UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

OR

For the transition period from __________ to __________.

Commission file number 0-5734

AGILYSYS, INC.

Registrant’s telephone number, including area code: (440) 720-8500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

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

Yes [X] No [  ]

The number of shares of the registrant’s common stock outstanding as of October 29, 2004 was 32,260,338.

AGILYSYS, INC.

Index

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AGILYSYS, INC.

See accompanying notes to the unaudited condensed consolidated financial statements.

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AGILYSYS, INC.

See accompanying notes to the unaudited condensed consolidated financial statements.

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AGILYSYS, INC.

See accompanying notes to the unaudited condensed consolidated financial statements.

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AGILYSYS, INC.

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Agilysys, Inc. and its subsidiaries (the “Company”). Investments in affiliated companies are accounted for by the equity or cost method, as appropriate. All intercompany accounts have been eliminated.

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

The condensed consolidated balance sheet as of September 30, 2004, as well as the condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three and six-months ended September 30, 2004 and 2003 have been prepared by the Company without audit. The financial statements have been prepared on the same basis as those in the audited annual financial statements. In the opinion of management, all adjustments necessary to fairly present the results of operations, financial position, and cash flows have been made. Such adjustments were of a normal recurring nature. The results of operations for the three and six-months ended September 30, 2004 are not necessarily indicative of the operating results for the full fiscal year or any future period.

Significant Accounting Policies

A detailed description of the Company’s significant accounting policies can be found in the audited financial statements for the fiscal year ended March 31, 2004, included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission. There have been no material changes in the Company’s significant accounting policies and estimates from those disclosed therein.

Stock-Based Compensation

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

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1. Basis of Presentation and Significant Accounting Policies – continued

The following table shows the effects on net income (loss) and earnings (loss) per share had compensation cost been measured on the fair value method pursuant to SFAS No. 123:

Reclassifications

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

2. Recent Acquisitions

In accordance with SFAS No. 141, “Business Combinations,” the Company allocates the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over the fair values of the net assets acquired is recorded as goodwill. Last year, the Company acquired two businesses, Kyrus Corporation (“Kyrus”) and Inter-American Data, Inc. (“IAD”).

Kyrus Corporation

Kyrus was acquired on September 30, 2003. The results of Kyrus’ operations have been included in the Company’s consolidated financial statements since that date. Kyrus was an IBM Master Distributor and Premier Business Partner in retail sales solutions. The acquisition expands the Company’s operations to include a wide range of services and solutions, including hardware and software products and extensive professional services to customers in the retail industry. The purchase price was $29.6 million, offset by approximately $0.9 million of cash acquired, with approximately $26.6 million assigned to goodwill in fiscal 2004 based on the estimated fair vales of the net assets acquired.

During the six-months ended September 30, 2004, the Company finalized its purchase price allocation and made several adjustments to the fair value assigned to the net assets acquired. First, the Company recorded an additional $26,700 of costs that were directly associated with the Kyrus acquisition, resulting in an increase to goodwill. Second, the Company lowered the estimated fair value of certain liabilities assumed by approximately $0.3 million, resulting in a decrease to goodwill. Third, the Company recorded a liability of $1.2 million relating to state tax uncertainties existing at the date of acquisition, which increased goodwill.

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2. Recent Acquisitions – continued

The Company anticipates recording additional liabilities for similar tax uncertainties in the foreseeable future; however such liabilities cannot be estimated with sufficient probability at this time. Any incremental liability recorded by the Company for state tax uncertainties that existed at the date of acquisition will increase goodwill.

In addition to the above, the Company also identified approximately $1.9 million of intangible assets acquired reducing goodwill. Of the intangible assets acquired, $1.7 million was assigned to customer relationships, which is being amortized over five years using an accelerated method; $210,000 was assigned to non-competition agreements, which is being amortized over six years using the straight-line method; and $30,000 was assigned to developed technology, which is being amortized over eight years using the straight-line method. It is not anticipated that such assets will have significant residual values.

Inter-American Data, Inc.

Inter-American Data, Inc. was acquired on February 17, 2004 during the fourth quarter of fiscal 2004. The results of IAD’s operations have been included in the Company’s consolidated financial statements since that date. IAD was a leading developer and provider of software and services to hotel casinos and major resorts in the United States. The acquisition provides significant opportunities for growth in the hospitality industry. The purchase price was $38.0 million, with approximately $35.7 million assigned to goodwill in fiscal 2004 based on the estimated fair values of assets acquired and liabilities assumed. During the six-months ended September 30, 2004, the Company recorded an additional liability of $151,000 assumed in the acquisition, with a corresponding increase to goodwill. The liability related to one-time involuntary termination costs for employees of IAD whose job functions were terminated during the integration of IAD. Termination benefits are expected to continue through the current fiscal year.

The Company is in the process of finalizing its assessment of the fair value of assets acquired and liabilities assumed, including whether there were any identifiable intangible assets in the transaction. Based on the progress of the assessment, it is likely that certain intangible assets will be identified and a portion of the purchase price will be allocated to the fair value of such intangible assets. Accordingly, the allocation of the purchase price is preliminary and subject to adjustment. The Company anticipates completing its assessment within 12 months of the date of acquisition.

3. Discontinued Operations

During fiscal 2003, the Company sold substantially all of the assets and liabilities of its Industrial Electronics Division (“IED”), which distributed semiconductors, interconnect, passive and electromechanical components, power supplies and embedded computer products in North America and Germany. In connection with the sale of IED, the Company discontinued the operations of Aprisa, Inc. (“Aprisa”), which was an internet-based start up corporation that created customized software for the electronic components market. The disposition of IED and discontinuance of Aprisa represented a disposal of a component of an entity as defined by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company continues to incur certain costs related to IED and Aprisa, which are reported in the condensed consolidated statement of operations as loss from discontinued operations.

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3. Discontinued Operations – continued

For the three-months ended September 30, 2004 and 2003, the Company realized a loss from discontinued operations of $96,122 (net of $64,602 in income taxes) and $0.3 million (net of $0.2 million in income taxes), respectively. For the six-months ended September 30, 2004 and 2003, the Company realized a loss from discontinued operations of $259,931 (net of $166,675 in income taxes) and $1.1 million (net of $0.6 million in income taxes), respectively.

The loss from discontinued operations for the three and six-months ended September 30, 2004 includes the results from sale of a distribution facility and adjacent land. Proceeds from the facility and land sales were approximately $3.3 million, resulting in a loss on sale of $0.3 million.

4. Restructuring Charges

Continuing Operations

In the fourth quarter of fiscal 2003, concurrent with the sale of IED, the Company announced it would restructure its remaining enterprise computer solutions business and facilities to reduce overhead and eliminate assets that were inconsistent with the Company’s strategic plan and were no longer required. In connection with this reorganization, the Company recorded restructuring charges totaling $20.7 million for the impairment of facilities and other assets no longer required as well as severance, incentives, and other employee benefit costs for personnel whose employment was involuntarily terminated. The charges were classified as restructuring charges in the consolidated statement of operations.

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

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

Of the remaining $5.6 million reserve at September 30, 2004, approximately $0.4 million is expected to be paid during the remainder of fiscal 2005 for facilities obligations. Facilities obligations are expected to continue to 2017.

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4. Restructuring Charges – continued

Discontinued Operations

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

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

Of the remaining $2.4 million reserve at September 30, 2004, approximately $0.5 million is expected to be paid during the remainder of fiscal 2005 for facilities obligations. Facilities obligations are expected to continue to 2010.

5. Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill during the six-months ended September 30, 2004 are summarized in the following table:

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5. Goodwill and Intangible Assets – continued

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill; rather, goodwill is tested for impairment on an annual basis, or more often if conditions exist which indicate potential impairment. The Company uses a measurement date of February 1 for its annual impairment test of goodwill. As of February 1, 2004, which was the latest annual impairment test performed, the Company concluded that the fair value of its reporting unit exceeded its carrying value, including goodwill. As such, step two of the goodwill impairment test was not necessary and no impairment loss was recognized. As of September 30, 2004, the Company was not aware of any circumstances or events requiring an interim impairment test of goodwill.

Intangible Assets

Following is a summary of the Company’s intangible assets at September 30, 2004:

Amortization expense for the three and six-months ended September 30, 2004 was $633,750. Estimated amortization expense for the entire fiscal year is approximately $1.0 million.

6. Mandatorily Redeemable Convertible Trust Preferred Securities

In 1998, Pioneer-Standard Financial Trust (the “Pioneer-Standard Trust”) issued 2,875,000 shares relating to $143.7 million of 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (the “Trust Preferred Securities”). The Pioneer-Standard Trust, a statutory business trust, is a wholly-owned consolidated subsidiary of the Company, with its sole asset being $148.2 million aggregate principal amount of 6.75% Junior Convertible Subordinated Debentures of Agilysys, Inc. due March 31, 2028 (the “Trust Debentures”). The Company has executed a guarantee with regard to the Trust Preferred Securities. The guarantee, when taken together with the Company’s obligations under the Trust Debentures, the indenture pursuant to which the Trust Debentures were issued and the applicable trust document, provide a full and unconditional guarantee of the Pioneer-Standard Trust’s obligations under the Trust Preferred Securities. The Trust Preferred Securities are non-voting (except in limited circumstances), pay quarterly distributions at an annual rate of 6.75%, carry a liquidation value of $50 per share and are convertible at the option of the holder into the Company’s Common Shares at any time prior to the close of business on March 31, 2028. As of March 31, 2004, the Trust Preferred Securities were redeemable at the option of the Company for a redemption price of 102.7% of par reduced annually by 0.675% to a minimum of $50 per Trust Preferred Security. The redemption price will be reduced to 100% of par by March 31, 2008.

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6. Mandatorily Redeemable Convertible Trust Preferred Securities – continued

No Trust Preferred Securities were repurchased during the six-months ended September 30, 2004. During the same period last year, the Company repurchased 365,000 Trust Preferred Securities for a cash purchase price of approximately $17.0 million. The repurchased securities had a face value of approximately $18.3 million. The difference between the face value and cash paid, offset by the expensing of related deferred financing fees, resulted in a net gain of $0.7 million.

As of September 30, 2004, a total of 366,500 Trust Preferred Securities have been redeemed by the Company.

7. Contingencies

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

8. Comprehensive Income

The components of comprehensive income (loss), net of tax, for the three and six-months ended September 30, 2004 and 2003 are as follows: