AGILYSYS, INC. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 0-5734
AGILYSYS, INC.
(Exact name of registrant as specified in its charter)
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Ohio
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34-0907152 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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2255 Glades Road, Suite 301E, Boca Raton, Florida
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33431 |
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(Address of principal executive offices)
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(ZIP Code) |
(561) 999-8700
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of Common Shares of the registrant outstanding as of October 26, 2007 was
26,390,625.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AGILYSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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September 30 |
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September 30 |
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(In thousands, except share and per share data) |
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2007 |
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2006 |
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2007 |
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2006 |
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Net sales |
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Products |
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$ |
161,507 |
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$ |
71,319 |
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$ |
264,909 |
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$ |
154,640 |
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Services |
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34,724 |
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26,615 |
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59,685 |
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50,359 |
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Total net sales |
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196,231 |
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97,934 |
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324,594 |
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204,999 |
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Cost of goods sold |
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Products |
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141,072 |
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67,557 |
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231,518 |
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140,033 |
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Services |
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12,346 |
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5,859 |
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17,947 |
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11,699 |
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Total cost of goods sold |
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153,418 |
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73,416 |
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249,465 |
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151,732 |
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Gross margin |
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42,813 |
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24,518 |
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75,129 |
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53,267 |
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Operating expenses |
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Selling, general and administrative expenses |
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46,358 |
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31,520 |
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83,981 |
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62,884 |
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Restructuring charges (credits) |
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5 |
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(44 |
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31 |
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(78 |
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Operating loss |
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(3,550 |
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(6,958 |
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(8,883 |
) |
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(9,539 |
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Other expenses (income) |
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Other expense (income), net |
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260 |
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83 |
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(920 |
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894 |
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Interest income |
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(3,654 |
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(1,209 |
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(10,651 |
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(2,782 |
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Interest expense |
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204 |
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574 |
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434 |
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2,018 |
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Income (loss) before income taxes |
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(360 |
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(6,406 |
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2,254 |
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(9,669 |
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Income tax benefit |
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1,784 |
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1,598 |
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1,827 |
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2,077 |
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Income (loss) from continuing operations |
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1,424 |
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(4,808 |
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4,081 |
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(7,592 |
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Income from discontinued operations, net of taxes
of $1,107 and $5,579 for the three-months
ended September 30, 2007 and 2006, respectively
and $1,068 and $10,790 for the six-months ended
September 30, 2007, and 2006, respectively |
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2,016 |
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10,300 |
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1,951 |
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19,835 |
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Net income |
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$ |
3,440 |
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$ |
5,492 |
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$ |
6,032 |
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$ |
12,243 |
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Earnings per share basic and diluted |
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Income (loss) from continuing operations |
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$ |
0.05 |
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$ |
(0.16 |
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$ |
0.13 |
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$ |
(0.25 |
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Income from discontinued operations |
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0.06 |
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0.34 |
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0.06 |
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0.65 |
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Net income |
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$ |
0.11 |
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$ |
0.18 |
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$ |
0.19 |
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$ |
0.40 |
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Weighted average shares outstanding |
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Basic |
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31,283,478 |
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30,565,749 |
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31,333,014 |
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30,545,366 |
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Diluted |
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31,915,716 |
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30,565,749 |
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32,106,268 |
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30,545,366 |
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Cash dividends per share |
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$ |
0.03 |
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$ |
0.03 |
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$ |
0.06 |
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$ |
0.06 |
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See accompanying notes to condensed consolidated financial statements.
3
AGILYSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts at September 30, 2007 are unaudited)
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September 30 |
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March 31 |
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(In thousands) |
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2007 |
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2007 |
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ASSETS |
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Current assets
Cash and cash equivalents |
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$ |
167,816 |
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$ |
604,667 |
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Accounts receivable, net |
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172,171 |
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116,735 |
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Inventories, net |
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16,480 |
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9,922 |
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Deferred income taxes |
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3,821 |
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3,092 |
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Prepaid expenses and other current assets |
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5,464 |
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3,494 |
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Assets of discontinued operations current |
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174 |
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206 |
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Total current assets |
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365,926 |
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738,116 |
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Goodwill |
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280,785 |
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93,197 |
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Intangible assets, net |
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29,122 |
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8,716 |
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Investments in affiliated companies |
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6,903 |
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11,231 |
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Other non-current assets |
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25,818 |
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30,701 |
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Property and equipment, net |
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26,231 |
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17,279 |
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Total assets |
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$ |
734,785 |
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$ |
899,240 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
119,771 |
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$ |
84,286 |
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Income taxes payable |
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134,607 |
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Accrued and other current liabilities |
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38,886 |
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32,305 |
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Liabilities of discontinued operations current |
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914 |
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162 |
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Total current liabilities |
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159,571 |
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251,360 |
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Other non-current liabilities |
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28,028 |
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20,813 |
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Liabilities of discontinued operations noncurrent |
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141 |
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223 |
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Shareholders equity |
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Common shares |
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9,366 |
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9,333 |
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Treasury shares |
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(1,397 |
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(10 |
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Capital in excess of stated value |
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48,626 |
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129,750 |
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Retained earnings |
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490,695 |
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489,435 |
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Accumulated other comprehensive loss |
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(245 |
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(1,664 |
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Total shareholders equity |
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547,045 |
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626,844 |
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Total liabilities and shareholders equity |
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$ |
734,785 |
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$ |
899,240 |
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See accompanying notes to condensed consolidated financial statements.
4
AGILYSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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September 30 |
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(In thousands) |
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2007 |
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2006 |
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Operating activities: |
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Net income |
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$ |
6,032 |
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$ |
12,243 |
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Less: Income from discontinued operations |
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(1,951 |
) |
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(19,835 |
) |
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Income (loss) from continuing operations |
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4,081 |
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(7,592 |
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Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used for) operating
activities (net of effects from business acquisitions): |
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Gain on redemption of investment in affiliated company |
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(1,330 |
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Loss on disposal of property and equipment |
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373 |
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Depreciation |
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1,184 |
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819 |
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Amortization |
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4,060 |
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3,268 |
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Deferred income taxes |
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(456 |
) |
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3,464 |
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Stock based compensation |
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3,219 |
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1,413 |
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Excess tax benefit from exercise of stock options |
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(97 |
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(44 |
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Changes in working capital: |
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Accounts receivable |
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26,529 |
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29,345 |
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Inventories |
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3,454 |
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973 |
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Accounts payable |
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(31,746 |
) |
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(14,879 |
) |
Accrued liabilities |
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(16,362 |
) |
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(9,981 |
) |
Income taxes payable |
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(134,671 |
) |
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(687 |
) |
Other changes, net |
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721 |
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(672 |
) |
Other non-cash adjustments |
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(1,096 |
) |
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(289 |
) |
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Total adjustments |
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(146,591 |
) |
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13,103 |
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Net cash (used for) provided by operating activities |
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(142,510 |
) |
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5,511 |
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Investing activities: |
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Proceeds from redemption of investment in affiliated company |
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4,770 |
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Acquisition of businesses, net of cash acquired |
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(212,752 |
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Proceeds from escrow settlement |
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|
423 |
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Purchase of property and equipment |
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(3,702 |
) |
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(1,353 |
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Net cash used for investing activities |
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(211,684 |
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(930 |
) |
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Financing activities: |
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Purchase of treasury shares |
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(86,087 |
) |
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Dividends paid |
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(1,884 |
) |
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(1,833 |
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Issuance of common shares |
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1,447 |
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|
778 |
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Principal payment under long term obligations |
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(171 |
) |
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(59,481 |
) |
Excess tax benefit from exercise of stock options |
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|
97 |
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44 |
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Net cash used for financing activities |
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(86,598 |
) |
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(60,492 |
) |
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Effect of exchange rate changes on cash |
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1,289 |
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|
111 |
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Cash flows used for continuing operations |
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(439,503 |
) |
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(55,800 |
) |
Cash flows of discontinued operations |
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Operating cash flows |
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|
2,652 |
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|
3,620 |
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Investing cash flows |
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|
60 |
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Net decrease in cash |
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(436,851 |
) |
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|
(52,120 |
) |
Cash at beginning of period |
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|
604,667 |
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|
147,850 |
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Cash at end of period |
|
$ |
167,816 |
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|
$ |
95,730 |
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|
See accompanying notes to condensed consolidated financial statements.
5
AGILYSYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands, except per share data)
1. Financial Statement Presentation
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Agilysys, Inc. and its subsidiaries (the company). Investments in affiliated companies are
accounted for by the equity and cost method, as appropriate, under U.S. generally accepted
accounting principles (GAAP). All inter-company accounts have been eliminated. The companys
fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in
March of that year. For example, 2008 refers to the fiscal year ending March 31, 2008.
The unaudited interim financial statements of the company are prepared in accordance with GAAP for
interim financial information and pursuant to the instructions for Form 10-Q under the Securities
Exchange Act of 1934, as amended (the Exchange Act), and Article 10 of Regulation S-X under the
Exchange Act. Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules
and regulations relating to interim financial statements.
The condensed consolidated balance sheet as of September 30, 2007, as well as the condensed
consolidated statements of operations and condensed consolidated statements of cash flows for the
three and six months ended September 30, 2007 and 2006 have been prepared by the company without
audit. However, the financial statements have been prepared on the same basis as those in the
audited annual financial statements. In the opinion of management, all adjustments necessary to
fairly present the results of operations, financial position, and cash flows have been made. Such
adjustments were of a normal recurring nature.
The company experiences a disproportionately large percentage of quarterly sales in the last month
of its fiscal quarters. In addition, the company experiences a seasonal increase in sales during
its fiscal third quarter ending in December. Accordingly, the results of operations for the three
and six months ended September 30, 2007 are not necessarily indicative of the operating results for
the full fiscal year or any future period.
Reclassifications
Certain amounts in the prior periods condensed consolidated financial statements have been
reclassified to conform to the current periods presentation, primarily to reflect the results of
the KeyLink Systems Distribution Business as discontinued operations (see note 4).
2. Summary of Significant Accounting Policies
A detailed description of the companys significant accounting policies can be found in the audited
financial statements for the fiscal year ended March 31, 2007, included in the companys Annual
Report on Form 10-K filed with the Securities and Exchange Commission. There have been no material
changes in the companys significant accounting policies and estimates from those disclosed therein
other than the companys accounting for income tax uncertainties, as discussed below.
6
Recently Issued Accounting Standards.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115 (Statement 159).
Statement 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. Statement 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. Statement 159 is effective for fiscal years beginning after
November 15, 2007, or fiscal 2009 for the company. The company is currently evaluating the impact
that statement 159 will have on its financial position, results of operations and cash flows.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (Statement 157).
Statement 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. Statement 157 applies under those previously issued pronouncements that prescribe fair
value as the relevant measure of value, except SFAS No. 123R and related interpretations and
pronouncements that require or permit measurement similar to fair value but are not intended to
measure fair value. Statement 157 is effective for fiscal years beginning after November 15,
2007, or fiscal 2009 for the company. The company is currently evaluating the impact that
statement 157 will have on its financial position, results of operations and cash flows.
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. As a result of the implementation of FIN 48, the
company recognized approximately $2.9 million increase in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the April 1, 2007 balance of retained earnings.
At April 1, 2007 (the adoption date of FIN 48), the company had a liability for unrecognized tax
benefits of $6.6 million. Approximately $6.2 million of this, if recognized, would favorably
affect the companys effective tax rate.
In connection with business acquisitions made during the current year, the company has assumed
liabilities for unrecognized tax benefits of $1.6 million.
Approximately $1.7 million and $2.8 million of unrecognized tax benefits were recognized during the
three and six months ended September 30, 2007, respectively, for effective settlement with tax authorities
in certain jurisdictions.
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. The company recognized $79,000 of interest and penalty benefit and $34,000 of interest
and penalty expense related to unrecognized tax benefits during the three and six months ended
September 30, 2007. The company had approximately $1.0 million for the payment of interest and
penalties accrued at September 30, 2007.
The company anticipates the completion of a state income tax audit in the next 12 months which
could reduce the accrual for unrecognized tax benefits by $0.2 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.
7
The company is currently under audit by the Internal Revenue Service (IRS) for 2005 and 2006.
The company is also being audited by multiple state taxing jurisdictions. In material
jurisdictions, the company has tax years open back to and including 1998.
3. Recent Acquisitions
In accordance with FASB Statement No. 141, Business Combinations, the company allocates the cost of
its acquisitions to the assets acquired and liabilities assumed based on their estimated fair
values. The excess of the cost over the fair value of the net assets acquired is recorded as
goodwill.
2008 Acquisitions
Innovative Systems Design, Inc.
On July 2, 2007, the company acquired all of the shares of Innovative Systems Design, Inc.
(Innovativ), the largest U.S. commercial reseller of Sun Microsystems servers and storage
products. Accordingly, the results of operations for Innovativ have been included in the
accompanying condensed consolidated financial statements from that date forward. Innovativ is an
integrator and solution provider of servers, enterprise storage management products and
professional services. The acquisition of Innovativ establishes a new and significant relationship
between Sun Microsystems and the company. Innovativ was acquired for a total cost of $108.6
million. Additionally, the company will 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 will be limited to a maximum payout of $90.0 million.
Based on managements preliminary allocation of the acquisition cost to the net assets acquired,
approximately $92.1 million has been assigned to goodwill. However, management is still in the
process of assessing the fair value of certain acquired assets, including intangible assets, and
expects to complete this analysis within one year. Accordingly, allocation of the acquisition cost
is subject to modification in the future. Goodwill resulting from the Innovativ acquisition will
be deductible for income tax purposes.
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 condensed 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 will provide the company a complementary offering that
will extend its reach into new segments of the hospitality market, broaden its customer base and
increase its software application offerings. InfoGenesis was acquired for a total acquisition cost
of $90.7 million.
Based on managements preliminary allocation of the acquisition cost to the net assets acquired,
approximately $75.2 million has been assigned to goodwill. InfoGenesis had intangible assets with
a net book value of $18.3 million as of the acquisition date, which were included in the acquired
net assets to determine goodwill. Management is in the process of evaluating the acquired
intangible assets, including an evaluation of additional intangible assets not previously
recognized by InfoGenesis, and determining the appropriate fair value. Management expects to
complete this analysis within one year. Accordingly, allocation of the acquisition cost is subject
to modification in the future. Goodwill resulting from the InfoGenesis acquisition will not be
deductible for income tax purposes.
8
Pro Forma Disclosure of Financial Information
The following table summarizes the companys unaudited consolidated results of operations as if the
InfoGenesis and Innovativ acquisitions occurred on April 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net Sales |
|
$ |
162,258 |
|
|
$ |
405,528 |
|
|
$ |
360,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(2,926 |
) |
|
|
5,534 |
|
|
|
92 |
|
Net income |
|
|
5,154 |
|
|
|
7,496 |
|
|
|
17,510 |
|
Earnings per share basic |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(0.10 |
) |
|
|
0.18 |
|
|
|
|
|
Net income |
|
|
0.17 |
|
|
|
0.24 |
|
|
|
0.57 |
|
Earnings per share diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(0.10 |
) |
|
|
0.17 |
|
|
|
|
|
Net income |
|
|
0.17 |
|
|
|
0.23 |
|
|
|
0.57 |
|
Pro forma disclosures for the three months ended September 30, 2007 are not presented because the
operating results of InfoGenesis and Innovativ are already recognized in the condensed consolidated
statement of operations.
Stack Computer
On April 2, 2007, the company acquired all of the shares of Stack Computer, Inc. (Stack), a
premier technology integrator with a strong focus on high availability storage infrastructure
solutions. Accordingly, the results of operations for Stack have been included in the accompanying
condensed consolidated financial statements from that date forward. Stacks customers include
leading corporations in the financial services, healthcare and manufacturing industries. 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
$26.9 million.
Based on managements preliminary allocation of the acquisition cost to the net assets acquired,
approximately $25.0 million has been assigned to goodwill. The company is currently assessing the
fair value of the acquired net assets, including intangible assets. Management expects to complete
this analysis within one year. Accordingly, allocation of the acquisition cost is subject to
modification in the future. Goodwill resulting from the Stack acquisition will be deductible for
income tax purposes.
2007 Acquisition
Visual One Systems Corporation
On January 23, 2007, the company acquired all the shares of Visual One Systems Corporation (Visual
One Systems), a leading developer and marketer of Microsoft® Windows® -based
software for the hospitality industry. Accordingly, the results of operations for Visual One
Systems have been included in the accompanying condensed 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 Systems customers include well-known North American and
international full-service hotels, resorts, conference centers and condominiums of all sizes. The
aggregate acquisition cost was $14.3 million. Based on managements allocation of the acquisition
cost to the net assets acquired, approximately $7.0 million has been assigned to goodwill.
Goodwill resulting from the Visual One Systems acquisition will not be deductible for income tax
purposes.
9
During the quarter ended September 30, 2007, 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 6 years using the straight-line amortization method; $0.6 million to non-compete
agreements, which will be amortized over 8 years using the straight-line amortization method; and
$0.5 million to customer relationships, which will be amortized over 5 years using an accelerated
amortization method. The cumulative amortization expense of $0.7 million relating to the
identified intangible assets from the acquisition date through September 30, 2007 was recognized
during the second quarter of 2008.
4. Discontinued Operations
Sale of Assets and Operations of KeyLink Systems Distribution Business
On March 31, 2007, the company sold the assets and operations of its KeyLink Systems Distribution
Business (KSG) for $485.0 million in cash, subject to a working capital adjustment. During the
current quarter, the final working capital adjustment of $10.8 million was settled and paid.
Through the sale of KSG, the company exited all distribution-related businesses and now sells
solely directly to end-user customers. By monetizing the value of KSG, the company significantly
increased its financial flexibility and intends to redeploy 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 have been reported as
a component of discontinued operations.
The income from discontinued operations for the three months ended September 30, 2006 includes KSG
net sales of $287.5 million, pre-tax income of $15.9 million and net income of $10.3 million. The
income from discontinued operations for the six months ended September 30, 2006 includes KSG net
sales of $568.8 million, pre-tax income of $30.6 million and net income of $19.8 million.
Income from discontinued operations for the three and six months ended September 30, 2007 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.
5. Comprehensive Income
Comprehensive income includes net income and other comprehensive income. Other comprehensive
income considers the effects of additional economic events that are not required to be recorded in
determining net income, but rather are reported as a separate component of shareholders equity.
The following table illustrates the components of the companys comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
3,440 |
|
|
$ |
5,492 |
|
|
$ |
6,032 |
|
|
$ |
12,243 |
|
Foreign currency translation adjustment |
|
|
423 |
|
|
|
(323 |
) |
|
|
1,535 |
|
|
|
(861 |
) |
Unrealized gains (losses) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising during the period |
|
|
9 |
|
|
|
94 |
|
|
|
(74 |
) |
|
|
43 |
|
Reclassification to net income |
|
|
(41 |
) |
|
|
(10 |
) |
|
|
(42 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
3,831 |
|
|
$ |
5,253 |
|
|
$ |
7,451 |
|
|
$ |
11,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Restructuring Charges
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 are expected to be substantially complete in 2008.
10
2006 Restructuring Activity
During 2006, the company recorded restructuring charges of $4.2 million to consolidate a portion of
its operations in order to reduce costs and increase operating efficiencies. Costs incurred in
connection with the restructuring comprised one-time termination benefits and other associated
costs resulting from workforce reductions as well as facilities costs relating to the exit of
certain leased facilities. Costs of $2.5 million were incurred to reduce the workforce of KSG,
professional services business and to execute a senior management realignment and consolidation of
responsibilities. Facilities costs of $1.7 million represented the present value of qualifying
exit costs, offset by an estimate for future sublease income.
Approximately $35,000 is expected to be paid during the remainder of 2008 for ongoing facility
obligations. Such facility obligations are expected to continue through 2010.
Reconciliation of Restructuring Liabilities
Following is a reconciliation of the beginning and ending balances of the restructuring
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
and other |
|
|
|
|
|
|
|
|
|
employee |
|
|
|
|
|
|
|
|
|
costs |
|
|
Facilities |
|
|
Total |
|
Balance at April 1, 2007 |
|
$ |
535 |
|
|
$ |
100 |
|
|
$ |
635 |
|
Accretion of lease obligations |
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Payments |
|
|
(252 |
) |
|
|
(17 |
) |
|
|
(269 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
|
283 |
|
|
|
85 |
|
|
|
368 |
|
Accretion of lease obligations |
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Payments |
|
|
(177 |
) |
|
|
(18 |
) |
|
|
(195 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 |
|
$ |
106 |
|
|
$ |
69 |
|
|
$ |
175 |
|
|
|
|
|
|
|
|
|
|
|
Components of Restructuring Credit (Charge)
Following is a reconciliation of the restructuring charge (credit) included in the accompanying
condensed consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Accretion of lease obligations |
|
$ |
2 |
|
|
$ |
85 |
|
|
$ |
4 |
|
|
$ |
198 |
|
Write-off of leasehold improvements and differences between
actual and accrued sub-lease income and common area costs |
|
|
3 |
|
|
|
127 |
|
|
|
27 |
|
|
|
335 |
|
Adjustments to the remaining facility obligations |
|
|
|
|
|
|
(256 |
) |
|
|
|
|
|
|
(611 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges (credits) |
|
$ |
5 |
|
|
$ |
(44 |
) |
|
$ |
31 |
|
|
$ |
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $0.3 million and the $0.6 million adjustments in the prior year represent adjustments for
sub-lease and early termination agreements, with an offset to the restructuring charges (credits) in
the condensed consolidated statement of operations.
7. Stock Based Compensation
The company has a stock incentive plan. Under the plan, the company may grant stock options, stock
appreciation rights, restricted shares, restricted share units, and performance shares for up to
3.2 million shares of common stock. The maximum aggregate number of restricted shares, restricted
share units and performance shares that may be granted under the plan is 1.6 million. For stock
option awards, the
11
exercise price must be set at least equal to the market price of the companys
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 September 30, 2007, there were no stock appreciation rights or restricted share units awarded
from the plan.
Stock Options
Compensation expense charged to operations during the six months ended September 30, 2007 and 2006
relating to stock options was $1.7 million and $1.2 million, respectively. The total income tax
benefit recognized in operations during the six months ended September 30, 2007 and 2006 was $0.1
million and $0.3 million, respectively. As of September 30, 2007, total unrecognized stock based
compensation expense related to non-vested stock options was $3.5 million, which is expected to be
recognized over a weighted-average period of 14 months.
The following table summarizes stock option activity during the six months ended September 30, 2007
for stock options awarded by the company under the stock incentive plan and prior plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
Number of |
|
|
exercise |
|
|
|
shares |
|
|
price |
|
Outstanding at April 1, 2007 |
|
|
3,394,748 |
|
|
$ |
13.61 |
|
Granted |
|
|
280,000 |
|
|
|
22.21 |
|
Exercised |
|
|
(108,038 |
) |
|
|
13.38 |
|
Cancelled |
|
|
(20,000 |
) |
|
|
20.62 |
|
Expired |
|
|
(11,800 |
) |
|
|
14.57 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
3,534,910 |
|
|
$ |
14.26 |
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007 |
|
|
2,516,306 |
|
|
$ |
13.06 |
|
|
|
|
|
|
|
|
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 grant
during the six months ended September 30, 2007:
|
|
|
|
|
Dividend yield |
|
|
0.7 |
% |
Risk-free interest rate |
|
|
4.9 |
% |
Expected life |
|
6.0 years |
Expected volatility |
|
|
43.8 |
% |
The dividend yield reflects the companys 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 options expected term. The expected term reflects historical exercise patterns.
The expected volatility is based on historical volatility of the companys common stock. The fair
market value of options granted during the six-months ended September 30, 2007 was $10.27.
12
The following table summarizes the status of stock options outstanding at September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
average |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
average |
|
remaining |
|
|
|
|
|
average |
Exercise price range |
|
Number |
|
exercise price |
|
contractual life |
|
Number |
|
exercise price |
$6.63 $8.29
|
|
|
138,400 |
|
|
$ |
7.63 |
|
|
|
5.3 |
|
|
|
138,400 |
|
|
$ |
7.63 |
|
$8.29 $9.95
|
|
|
230,876 |
|
|
|
8.72 |
|
|
|
3.3 |
|
|
|
212,376 |
|
|
|
8.71 |
|
$9.95 $11.61
|
|
|
30,000 |
|
|
|
11.17 |
|
|
|
3.8 |
|
|
|
30,000 |
|
|
|
11.17 |
|
$11.61 $13.26
|
|
|
364,800 |
|
|
|
12.82 |
|
|
|
2.9 |
|
|
|
356,700 |
|
|
|
12.83 |
|
$13.26 $14.92
|
|
|
1,602,500 |
|
|
|
13.88 |
|
|
|
5.7 |
|
|
|
1,602,500 |
|
|
|
13.88 |
|
$14.92 $16.58
|
|
|
903,334 |
|
|
|
15.70 |
|
|
|
8.7 |
|
|
|
176,330 |
|
|
|
15.82 |
|
$16.58 $22.21
|
|
|
265,000 |
|
|
|
22.21 |
|
|
|
9.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,534,910 |
|
|
|
|
|
|
|
|
|
|
|
2,516,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Shares
Compensation expense related to non-vested share awards is recognized over the restriction period.
Compensation expense charged to operations for non-vested share awards was $1.1 million and $57,000
for the six months ended September 30, 2007 and 2006, respectively. As of September 30, 2007,
there was $1.4 million of total unrecognized compensation cost related to non-vested share awards,
which is expected to be recognized over a weighted-average period of 24 months.
The following table summarizes non-vested share activity during the six-months ended September 30,
2007 for restricted shares awarded by the company under the stock incentive plan and prior plans.
|
|
|
|
|
Outstanding at April 1, 2007 |
|
|
18,750 |
|
Granted |
|
|
108,000 |
|
Vested |
|
|
(38,250 |
) |
Forfeited |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
88,500 |
|
|
|
|
|
The fair market value of non-vested shares is determined based on the closing price of the
companys shares on the grant date.
Performance Shares
Compensation expense charged to operations for performance share awards was $0.4 million for the
six months ended September 30, 2007. As of September 30, 2007, there was $2.9 million of total
unrecognized compensation cost related to performance share awards, which is expected to be
recognized over a weighted-average period of 30 months.
The following table summarizes performance share activity during the six months ended September 30,
2007:
|
|
|
|
|
Outstanding at April 1, 2007 |
|
|
|
|
Granted |
|
|
152,000 |
|
Vested |
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
152,000 |
|
|
|
|
|
13
The company granted shares to certain executives 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
price of the companys 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.
8. Income Taxes
Income tax expense for the three and six months ended September 30, 2007 and 2006 is based on the
companys estimate of the effective tax rate expected to be applicable for the full year. The tax
effect of discrete items is recognized in the period in which they occur as an adjustment to the
income tax provision rather than included in the estimated annual effective income tax rate.
The companys effective income tax rate for continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Effective income tax rate |
|
|
(35.8 |
)% |
|
|
(25.0 |
)% |
|
|
44.5 |
% |
|
|
(21.5 |
)% |
The effective income tax rates (expense and benefit) for continuing operations differ from the
statutory rate principally because of the effects of equity in undistributed earnings and losses of
an equity investee, limitations on deductibility for meals and entertainment costs, and
compensation associated with incentive stock option awards.
The income tax provision for the three and six months ended September 30, 2007 include tax benefits
of $1.7 million and $2.8 million, respectively, for the recognition of previously unrecognized
income tax benefits associated with the effective settlement with tax authorities in certain
jurisdictions.
9. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations basic and diluted |
|
$ |
1,424 |
|
|
$ |
(4,808 |
) |
|
$ |
4,081 |
|
|
$ |
(7,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
31,283 |
|
|
|
30,566 |
|
|
|
31,333 |
|
|
|
30,545 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and unvested restricted stock |
|
|
632 |
|
|
|
|
|
|
|
773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
31,915 |
|
|
|
30,566 |
|
|
|
32,106 |
|
|
|
30,545 |
|
Earnings (loss) per share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
$ |
0.05 |
|
|
$ |
(0.16 |
) |
|
$ |
0.13 |
|
|
$ |
(0.25 |
) |
For the three and six months ended September 30, 2007 and 2006, options on 0.3 million and 0.4
million shares, respectively, of common stock were not included in computing diluted earnings per
share because their effects were anti-dilutive.
See Note 13 for a discussion of the companys repurchase of common shares, which will continue to
have an impact on weighted average shares outstanding in future periods.
14
10. 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 companys 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.
11. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill during the six-months ended September 30, 2007 are as
follows:
|
|
|
|
|
Balance at April 1, 2007 |
|
$ |
93,197 |
|
Goodwill acquired Innovativ |
|
|
92,136 |
|
Goodwill acquired InfoGenesis |
|
|
75,153 |
|
Goodwill acquired Stack |
|
|
25,033 |
|
Goodwill adjustment Visual One |
|
|
(4,905 |
) |
Impact of foreign currency translation |
|
|
171 |
|
|
|
|
|
Balance at September 30, 2007 |
|
$ |
280,785 |
|
|
|
|
|
Intangible Assets
The following table summarizes the companys intangible assets at September 30, 2007 and March 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
March 31, 2007 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
|
amount |
|
|
amortization |
|
|
amount |
|
|
amount |
|
|
amortization |
|
|
amount |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
19,676 |
|
|
$ |
(9,724 |
) |
|
$ |
9,952 |
|
|
$ |
14,700 |
|
|
$ |
(8,324 |
) |
|
$ |
6,376 |
|
Non-competition agreements |
|
|
1,910 |
|
|
|
(757 |
) |
|
|
1,153 |
|
|
|
1,310 |
|
|
|
(587 |
) |
|
|
723 |
|
Developed technology |
|
|
8,285 |
|
|
|
(1,968 |
) |
|
|
6,317 |
|
|
|
1,470 |
|
|
|
(753 |
) |
|
|
717 |
|
Patented technology |
|
|
80 |
|
|
|
(80 |
) |
|
|
|
|
|
|
80 |
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,951 |
|
|
|
(12,529 |
) |
|
|
17,422 |
|
|
|
17,560 |
|
|
|
(9,744 |
) |
|
|
7,816 |
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
11,700 |
|
|
|
N/A |
|
|
|
11,700 |
|
|
|
900 |
|
|
|
N/A |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
41,651 |
|
|
$ |
(12,529 |
) |
|
$ |
29,122 |
|
|
$ |
18,460 |
|
|
$ |
(9,744 |
) |
|
$ |
8,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships are being amortized over estimated useful lives between four and ten years;
non-competition agreements are being amortized over estimated useful lives between four and eight
years; developed technology is being amortized over estimated useful lives between one and eight
years; and patented technology was amortized over an estimated useful life of three years.
Amortization expense relating to intangible assets for the six months ended September 30, 2007 and
2006 was $2.8 million and $1.6 million, respectively.
15
The estimated amortization expense relating to intangible assets for the remainder of fiscal year
2008 and each of the five succeeding fiscal years is as follows:
|
|
|
|
|
|
|
Amount |
|
Year ending March 31 |
|
|
|
|
2008 (remaining six months) |
|
$ |
3,000 |
|
2009 |
|
|
4,500 |
|
2010 |
|
|
2,700 |
|
2011 |
|
|
2,400 |
|
2012 |
|
|
1,800 |
|
2013 |
|
|
1,500 |
|
|
|
|
|
Total estimated amortization expense |
|
$ |
15,900 |
|
|
|
|
|
12. Investments
The following table summarizes the companys investments in affiliated companies at September 30,
2007 and March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
March 31 |
|
|
|
2007 |
|
|
2007 |
|
Magirus AG |
|
$ |
6,903 |
|
|
$ |
7,788 |
|
Other non-marketable equity securities |
|
|
|
|
|
|
3,443 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,903 |
|
|
$ |
11,231 |
|
|
|
|
|
|
|
|
The other non-marketable equity securities consisted of capital stock in a privately held company
where a market value was not readily available and the company did not exercise significant
influence over its operating and financial policies. As such, the investment was stated at cost.
During the six months ended September 30, 2007, the investment 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 condensed consolidated
statement of operations.
13. Capital Stock
In August 2007, in fulfillment of the companys 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 companys common shares. On September 19, 2007, the company accepted for purchase 4,653,287 of
the companys common shares at a purchase price of $18.50 per share, 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 with Rule 10b5-1
under the Securities Exchange Act of 1934, as amended, which provides for the purchase of up to
2,000,000 of the companys common shares. In accordance with Securities and Exchange Commission
rules, purchases under the plan did not begin until at least 10 business days after the termination
of the tender offer. As of October 26, 2007, 445,602 common shares have been repurchased for total
cost of approximately $7.6 million under the plan, excluding related transaction costs. The
company anticipates that the plan will be in place for up to one year following the expiration of
the tender offer.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which management believes is relevant to
an assessment and understanding of Agilysys, Inc.s consolidated results of operations and
financial condition. The discussion should be read in conjunction with the condensed consolidated
financial statements and related notes that appear elsewhere in this document as well as the
companys Annual Report on Form 10-K for the year ended March 31, 2007. Information set forth in
Managements Discussion and Analysis of Financial Condition and Results of Operations may include
forward-looking statements that involve risks and uncertainties. Many factors could cause actual
results to differ materially from those contained in the forward-looking statements. See
Forward-Looking Information and Risk Factors included elsewhere in this filing for additional
information concerning these items. Table amounts are in thousands.
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 uses technologyincluding hardware, software and servicesto 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 Boca Raton, Florida, Agilysys operates extensively
throughout North America, with additional sales offices in the United Kingdom and China.
As disclosed in previous filings, the company sold its KeyLink Systems Distribution business
(KSG) in March 2007 and now operates solely as an IT solutions provider. The following long-term
goals were established by the company with the divestiture of KSG:
|
|
Grow sales to $1 billion in two years and to $1.5 billion in three years. Much of the
growth will come from acquisitions. |
|
|
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%. |
Since the divestiture of KSG, the company has completed several acquisitions as it looks to achieve
its long-term goals. For the quarter ended September 30, 2007, recently acquired companies
contributed $80.0 million to the year-over-year increase in net sales, $16.4 million to the
increase in gross margin, and $2.2 million to the improvement in operating results. The companys
current position, strong cash balance and successful integration of recent acquisitions will enable
us to continue executing towards our long-term goals.
For financial reporting purposes, the prior period operating results of KSG have been classified as
discontinued operations. Accordingly, the discussion and analysis presented below, including the
comparison to prior periods, reflects the continuing business of Agilysys.
The following discussion of the companys results of operations and financial condition is intended
to provide information that will assist in understanding the companys financial statements,
including key changes in financial statement components and the primary factors that accounted for
those changes.
17
Results of Operations Quarter to Date
Net Sales and Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
161,507 |
|
|
$ |
71,319 |
|
|
$ |
90,188 |
|
|
|
126.5 |
% |
Service |
|
|
34,724 |
|
|
|
26,615 |
|
|
|
8,109 |
|
|
|
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
196,231 |
|
|
|
97,934 |
|
|
|
98,297 |
|
|
|
100.4 |
|
Cost of goods sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
141,072 |
|
|
|
67,557 |
|
|
|
73,515 |
|
|
|
108.8 |
|
Service |
|
|
12,346 |
|
|
|
5,859 |
|
|
|
6,487 |
|
|
|
110.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
153,418 |
|
|
|
73,416 |
|
|
|
80,002 |
|
|
|
109.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
42,813 |
|
|
|
24,518 |
|
|
|
18,295 |
|
|
|
74.6 |
|
Gross margin percentage |
|
|
21.8 |
% |
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
46,358 |
|
|
|
31,520 |
|
|
|
14,838 |
|
|
|
47.1 |
|
Restructuring charges (credits) |
|
|
5 |
|
|
|
(44 |
) |
|
|
49 |
|
|
|
111.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(3,550 |
) |
|
$ |
(6,958 |
) |
|
$ |
3,408 |
|
|
|
49.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss margin |
|
|
(1.8 |
%) |
|
|
(7.1 |
%) |
|
|
|
|
|
|
|
|
Net Sales. The $98.3 million increase in net sales was principally due to incremental sales from
the companys recent acquisitions, which accounted for $80.0 million, or 81.4%, of the increase.
In particular, sales resulting from the acquisition of Innovative Systems Design, Inc.
(Innovativ) accounted for $51.7 million of the $80.0 million incremental sales achieved during
the quarter. The acquisition of Innovativ expanded the companys IT solutions offerings to provide
for the sale of Sun Microsystems server and storage products, which were not offered by the company
prior to the acquisition. The balance of the $80.0 million incremental sales resulted from the
companys recent acquisitions of InfoGenesis, Stack Computer, and Visual One Systems.
Aside from the $80.0 million incremental sales from the companys recent acquisitions, net sales
from the companys existing business increased $18.3 million, or 18.7%, compared with last year.
The year-over-year increase in existing business net sales was principally due to higher volume of
hardware sales.
Sales by product category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Hardware |
|
$ |
146,924 |
|
|
$ |
65,028 |
|
|
$ |
81,896 |
|
|
|
125.9 |
% |
Software |
|
|
14,583 |
|
|
|
6,291 |
|
|
|
8,292 |
|
|
|
131.8 |
|
Services |
|
|
34,724 |
|
|
|
26,615 |
|
|
|
8,109 |
|
|
|
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
196,231 |
|
|
$ |
97,934 |
|
|
$ |
98,297 |
|
|
|
100.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $81.9 million increase in hardware sales, $65.5 million was the result of incremental sales
from the companys recent acquisitions. Hardware sales of Sun Microsystems products resulting from
the companys acquisition of Innovativ accounted for approximately 75.0% of the $65.5 million
incremental sales.
Aside from the $65.5 million incremental hardware sales from the companys recent acquisitions,
hardware sales from the companys existing business increased $16.4 million, or 25.2%, compared
with last year. The increase in hardware sales from the companys existing business was mainly due
to higher sales of server technology.
18
Of the $8.3 million in software sales, $4.6 million was the result of incremental sales from the
companys recent acquisitions. The remaining $3.7 million increase in software sales was mainly
due to higher sales of remarketed software offerings from the companys existing business.
The $8.1 million increase in service revenue was the result of incremental sales from the companys
recent acquisitions.
The company generally experiences a seasonal increase in sales during its fiscal third quarter
ending in December. Accordingly, the results of operations for the quarter ended September 30, 2007
are not necessarily indicative of the operating results for the full year 2008.
Gross Margin. The $18.3 million increase in gross margin was due to the corresponding increase in
net sales. The decline of 3.2 percentage points in gross margin percentage was principally due to
a higher mix of hardware sales in the companys total sales for the current quarter compared with
the same period last year. Hardware sales traditionally carry a lower gross margin percentage
compared to sales of software and services.
Operating Expenses. The companys operating expenses principally consist of selling, general, and
administrative (SG&A) expenses. The $14.8 million increase in SG&A expenses was mainly due to
incremental operating expenses from the companys recent acquisitions, which contributed $14.3
million of the increase.
Other (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Favorable |
|
|
|
September 30 |
|
|
(Unfavorable) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
260 |
|
|
$ |
83 |
|
|
$ |
(177 |
) |
|
|
(213.2 |
)% |
Interest income |
|
|
(3,654 |
) |
|
|
(1,209 |
) |
|
|
2,445 |
|
|
|
202.2 |
|
Interest expense |
|
|
204 |
|
|
|
574 |
|
|
|
370 |
|
|
|
64.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense |
|
$ |
(3,190 |
) |
|
$ |
(552 |
) |
|
$ |
2,638 |
|
|
|
477.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and expense. The 202.2% favorable change in interest income was due to higher
average cash and cash equivalent balance in the current quarter compared with the same period last
year, as the yield earned on the companys short-term investments remained relatively consistent
year-over-year. The higher cash and cash equivalent balance was driven by the sale of KSG.
The 64.5% favorable change in interest expense was due to lower average debt levels in the current
quarter compared with the same period last year. Last year, $59.4 million in Senior Notes were
outstanding until they matured in August 2006. The Senior Notes paid interest at an annual
percentage rate of 9.5% through the date of their retirement.
Income Tax Expense
The effective tax rate for continuing operations for the three months ended September 30, 2007 was
(35.8)% compared with (25.0)% for the second quarter in the prior year. The effective income tax
rates for continuing operations differ from the statutory rate principally because of the effects
of equity in undistributed earnings and losses of an equity investee, limitations on deductibility
for meals and entertainment costs, and compensation associated with incentive stock option awards.
The income tax provision for the three months ended September 30, 2007 includes a tax benefit of
$1.7 million for the recognition of previously unrecognized income tax benefits associated with the
effective settlement with tax authorities in certain jurisdictions.
19
Results of Operations Year to Date
Net Sales and Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
264,909 |
|
|
$ |
154,640 |
|
|
$ |
110,269 |
|
|
|
71.3 |
% |
Service |
|
|
59,685 |
|
|
|
50,359 |
|
|
|
9,326 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
324,594 |
|
|
|
204,999 |
|
|
|
119,595 |
|
|
|
58.3 |
|
Cost of goods sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
231,518 |
|
|
|
140,033 |
|
|
|
91,485 |
|
|
|
65.3 |
|
Service |
|
|
17,947 |
|
|
|
11,699 |
|
|
|
6,248 |
|
|
|
53.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
249,465 |
|
|
|
151,732 |
|
|
|
97,733 |
|
|
|
64.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
75,129 |
|
|
|
53,267 |
|
|
|
21,862 |
|
|
|
41.0 |
|
Gross margin percentage |
|
|
23.1 |
% |
|
|
26.0 |
% |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
83,981 |
|
|
|
62,884 |
|
|
|
21,097 |
|
|
|
33.5 |
|
Restructuring charges (credits) |
|
|
31 |
|
|
|
(78 |
) |
|
|
109 |
|
|
|
139.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(8,883 |
) |
|
$ |
(9,539 |
) |
|
$ |
656 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss margin |
|
|
(2.7 |
)% |
|
|
(4.7 |
)% |
|
|
|
|
|
|
|
|
Net Sales. The $119.6 million increase in net sales was principally due to incremental sales from
the companys recent acquisitions, which accounted for $92.0 million, or 76.9%, of the increase.
Consistent with the companys quarter-to-date operating results, sales resulting from the
acquisition of Innovativ accounted for a significant portion of incremental sales achieved during
the six months ended September 30, 2007, or $51.7 million. As previously noted, the acquisition of
Innovativ expanded the companys IT solutions offerings to provide for the sale of Sun Microsystems
server and storage products, which were not offered by the company prior to the acquisition of
Innovativ. The balance of the $92.0 million incremental sales resulted from the companys recent
acquisitions of InfoGenesis, Stack Computer, and Visual One Systems.
Aside from the $92.0 million incremental sales from the companys recent acquisitions, net sales
from the companys existing business increased $27.6 million, or 13.5%, compared with last year.
The year-over-year increase in existing business net sales was principally due to higher volume of
hardware sales.
Sales by product category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Hardware |
|
$ |
237,948 |
|
|
$ |
140,781 |
|
|
$ |
97,167 |
|
|
|
69.0 |
% |
Software |
|
|
26,961 |
|
|
|
13,859 |
|
|
|
13,102 |
|
|
|
94.5 |
|
Services |
|
|
59,685 |
|
|
|
50,359 |
|
|
|
9,326 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
324,594 |
|
|
$ |
204,999 |
|
|
$ |
119,595 |
|
|
|
58.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $97.2 million increase in hardware sales, $69.0 million was the result of incremental sales
from the companys recent acquisitions. Hardware sales of Sun Microsystems products resulting from
the companys acquisition of Innovativ accounted for approximately 70.2% of the $69.0 million
incremental sales.
Aside from the $69.0 million incremental hardware sales from the companys recent acquisitions,
hardware sales from the companys existing business increased $28.2 million, or 20.0%, compared
with last year. The increase in hardware sales from the companys existing business was mainly due
to higher sales of midrange server and storage technologies.
20
Of the $13.1 million increase in software sales, $5.9 million was the result of incremental sales
from the companys recent acquisitions. The remaining $7.2 million increase in software sales was
mainly due to higher sales of remarketed software offerings from the companys existing business.
The $9.3 million increase in service revenue was the result of incremental sales from the companys
recent acquisitions.
The company generally experiences a seasonal increase in sales during its fiscal third quarter
ending in December. Accordingly, the results of operations for the quarter ended September 30, 2007
are not necessarily indicative of the operating results for the full year 2008.
Gross Margin. The $21.9 million increase in gross margin was due to the corresponding increase in
net sales. Consistent with the companys quarter-to-date operating results, the decline of 2.9
percentage points in gross margin percentage was principally due to a higher mix of hardware sales
in the companys total sales compared with the prior year. Hardware sales traditionally carry a
lower gross margin percentage compared to sales of software and services.
Operating Expenses. The companys operating expenses principally consist of SG&A expenses. The
$21.1 million increase in SG&A expenses was mainly due to incremental operating expenses from the
companys recent acquisitions, which contributed $18.2 million, or 86.3%, of the increase.
Other (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Favorable |
|
|
|
September 30 |
|
|
(Unfavorable) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(920 |
) |
|
$ |
894 |
|
|
$ |
1,814 |
|
|
|
202.9 |
% |
Interest income |
|
|
(10,651 |
) |
|
|
(2,782 |
) |
|
|
7,869 |
|
|
|
282.9 |
|
Interest expense |
|
|
434 |
|
|
|
2,018 |
|
|
|
1,584 |
|
|
|
78.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense |
|
$ |
(11,137 |
) |
|
$ |
130 |
|
|
$ |
11,267 |
|
|
|
8,666.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net. The 202.9% favorable change in other (income) expense, net was
principally due to a $1.4 million gain recognized on the redemption of the companys investment in
an affiliated company in the first quarter of the current year. The investment, which was
accounted for using the cost method, had a carrying value of $3.4 million and was redeemed by the
affiliated company for $4.8 million, resulting in the pre-tax gain. Additionally, the company
recognized a $0.6 million increase in foreign currency transaction gains during the current year
compared with last year due to changes in exchange rates. These favorable changes were principally
offset by a year-over-year decline in earnings from the companys equity method investment.
Interest income and expense. The 282.9% favorable change in interest income was due to higher
average cash and cash equivalent balance in the current year compared with last year, as the yield
earned on the companys short-term investments remained relatively consistent year-over-year. The
higher cash and cash equivalent balance was driven by the sale of KSG for $485.0 million on March
31, 2007.
The 78.5% favorable change in interest expense was due to lower average debt levels in the current
year compared with last year. Last year, $59.4 million in Senior Notes were outstanding until they
matured in August 2006. The Senior Notes paid interest at an annual percentage rate of 9.5%
through their maturity date.
21
Income Tax Expense
The effective tax rate for continuing operations for the six months ended September 30, 2007 was
44.5% compared with (21.5)% for the second quarter in the prior year. The effective income tax
rates for continuing operations differ from the statutory rate principally because of the effects
of equity in undistributed earnings and losses of an equity investee, limitations on deductibility
for meals and entertainment costs, and compensation associated with incentive stock option awards.
The income tax provision for the six months ended September 30, 2007 includes a tax benefit of $2.8
million for the recognition of previously unrecognized income tax benefits associated with the
effective settlement with tax authorities in certain jurisdictions.
Capital Stock
In August 2007, in fulfillment of the companys 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 companys common shares. On September 19, 2007, the company accepted for purchase 4,653,287 of
the companys common shares at a purchase price of $18.50 per share, for a total cost of
approximately $86.1 million, excluding related transaction costs. The tender offer was funded
through cash on hand.
In September 2007, the company entered into a written trading plan that complies with Rule 10b5-1
under the Securities Exchange Act of 1934, as amended, which provides for the purchase of up to
2,000,000 of the companys common shares. In accordance with Securities and Exchange Commission
rules, purchases under the plan did not begin until at least 10 business days after the termination
of the tender offer. As of October 26, 2007, 445,602 common shares have been repurchased for total
cost of approximately $7.6 million under the plan, excluding related transaction costs. The
company anticipates that the plan will be in place for up to one year following the expiration of
the tender offer.
Business Combinations
Innovative Systems Design, Inc.
On July 2, 2007, the company acquired all of the shares of Innovativ, the largest U.S. commercial
reseller of Sun Microsystems servers and storage products. Innovativ is an integrator and solution
provider of servers, enterprise storage management products and professional services. The
acquisition of Innovativ establishes a new and significant relationship between Sun Microsystems
and Agilysys. Innovativ was acquired for a total cost of $108.6 million. Additionally, the
company will 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 will be limited to a maximum
payout of $90.0 million.
Based on managements preliminary allocation of the acquisition cost to the net assets acquired,
approximately $92.1 million has been assigned to goodwill. However, management is still in the
process of assessing the fair value of certain acquired assets, including intangible assets. As
such, the amount of acquisition cost allocated to goodwill will change in the near future.
Goodwill resulting from the Innovativ acquisition will be deductible for income tax purposes.
InfoGenesis, Inc.
On June 18, 2007, the company acquired all of the shares of InfoGenesis, an independent software
vendor and solution provider to the hospitality market. 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 will provide the company a complementary offering
that will extend its reach into new segments of the hospitality market, broaden its customer base and increase its software application
offerings. InfoGenesis was acquired for a total acquisition cost of $90.7 million.
22
Based on managements preliminary allocation of the acquisition cost to the net assets acquired,
approximately $75.2 million has been assigned to goodwill. InfoGenesis had intangible assets with
a net book value of $18.3 million as of the acquisition date, which were included in the acquired
net assets to determine goodwill. Management is in the process of evaluating the acquired
intangible assets, including an evaluation of additional intangible assets not previously
recognized by InfoGenesis, and determining the appropriate fair value. Management expects to
complete this analysis within one year. Accordingly, allocation of the acquisition cost is subject
to modification in the future. Goodwill resulting from the InfoGenesis acquisition will not be
deductible for income tax purposes.
Stack Computer
On April 2, 2007, the company acquired all of the shares of Stack. Stacks customers include
leading corporations in the financial services, healthcare and manufacturing industries. 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
$26.9 million.
Based on managements preliminary allocation of the acquisition cost to the net assets acquired,
approximately $25.0 million has been assigned to goodwill. The company is currently assessing the
fair value of the acquired net assets, including intangible assets. Management expects to complete
this analysis within one year. Accordingly, allocation of the acquisition cost is subject to
modification in the future. Goodwill resulting from the Stack acquisition will be deductible for
income tax purposes.
Visual One Systems Corporation
On January 23, 2007, the company acquired all the shares of Visual One Systems, a leading developer
and marketer of Microsoft® Windows®-based software for the hospitality
industry. The acquisition provides Agilysys 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 Systems customers include well-known North American and international full-service
hotels, resorts, conference centers and condominiums of all sizes. The aggregate acquisition cost
was $14.3 million. Based on managements allocation of the acquisition cost to the net assets
acquired, approximately $7.0 million has been assigned to goodwill. Goodwill resulting from the
Visual One Systems acquisition will not be deductible for income tax purposes.
During the quarter ended September 30, 2007, 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 6 years using the straight-line method; $0.6 million to non-compete agreements,
which will be amortized over 8 years using the straight-line amortization method; and $0.5 million
to customer relationships, which will be amortized over 5 years using an accelerated amortization
method. The cumulative amortization expense of $0.7 million relating to the identified intangible
assets from the acquisition date through September 30, 2007 was recognized during the second
quarter of 2008.
Discontinued Operations
On March 31, 2007, the company sold the assets and operations of KSG for $485.0 million in cash,
subject to a working capital adjustment. During the second quarter of 2008, the final working
capital adjustment of $10.8 million was settled and paid. Through the sale of KSG, the company
exited all distribution-related business and exclusively sells directly to end-user customers. By
monetizing the value of KSG, the company significantly increased its financial flexibility to
accelerate growth both organically and through acquisitions. The sale of the KSG represented a disposal of a component of
an entity. As such, the operating results of KSG have been reported as a component of discontinued
operations.
23
The income from discontinued operations for the three months ended September 30, 2006 includes KSG
net sales of $287.5 million, pre-tax income of $15.9 million and net income of $10.3 million. The
income from discontinued operations for the six months ended September 30, 2006 includes KSG net
sales of $568.8 million, pre-tax income of $30.6 million and net income of $19.8 million.
Income from discontinued operations for the three and six months ended September 30, 2007 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.
Restructuring Charges
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 will be substantially complete in 2008.
2006 Restructuring Activity
During 2006, the company recorded restructuring charges of $4.2 million to consolidate a portion of
its operations in order to reduce costs and increase operating efficiencies. Costs incurred in
connection with the restructuring comprised one-time termination benefits and other associated
costs resulting from workforce reductions as well as facilities costs relating to the exit of
certain leased facilities. Facilities costs represented the present value of qualifying exit costs,
offset by an estimate for future sublease income. As part of the restructuring effort, the company
incurred costs of $1.7 million to shut-down certain leased facilities. The remaining $2.5 million
of the restructuring charge was incurred to reduce the workforce of KSG, professional services
business and to execute a senior management realignment and consolidation of responsibilities. As
of September 30, 2007, the remaining obligation from the 2006 restructuring activity was $69,000
and related to facility obligations. Payment of facility obligations is expected to continue
through 2010.
Investment in Affiliated Company
During the six months ended September 30, 2007, the companys investment in a privately-held
affiliated company was redeemed by the affiliated company for $4.8 million in cash. The
investment, which was accounted for using the cost method, had a carrying value of $3.4 million.
Accordingly, the company recognized a $1.4 million pre-tax gain on redemption of the investment in
the first quarter of 2008.
Recently Issued Accounting Pronouncements
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115 (Statement 159).
Statement 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. Statement 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. Statement 159 is effective for fiscal years beginning after
November 15, 2007, or fiscal 2009 for the company. The company is currently evaluating the impact
that statement 159 will have on its financial position, results of operations and cash flows.
24
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (Statement 157).
Statement 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. Statement 157 applies under those previously issued pronouncements that prescribe fair
value as the relevant measure of value, except SFAS No. 123R and related interpretations and
pronouncements that require or permit measurement similar to fair value but are not intended to
measure fair value. Statement 157 is effective for fiscal years beginning after November 15, 2007,
or fiscal 2009 for the company. The company is currently evaluating the impact that statement 157
will have on its financial position, results of operations and cash flows.
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. As a result of the implementation of FIN 48, the
company recognized approximately $2.9 million increase in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the April 1, 2007 balance of retained earnings.
At April 1, 2007 (the adoption date of FIN 48), the company had a liability for unrecognized tax
benefits of $6.6 million. Approximately $6.2 million of this, if recognized, would favorably
affect the companys effective tax rate.
In connection with business acquisitions made during the current year, the company has assumed
liabilities for unrecognized tax benefits of $1.6 million.
Approximately $1.7 million and $2.8 million of unrecognized tax benefits were recognized during the
three and six-months ended September 30, 2007, respectively, for effective settlement with tax authorities
in certain jurisdictions.
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. The company recognized $79,000 of interest and penalty benefit and $34,000 of interest
and penalty expense related to unrecognized tax benefits during the three and six-months ended
September 30, 2007. The company had approximately $1.0 million for the payment of interest and
penalties accrued at September 30, 2007.
The company anticipates the completion of a state income tax audit in the next 12 months which
could reduce the accrual for unrecognized tax benefits by $0.2 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 audit by the Internal Revenue Service (IRS) for 2005 and 2006.
The company is also being audited by multiple state taxing jurisdictions. In material
jurisdictions, the company has tax years open back to and including 1998.
Liquidity and Capital Resources
Overview
The companys operating cash requirements consist primarily of working capital needs, operating
expenses, capital expenditures and payments of principal and interest on indebtedness outstanding,
which mainly consists of lease and rental obligations at September 30, 2007. The company believes
that cash flow from operating activities, cash on hand, available borrowings under its credit
facility, and access to capital markets will provide adequate funds to meet its short and long-term
liquidity requirements.
25
As of September 30, 2007 and March 31, 2007, the companys total debt balance was $0.5 million and
$0.1 million, respectively, and consisted of capital lease obligations.
Revolving Credit Facility
The company currently has a $200 million unsecured credit facility (Facility) that expires in
2010. At September 30, 2007, the company had $199 million available under the Facility given
certain letter of credit commitments. The Facility includes a $20 million sub-facility for letters
of credit and a $20 million sub-facility for swingline loans. The Facility is available to
refinance existing debt, provide for working capital requirements, capital expenditures and general
corporate purposes of the company including acquisitions. Borrowings under the Facility will
generally bear interest at various levels over LIBOR. The Facility contains various financial
covenants that must be met the earlier of when the minimum available cash balance is less than $100
million, or December 31, 2007. There were no amounts outstanding under the Facility at September
30, 2007 or March 31, 2007.
Cash Flow
The following table presents cash flow results from operating activities, investing activities, and
financing activities for the six-months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
Net cash provided by (used for) continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(142,510 |
) |
|
$ |
5,511 |
|
|
$ |
(148,021 |
) |
Investing activities |
|
|
(211,684 |
) |
|
|
(930 |
) |
|
|
(210,754 |
) |
Financing activities |
|
|
(86,598 |
) |
|
|
(60,492 |
) |
|
|
(26,106 |
) |
Effect of foreign currency fluctuations on cash |
|
|
1,289 |
|
|
|
111 |
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for continuing operations |
|
|
(439,503 |
) |
|
|
(55,800 |
) |
|
|
(383,703 |
) |
Net cash provided by discontinued operations |
|
|
2,652 |
|
|
|
3,680 |
|
|
|
(1,028 |
) |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(436,851 |
) |
|
$ |
(52,120 |
) |
|
$ |
(384,731 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flow (Used for) Provided by Operating Activities. The $148.0 million change in cash flow used
for operating activities was principally due to the companys payment of income taxes during the
current year, which occurred during the first fiscal quarter. The income tax payments made last
quarter were unusually high as a result of the gain on sale of KSG in March 2007.
Cash Flow Used for Investing Activities. The $210.8 million change in cash flow used for investing
activities was principally due to the companys acquisitions of Innovativ, Stack, and InfoGenesis
during the current year. The acquisitions were funded with cash on hand. Additionally, the
company had cash purchases of approximately $3.7 million for capital equipment during the normal
course of business. Capital expenditures are expected to be approximately $5.0 million for 2008.
These cash outflows were offset by $4.8 million received from the redemption of the companys
investment in an affiliated company during the current year.
Cash Flow Used for Financing Activities. The $26.1 million change in cash flow used for financing
activities was principally due to the companys $86.1 million purchase of treasury shares through
its Dutch Auction tender offer during the second quarter of 2008 as described in more detail
under the section titled Capital Stock above; offset by the retirement of the companys Senior
Notes during quarter ended September 30, 2006 for a total cash outflow of approximately $59.5
million.
26
Contractual Obligations
As a result of the adoption of FIN 48 on April 1, 2007, the company recognized an additional
long-term liability of approximately $2.9 million for unrecognized tax benefits, of which
approximately $0.2 million could potentially be settled within the next 12 months. The timing of payment of the remaining
liability for unrecognized tax benefits cannot be reasonably estimated. Since March 31, 2007,
there have been no other material changes to the contractual obligations summarized under the
Contractual Obligations section of Item 7 in the companys Annual Report on Form 10-K for 2007
(Annual Report).
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 companys financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources.
Critical Accounting Policies
A detailed description of the companys critical accounting policies can be found in the companys
Annual Report. There have been no significant changes to those critical accounting policies other
than the companys accounting for income tax uncertainties upon adoption of FIN 48 on April 1,
2007, which is discussed above under Recently Issued Accounting Pronouncements.
Forward-Looking Information
Portions of this report contain current management expectations, which may constitute
forward-looking information. When used in this Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere throughout this Quarterly Report on Form 10-Q,
the words believes, anticipates, plans, expects and similar expressions are intended to
identify forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation
Reform Act of 1995. These forward-looking statements reflect managements current opinions and are
subject to certain risks and uncertainties that could cause actual results to differ materially
from those stated or implied.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after the date hereof.
Risks and uncertainties include, but are not limited to, those described below in Item 1A, Risk
Factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting the company, see Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, of the companys Annual Report.
There have been no material changes in the companys market risk exposures since March 31, 2007.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The companys management, with the participation
of the companys Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the companys disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act))
as of the end of the period covered by this report. The companys disclosure controls and
procedures are designed to provide reasonable assurance that information required to be disclosed
in the companys Exchange Act reports is recorded, processed, summarized, and reported within the
time periods specified by the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to management, including the companys Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. The companys disclosure controls and procedures include components of the companys
internal control over financial reporting.
27
Based upon this evaluation, the companys Chief Executive Officer and Chief Financial Officer, as
of September 30, 2007, concluded that the companys disclosure controls and procedures were
effective for
the purpose of ensuring that material information required to be in this quarterly report was made
known to them by others on a timely basis.
Changes in internal control over financial reporting. During the six months ended September 30,
2007, the company completed the acquisition of Stack, InfoGenesis and Innovativ. As of September
30, 2007, the company was still in the process of evaluating the internal controls over financial
reporting for each of these acquired entities. Although the evaluation process is not yet
complete, where appropriate the company has modified the internal controls over financial reporting
of the acquired entities in order to correct any identified control deficiencies. The company
continues to integrate each acquired entitys internal controls over financial reporting into the
companys own internal controls over financial reporting, and will continue to review and, if
necessary, make changes to each acquired entitys internal controls over financial reporting until
such time as integration is complete. There were no other changes in the companys internal
control over financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the companys internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
A detailed description of the companys risk factors can be found in the companys Annual Report.
There have been no material changes from the risk factors summarized in our Annual Report. Before
deciding to purchase, hold or sell our common shares, you should carefully consider the risks
described in our Annual Report in addition to the other cautionary statements and risks described
elsewhere, and the other information contained, in this Report and in our other filings with the
Securities and Exchange Commission (the SEC). The special risk considerations described in our
Annual Report are not the only ones facing Agilysys. Additional considerations not presently known
to us or that we currently believe are immaterial may also impair our business operations. If any
of the following special risk considerations actually occur, our business, financial condition or
results of operations could be materially adversely affected, the value of our common shares could
decline, and you may lose all or part of your investment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders was held on July 27, 2007. The following Directors were
re-elected to serve until the annual meeting in 2010:
|
|
|
|
|
|
|
|
|
|
|
Director |
|
For |
|
|
Against |
|
Abstentions |
|
Keith M. Kolerus |
|
|
27,094,932 |
|
|
|
|
|
1,232,441 |
|
Robert A. Lauer |
|
|
26,867,186 |
|
|
|
|
|
1,460,187 |
|
Robert G. McCreary, III |
|
|
27,064,449 |
|
|
|
|
|
1,262,924 |
|
28
The term of office for the following Directors continued after the shareholders meeting: Charles F.
Christ, Thomas A. Commes, Curtis J. Crawford, Howard Knicely, Arthur Rhein and Thomas C. Sullivan.
Also at the annual meeting, shareholders voted to approve amendments to the Amended Code of
Regulations of the Company. The amendments were proposed to enable the Annual Shareholders Meeting
to occur at any time during the year as the Board of Directors determines is necessary, instead of
only in June or July. The amendments also intended to enable the Companys share ownership to be
evidenced either by the issuance of a certificate or by the issuance of book-entry or
non-certificated shares electronically. Shareholders voted as follows:
|
|
|
|
|
|
|
For |
|
Against |
|
Abstentions |
|
Broker Non-Votes |
28,015,786
|
|
296,324
|
|
15,264
|
|
|
Item 5. Other Information
None.
Item 6. Exhibits
3.1 |
|
Amended Code of Regulations of Agilysys, Inc., as amended |
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
AGILYSYS, INC. |
|
|
|
Date: November 2, 2007
|
|
/s/ Arthur Rhein |
|
|
|
|
|
Arthur Rhein
Chairman, President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
Date: November 2, 2007
|
|
/s/ Martin F. Ellis |
|
|
|
|
|
Martin F. Ellis
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer) |
30