UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.  )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to Section 240.14a-11c or Section 240.14a-12

 

AGILYSYS, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

$485,000,000

 

 

$51,895

 

 

 

 

 

 

 

 

 

 

 

AGILYSYS, INC.

 

2255 GLADES ROAD, SUITE 425W, BOCA RATON, FLORIDA, 33431

 

 

January   , 2007

 

Dear Shareholder:

 

You are cordially invited to attend the special meeting of shareholders of Agilysys, Inc., which will be held at [          ], local time, on [          ], 2007, at [The Marriott Boca Town Center, 5150 Town Center Circle, Boca Raton, Florida 33486 (Phone: 561-392-4600)]. If you plan to attend, we ask you to assist in our planning efforts and RSVP by calling 877-415-1886. Please leave your name, address and telephone number.

 

We have made the strategic decision to sell our KeyLink Systems Group distribution business (our “KeyLink Systems Distribution Business”) at this time so that we can focus solely on our Enterprise Solutions Group direct-sale business (our “IT Solutions Business”) — which, we believe, offers our shareholders and employees significant long-term value creation opportunities as a stand-alone entity. At the special meeting we will seek approval of the sale of assets and operations related to our KeyLink Systems Distribution Business.

 

Our board of directors has unanimously approved and recommends that our shareholders vote “FOR” approving the proposed asset sale and granting authority to management to adjourn or postpone the special meeting to allow time for the further solicitation of proxies in the event there are insufficient votes, present at the special meeting in person or by proxy, to approve the proposed asset sale.

 

As more fully detailed in the attached proxy statement, we propose to sell substantially all the assets and operations of our KeyLink Systems Distribution Business to Arrow Electronics, Inc. for a price of $485 million in cash. The buyers will be assuming all ordinary course liabilities and obligations associated with our KeyLink Systems Distribution Business, subject to certain exceptions. In addition, we will enter into a product procurement agreement with Arrow.

 

Please review in detail the attached proxy statement for a more complete understanding of the proposed asset sale, including a description of the asset purchase agreement, the background of the decision to enter into the asset purchase agreement, the reasons that our board of directors has decided to recommend that you approve the proposed asset sale, and the section titled “Special Risk Considerations Regarding the Proposal to Sell the KeyLink Systems Distribution Business” describing risk factors relating to the proposed asset sale.

 

It is important that your shares are represented and voted at the meeting, whether or not you plan to attend. Because approval of two-thirds of the voting power of the company’s common shares is required to approve the proposed asset sale, failure to vote your shares or to instruct your broker to vote your shares held in “street name” will have the practical effect of a vote against the proposed asset sale. Accordingly, please sign, date and mail the enclosed proxy, in the envelope provided, at your earliest convenience.

 

Thank you for your cooperation and continued support.

 

Arthur Rhein

Chairman of the Board

 

AGILYSYS, INC.

 

2255 GLADES ROAD, SUITE 425W, BOCA RATON, FLORIDA, 33431

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

 

The special meeting of shareholders of Agilysys, Inc. will be held at [The Marriott Boca Town Center, 5150 Town Center Circle, Boca Raton, Florida 33486 (Phone: 561-392-4600)], on [          ] at   p.m., local time, for the following purposes:

 

1. To approve the sale of our KeyLink Systems Distribution Business (as defined in this proxy statement) to Arrow Electronics, Inc., Arrow Electronics Canada Ltd. and Support Net, Inc. under the terms of the asset purchase agreement attached as Annex A to this proxy statement;

 

2. To grant authority to management to adjourn or postpone the special meeting to allow time for the further solicitation of proxies in the event there are insufficient votes, present in person or by proxy, to approve the sale of the KeyLink Systems Distribution Business; and

 

3. To transact such other business as may properly come before the special meeting or any adjournments or postponements thereof.

 

Only shareholders of record at the close of business on [          ], 2007 are entitled to notice of the special meeting and to vote thereat.

 

If you plan to attend, we ask you to assist in our planning efforts and RSVP by calling 877-415-1886. Please leave your name, address and telephone number.

 

By Order of the Board of Directors.

 

Lawrence N. Schultz

Secretary

 

[          ], 2007

 

TABLE OF CONTENTS

 

 

AGILYSYS, INC.

 

2255 GLADES ROAD, SUITE 425W, BOCA RATON, FLORIDA, 33431

 

 

Mailed to Shareholders on or about [          ], 2007

 

Special Meeting of Shareholders to be held on [          ], 2007

 

The proxy enclosed with this proxy statement is solicited by the board of directors of Agilysys, Inc., and is to be used at the special meeting of shareholders to be held on [          ], 2007, and any adjournments or postponements thereof. The time, place and purposes of the special meeting are stated in the notice of special meeting of shareholders which accompanies this proxy statement. Without affecting any vote previously taken, a shareholder may revoke his, her or its proxy by giving notice to the company in writing at any time before the earlier of its exercise or in open meeting. Unless so revoked, shares represented by a valid proxy (in the form enclosed and properly signed) received in time for voting will be voted in accordance with the directions contained therein.

 

The holders of common shares of the company (the only class of voting shares outstanding) will be entitled to vote at the special meeting. At the close of business on [          ], 2007, the date fixed for the determination of persons entitled to vote, there were [          ] common shares outstanding and entitled to vote at the special meeting, each share being entitled to one vote. To assure compliance with Ohio law, the proposal to approve the sale of our KeyLink Systems Distribution Business (as defined below) must be approved by the affirmative vote of the holders of record of at least two-thirds of the outstanding common shares. An abstention from voting any share with respect to the proposal will have the practical effect of a vote against the proposal.

 

THIS DOCUMENT IS NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION OF AN OFFER TO SELL SECURITIES. AGILYSYS HAS NOT YET COMMENCED THE TENDER OFFER REFERRED TO HEREIN. THE TENDER OFFER WILL BE MADE ONLY, IF AT ALL, THROUGH AN OFFER TO PURCHASE AND RELATED LETTER OF TRANSMITTAL. INVESTORS AND SECURITY HOLDERS ARE STRONGLY ADVISED TO READ THE TENDER OFFER STATEMENT OF AGILYSYS AND THE RELATED LETTER OF TRANSMITTAL WHEN SUCH DOCUMENTS ARE FILED AND BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. THE TENDER OFFER STATEMENT WILL BE FILED BY AGILYSYS WITH THE SECURITIES AND EXCHANGE COMMISSION (“SEC”). INVESTORS AND SECURITY HOLDERS MAY OBTAIN A FREE COPY OF THIS STATEMENT (WHEN FILED AND AVAILABLE) AND OTHER RELEVANT DOCUMENTS ON THE SEC’S WEB SITE AT: HTTP://WWW.SEC.GOV. THE TENDER OFFER STATEMENT AND RELATED MATERIALS MAY ALSO BE OBTAINED FOR FREE BY DIRECTING SUCH REQUESTS TO AGILYSYS.

 

SUMMARY TERM SHEET

	•	Initiates a liquidity event for KeyLink Systems Distribution Business that maximizes value and provides additional financial flexibility to fund the growth of our IT solutions business;
	•	Provides liquidity for shareholders through the planned self-tender offer (discussed below) contemplated as a use of proceeds;
	•	Under Arrow’s ownership, provides the KeyLink Systems Distribution Business the required scale and leverage for continued success;
	•	Eliminates channel conflict between the KeyLink Systems Distribution Business and the IT Solutions Business as well as eliminating ambiguity in the IT marketplace and investment community regarding the company’s dual route to market strategy;
	•	Eliminates restrictions on future growth by allowing management to solely focus on the IT Solutions Business, and as such, creates the opportunity to expand our already significant IT Solutions Business;
	•	Further facilitates our investment in the development of our existing proprietary software and services to offer robust IT solution for new and existing customers;
	•	Transformed Agilysys should have superior profitability since the IT Solutions Business generally generates higher margins due to end-user customer relationships and higher proprietary content, as well as requiring less fixed capital; and
	•	Moves the company closer to the end customer.

	•	On a pro forma basis, the IT Solutions Business contributed approximately 27% of our consolidated sales for the trailing twelve months ended September 30, 2006 (but approximately 49% of gross profit); while the KeyLink Systems Distribution Business contributed approximately 73% for the same time period;

	—	Revenues will be reduced from $1.7 billion to approximately $470 million;

	•	The asset sale might not be consummated;

	—	The public announcement of the asset sale and pending shareholder approval could have a negative effect on our KeyLink Systems Distribution Business and on our stock price;

	•	A disruption of management and employees might occur as a result of the announced sale;
	•	Agilysys will not be permitted to compete within IT distribution for a period of five years;
	•	There is no current plan to distribute proceeds of the asset sale to our shareholders, other than the self-tender offer, and shareholders may disagree as to how the proceeds are reinvested;
	•	We may be subject to certain contingent liabilities pursuant to the asset purchase agreement;
	•	We will need to grow our remaining business through organic investment and acquisitions;
	•	Growth based on acquisitions is dependent on market conditions and competition;
	•	Future performance anticipates successful rationalization and reduction of corporate overhead; and
	•	Agilysys might fail to effectively integrate the companies it acquires.

	•	Self-Tender Offer:  As part of the company’s commitment to increase financial flexibility and create value for shareholders, as soon as reasonably practicable following the completion of the proposed sale of the KeyLink Systems Distribution Business, we intend to purchase up to six million common shares in an estimated $100 million self-tender offer. The ultimate number of shares repurchased and dollar value of the self-tender offer will be dependent on the stock price and market conditions at the time. You should be aware that, although we expect to commence the self-tender offer shortly following the closing, it is possible that we will not commence the self-tender offer or the cash payment we expect to offer could be substantially less than we currently anticipate due to unanticipated events or circumstances.

	•	Fund Organic Growth:  We will have the financial flexibility to accelerate our investment in the business, including but not limited to:

	•	Hiring new sales and technical resources;
	•	Introducing new products, services and solutions; and
	•	Developing our current software and services.

	•	Acquisitions:  Agilysys will continue to enhance its offerings through the acquisition of products and services that help provide a differentiated competitive position. Agilysys evaluates any prospective acquisition based on how well it provides the company an opportunity to accelerate growth by expanding its customer base, extending its reach into new markets, expanding its offering of proprietary services to select industry vertical markets, or broadening the range of solutions that the company offers. The company’s long-term goal is to improve its business model by acquiring and integrating intellectual assets in the form of products and services which position Agilysys higher up the value scale. Agilysys requires any acquisition to improve the company’s financial performance within a reasonable period of time and create value for shareholders.
	•	General Corporate Purposes:

	•	The company intends to use proceeds for, among other operating and financial activities, paying its 3-cent quarterly, or 12-cent annual, dividend per share.

	•	As a leading North American IBM Corporation, or IBM, and Hewlett Packard, or HP, distributor, the KeyLink Systems Distribution Business represents an opportunity for Buyers to strengthen their relationships with these key suppliers, contributing to Buyers’ growth and enhancing their scale in the enterprise computing distribution business;
	•	Merging the KeyLink Systems Distribution Business into the Buyers’ existing enterprise computing distribution business provides the Buyers with significant opportunity for synergies and cost savings;
	•	The KeyLink Systems Distribution Business supplier and reseller relationships will provide Buyers with significant cross-selling opportunities, enabling Buyers to further accelerate the growth of their enterprise computing distribution business;

	•	The product procurement agreement to be entered into with Agilysys will increase the scale and profitability of the KeyLink Systems Distribution Business and enable the Buyers to benefit from the future growth of the Agilysys IT Solutions Business; and
	•	The addition of the KeyLink Systems Distribution Business’ highly experienced sales and marketing professionals will better equip Buyers to serve their value-added reseller partners with an unprecedented supplier line offering, further strengthening Buyers’ existing relationships and firmly positioning Buyers to attract new relationships.

	•	Not vote your common shares in favor of the proposal to approve the sale of the KeyLink Systems Distribution Business;
	•	Deliver a written demand for payment of the fair cash value of your common shares on or before the tenth day following the special meeting; and
	•	Otherwise comply with the statutory requirements of the ORC.

	•	In order to complete the asset sale, Agilysys and Buyers are required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or the HSR Act, to make filings with the United States Federal Trade Commission and the United States Department of Justice and wait for the expiration or early termination of the required waiting period. These filings were made on January [  ], 2007.
	•	Other than applicable U.S. antitrust laws, neither we nor Buyers are aware of any other regulatory requirements or governmental approvals or actions that may be required to consummate the sale of our KeyLink Systems Distribution Business, except for compliance with the applicable regulations of the Securities and Exchange Commission in connection with this proxy statement and the ORC in connection with the sale of our KeyLink Systems Distribution Business.

Assets to be Sold (see pages 46-47)		We are selling substantially all the assets and operations that relate to our KeyLink Systems Distribution Business.
Assets to be Retained (see pages 47-48)		We will be retaining certain assets, referred to as the Retained Assets, related to our IT Solutions Business and associated with our KeyLink Systems Distribution Business, including, for example:
		• Cash on hand and checks received pending collection as of the close of business on the closing date, notes, bank deposits, certificates of deposit, marketable securities and other cash equivalents, including the consideration payable to us under the asset purchase agreement in respect of the purchase price;
		• All rights to certain marks, trade secrets and copyrights and applications and other intellectual property owned by us, together with any goodwill associated therewith;
		• Certain operating leases and leasehold interests;
		• Hardware, software and other technology used to support both businesses, with interim support to be provided by us to Buyers pursuant to a transition services agreement; and
		• All capital stock of, or ownership interest in, any entity.
Liabilities to be Assumed (see page 48)		Buyers will assume only certain specified liabilities of our KeyLink Systems Distribution Business, referred to as the Assumed Liabilities, subject to certain exceptions, including, for example:

		• All accounts payable, except disputed accounts payable, and accrued expenses relating to the KeyLink Systems Distribution Business to the extent reflected or reserved against in the audited balance sheet that is delivered as part of the closing;
		• Our pre- and post-closing obligations under all contracts used exclusively in connection with the KeyLink Systems Distribution Business, except for any pre-closing liabilities arising from any material breach by us; and
		• All product liability claims relating to the KeyLink Systems Distribution Business prior to the closing date for which Buyers receive reimbursement or indemnification by a supplier of the KeyLink Systems Distribution Business.
Liabilities to be Retained (see pages 48-49)		Other than the Assumed Liabilities, we will retain all of our liabilities including liabilities related to our IT Solutions Business. As of September 30, 2006, there were no contingent or accrued non-contingent liabilities of the KeyLink Systems Distribution Business that we are retaining.
Purchase Price (see page 49)		In exchange for the assets that we are selling, we will receive $485 million in cash. A dollar-for-dollar increase or decrease to the purchase price will occur if net working capital at closing, as provided in the asset purchase agreement, is greater than or less than certain target amounts which vary based on the actual closing date.
		The purchase price may also be reduced in the event that KeyLink Systems Distribution Business customer contracts for the purchase of products have terminated after execution but prior to the closing date or, as of the closing date, if Oracle Corporation (“Oracle”) has not consented to the transaction. In that event the purchase price will be reduced by an amount equal to the product of (x) the amount by which the sum of (a) the sales to such pre-closing lost customers during the twelve-month period ending September 30, 2006 and (b) sales of Oracle products during the twelve month period ending September 30, 2006, exceeds $200 million, multiplied by (y) 0.35.
Conditions to Our Obligations (see pages 53-54)		Our obligation to complete the sale of the KeyLink Systems Distribution Business is subject to the fulfillment or waiver prior to closing of certain conditions, including without limitation:
		• Buyers’ representations and warranties must be materially true and correct at closing;
		• Buyers’ compliance with their covenants and agreements in all material respects;
		• Any waiting period (and any extension) under the HSR Act will have expired or will have been terminated;
		• No governmental authority will have issued any law making the transactions contemplated by the asset purchase agreement illegal; and
		• Approval of the sale of the KeyLink Systems Distribution Business.

Conditions to Buyers’ Obligations (see page 54)		Buyers’ obligation to complete the purchase of the KeyLink Systems Distribution Business is subject to the fulfillment or waiver prior to closing of certain conditions, including without limitation:
		• Our representations and warranties must be materially true and correct at closing, as contemplated by the asset purchase agreement;
		• Our compliance with our covenants and agreements in all material respects;
		• Any waiting period (and any extension) under the HSR Act will have expired or will have been terminated;
		• No governmental authority will have issued any law making the transactions contemplated by the asset purchase agreement illegal;
		• Our receipt of necessary third-party consents to assign certain agreements to Buyers; and
		• Approval of the sale of the KeyLink Systems Distribution Business by our shareholders.
Termination (see page 56)		The asset purchase agreement may be terminated at any time prior to the closing:
		• By the mutual written consent of us and Buyers;
		• By either party if the closing will not have occurred by June 2, 2007, unless this date is extended by either party pursuant to the asset purchase agreement;
		• By either party, if there has been a material breach by the other party of any material representation or warranty or any covenant in each case, which breach has not been cured within 30 days following receipt of notice of such breach, and will result in the failure to satisfy any closing conditions; or
		• By either party if the asset purchase agreement fails to receive the requisite vote for approval at the special meeting.
Break-Up Fee/Expenses (see pages 56-57)		• If the proposed sale of the KeyLink Systems Distribution Business to Buyers is terminated because Agilysys shareholders fail to approve it, we will reimburse Buyers for the expenses incurred in connection with the proposed sale.
		• If we receive an offer to acquire the assets and operations of the KeyLink Systems Distribution Business and the proposed sale to Buyers is later terminated because of material breach by us or the failure of our shareholders to approve the sale to Buyers, and within one year of termination we enter into and subsequently close a transaction which constitutes a superior offer, as defined in the asset purchase agreement, we will pay Buyers a termination fee equal to 2% of the purchase price under the asset purchase agreement (less any expenses previously reimbursed to Buyers) within 10 days of the closing of the transaction contemplated by the superior offer.
		• If our board of directors withdraws, modifies or changes its recommendation that our shareholders approve the sale of the KeyLink Systems Distribution Business to Buyers, and the proposed sale later is terminated because our shareholders fail to approve it, we will pay

		Buyers a termination fee equal to 1% of the purchase price under the asset purchase agreement (less any expenses previously reimbursed to Buyers).
No Solicitation		Except as necessary to verify the potential value of another proposal to acquire the KeyLink Systems Distribution Business as contemplated by the asset purchase agreement, we have agreed that we will not take any action to encourage any offer or inquiry from any person other than the Buyers regarding the sale of our KeyLink Systems Distribution Business.

 

 

 

 

 

This proxy statement is provided in connection with the special meeting of shareholders of Agilysys, Inc., and any adjournment or postponement of the meeting. The accompanying proxy is solicited by the board of directors. This proxy statement and the accompanying form of proxy are first being sent or given to shareholders beginning on or about [          ], 2007.

 

The special meeting of shareholders of Agilysys, Inc. will be held at [          ] on [          ], 2007 at [The Marriott Boca Town Center, 5150 Town Center Circle, Boca Raton, Florida 33486 (Phone: 561-392-4600)].

 

At the special meeting, you will be asked:

 

 

The board of directors knows of no other matters to be presented for action at the special meeting. If any other matters properly come before the special meeting, however, the persons named in the proxy will vote on such other matters in accordance with their best judgment.

 

The record date for the determination of shareholders entitled to notice of and to vote at the special meeting was the close of business on [          ], 2007.

 

The presence in person or by proxy of the holders as of the record date of a majority of the common shares entitled to vote at the special meeting is necessary to constitute a quorum. Abstentions and broker non-votes are treated as present at the meeting and are therefore counted to determine a quorum. The special meeting may be adjourned by a majority of voting shares present in person or by proxy and entitled to vote, whether or not a quorum is present. If a quorum is not present, the chairman of the meeting may adjourn the meeting to another place or time, without notice other than announcement at the meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the special meeting as originally called.

 

At the close of business on [          ], 2007, there were [          ] common shares outstanding. At the special meeting, each common share is entitled to one vote. Approval of the proposed asset sale will require the affirmative vote of two-thirds the voting power of our common shares. Failure to vote your shares or to instruct your broker to vote any of your shares in “street name” will have the practical effect of a vote against the proposed asset sale. Approval of the proposal to authorize adjournment or postponement will require the affirmative vote of the holders of a majority of the shares represented at the special meeting.

 

Our board of directors unanimously recommends that you vote “FOR” the approval of the sale of our KeyLink Systems Distribution Business under the terms of the asset purchase agreement and “FOR” the grant of authority to

management to adjourn or postpone the special meeting to allow time for further solicitation of proxies in the event there are insufficient votes, present in person or by proxy, to approve the sale of the KeyLink Systems Distribution Business.

 

The board of directors is soliciting proxies from our shareholders. By completing and returning the accompanying proxy, you will be authorizing Martin F. Ellis and Lawrence N. Schultz to vote your shares. If your proxy is properly signed and dated it will be voted as you direct. If you attend the special meeting in person, you may vote your shares by completing a ballot at the meeting. You may also vote your shares by mail, telephone or electronically by Internet as described on your proxy card.

 

Your proxy may be revoked at any time before it is voted at the special meeting by giving notice of revocation to us, in writing, by execution of a later dated proxy or by attending and voting at the special meeting. Simply attending the special meeting, however, will not revoke your proxy; you must vote at the special meeting.

 

If you return a signed and dated proxy card but do not indicate how your shares are to be voted, those shares will be voted “FOR” approval of the sale of our KeyLink Systems Distribution Business and “FOR” the proposal to grant authority to management to adjourn or postpone the special meeting to allow time for the further solicitation of proxies in the event there are insufficient votes, present in person or by proxy, to approve the proposed asset sale. Votes cast by proxy or in person at the special meeting will be tabulated by the election inspectors appointed for the special meeting.

 

Shares voted as abstentions will be counted for purposes of determining the presence of a quorum at the special meeting and treated as unvoted, although present and entitled to vote, for purposes of determining the approval of the sale of our KeyLink Systems Distribution Business and the proposal to authorize adjournment or postponement. As a result, abstentions will have the same effect as a vote against the proposal to approve the sale of our KeyLink Systems Distribution Business. Brokers will not have discretionary authority to vote on the proposals. Therefore, if a broker submits a proxy that indicates that the broker has not received voting instructions from the beneficial owner as to certain common shares, those common shares will be counted for purposes of determining the presence of a quorum at the special meeting, and these “broker non-votes” will have the same effect as votes against the proposal to approve the proposed asset sale. “Broker non-votes” will not affect the proposal to authorize adjournment or postponement.

 

We will bear the entire cost of solicitation of proxies, including preparation, assembly, printing and mailing of this proxy statement, the proxy and any additional information furnished to you. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names our common shares beneficially owned by others to forward to such beneficial owners. We may reimburse persons representing beneficial owners of common shares for their costs of forwarding solicitation materials to such beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, telegram or personal solicitation by our directors, officers or other regular employees. The company has retained Georgeson Inc. to assist in soliciting proxies, at an anticipated cost of $25,000 plus expenses.

 

This section of this proxy statement describes aspects of the proposed asset sale. However, we recommend that you read carefully the complete asset purchase agreement for the precise legal terms of the agreement and other information that may be important to you. The asset purchase agreement is included in this proxy statement as Annex A. Unless otherwise defined in this section, all capitalized terms used in this section have the meanings ascribed to them in the section titled “Summary Term Sheet.”

 

Agilysys Company Description — Prior to the Sale of the KeyLink Systems Distribution Business. We currently have two routes to market. We sell directly to end customers via our IT Solutions Business; and to our reseller partners via our KeyLink Systems Distribution Business. These reseller partners add their own set of products and services to create solutions that they ultimately sell to end customers.

 

Our IT Solutions Business delivers tailored solutions by providing the best available products and services from suppliers, which we often combine with our proprietary software and services. Our IT Solutions Business helps end customers across many industries resolve their most critical and complicated IT business challenges by designing and implementing solutions that fit their specific needs. We fulfill our role as a leading provider of enterprise computer technology solutions by offering complex and specialized infrastructure solutions consisting of hardware, software and services. We have strong relationships with leading suppliers of enterprise hardware, software and services. Also, we are a leading systems integrator in the supermarket, chain drug and general retail marketplace, a provider of proprietary software for the hotel casino and destination resort segments of the hospitality industry, and a broad-based provider of professional IT consulting, implementation, integration and support services. Our IT Solutions Business operates through four groups — Technology Solutions, Retail Solutions, Hospitality Solutions and Professional Services.

 

 

Our KeyLink Systems Distribution Business is a leading distributor of enterprise computer technology products and services, with a partner-focused strategy of promoting the growth opportunities of our reseller customers. We act as a key link between our suppliers — HP, IBM, Oracle and others — and our reseller customers. In addition to distributing hardware, software and services from the leading technology suppliers, we also offer our own services that foster the business growth of approximately 800 reseller partners. These services help our reseller partners serve the needs of their end-user customers. We also provide technical competency and support, along with integration, configuration, pricing and supplier programs, packaging and bundling.

 

Our principal executive offices are located at 2255 Glades Road, Suite 425W, Boca Raton, Florida, 33431. The telephone number of our principal executive offices is (561) 999-8700.

 

Agilysys Canada Inc.  Agilysys Canada Inc., an Ontario corporation, has a principal office at 300 March Road, Suite 203, Kanata, Ontario, Canada, K2K 2E2. Agilysys Canada is a wholly-owned subsidiary of Agilysys. It is through Agilysys Canada that the Canadian operations of both our KeyLink Systems Distribution Business and our IT Solutions Business function.

 

Arrow Electronics, Inc., Arrow Electronics Canada Ltd. and Support Net, Inc.  Arrow Electronics, Inc., a New York corporation, is a major global provider of products, services and solutions to industrial and commercial users of electronic components and computer products. Headquartered in Melville, New York, Arrow serves as a supply channel partner for nearly 600 suppliers and more than 130,000 original equipment manufacturers, contract manufacturers and commercial customers through a global network of over 270 locations in 53 countries and territories. Arrow Electronics Canada Ltd, a Canadian corporation and Support Net, Inc., an Indiana corporation, are wholly-owned subsidiaries of Arrow.

 

Business and Industry Overview

 

In the fiscal year ended March 31, 2002, Agilysys (known then as Pioneer-Standard Electronics, Inc.) had managed through a difficult year. Sales had declined 20% from $2.9 billion in fiscal 2001 to $2.3 billion in fiscal 2002. Gross margins were pressured, significantly declining for the second year in a row, and operating margins were at an all-time low at just under 1%. The distribution-focused business was capital intensive, requiring an inventory investment of over $260 million, and long-term debt levels were over $300 million, equating to a debt-to-capital ratio of approximately 50%. The company had limited financial flexibility and even with aggressive management of expenses, the company reported break-even operating results, and a net loss in earnings per share.

 

Fiscal 2003 looked to be another challenging year with a protracted downturn in electronics markets and continued competitive pressures on margins and pricing.

 

Specifically, the electronic components business was challenged by a number of issues, including:

 

 

On the other hand, the computer industry provided more significant long-term growth opportunities for the company than the electronic components industry. In addition, the operating margins of 3% to 5% achieved by the company’s computer systems business were among the best in the industry. The prospects for further growth in the computer systems business were excellent, as forecasts at the time called for IT spending growth from 2001 through 2006 at a compound annual growth rate of 8% to 10% worldwide. Agilysys had significant opportunities to grow the

computer systems business both organically and through acquisitions to expand its product and service offerings and profit potential.

 

Beginning of the Transformation

 

Working with Stern Stewart & Co. (financial advisors and experts in the development of EVA or Economic Value Added, the business performance and valuation measure), Agilysys conducted a review of strategic alternatives for the company. From that process, a strategic plan to transform the business was developed to increase the intrinsic value of the company, which would, in turn, increase shareholder value.

 

The company’s strategic transformation began with its divestiture of its broad-line electronic components distribution business to focus solely on the computer systems business. The sale of the electronic components business meant that the company would be less dependent on the more cyclical markets in the components business. In addition, the company would be able to invest more in the computer systems business, which offered greater potential for sustainable growth at higher levels of profitability.

 

The proceeds from the sale of the electronic components distribution business, combined with cash generated from the company’s ongoing operations, were used to retire long-term debt and accelerate the growth of the company, both organically and through a series of acquisitions.

 

Following the sale of the electronic components distribution business, the company announced that it would restructure its remaining computer systems business and facilities to reduce overhead and eliminate assets that were inconsistent with the company’s strategic plan. As a result of the restructuring, management adjusted cost and overhead appropriately to deal with the immediately reduced sales and profitability. The remaining computer systems business consisted of the KeyLink Systems Distribution Business and the IT Solutions Business. The KeyLink Systems Distribution Business operated as a distributor of enterprise computing products and sold to resellers, who then sold directly to end customers. The IT Solutions Business operated as a reseller providing enterprise servers, software, storage and services and sold directly to end customers. Overall, the company was a leading distributor and reseller of enterprise computer systems, software, storage and services from HP, IBM, Intel, Enterasys, Hitachi Data Systems, Oracle and other leading manufacturers.

 

The computer systems business enjoyed a strong market position in a more stable industry with significant growth opportunities. Management had identified its top priorities for the company as long-term growth, innovation and differentiation — all directed toward achieving growth at more sustainable, higher levels of profitability and improved shareholder returns.

 

Goals and Accomplishments

 

With the divestiture of its $1.0 billion electronic components distribution business, the company sold 43% of its annual sales of $2.3 billion, with the intent to significantly grow the remaining business and improve profits within two to three years. At that time, management developed a number of near and longer-term goals, all of which the company essentially met or exceeded ahead of schedule.

 

From fiscal 2004 to 2006, these included:

 

 

 

Timeline of Events

 

2002 — Transformation process begins

 

The company decides to transform itself from a predominantly distribution-based business of broad-line electronic components and computer systems into a more differentiated, higher-margin company positioned closer to the end customer and focused solely on providing computer systems.

 

February 2003 — Divests electronic components business

 

The company begins to focus exclusively on its $1.2 billion computer systems business and divests its former broad-line electronic components distribution business. The sale raises pre-tax proceeds of $285 million in cash. The company cites the following reasons for the divestiture:

 

 

October 2003 — Acquires Kyrus Corporation

 

Agilysys acquires Kyrus Corporation, a leading provider of retail sales solutions and services with a direct focus on the supermarket, chain drug and general retail segments of the retail industry.

 

The Kyrus acquisition opens up a new market, expands the Agilysys customer base, increases the company’s service offerings and provides access to additional products. The addition of Kyrus strengthens the company’s reputation as a leading source of enterprise computer solutions across a diverse set of industries.

 

Kyrus positions Agilysys as the leading provider of IBM retail sales solutions, offering hardware and software products that ensure continuous retail operations. Kyrus also brings to Agilysys an extensive professional services organization with technology consulting, software customization, staging, implementation, hardware and software maintenance and 24/7 support service capabilities.

 

February 2004 — Acquires Inter-American Data, Inc.

 

The company acquires Inter-American Data, Inc., or IAD, a leading developer and provider of technology solutions in the hotel casino and destination resort segments of the hospitality industry.

 

The acquisition of IAD establishes Agilysys as a leading software developer and service provider to the hospitality industry, particularly the gaming sector, an area of the economy that has experienced positive growth in

recent years. The addition of IAD opened up a new market, broadened the Agilysys customer base, and increased the company’s service and product offerings.

 

With IAD, Agilysys becomes the leading developer and provider of technology solutions for property and inventory management in the casino and destination resort segments of the hospitality industry. IAD solutions consist of application-specific software and related services. IAD also develops and markets proprietary document management solutions with a focus on the hospitality, health care, retail and government markets with solutions that enable the capture, storage, control, manipulation, and distribution of scanned and electronically originated images.

 

May 2005 — Acquires The CTS Corporations

 

Agilysys acquires The CTS Corporations — a leading independent services organization specializing in IT storage solutions for large and medium-sized corporate customers and public-sector clients.

 

The acquisition of CTS initiates a relationship with EMC and immediately positions Agilysys as a leading provider of storage services. Its team of highly skilled consultants is an important addition to the organization, as Agilysys continues to enhance its competitive position, expand the company’s intellectual assets and extend its reach into new markets.

 

CTS enables Agilysys to work closely with corporate and public sector end-users to help optimize the value and performance of their IT storage systems. The company has a long and successful history of implementing storage solutions around major storage providers. These include EMC, as well as Hitachi Data Systems, HP, IBM, Legato, and StorageTek. Services include storage assessments, storage-related design and architecture, high availability/clustering, business continuance, data migration, backup and recovery, and project management.

 

December 2005 — Enters the China enterprise solutions market

 

The company enters the enterprise IT solutions market in China with the acquisition of the China operations of Mainline Information Systems.

 

The business specializes in IBM information technology enterprise solutions for large and medium-sized businesses and banking institutions in the China market, and has sales offices in Beijing, Guangzhou, Macau, Shanghai and Hong Kong. The acquired business provides the opportunity for Agilysys to quickly begin operations in China with a nucleus of local talented people.

 

December 2006 — Agrees to acquire Visual One Systems

 

Agilysys agrees to acquire Visual One Systems Corp., which expands the company’s position as a leading software developer and services provider within the hospitality industry, as well as extends the company’s reach into new markets, expands its customer base, and broadens its product and service offerings. This acquisition will continue the company’s commitment to offer industry-leading hospitality applications.

 

With Visual One Systems, Agilysys becomes a leading developer and marketer of Microsoft^® Windows^®-based software for the hospitality industry with offerings 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 acquisition of Visual One strategically provides Agilysys a complementary product offering and significantly increases the breadth of its customer set in the hospitality market. The purchase also immediately provides Agilysys a Windows-based solution for hotels and resorts that expands its current leading position in the hotel casino and destination resort market.

 

During this time-line period, Agilysys reduced its working capital as a percentage of revenue, provided greater rewardable value by positioning the company closer to the end customer, improved its margins and cash flow, and significantly delevered its balance sheet. The company also made five strategic acquisitions which expanded its product and service offerings, increased the profitably and extended its reach into new geographies and markets, and contributed to the acquisition and development of intellectual assets.

In addition to the favorable financial impact of these acquisitions, the company has significantly reduced leverage and in the process retired $150 million of 9.5% Senior Notes and $143 million of 6.75% Mandatorily Redeemable Convertible Preferred securities. With the remaining portion of this long-term debt retired in August 2006, the company became debt-free for the first time in more than 30 years. The strengthening of the balance sheet together with the business transformation has allowed us to reposition our company so that we have the flexibility to competitively build our IT Solutions Business.

 

From a stock price of $8.93 prior to the electronic components distribution business divestiture announcement in January 2003 to the closing price of $16.74 at December 31, 2006, the stock has increased $7.81, or 87%. In the process, Agilysys has grown sales from $1.2 billion in fiscal 2003 to $1.7 billion in fiscal 2006.

 

Completing the Transformation

 

The management team has proven that it can successfully redeploy the asset base and seize marketplace opportunities to shape a more profitable and attractive business after a significant divestiture. It intends to do the same with the timely strategic divestiture of the KeyLink Systems Distribution Business.

 

The sale of the KeyLink Systems Distribution Business is the final event that completes this multi-year transformation to move Agilysys closer to the customer and higher up the IT value scale, effectively positioning it to focus on its higher-growth IT Solutions Business. As a result of the divestiture, the company will essentially be freed from the increasing channel conflict and marketplace restrictions that exist in the business today.

 

This is the foundation upon which Agilysys intends to continue to grow following the divestiture of KeyLink Systems Distribution Business. We expect that the IT Solutions Business will:

 

 

Background of the sale of the KeyLink Systems Distribution Business

 

During calendar year 2004, our board of directors engaged JPMorgan to assist in a strategic review of our evolving business, particularly evaluating relative opportunities and challenges in our KeyLink Systems Distribution Business and our expanding IT Solutions Business. As a result of this review, our board of directors determined that divesting our KeyLink Systems Distribution Business would present an opportunity to maximize the value of that business while affording us a significant opportunity to increase long-term shareholder value.

 

To confirm our board’s strategic and value expectations, the company was assisted by JPMorgan in conducting a confidential process to allow qualified, interested potential acquirers to evaluate the KeyLink Systems Distribution Business and submit competitive offers. The company also continued its ongoing discussions with several potential IT Solutions Business target acquisition candidates to confirm growth, profitability and scale opportunities in that business.

 

JPMorgan conducted an auction process in late 2004 and early 2005, inviting a number of strategic and private equity investors to sign confidentiality agreements and obtain summary financial and descriptive information regarding the KeyLink Systems Distribution Business. After providing preliminary indications of interest, a small number of participants were invited to review detailed financial and other business information, as well as to meet with management. Final bids and completed contract proposals were received from two parties, including Arrow, in March 2005. IBM was unable to resolve matters related to the IBM franchise agreement and, therefore, the parties terminated further discussion regarding the transaction.

In the months immediately following the unsuccessful divestiture process, we continued to engage JPMorgan to evaluate strategic alternatives with respect to the KeyLink Systems Distribution Business. In late 2005, certain changes in the computer enterprise distribution market led both Agilysys and Arrow to believe that a transaction may be possible and would be mutually beneficial to both companies.

 

On December 2, 2005, Mr. Arthur Rhein, our Chairman, President and Chief Executive Officer, contacted Mr. William E. Mitchell, Arrow’s Chairman, President and Chief Executive Officer, for the purpose of exploring Arrow’s interest in acquiring the KeyLink Systems Distribution Business. On January 13, 2006, at the request of Mr. Rhein, Mr. Mitchell met with Mr. Rhein. Mr. Rhein and Mr. Mitchell discussed Arrow’s interest in re-engaging in discussions to acquire the KeyLink Systems Distribution Business. It was agreed that a very small group of management at the respective companies would be made aware of the discussions. On January 17, 2006, Mr. Paul J. Reilly, Arrow’s Senior Vice President and Chief Financial Officer, contacted Mr. Martin F. Ellis, Agilysys Executive Vice President, Treasurer and Chief Financial Officer, with an information request. The information request was filled over the following weeks and months. On May 10, 2006, Mr. Ellis met with Mr. Reilly to discuss progress and a mechanism for addressing outstanding issues. On May 18, 2006, a meeting was held principally between Mr. Ellis and Mr. Reilly, and other representatives of Agilysys and Arrow as well as financial advisors, to discuss valuation of the KeyLink Systems Distribution Business and to present the value of the transaction to Arrow. Mr. Ellis discussed with Mr. Reilly and other representatives of Arrow the KeyLink Systems Distribution Business’ business model, expected revenue and profitability growth, possible synergies from the potential transaction, tax benefits to Arrow and the incremental profitability and value to Arrow of establishing a product procurement agreement between Agilysys and Arrow. This discussion was followed by a meeting on May 31, 2006 which included business unit management from the KeyLink Systems Distribution Business and Arrow, to discuss in greater detail the revenue and profitability contribution to Arrow of the product procurement agreement.

 

IBM was contacted in the spring of 2006 to explore IBM’s willingness to consent to the sale of the KeyLink Systems Distribution Business to Arrow. Discussions continued with IBM.

 

Renewed discussions, due diligence and negotiation of an asset purchase agreement and product procurement agreement between Agilysys and Arrow took place over the first half of 2006.

 

In the fall of 2006, IBM indicated its willingness to consider consenting to the sale of the business to Arrow.

 

In October 2006, Arrow engaged in further due diligence. On November 8, 2006, Arrow submitted an information request for due diligence. On December 5, 2006, a management meeting was held between Agilysys and Arrow. In late December 2006, IBM provided its consent for the KeyLink Systems Distribution Business to be sold to Arrow only. Due diligence and negotiations of the terms and conditions of the asset purchase agreement and the product procurement agreement continued through the end of the calendar year 2006.

 

Throughout the process, from late 2004 through announcement of the transaction, the board of directors received regular updates on status of the sale of the KeyLink Systems Distribution Business as well as explored other strategic alternatives to separate the KeyLink Systems Distribution Business from the IT Solutions Business. A special meeting of the board of directors was held on December 20, 2006 to review and discuss the progress, status and possible terms of a potential sale of the business to Arrow. Management and the company’s legal advisors reviewed the material terms of the draft asset purchase agreement, draft procurement agreement, and draft proxy statement. JPMorgan reviewed with the board the valuation of the KeyLink Systems Distribution Business, implications of alternative purchase prices on a fairness opinion and a variety of alternatives regarding use of proceeds, including issuer tender offer considerations.

 

Agilysys and Arrow negotiated terms and conditions on the asset purchase agreement and the product procurement agreement and on December 31, 2006, had come to agreement on all material terms and conditions. On January 2, 2007, the board of directors held a special telephonic meeting to review the final terms and conditions of the proposed sale of the KeyLink Systems Distribution Business. Management and the company’s legal advisors reviewed the material terms of the asset purchase agreement, product procurement agreement, and draft proxy statement, specifically noting the changes since the Special Board Meeting on December 20, 2006. JPMorgan again reviewed with the board the valuation of the KeyLink Systems Distribution Business and provided its oral fairness opinion. The board also reviewed tender offer considerations among other use of proceeds alternatives.

 

Our management and board of directors believe the sale of KeyLink Systems Distribution Business and the terms of the related asset purchase agreement are in the best interests of Agilysys and our shareholders. The reasons for the proposed asset sale of the KeyLink Systems Distribution Business and some of the anticipated benefits, include:

 

 

 

However, if the asset sale is not consummated, we intend to continue to operate the KeyLink Systems Distribution Business as a continuing part of our business. In that event, we will continue to operate our distribution and sales business as an integrated provider of enterprise computer technology products and services to a variety of markets, including solution providers, resellers and ultimately end customers. However, we will be exposed to various market risks relating to this integrated business, which include, but may not be limited to:

 

 

In arriving at its determination that the proposed asset sale is in the best interest of Agilysys and our shareholders, our board of directors carefully considered the terms of the asset purchase agreement as well as the potential impact of the proposed asset sale on the company. As part of this process, our board of directors considered the advice and assistance of its outside financial advisors and legal counsel. In determining to authorize the proposed asset sale, our board of directors considered the factors set forth above as well as the following factors:

 

 

 

In view of the variety of factors considered in connection with its evaluation of the asset sale, the Agilysys board of directors did not find it practical to, and did not quantify or otherwise attempt to assign, relative weights to the specific factors considered in reaching its conclusions.

 

Buyers expect the transaction to significantly benefit its existing enterprise computing distribution business. In particular, Buyers have announced the following reasons for the purchase of the KeyLink Systems Distribution Business:

 

 

Our board of directors unanimously has determined that the sale of the KeyLink Systems Distribution Business is in the best interests of Agilysys and our shareholders. The Agilysys board of directors has unanimously approved

the asset purchase agreement and recommends that shareholders vote in favor of the proposal to approve the sale of the KeyLink Systems Distribution Business to Buyers under the terms of the asset purchase agreement.

 

Pursuant to an engagement letter dated November 5, 2004, as amended October 30, 2006, we retained JPMorgan as our financial advisor in connection with the proposed sale of the KeyLink Systems Distribution Business.

 

At a meeting of our board of directors held on January 2, 2007, JPMorgan rendered its oral opinion, subsequently confirmed in a written opinion, to our board of directors that, as of that date and based upon the assumptions, qualifications and limitations set forth in its opinion, the consideration to be received by Agilysys and Agilysys Canada in the proposed sale of the KeyLink Systems Distribution Business was fair, from a financial point of view, to Agilysys and Agilysys Canada.

 

The full text of the written opinion of JPMorgan, dated January 2, 2007, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations of the review undertaken by JPMorgan in rendering its opinion, is attached as Annex B to this proxy statement and is incorporated into this proxy statement by reference. The summary of JPMorgan’s opinion included in this proxy statement is qualified in its entirety by reference to the full text of such opinion. We urge our shareholders to read the opinion carefully and in its entirety. JPMorgan provided its opinion to our board of directors in connection with and for the purposes of its evaluation of the sale of the KeyLink Systems Distribution Business. JPMorgan’s opinion addresses only the consideration to be received in the sale, which was determined in negotiations between us and Arrow, and does not address any other matter. JPMorgan’s opinion does not constitute a recommendation to any shareholder of ours as to how such shareholder should vote with respect to the proposed sale of the KeyLink Systems Distribution Business or any other matter, and should not be relied upon by any shareholder as such.

 

In arriving at its opinion, JPMorgan, among other things:

 

 

In addition, JPMorgan held discussions with certain members of our and Arrow’s management with respect to certain aspects of the sale of the KeyLink Systems Distribution Business, and the past and current business operations of Agilysys and the KeyLink Systems Distribution Business, the financial condition and future prospects and operations of Agilysys and the KeyLink Systems Distribution Business, and certain other matters JPMorgan believed necessary or appropriate to its inquiry.

 

In giving its opinion, JPMorgan relied upon and assumed, without assuming responsibility or liability for independent verification, the accuracy and completeness of all information that was publicly available or was furnished to or discussed with it by us or otherwise reviewed by or for JPMorgan. JPMorgan did not conduct or was not provided with any valuation or appraisal of any assets or liabilities, nor did JPMorgan evaluate the solvency of

our company, Agilysys Canada, Arrow, Arrow Canada or Support Net, Inc. under any state or federal laws relating to bankruptcy, insolvency or similar matters. In relying on financial analyses and forecasts provided to it, JPMorgan assumed that they have been reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by our management as to the expected future results of operations and financial condition of the KeyLink Systems Distribution Business to which such analyses or forecasts relate. JPMorgan expressed no view as to such analyses or forecasts or the assumptions on which they were based. JPMorgan also assumed that the sale of the KeyLink Systems Distribution Business and the other transactions contemplated by the asset purchase agreement will be consummated as described in the asset purchase agreement. JPMorgan also assumed that the representations and warranties made by us, Agilysys Canada, Arrow, Arrow Canada and Support Net, Inc. in the asset purchase agreement and related agreements were and will be true and correct in all ways material to JPMorgan’s analysis, and that we will have no exposure under any indemnification obligations contained within the asset purchase agreement or the related documents in any amount material to its analysis, and that the purchase price adjustments set forth in the asset purchase agreement will not result in any adjustment to the consideration that is material to JPMorgan’s analysis. JPMorgan is not legal, regulatory or tax experts, and relied on the assessments made by our advisors with respect to such issues. JPMorgan further assumed that all material governmental, regulatory or other consents and approvals necessary for the consummation of the sale of the KeyLink Systems Distribution Business will be obtained without any adverse effect on us.

 

JPMorgan’s opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to JPMorgan as of, the date of the opinion. Subsequent developments may affect JPMorgan’s opinion and JPMorgan does not have any obligation to update, revise, or reaffirm its opinion. JPMorgan’s opinion is limited to the fairness, from a financial point of view, of the consideration to be received by Agilysys and Agilysys Canada in the proposed sale of the KeyLink Systems Distribution Business and JPMorgan expresses no opinion as to the fairness of the proposed sale of the KeyLink Systems Distribution Business to, or any consideration received in connection therewith by the holders of any class of securities, creditors or other constituencies of ours or as to the underlying decision by Agilysys and Agilysys Canada to engage in the transaction. JPMorgan expressed no opinion as to the price at which our common stock will trade at any future time.

 

Summary of JPMorgan’s Analysis

 

In connection with its opinion, JPMorgan performed the following financial analyses:

 

 

For the comparable company trading multiples analysis and precedent transaction multiples analysis, JPMorgan used summary financial estimates prepared by our management, which we refer to as the management projections, public filings, press releases, market data, and equity research reports. The discounted cash flow analysis was prepared using two cases based on our management’s projections. All market data used by JPMorgan in its analyses was as of the close of trading on December 29, 2006.

 

The following paragraphs summarize but do not purport to be complete descriptions of the analyses JPMorgan performed. The preparation of a fairness opinion is a complex process and does not lend itself to partial analysis or summary descriptions. Accordingly, the following summary of the analyses performed by JPMorgan must be considered in its entirety, as selecting portions of the analyses performed by JPMorgan could create an incomplete view of the process or assumptions underlying JPMorgan’s analyses and opinion. In arriving at its opinion, JPMorgan considered all of the financial analyses that it performed and did not attribute any particular weight to any individual analysis or factor that it considered or reach any specific conclusion with respect to any individual analysis. Rather, JPMorgan made its determination as to the fairness to Agilysys and Agilysys Canada, from a financial point of view, on the basis of JPMorgan’s experience and professional judgment after considering the results of all of the analyses performed by it. Analyses that are based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors. Accordingly, the forecasts and analyses made or used by JPMorgan are not necessarily indicative of actual future

results, which may be significantly more or less favorable than suggested by those analyses. Moreover, JPMorgan’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be bought or sold.

 

In accordance with customary investment banking practice, JPMorgan employed generally accepted valuation methods in reaching its opinion. The following is a summary of the material financial analyses that JPMorgan used in providing its opinion.

 

Comparable Company Trading Multiples Analysis

 

Using publicly available information, JPMorgan examined the trading values of selected companies involved in enterprise computer products and services distribution that it deemed to be comparable in operations to the KeyLink Systems Distribution Business. JPMorgan calculated a range of implied value for the KeyLink Systems Distribution Business based on the ratio of firm value to estimated calendar year 2007 earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, and the ratio of firm value to estimated calendar year 2007 revenues. JPMorgan calculated the firm value of each of those companies by first adding the sum of the company’s long-term and short-term debt to the sum of the market value of such company’s common equity, the book value of such company’s preferred stock and the book value of such company’s minority interest, and then subtracting from that result such company’s cash and cash equivalents. JPMorgan also calculated the ratio of firm value to EBITDA and ratio of firm value to revenues for Agilysys. For the comparable companies and our company, estimated EBITDA and revenues were based on consensus equity research estimates.

 

JPMorgan determined that the following companies were relevant to an evaluation of the KeyLink Systems Distribution Business based on JPMorgan’s view of the comparability of the operating and financial characteristics of these companies to the KeyLink Systems Distribution Business:

 

 

JPMorgan calculated a range of implied value for the KeyLink Systems Distribution Business by applying ranges of multiples derived from this analysis to the management projections of estimated 2007 revenues and estimated 2007 EBITDA. A range of multiples of 0.20x to 0.25x was applied to the estimated 2007 revenue projections and a range of multiples of 5.0x to 6.5x was applied to the estimated 2007 EBITDA projections. This analysis indicated approximate firm values for the KeyLink Systems Distribution Business ranging from $300 million to $375 million based on estimated 2007 revenues and $400 million to $520 million based on estimated 2007 EBITDA. The $485 million purchase price was greater than the range of approximations of firm value for the KeyLink Systems Distribution Business based on the multiples for estimated 2007 revenue for us and was within the range based on the multiples for estimated 2007 EBITDA. JPMorgan also noted that the company expects to receive estimated after-tax proceeds of $340 million, although since the comparable companies trading multiples analysis does not take into account the tax consequences of the sale to Agilysys, the estimated after-tax proceeds of $340 million are not directly comparable to the approximate firm values noted above.

Precedent Transaction Multiples Analysis

 

Using publicly available information, JPMorgan examined the following selected transactions involving companies in the enterprise computer products and services distribution industry.

 

 

JPMorgan calculated the transaction value in the selected transactions as multiples of Latest Twelve Month (“LTM”) revenues and LTM EBITDA based on public filings, press releases and equity research reports. As none of these acquisition targets were publicly traded companies at the time of the acquisition, the transaction value used by JPMorgan in its analysis was the announced purchase price, where publicly available. JPMorgan noted that the merger and acquisition transaction environment varies over time. JPMorgan also noted that no transaction reviewed by JPMorgan was directly comparable to the proposed sale of the KeyLink Systems Distribution Business and that, accordingly, its analysis involved complex considerations and judgments concerning differences in financial and operating characteristics of the KeyLink Systems Distribution Business relative to the targets in the selected transactions and other factors that would affect the acquisition values in the precedent transactions.

 

JPMorgan determined that the ratio of the firm value to the LTM revenues and the ratio of the firm value to the LTM EBITDA for the target companies ranged from 0.20x to 0.25x for estimated 2006 revenues and 4.5x to 6.0x for estimated 2006 EBITDA. These multiples indicated approximate firm values for the KeyLink Systems Distribution Business ranging from $290 million to $360 million based on estimated 2006 revenue and $340 million to $450 million based on estimated 2006 EBITDA. The $485 million purchase price was greater than the range of approximations of firm value for the KeyLink Systems Distribution Business based on the multiples for LTM revenues and based on the multiples of LTM EBITDA. JPMorgan also noted that the company expects to receive estimated after-tax proceeds of $340 million, although since the precedent transaction multiples analysis does not take into account the tax consequences of the sale to Agilysys, the estimated after-tax proceeds of $340 million are not directly comparable to the approximate firm values noted above.

 

Discounted Cash Flow Analysis

 

JPMorgan conducted a discounted cash flow analysis to calculate a range of implied value for the KeyLink Systems Distribution Business. A discounted cash flow analysis is a method of evaluating an asset using estimates of the future unlevered free cash flows generated by the asset and taking into consideration the time value of money with respect to those future cash flows by calculating their “present value.” “Present value” refers to the current value of one or more future cash payments from the asset, which we refer to as that asset’s cash flows, and is obtained by discounting those cash flows back to the present using a discount rate that takes into account macro-economic assumptions and estimates of risk, and the opportunity cost of capital and other appropriate factors. “Terminal value” refers to the capitalized value of all cash flows from an asset for periods beyond the final forecast period.

 

JPMorgan performed its discounted cash flow analysis using two cases based on our management’s projections using March 31, 2007 as the valuation date. The second case, which we refer to as the sensitivity case, incorporated certain adjustments to our management’s projections to incorporate certain risks that could potentially adversely impact the future operations and business performance of the KeyLink Systems Distribution Business. The projections for both cases consisted of detailed financial projections for fiscal years 2008 through 2012 and extensions of those projections for fiscal years 2013 through 2017. Using discount rates ranging from 14.0% to 16.0%, JPMorgan calculated a range of present values for the future unlevered free cash flows that the KeyLink

Systems Distribution Business is expected to generate, based upon both cases. The discount rates utilized were chosen based upon an analysis of the cost of capital for the KeyLink Systems Distribution Business. The terminal value for the KeyLink Systems Distribution Business was calculated using perpetuity growth rates ranging from negative 1.5% to positive 1.5%. The discounted cash flow analysis indicated approximate firm values for the KeyLink Systems Distribution Business ranging from $355 million to $430 million based on management’s projections and $265 million to $320 million based on the sensitivity case. The $485 million purchase price was greater than the range of approximations of firm value for the KeyLink Systems Distribution Business based on both cases. Since a discounted cash flow analysis measures after-tax value, JPMorgan also compared the estimated after-tax proceeds of approximately $340 million to the range of firm values calculated and found that the estimated after tax proceeds were less than the approximations of firm value for the management projections and greater than the approximations of firm value for the sensitivity case.

 

JPMorgan’s opinion was one of many factors that our board of directors considered in making its determination to recommend that our shareholders approve the sale of the KeyLink Systems Distribution Business. You should not view the analyses of JPMorgan as a determination of the opinion of our board of directors with respect to our value.

 

Our board of directors selected JPMorgan to render its opinion in connection with the sale of our Keylink Systems Distribution Business because of JPMorgan’s reputation as an internationally recognized investment banking and advisory firm with substantial experience in transactions similar to the sale of our Keylink Systems Distribution Business and because JPMorgan is familiar with us and our business. Our board of directors did not limit the investigations made or the procedures followed by JPMorgan in giving its oral or written opinion.

 

JPMorgan will receive a fee of $9,700,000 from us for its services as our financial advisor, a portion of which was paid upon delivery of its fairness opinion and a substantial portion of which it will receive upon consummation of the transaction. In addition, we have agreed to indemnify JPMorgan and its affiliates from and against certain liabilities arising from its engagement as our financial advisor, including liabilities under securities laws, and, subject to limited exceptions, to reimburse JPMorgan and its affiliates for all reasonable expenses incurred by them in investigating, preparing or defending any action or proceeding arising out of its provision of services as our financial advisor. In addition, we have agreed to reimburse JPMorgan for its reasonable expenses incurred by it in connection with its provision of services to us, including reasonable fees of outside counsel and other professional advisors. JPMorgan and its affiliates have performed in the past, and may continue to perform, certain services for us, Arrow and our and Arrow’s respective affiliates, all for customary compensation, including acting as co-managing underwriter of an offering of common stock of Arrow in 2004. JPMorgan’s commercial bank affiliate is a lender to us and is agent bank on Arrow’s credit facility. In the ordinary course of its businesses, JPMorgan and its affiliates may actively trade our and Arrow’s debt and equity securities for its own account or for the accounts of its customers and, accordingly, it may at any time hold long or short positions in such securities.

 

With all remaining portions of long-term debt retired in August 2006, Agilysys became debt-free for the first time in more than 30 years. As of September 30, 2006, the company had $95.7 million in cash on hand. With operating cash flows and the net proceeds from the sale of the KeyLink Systems Distribution Business, the company expects to have approximately $440 million in cash on hand at close.

 

The company plans to use the net proceeds over the short and medium term for: (i) the return of cash to shareholders through a self-tender offer, (ii) investment in the growth of the IT Solutions Business, both organically and through acquisition, and (iii) for general corporate purposes. The repurchase of the shares is a significant short-term use of proceeds to be executed as soon as reasonably practicable after the close of the transaction. Use of the proceeds for investment in the business will be ongoing over the short to medium term both as new headcount is added and new products and services are developed. Acquisitions will be continually pursued and proceeds will be used to finance acquisitions.

 

 

 

 

 

 

 

 

 

Overview

 

Focusing solely on its IT Solutions Business, Agilysys annual revenues will be approximately $470 million immediately following the divestiture of the KeyLink Systems Distribution Business, with gross margins in excess of 20%.

 

Agilysys will continue to grow as one of the largest providers of innovative IT solutions to corporate and public-sector customers, with special expertise in select vertical markets, including retail and hospitality. The company operates extensively throughout North America, with additional sales offices in the United Kingdom and China. The IT Solutions Business will be a leading provider of:

 

 

Our Strengths

 

Our many strengths — the greatest of which are the quality, experience and expertise of our people — underlie our position as a leading provider of innovative IT solutions. These strengths allow us to deliver knowledge, products and services that solve our customers’ challenges. They also enable our company to drive technology innovation in the markets we serve.

 

 

Capabilities & Solutions

 

 

 

Growth Opportunities and Strategy

 

By taking advantage of its market opportunities for growth via acquisitions and organically, the company intends to more fully leverage its industry-recognized operational savvy and customer service excellence, coupled with its demonstrated financial discipline, to deliver on the following newly projected performance goals:

 

 

Market Opportunities

 

Within the IT industry in which Agilysys operates, product sets include enterprise servers, data storage hardware, systems infrastructure software, networking equipment and IT services related to the implementation and support of these systems. IDC and other researchers estimate North American spending in these product sets was $211 billion in 2005, and is projected to grow to $272 billion by 2010.

 

The IT Solutions Business, with $470 million in revenues, is currently among the largest solution providers in the industry. From fiscal 2003 to 2006, the sales of IT solutions to end users increased from $276.7 million to $470 million or a compound annual growth rate (CAGR) of 19%, which includes acquisitions. The CAGR for the solutions segment of the IT industry was approximately 6% from 2003 to 2006 (Source: IDC).

 

Organic Growth

 

With its current financial flexibility and strong balance sheet, combined with the proceeds of the sale of the KeyLink Systems Distribution Business, the company has the means to continue investing in the business through organic growth as well as through acquisitions. Agilysys plans to continue enhancing its offerings organically through the development of products and services that will further differentiate its competitive position. The company’s ongoing goal will be to develop intellectual assets in the form of products and services that are higher up the value scale, and for which Agilysys will be financially rewarded.

 

Acquisition Strategy

 

Agilysys continues to broaden its offering through the acquisition of products and services that help provide a differentiated competitive position. The company evaluates any prospective acquisition based on its potential to accelerate growth by expanding the Agilysys customer base, extending its reach into new markets, expanding its offering of proprietary services to select industry vertical markets, or broadening the range of solutions that the company offers. Agilysys requires any acquisition to improve the company’s financial performance within a reasonable period of time and create value for shareholders. Management is confident in its ability to identify and purchase established, high-quality companies at an acceptable price and to effectively integrate them with minimal risk.

 

Both organic growth and additional acquisitions are expected to contribute significantly to the company’s achievement of its stated goals of revenue growth, improved gross margins and greater return on capital over the next three years. Following the divestiture, Agilysys will have a strong balance sheet with significant financial flexibility to quickly take advantage of its opportunities to enhance and differentiate its product and services offerings, broaden the customer base and expand its markets, while increasing shareholder value. As demonstrated by the company’s successful track record and strategic transformation over the past four years, the board of directors and management team will continue to focus on growing shareholder value by again redeploying the asset base to deliver additional sustainable value to shareholders.

 

We are organized under the corporate laws of the State of Ohio. Under Section 1701.76 of the ORC, the sale by us of “all or substantially all” our assets requires approval by the affirmative vote of the holders of two-thirds of the voting power of our outstanding common shares on the record date. The Ohio statute does not define the phrase “all or substantially all” and, since we are retaining material on-going businesses and assets after the proposed asset sale, the meaning of the phrase is not entirely clear in this context. In light of this uncertainty, we are seeking approval of our shareholders of the proposed asset sale. The asset purchase agreement provides that if our shareholders fail to approve the proposed asset sale, either party may terminate the asset purchase agreement. The asset purchase agreement also provides that obtaining such approval is a condition to each of us and Buyers being obligated to consummate the asset sale.

 

Our shareholders will not experience any change in their rights as shareholders as a result of the sale of the KeyLink Systems Distribution Business.

 

Under Ohio law, if you do not vote for the sale of the KeyLink Systems Distribution Business and comply with the other statutory requirements of the ORC, you may elect to receive the fair cash value of your shares. Fair cash value: (i) will be determined as of the day prior to the special meeting, (ii) will be the amount a willing seller and willing buyer would accept or pay with neither being under compulsion to sell or buy, (iii) will not exceed the amount specified in the shareholder’s written demand, and (iv) will exclude any appreciation or depreciation in market value resulting from anticipation of the sale of the KeyLink Systems Distribution Business.

 

The following is a description of the steps you must take to perfect your dissenters’ rights under Ohio law. This summary does not purport to contain all of the information that may be important to you. You should read carefully the provisions of Section 1701.85 of the ORC, which is reproduced in full as Annex C to this proxy statement.

 

 

 

 

To exercise your dissenters’ rights, strict adherence to the provisions of Ohio law is required. If you think you may desire to exercise your dissenters’ rights, you should carefully review the statutory provisions attached to this proxy statement as Annex C. As in all legal matters, you would be well advised to seek the guidance of your personal attorney.

 

Agilysys shareholders who desire to demand their dissenters’ rights but fail to perfect or who effectively withdraw or lose the right to appraisal prior to the effective time of the sale of the KeyLink Systems Distribution Business will remain shareholders of Agilysys and will not be entitled to the fair cash value of their shares.

 

If you fail to comply strictly with the procedures described above, you will lose your appraisal rights. Consequently, if you wish to exercise your appraisal rights, we strongly urge you to consult a legal advisor before attempting to exercise your appraisal rights.

 

The asset sale is subject to review by the United States Federal Trade Commission or the Antitrust Division of the United States Department of Justice under the HSR Act. Under the HSR Act, Agilysys and Buyers are required to make pre-acquisition notification filings and to await the expiration or early termination of the statutory waiting period prior to completing the acquisition. These filings were made on January [  ], 2007.

 

Even after the expiration of the statutory waiting period and completion of the acquisition, either the Antitrust Division of the U.S. Department of Justice or the U.S. Federal Trade Commission could challenge, seek to block or block the acquisition under the antitrust laws as it deems necessary or desirable in the public interest. In addition, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the acquisition, before or after it is completed. We cannot be sure that a challenge to the acquisition will not be made or that, if a challenge is made, that we and Buyers will prevail.

 

Other than applicable U.S. antitrust laws, compliance with the applicable regulations of the Securities and Exchange Commission in connection with this proxy statement and compliance with the ORC in connection with the proposed asset sale, neither we nor Buyers are aware of any other regulatory requirements or governmental approvals or actions that may be required to consummate the sale. Should any such approval or action be required, it is presently contemplated that such approval or action would be sought. There can be no assurance, however, that any such approval or action, if needed, could be obtained and would not be conditioned in a manner that would cause the parties to abandon the acquisition.

 

The proposed sale of the KeyLink Systems Distribution Business is expected to be accounted for as a sale of assets transaction, pursuant to accounting principles generally accepted in the United States of America. At the closing of the proposed asset sale, any excess in the purchase price received by the company, less transaction expenses, over the book value of the net assets sold will be recognized as a gain for financial accounting purposes. In subsequent reporting periods, the presentation of the KeyLink Systems Distribution Business for current and prior years, including the gain on sale of its assets, will be presented as a discontinued operation for financial accounting purposes.

 

The proposed asset sale will be a transaction taxable to us for United States consolidated federal income tax purposes. We will recognize taxable income equal to the amount realized on the sale in excess of our tax basis in the assets sold. The amount realized on the sale will consist of the cash received in exchange for the assets sold, plus the amount of liabilities assumed by Buyers. We estimate that the federal and state income taxes related to the sale of the KeyLink Systems Distribution Business to be approximately $145 million. The federal income tax portion of the total tax liability will be approximately $130 million.

 

Although the asset sale will result in a taxable gain to us, a portion of the taxable gain will be offset to the extent of available net operating loss carry forwards as currently reflected on our state income tax returns. The taxable gain will differ from the gain to be reported in our financial statements due to temporary tax differences and certain other differences between the tax laws and generally accepted accounting principles.

 

Our shareholders will experience no federal income tax consequences as a result of the consummation of the proposed sale of the assets to Buyers pursuant to the asset purchase agreement. If we engage in a self-tender offer following the closing, any tax consequences to you as a result of the self-tender offer will be described in the applicable self-tender offer documents that will be sent to shareholders describing the self-tender offer.

 

As of December 1, 2006, Agilysys directors and executive officers owned of record 532,830 common shares representing approximately 1.7% of the outstanding votes of all of our common shares. We believe that each of our directors and executive officers intends to vote at the special meeting in favor of all of the proposals that shareholders are being asked to approve.

 

You should carefully consider the special risk considerations described below as well as other information provided to you or referenced in this document in deciding how to vote on the proposal to sell the KeyLink Systems Distribution Business. The special risk considerations described below 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.

 

If we fail to complete the sale of the KeyLink Systems Distribution Business, our business may be harmed.

 

We cannot assure you that the sale of our KeyLink Systems Distribution Business will be completed. As a result of our announcement of the sale of our KeyLink Systems Distribution Business, third parties may be unwilling to enter into material agreements with respect to our KeyLink Systems Distribution Business. New or existing customers may prefer to enter into agreements with our competitors who have not expressed an intention to sell their business because customers may perceive that such new relationships are likely to be more stable. If we fail to complete the proposed asset sale, the failure to maintain existing business relationships or enter into new ones could adversely affect our business, results of operations and financial condition. In addition, if we fail to complete the proposed asset sale, we will retain and continue to operate the KeyLink Systems Distribution Business as well as our IT Solutions Business and our channel conflict with our KeyLink Systems Distribution Business customers will continue. The resultant potential for loss or disaffection of one or more large KeyLink Systems Distribution Business customers would have a material, negative impact on the value of our KeyLink Systems Distribution Business.

 

You are not guaranteed any of the proceeds from the sale of the KeyLink Systems Distribution Business.

 

The purchase price for the assets of the KeyLink Systems Distribution Business will be paid directly to our company. As soon as reasonably practicable following the completion of the proposed sale of the KeyLink Systems Distribution Business, we intend to purchase up to six million common shares in an estimated $100 million self-tender offer. The ultimate number of shares and dollar value of the self-tender offer will be dependent on the stock price and market conditions at the time. You should be aware that, although we expect to commence the self-tender offer shortly following the closing, it is possible that we will not commence the self-tender offer or the cash payment we expect to offer could be substantially less than we currently anticipate due to unanticipated events or circumstances. If you decide not to tender your shares in the self-tender offer or if the self-tender offer is not commenced due to unanticipated events or circumstances, you will not receive any proceeds from the sale of the assets and you will continue to be a shareholder in our company.

 

Management could spend or invest the net proceeds from the sale of the KeyLink Systems Distribution Business in ways with which our shareholders may not agree, including the possible pursuit of alternative market opportunities, including acquisitions.

 

Our management could spend or invest the proceeds from the sale of the KeyLink Systems Distribution Business in ways with which our shareholders may not agree. The investment of these proceeds may not yield a favorable return. Furthermore, the market for our remaining businesses continues to evolve. We may face risks that may be different from the risks associated with such current businesses.

 

The asset purchase agreement may expose Agilysys to contingent liabilities.

 

Under the asset purchase agreement, we agreed to indemnify Buyers for breach or violation of any representation, warranty, covenant or agreement made by us in the asset purchase agreement and for other matters, subject to certain limitations. Significant indemnification claims by Buyers could have a material adverse effect on our financial condition. We will not be obligated to indemnify Buyers for any breach of the representations and

warranties made by us under the asset purchase agreement until the aggregate amount of claims for indemnification for such breach exceeds 1% of the purchase price, or approximately $4.9 million. In the event that claims for indemnification for breach of the representations and warranties made by us under the asset purchase agreement exceed the stated threshold, we may be obligated to indemnify Buyers for any damages or loss resulting from such breach in an amount not to exceed 20% of the purchase price, or approximately $97 million. Claims for indemnification for breach of any covenant, agreement or other matter made by us in the asset purchase agreement, or for any other matter for which we have agreed to indemnify Buyers, are not subject to the limits described above.

 

Agilysys will be unable to compete with the KeyLink Systems Distribution Business for five years from the date of the closing.

 

The asset purchase agreement provides that for a period of five years after the closing, Agilysys will not compete, directly or indirectly, with KeyLink Systems Distribution Business or, without the prior written consent of Buyers, directly or indirectly, own an interest in, manage, operate, control, as a partner, shareholder or otherwise, any person that conducts the KeyLink Systems Distribution Business, subject to certain exceptions.

 

In order to achieve our stated objectives, we need to engage in a substantial acquisition program that will require successful execution and efficient integration of such acquisitions.

 

Following the divestiture of the KeyLink Systems Distribution Business, our acquisition strategy will be potentially larger in scope and size than our previous acquisition strategy. We cannot assure you that we will successfully manage the challenges of a more aggressive acquisition program. We may not be able to identify suitable acquisition candidates at prices we consider appropriate. If we do identify an appropriate acquisition candidate, we may not be able to successfully and satisfactorily negotiate the terms of the acquisition. Our management may not be able to effectively implement our acquisition program and internal growth strategy simultaneously. Our failure to identify, consummate or integrate suitable acquisitions could lead to a reduced rate of revenue growth, operating income and net earnings in the future. We cannot readily predict the timing, size or success of our future acquisitions.

 

We may not successfully integrate recent or future acquisitions.

 

The integration of acquisitions involves a number of risks and presents financial, managerial and operational challenges. We may have difficulty, and may incur unanticipated expenses related to, integrating management and personnel from these acquired entities with our management and personnel. Failure to successfully integrate recent acquisitions or future acquisitions could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Our business could be materially adversely affected as a result of IT risks inherent in supporting a changing business.

 

We may not be able to successfully manage the increased scope of our operations or a significantly larger and more geographically diverse workforce as we expand. Additionally, growth increases the demands on our management, our internal systems, procedures and controls. We may be unable to successfully implement improvements to our information and control systems in an efficient or timely manner.

 

Initially our profitability will be dependent upon restructuring and executing planned cost savings.

 

The pro forma financial statements included in this proxy statement show significant operating losses for the six month period ended September 30, 2006 and the fiscal year ended March 31, 2006. These pro forma financial statements do not reflect any planned cost savings that we expect to realize from restructuring of our overhead cost structure after the sale of the KeyLink Systems Distribution Business. If our cost reduction efforts are ineffective or our estimates of costs available to be saved are inaccurate, our revenues and profitability could be negatively impacted. We may not be successful in achieving the operating efficiencies and operating cost reductions expected

from these efforts, and may experience business disruptions associated with the restructuring and cost reduction activities. These efforts may not produce the full efficiency and cost reduction benefits that we expect. Further, such benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated. If these efforts are not successful, we intend to undertake additional cost reduction efforts, which could result in future charges.

 

We will be dependent on a long-term product procurement agreement with Arrow.

 

We have entered into a long term product procurement agreement to purchase a wide variety of products from Arrow. Our success will be dependent on competitive pricing and availability of products on a timely basis.

 

We are highly dependent on key suppliers and supplier program, which would continue if the KeyLink Systems Distribution Business is not sold to Arrow.

 

We presently depend on a small number of key suppliers. During fiscal 2006, products purchased from IBM and HP, the company’s two largest suppliers, accounted for 71% and 15%, respectively, of the company’s sales volume. After the sale is consummated, we expect to continue to have IBM and HP as large suppliers as well. 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.

 

The market for our products and services is affected by changing technology and if we fail to anticipate and adapt to such changes, our results of operations may suffer.

 

The markets in which the company competes are characterized by technological change, new product introductions, evolving industry standards and changing needs of customers. The company’s future success will depend on its ability to anticipate and adapt to changes in technology and industry standards. If the company fails to successfully manage the challenges of rapidly changing technology, 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 demand for 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, our business, results of operations or financial condition could be materially adversely affected.

 

Our 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 and supplier base, extending its reach into new markets and/or broadening the range of solutions it offers. We may not be able to identify suitable acquisition candidates at prices we consider appropriate. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of the acquisition on terms that are satisfactory to us. Negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting management attention from day-to-day operations. Acquisitions may have an adverse effect on our operating results, particularly in quarters immediately following the consummation of acquisitions, as we integrate the operations of the acquired businesses into our operations. Once integrated, acquisitions may not perform as expected. These factors could have a material adverse effect on the company’s business, results of operations or financial condition.

 

Certain information contained in this proxy statement that does not relate to historical information may be deemed to constitute forward-looking statements. The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar expressions 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, as amended. This proxy statement contains forward-looking statements with respect to the strategic direction, financial condition, results of operations, plans, objectives, future performance, restructuring, cost savings and business of Agilysys and its subsidiaries, the markets and industry in which our businesses participate, the proposed sale of the KeyLink Systems Distribution Business and our intent to commence an issuer tender offer. Because such statements are subject to risks and uncertainties, actual results may differ materially from historical results and those presently anticipated or projected. Shareholders are cautioned not to place undue reliance on such statements, which speak only as of the date hereof. Among the factors that could cause actual results in the future to differ materially from any opinions or statements expressed with respect to future periods are those described under the caption “Special Risk Considerations You Should Take Into Account in Deciding How to Vote on the Proposal to Sell the KeyLink Systems Distribution Business.” Neither Agilysys nor any of its subsidiaries undertakes any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Please note that the protections afforded to us under the Private Securities Litigation Reform Act of 1995 will not apply to forward-looking statements that may be made in connection with our planned tender offer following the closing of the sale of the KeyLink Systems Distribution Business to Buyers.

 

The summary of the material terms of the asset purchase agreement below and elsewhere in this proxy statement is qualified in its entirety by reference to the asset purchase agreement, a copy of which is attached to this proxy statement as Annex A and which we incorporate by reference into this document. This summary does not purport to be complete and may not contain all of the information about the asset purchase agreement that is important to you. We encourage you to read carefully the asset purchase agreement in its entirety.

 

The asset purchase agreement contains representations and warranties Agilysys and Buyers made to each other. The statements embodied in those representations and warranties were made as of specific dates and are in some cases subject to important exceptions, qualifications, limitations and supplemental information agreed to by us and Buyers in connection with negotiating the terms of the asset purchase agreement. In addition, the representations and warranties may have been included in the asset purchase agreement for the purpose of allocating risk between us and Buyers rather than to establish matters as facts. The asset purchase agreement is described herein, and included as Annex A hereto, only to provide you with information regarding its terms and conditions, and not to provide any other factual information regarding us or our business. Accordingly, the representations and warranties and other provisions of the asset purchase agreement should not be read alone, and you should read the information provided elsewhere in this document and in the documents incorporated by reference into this document for information regarding Agilysys and its business.

 

Under the terms of the asset purchase agreement, Buyers have agreed to purchase substantially all the assets, and assume certain liabilities, relating to the KeyLink Systems Distribution Business. We will sell these assets for a purchase price of $485 million in cash, subject to certain adjustments described below.

 

The KeyLink Systems Distribution Business consists of assets related to our business, as presently conducted, of distributing computer technology products through our solution partner and reseller channel, which is operated by our KeyLink Systems Distribution Business.

 

The asset purchase agreement provides that the following assets will be sold to Buyers (the “Purchased Assets”):

 

 

 

Notwithstanding the foregoing, the following of our assets will not be sold to Buyers (the “Retained Assets”):

 

 

 

The asset purchase agreement provides that Buyers will assume and agree to pay, perform and discharge when due and indemnify and hold us harmless against the following liabilities of ours incurred exclusively in connection with the KeyLink Systems Distribution Business (“Assumed Liabilities”):

 

 

Other than the Assumed Liabilities, all of our liabilities will be retained by us (“Retained Liabilities”). Retained Liabilities include:

 

 

 

Under the terms of the asset purchase agreement, Buyers have agreed to purchase substantially all the assets, and assume certain liabilities, relating to the KeyLink Systems Distribution Business. We will sell these assets for a purchase price of $485 million in cash, subject to certain purchase price adjustments described below.

 

At the closing, Buyers will deliver to us the purchase price paid in cash.

 

A dollar-for-dollar increase or decrease to the purchase price will occur if the closing net working capital is greater than or less than (i) the greater of 11% of revenues of the KeyLink Systems Distribution Business for the three month period ending on the closing date or $32 million, if the closing date is March 31, 2007, (ii) the greater of 14% of revenues of the KeyLink Systems Distribution Business for the three month period ending on the closing date or $38 million, if the closing date is April 30, 2007, or (iii) the greater of 11% of revenues of the KeyLink Systems Distribution Business for the three month period ending on the closing date or $32 million, if the closing date is May 31, 2007. All revenue amounts will be calculated in accordance with generally accepted accounting principles. Net working capital means the difference in value between current assets contained in the Purchased Assets and the current liabilities included in the Assumed Liabilities. Within 60 days after the closing date, we will prepare and deliver to Buyers a statement containing the net working capital as of the closing date, prepared in accordance with generally accepted accounting principles in a manner consistent with our historical internal accounting practices and on a basis consistent with the unaudited balance sheet of the KeyLink Systems Distribution Business. If there are disagreements with the net working capital statement, the asset purchase agreement contains a dispute resolution mechanism under which PricewaterhouseCoopers will resolve the dispute.

 

The purchase price may also be reduced in the event that KeyLink Systems Distribution Business customer contracts for the purchase of products have terminated after execution but prior to the closing date or, as of the closing date if Oracle has not consented to the transaction. In that event the purchase price will be reduced by an amount equal to the product of (x) the amount by which the sum of (a) the sales to such pre-closing lost customers during the twelve-month period ending September 30, 2006 and (b) sales of Oracle products during the twelve month period ending September 30, 2006, exceeds $200 million, multiplied by (y) 0.35.

 

The closing of the asset sale will be held at 10:00 a.m. at the offices of Milbank, Tweed, Hadley & McCloy, LLP, One Chase Manhattan Plaza, New York, NY 10005 on the last business day of the month in which our shareholders approve the asset sale, provided all of the other closing conditions have been satisfied or waived, or at such other place or time as we and Buyers may mutually agree.

 

We have made a number of limited representations and warranties, subject in some cases to qualifications, to Buyers in the asset purchase agreement, including, among other things, representations relating to (subject to certain exceptions):

 

 

Buyers have represented and warranted to us that they are corporations in good standing under the laws of their respective incorporation jurisdictions and have authority to enter into the asset purchase agreement and the related transaction documents. Buyers have represented to us that no approval is required for them to consummate the purchase of the KeyLink Systems Distribution Business, other than required pursuant to the HSR Act and the Competition Act (Canada); the asset purchase agreement and the related transaction documents are enforceable and do not result in the breach of Buyers’ organizational documents or any applicable law; that certain brokers or advisory fees will be paid in connection with the transaction; and that Buyers will have sufficient funds to pay the purchase price. Buyers have represented to us that no litigation exists or is threatened against Buyers that would challenge, prevent or delay the transactions contemplated by the asset purchase agreement.

 

The representations, warranties and covenants in the asset purchase agreement will survive the closing:

 

 

Under the asset purchase agreement, we have agreed that, except as disclosed in the asset purchase agreement, between the date of the asset purchase agreement and the time of the closing, we will not conduct the KeyLink Systems Distribution Business other than in the ordinary course.

 

The asset purchase agreement also provides that we will afford Buyers reasonable access — and permit them to make inspections as they may reasonably require during normal business hours during the period from the date of the asset purchase agreement through the closing — to the real property included among the assets to be sold, management personnel, officers and employees of the KeyLink Systems Distribution Business and accountants and books and records as they relate to the KeyLink Systems Distribution Business. However, we will not be required to supply to Buyers any sensitive information that could subject us to liability.

 

We and Buyers have agreed to use all reasonable efforts to consummate the transactions contemplated by the asset purchase agreement, including obtaining all consents and approvals from governmental authorities; obtaining consents from third parties; obtaining approval of our shareholders; defending any law suits or legal proceedings challenging the asset purchase agreement or the transactions contemplated thereby; and the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by the asset purchase agreement.

 

We have agreed to promptly notify Buyers, and use commercially reasonable efforts to cure before closing, if we become aware of any fact or condition that causes or will cause any of our covenants or agreements under the asset purchase agreement to be breached or renders untrue any representation or warranty made by us as if it were made as of the date of such event, transaction or circumstance.

 

Buyers have agreed to offer employment to substantially all employees of the KeyLink Systems Distribution Business on substantially the same terms as those in effect with us as of the closing date and at benefit levels which are no less favorable than those generally provided by Buyers to similarly situated employees as of the closing date. Buyers will have no obligation to make employment offers to employees of the KeyLink Systems Distribution Business who are not expected to return to work from any leave or other absence before the six-month anniversary of the date of the asset purchase agreement.

 

We have agreed to use commercially reasonable efforts to enter into a new employment agreement with certain employees of the KeyLink Systems Distribution Business prior to closing on substantially similar terms as each employees’ current employment agreement. Each of these employment agreements will provide that it, and any change in control agreement, is assignable and transferable by us to Buyers without constituting a termination of employment or giving rise to any termination rights.

 

Buyers have agreed to remove, as promptly as practicable but no later than six months after the closing date, all of our trade names, trademarks and service marks not included in the Purchased Assets from Buyers’ signs, purchase orders, invoices, sales orders, labels, letterheads, shipping documents and other materials. However, if the removal of a mark or logo would not be commercially reasonable, Buyers will be permitted to use any such materials, and any inventories that bear any trade name, trademark or service mark of ours not included in the Purchased Assets or any name, mark or logo similar thereto included in the Purchased Assets for a period of six months following the closing date.

 

We and Buyers have agreed to retain and furnish to each other, upon request, working papers and information relating to the Purchased Assets and the KeyLink Systems Distribution Business and to provide assistance as is reasonably necessary for the preparation and filing of tax returns, the making of any election related to taxes, the preparation for any audit by any taxing authority, and the prosecution or defense of any claim, suit or proceeding relating to any tax return. We and Buyers have agreed to cooperate in the conduct of any audit or other proceeding related to taxes involving the KeyLink Systems Distribution Business.

 

 

Buyers will be solely responsible for all payments or benefits under the terms of a stay bonus plan that are earned after the closing date by employees of the KeyLink Systems Distribution Business that are hired by Buyers. We and Buyers each will be responsible for 50% of all payments or benefits earned under the terms of a stay bonus plan during the period beginning immediately following the date of the asset purchase agreement and ending on the closing date by employees of the KeyLink Systems Distribution Business that are hired by Buyers; provided, however, that our maximum obligation for such payments shall not exceed $500,000.

 

We have agreed that we will not, for a period of five years from the closing date, without the prior written consent of Buyers, either directly or indirectly:

 

 

 

We and Buyers have agreed that, as requested by the other party, we will do all further acts as may be required to effect the transactions contemplated by the asset purchase agreement.

 

 

Conditions to Obligations of Ours and Buyers.  The respective obligations of each party to effect the transaction will be subject to fulfillment of the following conditions:

 

 

Conditions to Our Obligations.  Our obligations to consummate the transactions contemplated by the asset purchase agreement will be subject to the fulfillment or written waiver by us, at or prior to the closing, of each of the following conditions:

 

 

 

Conditions to Obligations of Buyers.  The obligations of Buyers to consummate the transactions contemplated by the asset purchase agreement will be subject to the fulfillment or written waiver by Buyers, at or prior to the closing, of each of the following conditions:

 

 

Indemnification by Us.  After the closing, Buyers and their affiliates (“Seller Indemnified Parties”) will be entitled to indemnification from us for all losses directly or indirectly incurred by or sought to be imposed upon any of them from any:

 

 

 

Indemnification by Buyers.  After the closing, we and our affiliates (“Buyer Indemnified Parties”) will be entitled to indemnification from Buyers for all losses directly or indirectly incurred by or sought to be imposed upon any of us from any:

 

 

Limitation on Our Obligation to Indemnify.  Notwithstanding the foregoing discussion of indemnification by us:

 

 

Limitation on Buyers’ Obligation to Indemnify.  Notwithstanding the foregoing discussion of indemnification by Buyers:

 

 

 

The asset purchase agreement may be terminated at any time prior to the closing:

 

 

If the asset purchase is terminated because our shareholders fail to approve the proposed asset sale, or the proxy statement fails to be cleared by the Securities and Exchange Commission or the shareholders’ meeting fails to have occurred within the relevant time period, we will reimburse Buyers for the expenses they incurred in connection with the transactions contemplated by the asset purchase agreement. Except as noted below, in all other situations, each party will be liable for any damages resulting from their breach.

 

If the proposed sale of the KeyLink Systems Distribution Business to Buyers is terminated because Agilysys shareholders fail to approve it, we will reimburse Buyers for the expenses incurred in connection with the proposed sale.

 

If we receive an offer to acquire the assets and operations of the KeyLink Systems Distribution Business and the proposed sale to Buyers is later terminated because of material breach by us or the failure of our shareholders to approve the sale to Buyers, and within one year of termination we enter into and subsequently close a transaction which constitutes a superior offer, as defined in the asset purchase agreement, we will pay Buyers a termination fee

equal to 2% of the purchase price under the asset purchase agreement (less any expenses previously reimbursed to Buyers) within 10 days of the closing of the transaction contemplated by the superior offer.

 

If our board of directors withdraws, modifies or changes its recommendation that our shareholders approve the sale of the KeyLink Systems Distribution to Buyers, and the proposed sale later is terminated because our shareholders fail to approve it, we will pay Buyers a termination fee equal to 1% of the purchase price under the asset purchase agreement (less any expenses previously reimbursed to Buyers).

 

The asset purchase agreement provides that unless otherwise required by applicable law or pursuant to any listing agreement with any national securities exchange, neither we nor Buyers will issue any press release or otherwise make any public statements with respect to the transactions contemplated by the asset purchase agreement without the other’s prior consent.

 

Except as necessary to verify another proposal to acquire the Key Link Distribution Business as contemplated by the asset purchase agreement, we have agreed that we will not take any action to encourage any offer or inquiry from any person other than the Buyers regarding the sale of our KeyLink Systems Distribution Business.

 

In connection with the asset purchase agreement, we and Arrow have agreed to enter into an Agreement for the Establishment of a Strategic Investment Program, which we refer to as the “product procurement agreement.” The product procurement agreement provides terms under which we will purchase certain of various supplier products, including HP, Oracle and IBM products, from Arrow through its Arrow Partner Solutions Division. The term of the product procurement agreement is five years and will automatically renew for one-year periods unless sooner terminated by us or Arrow.

 

The board of directors unanimously recommends that you vote “FOR” the sale of substantially all the assets related to the KeyLink Systems Distribution Business under the terms of the asset purchase agreement.

 

The following table sets forth selected historical consolidated financial data for the company as of the dates and for the periods indicated. The consolidated financial data and the consolidated operations data for fiscal years 2002 through 2006 have been derived from our audited consolidated financial statements included in our filings on Form 10-K for each of the respective periods. The consolidated financial data as of September 30, 2006 and 2005 and the consolidated operations data for the six months ended September 30, 2006 and 2005 have been derived from our unaudited consolidated financial statements included in our Form 10-Q for the quarters ended September 30, 2006 and 2005.

 

 

 

 

The following unaudited pro forma consolidated financial statements are based on the historical consolidated financial statements of Agilysys after giving effect to the proposed sale of the KeyLink Systems Distribution Business to Arrow, the receipt of net proceeds from the proposed sale, and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma consolidated financial statements.

 

The unaudited pro forma consolidated statements of operations for the fiscal year ended March 31, 2006 and the six months ended September 30, 2006 give effect to the proposed transaction and adjustments as if they had occurred on April 1, 2005 and carried forward through the latest interim period presented. The unaudited pro forma consolidated balance sheet as of September 30, 2006 gives effect to the proposed transaction and adjustments as if it occurred on the date of the balance sheet.

 

The unaudited pro forma consolidated financial statements should be read in conjunction with the historical audited consolidated financial statements and notes thereto included in our 2006 Form 10-K.

 

The unaudited pro forma consolidated financial statements, including the notes thereto, are not necessarily indicative of what the actual financial results would have been had the proposed transaction taken place on the dates indicated and do not purport to indicate the results of future operations.

 

The pro forma adjustments are described in the accompanying notes and are based upon information and assumptions available at the time of filing this proxy statement.

 

The unaudited pro forma consolidated financial statements are prepared in accordance with Article 11 of Regulation S-X.

Unaudited Condensed Consolidated Pro Forma Statement of Operations
For the Six Months Ended September 30, 2006

 

Unaudited Condensed Consolidated Pro Forma Statement of Operations
For the Fiscal Year Ended March 31, 2006