10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005


o		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)


Ohio				34-0907152

(State or other jurisdiction of				(I.R.S. Employer Identification No.)
incorporation or organization)

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

The number of shares of the registrant’s common stock outstanding as of August 2, 2005 was 30,381,114.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Three months ended
	June 30
(In thousands, except share and per share data)	2005			2004
Net sales	$	409,954		$	386,672
Cost of goods sold		359,196			338,007

Gross margin		50,758			48,665
Operating expenses
Selling, general and administrative expenses		41,239			38,950
Restructuring charges		2,424			189

Operating income		7,095			9,526
Other (income) expense
Other income, net		(362	)		(239	)
Interest income		(1,471	)		(352	)
Interest expense		1,607			1,641
Loss on redemption of Mandatorily Redeemable Convertible Trust Preferred Securities		4,811			—

Income before income taxes		2,510			8,476
Provision for income taxes		1,177			3,102
Distributions on Mandatorily Redeemable Convertible Trust Preferred Securities, net of taxes		900			1,360

Income from continuing operations		433			4,014
Loss from discontinued operations, net of taxes		143			164

Net income	$	290		$	3,850


Earnings per share — basic and diluted
Income from continuing operations	$	0.01		$	0.14
Loss from discontinued operations		—			—

Net income	$	0.01		$	0.14


Weighted average shares outstanding
Basic		28,901,927			28,014,938
Diluted		29,827,852			28,418,415

Cash dividends per share	$	0.03		$	0.03

See accompanying notes to unaudited condensed consolidated financial statements.

AGILYSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts at June 30, 2005 are Unaudited)


	June 30			March 31
(In thousands, except share and per share data)	2005			2005
ASSETS
Current assets
Cash and cash equivalents	$	139,262		$	241,880
Accounts receivable, net		283,964			263,986
Inventories, net		53,219			47,305
Deferred income taxes		10,396			9,379
Prepaid expenses		1,290			1,991
Assets of discontinued operations		648			702

Total current assets		488,779			565,243
Goodwill		197,417			173,774
Intangible assets, net		5,239			5,796
Investments		19,974			19,785
Other assets		19,049			20,241
Property and equipment, net		29,836			30,319

Total assets	$	760,294		$	815,158


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	273,442		$	228,775
Accrued liabilities		40,423			38,178
Mandatorily Redeemable Convertible Trust Preferred Securities		—			125,317
Liabilities of discontinued operations		1,378			1,767

Total current liabilities		315,243			394,037
Long-term debt		59,641			59,624
Deferred income taxes		11,835			11,657
Other non-current liabilities		18,614			17,389

Shareholders’ equity
Common stock, at $0.30 stated value; 30,381,114 and 28,820,531 shares outstanding at June 30, 2005 and March 31, 2005, respectively, net of 1,125 and 46,442 shares in treasury at June 30, 2005 and March 31, 2005, respectively		9,032			8,564
Capital in excess of stated value		111,760			88,927
Retained earnings		235,174			235,749
Unearned compensation on restricted stock awards		(843	)		(873	)
Accumulated other comprehensive (loss) income		(162	)		84

Total shareholders’ equity		354,961			332,451

Total liabilities and shareholders’ equity	$	760,294		$	815,158

See accompanying notes to unaudited condensed consolidated financial statements.

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three months ended
	June 30
(In thousands)	2005			2004
Operating activities:
Net income	$	290		$	3,850
Add: Loss from discontinued operations		143			164

Income from continuing operations		433			4,014
Adjustments to reconcile income from continuing operations to net cash provided by operating activities (net of effects from business acquisition):
Loss on redemption of Convertible Trust Preferred Securities		4,811			—
Loss on disposal of plant and equipment		1			34
Depreciation		971			1,027
Amortization		1,269			1,153
Deferred income taxes		(1,150	)		2,169
Changes in working capital
Accounts receivable		(16,040	)		21,392
Inventory		(5,914	)		2,149
Accounts payable		43,577			29,581
Accrued liabilities		2,302			(6,494	)
Other working capital		818			383
Other non-cash adjustments		(487	)		(3,005	)

Total adjustments		30,158			48,389

Net cash provided by operating activities		30,591			52,403

Investing activities:
Acquisition of business		(27,784	)		—
Proceeds from sale of property and equipment		—			105
Additions to property and equipment		(310	)		(228	)

Net cash used for investing activities		(28,094	)		(123	)

Financing activities:
Redemption of Convertible Trust Preferred Securities		(107,536	)		—
Dividends paid		(866	)		(748	)
Proceeds from issuance of common stock		3,843			875
Other		(78	)		(72	)

Net cash (used for) provided by financing activities		(104,637	)		55

Cash flows (used for) provided by continuing operations		(102,140	)		52,335
Cash flows (used for) provided by discontinued operations		(478	)		3,698

Net (decrease) increase in cash		(102,618	)		56,033
Cash at beginning of period		241,880			149,903

Cash at end of period	$	139,262		$	205,936

See accompanying notes to unaudited condensed consolidated financial statements.

AGILYSYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands, except per share data)

Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Agilysys, Inc. and its subsidiaries (the “company”). Investments in affiliated companies are accounted for by the equity or cost method, as appropriate. All inter-company accounts have been eliminated. The company’s fiscal year ends on March 31. References to a particular year refer to the fiscal year ending in March of that year. For example, 2006 refers to the fiscal year ended March 31, 2006.

The unaudited interim financial statements of the company are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Article 10 of Regulation S-X under the Exchange Act. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

The condensed consolidated balance sheet as of June 30, 2005, as well as the condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three-months ended June 30, 2005 and 2004 have been prepared by the company without audit. The financial statements have been prepared on the same basis as those in the audited annual financial statements. In the opinion of management, all adjustments necessary to fairly present the results of operations, financial position, and cash flows have been made. Such adjustments were of a normal recurring nature. The results of operations for the three-month period ended June 30, 2005 are not necessarily indicative of the operating results for the full fiscal year or any future period.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current presentation.

Significant Accounting Policies

A detailed description of the company’s significant accounting policies can be found in the audited financial statements for the fiscal year ended March 31, 2005, included in the company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission. There have been no material changes in the company’s significant accounting policies and estimates from those disclosed therein.

Basis of Presentation and Significant Accounting Policies — continued

Stock-Based Compensation

The company applies the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for employee stock compensation costs, which is referred to as the intrinsic value method. Since the exercise price of the company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized for the company’s stock option plans. The company has adopted the disclosure provisions of Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, as amended by Statement 148, Accounting for Stock-Based Compensation - Transition and Disclosure.

The following table shows the effects on net income and earnings per share had compensation cost been measured on the fair value method pursuant to Statement 123:


	Three months ended
	June 30
	2005		2004
Net income, as reported	$	290	$	3,850
Compensation cost based on fair value method, net of taxes		170		181

Pro forma net income	$	120	$	3,669


Earnings per share — basic and diluted
As reported	$	0.01	$	0.14
Pro forma		—		0.13

Recently Issued Accounting Pronouncement

On December 16, 2004, the Financial Accounting Standards Board issued Statement 123 (revised 2004), Share Based Payment, which is a revision of Statement 123. Statement 123(R) supersedes APB Opinion No. 25 and amends Statement 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in operating results based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) will be effective for the company at the beginning of the first fiscal year beginning after June 15, 2005, or the beginning of the company’s fiscal 2007.

Recently Issued Accounting Pronouncement — continued

Statement 123(R) permits public companies to adopt its requirements using one of two methods: (1) a “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date, or (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The company has not yet determined which of the two methods it will use to adopt the provisions of Statement 123(R).

As permitted by Statement 123, the company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have an impact on the company’s operating results. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the company adopted Statement 123(R) in prior periods, the impact would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in note 1. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions have not been significant.

Recent Acquisition

In accordance with FASB Statement 141, Business Combinations, the company allocates the cost of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the cost over the fair value of the net assets acquired is recorded as goodwill.

On May 31, 2005, the company acquired The CTS Corporations (“CTS”), a leading independent services organization, specializing in information technology storage solutions for large and medium-sized corporate customers and public-sector clients. Accordingly, the results of operations for CTS have been included in the accompanying condensed consolidated financial statements from that date forward. The addition of CTS enhances the company’s offering of comprehensive storage solutions. The acquisition price was $27.8 million, which included $2.6 million in assumed debt and $0.3 million of direct acquisition expenses. In addition, the company will pay an earn-out to former CTS shareholders based on the acquired business achieving specific financial performance targets. If those financial performance targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill arising in the acquisition.

Based on management’s initial allocation of the acquisition cost to the net assets acquired, approximately $24.1 million has been assigned to goodwill. However, the company is still in the process of assessing the fair value of the acquired net assets, which includes identifying intangible assets acquired in the business combination. Accordingly, allocation of the purchase price is subject to modification in the near future. Goodwill resulting from the CTS acquisition will not be deductible for income tax purposes.

Discontinued Operations

During 2003, the company sold substantially all of the assets and liabilities of its Industrial Electronics Division (“IED”), which distributed semiconductors, interconnect, passive and electromechanical components, power supplies and embedded computer products in North America. In connection with the sale of IED, the company discontinued the operations of Aprisa, Inc. (“Aprisa”), which was an internet-based start up corporation that created customized software for the electronic components market. The disposition of IED and discontinuance of Aprisa represented a disposal of a component of an entity as defined by FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The company continues to incur certain costs related to IED and Aprisa, which are reported in the condensed consolidated statement of operations as loss from discontinued operations.

For the three-months ended June 30, 2005 and 2004, the Company realized a loss from discontinued operations of $143,000 (net of $93,000 of income taxes) and $164,000 (net of $102,000 of income taxes), respectively.

Restructuring Charges

Continuing Operations

During the first quarter of 2006, the company initiated a plan to consolidate a portion of its operations to reduce costs and increase future operating efficiencies. As part of that restructuring effort, the company initiated the shut-down of certain leased facilities and reduced the workforce of its Keylink Systems Group. The company also executed a senior management realignment and consolidation of responsibilities. Costs incurred for one-time termination benefits and other associated costs resulting from workforce reductions amounted to $2.3 million, which are recorded as a component of restructuring charges in the accompanying condensed consolidated statement of operations. These termination benefits are expected to be paid over the next 12 months. The company has not recorded a liability for contract termination costs relating to the exit of certain leased facilities since the company had not ceased using the properties as of June 30, 2005. Such costs are expected to be incurred during the second quarter of 2006. The company will also incur an additional workforce reduction during the second quarter of 2006 as certain synergies from the integration of CTS into the company’s professional services business are realized. The aggregate amount of costs to be incurred by the company upon completion of the restructuring activities is anticipated to be $4.3 to $4.8 million.

In the fourth quarter of 2003, concurrent with the sale of IED, the company announced it would restructure its remaining enterprise computer solutions business and facilities to reduce overhead and eliminate assets that were inconsistent with the company’s strategic plan and were no longer required. In connection with this reorganization, the company recorded restructuring charges totaling $20.7 million for the impairment of facilities and other assets no longer required as well as severance, incentives, and other employee benefit costs for personnel whose employment was involuntarily terminated. The charges were classified as restructuring charges in the statement of operations. Severance, incentives, and other employee benefit costs were paid to approximately 110 personnel. Facilities costs represent the present value of qualifying exit costs, offset by an estimate for future sublease income for a vacant warehouse that represents excess capacity as a result of the sale of IED.

Restructuring Charges — continued

Following is a reconciliation of the beginning and ending balances of the restructuring liability:


	Severance and
	other employee
	costs			Facilities			Total
Balance at April 1, 2005	$	—		$	5,458		$	5,458
Additions		2,297			—			2,297
Accretion of lease obligations		—			103			103
Amounts paid		(72	)		(160	)		(232	)
Other		(492	)		—			(492	)

Balance at June 30, 2005	$	1,733		$	5,401		$	7,134

The $0.5 million classified as “other” in the reconciliation represents the net cost of certain incentive and benefit plan obligations that were included in the restructuring charge during the current quarter and subsequently reclassified elsewhere within the balance sheet to conform to the classification of similar obligations of the company. Of the remaining $7.1 million reserve at June 30, 2005, approximately $1.6 million is expected to be paid during the remainder of 2006 for severance and other employment costs and $0.5 million is expected to be paid for facilities obligations. Severance and other employee costs are expected to continue to 2007 and facilities obligations are expected to continue to 2017.

Discontinued Operations

In connection with the sale of IED in 2003, the company recognized a restructuring charge of $28.7 million. The significant components of the charge were as follows: $5.9 million related to severance and other employee benefit costs to be paid to approximately 525 employees previously employed by IED and not hired by the acquiring company; $5.0 million related to facilities costs for approximately 30 vacated locations no longer required as a result of the sale that were determined as the present value of qualifying exit costs offset by an estimate for future sublease income; and $17.4 million related to the write down of assets to fair value that were abandoned or classified as “held for sale,” as a result of the disposition and discontinuance of IED and Aprisa, respectively.

Following is a reconciliation of the beginning and ending balances of the restructuring liability:


	Facilities
Balance at April 1, 2005	$	1,639
Accretion of lease obligations		19
Amounts paid		(207	)

Balance at June 30, 2005	$	1,451

Of the remaining $1.5 million reserve at June 30, 2005, approximately $0.3 million is expected to be paid during the remainder of 2006 for facilities obligations. Facilities obligations are expected to continue to 2010.

Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill during the three-months ended June 30, 2005 are summarized in the following table:


Balance at April 1, 2005	$	173,774
Goodwill acquired — CTS (see note 3)		24,075
Goodwill adjustment — Kyrus Corporation		(415	)
Impact of foreign currency translation		(17	)

Balance at June 30, 2005	$	197,417

The company acquired Kyrus Corporation (“Kyrus”) on September 30, 2003. The $0.4 million adjustment to goodwill relating to Kyrus is for the settlement of tax uncertainties that existed at the date of acquisition. The company may have to record additional amounts for similar tax uncertainties in the future; however, such amounts cannot be estimated at this time. Any additional amounts recorded by the company for tax uncertainties that existed at the date of acquisition will result in a change to goodwill.

In accordance with FASB Statement 142, Goodwill and Other Intangible Assets, the company does not amortize goodwill; rather, goodwill is tested for impairment on an annual basis, or more often if conditions exist which indicate potential impairment. The company uses a measurement date of February 1 for its annual impairment test of goodwill. As of February 1, 2005, which was the latest annual impairment test performed, the company concluded that the fair value of its two reporting units exceeded their carrying value, including goodwill. As such, step two of the goodwill impairment test was not necessary and no impairment loss was recognized. As of June 30, 2005, the company was not aware of any circumstances or events requiring an interim impairment test of goodwill.

Intangible Assets

The following table summarizes the company’s intangible assets at June 30, 2005:


	Gross carrying		Accumulated
	amount		amortization			Net carrying amount
Amortized intangible assets:
Customer relationships	$	5,300	$	(2,875	)	$	2,425
Non-competition agreements		910		(183	)		727
Developed technology		1,470		(327	)		1,143
Patented technology		80		(36	)		44

		7,760		(3,421	)		4,339
Unamortized intangible assets:
Trade names		900		—			900

Total intangible assets	$	8,660	$	(3,421	)	$	5,239

Amortization expense for the three-months ended June 30, 2005 and 2004 was $0.6 million and zero, respectively. Estimated amortization expense for the entire fiscal year relating to the intangible assets identified above is approximately $2.0 million. Finite-lived intangible assets identified upon the completion of assessing the fair value of net assets acquired in connection with the CTS business combination will result in an increase in the company’s amortization expense.

Mandatorily Redeemable Convertible Trust Preferred Securities

On June 15, 2005, the company completed the redemption of its 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (“Securities”). The carrying value of the Securities as of March 31, 2005 was $125.3 million and was classified as a current liability. Securities with a carrying value of $105.4 million were redeemed for cash at a total cost of $109.0 million, which included accrued interest of $1.5 million and a 2.025% premium of $2.1 million. The company funded the redemption with existing cash. In addition, 398,324 Securities with a carrying value of $19.9 million were converted into common shares of the company. The securities were converted at the conversion rate of 3.1746 common shares for each share of the Securities converted, resulting in the issuance of 1,264,505 common shares of the company.

As a result of the redemption, the company wrote off deferred financing fees of $2.7 million in the first quarter of 2006. The financing fees, incurred at the time of issuing the Securities, were being amortized over a 30-year period ending on March 31, 2028, which was the initial maturity date of the Securities. The write off of deferred financing fees, along with the premium payment discussed above, resulted in a loss on retirement of debt of $4.8 million.

Contingencies

The company is the subject of various threatened or pending legal actions and contingencies in the normal course of conducting its business. The company provides for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the company’s future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict with certainty, management believes that the ultimate resolution of such matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the company.

Comprehensive Income

The components of comprehensive income, net of taxes, for the three-months ended June 30, 2005 and 2004 are as follows:


	Three months ended June 30
	2005			2004
Net income	$	290		$	3,850

Other comprehensive income:
Foreign currency translation adjustment		(246	)		966

Comprehensive income	$	44		$	4,816

10.

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:


	Three months ended
	June 30
	2005		2004
Numerator:
Income from continuing operations — basic and diluted	$	433	$	4,014


Denominator:
Weighted average shares outstanding — basic		28,902		28,015
Effect of dilutive securities
Stock options and unvested restricted stock		926		403

Weighted average shares outstanding — diluted		29,828		28,418


Earnings per share from continuing operations — basic and diluted	$	0.01	$	0.14

Options on 2.2 million shares of common stock for the three months ended June 30, 2004 were not included in computing diluted earnings per share nor were 6.6 million and 8.0 million shares issuable upon conversion of the Mandatorily Redeemable Convertible Trust Preferred Securities (“Securities”) for the three months ended June 30, 2005 and 2004, respectively, because their effects were anti-dilutive.

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

AGILYSYS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document as well as the company’s Annual Report on Form 10-K for the year ended March 31, 2005.

Overview

Agilysys, Inc. (“company”) is one of the foremost distributors and premier resellers of enterprise computer technology solutions. The company sells complex servers, software, storage and services to resellers and corporate customers across a diverse set of industries. The company also provides customer-centric software applications and services focused on the retail and hospitality markets. As an integrator of server, storage, software and services needs, the company is able to partner with its customers to become a single solutions provider for enterprise computing requirements.

The company’s results for the first quarter of 2006 reflect sales growth in each of our major product lines, as net sales increased 6% to $410.0 million for the current quarter, compared with $386.7 million for the quarter ended June 30, 2004. Further, the company continued the execution of its strategic plan and focus on improving operational efficiency. During the current quarter, the company initiated a plan to reduce costs and drive future efficiencies. As part of this effort, the company reduced headcount and began to exit certain facilities and consolidate activities. Management expects to complete most of the restructuring efforts during the second quarter of 2006.

During the quarter, the company completed two significant investing and financing activities. First, the company completed the acquisition of The CTS Corporations (“CTS”), a leading independent services organization, specializing in information technology storage solutions for large and medium-sized corporate customers and public-sector clients. The addition of CTS enhances the company’s offering of comprehensive storage solutions. Second, the company completed the redemption of its 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (“Securities”). This redemption eliminates the annual distribution on the Securities and eliminates the potential dilution of approximately 6.7 million shares.

The company experiences a disproportionately large percentage of quarterly sales in the last month of its fiscal quarters. In addition, the company experiences a seasonal increase in sales during its fiscal third quarter ending in December. Accordingly, the results of operations for the three-month period ended June 30, 2005 are not necessarily indicative of the operating results for the full fiscal year or any future period.

The following discussion of the company’s results of operations and financial condition is intended to provide information that will assist in understanding the company’s financial statements, including key changes in financial statement components and the primary factors that accounted for those changes.

Results of Operations

Net Sales and Operating Income


	Three months ended						Increase
	June 30						(decrease)
(Dollars In Thousands)	2005			2004			$			%
Net sales	$	409,954		$	386,672		$	23,282			6.0	%
Cost of goods sold		359,196			338,007			21,189			6.3

Gross margin		50,758			48,665			2,093			4.3
Gross margin percentage		12.4	%		12.6	%
Operating expenses
Selling, general and administrative expenses		41,239			38,950			2,289			5.9
Restructuring charges		2,424			189			2,235			1,182.5

Operating income	$	7,095		$	9,526		$	(2,431	)		(25.5	)%
Operating income percentage		1.7	%		2.5	%

Net Sales. Of the $23.3 million increase in net sales, approximately $20.8 million was achieved by higher sales volume from the company’s Enterprise Solutions Group (“ESG”), which serves large and medium-sized corporations across many industries. Approximately $15.1 million of the increase in ESG sales was attributed to higher sales in the hospitality and retail industries. The remaining $2.5 million increase in net sales was achieved by higher sales volume from the company’s KeyLink Systems Group, which is the company’s primary connection with its reseller partners.

Changes in net sales by major product category are as follows: hardware sales increased $14.9 million, software sales increased $7.4 million, and professional services revenue increased $1.0 million. The increase in hardware sales was mainly driven by higher sales volume of mid-range servers, offset by lower sales volume of storage solutions. The increase in software sales was primarily due to higher sales of remarketed software. The marginal increase in professional services revenue can be attributed to higher sales of proprietary services.

As previously discussed, the company acquired The CTS Corporations (“CTS”) on May 31, 2005, a leading independent services organization, specializing in information technology storage solutions for large and medium-sized corporate customers and public-sector clients. Accordingly, the results of operations for CTS have been included in the accompanying condensed consolidated financial statements from that date forward, contributing approximately $1.4 million of incremental revenue to the company’s consolidated results for the current quarter. Based on the timing of the acquisition, CTS is expected to contribute approximately $30.0 million to the company’s 2006 net sales.

The company anticipates net sales for the full year to increase approximately 5% to 7% compared with prior year. 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-months ended June 30, 2005 are not necessarily indicative of the operating results for the full fiscal year 2006.

Gross Margin. The $2.1 million increase in gross margin was driven by the increase in net sales, as gross margin percentage remained relatively consistent at 12.4% for the current quarter compared with 12.6% for the same quarter last year. The relative consistency in gross margin percentage was achieved as supplier incentives earned in the current quarter largely offset pricing pressures experienced in the company’s solutions offerings. A significant component of the company’s gross margin is the realization and timing of incentive payments from its suppliers. Incentive programs are principally designed to

reward sales performance. The company anticipates gross margin to be approximately 12.4% of net sales for the entire fiscal year 2006.

Operating Expenses. The company’s operating expenses consist of selling, general, and administrative (“SG&A”) expenses and restructuring charges. The $2.3 million increase in SG&A expenses was mainly due to higher compensation and benefits, which increased approximately $2.1 million during the current quarter compared with the first quarter last year. Compensation and benefits costs attributed to the addition of CTS employees accounted for approximately $0.8 million of the increase. Costs associated with incentive and retirement plans increased approximately $0.2 million in the current quarter compared with the first quarter last year. The remaining increase in compensation and benefits can generally be attributed to annual wage increases and variable compensation arrangements that tend to fluctuate based on sales results.

Restructuring charges increased $2.2 million during the quarter compared with the first quarter last year, which reflects restructuring efforts executed by the company during the quarter. The company initiated a plan to consolidate a portion of its operations to reduce costs and increase future operating efficiencies. As part of that restructuring effort, the company initiated the shut-down of certain leased facilities and reduced the workforce of its Keylink Systems Group. The company also executed a senior management realignment and consolidation of responsibilities. Costs incurred for one-time termination benefits and other associated costs resulting from workforce reductions amounted to $2.3 million, which are recorded as a component of restructuring charges in the accompanying condensed consolidated statement of operations. These termination benefits are expected to be paid over the next 12 months. The company has not recorded a liability for contract termination costs relating to the exit of certain leased facilities since the company had not ceased using the properties as of June 30, 2005. Such costs are expected to be incurred during the second quarter of 2006. The company will also incur an additional workforce reduction during the second quarter of 2006 as certain synergies from the integration of CTS into the company’s professional services business are realized. The aggregate amount of costs to be incurred by the company upon completion of the restructuring activities is anticipated to be $4.3 to $4.8 million.

Other (Income) Expense


	Three months ended						Favorable
	June 30						(unfavorable)
(In Thousands)	2005			2004			$			%
Other (income) expense
Other income, net	$	(362	)	$	(239	)	$	123			51.5	%
Interest income		(1,471	)		(352	)		1,119			317.9
Interest expense		1,607			1,641			34			2.1
Loss on redemption of Mandatorily Redeemable Convertible Trust Preferred Securities		4,811			—			(4,811	)		100.0

Total other (income) expense, net	$	4,585		$	1,050		$	(3,535	)		(336.7	)%

Interest income. The increase in interest income was the result of higher investment yields earned on the company’s cash equivalents versus the comparable quarter last year. The company’s average cash and cash equivalent balance was reasonably consistent during the current quarter and first quarter prior year.

Loss on redemption of Mandatorily Redeemable Convertible Trust Preferred Securities. In connection with the company’s redemption of its 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (“Securities”) in the current quarter, the company wrote off deferred financing fees of $2.7 million. The financing fees, incurred at the time of issuing the Securities, were being amortized over a

30-year period ending on March 31, 2028, which was the maturity date of the Securities. The write off of deferred financing fees, along with the $2.1 million premium payment made with the redemption, resulted in a loss of $4.8 million.

Income Tax Expense

The effective tax rate for continuing operations for the three-months ended June 30, 2005 was 46.9% compared with 36.6% for the first quarter in the prior year. The increase in the effective tax rate primarily reflects the recognition of State net operating loss carryforwards in the prior year and the impact of tax legislation enacted by the State of Ohio during the quarter ended June 30, 2005. The impact of this legislation on existing deferred tax assets, including state net operating losses and related valuation allowance, resulted in additional income tax expense of $168,000 in the current quarter.

Business Combination

On May 31, 2005, the company acquired CTS, a leading, independent services organization, specializing in information technology storage solutions for large and medium-sized corporate customers, and public-sector clients. The acquisition of CTS initiates a relationship with EMC Corporation and will position the company as a leading provider of storage services. CTS works closely with corporate and public sector end-users to help optimize the value and performance of their IT storage systems, implementing storage solutions around major storage providers. The purchase price was $27.8 million, which included $2.6 million in assumed debt and $0.3 million of direct acquisition expenses and was funded by cash. In addition, the company will pay an earn-out to CTS shareholders based on the acquired business achieving specific financial performance targets. CTS has annual revenues of approximately $35.0 million and, based on the timing of the close of the transaction, contribution to 2006 revenues is expected to be approximately $30.0 million. In the first quarter of 2006, sales generated from CTS since the date of acquisition were $1.4 million, or less than 1.0% of consolidated sales.

Restructuring Charges

Continuing Operations. During the first quarter of 2006, the company initiated a plan to consolidate a portion of its operations to reduce costs and increase future operating efficiencies. As part of that restructuring effort, the company initiated the shut-down of certain leased facilities and reduced the workforce of its Keylink Systems Group. The company also executed a senior management realignment and consolidation of responsibilities. Costs incurred for one-time termination benefits and other associated costs resulting from workforce reductions amounted to $2.3 million, which are recorded as a component of restructuring charges in the accompanying condensed consolidated statement of operations. These termination benefits are expected to be paid over the next 12 months. The company has not recorded a liability for contract termination costs relating to the exit of certain leased facilities since the company had not ceased using the properties as of June 30, 2005. Such costs are expected to be incurred during the second quarter of 2006. The company will also incur an additional workforce reduction during the second quarter of 2006 as certain synergies from the integration of CTS into the company’s professional services business are realized. The aggregate amount of costs to be incurred by the company upon completion of the restructuring activities is anticipated to be $4.3 to $4.8 million.

classified as restructuring charges in the statement of operations. Severance, incentives, and other employee benefit costs were paid to approximately 110 personnel. Facilities costs represent the present value of qualifying exit costs, offset by an estimate for future sublease income for a vacant warehouse that represents excess capacity as a result of the sale of IED.

Discontinued operations. In connection with the sale of IED in 2003, the company recognized a restructuring charge of $28.7 million. Of the total charge, $5.9 million related to severance and other employee benefit costs to be paid to approximately 525 employees previously employed by IED and not hired by the acquiring company; $5.0 million related to facilities costs for approximately 30 vacated locations no longer required as a result of the sale that were determined as the present value of qualifying exit costs offset by an estimate for future sublease income; and $17.4 million related to the write down of assets to fair value that were abandoned or classified as “held for sale,” as a result of the disposition and discontinuance of IED and Aprisa, respectively. During the first quarter of 2006, the restructuring reserve was reduced by ongoing payment of facilities obligations. As of June 30, 2005, $1.5 million of the restructuring charge remained, all of which relates to facilities obligations. Approximately $0.3 million is expected to be paid during the remainder of 2006 for facilities obligations, representing the accretion of lease obligations and the absence of sub-lease income that was assumed when the restructuring charge was initially recorded. Facilities obligations are anticipated to continue until 2010.

Liquidity and Capital Resources

Overview

The company’s operating cash requirements consists primarily of working capital requirements, scheduled payments of principal and interest on indebtedness outstanding and capital expenditures. The company believes that cash flow from operating activities, cash on hand, available borrowings under its credit facility, and access to capital markets will provide adequate funds to meet its short and long-term liquidity requirements.

As of June 30, 2005, the company’s total debt balance was $59.9 million and consisted of Senior Notes and capital lease obligations. As of March 31, 2005, the company’s total debt balance was $185.2 million, and consisted of Senior Notes, capital lease obligations and Mandatorily Redeemable Convertible Trust Preferred Securities (“Securities”). The significant decrease in total debt from prior year-end to June 30, 2005 is due to the redemption of the company’s Securities in June 2005.

Mandatorily Redeemable Convertible Trust Preferred Securities

On June 15, 2005, the company completed the redemption of its Securities. The carrying value of the Securities as of March 31, 2005 was $125.3 million. Securities with a carrying value of $105.4 million were redeemed for cash at a total cost of $109.0 million. The company funded the redemption with existing cash. In addition, 398,324 Securities with a carrying value of $19.9 million were converted into common shares of the company. The Securities were converted at the conversion rate of 3.1746 common shares for each share of the Securities converted resulting in the issuance of 1,264,505 common shares of the company. As a result of the redemption, the company wrote off deferred financing fees of $2.7 million. The financing fees incurred at the time of issuing the Securities were being amortized over a 30-year period ending March 31, 2028.

Prior to redemption the Securities were non-voting (except in limited circumstances) and paid quarterly distributions at an annual rate of 6.75%. The Securities were convertible into common shares at the rate of 3.1746 common shares for each Security (equivalent to a conversion price of $15.75 per common share).

Senior Notes

The principal amount of Senior Notes outstanding at June 30, 2005 and March 31, 2005 was $59.4 million, which are due August 2006. The Senior Notes pay interest semi-annually on February 1 and August 1 at an annual rate of 9.5%. Interest accrued on the Senior Notes as of June 30, 2005 was approximately $2.4 million. The indenture under which the Senior Notes were issued limits the creation of liens, sale and leaseback transactions, consolidations, mergers and transfers of all or substantially all of the company’s assets, and indebtedness of the company’s restricted subsidiaries. The Senior Notes are subject to mandatory repurchase by the company at the option of the holders in the event of a change in control of the company.

Revolving Credit Facility

The company maintains a revolving credit agreement (“Revolver”), which provides the ability to borrow up to $100 million (limited to certain borrowing base calculations) and allows for increases under certain conditions up to $150 million during the life of the facility. Advances on the Revolver bear interest at various levels over LIBOR, and a facility fee is required, both of which are determined based on the company’s leverage ratio. The Revolver does not contain a pre-payment penalty. There were no amounts outstanding under the Revolver at June 30, 2005 or March 31, 2005.

Cash Flow

The following table presents cash flow results from operating activities, investing activities, and financing activities for the three-months ended June 30, 2005 and 2004:


	Three months ended
	June 30						Increase
(In Thousands)	2005			2004			(decrease)
Net cash provided by (used for) continuing operations:
Operating activities	$	30,591		$	52,403		$	(21,812	)
Investing activities		(28,094	)		(123	)		(27,971	)
Financing activities		(104,637	)		55			(104,692	)

Cash flows (used for) provided by continuing operations		(102,140	)		52,335			(154,475	)
Net cash (used for) provided by discontinued operations		(478	)		3,698			(4,176	)

Net (decrease) increase in cash and cash equivalents	$	(102,618	)	$	56,033		$	(158,651	)

Cash Flow from Operating Activities. The decrease in cash provided by operating activities was mainly due to working capital changes, which negatively impacted operating cash flow in the current quarter by approximately $22.3 million when compared with prior year. The negative working capital change was principally due to the timing of cash receipts from customers and inventory purchases; offset by the impact of the timing of payment to our vendors.

Cash Flow Used for Investing Activities. The increase in cash used for investing activities was the result of the company’s acquisition of CTS during the current quarter, which was funded by cash. The purchase price for the acquisition of CTS was $27.8 million. The acquisition of CTS initiates a relationship with EMC Corporation and positions the company as a leading provider of storage services.

Cash Flow from Financing Activities. The increase in cash used for financing activities was the result of the redemption of the company’s Securities in June 2005. Securities with a carrying value of $105.4 million were redeemed at a premium of 2.025%, for a total of $107.5 million. The company funded the redemption with existing cash. The remaining Securities, which had a carrying value of $19.9 million, were converted into common shares of the company.

Contractual Obligations

The company has contractual obligations for long-term debt, capital leases and operating leases that were summarized in a table of contractual obligations in the company’s Annual Report on Form 10-K for the year ended March 31, 2005 (“Annual Report”). On June 15, 2005, the company completed the redemption of its 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (“Securities”). Securities with a carrying value of $105.4 million were redeemed for cash at a total cost of $109.0 million. The company funded the redemption with existing cash. In addition, 398,324 Securities with a carrying value of $19.9 million were converted into common shares of the company. The Securities were converted at the conversion rate of 3.1746 common shares for each share of the Securities converted, resulting in the issuance of 1,264,505 common shares of the company.

Other than the redemption of the Securities, there have been no material changes to the contractual obligations summarized in the table included in the Annual Report outside the ordinary course of business.

Off-Balance Sheet Arrangements

The company has not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Recent Accounting Standard

A detailed description of the company’s critical accounting policies can be found in the company’s Annual Report.

In December 2004, the FASB issued Statement 123 (revised 2004), Share Based Payment, which is a revision of Statement 123. Statement 123(R) supersedes APB Opinion No. 25 and amends Statement 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in operating results based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) will be effective for the company at the beginning of the first fiscal year beginning after June 15, 2005, or the beginning of the company’s fiscal 2007.

interim periods of the year of adoption. The company has not yet determined which of the two methods it will use to adopt the provisions of Statement 123(R).

As permitted by Statement 123, the company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have an impact on the company’s operating results. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the company adopted Statement 123(R) in prior periods, the impact would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in note 1 to the accompanying consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions have not been significant.

Risks Relating to the Company

The company is highly dependent on its key suppliers and supplier programs.
The company depends on a small number of key suppliers. During fiscal 2005, products purchased from IBM and HP, the company’s two largest suppliers, accounted for 72% and 16%, respectively, of the company’s sales volume. The loss of either of these suppliers or a combination of certain other suppliers could have a material adverse effect on the company’s business, results of operations and financial condition. From time to time, a supplier may terminate the company’s right to sell some or all of a supplier’s products or change the terms and conditions of the supplier relationship or reduce or discontinue the incentives or programs offered. Any such termination or implementation of such changes could have a material negative impact on the company’s results of operations.

Risks associated with the indirect distribution of the company’s products and services may materially adversely affect the company’s financial results.
In addition to direct sales, the company markets and sells products and services indirectly through systems integrators, resellers and original equipment manufacturers. The company derives a significant percentage of its revenues from sales through these reseller partners. The company’s financial results could be materially adversely affected if the company’s agreements with its reseller partners were terminated, if the company’s relationships with its reseller partners were to deteriorate or if the financial condition of its reseller partners were to weaken. In addition, as the company’s market opportunities change, the company may have an increased reliance on its reseller partners, which may negatively impact the company’s gross margins. There can be no assurance that the company will be successful in maintaining or expanding the sales revenue generated by the indirect distribution of its products and services. If the company is not successful, the company may lose sales opportunities, customers and market share. In addition, there can be no assurance that the company’s reseller partners will not develop, market or sell products or services in competition with the company in the future.

The market for the company’s products and services is affected by rapidly changing technology and inventory obsolescence and if the company fails to anticipate and adapt to such changes and protect against inventory obsolescence, the company’s results of operations may suffer.
The markets in which the company competes are characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing needs of customers. The company’s future success will depend on its ability to adapt to changes in technology and industry standards. In

addition, because the company maintains certain levels of inventory in order to ensure that the lead times to customers remain competitive, the company is subject to the risk of inventory obsolescence. If the company fails to successfully manage the challenges of rapidly changing technology and inventory obsolescence risks, the company’s results of operations may suffer.

Market factors could cause a decline in spending for information technology, adversely affecting our financial results.
Our revenue and profitability depend on the overall demand for our products and services. Delays or reductions in information technology by end users could materially adversely affect the demand for our products and services. If the markets for our products and services soften or continue to soften, our business, results of operations or financial condition could be materially adversely affected.

The company’s business could be materially adversely affected as a result of the risks associated with acquisitions and investments.
As part of the company’s business strategy, the company seeks acquisition prospects that could accelerate the growth of its business by expanding its customer base, extending its reach into new markets and/or broadening the range of solutions it offers. However, acquisitions always present risks and uncertainties. These factors could have a material adverse effect on the company’s business, results of operations or financial condition.

Management has identified material weaknesses in the company’s disclosure controls and procedures and its internal control over financial reporting, which, if not remedied effectively, could result in a material misstatement of the company’s reported results.
As discussed reporting the company’s Annual Report on Form 10-K for the year ended March 31, 2005, management concluded that the company’s disclosure controls and procedures and internal control over financial reporting had material weaknesses as of March 31, 2005. The company has taken certain actions to begin to address these material weaknesses. The company’s inability to remediate these material weaknesses promptly and effectively could have a material impact on the reported results of operations and financial condition, as well as impair its ability to meet its quarterly and annual reporting requirements in a timely manner. These effects could in turn adversely affect the trading price of the company’s common shares. Prior to the remediation of these material weaknesses, there remains the risk that the transitional controls on which the company currently relies will not be sufficiently effective, which could result in a material misstatement of the company’s financial position or results of operations and require a restatement.

Forward-Looking Information

Portions of this report contain current management expectations, which may constitute forward-looking information. When used in this Management’s 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 management’s current opinions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those stated or implied.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Risks and uncertainties include, but are not limited to: competition, dependence on the IT market, softening in the computer network and platform market, rapidly changing technology and inventory obsolescence, dependence on

key suppliers and supplier programs, risks and uncertainties involving acquisitions, instability in world financial markets, downward pressure on gross margins, the ability to meet financing obligations based on the impact of previously described factors and uneven patterns of quarterly sales.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting the company, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the company’s Annual Report. There have been no material changes in the company’s market risk exposures since March 31, 2005.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. The company’s management, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. The company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The company’s disclosure controls and procedures include components of the company’s internal control over financial reporting.

In Item 9A of the company’s Annual Report on Form 10-K for the year ended March 31, 2005, as filed with the Securities and Exchange Commission, management reported that two material weaknesses existed in the company’s internal control over financial reporting as of March 31, 2005 and the company is in the process of taking remedial steps to correct these weaknesses. Since these remedial steps have not been completed as of June 30, 2005, management performed additional analysis and other procedures to ensure the condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the condensed consolidated financial statements included in this quarterly report present fairly in all material respects the company’s financial position, results of operations and cash flows for the period presented.

Based upon, and as of the date of, this evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures were effective for the purpose of ensuring that material information required to be in this quarterly report was made known to them by others on a timely basis.

(c) Changes in internal control over financial reporting. During the most recent quarter, the company began implementing the remedial measures described in “Management’s Report on Internal Control over Financial Reporting,” which is included in the company’s Annual Report on Form 10-K for the year ended March 31, 2005. These remedial measures are in response to the material weaknesses identified in the company’s internal control over financial reporting as of March 31, 2005. Because these remedial measures are in early stages of implementation, there has been no change in the company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On June 15, 2005, the company completed the redemption of its 6.75% Convertible Trust Preferred Securities (“Securities”). Holders of the Securities were required to accept a cash payment of $51.72 in exchange for each Security, or to convert the Securities into common shares of Agilysys by June 15, 2005. In connection with the redemption during the quarter ended June 30, 2005, the company issued 1,264,505 common shares upon conversion of Securities. The common shares were not registered under the Securities Act of 1933 (the “Securities Act”) in reliance on an exemption from registration afforded by Section 3(a)(9) of the Securities Act.

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


Exhibits
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.


Date: August 9, 2005				/s/ Arthur Rhein
				Arthur Rhein
				Chairman, President and Chief Executive Officer
				(Principal Executive Officer)

Date: August 9, 2005				/s/ Martin F. Ellis
				Martin F. Ellis
				Executive Vice President, Treasurer and
				Chief Financial Officer
				(Principal Financial and Accounting Officer)

6065 Parkland Boulevard, Mayfield Heights, Ohio

(Address of principal executive offices)

(Zip code)


Part I.	Financial Information

	Item 1	Financial Statements

		Condensed Consolidated Statements of Operations — Three Months Ended June 30, 2005 and 2004 (Unaudited)

		Condensed Consolidated Balance Sheets — June 30, 2005 (Unaudited) and March 31, 2005

		Condensed Consolidated Statements of Cash Flows — Three Months Ended June 30, 2005 and 2004 (Unaudited)

		Notes to Condensed Consolidated Financial Statements — June 30, 2005 (Unaudited)

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Item 3	Quantitative and Qualitative Disclosures About Market Risk

	Item 4	Controls and Procedures

Part II.	Other Information

	Item 1	Legal Proceedings

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds

	Item 3	Defaults Upon Senior Securities

	Item 4	Submission of Matters to a Vote of Security Holders

	Item 5	Other Information

	Item 6	Exhibits

Signatures
EX-31.1 Certification
EX-31.2 Certification
EX-32.1 Certification
EX-32.2 Certification