Form 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, 2008
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
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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28925 Fountain Parkway, Solon, Ohio
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44139 |
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(Address of principal executive offices)
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(ZIP Code) |
(440) 519-8700
(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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 January 10, 2009 was
22,672,040.
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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2008 |
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2007 |
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2008 |
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2007 |
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Net sales: |
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Products |
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$ |
136,477 |
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$ |
158,557 |
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$ |
282,180 |
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$ |
259,389 |
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Services |
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34,961 |
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34,712 |
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69,009 |
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59,515 |
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Total net sales |
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171,438 |
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193,269 |
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351,189 |
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318,904 |
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Cost of goods sold: |
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Products |
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112,319 |
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138,582 |
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233,306 |
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226,149 |
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Services |
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8,255 |
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12,336 |
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19,240 |
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18,455 |
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Total cost of goods sold |
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120,574 |
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150,918 |
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252,546 |
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244,604 |
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Gross margin |
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50,864 |
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42,351 |
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98,643 |
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74,300 |
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Selling, general and administrative expenses |
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52,788 |
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45,642 |
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109,347 |
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82,542 |
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Impairment of goodwill |
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112,020 |
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145,643 |
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Restructuring charges |
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510 |
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5 |
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23,573 |
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31 |
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Operating loss |
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(114,454 |
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(3,296 |
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(179,920 |
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(8,273 |
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Other (income) expenses: |
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Other (income) expense, net |
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(242 |
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269 |
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(480 |
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(891 |
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Interest income |
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(215 |
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(3,654 |
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(462 |
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(10,651 |
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Interest expense |
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197 |
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181 |
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452 |
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393 |
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(Loss) income before income taxes |
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(114,194 |
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(92 |
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(179,430 |
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2,876 |
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Income tax benefit |
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(8,917 |
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(1,784 |
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(14,080 |
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(1,827 |
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(Loss) income from continuing operations |
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(105,277 |
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1,692 |
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(165,350 |
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4,703 |
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(Loss) income from discontinued operations, net
of taxes of $(602) and $1,107 for the three
months ended September 30, 2008 and 2007,
respectively and $(609) and $1,067 for the six
months ended September 30, 2008 and 2007,
respectively |
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(1,312 |
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1,748 |
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(1,274 |
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1,329 |
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Net (loss) income |
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$ |
(106,589 |
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$ |
3,440 |
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$ |
(166,624 |
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$ |
6,032 |
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Earnings per
share basic and diluted |
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(Loss) income from continuing operations |
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$ |
(4.66 |
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$ |
0.05 |
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$ |
(7.33 |
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$ |
0.15 |
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(Loss) income from discontinued operations |
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(0.06 |
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0.06 |
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(0.05 |
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0.04 |
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Net (loss) income |
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$ |
(4.72 |
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$ |
0.11 |
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$ |
(7.38 |
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$ |
0.19 |
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Weighted average shares outstanding |
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Basic |
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22,601,549 |
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31,283,478 |
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22,569,206 |
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31,333,014 |
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Diluted |
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22,601,549 |
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31,915,716 |
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22,569,206 |
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32,106,268 |
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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, 2008 are unaudited)
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September 30 |
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March 31 |
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(In thousands) |
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2008 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
49,852 |
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$ |
69,935 |
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Short-term
investments |
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7,657 |
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Accounts receivable, net |
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134,486 |
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166,900 |
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Inventories, net |
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23,452 |
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25,408 |
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Deferred income taxes |
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21,991 |
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3,788 |
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Prepaid expenses and other current assets |
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6,008 |
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2,756 |
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Assets held for sale |
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5,148 |
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4,810 |
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Income taxes receivable |
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4,037 |
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4,960 |
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Assets of
discontinued operations current |
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596 |
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369 |
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Total current assets |
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253,227 |
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278,926 |
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Goodwill |
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132,468 |
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298,420 |
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Intangible assets, net |
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47,590 |
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55,625 |
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Investments
in affiliated companies held for sale |
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2,336 |
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9,549 |
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Other non-current assets |
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28,498 |
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25,779 |
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Property and equipment, net |
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26,810 |
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27,572 |
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Total assets |
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$ |
490,929 |
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$ |
695,871 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
20,524 |
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$ |
96,199 |
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Floor plan financing |
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90,104 |
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14,552 |
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Liabilities held for sale |
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147 |
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1,951 |
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Deferred revenue |
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9,579 |
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16,232 |
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Accrued and other current liabilities |
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23,852 |
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58,117 |
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Liabilities
of discontinued operations - current |
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638 |
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610 |
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Total current liabilities |
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144,844 |
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187,661 |
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Other non-current liabilities |
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27,459 |
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27,262 |
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Liabilities
of discontinued operations non-current |
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1,768 |
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232 |
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Shareholders equity: |
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Common shares, without par value, at $0.30
stated value; authorized 80,000,000 shares;
31,568,818 issued |
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9,366 |
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9,366 |
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Treasury stock (8,896,778 shares in September
2008 and 8,978,378 in March 2008) |
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(2,669 |
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(2,694 |
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Capital in excess of stated value |
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(9,341 |
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(11,469 |
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Retained earnings |
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322,243 |
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488,050 |
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Accumulated other comprehensive income |
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(2,741 |
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(2,537 |
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Total shareholders equity |
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316,858 |
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480,716 |
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Total liabilities and shareholders equity |
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$ |
490,929 |
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$ |
695,871 |
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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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2008 |
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2007 |
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Operating activities: |
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Net (loss) income |
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$ |
(166,624 |
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$ |
6,032 |
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Add: Loss (income) from discontinued operations |
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1,274 |
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(1,329 |
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(Loss) income from continuing operations |
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(165,350 |
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4,703 |
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Adjustments to reconcile (loss) income from continuing
operations to net cash used for operating activities (net of
effects from business acquisitions): |
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Impairment of goodwill and intangible assets |
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166,223 |
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Gain on redemption of investment in affiliated company |
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(1,330 |
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Gain on cost investment |
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(51 |
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1,714 |
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Depreciation |
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1,927 |
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1,184 |
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Amortization |
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12,145 |
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4,060 |
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Deferred income taxes |
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(18,372 |
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(456 |
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Stock based compensation |
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2,152 |
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3,219 |
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Excess tax benefit from exercise of stock options |
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(97 |
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Changes in working capital: |
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Accounts receivable |
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32,699 |
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23,713 |
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Inventories |
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2,001 |
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3,427 |
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Accounts payable |
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(76,327 |
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(29,574 |
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Accrued liabilities |
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(5,816 |
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(15,222 |
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Accrued
Innovative earnout |
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(35,000 |
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Income taxes payable |
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946 |
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(134,671 |
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Other changes, net |
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(3,252 |
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309 |
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Other non-cash adjustments |
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(2,487 |
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(3,596 |
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Total adjustments |
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76,788 |
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(147,320 |
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Net cash used for operating activities |
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(88,562 |
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(142,617 |
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Investing activities: |
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Claim on The
Reserve Primary Fund |
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(7,657 |
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Change in cash surrender value of company owned life insurance policies |
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(103 |
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(97 |
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Proceeds from redemption of investment in cost basis investment |
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7,172 |
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4,770 |
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Acquisition of businesses, net of cash acquired |
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(2,381 |
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(212,752 |
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Purchase of property and equipment |
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(2,603 |
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(3,702 |
) |
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Net cash provided by (used for) investing activities |
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(5,572 |
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(211,781 |
) |
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Financing activities: |
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Purchase of treasury shares |
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(86,087 |
) |
Floor plan financing agreement, net |
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75,551 |
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Dividends paid |
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(1,358 |
) |
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(1,884 |
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Issuance of common shares |
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1,447 |
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Principal payment under long term obligations |
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(47 |
) |
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(171 |
) |
Excess tax benefit from exercise of stock options |
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|
97 |
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Net cash provided by (used for) financing activities |
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74,146 |
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(86,598 |
) |
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Effect of exchange rate changes on cash |
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(101 |
) |
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|
1,289 |
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Cash flows used for continuing operations |
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(20,089 |
) |
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(439,707 |
) |
Cash flows of discontinued operations: |
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Operating cash flows |
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(29 |
) |
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|
3,308 |
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Investing cash flows |
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35 |
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Net decrease in cash |
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(20,083 |
) |
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(436,399 |
) |
Cash at beginning of period |
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69,935 |
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604,215 |
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Cash at end of period |
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$ |
49,852 |
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$ |
167,816 |
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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 cost method, as appropriate under U.S. generally accepted accounting
principles (GAAP) because the company does not have significant influence over the entity. 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, 2009 refers to the fiscal year ending March 31, 2009.
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, 2008, as well as the condensed
consolidated statements of operations for the three and six month periods ended September 30, 2008,
and 2007 and the condensed consolidated statements of cash flows for the six month periods ended
September 30, 2008, and 2007 have been prepared by the company without audit. However, these
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, 2008, 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 and the Hong Kong and China operations as discontinued
operations (see note 4). The September 30, 2007, balance sheet contains a reclassification between
accounts receivable and accrued liabilities to conform to the September 2008 presentation.
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, 2008, included in the companys Annual
Report on Form 10-K filed with the Securities and Exchange
Commission. For the second quarter of
2009, the company completed a step-two analysis of FASB Statement 142, Goodwill and Other
Intangible Assets (Statement 142). This was required due to potential goodwill impairment
indicators that arose during the first quarter of 2009. For the first quarter of 2009, the
step-two analysis was initiated and an
6
estimated impairment charge of $33.6 million was taken as of June 30, 2008, pending completion of
the analysis. The analysis was updated and completed for the second quarter of 2009 and consisted
of comparing the fair value of each reporting unit (calculated using discounted cash flow
analyses), to the implied goodwill of the unit, in accordance with Statement 142. Refer to Note 11
for further information on goodwill impairment.
At
September 30, 2008, the company had $36.2 million invested in The
Reserve Primary Fund. Due to liquidity issues, the fund has
temporarily ceased honoring redemption requests. The Board of
Trustees of the fund subsequently voted to liquidate the assets of
the fund and approved a distribution of cash to the investors. As of
the date of this filing, the company has received $28.5 million
of the investment, with $7.7 million remaining in the fund. As a
result of the delay in cash distribution, we have reclassified the
remaining $7.7 million from Cash and cash equivalents to
Short-term investments on the balance sheet, and accordingly, have
presented the reclassification as a cash outflow from investing
activities in the consolidated statements of cash flows. As of
January 13, 2009, the company is unable to estimate the amount
of loss, if any, that will be recognized upon final liquidation of
the fund. There have been no other significant changes to
the accounting policies that were included in the companys Annual Report as of March 31, 2008.
Recently Issued Accounting Standards
Management continually evaluates the potential impact, if any, on its financial position, results
of operations and cash flows, of all recent accounting pronouncements, including FASB Statement
162, 161, 141R, 160, and 159. The company will disclose if the adoption of any accounting
pronouncements results in any material changes to the financial statements. During the second
quarter of fiscal 2009, no material changes resulted from the adoption of recent accounting
pronouncements.
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.
2009 Acquisition
Triangle Hospitality Solutions Limited
On April 9, 2008, the company acquired all of the shares of Triangle Hospitality Solutions Limited
(Triangle), the UK-based reseller and specialist for the companys InfoGenesis products and
services for $2.7 million, comprised of $2.4 million in cash and $0.3 million of assumed
liabilities. Accordingly, the results of operations for Triangle have been included in the
accompanying condensed consolidated financial statements from that date forward. Triangle will be
instrumental in enhancing the companys international presence and growth strategy in the UK, as
well as solidifying the companys leading position in the hospitality and stadium and arena
markets. Triangle will also add to the companys hospitality solutions suite with the ability to
offer customers the Triangle mPOS solution, which is a handheld point-of-sale solution which
seamlessly integrates with InfoGenesis products. Based on managements preliminary allocation of
the acquisition cost to the net assets acquired, approximately $2.7 million was assigned to
goodwill. The company is still in the process of valuing certain intangible assets; accordingly,
allocation of the acquisition cost is subject to modification in the future. Goodwill resulting
from the Triangle acquisition will not be deductible for income tax purposes.
2008 Acquisitions
Eatec
On February 19, 2008, the company acquired all of the shares of Eatec Corporation (Eatec), a
privately held developer and marketer of inventory and procurement software. Accordingly, the
results of operations for Eatec have been included in the accompanying condensed consolidated
financial statements from that date forward. Eatecs software, EatecNetX (now called Eatec
Solutions by Agilysys), is a recognized leading, open architecture-based, inventory and procurement
management system. The software provides customers with the data and information necessary to
enable them to increase sales, reduce product costs, improve back-office productivity and increase
profitability. Eatec customers include well-known restaurants, hotels, stadiums and entertainment
venues in North America and around the world as well as many public service institutions. The
acquisition further enhances the companys position as a leading inventory and procurement solution
provider to the hospitality and foodservice markets. Eatec was acquired for a total cost of $25.0
million. Based on managements allocation of the acquisition cost to the net assets acquired,
approximately $18.4 million was assigned to
7
goodwill. Goodwill resulting from the Eatec acquisition will not be deductible for income tax
purposes. In the first quarter of 2009, a non-cash goodwill impairment charge was taken in the
amount of $1.3 million relating to the Eatec acquisition. This was an estimate as of June 30,
2008, pending the completion of the companys step-two analysis in accordance with FASB Statement
142, Goodwill and Other Intangible Assets (Statement 142). The company has since completed the
step-two analysis after updating the discounted cash flow analyses for changes occurring in the
second quarter of 2009, resulting in an additional goodwill impairment charge at September 30,
2008, relating to the Eatec acquisition in the amount of $14.4 million. Refer to Note 11 for
further discussion of the companys goodwill and intangible assets.
During the second quarter of 2009, management completed its purchase price allocation and assigned
$6.2 million of the acquisition cost to identifiable intangible assets as follows: $1.4 million to
non-compete agreements, which will be amortized between two and seven years; $2.2 million to
customer relationships, which will be amortized over seven years; $1.8 million to developed
technology, which will be amortized over five years; and $0.8 million to trade names, which has an
indefinite life.
Innovative Systems Design, Inc.
On July 2, 2007, the company acquired all of the shares of Innovative Systems Design, Inc.
(Innovative), the largest U.S. commercial reseller of Sun Microsystems servers and storage
products. Accordingly, the results of operations for Innovative have been included in the
accompanying condensed consolidated financial statements from that date forward. Innovative is an
integrator and solution provider of servers, enterprise storage management products and
professional services. The acquisition of Innovative establishes a new and significant
relationship between Sun Microsystems and the company. Innovative was acquired for an initial cost
of $108.6 million. Additionally, the company is required to pay an earn-out of two dollars for
every dollar of earnings before interest, taxes, depreciation, and amortization, or EBITDA, greater
than $50.0 million in cumulative EBITDA over the first two years after consummation of the
acquisition. The earn-out will be limited to a maximum payout of $90.0 million. During the
fourth quarter of 2008, the company recognized $35.0 million paid subsequently, of the $90.0
million maximum earn-out, which was paid in the first quarter of 2009. In addition, the company
amended its agreement with the Innovative shareholders whereby the maximum payout available to the
Innovative shareholders was limited to $58.65 million, inclusive of the $35 million paid
previously. The EBITDA target required for the shareholders to be eligible for an additional
payout is now $67.5 million in cumulative EBITDA over the first two years after the close of the
acquisition.
During the fourth quarter of 2008, management completed its purchase price allocation and assigned
$29.7 million of the acquisition cost to identifiable intangible assets as follows: $4.8 million
to non-compete agreements, $5.5 million to customer relationships, and $19.4 million to supplier
relationships which will be amortized over useful lives ranging from two to five years.
Based on managements allocation of the acquisition cost to the net assets acquired, approximately
$97.8 million was assigned to goodwill. Goodwill resulting from the Innovative acquisition will be
deductible for income tax purposes.
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. InfoGenesis offers
enterprise-class point-of-sale solutions that provide end users a highly intuitive, secure and easy
way to process customer transactions across multiple departments or locations, including
comprehensive corporate and store reporting. InfoGenesis has a significant presence in casinos,
hotels and resorts, cruise lines, stadiums and foodservice. The acquisition provides the company a
complementary offering that extends its reach into new segments of the hospitality market, broadens
its customer base and increases its software application offerings. InfoGenesis was acquired for a
total acquisition cost of $90.6 million.
8
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. Intangible assets were
assigned values as follows: $3.0 million to developed technology, which will be amortized between
six months and three years; $4.5 million to customer relationships, which will be amortized between
two and seven years; and $10.8 million to trade names, which have an indefinite life. Based on
managements allocation of the acquisition cost to the net assets acquired, approximately $71.8
million was assigned to goodwill. Goodwill resulting from the InfoGenesis acquisition will not be
deductible for income tax purposes. In the first quarter of 2009, a non-cash goodwill impairment
charge was taken in the amount of $3.9 million relating to the Infogenesis acquisition. This was
an estimate as of June 30, 2008, pending the completion of the companys step-two analysis in
accordance with Statement 142. The company has since completed the step-two analysis after
updating the discounted cash flow analyses for changes occurring in the second quarter of 2009,
resulting in an additional goodwill impairment charge at September 30, 2008, relating to the
Infogenesis acquisition in the amount of $57.4 million. Refer to Note 11 for further discussion of
the companys goodwill and intangible assets.
Pro Forma Disclosure of Financial Information
The following table summarizes the companys unaudited consolidated results of operations as if the
InfoGenesis and Innovative acquisitions occurred on April 1, 2007:
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Proforma |
|
|
Six Months Ended |
|
Six Months Ended |
|
|
September 30, 2008 |
|
September 30, 2007 |
Net Sales |
|
$ |
351,189 |
|
|
$ |
399,837 |
|
(Loss) income from continuing operations |
|
$ |
(165,350 |
) |
|
$ |
6,156 |
|
Net (loss) income |
|
$ |
(166,624 |
) |
|
$ |
7,496 |
|
Earnings per
share basic |
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations |
|
$ |
(7.33 |
) |
|
$ |
0.20 |
|
Net (loss) income |
|
$ |
(7.38 |
) |
|
$ |
0.24 |
|
Earnings per
share diluted |
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations |
|
$ |
(7.33 |
) |
|
$ |
0.19 |
|
Net (loss) income |
|
$ |
(7.38 |
) |
|
$ |
0.23 |
|
Stack Computer, Inc.
On April 2, 2007, the company acquired all of the shares of Stack Computer, Inc. (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 $25.2 million.
Management made an adjustment of $0.8 million to the fair value of acquired capital equipment and
assigned $11.7 million of the acquisition cost to identifiable intangible assets as follows: $1.5
million to non-compete agreements, which will be amortized over five years using the straight-line
amortization method; $1.3 million to customer relationships, which will be amortized over five
years using an accelerated amortization method; and $8.9 million to supplier relationships, which
will be amortized over ten years using an accelerated amortization method.
Based on managements allocation of the acquisition cost to the net assets acquired, approximately
$13.3 million was assigned to goodwill. Goodwill resulting from the Stack acquisition is
deductible for income
9
tax purposes. In the first quarter of 2009, a non-cash goodwill impairment charge was taken in the
amount of $7.8 million relating to the Stack acquisition. This was an estimate as of June 30,
2008, pending the completion of the companys step-two analysis in accordance with Statement 142.
The company has since completed the step-two analysis after updating the discounted cash flow
analyses for changes occurring in the second quarter of 2009, resulting in an additional goodwill
impairment charge at September 30, 2008, relating to the Stack acquisition in the amount of $2.1
million. Refer to Note 11 for further discussion of the companys goodwill and intangible assets.
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. 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 $14.4 million.
During the second quarter of 2008, management assigned $4.9 million of the acquisition cost to
identifiable intangible assets as follows: $3.8 million to developed technology, which will be
amortized over six years using the straight-line method; $0.6 million to non-compete agreements,
which will be amortized over eight years using the straight-line amortization method; and $0.5
million to customer relationships, which will be amortized over five years using an accelerated
amortization method.
Based on managements allocation of the acquisition cost to the net assets acquired, including
identified intangible assets, approximately $9.4 million was assigned to goodwill. Goodwill
resulting from the Visual One Systems acquisition is not deductible for income tax purposes. In
the first quarter of 2009, a non-cash goodwill impairment charge was taken in the amount of $0.5
million relating to the Visual One acquisition. This was an estimate as of June 30, 2008, pending
the completion of the companys step-two analysis in accordance with Statement 142. The company
has since completed the step-two analysis after updating the discounted cash flow analyses for
changes that occurred in the second quarter of 2009, resulting in an additional goodwill impairment
charge at September 30, 2008, relating to the Visual One acquisition in the amount of $7.5 million.
Refer to Note 11 for further discussion of the companys goodwill and intangible assets.
4. Discontinued Operations
China and Hong Kong Operations
In July, 2008, the company met the requirements of FASB issued Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (Statement 144) to classify its Hong Kong and
China operations as held-for-sale and discontinued operations, and began exploring divestiture
opportunities for these operations. Agilysys acquired the Hong Kong and China businesses of the
Technology Solutions Group in December 2005. The assets and liabilities of these operations are
recorded as held for sale on the companys balance sheet, and the operations are reported as
discontinued operations in accordance with FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (Statement 144). As of the January 13, 2009, the
company is in negotiations with potential buyers for these assets and operations.
Sale of Assets and Operations of KeyLink Systems Distribution Business
During 2007, the company sold the assets and operations of KSG for $485.0 million in cash, subject
to a working capital adjustment. At March 31, 2007, the final working capital adjustment was $10.8
million.
10
Through the sale of KSG, the company exited all distribution-related businesses and now exclusively
sells directly to end-user customers. By monetizing the value of KSG, the company significantly
increased its financial flexibility and 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, along with the gain
on sale, have been reported as a component of discontinued operations.
In connection with the sale of KSG, the company entered into a product procurement agreement
(PPA) with Arrow Electronics, Inc. Under the PPA, the company is required to purchase a minimum
of $330 million worth of products each year during the term of the agreement (5 years), adjusted
for product availability and other factors.
Loss from discontinued operations for the quarter ended September 30, 2008, consists primarily of
the resolution and settlement of obligations and contingencies of KSG that existed as of the date
the assets, results from the operations of KSG that were sold and results of the Hong Kong and
China businesses currently for sale.
Components of Results of Discontinued Operations
For the periods ended September 30, 2008, and 2007, income from discontinued operations consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Discontinued
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resolution of
contingencies |
|
$ |
(1,471 |
) |
|
$ |
3,107 |
|
|
$ |
(1,485 |
) |
|
$ |
3,071 |
|
(Loss) from
operations of
IED and Asia |
|
|
(443 |
) |
|
|
(252 |
) |
|
|
(398 |
) |
|
|
(675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,914 |
) |
|
|
2,855 |
|
|
|
(1,883 |
) |
|
|
2,396 |
|
Provisions for
income tax
(benefit) expense |
|
|
(602 |
) |
|
|
1,107 |
|
|
|
(609 |
) |
|
|
1,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
discontinued
operations |
|
$ |
(1,312 |
) |
|
$ |
1,748 |
|
|
$ |
(1,274 |
) |
|
$ |
1,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Comprehensive Income
Comprehensive income (loss) is the total of net income (loss) plus all other changes in net assets
arising from non-owner sources, which are referred to as other comprehensive income (loss).
Changes in the components of accumulated other comprehensive loss for year-to-date 2009 and 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
currency |
|
|
Unrealized |
|
|
Minimum |
|
|
other |
|
|
|
|
|
|
translation |
|
|
gain on |
|
|
pension |
|
|
comprehensive |
|
|
Comprehensive |
|
|
|
adjustment |
|
|
securities |
|
|
liability |
|
|
income |
|
|
Income/(Loss) |
|
Balance at April 1, 2008 |
|
$ |
(243 |
) |
|
$ |
(74 |
) |
|
$ |
(2,220 |
) |
|
$ |
(2,537 |
) |
|
|
|
|
Change during First Quarter 2009 |
|
|
97 |
|
|
|
(1 |
) |
|
|
|
|
|
|
96 |
|
|
$ |
96 |
|
Balance at June 30, 2008 |
|
|
(146 |
) |
|
|
(75 |
) |
|
|
(2,220 |
) |
|
|
(2,441 |
) |
|
|
|
|
Net loss through June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(60,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change during Second Quarter
2009 |
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
(300 |
) |
|
$ |
(300 |
) |
Balance at September 30, 2008 |
|
|
(446 |
) |
|
|
(75 |
) |
|
|
(2,220 |
) |
|
|
(2,741 |
) |
|
|
|
|
Net loss through September 30,
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(106,589 |
) |
Total
Comprehensive Loss for the six months ended
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(166,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
currency |
|
|
Unrealized |
|
|
Minimum |
|
|
other |
|
|
|
|
|
|
translation |
|
|
gain on |
|
|
pension |
|
|
comprehensive |
|
|
Comprehensive |
|
|
|
adjustment |
|
|
securities |
|
|
liability |
|
|
income |
|
|
Income/(Loss) |
|
Balance at April 1, 2007 |
|
$ |
1,260 |
|
|
$ |
95 |
|
|
$ |
(3,019 |
) |
|
$ |
(1,664 |
) |
|
|
|
|
Change during First Quarter 2008 |
|
|
1,111 |
|
|
|
(84 |
) |
|
|
|
|
|
|
1,027 |
|
|
$ |
1,027 |
|
Balance at June 30, 2007 |
|
|
2,371 |
|
|
|
11 |
|
|
|
(3,019 |
) |
|
$ |
(637 |
) |
|
|
|
|
Net income through June 30,
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change during Second Quarter
2008 |
|
|
423 |
|
|
|
(32 |
) |
|
|
|
|
|
|
391 |
|
|
$ |
391 |
|
Balance at September 30, 2007 |
|
|
2,794 |
|
|
|
(21 |
) |
|
$ |
(3,019 |
) |
|
|
(246 |
) |
|
|
|
|
Net income through September
30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive income for the six months ended
September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Restructuring Charges
2009 Restructuring Activity
During the first quarter of 2009, the company performed a detailed review of the business to
identify opportunities to improve operating efficiencies and reduce costs. As part of this cost
reduction effort, management reorganized the professional services go-to-market strategy by
consolidating its management and delivery groups. The company will continue to offer specific
proprietary professional services, including identity management, security, and storage
virtualization, however it will increase the use of external business partners.
The cost reduction resulted in a $2.5 million and $0.5 million charge for one-time termination
benefits relating to a workforce reduction in the first and second quarter of 2009, respectively.
The workforce reduction was comprised mainly of sales personnel. Payment of the one-time
termination benefits is expected to be substantially complete in 2009. This restructuring also
resulted in a $20.6 million impairment to goodwill and intangible assets, related to the companys
2005 acquisition of the CTS Corporations. The entire $23.6 million restructuring charge relates to
the Technology Solutions Group.
2007 Restructuring Activity
During 2007, the company recorded a restructuring charge of approximately $0.5 million for one-time
termination benefits resulting from a workforce reduction that was executed in connection with the
sale of KSG. The workforce reduction was comprised mainly of corporate personnel. Payment of the
one-time termination benefits was substantially complete in 2008.
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.
12
Following is a reconciliation of the beginning and ending balances of the restructuring liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
employee |
|
|
|
|
|
|
Long-lived |
|
|
|
|
|
|
costs |
|
|
Facilities |
|
|
Intangibles |
|
|
Total |
|
Balance at April 1, 2008 |
|
$ |
1 |
|
|
$ |
43 |
|
|
$ |
|
|
|
$ |
44 |
|
Additions |
|
|
2,492 |
|
|
|
|
|
|
|
20,571 |
|
|
|
23,063 |
|
Payments |
|
|
(95 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
(112 |
) |
Write-off of intangibles |
|
|
|
|
|
|
|
|
|
|
(20,571 |
) |
|
|
(20,571 |
) |
Balance at June 30, 2008 |
|
|
2,398 |
|
|
|
26 |
|
|
|
|
|
|
|
2,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
Accretion of lease obligations |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Payments |
|
|
(1,821 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(1,827 |
) |
Balance at September 30, 2008 |
|
$ |
1,086 |
|
|
$ |
21 |
|
|
$ |
|
|
|
$ |
1,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the
remaining $21,000 facilities liability at September 30, 2008, approximately $11,000 is
expected to be paid during 2009 for ongoing facility obligations. Facility obligations are
expected to continue through 2010.
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 exercise price must be set at least equal to the closing 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, 2008, there were no stock appreciation rights or restricted share units awarded
from the plan.
Stock Options
The following table summarizes stock option activity for the six months ended September 30, 2008
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, 2008 |
|
|
3,526,910 |
|
|
$ |
14.24 |
|
Granted |
|
|
253,500 |
|
|
|
9.88 |
|
Exercised |
|
|
|
|
|
|
|
|
Cancelled/expired |
|
|
(125,965 |
) |
|
|
13.91 |
|
Forfeited |
|
|
(37,835 |
) |
|
|
20.84 |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
3,616,610 |
|
|
$ |
13.88 |
|
|
|
|
|
|
|
|
Options exercisable at September
30, 2008 |
|
|
2,779,699 |
|
|
$ |
13.56 |
|
|
|
|
|
|
|
|
13
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, 2008.
|
|
|
|
|
Dividend yield |
|
|
0.72% - 0.77 |
% |
Risk-free interest rate |
|
|
4.19 |
% |
Expected life |
|
6.0 years |
Expected volatility |
|
|
43.05% - 43.39 |
% |
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 employee-specific future
exercise expectations and historical exercise patterns, as appropriate. The expected volatility is
based on historical volatility of the companys common stock. The fair market values of options
granted during the six months ended September 30, 2008 were 246,000 options at $4.39 and 7,500
options at $5.31.
Compensation expense charged to operations during the six months ended September 30, 2008, and
2007, relating to stock options was $0.9 and $1.7 million, respectively. There was no income tax
benefit recognized in operations during the six months ended September 30, 2008. As of September
30, 2008, total unrecognized stock based compensation expense related to non-vested stock options
was $1.5 million, which is expected to be recognized over a weighted-average period of 11 months.
During the six months ended September 30, 2008, no stock options were exercised.
In November 2008, 852,276 outstanding options were forfeited due to management restructuring (refer
to Note 15 for more information regarding the restructuring).
The following table summarizes the status of stock options outstanding at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Options exercisable |
|
|
|
|
|
|
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 |
|
|
|
4.34 |
|
|
|
138,400 |
|
|
$ |
7.63 |
|
$8.29 - $9.95 |
|
|
476,876 |
|
|
|
9.29 |
|
|
|
6.07 |
|
|
|
219,476 |
|
|
|
8.71 |
|
$9.95 - $11.61 |
|
|
30,000 |
|
|
|
11.17 |
|
|
|
2.81 |
|
|
|
30,000 |
|
|
|
11.17 |
|
$11.61 - $13.26 |
|
|
279,500 |
|
|
|
12.98 |
|
|
|
2.89 |
|
|
|
272,000 |
|
|
|
13.01 |
|
$13.26 - $14.92 |
|
|
1,600,500 |
|
|
|
13.88 |
|
|
|
4.67 |
|
|
|
1,600,500 |
|
|
|
13.88 |
|
$14.92 - $16.58 |
|
|
878,834 |
|
|
|
15.70 |
|
|
|
7.73 |
|
|
|
448,498 |
|
|
|
15.75 |
|
$16.58 - $22.21 |
|
|
212,500 |
|
|
|
22.21 |
|
|
|
8.64 |
|
|
|
70,825 |
|
|
|
22.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,616,610 |
|
|
|
|
|
|
|
|
|
|
|
2,779,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Shares
Compensation expense related to non-vested share awards is recognized over the restriction period
based upon the closing market price of the Companys shares on the grant date. Compensation
expense charged to operations for non-vested share awards was $1.1 million for both the six months
ended September 30, 2008 and 2007. As of September 30, 2008, there was $0.6 million of total
unrecognized compensation cost related to non-vested share awards, which is expected to be
recognized over a weighted-average period of 18 months.
14
The following table summarizes non-vested share activity during the six months ended September 30,
2008 for restricted shares awarded by the company under the stock incentive plan and prior plans:
|
|
|
|
|
Outstanding at April 1, 2008 |
|
|
80,900 |
|
Granted |
|
|
81,600 |
|
Vested |
|
|
(94,100 |
) |
Forfeited |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
68,400 |
|
|
|
|
|
The fair market value of non-vested shares is determined based on the closing price of the
companys shares on the grant date.
In October 2008, 36,000 restricted shares were forfeited due to management restructuring (refer to
Note 15 for more information regarding the restructuring).
Performance Shares
Compensation expense charged to operations for performance share awards was $0.2 million and $0.4
million for the six months ended September 30, 2008, and 2007, respectively. As of September 30,
2008, there was $1.8 million of total unrecognized compensation cost related to performance share
awards, which is expected to be recognized over a weighted-average period of 18 months.
The following table summarizes performance share activity during the six months ended September 30,
2008:
|
|
|
|
|
Outstanding at April 1, 2008 |
|
|
101,334 |
|
Granted |
|
|
|
|
Vested |
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
101,334 |
|
|
|
|
|
|
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
market 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.
In October 2008, 80,000 performance share grants were forfeited due to management restructuring
(refer to Note 15 for more information regarding the restructuring).
8. Income Taxes
Income tax expense for the three and six months ended September 30, 2008 and 2007 is based on the
companys estimate of the effective tax rate expected to be applicable for the respective full
year. The effective tax rates from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
September 30 |
|
September 30 |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Effective income tax rate |
|
|
7.8 |
% |
|
nm |
|
|
7.8 |
% |
|
|
63.5 |
% |
The decrease in the effective tax rate from the same periods in the prior year was primarily due to
the goodwill impairment recognized for the three and six months ended September 30, 2008, which is
a discrete item, the majority of which has no corresponding tax benefit.
15
As of September 30, 2008, the Company had gross unrecognized tax benefits of $6.1 million, of which
approximately $4.4 million, if recognized, would favorably affect the Companys effective tax rate.
Gross unrecognized tax benefits increased approximately $0.1 million from March 31, 2008 primarily
due an increase in unrecognized tax benefits associated with both current and prior year tax
positions which was substantially offset by settlement and the expiration of the statute of
limitations associated with uncertain tax positions from a business combination completed in a
previous year. As of September 30, 2008, the company had an accrual of approximately $1.5 million
for interest and penalties, an increase of $0.3 million from March 31, 2008.
Management does not anticipate that the ongoing nature of examinations in multiple jurisdictions
will result in an unfavorable material change to its financial position or results of operations.
However, it is reasonably possible that other changes in the unrecognized tax benefits may occur in
the next twelve months from the outcome of examinations and/or the expiration of statutes of
limitations in the next 12 months which cannot be estimated at this time.
9. Earnings (Loss) Per Share
The following data show the amounts used in computing earnings per share from continuing operations
and the effect on income and the weighted average number of shares of dilutive potential common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations basic
and diluted |
|
$ |
(105,277 |
) |
|
$ |
1,692 |
|
|
$ |
(165,350 |
) |
|
$ |
4,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding basic |
|
|
22,602 |
|
|
|
31,283 |
|
|
|
22,569 |
|
|
|
31,333 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and unvested restricted stock |
|
|
|
|
|
|
632 |
|
|
|
|
|
|
|
773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted |
|
|
22,602 |
|
|
|
31,915 |
|
|
|
22,569 |
|
|
|
32,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share from continuing operations
Basic and dilutive |
|
$ |
(4.66 |
) |
|
$ |
0.05 |
|
|
$ |
(7.33 |
) |
|
$ |
0.15 |
|
Diluted earnings per share is computed by sequencing each series of potential issuance of common
shares from the most dilutive to the least dilutive. Diluted earnings per share is determined as
the lowest earnings or highest (loss) per incremental share in the sequence of potential common
shares.
For the three and six months ended September 30, 2008, and 2007, options on 2.8 million and 0.3
million shares of common stock, respectively, were not included in computing diluted earnings per
share because their effects were anti-dilutive.
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.
The company has a $200 million unsecured credit facility (Facility) that expires in 2010. At
September 30, 2008, the company had $199 million available under the Facility given certain
letter-of-credit
16
commitments. The Facility includes a $20 million sub-facility for letters of credit and a
$20 million sub-facility for swingline loans. The Facility was 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. The company was in
default of its covenants as a result of its failure to timely file this report with the SEC and of
other technical requirements. There were no amounts outstanding under the Facility at September 30,
2008.
On February 22, 2008, the company entered into the Fourth Amended and Restated Agreement for
Inventory Financing (Unsecured) (Inventory Financing Agreement) with IBM Credit LLC, a
wholly-owned subsidiary of International Business Machines Corporation (IBM). In addition to
providing the Inventory Financing Agreement, IBM has engaged and may engage as a primary supplier
to the company in the ordinary course of business. Under the Inventory Financing Agreement, the
company may finance the purchase of products from authorized suppliers up to an aggregate
outstanding amount of $145 million. The lender may, in its sole discretion, temporarily increase
the amount of the credit line but in no event shall the amount of the credit line exceed
$250 million. Financing charges will only accrue on amounts outstanding more than 75 days. The
company was in default of its covenants as a result of its failure to timely file this report with
the SEC and of other technical requirements.
11. Goodwill and Intangible Assets
Goodwill
Goodwill is tested for impairment at the reporting unit level. Statement 142 describes a reporting
unit as an operating segment or one level below the operating segment (depending on whether certain
criteria are met), as that term is used in FASB Statement 131, Disclosures About Segments of an
Enterprise and Related Information. Goodwill has been allocated to the companys reporting units
that are anticipated to benefit from the synergies of the business combinations generating the
underlying goodwill. As discussed in Note 14, the company has three operating segments and six
reporting units.
The company conducts its annual goodwill impairment test on February 1, and did so in 2008 without
a need to expand the impairment test to step-two of Statement 142. However, during fiscal 2009,
indictors of potential impairment caused the company to conduct an interim impairment test. Those
indicators included the following: a significant decrease in market capitalization, a decline in
recent operating results, and a decline in the companys business outlook primarily due to the
macroeconomic environment. In accordance with Statement 142, the company completed step one of
the impairment analysis and concluded that, as of June 30, 2008, the fair value of three of its six
reporting units was below their respective carrying values, including goodwill. The three
reporting units that showed potential impairment were Retail Solutions Group, Hospitality Solutions
Group, and Stack (a reporting unit within the Technology Solutions Group). As such, step two of
the impairment test was initiated in accordance with Statement 142. As of June 30, 2008, the
step-two analysis had not been completed due to its time consuming nature. In accordance with
paragraph 22 of Statement 142, the company recorded an estimate in the amount of $33.6 million as a
non-cash goodwill impairment charge as of June 30, 2008. The step-two analysis has since been
completed after updating the discounted cash flow analyses for changes occurring in the second
quarter or 2009, resulting in an additional impairment charge of $112.0 million as of September 30,
2008. The three reporting units for which a second quarter impairment was charged were RSG ($6.5
million), HSG (103.4 million), and Stack, a reporting unit within TSG ($2.1 million).
17
During the six months ended September 30, 2008, changes in the carrying amount of goodwill related
to the companys past acquisitions are as follows:
|
|
|
|
|
Balance at April 1, 2008 |
|
$ |
298,420 |
|
Acquisition of Triangle |
|
|
2,707 |
|
Goodwill adjustment after completion of
purchase price allocation for the Eatec
acquisition. |
|
|
(6,406 |
) |
Goodwill
adjustment to Innovative of $56, InfoGenesis of $138, and Triangle of $22
related to purchase price adjustments |
|
|
216 |
|
Goodwill impairment Kyrus |
|
|
(24,910 |
) |
Goodwill impairment IAD |
|
|
(25,781 |
) |
Goodwill impairment Visual One |
|
|
(8,032 |
) |
Goodwill impairment Stack |
|
|
(9,881 |
) |
Goodwill impairment InfoGenesis |
|
|
(61,300 |
) |
Goodwill impairment Eatec |
|
|
(15,739 |
) |
Goodwill impairment CTS (refer to Note 6) |
|
|
(16,811 |
) |
Impact of foreign currency translation |
|
|
(15 |
) |
|
|
|
|
Balance at September 30, 2008 |
|
$ |
132,468 |
|
|
|
|
|
Intangible Assets
During the second quarter of 2009, management completed its purchase price allocation for the Eatec
acquisition, and assigned $6.2 million of the acquisition cost to identifiable intangible assets as
follows: $1.4 million to non-compete agreements, which will be amortized between two and seven
years; $2.2 million to customer relationships, which will be amortized over seven years; $1.8
million to developed technology, which will be amortized over five years; and $0.8 million to trade
names, which has an indefinite life.
The following table summarizes the companys intangible assets at September 30, 2008, and March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
March 31, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
|
amount |
|
|
amortization |
|
|
amount |
|
|
amount |
|
|
amortization |
|
|
amount |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
24,957 |
|
|
$ |
(16,228 |
) |
|
$ |
8,729 |
|
|
$ |
26,526 |
|
|
$ |
(13,627 |
) |
|
$ |
12,899 |
|
Supplier relationships |
|
|
28,280 |
|
|
|
(13,715 |
) |
|
|
14,565 |
|
|
|
28,280 |
|
|
|
(8,336 |
) |
|
|
19,944 |
|
Non-competition
agreements |
|
|
9,610 |
|
|
|
(2,960 |
) |
|
|
6,650 |
|
|
|
8,210 |
|
|
|
(2,015 |
) |
|
|
6,195 |
|
Developed technology |
|
|
10,085 |
|
|
|
(4,939 |
) |
|
|
5,146 |
|
|
|
8,285 |
|
|
|
(3,398 |
) |
|
|
4,887 |
|
Patented technology |
|
|
80 |
|
|
|
(80 |
) |
|
|
|
|
|
|
80 |
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,012 |
|
|
|
(37,922 |
) |
|
|
35,090 |
|
|
|
71,381 |
|
|
|
(27,456 |
) |
|
|
43,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
12,500 |
|
|
|
N/A |
|
|
|
12,500 |
|
|
|
11,700 |
|
|
|
N/A |
|
|
|
11,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
85,512 |
|
|
$ |
(37,922 |
) |
|
$ |
47,590 |
|
|
$ |
83,081 |
|
|
$ |
(27,456 |
) |
|
$ |
55,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships are being amortized over estimated useful lives between two and seven years;
non-competition agreements are being amortized over estimated useful lives between four and eight
years; developed technology are being amortized over estimated useful lives between six months and
eight years; patented technology is amortized over an estimated useful life of three years;
supplier relationships are being amortized over estimated useful lives between two and ten years.
Amortization expense relating to intangible assets for the six months ended September 30, 2008, and
2007 was $10.5 million and $2.8 million, respectively.
18
The estimated amortization expense relating to intangible assets for the remainder of fiscal year
2009 and each of the five succeeding fiscal years is as follows:
|
|
|
|
|
|
|
Amount |
|
Year ending March 31 |
|
|
|
|
2009 (remaining six months) |
|
$ |
9,491 |
|
2010 |
|
|
8,393 |
|
2011 |
|
|
4,744 |
|
2012 |
|
|
4,512 |
|
2013 |
|
|
3,357 |
|
2014 |
|
|
2,134 |
|
|
|
|
|
Total estimated amortization expense |
|
$ |
32,631 |
|
|
|
|
|
During the first quarter of 2009, the company took steps to realign its cost structure. Management
reorganized the professional services organizational structure, resulting in a $3.0 million
restructuring charge for one-time termination benefits. In addition, this restructuring resulted
in a $16.8 million goodwill impairment charge and a $3.8 million customer relationship intangible
asset impairment charge, both relating to the 2005 CTS acquisition.
12. Investment in Magirus Held For Sale
During the first quarter of fiscal 2009, the company maintained an equity interest in Magirus AG
(Magirus), a privately-owned European enterprise computer systems distributor headquartered in
Stuttgart, Germany. The company held a 20% interest in Magirus as of September 30, 2008.
Prior to March 31, 2008, the company decided to sell its 20% investment in Magirus and met the
qualifications to consider the asset as held for sale. As a result, the company reclassified its
Magirus investment to investment held for sale in accordance with FASB issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). At September 30,
2008, the investment remained held for sale.
Because of the companys inability to obtain and include audited financial statements of Magirus
for fiscal years ended March 31, 2008 and 2007 as required by Rule 3-09 of Regulation S-X, the SEC
has stated that it will not permit effectiveness of any new securities registration statements or
post-effective amendments, if any, until such time as the company files audited financial
statements that reflect the disposition of Magirus and the company requests and the SEC grants
relief to the company from the requirements of Rule 3-09. As part of this restriction, the company
is not permitted to file any new securities registration statements that are intended to
automatically go into effect when they are filed, nor can the company make offerings under
effective registration statements or under Rules 505 and 506 of Regulation D where any purchasers
of securities are not accredited investors under Rule 501(a) of Regulation D. These restrictions do
not apply to: offerings or sales of securities upon the conversion of outstanding convertible
securities or upon the exercise of outstanding warrants or rights; dividend or interest
reinvestment plans; employee benefit plans, including stock option plans; transactions involving
secondary offerings; or sales of securities under Rule 144.
As of April 1, 2008, the company has invoked FASB Interpretation No. 35, Criteria for Applying the
Equity Method of Accounting for Investments in Common Stock (FIN 35), for its investment in
Magirus. The invocation of FIN 35 requires the company to account for its investment in Magirus via
cost, rather than equity accounting. FIN 35 clarifies the criteria for applying the equity method
of accounting for investments of 50% or less of the voting stock of an investee enterprise. The
cost method is being used by the company because management does not have the ability to exercise
significant influence over Magirus, which is one of the presumptions in APB Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock, necessary to account for an investment
in common stock under the equity method.
In July, 2008, the company received a dividend from Magirus (as a result of Magirus selling a
portion of its distribution business in fiscal 2008) of approximately $7.3 million. In November
2008, the company sold its 20% ownership interest in Magirus for approximately $2.3 million,
resulting in approximately
19
$9.6 million of total proceeds received in fiscal 2009. The company adjusted the fair value of the
investment as of March 31, 2008, to the net present value of the subsequent cash proceeds,
resulting in a fourth quarter charge of (i) a $5.5 million reversal of the cumulative currency
translation adjustment in accordance with EITF 01-5, Application of FASB Statement No. 52 to an
Investment Being Evaluated for Impairment That Will Be Disposed of, and (ii) an impairment charge
of $4.9 million to write the held-for-sale investment to its fair value less cost to sell.
During the three and six months ending September 30, 2008, the company recognized interest income
from its investment in Magirus of $16,981 and $51,064, respectively.
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. In September 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 provided for the purchase of up to
2,000,000 of the companys common shares. In December 2007, the company announced it had completed
the repurchase of the shares on the open market for a total cost of $30.4 million, excluding
related transaction costs. Also in December 2007, the company entered into an additional Rule
10b5-1 plan that provided for the purchase of up to an additional 2,500,000 of the companys common
shares. The Board of Directors only authorized a cash outlay of $150 million, which complied with
the credit facility approval limit. By February 2008, 2,321,787 of the 2,500,000 shares were
redeemed for a total cost of $33.5 million. The $150 million maximum cash outlay was achieved;
therefore the purchase of common shares for treasury was completed.
14. Business Segments
Description of Business Segments
The company has three reportable segments: Hospitality Solutions Group, Retail Solutions Group, and
Technology Solutions Group. The reportable segments are each managed separately and are supported
by various practices for storage and network solutions, professional services, and software
services, as well as company-wide functional departments. The segment information for 2007 that is
provided below has been restated as a result of the change in the composition of the companys
reportable segments.
The Hospitality Solutions Group (HSG) is a leading technology provider to the hospitality industry,
offering application software and services that streamline management of operations, property and
inventory for customers in the gaming, hotel and resort, cruise lines, food management services,
and sports and entertainment markets.
The Retail Solutions Group (RSG) is a leader in designing solutions that help make retailers more
productive and provide their customers with an enhanced shopping experience. RSG solutions help
improve operational efficiency, technology utilization, customer satisfaction and in-store
profitability, including customized pricing, inventory and customer relationship management
systems. The group also provides implementation plans and supplies the complete package of hardware
needed to operate the systems, including servers, receipt printers, point-of-sale terminals and
wireless devices for in-store use by the retailers store associates.
20
The Technology Solutions Group (TSG) is an aggregation of the companys IBM, HP, Sun and Stack
reporting units due to the similarity of their economic and operating characteristics. TSG is a
leading provider of HP, Sun, IBM and EMC enterprise IT solutions for the complex needs of customers
in a variety of industries including education, finance, government, healthcare and
telecommunications, among others. The solutions offered include enterprise architecture and high
availability, infrastructure optimization, storage and resource management, identity management and
business continuity.
Measurement of Segment Operating Results and Segment Assets
The company evaluates performance and allocates resources to its reportable segments based on
operating income and adjusted EBITDA, which is defined as operating income plus depreciation and
amortization expense. Certain costs and expenses arising from the companys functional departments
are not allocated to the reportable segments for performance evaluation purposes. The accounting
policies of the reportable segments are the same as those described in the summary of significant
accounting policies listed in the companys Annual Report at March 31, 2008.
As a result of the March 2007 divestiture of KSG and acquisitions, and due to the debt covenant
definitions, the company believes that adjusted EBITDA is a meaningful measure and reflects the
companys performance. Adjusted EBITDA differs from U.S. GAAP and should not be considered an
alternative measure required by U.S. GAAP. Management has reconciled adjusted EBITDA to operating
income (loss) in the following chart.
Intersegment sales are recorded at pre-determined amounts to allow for intercompany profit to be
included in the operating results of the individual reportable segments. Such intercompany profit
is eliminated for consolidated financial reporting purposes.
The companys chief operating decision maker does not evaluate a measurement of segment assets when
evaluating the performance of the companys reportable segments. As such, financial information
relating to segment assets is not provided in the financial information below.
21
The following table presents segment profit and related information for each of the companys
reportable segments for the three and six months ended September 30. Please refer to Note 6 for
further information on the TSG restructuring charge, and Note 11 for the TSG, RSG, and HSG goodwill
impairment charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Hospitality |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
23,488 |
|
|
$ |
23,639 |
|
|
$ |
48,242 |
|
|
$ |
37,052 |
|
Elimination of intersegment
revenue |
|
|
(43 |
) |
|
|
(13 |
) |
|
|
(82 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
23,445 |
|
|
$ |
23,626 |
|
|
$ |
48,160 |
|
|
$ |
36,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
15,190 |
|
|
$ |
12,690 |
|
|
$ |
30,355 |
|
|
$ |
20,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.8 |
% |
|
|
53.7 |
% |
|
|
63.0 |
% |
|
|
56.7 |
% |
Depreciation and Amortization |
|
$ |
1,855 |
|
|
$ |
1,825 |
|
|
$ |
3,186 |
|
|
$ |
2,128 |
|
Operating (loss) income |
|
|
(102,906 |
) |
|
|
903 |
|
|
|
(108,765 |
) |
|
|
2,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
(101,051 |
) |
|
$ |
2,728 |
|
|
$ |
(105,579 |
) |
|
$ |
4,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
$ |
103,387 |
|
|
$ |
|
|
|
$ |
110,852 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
29,437 |
|
|
$ |
33,337 |
|
|
$ |
67,704 |
|
|
$ |
53,747 |
|
Elimination of intersegment
revenue |
|
|
(148 |
) |
|
|
(162 |
) |
|
|
(316 |
) |
|
|
(232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
29,289 |
|
|
$ |
33,175 |
|
|
$ |
67,388 |
|
|
$ |
53,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
6,095 |
|
|
$ |
6,286 |
|
|
$ |
14,495 |
|
|
$ |
11,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.8 |
% |
|
|
18.9 |
% |
|
|
21.5 |
% |
|
|
21.4 |
% |
Depreciation and Amortization |
|
$ |
53 |
|
|
$ |
112 |
|
|
$ |
141 |
|
|
$ |
215 |
|
Operating (loss) income |
|
|
(5,942 |
) |
|
|
1,989 |
|
|
|
(20,314 |
) |
|
|
3,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
(5,889 |
) |
|
$ |
2,101 |
|
|
$ |
(20,173 |
) |
|
$ |
3,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
$ |
6,549 |
|
|
$ |
|
|
|
$ |
24,910 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
120,047 |
|
|
$ |
138,572 |
|
|
$ |
238,748 |
|
|
$ |
232,672 |
|
Elimination of intersegment
revenue |
|
|
(1,343 |
) |
|
|
(2,104 |
) |
|
|
(3,107 |
) |
|
|
(4,259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
118,704 |
|
|
$ |
136,468 |
|
|
$ |
235,641 |
|
|
$ |
228,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
29,009 |
|
|
$ |
23,475 |
|
|
$ |
51,446 |
|
|
$ |
40,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.4 |
% |
|
|
17.2 |
% |
|
|
21.8 |
% |
|
|
17.7 |
% |
Depreciation and Amortization |
|
$ |
4,061 |
|
|
$ |
670 |
|
|
$ |
8,534 |
|
|
$ |
1,219 |
|
Operating income (loss) |
|
|
5,732 |
|
|
|
3,903 |
|
|
|
(26,313 |
) |
|
|
7,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
9,793 |
|
|
$ |
4,573 |
|
|
$ |
(17,779 |
) |
|
$ |
8,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
$ |
2,084 |
|
|
$ |
|
|
|
$ |
9,881 |
|
|
$ |
|
|
Restructuring charge |
|
|
510 |
|
|
|
5 |
|
|
|
23,573 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate / Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
570 |
|
|
$ |
(100 |
) |
|
$ |
2,347 |
|
|
$ |
1,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
$ |
1,136 |
|
|
$ |
718 |
|
|
$ |
2,211 |
|
|
$ |
1,682 |
|
Operating loss |
|
|
(11,338 |
) |
|
|
(10,091 |
) |
|
|
(24,528 |
) |
|
|
(21,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
(10,202 |
) |
|
$ |
(9,373 |
) |
|
$ |
(22,317 |
) |
|
$ |
(19,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
172,972 |
|
|
$ |
195,548 |
|
|
$ |
354,694 |
|
|
$ |
323,471 |
|
Elimination of intersegment
revenue |
|
|
(1,534 |
) |
|
|
(2,279 |
) |
|
|
(3,505 |
) |
|
|
(4,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
171,438 |
|
|
$ |
193,269 |
|
|
$ |
351,189 |
|
|
$ |
318,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
50,864 |
|
|
$ |
42,351 |
|
|
$ |
98,643 |
|
|
$ |
74,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.7 |
% |
|
|
21.9 |
% |
|
|
28.1 |
% |
|
|
23.3 |
% |
Depreciation and Amortization |
|
$ |
7,105 |
|
|
$ |
3,325 |
|
|
$ |
14,072 |
|
|
$ |
5,244 |
|
Operating loss |
|
|
(114,454 |
) |
|
|
(3,296 |
) |
|
|
(179,920 |
) |
|
|
(8,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
(107,349 |
) |
|
$ |
29 |
|
|
$ |
(165,848 |
) |
|
$ |
(3,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
$ |
112,020 |
|
|
$ |
|
|
|
$ |
145,643 |
|
|
$ |
|
|
Restructuring charge |
|
|
510 |
|
|
|
5 |
|
|
|
23,573 |
|
|
|
31 |
|
22
Enterprise-Wide Disclosures
The companys assets are primarily located in the United States of America. Further, revenues
attributable to customers outside the United States of America accounted for less than 6% of total
revenues for the three and six months ended September 30, 2008 and 2007. Total revenues for the
companys three specific product areas are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Hardware |
|
$ |
121,926 |
|
|
$ |
144,307 |
|
|
$ |
250,478 |
|
|
$ |
233,037 |
|
Software |
|
|
14,551 |
|
|
|
14,250 |
|
|
|
31,702 |
|
|
|
26,352 |
|
Services |
|
|
34,961 |
|
|
|
34,712 |
|
|
|
69,009 |
|
|
|
59,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
171,438 |
|
|
$ |
193,269 |
|
|
$ |
351,189 |
|
|
$ |
318,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Subsequent Events
Liquidity and Capital Resources
The Reserve Funds Primary Fund. As of January 7, 2009, approximately $7.7 million of the
companys cash was invested with The Reserve Funds Primary Fund, a Triple A rated money market
account. Effective September 19, 2008, the Reserve Fund suspended rights of redemption from the
Primary Fund. As has been widely reported, the Reserve Fund is working with the Securities and
Exchange Commission to liquidate the Reserve Fund however, the timing of the liquidation is
uncertain at this time. As the liquidation process completes, the Reserve Fund may impose a
partial loss of principal upon the investors, however the company believes that loss, if any, will
be negligible.
Credit Facility. The company has no amounts outstanding under its credit facility. As of October
17, 2008, the companys ability to borrow under its credit facility was suspended. The suspension
of the facility was due to the companys previously announced failure to timely file its 10-K
annual report with the SEC due to audit issues relating to Magirus and potential default due to
other technical deficiencies. The company is exploring alternative financing arrangements,
however, believes there is no immediate need for additional debt availability.
Changes to Management, Board and Headquarters
On October 20, 2008, the companys former Chairman, President and CEO, Arthur Rhein, announced his
retirement, effective immediately. The Board appointed Keith M. Kolerus, a current Agilysys
director, as its non-executive Chairman. Martin F. Ellis, the companys Executive Vice President,
Treasurer and Chief Financial Officer, was appointed by the Board to serve as President and
Chief Executive Officer of the company and elected to the Board. The Board further appointed
Kenneth J. Kossin, Jr., the former Vice President and Controller, to Senior Vice President and
Chief Financial Officer. Curtis C. Stout, was appointed to serve as Treasurer. On October 21,
2008, the company terminated the employment of Messrs. Robert J. Bailey and Peter J. Coleman, both
Executive Vice Presidents of the company.
Also in October, the company relocated its headquarters from Boca Raton, Florida, to Cleveland,
Ohio, where the company has a facility with a large number of employees. The company was previously
headquartered in Cleveland, Ohio.
23
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, 2008. 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 Cleveland, Ohio effective October, 2008, Agilysys
operates extensively throughout North America, with additional sales offices in the United Kingdom
and China. The China operations are held for sale effective July 2008. Agilysys has three
reportable segments: Hospitality Solutions, Retail Solutions, and Technology Solutions. See note
14 to consolidated financial statements for additional discussion regarding the companys segments.
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%. |
As a result of the decline in GDP growth and a weak macroeconomic environment, significant risk in
the credit markets and changes in demand for IT products, the company is re-evaluating its
long-term revenue goals and acquisition strategy.
The company experienced solid demand across its newly acquired businesses, which contributed $72.0
million of incremental sales during the six months ended September 30, 2008. Gross margin as a
percentage of sales increased 4.8% year-over-year to 28.1% from 23.3% for the six months ended
September 30, 2008, and 2007, respectively, which was above our long-term goal of achieving gross
margins in excess of 20%.
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.
24
Results
of Operations Quarter to Date
Net Sales and Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
136,477 |
|
|
$ |
158,557 |
|
|
$ |
(22,080 |
) |
|
|
(14.0 |
)% |
Service |
|
|
34,961 |
|
|
|
34,712 |
|
|
|
249 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
171,438 |
|
|
|
193,269 |
|
|
|
(21,831 |
) |
|
|
(11.3 |
) |
Cost of goods sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
112,319 |
|
|
|
138,582 |
|
|
|
(26,263 |
) |
|
|
(19.0 |
) |
Service |
|
|
8,255 |
|
|
|
12,336 |
|
|
|
(4,081 |
) |
|
|
(33.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
120,574 |
|
|
|
150,918 |
|
|
|
(30,344 |
) |
|
|
(20.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
50,864 |
|
|
|
42,351 |
|
|
|
8,513 |
|
|
|
20.1 |
|
Gross margin percentage |
|
|
29.7 |
% |
|
|
21.9 |
% |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
52,788 |
|
|
|
45,642 |
|
|
|
7,146 |
|
|
|
15.7 |
|
Impairment of goodwill |
|
|
112,020 |
|
|
|
|
|
|
|
112,020 |
|
|
nm |
|
Restructuring charges |
|
|
510 |
|
|
|
5 |
|
|
|
505 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(114,454 |
) |
|
$ |
(3,296 |
) |
|
$ |
(111,158 |
) |
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income margin |
|
|
(66.8 |
)% |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
Net Sales. The $21.8 million decrease in net sales was due to a decrease in the TSG segment of
$17.7 million, a decrease in the RSG segment of $3.9 million, and a decrease in the HSG segment of
$0.2 million. The decline in TSG and RSG sales was primarily a result of lower hardware sales
volume due to the broad-based decline in demand for IT products. The slight decline in HSG is due
to lower sales of its legacy property management software compared with the prior year period. The
company is developing a new property management solution that the company plans to launch in fiscal
2010.
Eatec and Triangle were purchased on February 19, 2008, and April 9, 2008, respectfully, and are
therefore not included in prior year sales. Eatec contributed $1.6 million and Triangle
contributed $0.2 million in the second quarter of fiscal year 2009. Both acquisitions are included
in the HSG segment.
Sales by product category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Hardware |
|
$ |
121,926 |
|
|
$ |
144,307 |
|
|
$ |
(22,381 |
) |
|
|
(15.5 |
)% |
Software |
|
|
14,551 |
|
|
|
14,250 |
|
|
|
301 |
|
|
|
2.1 |
|
Services |
|
|
34,961 |
|
|
|
34,712 |
|
|
|
249 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
171,438 |
|
|
$ |
193,269 |
|
|
$ |
(21,831 |
) |
|
|
(11.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $22.4 million decrease in hardware sales was primarily due to softer demand for IT products,
customer delays in information technology infrastructure spending, and an uncertain macroeconomic
environment.
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,
2008, are not necessarily indicative of the operating results for the full year 2009.
Gross Margin. The $8.5 million increase in gross margin was primarily due to a $5.5 million
increase in the TSG segment and a $2.5 million increase in the HSG segment. The RSG segment
remained relatively flat to the prior year quarter. The TSG increase was due to favorable product
mix and an increase in
25
vendor rebates received. The HSG increase was due to a favorable product mix with higher sales of
proprietary software.
Selling, General and Administrative Expenses. The $7.1 million increase in SG&A expenses was
partially due to the companys recent acquisitions in the HSG segment, which contributed $1.8
million of incremental operating expenses. The remaining $5.3 million increase in SG&A was
primarily attributed to a $2.6 million increase in the amortization of intangible assets, a $1.4
million increase in the allowance for bad debts, a $0.5 million increase in annual software
liscensing and maintenance costs, and a $0.6 million increase in incremental expenses associated
with the development of Guest360.
Impairment of Goodwill. The $112.0 million increase in goodwill impairment was due to the
impairment charge taken at September 30, 2008, in three of the companys reporting units. The
three reporting units for which an impairment was charged were RSG ($6.5 million), HSG (103.4
million), and Stack, a reporting unit within TSG ($2.1 million).
Goodwill is tested for impairment at the reporting unit level. Statement 142 describes a reporting
unit as an operating segment or one level below the operating segment (depending on whether certain
criteria are met), as that term is used in FASB Statement 131, Disclosures About Segments of an
Enterprise and Related Information. Goodwill has been allocated to the companys reporting units
that are anticipated to benefit from the synergies of the business combinations generating the
underlying goodwill. As discussed under Note 14 to the condensed consolidated financial statements,
the company has three operating segments and six reporting units.
The company conducts its annual goodwill impairment test on February 1, and did so in 2008 without
a need to expand the impairment test to step-two of Statement 142. However, during fiscal 2009,
indictors of potential impairment caused the company to conduct an interim impairment test. Those
indicators included the following: a significant decrease in market capitalization, a decline in
recent operating results, and a decline in the companys business outlook primarily due to the
macroeconomic environment. In accordance with Statement 142, the company completed step one of
the impairment analysis and concluded that, as of June 30, 2008, the fair value of three of its six
reporting units was below their respective carrying values, including goodwill. The three
reporting units that showed potential impairment were RSG, HSG, and Stack (a reporting unit within
TSG). As such, step two of the impairment test was initiated in accordance with Statement 142. As
of June 30, 2008, the step-two analysis had not been completed due to its time consuming nature.
In accordance with paragraph 22 of Statement 142, the company recorded an estimate in the amount of
$33.6 million as a non-cash goodwill impairment charge as of June 30, 2008. The analysis was
completed during the second quarter of 2009 and consisted of comparing the fair value of each
reporting unit (calculated using discounted cash flow analyses updated for changes occurring in the
second quarter of 2009), to the implied goodwill of the unit, in accordance with Statement 142.
The completion of the analysis resulted in an impairment charge of $112.0 million at September 30,
2008. As disclosed as a subsequent event in the companys Form 10-Q at June 30, 2008, due to
changing factors that occurred in the second quarter of 2009, primarily a decline in the companys
business outlook, the company expected to incur an additional goodwill impairment charge of up to
$250 million as of September 30, 2008, after the step-two analysis was completed.
Restructuring Expense. The $0.5 million increase was primarily due to an additional $0.5 million
expense for the one-time termination benefits resulting from workforce reductions in the TSG
segment during the first half of 2009, as discussed in Note 6 to the consolidated financial
statements.
26
Other (Income) Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Favorable |
|
|
|
September 30 |
|
|
(Unfavorable) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Other (income) expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
(242 |
) |
|
$ |
269 |
|
|
$ |
511 |
|
|
|
190.0 |
)% |
Interest income |
|
|
(215 |
) |
|
|
(3,654 |
) |
|
|
(3,439 |
) |
|
|
(94.1 |
) |
Interest expense |
|
|
197 |
|
|
|
181 |
|
|
|
(16 |
) |
|
|
(8.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
(260 |
) |
|
$ |
(3,204 |
) |
|
$ |
(2,944 |
) |
|
|
(91.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net. The 190.0% favorable change in other expense, net, was principally driven by
the year-over-year change from the equity method to the cost method of accounting for the companys
investment in Magirus.
Interest income and expense. The 94.1% unfavorable change in interest income was due to lower
average cash and cash equivalent balance in the current quarter compared with the same period last
year. The higher cash and cash equivalent balance in the prior year was driven by the cash
generated from the sale of KSG in March 2007.
Income Tax Expense. Income tax expense for the three months ended September 30, 2008 and 2007 is
based on the companys estimate of the effective tax rate expected to be applicable for the
respective full year. The effective tax rates from continuing operations were 7.8% and nm for
the three months ended September 30, 2008 and 2007, respectively. The decrease in the effective
tax rate from the same period in the prior year was primarily due to the $112.0 million of goodwill
impairment recognized for the three months ended September 30, 2008, which is a discrete item the
majority of which has no corresponding tax benefit. The effective tax rate for continuing
operations for the second quarter of the prior year were higher than the statutory rates
principally due to compensation expense associated with incentive stock option awards which was
partially offset by the recognition of a discrete income tax benefit of $1.7 million related to
previously unrecognized tax benefits associated with an effective settlement with tax authorities
in certain state and federal jurisdictions.
Results
of Operations Year to Date
Net Sales and Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
282,180 |
|
|
$ |
259,389 |
|
|
$ |
22,791 |
|
|
|
8.8 |
% |
Service |
|
|
69,009 |
|
|
|
59,515 |
|
|
|
9,494 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
351,189 |
|
|
|
318,904 |
|
|
|
32,285 |
|
|
|
10.1 |
|
Cost of goods sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
233,306 |
|
|
|
226,149 |
|
|
|
7,157 |
|
|
|
3.2 |
|
Service |
|
|
19,240 |
|
|
|
18,455 |
|
|
|
785 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
252,546 |
|
|
|
244,604 |
|
|
|
7,942 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
98,643 |
|
|
|
74,300 |
|
|
|
24,343 |
|
|
|
32.8 |
|
Gross margin percentage |
|
|
28.1 |
% |
|
|
23.3 |
% |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
109,347 |
|
|
|
82,542 |
|
|
|
26,805 |
|
|
|
32.5 |
|
Impairment of goodwill |
|
|
145,643 |
|
|
|
|
|
|
|
145,643 |
|
|
nm |
|
Restructuring charges |
|
|
23,573 |
|
|
|
31 |
|
|
|
23,542 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(179,920 |
) |
|
$ |
(8,273 |
) |
|
$ |
(171,647 |
) |
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss margin |
|
|
(51.2 |
)% |
|
|
(2.6 |
)% |
|
|
|
|
|
|
|
|
27
Net Sales. The $32.3 million increase in net sales was due to an increase in the TSG segment of
$7.2 million, an increase in the RSG segment of $13.9 million, and an increase in the HSG segment
of $11.2 million. The increase in the sales was due to the companys recent acquisitions discussed
below. The incremental revenue from acquisitions was offset by a decrease in organic revenue,
primarily due to soft demand for server and storage related products.
Eatec and Triangle were acquired on February 19, 2008, and April 9, 2008, respectfully. Therefore,
their sales were not included in prior year sales. Eatec contributed $3.2 million and Triangle
contributed $1.1 million for the year to date ended September 30, 2008. Both acquisitions are
classified in the HSG segment. InfoGenesis and Innovative were acquired on June 18, 2007, and July
2, 2007, respectively, therefore their sales were only included in a portion of the prior year
total net sales. In the current year, InfoGenesis contributed an additional $8.5 million and is
classified in the HSG segment. Innovative contributed an additional $59.2 million and is
classified in the TSG segment.
Sales by product category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Hardware |
|
$ |
250,477 |
|
|
$ |
233,037 |
|
|
$ |
17,440 |
|
|
|
7.5 |
% |
Software |
|
|
31,702 |
|
|
|
26,352 |
|
|
|
5,350 |
|
|
|
20.3 |
|
Services |
|
|
69,010 |
|
|
|
59,515 |
|
|
|
9,495 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
351,189 |
|
|
$ |
318,904 |
|
|
$ |
32,285 |
|
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $17.4 million increase in hardware sales, $56.8 million was the result of incremental sales
from the companys recent acquisitions. Recent HSG acquisitions include Eatec and Triangle which
were purchased on February 19, 2008, and April 9, 2008, respectively, as well as the incremental
sales of InfoGenesis which was purchased on June 18, 2007. Innovative, a TSG acquisition, was
purchased on July 2, 2007, and accounted for approximately 96.2% of the $56.8 million incremental
hardware sales from acquisitions. Aside from the $56.8 million incremental hardware sales from the
companys recent acquisitions, hardware sales from the companys existing business decreased $39.4
million, or 16.9%, compared with last year due to lower volume caused by the broad-based decline in
IT spending.
Of the $5.4 million increase in software sales, $4.3 million was primarily a result of incremental
sales from the companys recent HSG acquisitions. The remaining $1.1 million increase in software
sales was driven by higher sales of remarketed software offerings from the companys existing
business.
Of the $9.5 million increase in service revenue, $11.0 million was the result of incremental sales
from the companys recent acquisitions. Aside from the recent acquisitions, the companys existing
business decreased $1.5 million. The decrease was primarily attributed to lower volume of
remarketed service revenue.
The company generally experiences a seasonal increase in sales during its fiscal third quarter
ending in December. Accordingly, the results of operations for the six months ended September 30,
2008, are not necessarily indicative of the operating results for the full year 2009.
Gross Margin. The $24.3 million increase in gross margin was primarily due to an $11.0 million
increase in the TSG segment, a $3.1 million increase in the RSG segment, and a $9.4 million
increase in the HSG segment. The TSG increase can be attributed to the increase in sales, as well
as a favorable product mix and an increase in rebates received. The HSG and RSG increase can also
be attributed to the increase in sales, as well as higher sales of proprietary software in the HSG
segment.
Selling, General and Administrative Expenses. The $26.8 million increase in SG&A expenses was
principally due to the companys recent acquisitions, which contributed $20.7 million of
incremental
28
operating expenses. The remaining $6.1 million increase in SG&A was primarily attributed to a $2.1
million increase in compensation and benefits, a $0.9 million increase in professional fees, a $0.5
million increase in repairs and maintenance, a $0.5 million increase in depreciation, a $0.4
million increase in travel and entertainment, and a $0.4 million increase in advertising and
promotions.
Impairment of Goodwill. The $145.6 million increase in Goodwill Impairment was due to the charge
taken at June 30, 2008 and September 30, in three of the companys reporting units. The three
reporting units for which an impairment was charged were RSG ($24.9 million), HSG ($110.8 million),
and Stack, a reporting unit within TSG ($9.9 million).
Goodwill is tested for impairment at the reporting unit level. Statement 142 describes a reporting
unit as an operating segment or one level below the operating segment (depending on whether certain
criteria are met), as that term is used in FASB Statement 131, Disclosures About Segments of an
Enterprise and Related Information. Goodwill has been allocated to the companys reporting units
that are anticipated to benefit from the synergies of the business combinations generating the
underlying goodwill. As discussed under Note 14 to consolidated financial statements, the company
has three operating segments and six reporting units.
The company conducts its annual goodwill impairment test on February 1, and did so in 2008 without
a need to expand the impairment test to step-two of Statement 142. However, during fiscal 2009,
indictors of potential impairment caused the company to conduct an interim impairment test. Those
indicators included the following: a significant decrease in market capitalization, a decline in
recent operating results, and a decline in the companys business outlook primarily due to the
macroeconomic environment. In accordance with Statement 142, the company completed step one of
the impairment analysis and concluded that, as of June 30, 2008, the fair value of three of its six
reporting units was below their respective carrying values, including goodwill. The three
reporting units that showed potential impairment were Retail Solutions Group, Hospitality Solutions
Group, and Stack (a reporting unit within the Technology Solutions Group). As such, step two of
the impairment test was initiated in accordance with Statement 142. As of June 30, 2008, the
step-two analysis had not been completed due to its time consuming nature. In accordance with
paragraph 22 of Statement 142, the company recorded an estimate in the amount of $33.6 million as a
non-cash goodwill impairment charge as of June 30, 2008. The analysis was completed during the
second quarter of 2009 and consisted of comparing the fair value of each reporting unit (calculated
using discounted cash flow analyses updated for changes occurring in the second quarter of 2009),
to the implied goodwill of the unit, in accordance with Statement 142. The completion of the
analysis resulted in an impairment charge of $112.0 million at September 30, 2008.
Restructuring Expense. The $23.5 million increase was primarily due to a $20.6 million expense for
the impairment of goodwill and intangible assets and a $3.0 million expense for the one-time
termination benefits resulting from workforce reductions.
Other (Income) Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Favorable |
|
|
|
September 30 |
|
|
(Unfavorable) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Other (income) expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
$ |
(480 |
) |
|
$ |
(891 |
) |
|
$ |
(411 |
) |
|
|
(46.1 |
)% |
Interest income |
|
|
(462 |
) |
|
|
(10,651 |
) |
|
|
(10,189 |
) |
|
|
(95.7 |
) |
Interest expense |
|
|
452 |
|
|
|
393 |
|
|
|
(59 |
) |
|
|
(15.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
(490 |
) |
|
$ |
(11,149 |
) |
|
$ |
(10,659 |
) |
|
|
(95.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net. The 46.1% unfavorable change in other income, net, was principally driven by
the year-over-year change from the equity method to the cost method of accounting for the companys
investment in Magirus.
29
Interest income and expense. The 95.7% unfavorable change in interest income was due to lower
average cash and cash equivalent balance in the current quarter compared with the same period last
year. The higher cash and cash equivalent balance in the prior year was driven by the cash
generated from the sale of KSG in March 2007.
Income Tax Expense. Income tax expense for the six months ended September 30, 2008 and 2007 is
based on the companys estimate of the effective tax rate expected to be applicable for the
respective full year. The effective tax rates from continuing operations were 7.8% and 63.5% for
the three months ended September 30, 2008 and 2007, respectively. The decrease in the effective
tax rate from the same period in the prior year was primarily due to the $145.6 million of goodwill
impairment recognized for the six months ended September 30, 2008, which is a discrete item the
majority of which has no corresponding tax benefit. The effective tax rate for continuing
operations for the first half of the prior year were higher than the statutory rates principally
due to compensation expense associated with incentive stock option awards which was partially
offset by the recognition of a discrete income tax benefit of $2.8 million related to previously
unrecognized tax benefits associated with an effective settlement with tax authorities in certain
state and federal 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. In September 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 provided for the purchase of up to
2,000,000 of the companys common shares. In December 2007, the company announced it had completed
the repurchase of the shares on the open market for a total cost of $30.4 million, excluding
related transaction costs. Also in December 2007, the company entered into an additional Rule
10b5-1 plan that provided for the purchase of up to an additional 2,500,000 of the companys common
shares. The Board of Directors only authorized a cash outlay of $150 million, which complied with
the credit facility approval limit. By February 2008, 2,321,787 of the 2,500,000 shares were
redeemed for a total cost of $33.5 million. The $150 million maximum cash outlay was achieved;
therefore the purchase of the companys common shares for treasury was completed.
Business Combinations
2009 Acquisition
Triangle Hospitality Solutions Limited
On April 9, 2008, the company acquired all of the shares of Triangle Hospitality Solutions Limited
(Triangle), the UK-based reseller and specialist for the companys InfoGenesis products and
services for $2.7 million, comprised of $2.4 million in cash and $0.3 million of assumed
liabilities. Accordingly, the results of operations for Triangle have been included in the
accompanying condensed consolidated financial statements from that date forward. Triangle will be
instrumental in enhancing the companys international presence and growth strategy in the UK, as
well as solidifying the companys leading position in the hospitality and stadium and arena
markets. Triangle will also add to the companys hospitality solutions suite with the ability to
offer customers the Triangle mPOS solution, which is a handheld point-of-sale solution which
seamlessly integrates with InfoGenesis products. Based on
30
managements preliminary allocation of the acquisition cost to the net assets acquired,
approximately $2.7 million was assigned to goodwill. The company is still in the process of
valuing certain intangible assets; accordingly, allocation of the acquisition cost is subject to
modification in the future. Goodwill resulting from the Triangle acquisition will not be
deductible for income tax purposes.
2008 Acquisitions
Eatec
On February 19, 2008, the company acquired all of the shares of Eatec Corporation (Eatec), a
privately held developer and marketer of inventory and procurement software. Accordingly, the
results of operations for Eatec have been included in the accompanying condensed consolidated
financial statements from that date forward. Eatecs software, EatecNetX (now called Eatec
Solutions by Agilysys), is a recognized leading, open architecture-based, inventory and procurement
management system. The software provides customers with the data and information necessary to
enable them to increase sales, reduce product costs, improve back-office productivity and increase
profitability. Eatec customers include well-known restaurants, hotels, stadiums and entertainment
venues in North America and around the world as well as many public service institutions. The
acquisition further enhances the companys position as a leading inventory and procurement solution
provider to the hospitality and foodservice markets. Eatec was acquired for a total cost of $25.0
million. Based on managements allocation of the acquisition cost to the net assets acquired,
approximately $18.4 million was assigned to goodwill. Goodwill resulting from the Eatec
acquisition will not be deductible for income tax purposes. In the first quarter of 2009, a
non-cash goodwill impairment charge was taken in the amount of $1.3 million relating to the Eatec
acquisition. This was an estimate as of June 30, 2008, pending the completion of the companys
step-two analysis in accordance with FASB Statement 142, Goodwill and Other Intangible Assets
(Statement 142). The company has since completed the step-two analysis after updating the
discounted cash flow analyses for changes occurring in the second quarter of 2009, resulting in an
additional goodwill impairment charge at September 30, 2008 relating to the Eatec acquisition in
the amount of $14.4 million. Refer to Note 11 to consolidated financial statements for further
discussion of the companys goodwill and intangible assets.
During the second quarter of 2009, management completed its purchase price allocation and assigned
$6.2 million of the acquisition cost to identifiable intangible assets as follows: $1.4 million to
non-compete agreements, which will be amortized between two and seven years; $2.2 million to
customer relationships, which will be amortized over seven years; $1.8 million to developed
technology, which will be amortized over five years; and $0.8 million to trade names, which has an
indefinite life.
Innovative Systems Design, Inc.
On July 2, 2007, the company acquired all of the shares of Innovative Systems Design, Inc.
(Innovative), the largest U.S. commercial reseller of Sun Microsystems servers and storage
products. Accordingly, the results of operations for Innovative have been included in the
accompanying condensed consolidated financial statements from that date forward. Innovative is an
integrator and solution provider of servers, enterprise storage management products and
professional services. The acquisition of Innovative establishes a new and significant
relationship between Sun Microsystems and the company. Innovative was acquired for an initial cost
of $108.6 million. Additionally, the company is required to pay an earn-out of two dollars for
every dollar of earnings before interest, taxes, depreciation, and amortization, or EBITDA, greater
than $50.0 million in cumulative EBITDA over the first two years after consummation of the
acquisition. The earn-out will be limited to a maximum payout of $90.0 million. During the
fourth quarter of 2008, the company recognized $35.0 million paid previously, of the $90.0 million
maximum earn-out, which was paid in the first quarter of 2009. In addition, the company amended
its agreement with the Innovative shareholders whereby the maximum payout available to the
Innovative shareholders was limited to $58.65 million, inclusive of the $35 million paid
previously. The EBITDA target required for the shareholders to be eligible for an additional
payout is now $67.5 million in cumulative EBITDA over the first two years after the close of the
acquisition.
31
During the fourth quarter of 2008, management completed its purchase price allocation and assigned
$29.7 million of the acquisition cost to identifiable intangible assets as follows: $4.8 million
to non-compete agreements, $5.5 million to customer relationships, and $19.4 million to supplier
relationships which will be amortized over useful lives ranging from two to five years.
Based on managements allocation of the acquisition cost to the net assets acquired, approximately
$97.8 million was assigned to goodwill. Goodwill resulting from the Innovative acquisition will be
deductible for income tax purposes.
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. InfoGenesis offers
enterprise-class point-of-sale solutions that provide end users a highly intuitive, secure and easy
way to process customer transactions across multiple departments or locations, including
comprehensive corporate and store reporting. InfoGenesis has a significant presence in casinos,
hotels and resorts, cruise lines, stadiums and foodservice. The acquisition provides the company a
complementary offering that extends its reach into new segments of the hospitality market, broadens
its customer base and increases its software application offerings. InfoGenesis was acquired for a
total acquisition cost of $90.6 million.
Based on managements allocation of the acquisition cost to the net assets acquired, approximately
$71.8 million was 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. Intangible assets were assigned values as follows: $3.0 million to developed
technology, which will be amortized between six months and three years; $4.5 million to customer
relationships, which will be amortized between two and seven years; and $10.8 million to trade
names, which have an indefinite life. Goodwill resulting from the InfoGenesis acquisition will not
be deductible for income tax purposes. In the first quarter of 2009, a non-cash goodwill
impairment charge was taken in the amount of $3.9 million relating to the Infogenesis acquisition.
This was an estimate as of June 30, 2008, pending the completion of the companys step-two analysis
in accordance with Statement 142. The company has since completed the step-two analysis after
updating the discounted cash flow analyses for changes occurring in the second quarter of 2009,
resulting in an additional goodwill impairment charge at September 30, 2008, relating to the
Infogenesis acquisition in the amount of $57.4 million. Refer to Note 11 to consolidated financial
statements for further discussion of the companys goodwill and intangible assets.
32
Pro Forma Disclosure of Financial Information
The following table summarizes the companys unaudited consolidated results of operations as if the
InfoGenesis and Innovative acquisitions occurred on April 1, 2007:
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Proforma |
|
|
Six Months Ended |
|
Six Months Ended |
|
|
September 30, 2008 |
|
September 30, 2007 |
Net Sales |
|
$ |
351,189 |
|
|
$ |
399,837 |
|
(Loss) income from continuing operations |
|
$ |
(165,350 |
) |
|
$ |
6,156 |
|
Net (loss) income |
|
$ |
(166,624 |
) |
|
$ |
7,496 |
|
Earnings per
share basic |
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations |
|
$ |
(7.33 |
) |
|
$ |
0.20 |
|
Net (loss) income |
|
$ |
(7.38 |
) |
|
$ |
0.24 |
|
Earnings per
share diluted |
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations |
|
$ |
(7.33 |
) |
|
$ |
0.19 |
|
Net (loss) income |
|
$ |
(7.38 |
) |
|
$ |
0.23 |
|
Stack Computer, Inc.
On April 2, 2007, the company acquired all of the shares of Stack Computer, Inc. (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 $25.2 million.
Management made an adjustment of $0.8 million to the fair value of acquired capital equipment and
assigned $11.7 million of the acquisition cost to identifiable intangible assets as follows: $1.5
million to non-compete agreements, which will be amortized over five years using the straight-line
amortization method; $1.3 million to customer relationships, which will be amortized over five
years using an accelerated amortization method; and $8.9 million to supplier relationships, which
will be amortized over ten years using an accelerated amortization method.
Based on managements allocation of the acquisition cost to the net assets acquired, approximately
$13.3 million was assigned to goodwill. Goodwill resulting from the Stack acquisition is
deductible for income tax purposes. In the first quarter of 2009, a non-cash goodwill impairment
charge was taken in the amount of $7.8 million relating to the Stack acquisition. This was an
estimate as of June 30, 2008, pending the completion of the companys step-two analysis in
accordance with Statement 142. The company has since completed the step-two analysis after
updating the discounted cash flow analyses for changes occurring in the second quarter of 2009,
resulting in an additional goodwill impairment charge at September 30, 2008, relating to the Stack
acquisition in the amount of $2.1 million. Refer to Note 11 to consolidated financial statements
for further discussion of the companys goodwill and intangible assets.
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. 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 $14.4 million.
During the second quarter of 2008, management assigned $4.9 million of the acquisition cost to
33
identifiable intangible assets as follows: $3.8 million to developed technology, which will be
amortized over six years using the straight-line method; $0.6 million to non-compete agreements,
which will be amortized over eight years using the straight-line amortization method; and $0.5
million to customer relationships, which will be amortized over five years using an accelerated
amortization method.
Based on managements allocation of the acquisition cost to the net assets acquired, including
identified intangible assets, approximately $9.4 million was assigned to goodwill. Goodwill
resulting from the Visual One Systems acquisition is not deductible for income tax purposes. In
the first quarter of 2009, a non-cash goodwill impairment charge was taken in the amount of $0.5
million relating to the Visual One acquisition. This was an estimate as of June 30, 2008, pending
the completion of the companys step-two analysis in accordance with Statement 142. The company
has since completed the step-two analysis after updating the discounted cash flow analyses for
changes that occurred in the second quarter of 2009, resulting in an additional goodwill impairment
charge at September 30, 2008, relating to the Visual One acquisition in the amount of $7.5 million.
Refer to Note 11 to consolidated financial statements for further discussion of the companys
goodwill and intangible assets.
Discontinued Operations
China and Hong Kong Operations
In July 2008, the company met the requirements of FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (Statement 144) to classify its Hong Kong and China
operations as held-for-sale and discontinued operations, and began exploring divestiture
opportunities for these operations. Agilysys acquired the Hong Kong and China businesses of the
Technology Solutions Group in December 2005. The assets and liabilities of these operations are
recorded as held for sale on the companys balance sheet, and the operations are reported as
discontinued operations in accordance with FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (Statement 144). As of the January 13, 2009, the
company is in negotiations with potential buyers for these assets and operations.
Sale of Assets and Operations of KeyLink Systems Distribution Business
During 2007, the company sold the assets and operations of KSG for $485.0 million in cash, subject
to a working capital adjustment. At March 31, 2007, the final working capital adjustment was $10.8
million. Through the sale of KSG, the company exited all distribution-related businesses and now
exclusively sells directly to end-user customers. By monetizing the value of KSG, the company
significantly increased its financial flexibility and 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,
along with the gain on sale, have been reported as a component of discontinued operations.
Investment in Magirus Held For Sale
During the first quarter of fiscal 2009, the company maintained an equity interest in Magirus AG
(Magirus), a privately-owned European enterprise computer systems distributor headquartered in
Stuttgart, Germany. The company held a 20% interest in Magirus as of September 30, 2008.
Prior to March 31, 2008, the company decided to sell its 20% investment in Magirus and met the
qualifications to consider the asset as held for sale. As a result, the company reclassified its
Magirus investment to investment held for sale in accordance with FASB issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). At September 30,
2008, the investment remained held for sale.
Because of the companys inability to obtain and include audited financial statements of Magirus
for fiscal years ended March 31, 2008 and 2007 as required by Rule 3-09 of Regulation S-X, the SEC
has
34
stated that it will not permit effectiveness of any, if any, of the companys securities
registration statements or post-effective amendments until such time as the company files audited
financial statements that reflect the disposition of Magirus and the company requests and the SEC
grants relief to the company from the requirements of Rule 3-09. As part of this restriction, the
company is not permitted to file any new securities registration statements that are intended to
automatically go into effect when they are filed, nor can the company make offerings under
effective registration statements or under Rules 505 and 506 of Regulation D where any purchasers
of securities are not accredited investors under Rule 501(a) of Regulation D. These restrictions do
not apply to: offerings or sales of securities upon the conversion of outstanding convertible
securities or upon the exercise of outstanding warrants or rights; dividend or interest
reinvestment plans; employee benefit plans, including stock option plans; transactions involving
secondary offerings; or sales of securities under Rule 144.
As of April 1, 2008, the company has invoked FASB Interpretation No. 35, Criteria for Applying the
Equity Method of Accounting for Investments in Common Stock (FIN 35), for its investment in
Magirus. The invocation of FIN 35 requires the company to account for its investment in Magirus via
cost, rather than equity accounting. FIN 35 clarifies the criteria for applying the equity method
of accounting for investments of 50% or less of the voting stock of an investee enterprise. The
cost method is being used by the company because management does not have the ability to exercise
significant influence over Magirus, which is one of the presumptions in APB Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock necessary to account for an investment
in common stock under the equity method.
In July, 2008, the company received a dividend from Magirus (as a result of Magirus selling its
distribution business in fiscal 2008) of approximately $7.3 million. In November 2008, the company
sold its 20% ownership interest in Magirus for approximately $2.3 million, resulting in
approximately $9.6 million of total proceeds received in fiscal 2009. The company adjusted the
fair value of the investment as of March 31, 2008, to the net present value of the subsequent cash
proceeds, resulting in a fourth quarter charge of (i) $5.5 million reversal of the cumulative
currency translation adjustment in accordance with EITF 01-5, Application of FASB Statement No. 52
to an Investment Being Evaluated for Impairment That Will Be Disposed of, and (ii) an impairment
charge of $4.9 million to write the held-for-sale investment to its fair value less cost to sell.
During the three and six months ending September 30, 2008, the company recognized interest income
from its investment in Magirus of $16,981 and $51,064, respectively.
Recently Issued Accounting Pronouncements
Management continually evaluates the potential impact, if any, on its financial position, results
of operations and cash flows, of all recent accounting pronouncements, including FASB Statement
162, 161, 141R, 160, and 159. The company will disclose if the adoption of any accounting
pronouncements results in any material changes to the financial statements. During the second
quarter of fiscal 2009, no material changes resulted from the adoption of recent accounting
pronouncements.
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, 2008. The company believes
that cash flow from operating activities, cash on hand, and access to capital markets will provide
adequate funds to meet its short and long-term liquidity requirements.
As of September 30, 2008 and March 31, 2008, the companys total debt balance was $1.0 million, and
consisted of capital lease obligations.
35
Revolving Credit Facility
The company has a $200 million unsecured credit facility (Facility) that is scheduled to expire
in 2010. The Facility includes a $20 million sub-facility for letters of credit and a $20 million
sub-facility for swingline loans. The Facility was 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 bears interest at various levels
over LIBOR. The company has no amounts outstanding under its credit facility. As of October 17,
2008, the companys ability to borrow under its credit facility was suspended. The suspension of
the facility was due to the companys previously announced failure to timely file its 10-K annual
report with the SEC due to audit issues relating to Magirus, and potential default of covenants due
to other technical deficiencies. The company is exploring alternative financing arrangements,
however, believes there is no immediate need for additional debt availability.
IBM Floor Plan Agreement
On February 22, 2008, the company entered into the Fourth Amended and Restated Agreement for
Inventory Financing (Unsecured) (Inventory Financing Agreement) with IBM Credit LLC, a
wholly-owned subsidiary of International Business Machines Corporation (IBM). In addition to
providing the Inventory Financing Agreement, IBM has engaged and may engage as a primary supplier
to the company in the ordinary course of business. Under the Inventory Financing Agreement, the
company may finance the purchase of products from authorized suppliers up to an aggregate
outstanding amount of $145 million. The lender may, in its sole discretion, temporarily increase
the amount of the credit line but in no event shall the amount of the credit line exceed
$250 million. Financing charges will only accrue on amounts outstanding more than 75 days. The
company was in default of its covenants as a result of its failure to timely file this report with
the SEC and of other technical requirements.
Cash Flow
The following table presents cash flow results from operating activities, investing activities, and
financing activities for the six months ended September 30, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Increase |
|
|
|
September 30 |
|
|
(Decrease) |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
Net cash flows (used for) provided by continuing
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(88,562 |
) |
|
$ |
(142,617 |
) |
|
$ |
54,055 |
|
Investing activities |
|
|
(5,572 |
) |
|
|
(211,781 |
) |
|
|
206,209 |
|
Financing activities |
|
|
74,146 |
|
|
|
(86,598 |
) |
|
|
160,744 |
|
Effect of foreign currency fluctuations on cash |
|
|
(101 |
) |
|
|
1,289 |
|
|
|
(1,390 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows used for continuing operations |
|
|
(20,089 |
) |
|
|
(439,707 |
) |
|
|
419,618 |
|
Net cash flows provided by discontinued operations |
|
|
6 |
|
|
|
3,308 |
|
|
|
(3,302 |
) |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(20,083 |
) |
|
$ |
(436,399 |
) |
|
$ |
(416,316 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities. The companys use of cash for operating activities during
the six months ended September 30, 2008, decreased $54.1 million compared with the same period last
year. The decrease was principally due to the income tax payments made during the six months ended
September 30, 2007 as a result of the gain on sale of KSG in March 2007. The cash outflow for the
2007 income tax payments was partially offset by a decrease in Accrued Liabilities which can be
attributed to the Innovative earn-out payment of $35.0 million. The remainder of the decrease
during the six months ended September 30, 2008, was principally driven by changes in working
capital, particularly the transition to floor plan financing, which is recorded as a financing
activity.
36
Cash Flows from Investing Activities. The companys use of cash for investing activities during
the six months ended September 30, 2008 decreased $206.2 million compared with the same period last
year. The decrease was principally due to the business acquisitions made in the prior year, which
were funded by cash on hand. Cash paid for the Triangle acquisition made in the current year was
$2.4 million, compared to the cash paid for Stack, InfoGenesis, and Innovative in the first half of
the prior year of $212.8 million. The prior periods use of cash was offset by $4.8 million
received from the redemption of the companys cost investment in an affiliated company during the
prior year, and the six months ended September 30, 2008s use of cash for investing activities was
more than completely offset by the cash received from the Magirus
cost basis investment. In addition, the company reclassified the
$7.7 million remaining in the Reserve Primary Fund as a cash
outflow from investing activities. Refer to Note 2 to the
consolidated financial statements for more information regarding The
Reserve Primary Fund.
Cash Flows from Financing Activities. The companys cash provided by financing activities during
the six months ended September 30, 2008, increased $160.7 million compared with the same period
last year. The increase was due to the cash provided by the companys floor plan financing
agreement, which contributed $75.6 million in the current quarter, and the outflow in the prior
year as a result of the companys purchase of treasury shares for $86.1 million.
Contractual Obligations
There were no significant changes to the Contractual Obligation table presented in the Form 10-K
for the year ended March 31, 2008.
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 significant accounting policies can be found in the audited
financial statements for the fiscal year ended March 31, 2008, included in the companys Annual
Report on Form 10-K filed with the Securities and Exchange Commission. For the second quarter of
2009, the company completed a step-two analysis of FASB Statement 142, Goodwill and Other
Intangible Assets (Statement 142). This was required due to potential goodwill impairment
indicators that arose during the first quarter of 2009. For the first quarter of 2009, the
step-two analysis was initiated and an estimated impairment charge of $33.6 million was taken as
of June 30, 2008, pending completion of the analysis. The analysis was updated and completed for
the second quarter of 2009 and consisted of comparing the fair value of each reporting unit
(calculated using discounted cash flow analyses), to the implied goodwill of the unit, in
accordance with Statement 142. Refer to Note 11 to consolidated financial statements for further
information on goodwill impairment. At September 30, 2008, the
company had $36.2 million invested in The Reserve Primary Fund.
Due to liquidity issues, the fund has temporarily ceased honoring
redemption requests. The Board of Trustees of the fund subsequently
voted to liquidate the assets of the fund, and approved a
distribution of cash to the investors. As of the date of this filing,
the company has received $28.5 million of the investment, with
$7.7 million remaining in the fund. As a result of the delay in
the cash distribution, we have reclassified the remaining
$7.7 million from cash and cash equivalents to Short-term
investments on the balance sheet, and accordingly, have presented the
reclassification as a cash outflow from investing activities in the
consolidated statements of cash flows. As of January 13, 2009,
the company is unable to estimate the amount of loss, if any, that
will be recognized upon final liquidation of the fund. There have been no other significant changes to the critical
accounting policies that were included in the companys Annual Report as of March 31, 2008.
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.
37
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, 2008.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report are not effective solely
because of the material weakness relating to the companys internal control over financial
reporting as described below in Managements Report on Internal Controls Over Financial
Reporting. In light of the material weakness, the company performed additional analysis and
post-closing procedures to provide reasonable assurance that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and (ii) accumulated and communicated to our management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls
system cannot provide absolute assurance, however, that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
Managements Report on Internal Control Over Financial Reporting. The management of the company is
responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision of our
Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the
effectiveness of our internal control over financial reporting as of March 31, 2008 based on the
framework in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that evaluation, management has
concluded that it did not maintain effective internal control over financial reporting as a result
of the material weakness discussed below as of March 31, 2008.
Revenue
Recognition Controls The aggregation of several errors in the companys Hospitality
Solutions Groups and Retail Solutions Groups order processing operations resulted in a material
weakness in the operating effectiveness of revenue recognition controls.
Management has performed a review of the companys internal control processes and procedures
surrounding the hospitality and retail order processing operations. As a result of this review,
the company has taken and continues to implement the following steps to prevent future errors from
occurring:
|
1. |
|
Mandatory training for all sales operations personnel including procedure and process
review, and awareness and significance of key controls; |
|
|
2. |
|
Additional review and approval on documents supporting all transactions greater than
$100,000 by the Sales Operations Management; and |
|
|
3. |
|
Enhanced monthly sales cutoff testing by the companys Internal Audit Department to
ensure proper and timely revenue recognition. |
38
Ernst & Young LLP, our independent registered public accounting firm, has issued their report
regarding the companys internal control over financial reporting as of March 31, 2008, which can
be found in the companys 2008 Form 10-K.
Change in Internal Control over Financial Reporting. 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. No change in our internal control over financial reporting occurred during the companys
most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. However, during the second quarter of
fiscal 2009, the company continued to implement the remedial measures described above.
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
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
None.
Item 5. Other Information
None.
Item 6. Exhibits
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
39
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: January 13, 2009 |
/s/ Martin F. Ellis
|
|
|
Martin F. Ellis |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: January 13, 2009 |
/s/ Kenneth J. Kossin, Jr.
|
|
|
Kenneth J. Kossin, Jr. |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
40