United States
Washington, D.C. 20549
FOR ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
COMMISSION FILE NO. 0-5734
Registrant’s telephone number, including area code: (440) 720-8500
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K Annual Report or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The aggregate market value of Common Shares held by non-affiliates as of September 30, 2003 (the last business day of the registrant’s most recently completed second fiscal quarter) was $232,969,542 computed on the basis of the last reported sale price per share ($8.77) of such shares on the NASDAQ National Market.
As of May 3, 2004, the Registrant had the following number of Common Shares outstanding: 32,177,722
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement to be used in connection with its Annual Meeting of Shareholders to be held on July 28, 2004 are incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Annual Report on Form 10-K is as of March 31, 2004.
AGILYSYS, INC.
TABLE OF CONTENTS
Item 1. Business
Overview
History and significant events
Industry
Products and services distributed and sources of supply
Inventory
Customers
Uneven sales patterns and seasonality
Backlog
Competition
Growth through acquisitions
Employees
Distribution
Access to information
Item 2. Properties
As a result of the Company’s divestiture of its Industrial Electronics Division in 2003, the distribution facility in Twinsburg, Ohio was vacant and available for sale at March 31, 2004. This facility was sold in April 2004 for $2.9 million, which approximated book value.
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 4A. Executive Officers of the Registrant
As of May 3, 2004, there were 32,177,722 Common Shares (including 3,589,940 subscribed Common Shares) of Agilysys, Inc. outstanding, and there were 2,539 shareholders of record. The closing price of the Common Shares on May 3, 2004, was $12.00.
Item 7. Management’s discussion and analysis of financial condition and results of operations
Executive level overview
Critical accounting policies
Hardware
Software
Services
Results of operations
Fiscal year 2004 compared with fiscal year 2003
Net sales and operating income
Net sales
Gross margin
Selling, general and administrative expenses
Restructuring charges
Other income and expense
Income taxes
Fiscal year 2003 compared with fiscal year 2002
Net Sales and Operating Income
Discontinued operations
Cumulative effect of change in accounting principle — goodwill
Liquidity and capital resources
Cash and cash flows
Off-balance sheet arrangements
Contractual obligations
Risk control and effects of foreign currency and inflation
Forward-looking information
Item 7A. Quantitative and qualitative disclosures about market risk
Item 8. Financial statements and supplementary data
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure
Item 9A. Controls and procedures
Evaluation of disclosure controls and procedures
Changes in internal controls
part III
Item 10. Directors and executive officers of the registrant
Item 11. Executive compensation
Item 12. Security ownership of certain beneficial owners and management and related shareholder matters
Item 13. Certain relationships and related transactions
Item 14. Principal accountant fees and services
part IV
Item 15. Exhibits, financial statement schedules and reports on Form 8-K
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Agilysys, Inc. has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on June 11, 2004.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities as of June 11, 2004.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Shareholders and the Board of Directors of
We have audited the accompanying Consolidated Balance Sheets of Agilysys, Inc. and Subsidiaries as of March 31, 2004 and 2003, and the related Consolidated Statements of Operations, Shareholders’ Equity and Cash Flows for each of the three years in the period ended March 31, 2004. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
/S/ ERNST AND YOUNG LLP
Cleveland, Ohio
The consolidated financial statements of Agilysys, Inc. have been prepared by the Company, which is responsible for their integrity and objectivity. These statements have been prepared in accordance with U.S. generally accepted accounting principles and include amounts that are based on informed judgments and estimates. The Company also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements.
Agilysys, Inc. and Subsidiaries
See accompanying Notes to Consolidated Financial Statements.
1
Operations — Agilysys, Inc. and its subsidiaries (the “Company” or “Agilysys”) distributes and resells a broad range of enterprise computer systems products, including servers, storage, software and services. These products are sold to resellers and commercial end-users. The Company has operations in North America and strategic investments in the United States and Europe.
2
On September 12, 2003, the shareholders of Pioneer-Standard Electronics, Inc. approved an amendment to the Company’s Amended Articles of Incorporation to change the Company’s name to Agilysys, Inc. The name change became effective on September 15, 2003. Prior to September 16, 2003, Agilysys, Inc. traded on the National Association of Securities Dealers and Automated Quotations (“NASDAQ”) Stock Market as Pioneer-Standard Electronics, Inc. under the symbol “PIOS.” On September 16, 2003, Agilysys, Inc. began trading on the NASDAQ Stock Market under the symbol “AGYS.”
3
In accordance with SFAS No. 141, “Business Combinations,” the Company allocates the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” goodwill is no longer amortized but is reviewed annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The following two acquisitions were made in 2004.
Inter-American Data
Kyrus Corporation
4
On February 28, 2003, the Company completed the sale of substantially all of the assets and liabilities of its Industrial Electronics Division (“IED”), which distributed semiconductors, interconnect, passive and electromechanical components, power supplies and embedded computer products in North America and Germany. In addition, as of the sale date, the Company announced its strategic transformation to focus solely on its enterprise computer systems business. Cash proceeds from the sale of IED were $240 million, with $13 million collected in 2004 and $227 million collected in 2003. The assets sold consisted primarily of accounts receivable and
5
Discontinued Operations
During 2004, the reserve was increased by $0.5 million for certain exit costs on leased properties meeting the qualifications for expense during the year. The leased properties were part of the discontinued operations; however, the Company did not cease complete use of the properties until the current year.
Continuing Operations
Of the remaining $5.8 million reserve at March 31, 2004, approximately $0.8 million is expected to be paid during 2005 for severance costs and facilities obligations. Severance costs and facilities obligations are expected to continue to 2005 and 2017, respectively.
6
On April 1, 2002, the Company adopted SFAS No. 142. This Statement, among other things, eliminates the amortization of goodwill and other intangibles that have indefinite lives but requires annual tests for determining impairment of those assets. Effective April 1, 2002, the Company discontinued amortization of its goodwill in accordance with SFAS No. 142.
As discussed in Note 3, the Company made two business acquisitions in 2004. The excess of the cost of the acquisitions over the sum of the amounts assigned to the assets acquired and liabilities assumed has been recognized as goodwill.
The Company performed its annual goodwill impairment test using a measurement date of February 1, 2004 and 2003. The Company’s reporting unit is consistent with its reportable segment, as explained in Note 1. The Company concluded that the fair value of its reporting unit exceeded the carrying value, including goodwill. As such, step two of the goodwill impairment test, as prescribed by SFAS No. 142, was not necessary and no impairment loss was recognized.
7
At March 31, 2004 and 2003, “Investments in Affiliated Companies” consisted of the following:
Magirus AG
Eurodis Electron PLC
Other Non-Marketable Equity Securities
8
Capital Leases
Interest rates on capitalized leases vary from 5.04% to 12.0% and are imputed based on the lower of the Company’s incremental borrowing rate at the inception of each lease or the lessor’s implicit rate of return.
Operating Leases
Rental expense for all non-cancelable operating leases amounted to $7.0 million, $11.8 million and $11.5 million for 2004, 2003 and 2002, respectively.
9
The following is a summary of long-term obligations at March 31, 2004 and 2003:
The Company’s debt outstanding as of March 31, 2004 primarily consists of approximately $59.4 million principal amount of 9.5% Senior Notes (the “Notes”) due August 2006. Interest is payable semi-annually. The indenture under which the Notes were issued limits the creation of liens, sale and leaseback transactions, consolidations, mergers and transfers of all or substantially all of the Company’s assets, and indebtedness of the Company’s restricted subsidiaries. The Notes are subject to mandatory repurchase by the Company at the option of the holders in the event of a change in control of the Company. The fair value of the Notes was $65.5 million and $137.2 million at March 31, 2004 and 2003, respectively.
10
The components of Income (Loss) Before Income Taxes from Continuing Operations and Provision for Income Taxes for Continuing Operations for the years ended March 31 are as follows:
A reconciliation of the federal statutory rate to the Company’s effective income tax rate for continuing operations for the years ended March 31 follows:
Long term deferred tax assets of approximately $1.6 million are included in “Other Assets” in the accompanying Consolidated Balance Sheet at March 31, 2003.
At March 31, 2004, the Company had $25.3 million of federal net operating loss carryforwards that expire, if unused, through 2024 and $4.7 million of foreign net operating loss carryforwards that expire, if unused, in years 2007 through 2011. At March 31, 2004, the Company had $192.5 million of state net operating loss carryforwards that expire, if unused, in years 2008 through 2019. A valuation allowance of $5.5 million has been recognized to offset the state deferred tax assets related to those carryforwards.
11
The Company maintains various profit-sharing and 401(k) plans for all employees meeting certain service requirements. Generally, the plans allow eligible employees to contribute a portion of their compensation, with the Company matching a percentage thereof. The Company may also make contributions each year for the benefit of all eligible employees under the plans. Total profit sharing and Company matching contributions were $2.2 million, $2.3 million and $2.2 million for 2004, 2003 and 2002, respectively.
12
The Company is the subject of various threatened or pending legal actions and contingencies in the normal course of conducting its business. The Company provides for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company’s future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict with certainty, management believes that the ultimate resolution of such matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
13
In March and April 1998, Pioneer-Standard Financial Trust (the “Pioneer-Standard Trust”) issued 2,875,000 shares relating to $143.7 million of 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (the “Trust preferred securities”). The Pioneer-Standard Trust, a statutory business trust, is a wholly owned consolidated subsidiary of the Company, with its sole asset being $148.2 million aggregate principal amount of 6.75% Junior Convertible Subordinated Debentures due March 31, 2028 (the “Trust Debentures”).
14
Capital Stock — Holders of Common Shares are entitled to one vote for each share held of record on all matters to be submitted to a vote of the shareholders. At March 31, 2004 and 2003, there were no shares of Preferred Stock outstanding.
Shareholder Rights Plan — On April 27, 1999, the Company’s Board of Directors approved a new Shareholder Rights Plan, which became effective upon expiration of the existing plan on May 10, 1999. A dividend of one Right per Common Share was distributed to shareholders of record as of May 10, 1999. Each Right, upon the occurrence of certain events, entitles the holder to buy from the Company one-tenth of a Common Share at a price of $4.00, or $40.00 per whole share, subject to adjustment. The Rights may be exercised only if a person or group acquires 20% or more of the Company’s Common Shares, or announces a tender offer for at least 20% of the Company’s Common Shares. Each Right will entitle its holder (other than such acquiring person or members of such acquiring group) to purchase, at the Right’s then-current exercise price, a number of the Company’s Common Shares having a market value of twice the Right’s then-exercise price. The Rights trade with the Company’s Common Shares until the Rights become exercisable.
15
The following table sets forth the computation of basic and diluted earnings (loss) per share:
Diluted earnings per share is computed by sequencing each issue or series of issues of potential common shares from the most dilutive to the least dilutive. Diluted earnings per share is determined as the lowest earnings per incremental share in the sequence of potential common shares.
16
Stock Options — The Company has stock plans, which provide for the granting of restricted stock and options to employees and directors to purchase its Common Shares. These plans provide for nonqualified and incentive stock options. Stock options are granted to employees at an exercise price equal to the fair market value of the
Company’s Common Shares at the date of grant. Options expire 10 years from the date of grant. Vesting periods are established by the Compensation Committee of the Board of Directors and vary.
Restricted Stock — During 2003, restricted stock awards for 375,800 shares of the Company’s common stock were granted at a market value of $8.51 per share to certain officers under the 2000 Stock Incentive Plan. These shares are subject to certain terms and conditions and cliff-vest over a three-year period. Restrictions lapse three years after the date of the award. Unvested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The cost of these awards, determined as the market value of the shares at the date of grant, is being amortized over the restriction periods.
17
Because quarterly reporting of per share data stands on its own, the sum of per share amounts for the four quarters in the fiscal year will not necessarily equal annual per share amounts. SFAS No. 128 prohibits retroactive adjustment of quarterly per share amounts so that the sum of those amounts equals amounts for the full year.
Included in the results of the fourth quarter of 2004 is a $5.0 million ($3.2 million, after tax) favorable litigation settlement.
Agilysys, Inc.
* Denotes a management contract or compensatory plan or arrangement.