UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2004

OR

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

For the transition period from                      to                     .

Commission file number 0-5734

AGILYSYS, INC.

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

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

Yes þ No o

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

Yes þ No o

The number of shares of the registrant’s common stock outstanding as of February 4, 2005 was 28,759,799.

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 inter-company 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 December 31, 2004, as well as the condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three and nine-months ended December 31, 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 nine-months ended December 31, 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 from those disclosed therein.

Stock-Based Compensation

The Company applies the recognition and measurement provisions of Accounting Principles Board (“APB”) 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 the Financial Accounting Standard Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation, as amended by Statement 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 and earnings per share had compensation cost been measured on the fair value method pursuant to Statement 123:

Reclassifications

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

2. Recently Issued Accounting Pronouncement

On December 16, 2004, the FASB issued Statement 123 (revised 2004), Share Based Payment, which is a revision of Statement 123. Statement 123(R) supersedes APB Opinion No. 25 and amends Statement 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in operating results based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) will be effective for the Company at the beginning of the first interim period beginning after June 15, 2005, or the beginning of the Company’s second quarter of fiscal 2006.

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

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2. Recently Issued Accounting Pronouncement – continued

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

3. Recent Acquisitions

In accordance with FASB Statement 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. In fiscal 2004, 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.

As of 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. The Company may have to record additional amounts for similar tax uncertainties in the future; however such amounts cannot be estimated at this time. Any additional amounts recorded by the Company for state tax uncertainties that existed at the date of acquisition will result in a change to goodwill.

In addition to the above, the Company also recorded approximately $1.9 million of intangible assets acquired, and simultaneously reduced 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

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3. Recent Acquisitions – continued

eight years using the straight-line method. It is not anticipated that such assets will have significant residual values.

Inter-American Data, Inc.

IAD was acquired on February 17, 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 first quarter of fiscal 2005, 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. During the current quarter, the Company lowered the estimated fair value of certain assets acquired by $1.2 million, resulting in an increase to goodwill.

During the current quarter, the Company also recorded $6.7 million of intangible assets acquired, and simultaneously reduced goodwill. Of the intangible assets acquired, $3.6 million was assigned to customer relationships, which is being amortized over five years using an accelerated method; $1.4 million was assigned to developed technology, which is being amortized over six years using the straight-line method; $700,000 was assigned to non-competition agreements, which are being amortized over seven to eight years using the straight-line method; $80,000 was assigned to patented technology, which is being amortized over three years using the straight-line method; and $900,000 was assigned to trade names, which have been assigned indefinite useful lives and will be tested for impairment at least annually. It is not anticipated that such assets will have significant residual values.

4. 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 FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company continues to incur certain costs related to IED and Aprisa, which are reported in the condensed consolidated statement of operations as loss from discontinued operations.

For the three-months ended December 31, 2004 and 2003, the Company realized a loss from discontinued operations of $229,353 (net of $141,050 in income taxes) and $458,238 (net of $219,789 in income taxes), respectively. For the nine-months ended December 31, 2004 and 2003, the Company realized a loss from discontinued operations of $489,284 (net of $307,725 in income taxes) and $1.5 million (net of $0.8 million in income taxes), respectively.

The loss from discontinued operations for the nine-months ended December 31, 2004 includes the sale of a distribution facility and adjacent land. Proceeds from the sale of the distribution facility and land were approximately $3.3 million, resulting in a loss on sale of $0.3 million.

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5. 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 $5.5 million liability at December 31, 2004, approximately $0.2 million is expected to be paid during the remainder of fiscal 2005 for facilities obligations. Facilities obligations are expected to continue until 2017.

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.

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5. Restructuring Charges – continued

Following is a reconciliation of the beginning and ending balances of the restructuring liability related to discontinued operations:

Of the remaining $2.2 million reserve at December 31, 2004, approximately $0.2 million is expected to be paid during the remainder of fiscal 2005 for facilities obligations. Facilities obligations are expected to continue until 2010.

6. Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill during the nine-months ended December 31, 2004 are summarized in the following table:

In accordance with FASB Statement 142, Goodwill and Other Intangible Assets, the Company does not amortize goodwill; rather, goodwill is tested for impairment on an annual basis, or more often if conditions exist which indicate potential impairment. The Company uses a measurement date of February 1 for its annual impairment test of goodwill. As of February 1, 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 December 31, 2004, the Company was not aware of any circumstances or events requiring an interim impairment test of goodwill.

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6. Goodwill and Intangible Assets – continued

Intangible Assets

Following is a summary of the Company’s intangible assets at December 31, 2004: