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):

 

 

 

 

 

 

 

 

 

 

 

 

AGILYSYS, INC.

 

2255 GLADES ROAD, SUITE 301E/BOCA RATON, FLORIDA 33431

 

 

July 2, 2007

 

Dear Shareholder:

 

You are cordially invited to attend the Annual Meeting of Shareholders of Agilysys, Inc., which will be held at 1:00 p.m., local time, on Friday, July 27, 2007, at the Renaissance Boca Raton Hotel, 2000 NW 19th Street, Boca Raton, Florida, 33431. Your Board of Directors and management look forward to greeting personally those shareholders able to attend.

 

The matters to be addressed at the meeting include the election of three Class A Directors and approval of an amendment to the Company’s Amended Code of Regulations to change the meeting date for the Annual Meeting of Shareholders and to ensure compliance with the requirement that companies listed on Nasdaq be eligible to issue non-certificated shares as described later in this proxy.

 

It is important that your shares are represented and voted at the meeting, whether or not you plan to attend. 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 301E/BOCA RATON, FLORIDA 33431

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

The Annual Meeting of Shareholders (the “Annual Meeting”) of Agilysys Inc. (the “Company”), will be held at the Renaissance Boca Raton Hotel, 2000 NW 19th Street, Boca Raton, Florida, 33431 on Friday July 27, 2007 at 1:00 p.m., local time, for the following purposes:

 

1. To elect three Class A members of the Board of Directors of the Company to hold office for a term of three years expiring in 2010;

 

2. To approve an amendment to the Company’s Amended Code of Regulations allowing for the Company’s Annual Meeting of Shareholders to occur in any month of the year as designated by the Board of Directors and to ensure compliance with the requirement that companies listed on Nasdaq be eligible to issue non-certificated shares; and

 

3. To transact such other business as may properly come before the Annual Meeting or any adjournments thereof.

 

Only shareholders of record at the close of business on June 15, 2007 are entitled to notice of the Annual Meeting and to vote at the Annual Meeting.

 

By Order of the Board of Directors.

 

Lawrence N. Schultz

Secretary

 

July 2, 2007

 

AGILYSYS, INC.

 

2255 GLADES ROAD, SUITE 301E/BOCA RATON, FLORIDA 33431

 

 

Mailed to Shareholders on or about July 2, 2007

 

PROXY STATEMENT

 

Annual Meeting of Shareholders to be held on July 27, 2007

 

The Proxy enclosed with this Proxy Statement is solicited by the Board of Directors of Agilysys, Inc. (the “Company”), and is to be used at the Annual Meeting of Shareholders (the “Annual Meeting”) to be held on July 27, 2007, and any adjournments of the Annual Meeting. The time, place and purposes of the Annual Meeting are stated in the Notice of Annual Meeting of Shareholders which is provided with 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 Proxy’s exercise or in the 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 according to the directions given in the Proxy.

 

The holders of Common Shares of the Company (the only class of shares outstanding) can vote at the Annual Meeting. At the close of business on June 15, 2007 — the date fixed for purpose of determining which shareholders can vote — there were 31,399,514 Common Shares outstanding and entitled to vote at the Annual Meeting, each share being entitled to one vote. Under Ohio law and the Company’s Amended Code of Regulations, if a quorum is present at the Annual Meeting, the three nominees for election as Directors will be elected as Directors if they receive the greatest number of votes cast for the election of Directors at the Annual Meeting by the holders of Common Shares present in person or represented by Proxy and entitled to vote (“Proposal 1”). Abstentions and broker non-votes will have no effect on Proposal 1. The affirmative vote of the holders of at least two-thirds of the voting power of the Common Shares is required to amend the Agilysys, Inc. Amended Code of Regulations (“Proposal 2”). Abstentions and broker non-votes will have the practical effect of a vote against Proposal 2.

 

If not less than 48 hours before the start time of the Annual Meeting any shareholder gives written notice to the Chief Executive Officer, an Executive Vice President or the Secretary of the Company that he, she or it wants the voting for the election of Directors to be cumulative, the shareholder giving notice or a representative of that shareholder, the Chairman or the Secretary will make an announcement about such notice at the start of the Annual Meeting. Cumulative voting means that each shareholder may cumulate his, her or its voting power for the election by distributing a number of votes, determined by multiplying the number of Directors to be elected in this meeting times the number of the shareholder’s Common Shares. The shareholder may distribute all of the votes to one individual Director nominee, or distribute his, her or its votes among two or more Director nominees, as the shareholder chooses.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

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 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. This Proxy Statement contains forward-looking statements with respect to the strategic direction, plans,

objectives, future performance and business of Agilysys and its subsidiaries, the markets and industry in which our businesses participate. 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. 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.

 

SHARE OWNERSHIP

 

The following table shows the number of Common Shares of the Company beneficially owned by each current Director of the Company and Director nominee; the Chief Executive Officer and each of the Executive Officers of the Company named in the Summary Compensation Table below; all Directors and Executive Officers as a group; persons known to the Company to own beneficially in excess of 5% of the total outstanding Common Shares; and the percent of the class so owned as of June 15, 2007 unless otherwise indicated.

 

 

 

 

 

The following table provides certain information with respect to all of the Company’s equity compensation plans in effect as of March 31, 2007.

 

Equity Compensation Plan Information

 

 

PROPOSAL 1

 

ELECTION OF DIRECTORS

 

At this Annual Meeting, the shareholders will elect three Class A Directors for a three-year term ending at the Annual Meeting in 2010. The Board of Directors’ nominees for election are Keith M. Kolerus, Robert A. Lauer and Robert G. McCreary, III. Messrs. Kolerus, Lauer and McCreary currently serve as Directors of the Company.

 

The proxyholders named in the accompanying Proxy, or their substitutes, will vote the Proxy at the Annual Meeting, or any adjournments of the Annual Meeting, for the election of the three Director nominees named above, unless, by marking the appropriate space on the Proxy, the shareholder instructs that he, she or it withholds authority for the proxyholder to vote. If cumulative voting is in effect, the proxyholders will have full discretion and authority to vote for any one or more of the director nominees as specified above. Each of the nominees has indicated willingness to serve as a Director, if elected. If any nominee becomes unavailable for election — and the Company has no reason to believe this will happen — the shares represented by the Proxy will be voted for a substitute nominee as may be named by the Board of Directors. The accompanying Proxy will not be voted for more than three nominees or for anyone other than the nominee or his substitute, if any.

 

For each of the current Director nominees and each of the other Directors who serve on the Board of Directors for the Company, the following table shows: name; principal job for the past five years and directorships in other publicly-held corporations; the year during which service as a Director began or will begin; age; and when the service as a Director ends or will end.

 

NOMINEES FOR ELECTION

 

 

CORPORATE GOVERNANCE AND RELATED MATTERS

 

Corporate Governance Guidelines

 

In May 2006, the Board of Directors adopted Amended Corporate Governance Guidelines created and approved by the Nominating and Corporate Governance Committee. The Guidelines provide a sound framework to assist the Board in fulfilling its responsibilities to shareholders. Under these Guidelines, the Board exercises its role in overseeing the Company by electing qualified and competent officers, and by monitoring the performance of the Company. The Guidelines state that the Board and its Committees will exercise oversight in the areas of CEO and executive pay, director nomination, corporate governance, succession planning, financial reporting, internal controls, and strategic and operational issues. The Guidelines also state Board policy on eligibility for the Board, including director independence and qualifications for Board candidates, and Board policy describing events that require resignation from the Board. A complete copy of the Guidelines is available on the Company’s website at www.agilysys.com.

 

Independence

 

It is the policy of the Board that a substantial majority of its members should be independent. Upon the review and recommendation of the Nominating and Corporate Governance Committee, the Board has determined that all members of the Audit, Compensation and Nominating and Corporate Governance Committees are “independent” according to SEC regulations and applicable stock exchange listing standards, and that the members of these Committees have no direct or indirect material relationships with the Company other than their position as Directors. The Board has also determined that all members of the Audit Committee meet the additional independence requirements for audit committee membership.

 

The following Company Directors are independent:

 

Charles F. Christ
Thomas A. Commes
Curtis J. Crawford
Howard V. Knicely
Keith M. Kolerus
Robert A. Lauer
Robert G. McCreary, III
Thomas C. Sullivan

 

Code of Ethics

 

The Company has adopted a Code of Business Conduct that applies to all directors, officers and employees of the Company. In addition, the Company has adopted a Code of Ethics for Senior Financial Executives that applies to the Chief Executive Officer, Chief Financial Officer and Controller of the Company and any person performing a similar function. The Code of Business Conduct and the Code of Ethics for Senior Financial Executives are available on the Company’s website at www.agilysys.com. The Company has in place a hotline, managed by an independent third party, that all employees can use to anonymously report potential violations of the Code of Business Conduct or the Code of Ethics for Senior Financial Executives.

 

Meeting of Board of Directors and Attendance at Annual Meeting

 

The Board of Directors held eight meetings during the last fiscal year. During the fiscal year, no Director attended less than 75% of the aggregate of (i) the total number of meetings of the Board of Directors held during the period he served as a Director and (ii) the total number of meetings held by Committees of the Board on which he served, during the periods that he served. Independent Directors meet regularly in executive session at each Board meeting. Such executive sessions are chaired, on a rotating basis, by the Chairmen of the Audit, Compensation, and Nominating and Corporate Governance Committees.

 

It is the policy of the Board that all of its members attend the Annual Meeting of Shareholders absent exceptional cause. All of the Directors were in attendance at the July 2006 Annual Meeting except one.

 

Shareholder Communication with Directors

 

Shareholders and others who wish to communicate with the Board of Directors as a whole, or with any individual Director, may do so by sending a written communication to such Director(s) in care of the Company at its headquarters address. The Company’s general counsel will forward the communication to the Director(s) as instructed by the Director.

 

Committees of the Board

 

 

 

 

Executive Committee.  The Executive Committee exercises the power and authority of the Board of Directors as needed between regular Board meetings. The Executive Committee did not meet during the last fiscal year.

 

Audit Committee.  The Audit Committee reviews with the Company’s independent registered public accounting firm the proposed scope of the Company’s annual audits and audit results, reviews the adequacy of internal financial controls, reviews internal audit functions, provides recommendations as to the engagement of the independent registered public accounting firm and reviews any concerns identified by either the internal or external auditor. The Audit Committee held five meetings during the last fiscal year. The Board of Directors has determined that all Audit Committee members are financially literate under the current Nasdaq listing standards. The Board has also determined that Thomas A. Commes qualifies as an “audit committee financial expert” under the rules adopted

by the SEC under the Sarbanes-Oxley Act of 2002. In January, 2005, the Board adopted an Amended and Restated Charter, which is available on the Company’s website at www.agilysys.com.

 

Compensation Committee.  The purpose and mission of the Compensation Committee of the Board of Directors of the Company is to enhance shareholder value by ensuring the pay available to the Board of Directors, Chief Executive Officer and other executive officers enables us to attract and retain high-quality leadership and is consistent with the Company’s executive pay policy. As part of its responsibility in this regard, the Compensation Committee oversees the Company’s pay plans and policies, annually reviews and determines all pay (including base salary and the Company’s annual cash incentive, long-term stock incentive, retirement and perquisite plans and programs), administers the Company’s incentive programs (including establishing performance goals, determining the extent to which performance goals are achieved and calculating awards), administers the Company’s equity pay plans (including making grants to the Company’s executive officers) and regularly evaluates the effectiveness of the overall executive pay program. A more complete description of the Compensation Committee’s functions is found in the Compensation Committee’s charter, which is available on the Company’s website at www.agilysys.com.

 

The Compensation Committee held four meetings during the last fiscal year.

 

The Company’s Legal department and Human Resources department support the Compensation Committee in its work and, in some cases, as a result of delegation of authority by the Compensation Committee, fulfill various functions in administering the Company’s pay programs. In addition, the Compensation Committee has the authority to engage the services of outside advisers, experts and others to assist the Committee. In fiscal year 2007, the Compensation Committee relied on the services of Pearl Meyer & Partners, an executive pay consulting firm, to provide input to facilitate the Compensation Committee’s decision-making process regarding the executive pay programs for the executive officers. Specifically, the executive pay consulting firm:

 

 

While the Compensation Committee directly retains the executive pay consulting firm, in carrying out assignments the executive pay consulting firm also interacted with the Company’s executive officers when necessary and appropriate. Specifically, the executive pay consulting firm interacted with the Chief Executive Officer, Chief Financial Officer and Chief Human Resources and Compliance Officer, who provided data and insight on the Company’s compensation programs and business strategies.

 

Several executive officers, including the Chief Executive Officer and the Chief Human Resources and Compliance Officer, attend Compensation Committee meetings when executive compensation, Company performance, and individual performance are discussed and evaluated by Compensation Committee members. The executive officers provide their thoughts and recommendations on executive pay issues during these meetings and also provide updates on financial performance, divestitures, mergers and acquisitions, industry status and other factors that may impact executive pay. Decisions regarding the Chief Executive Officer’s compensation were based solely on the Compensation Committee’s deliberations while compensation decisions regarding other executive officers took into consideration recommendations from the Chief Executive Officer. Only Compensation Committee members make decisions on executive pay and approve all outcomes.

 

Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee held three meetings during the last fiscal year. The Nominating and Corporate Governance Committee assists the Board in finding and nominating qualified people for election to the Board, assessing and evaluating the Board’s effectiveness, and establishing, implementing and overseeing the Company’s governance programs and policies. The committee has hired a third-party executive recruitment firm to help find acceptable nominees for the Board. In January, 2005, the Board adopted an Amended and Restated Charter of the Nominating and Corporate Governance Committee, which is available on the Company’s website at www.agilysys.com.

The Nominating and Corporate Governance Committee is responsible for reviewing the qualifications of, and recommending to the Board of Directors, individuals to be nominated for membership on the Board of Directors. The Committee considers nominees using the criteria for the composition of the Board and the qualifications of members as outlined in the Company’s Corporate Governance Guidelines.

 

The Nominating and Corporate Governance Committee will consider shareholder recommendations for nominees for membership on the Board of Directors. Shareholders may make a nominee recommendation by sending the nomination to the Chairman of the Nominating and Corporate Governance Committee, at the Company’s headquarters address. The recommendation must include:

 

 

The Committee may request additional information from such candidate to assist in its evaluation. The Committee will evaluate any shareholder-recommended nominees in the same way it evaluates candidates recommended by other sources, as described above.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the Compensation Committee during fiscal 2007 or as of the date of this proxy statement is or has been an officer or employee of the Company and no executive officer of the Company served on the compensation committee or board of any company that employed any member of the Company’s Compensation Committee or Directors.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

The following discussion and analysis of the pay arrangements for 2007 of our named executive officers (our Chief Executive Officer, Chief Financial Officer and other executive officers appearing in the Summary Compensation Table) should be read together with the compensation tables and related disclosures appearing later in this Proxy Statement. This discussion also contains forward looking statements that are based on our current plans, considerations, expectations and determinations regarding future pay programs. Actual pay programs that we adopt may differ materially from currently planned programs as summarized in this discussion.

 

Introduction

 

Several years ago, we made a strategic decision to exit the electronic components distribution business and to potentially exit the computer systems distribution business and transform our Company into solely an IT solutions provider. The rationale for this strategy was to exit the businesses in which we were permanently disadvantaged in the market and concentrate our efforts on the higher margined IT solutions business with integrated offerings, thereby allowing us to provide greater differentiated value to our customers. This transformation was expected to result in greater and more sustainable shareholder value.

 

The strategy had several major steps, the first of which was the sale of the electronic components distribution business unit which comprised a significant majority of our revenues. By the end of fiscal 2007, we had successfully divested both distribution businesses, the second of which — KeyLink Systems — was sold for cash on March 31, 2007, the last day of the 2007 fiscal year. In addition to the divestitures, the strategy requires the acquisition, integration and growth of the IT solutions business. This strategy is ongoing and is expected to result in revenues of about $1.5 billion within three years and improved EBITDA margins of 6% within three years.

 

We continued to operate our existing business in an effective manner while we were executing the above strategy in fiscal 2007.

Our executive pay programs are designed to reward and retain executive officers and to motivate them to achieve key financial performance targets and allow them to participate, along with shareholders, in the value created through their efforts. The report below outlines how the executive pay programs support the above business strategies and the creation of shareholder value.

 

 

 

We believe that achieving the following executive pay program objectives will positively affect long-term shareholder value:

 

 

Our Compensation Committee adopted a pay philosophy for executive officers designed to achieve the compensation objectives described above. The philosophy has been reviewed and approved by our Compensation Committee on an annual basis since 1998, with minor changes. The Compensation Committee reaffirmed the pay philosophy, following input from the executive pay consultant, at its meeting on May 21, 2007.

 

Our pay philosophy is as follows:

 

 

We accomplish our pay philosophy and objectives through a variety of programs including annual and long-term incentive programs, both cash- and equity-based, as well as salaries and benefits programs regarded as competitive in the industries in which we compete for executive talent. We use measures of the Company’s overall performance in incentive pay plans designed to link rewards with performance against quantitative factors such as revenues, operating profit, return-on-capital employed and share price performance.

 

 

We consider the following factors, listed in order of importance, as part of the process by which we make executive pay determinations:

 

 

Our Chief Executive Officer also provides input to the Compensation Committee on individual executive performance and our Compensation Committee makes its own observations of each executive officer’s performance in the context of Board and Compensation Committee meetings.

 

 

 

We provide three key direct pay components to our executive officers, including:

 

 

We also offer indirect pay components to our executive officers, specifically including a program of retirement benefits, executive benefits and perquisites, described below and in the tables to this Proxy Statement. In addition, our executive officers are parties to either an employment agreement or a combination non-competition/change of control agreement that includes provisions related to payments in the event of change of control of the Company and severance in the event we terminate an executive officer’s employment without cause. These agreements are summarized below and described in more detail in the tables following this discussion.

 

 

We reviewed market competitive pay levels during fiscal year 2007 to ensure pay opportunities were appropriate for our executive officers. As noted above, our Compensation Committee reviewed data gathered by the executive pay consultant from two sources, including the proxy statements of a peer group of public companies in the technology industry as well as published and private survey sources covering a somewhat broader range of industries, but limited to non-manufacturing companies.

 

The primary peer group approved by our Compensation Committee for the purpose of reviewing executive pay included the following six companies, with revenues between $715 million and $4.4 billion (as compared to our revenues prior to our March 31 divestiture of $1.8 billion):

 

 

Because the revenues of these companies differed from ours, the Compensation Committee examined the proxy pay information using an analysis that related company size by revenue to the various overall pay components (i.e., salary, total cash compensation and total direct compensation, which includes the value of equity incentives granted in a given year).

 

The salary survey information covered not only the type of technology-oriented distributors listed above, but also a wider range of companies, including business services companies and other forms of non-manufacturing companies as well as distribution companies. As a result, the salary survey resulted in information that is more typical of the IT solutions business that we are in the process of transforming into through our strategic initiatives.

We attempted to position our executive officers at a minimum of the market median when using the analysis from the peer group. The salary survey information showed that our current pay levels for executive officers were at or just below the market median. The information was reviewed by the Compensation Committee in the context of our executive pay philosophy, objectives and current executive officer pay levels prior to making decisions regarding salary levels and approving target annual incentives and stock option grants for the 2007 fiscal year. We expect to change the peer group in the near future consistent with the transformation of our company from a distribution business to an IT solutions provider.

 

 

We use the three key pay elements described above to attract, motivate and retain our executive officers. The table below shows the target pay mix for each of our executive officer for fiscal year 2007:

 

 

Note: The above table takes into account target annual incentives, not actual annual incentive payouts. Long-term incentive percentages are based on the FAS 123R fair value of the stock option grants as of the date of the grants made in fiscal year 2007. This calculation includes two stock option grants each for Mr. Rhein and Mr. Ellis. For Mr. Rhein, we expect these option grants to be the only equity grants associated with his current contract of employment, which ends on March 31, 2009. As a result, his grants for fiscal year 2007 are larger than a typical annual grant from prior years. For fiscal 2007, Mr. Ellis received a regular annual stock option grant as well as an additional stock option grant as a result of outstanding performance.

 

The pay mix table illustrates key aspects of how we think about executive pay, including:

 

 

Decisions regarding each pay element are taken into account when considering other pay elements and are significant in the consideration of the program in its entirety and its relationship to the competitive market.

 

 

 

We set salaries based on the executive’s position, individual performance and relation to pay levels in the competing market. We also take into account changes in salaries in the overall general market. Salaries are reviewed annually by our Compensation Committee at its first meeting after the fiscal year end and changes in salary are based on these factors as well as input from our Chief Executive Officer. However, none of the factors are weighted according to any specific formula and new salaries are set based on the Compensation Committee’s discretion and judgment.

In May 2006, we increased Mr. Ellis’ salary by 6.2% — to $345,000 from $325,000. This increase reflected his increased experience and performance as our Chief Financial Officer. We did not change the salaries of Messrs. Bailey, Coleman and Sayers because they were close to or at the market median. As of April 1, 2007, we increased Mr. Rhein’s salary from $675,000 to $725,000, an increase of 7.4%. Mr. Rhein’s increase was negotiated as part of his new three-year employment agreement signed in December 2005. Our Compensation Committee does not expect to increase Mr. Rhein’s salary again during the term of the agreement, which ends on March 31, 2009.

 

At its meeting in May 2007, our Compensation Committee did not increase the salary of any of our named executive officers. This decision was driven by the sale of a significant portion of our business this year and our ongoing transformation to an IT solutions provider. Because of these events, we expect that market-competitive salaries for our executive officers, as defined in the context of our pay philosophy, will change because we will be competing in a different industry than our traditional distribution business.

 

 

Annual incentives are designed to motivate executives to achieve key annual financial goals and objectives because we expect that achieving these goals and objectives will result in the creation of shareholder value. Target annual incentives are set at a percent of salary. The annual incentives, along with the salaries, are designed to provide total annual cash compensation at a minimum of the market median.

 

At its May 2006 meeting, the Compensation Committee approved the Fiscal Year 2007 Annual Incentive Plan (the “2007 Annual Plan”). In the 2007 Annual Plan, we set a target incentive for Mr. Rhein of 100% of salary and targets for each of the other executive officers of 60% of salary. Each of these targets was at least at the minimum of the market median, based on information provided by the executive pay consultant. We set maximum payments at 250% of target incentive and threshold payments at 25% of target incentive. No annual incentive payments were to be made if threshold financial performance metrics are not met.

 

The 2007 Annual Plan used three financial performance measures, and weighs them, in order to determine annual incentive payouts, as follows:

 

 

In fiscal 2007, 75% of the financial performance metric had to be achieved before incentives could be paid, while maximum payouts would occur at 150% of the financial performance. Each of the above performance measures is independent of the others, meaning that payouts could be made under the 2007 Annual Plan for one or two measures, even if performance of the other one or two measures would be zero.

 

These performance measures were set at levels that were believed to represent, when they were set early in fiscal 2007, achievable performance at the threshold levels, more demanding performance at the 100% target incentive levels, and significantly difficult performance at the maximum levels, in each case relative to historical trends and future expectations at the time the levels were set.

 

For fiscal year 2007, actual outcomes versus the performance objectives resulted in an overall achievement of 121% of target, which triggered the following payouts:

 

 

At its May 2007 meeting, our Compensation Committee discussed alternative methods of determining the annual incentive awards for fiscal year 2008. The alternatives ranged from completely discretionary determinations made after the end of the year to setting traditional performance goals at the beginning of the year. Our Compensation Committee continues to consider the correct approach for this year in light of the current business strategy of the Company and the resulting difficulty in setting performance goals. If our Compensation Committee’s decision is to make discretionary awards or the decision to use performance goals extends beyond June 30, 2007, the annual incentive payments will not be eligible for deduction under Section 162(m) of the Internal Revenue Code (see Impact of Tax and Accounting Considerations, below, for a discussion of Section 162(m)).

 

 

We used the 2006 Stock Incentive Plan (the “2006 Equity Plan”), except as noted below, to grant various types of stock-based, or equity incentives, including stock options, stock-settled stock appreciation rights, restricted stock and restricted stock units, performance shares and units, and other equity-based and cash awards. The range of equity awards provides us the flexibility to address specific pay objectives for our executive officers, including motivating the creation of shareholder value and retaining and attracting executives and other employees.

 

We have no role in the timing of the equity awards, but we provide recommendations to the Compensation Committee regarding who should receive the awards and the amounts. The equity award, amounts and timing are at the discretion of our Compensation Committee. We chose to use stock options in fiscal year 2007 because we decided they matched closely with shareholder interests and allowed our executive officers to share in the shareholder value created over time.

 

The Compensation Committee determines equity awards in its first Compensation Committee meeting after the beginning of our fiscal year and the grant price is set at the market-closing price on that day. However, in fiscal year 2007 the Compensation Committee made grants in both its first and second Compensation Committee meetings of the fiscal year due to the fact that limited shares were available under our 2000 Stock Incentive Plan and that the 2006 Equity Plan required the approval of our shareholders, the vote related to which was not set until the July 28, 2006, Annual Meeting of Shareholders. As a result, the Compensation Committee made limited equity awards for fiscal year 2007 at its May 23, 2006 meeting and additional awards at its July 27, 2006 meeting, subject to approval by the Shareholders of the 2006 Equity Plan. Our shareholders approved the 2006 Equity Plan at the Annual Meeting. Therefore, the grant price for the equity awards made at the July 27th meeting was set at the market-closing price on July 28, 2006 of $15.85. These grants were as follows:

 

 

The number of options awarded in the above grants was at the market median, satisfying our pay philosophy.

 

Mr. Ellis received an additional grant of 15,000 stock options on May 23, 2006 at a price of $16.58, based on the recommendation of our Chief Executive Officer in recognition of Mr. Ellis’ outstanding performance. This grant was made from the 2000 Stock Incentive Plan at the closing price on that day, and was approved by our Compensation Committee at its regularly scheduled meeting on that date.

 

As part of the negotiations of his employment agreement, signed in late 2005, we agreed to provide Mr. Rhein with stock option grants totaling 500,000 shares, to be made during fiscal year 2007. We chose to make two grants of 250,000 stock options each to Mr. Rhein because there were fewer than 500,000 shares remaining in the 2000 Stock Incentive Plan and we were required to seek shareholder approval of a new equity plan and additional shares in order to make the second grant, as described above. We expect these grants to be the only equity grants made to Mr. Rhein during the term of his employment agreement, which concludes on March 31, 2009.

 

The dates for the grants to Mr. Rhein were chosen in advance and documented in a letter from the Compensation Committee Chairman to Mr. Rhein dated December 23, 2005. This letter stated that the option grants would be made on or about April 1, 2006 and on or about August 1, 2006. The letter can be found as Exhibit 10.2 of a Form 8-K filed by us on December 23, 2005.

Mr. Rhein received a grant on April 3, 2006 of 250,000 options, with an exercise price of $15.17, the closing price on that date, and a second grant of 250,000 options on July 28, 2006 at $15.85. The first grant was made from the 2000 Stock Incentive Plan and the second grant was made from the 2006 Equity Plan. The actual dates of the grants were the first business day of the 2007 fiscal year (April 3, because April 1 was a Saturday) and the date our shareholders approved the 2006 Equity Plan at the Annual Meeting (July 28). Each of Mr. Rhein’s option grants vest on the following schedule: 10% of the shares vest on March 31, 2007, 30% vest on March 31, 2008 and 60% vest on March 31, 2009.

 

Our Chief Executive Officer and the other executive officers did not play a role in the Compensation Committee’s decision on the timing of the 2007 stock options grants. Following Compensation Committee approval of the grants, our Human Resources, Legal and Finance departments administer the grants made under the 2000 Stock Incentive Plan and the 2006 Equity Plan.

 

At its meeting on May 21, 2007, our Compensation Committee approved a program of long-term incentives for Messrs. Ellis, Bailey, Coleman and Sayers. This program included both performance shares targeted to motivate the achievement of financial targets through March 31, 2010 related to the strategic initiative of repositioning the Company as a leading IT solutions provider, and restricted stock designed to provide a retention incentive. The following total shares were awarded under this program:

 

 

67% of the total shares awarded are performance shares, and the remaining 33% are restricted shares. The performance measures chosen for the performance shares are revenues and EBITDA margin. Threshold, target and maximum performance objectives were set for each performance measure. Performance at threshold will result in vesting of 50% of the performance shares, while performance at maximum will result in vesting of 150% of the performance shares. These performance measures are set at levels that are believed to represent achievable performance at the threshold levels, more demanding performance at the 100% target levels, and significantly difficult performance at the maximum levels, in each case relative to historical trends and future expectations at the time the levels were set. The performance shares will cliff vest on March 31, 2010 based on the executives’ success in achieving performance targets.

 

The restricted stock will vest on the following schedule: 10% of the shares will vest on March 31, 2008, 30% on March 31, 2009 and the remaining 60% will vest on March 31, 2010.

 

 

We provide a program of executive benefits and perquisites to our executive officers including, but not limited to, additional life and long-term disability insurance plans, contributions to company benefit plans, automobile allowance, personal use of the company’s fractional interest in an airplane, financial planning, attendance by guests at supplier events and club dues. In addition, following the move of our corporate headquarters this fiscal year to Florida, each executive officer was eligible for relocation monetary assistance for expenses incurred during this relocation. These executive benefits and perquisites are described in more detail in the Summary Compensation Table and related footnotes. We believe these benefit and perquisite programs enhance part of an overall competitive package that serves to attract and retain executive officers.

 

We also provide opportunities for executive officers to defer pay into a nonqualified deferred compensation plan, which we call the Benefit Equalization Plan (the “BEP”). We established the BEP to provide our executives with the ability to contribute amounts for retirement and to receive Company profit sharing contributions and 401(k) matches in excess of the contribution amounts allowed under our tax-qualified Section 401(k) Plan. We limit participation in the BEP to a select group of management and other highly-paid employees, including the executive officers. The BEP is an unfunded plan and company-owned life insurance is purchased as a source of funds to pay the benefits from the BEP.

 

The Nonqualified Deferred Compensation Plan Table provides additional information on specific deferrals of pay, our matching of these deferrals, if any, and balances in the BEP for each executive officer. In addition, the

discussion appearing with the below Nonqualified Deferred Compensation Plan Table describes the BEP in more detail.

 

 

We started our Supplemental Executive Retirement Plan (“SERP”) during fiscal year 2000 to provide cash retirement benefits to a select group of key management employees including the executive officers. Certain tax laws limit the retirement benefits that highly-paid executives can receive from a “qualified” retirement plan and the SERP is designed to provide retirement benefits that are not subject to these limits. In addition, the SERP provides a tool to help us competitively recruit and retain executive officers in the technology industry.

 

The SERP provides cash benefits on an annual amount not to exceed 50% of the executive’s final average annual earnings, including both salary and annual incentives. The cash benefit amount is reduced by other Company funded retirement benefits, such as the match provided in the Section 401(k) Plan, profit sharing amounts, and other Company contributions to the BEP, as well as 50% of Social Security retirement benefits payable at normal retirement. The value of accrued benefits for each executive officer is found in the Pension Benefits Table and the SERP is discussed in more detail in the footnotes and the discussion appearing with that Table.

 

 

Our executive officers’ pay opportunities can vary based on a number of factors such as scope of duties, tenure, experience and expertise in a particular functional area. Actual total cash compensation in a given year will vary above or below targeted pay levels based primarily on achieving annual financial goals. Total pay is directly related to long-term shareholder gains, given our historical use of stock options as a significant part of total pay.

 

Pay levels and mix are considered within the context of performance and objective market pay data. We believe the pay programs for our executive officers are within our defined range of competitive practices when compared to the objective market data.

 

 

Our executive officers are parties to various employment, change of control and non-competition agreements as follows:

 

 

The above agreements provide for severance payments which are payable in the event of termination of the executive’s employment by us without cause. In addition, should a change of control of the Company occur and the executive is terminated without cause related to the change of control or if the executive resigns for Good Reason, as defined in the agreements, the executive will receive severance payments for a specified time period. The major provisions of the agreements are summarized below for each executive and are covered in more detail in both the Termination and Change of Control Table and the related discussion, below.

 

Mr. Rhein

 

 

 

Messrs. Ellis, Bailey, Coleman and Sayers

 

 

We believe the terms described in the above summary provisions are competitive. In addition, we believe the various agreements serve the dual purpose of helping to attract and retain key executive officers and help us to compete with other companies for executive talent.

 

 

 

We do not maintain any specific plans or policies that provide for the adjustment or recovery of pay-related awards if certain performance levels are modified as a result of any requirement to restate our financials. However, under Section 304 of the Sarbanes-Oxley Act, if we are required to restate our financials due to material noncompliance with any financial reporting requirements as a result of misconduct, our Chief Executive Officer and Chief Financial Officer must reimburse us for (1) any bonus or other incentive-based or equity-based compensation received during the 12 months following the first public issuance of the non-complying document, and (2) any profits realized from the sale of our securities during those 12 months.

 

 

We do not consider prior pay outcomes, including stock compensation gains, in setting future pay levels. The Compensation Committee believes this approach furthers the Company’s philosophy of rewarding future financial and shareholder performance.

 

Our Compensation Committee approved stock ownership guidelines for our named executive officers on May 1, 2001, reflected as a multiple of the base salary for each named executive officer. The current named executive officers are each required to own the stock of the Company (directly or indirectly), as follows:

 

 

As of March 31, 2007, each of our named executive officer holds enough shares to meet the guidelines.

 

 

In general, we consider the various tax and accounting implications of the pay mechanisms that we use to provide pay to our executive officers. We analyze the accounting cost associated with long-term incentive grants when determining the grant amounts for executive officers. Section 162(m) of the Internal Revenue Code generally prohibits any publicly held corporation from taking a federal income tax deduction for pay to the chief executive officers and the next four highest compensated officers in excess of $1 million in any taxable year. Exceptions are made for certain qualified performance-based pay. It is our objective to maximize the effectiveness of our executive pay plans in this regard. The pay instruments we use, including salaries, annual incentives and stock options, are tax deductible to the extent that they are less than $1 million for each named executive officer in a given year.

 

We expect to complete our compliance with Internal Revenue Code Section 409A by December 31, 2007 as required by final regulations issued in April 2007. Section 409A relates to deferred pay and amounts includable in gross income. Changes may be made to the SERP, BEP and the employment/change of control/non-competition agreements with our executive officers if necessary to achieve compliance with Section 409A.

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with the Company’s management. Based on that review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be incorporated by reference in the Company’s Annual Report on Form 10-K and be incorporated into the Company’s definitive proxy statement prepared in connection with its 2007 Annual Meeting of Shareholders.

 

THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

 

Howard V. Knicely, Chairman
Charles F. Christ
Curtis J. Crawford
Robert A. Lauer

 

The above Compensation Committee Report does not constitute soliciting material and should not be deemed filed with the Securities and Exchange Commission or subject to Regulation 14A or 14C (other than as provided in Item 407 of Regulation S-K) or to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that the information in this Report be treated as soliciting material or specifically incorporates by reference into a document filed under the Securities Act or the Exchange Act. If this Report is incorporated by reference into the Company’s Annual Report on Form 10-K, such disclosure will be furnished in such Annual Report on Form 10-K, and will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act as a result of furnishing the disclosure in this manner.

Summary Compensation

 

The following table and related notes provide information about the compensation of our Chief Executive Officer and Chief Financial Officer, as well as the three next highest paid executive officers (“the Named Executive Officers”).

 

SUMMARY COMPENSATION TABLE FOR FISCAL 2007

 

 

 

 

 

Grants of Plan-Based Awards

 

The following table and related notes and discussion summarize grants of equity and non-equity incentive compensation awards to our Named Executive Officers for our fiscal year ended March 31, 2007.

 

GRANTS OF PLAN-BASED AWARDS FOR FISCAL 2007

 

 

 

 

 

Outstanding Equity Awards At Fiscal 2007 Year-End

 

The following table and related notes and discussion summarize certain information with respect to outstanding equity awards held by the Name Executive Officers as of March 31, 2007.

 

OUTSTANDING EQUITY AWARDS AT FISCAL 2007 YEAR-END

 

 

 

 

Option Exercises And Stock Vested For Fiscal 2007

 

The following table and related notes and discussion summarize certain information with respect to the exercise of options to purchase Common Shares and the vesting of other stock awards by the Named Executive Officers during the fiscal year ended March 31, 2007.

 

OPTION EXERCISES AND STOCK VESTED FOR FISCAL 2007

 

 

 

 

Retirement Benefits For Fiscal 2007

 

The following table provides information relating to potential payments under our SERP to the Named Executive Officers. The SERP is a nonqualified defined benefit plan that we implemented on April 1, 2000. The SERP participants include the Named Executive Officers those other executive officers, if any, who are approved for participation by the Compensation Committee. The plan provides benefits equal to 50% of defined covered pay. Covered pay is defined as annual salary plus actual annual incentive pay paid in a given year. The average of the highest three years of covered pay in the last five consecutive fiscal years prior to retirement is used as the basis for calculating benefits. The benefit formula is defined as 3.33% of final average covered pay times continuous service, capped at 15 years. The SERP benefit is offset by our matching and profit sharing contributions under the Section 401(k) Plan and BEP contributions as well as 50% of the participant’s estimated Social Security retirement benefits payable at age 62, attributable to wages earned from the date of hire.

 

Normal retirement age is 65 with early retirement defined as the age 55 and seven years of continuous service. The benefit is actuarially reduced for any benefits taken prior to age 60. Benefits may be taken in the form of life or joint and survivor annuities or as a lump sum.

 

RETIREMENT BENEFITS FOR FISCAL 2007

 

 

 

 

Nonqualified Deferred Compensation Plans

 

The following table presents deferred compensation information related to the Named Executive Officers. The BEP is a nonqualified deferred compensation plan that we adopted on April 27, 1999 to provide participants with the opportunity to defer salary and annual incentive amounts for tax purposes. Participants include certain management team members and other highly compensated executives, including each of our Named Executive Officers. Our Chief Executive Officer has the sole power and authority to determine participation in the BEP.

 

Participants must make irrevocable and timely elections to defer salary and annual incentive amounts into the BEP. We also provide both profit sharing amounts and matching amounts in the BEP as if the amounts deferred by the participant in the BEP were the equivalent to a pre-tax participant contribution to the Section 401(k) Plan. The BEP disregards certain government regulatory limitations that are applicable to the Section 401(k) Plan. Participants may direct the investment of their accounts by choosing from among a group of investment funds.

 

Participants will receive amounts from the BEP on their normal retirement date, which is defined for BEP purposes as the date on which they reach age 65. Participants who elect to take early retirement may receive their BEP benefits earlier than age 65, provided they have made an appropriate and timely election. A termination of employment for reasons of death or disability allows the participant’s beneficiary to receive the benefit in the form initiated by the participant. If a participant’s employment is terminated for cause, amounts credited for matching and profit sharing purposes are forfeited, although salary and annual incentive amounts deferred by the participant are still paid. BEP participants may elect to take their benefits as either a lump sum or in the form of a series of substantially equal annual installments, which may range between five and twenty years based on an election made by the participant.

 

NONQUALIFIED DEFERRED COMPENSATION PLANS FOR FISCAL 2007

 

 

 

 

Termination and Change of Control

 

The following table and related notes and discussion summarize certain information related to the total potential payments made to the Named Executive Officers as of March 31, 2007 in the event of termination of employment including upon a change of control. Please also refer to “Compensation Discussion and Analysis — Post-Termination Payments — Change of Control and Severance Payments” for additional related information. The amounts shown in the Table, below, assume that such termination was effective as of March 30, 2007, the last

business day of fiscal 2007. The actual amounts to be paid can only be determined at the time of an actual termination.

 

2005 Amended and Restated Employment Agreement with Mr. Rhein.  On December 23, 2005, we entered into an employment agreement with Mr. Rhein, beginning on December 23, 2005 (the Effective Date), and ending on March 31, 2009 (“the 2005 Agreement”). If the 2005 Agreement terminates without a new employment agreement having been executed between us and Mr. Rhein by the date of such termination, Mr. Rhein’s employment thereafter will be at will.

 

The 2005 Agreement provides that Mr. Rhein receive an annual salary of $725,000 effective April 1, 2006. Mr. Rhein’s salary is subject to annual review, at the beginning of each fiscal year commencing with fiscal year 2008, by the Compensation Committee or the Board and may be increased, but not decreased, to the extent, if any, that the Compensation Committee, or the Board, may determine. It is not anticipated that this amount will be increased during the employment term. In addition, the 2005 Agreement provides for Mr. Rhein’s participation in the Annual Incentive Plan. Mr. Rhein’s target annual incentive is 100% of salary, with a range from zero% to 250% of his salary.

 

In connection with entering into the 2005 Agreement, the Compensation Committee delivered a letter to Mr. Rhein (the “Rhein Letter Agreement”) demonstrating an intention to grant him options to purchase our Common Shares as follows: (i) on or about April 1, 2006, the option to purchase 250,000 shares; and (ii) on or about August 1, 2006, the option to purchase an additional 250,000 shares; with an exercise price equal to fair market value on the respective dates of grant, becoming exercisable during his continued employment at a rate of 10% on March 31, 2007, an additional 30% on March 31, 2008, and a final 60% on March 31, 2009. The Rhein Letter Agreement further provides that vesting of such options will not be accelerated due to Mr. Rhein’s retirement or termination for Good Reason. As noted previously, Mr. Rhein received a stock option grant of 250,000 shares on April 3, 2006 (the first business day after April 1, 2006) and a second stock option grant of 250,000 shares on July 28, 2006, the date our shareholders approved the 2006 Equity Plan.

 

Under the 2005 Agreement, Mr. Rhein is eligible to participate in other benefit plans, including, but not limited to, our Section 401(k) Plan, our plans for providing severance benefits to our executive officers, 2000 Stock Incentive Plan and 2006 Equity Plan, SERP, BEP, short- and long-term disability plans, group term life insurance plan (including life insurance protection in an amount not less than 200% of his earnings as reported on IRS Form W-2 for the prior calendar year), medical plan, dental plan, and any other plans or programs we may adopt from time to time and in which our executive officers, or employees in general, are eligible to participate.

 

If Mr. Rhein’s employment is terminated by us other than due to his Disability or for Cause or is terminated by Mr. Rhein for Good Reason (as those terms are defined in the 2005 Agreement), he will be entitled to the following:

 

(i) Salary through the date of his termination of his employment;

 

(ii) Pro rata award under the annual incentive plan for the year of his termination of employment;

 

(iii) Payment of his annual salary and target annual incentives as follows: for the one year period from the date of the termination, we will continue to pay Mr. Rhein’s annual salary and an amount in equal monthly installments equal to his target annual incentive for the year of his termination of employment; and within 30 days following the date which is one year from the date of such termination of employment, an amount in a single sum equal to the sum of his annual salary plus his target annual incentive for the year of his termination of employment;

 

(iv) For two years from the date of the termination, such other benefits as are provided under our relevant plans and arrangements;

 

(v) Director’s and officer’s liability insurance coverage until the later of the date on which Mr. Rhein attains age sixty-five (65) or the date which is two years from the date of his termination of employment;

 

(vi) Continuation of life insurance throughout the payment term;

 

(vii) An automobile allowance for two years in accordance with our automobile policy for executive officers (but not less than $12,000 per year);

(viii) An allowance for estate, financial and tax planning of $10,000 per year for two years;

 

(ix) For two years, reimbursement for reasonable club dues and membership fees consistent with our past practices; and

 

(x) For two years, continued participation in all of our benefit plans in which he was a participant at the time of his termination of employment.

 

If Mr. Rhein’s employment is terminated due to his death, Disability or Retirement (as defined in the 2005 Agreement), he (or his beneficiaries or estate, in the case of his death) will be entitled to the following:

 

(i) Salary through the end of the month of the termination of his employment;

 

(ii) Pro rata award under the Annual Incentive Plan for the year of his termination of employment;

 

(iii) Directors and officer’s liability insurance coverage for two years after such termination; and

 

(iv) Such other benefits as are provided under our relevant plans and arrangements.

 

In addition, if termination of employment is due to Mr. Rhein’s death or Disability, all of Mr. Rhein’s outstanding stock options become exercisable in full. In addition, restrictions on his restricted stock (if any) will lapse. If termination is due to Mr. Rhein’s Retirement, all of Mr. Rhein’s outstanding stock options will become exercisable in full, except for those options granted in the Rhein Letter Agreement and options granted on or after the Effective Date of the Agreement. Options granted to Mr. Rhein on or after the Effective Date of the Agreement will not become exercisable to any greater extent after termination due to Mr. Rhein’s retirement, even in the event of his death or Disability. Outstanding stock options which were granted to Mr. Rhein after April 1, 2003 will not terminate prior to the end of their respective terms due to such termination. In the event of termination of employment due to Mr. Rhein’s Disability or Retirement, he will also be entitled to continuation of life insurance and medical insurance coverage substantially equivalent to the coverage for himself, his spouse and his dependents provided under our medical plan at the time of such Retirement or Disability, until Mr. Rhein attains age 65.

 

If Mr. Rhein’s employment terminates in connection with a Change in Control (as defined in the 2005 Agreement), he will be entitled to receive the following:

 

(i) Within 30 days following such termination, a single sum payment equal to three times the sum of his salary and target annual incentive for the year of his termination of employment;

 

(ii) All other payments and benefits as described above (in the event of termination other than for Disability or Cause or if Mr. Rhein terminates his employment for Good Reason) for a three-year period from the date of his termination of employment;

 

(iii) All of Mr. Rhein’s then outstanding stock options, whether or not then exercisable, will become exercisable in full (except if Mr. Rhein’s termination is for Good Reason then those options related to Rhein Letter Agreement will not vest early) and then outstanding stock options which were granted to Rhein after April 1, 2003, will not terminate prior to the end of their respective terms;

 

(iv) Any restrictions on Mr. Rhein’s restricted stock shall lapse;

 

(v) A cash payment (the “Excise Tax Payment”) equal to the amount of excise taxes which he is required to pay pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (“Code”), as a result of any “parachute payments” as defined in Section 280G(b)(2) of the Code made by or on behalf of the Company or any successor thereto, under the 2005 Agreement or otherwise, resulting in an “excess parachute payment” as defined in Section 280G(b)(1) of the Code; and

 

(vi) An increase in the Excise Tax Payment due to Mr. Rhein by the aggregate of the amount of federal, state and local income, excise and penalty taxes, and any interest on any of the foregoing, for which he will be liable on account of the Excise Tax Payment, such that he will receive the Excise Tax Payment net of all income, excise and penalty taxes, and any interest on any of the foregoing, imposed on him on account of the receipt of the Excise Tax Payment.

Upon either voluntary termination without Good Reason, or termination for Cause, Mr. Rhein is not entitled to further payments under the 2005 Agreement.

 

The 2005 Agreement also contains provisions regarding confidentiality, and, except upon involuntary termination not for Cause or voluntary termination within one year after a Change in Control, non-competition and non-interference, for two years following termination of employment.

 

Non-Competition Agreements and Change of Control Agreements.  On February 25, 2000, we entered into non-competition agreements and change of control agreements with Messrs. Bailey, Coleman and Sayers (“the 2000 Agreements”). Under the 2000 Agreements, in the event we terminate an executive’s employment without cause, the executive is entitled to his monthly salary, target annual incentive and benefit coverage for twelve months following such termination. In the event an executive’s employment is terminated for cause or he voluntarily resigns his position, we have no obligations for such payments or benefits coverage under the 2000 Agreements. If any of Messrs. Bailey, Coleman or Sayers is terminated for cause or voluntarily terminates his employment, the executive is prohibited under the 2000 Agreement for the two-year period following any such termination (the “Noncompetition Period”) from being employed by, owning, operating or similar involvement, directly or indirectly, with any business that competes with us (then defined as the distribution of electronic parts, components or systems in the geographical area in which we conduct our business). In the event that either of Messrs. Bailey or Coleman is terminated without cause, we may, in our sole discretion, elect to pay the executive his regular salary and target annual incentive for all or any part of the Noncompetition Period, which payments are separate and in addition to the severance payments and benefits coverage described above and, so long as we make such payments, the executive will be bound by the non-competition provisions described above. The 2000 Agreements also contain nondisclosure and non-interference provisions. In the event of a change of control, the provisions of the change of control agreement described below will supersede those of the non-competition agreement with respect to severance and non-competition terms.

 

Under the 2000 Agreements, if during the 12 month period following a change of control (as defined in the 2000 Agreements), Messrs. Bailey, Coleman or Sayers is discharged without cause or voluntarily terminates his employment for any reason, the executive is entitled to receive a lump sum amount within 30 days of such termination of employment equal to 24 times the greater of (i) the executive’s highest monthly salary paid during the twelve month period preceding a change in control or (ii) the executive’s highest monthly salary paid or payable by us at any time from the ninety day period preceding a change of control through the date of termination. In addition, Messrs. Bailey, Coleman and Sayers are entitled to receive a lump sum amount equal to the greater of (i) four times such executive’s highest aggregate amount of annual incentive pay during any six consecutive months of the 12 months preceding a change of control or (ii) four times the executive’s highest aggregate amount of annual incentive pay during any six consecutive months preceding the date of termination. Further, Messrs. Bailey, Coleman and Sayers are entitled to receive 24 times the monthly amount paid such executive as an auto allowance immediately preceding a change of control. For two years following such termination, the executive is entitled to all benefits and service credits for benefits under all of our employee benefit plans, programs or arrangements, or the economic equivalent where such crediting is not permitted. For purposes of the 2000 Agreements for Messrs. Bailey, Sayers and Coleman, “cause” is defined as (i) an act or acts of personal dishonesty taken by the employee and intended to result in personal enrichment of the employee at our expense or (ii) the conviction of the employee of a felony.

 

If any payment received by Messrs. Bailey, Coleman or Sayers in connection with a change of control is deemed a “parachute payment” under Section 280G of the Internal Revenue Code of 1986, as amended, resulting in an “excess parachute payment” within the meaning of such Section 280G(b), he will be entitled under the change of control agreement to a cash payment in an amount equal to the 20% excise tax, if any, payable by him pursuant to the provisions of Section 4999, which amount will be increased by the aggregate of the amount of any federal, state, and local income taxes and excise taxes for which he may become liable on account of the receipt of the excise tax gross up payment.

 

Amendment to Non-Competition Agreements and Change of Control Agreements.  In January 2003, Messrs. Bailey, Coleman and Sayers entered into agreements with us amending the 2000 Agreements. Under the amendments, Messrs. Bailey, Coleman and Sayers relinquished their rights to receive severance payments under

the 2000 Agreements upon their voluntary termination of employment, and accepted a right to such payment in connection with a change in control only upon a discharge without cause or voluntary termination for a good reason. In exchange, the 2000 Agreements were amended to provide that payments under the 2000 Agreements would be for twenty-four months rather than twelve months if an executive’s employment is terminated without cause.

 

2005 Non-Competition Agreement with Mr. Ellis.  On May 31, 2005, the Company entered into a Non-Competition Agreement with Mr. Ellis, which replaced a similar 2003 agreement. Under the non-competition agreement, in the event we terminate Mr. Ellis’ employment without cause, he will be entitled to his monthly base salary, target incentive and benefit coverage for 12 months following such termination. In the event his employment is terminated for cause or he voluntarily resigns his position, we have no obligations for such payments or benefits coverage under the non-competition agreement. If Mr. Ellis is terminated for cause or voluntarily terminates his employment, he is prohibited under the non-competition agreement for the two-year period following any such termination (the “Noncompetition Period”) from being employed by, owning, operating or similar involvement, directly or indirectly, with any business that competes with us, including but not limited to the sale of information technology products and services, enterprise computer systems, and related consulting, integration, maintenance and professional services. In the event that Mr. Ellis is terminated without cause, we may, in our sole discretion, elect to pay his regular base salary and target incentive for all or any part of the Noncompetition Period, which payments are separate and in addition to the severance payments and benefits coverage described above and, so long as we make such payments, Mr. Ellis will be bound by the non-competition provisions described above. The non-competition agreements also contain nondisclosure and non-interference provisions. In the event of a change of control, the provisions of the change of control agreement described below will supersede those of the non-competition agreement with respect to severance and non-competition terms.

 

Change of Control Agreement with Mr. Ellis.  Mr. Ellis also entered into a Change of Control Agreement with us effective June 30, 2003 in substantially the same form as the 2000 Agreements, as amended, except that, in the event of discharge without cause following a change of control, Mr. Ellis is entitled to receive a lump sum amount equal to 12 times the greater of (i) his highest monthly salary paid during the twelve month period preceding a change in control, or (ii) his highest monthly salary at any time from the ninety day period preceding a change of control through the date of the termination; plus a lump sum amount equal to the greater of (a) two times his highest aggregate amount of annual incentive pay during any six consecutive months of the 12 months preceding a change of control or (b) two times his highest aggregate amount of incentive pay during any six months preceding the date of termination. Mr. Ellis is also entitled to receive an auto allowance and other benefits as described above for one year following such discharge.

 

On May 31, 2005, Mr. Ellis entered into an amendment of his Change in Control Agreement with us, providing that, in the event Mr. Ellis’ employment is terminated by us without cause (or by Mr. Ellis for good reason) within 12 months of a change in control, Mr. Ellis will be entitled to receive a lump sum amount equal to 24 times the greater of his highest monthly salary paid during the twelve month period preceding a change in control, or his highest monthly salary at any time from the ninety day period preceding a change of control through the date of the termination, plus a lump sum amount equal to two times the annual incentive plan target applicable to him at the time of termination. Mr. Ellis is also entitled to receive an auto allowance and other benefits described above for two years following his termination.

 

On May 21, 2007, we amended the Non-Competition Agreements for Messrs. Bailey, Coleman and Sayers, changing the definition of competing business from the distribution of electronic parts, components or systems in the geographical area in which we conduct our business to more accurately reflect our current business — a business that competes with us, including but not limited to the sale of information technology products and services, enterprise computer systems, and related consulting, integration, maintenance and professional services in the geographical area in which we conduct our business. In Mr. Ellis’ Non-Competition Agreement, we changed the amount of his severance payment for termination without cause to be consistent with Messrs, Bailey, Coleman and Sayers. In the event we terminate Mr. Ellis’ employment without cause, he will be entitled to his monthly base salary, target incentive and benefit coverage for 24 months following such termination.

TERMINATION AND CHANGE IN CONTROL

 

 

 

 

 

Director Compensation Table

 

The following table and related notes and discussion summarize certain information about our non-employee Directors and their annual or long-term compensation for the fiscal year ended March 31, 2007. Our independent Board members are paid as follows:

 

 

We pay no additional fees for Board or Committee meeting attendance. In addition, each of our outside Directors received 4,000 restricted shares, granted at the Compensation Committee meeting on May 23, 2006 and ratified by the independent members of the Board on May 24, 2007, and which vested in full on March 31, 2007.

 

We also provide a Deferred Compensation Plan (Deferral Plan) for our independent Directors. The Deferral Plan allows a Director to elect to defer all or a part of their pay for the following year, which deferral will continue until the election is revoked. Deferred pay is credited to a Director’s account, at the Director’s option, as a cash allotment or stock allotment. Amounts deferred as a cash allotment bear interest at the National City Bank prime interest rate. Amounts deferred as a stock allotment are credited to the Director’s account as the stock equivalent of the number of Common Shares that could be purchased with the dollar amount of the allotment at the last sales price of the Common Shares on the last trading day of the applicable quarter. Distributions of the final account balance in a Director’s account are payable in cash in five equal annual installments, or such other distribution schedule requested by the Director and which is acceptable to us, commencing six months after the date on which the person ceases to be a Director or the date on which the Director elects to terminate participation in the Deferral Plan. The final account balance of stock allotments is the cash amount equal to a Director’s aggregate stock equivalents multiplied by the last sales price of such shares on Nasdaq on the nearest trading day preceding the Director’s termination of participation in the Deferral Plan, subject to adjustment thereafter to reflect the market price of such shares on the last day of each fiscal quarter, until distributions are fully paid. The Deferral Plan also provides for various payment terms to beneficiaries in the event of the Director’s death.

Our Directors are subject to share ownership guidelines. The guidelines require ownership of 5,000 shares within the first term following the Director’s election to the board. Currently, all of our independent directors meet the guideline.

 

DIRECTOR COMPENSATION FOR FISCAL 2007