock Incentive Plan, as Amended and Restated Effective May 20, 2010, which is incorporated herein by reference to Exhibit 10(mm) to Agilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2010 (File No. 000-05734). |
| *10(p) | Agilysys, Inc. 2011 Stock Incentive Plan, which is incorporated herein by reference to Exhibit 10(a) to Agilysys, Inc.'s Definitive Proxy Statement on Schedule 14A filed June 28, 2011 (File No. 000-05734). |
| *10(q) | Form of Stock Appreciation Right Agreement, which is incorporated herein by reference to Exhibit 10(pp) to Agilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2010 (File No. 000-05734). |
| *10(r) | Form of Directors Restricted Stock Award Agreement, which is incorporated herein by reference to Exhibit 10(qq) to Agilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2010 (File No. 000-05734). |
| *10(s) | Employment Agreement by and between Agilysys, Inc. and Anthony Mellina, effective November 15, 2009, which is incorporated herein by reference to Exhibit 10(b) to Agilysys, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 000-05734). |
| *10(t) | Employment Agreement by and between Agilysys, Inc. and Henry R. Bond, effective October 18, 2010, which is incorporated herein by reference to Exhibit 10(a) to Agilysys, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (File No. 000-05734). |
| *10(u) | Form of Restricted Stock Award Agreement, which is incorporated herein by reference to Exhibit 10(c) to Agilysys, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (File No. 000-05734). |
| 10(v) | Stock and Asset Purchase Agreement among Agilysys Inc., Agilysys Technology Solutions Group, LLC, OnX Acquisition LLC and OnX Enterprise Solutions Limited, dated as of May 28, 2011, which is incorporated herein by reference to Exhibit 2.1 to Agilysys, Inc.'s Current Report on Form 8-K filed May 31, 2011 (File No. 000-05734). |
| *10(w) | Amendment to the Agilysys, Inc. Supplemental Executive Retirement Plan, effective March 25, 2011. |
| *10(x) | Amendment to the Agilysys, Inc. Benefits Equalization Plan, effective March 31, 2011. |
| *10(y) | Separation Agreement by and between Agilysys, Inc. and Martin F. Ellis, dated as of May 31, 2011. |
| *10(z) | Employment Agreement by and between Agilysys, Inc. and Robert R. Ellis, effective October 10, 2011, which is incorporated herein by reference to Exhibit 10(a) to Agilysys, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (File No. 000-05734) . |
| *10(aa) | Employment Agreement by and between Agilysys, Inc. and Kyle C. Badger, effective October 31, 2011, which is incorporated herein by reference to Exhibit 10(b) to Agilysys, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (File No. 000-05734). |
| *10(bb) | Employment Agreement by and between Agilysys, Inc. and James Dennedy, effective April 1, 2012, which incorporated by reference to Exhibit 10(bb) to Agilysys, Inc.'s Annual Report on Form 10-K for the year ended March 31, 2012 (File No. 000-5734). |
| **10(cc) | Employment Agreement by and between Agilysys, Inc. and Janine Seebeck, effective November 7, 2011. |
| **10(dd) | Employment Agreement by and between Agilysys, Inc. and Larry Steinberg, dated April 10, 2012. |
| 10(ee) | Asset Purchase Agreement by and between Agilysys, Inc. and Kyrus Solutions, Inc., dated May 31, 2013, which is incorporated by reference to Exhibit 1.01 to Agilysys, Inc.'s Current Report on Form 8-K filed June 4, 2013 (File No. 000-05734). |
| **21 | Subsidiaries of the Registrant. |
| **23.1 | Consent of Independent Registered Public Accounting Firm. |
| **23.2 | Consent of 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. |
| ***31.3 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
| ***31.4 | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
| 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). |
| |
| * | Denotes a management contract or compensatory plan or arrangement. |
| ** | Previously filed with the Annual Report on Form 10-K filed with the SEC on June 14, 2013, which is being amended hereby. |
| *** | Filed herewith |
| + | Previously furnished with the Annual Report on Form 10-K filed with the SEC on June 14, 2013, which is being amended hereby. |
79
