UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

Commission file number 0-5734

AGILYSYS, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (440) 519-8700

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of Common Shares held by non-affiliates as of September 30, 2008 (the second fiscal quarter in which this Form 10-K relates) was $139,709,258 computed on the basis of the last reported sale price per share ($10.09) of such shares on the Nasdaq Stock Market LLC.

 

As of June 1, 2009, the Registrant had the following number of Common Shares outstanding: 22,639,773, of which 5,666,343 were held by affiliates.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive Proxy Statement to be used in connection with its Annual Meeting of Shareholders to be held on July 31, 2009 are incorporated by reference into Part III of this Form 10-K.

 

Except as otherwise stated, the information contained in this Annual Report on Form 10-K is as of March 31, 2009.

 

AGILYSYS, INC.
ANNUAL REPORT ON FORM 10-K
Year Ended March 31, 2009

TABLE OF CONTENTS

 

 

part I

Reference herein to any particular year or quarter refers to periods within the company’s fiscal year ended March 31. For example, 2009 refers to the fiscal year ended March 31, 2009.

 

Overview

Agilysys, Inc. (“Agilysys” or the “company”) is a leading provider of innovative IT solutions to corporate and public-sector customers, with special expertise in select markets, including retail and hospitality. The company develops technology solutions — including hardware, software and services — to help customers resolve their most complicated IT needs. The company possesses expertise in enterprise architecture and high availability, infrastructure optimization, storage and resource management, and business continuity, and provides industry-specific software, services and expertise to the retail and hospitality markets. Headquartered in Solon, Ohio, Agilysys operates extensively throughout North America, with additional sales offices in the United Kingdom and in Asia. Agilysys has three reportable segments: Hospitality Solutions Group (“HSG”), Retail Solutions Group (“RSG”), and Technology Solutions Group (“TSG”).

 

History and Significant Events

Agilysys was organized as an Ohio corporation in 1963. While originally focused on electronic components distribution, the company grew to become a leading distributor in both electronic components and enterprise computer systems products and solutions.

As of the fiscal year ended March 31, 2002, the company was structured into two divisions, the Computer Systems Division (“CSD”), which focused on the distribution and reselling of enterprise computer systems products and solutions, and the Industrial Electronics Division (“IED”), which focused on the distribution of electronic components. Each division represented, on average, approximately one-half of the company’s total revenues.

In 2002, the company conducted a review of strategic alternatives and developed a long-term strategic plan designed to increase the intrinsic value of the company. The company’s strategic transformation began with its divestiture of IED, to focus solely on the computer systems business. The sale of the electronic components business meant that the company was less dependent on the more cyclical markets in the components business. In addition, this allowed the company to invest more in the computer systems business, which offered greater potential for sustainable growth at higher levels of profitability. The remaining CSD business consisted of the KeyLink Systems Distribution Business (“KSG”) and the IT Solutions Business. KSG operated as a distributor of enterprise computing products selling to resellers, which then sold directly to end-user customers. The IT Solutions Business operated as a reseller providing enterprise servers, software, storage and services and sold directly to end-user customers. Overall, the company was a leading distributor and reseller of enterprise computer systems, software, storage and services from HP, IBM, Intel, Enterasys, Hitachi Data Systems, Oracle, EMC, and other leading manufacturers.

The proceeds from the sale of the electronic components distribution business, combined with cash generated from the company’s ongoing operations, were used to retire long-term debt and accelerate the growth of the company, both organically and through a series of acquisitions. The growth of the company has been supported by a series of acquisitions that strategically expanded the company’s range of solutions and markets served, including:

In March 2007, the company completed its transformation with the sale of the assets and operations of KSG. This final event completed the Agilysys multi-year transformation to move closer to the customer and higher up the IT value scale, effectively positioning

the company to focus on its higher-growth IT Solutions Business. As a result of the divestiture, the company freed itself from the increasing channel conflict and marketplace restrictions that existed in the business. The divestiture also provided the company with the financial flexibility to grow through the pursuit of additional acquisitions, including:

Today, Agilysys offers diversified products and solutions from leading IT vendors such as HP, Sun, EMC, Oracle, and IBM. The company is a leading systems integrator of retail point-of-sale, self-service and wireless solutions with proprietary business consulting, implementation and hardware maintenance services. HSG offers property, activity, material, and inventory management software applications to automate functions for the hotel casino and destination resort segments of the hospitality industry. In addition, HSG provides Microsoft Windows-based software solutions as well as IBM servers and storage products.

During fiscal 2009, the company took aggressive action to reduce its cost structure and improve profitability. Specifically, the company executed the following restructuring actions over the past year:

 

Industry

According to information published in May 2009 by International Data Corporation (“IDC”), a leading provider of technology intelligence and market data, IT spending in the United States was estimated at $490 billion in calendar year 2008. The global IT market has been softening, according to IDC figures. In 2009, IDC projects hardware sales to decline by 16% in the United States and 3.6% globally, while software and services are projected to increase modestly at 4% and 3%, respectively. The recent slowdown in this market negatively affected the company’s revenues and results of operations for fiscal 2009.

The non-consumer IT industry consists of a supply chain made up of suppliers, distributors, resellers, and corporate and public-sector customers. Agilysys operates in the reseller category as a solution provider, as well as an independent software vendor (“ISV”) in the hospitality industry and system integrator in the retail industry.

In recent years, the role of solution providers in the industry has become more important as suppliers have shifted an increasing portion of their business away from direct sales, and many end-users are working more with solution providers to develop, implement and integrate comprehensive and increasingly complex solutions.

To ensure the efficient and cost-effective delivery of products and services to market, IT suppliers are increasingly outsourcing functions such as logistics, order management, sales and technical support. Solution providers play crucial roles in this outsourcing strategy by offering customers technically skilled and market-focused sales and services organizations. Certain solution providers, such as Agilysys, offer additional proprietary products and services that complement a total, customer-focused solution.

Products and Services

Within the solutions segment in which Agilysys operates, product sets include enterprise servers, data storage hardware, systems infrastructure software, networking equipment and IT services related to implementation and support. IDC estimates United States spending in these product sets was $490 billion in calendar year 2008, and is not expected to return to an annual growth rate of 6% until calendar year 2012.

Total revenues from continuing operations for the company’s three specific product areas are as follows:

 

During 2009, 2008, and 2007, sales of the company’s three largest suppliers’ products and services accounted for 65%, 65%, and 69%, respectively, of the company’s sales volume. Sales of HP products and services accounted for 22%, 27%, and 49% of the company’s sales volumes in 2009, 2008, and 2007, respectively. Sales of IBM products and services accounted for 12%, 15%, and 20% in 2009, 2008, and 2007, respectively. Sales of Sun products and services through Innovative, which was purchased in July 2007, accounted for 31% and 23% of the sales volume in 2009 and 2008, respectively.

The loss of any of the top three suppliers or a combination of certain other suppliers could have a material adverse effect on the company’s business, results of operations and financial condition unless alternative products manufactured by others are available to the company. In addition, although the company believes that its relationships with suppliers are good, there can be no assurance that the company’s suppliers will continue to supply products on terms acceptable to the company. Through agreements with its suppliers, Agilysys is authorized to sell all or some of the suppliers’ products. The authorization with each supplier is subject to specific terms and conditions regarding such items as purchase discounts and supplier incentive programs including sales volume incentives and cooperative advertising reimbursements. A substantial portion of the company’s profitability results from these supplier incentive programs. These incentive programs are at the discretion of the supplier. From time to time, suppliers may terminate the right of the company to sell some or all of their products or change these terms and conditions or reduce or discontinue the incentives or programs offered. Any such termination or implementation of such changes could have a material adverse impact on the company’s results of operations.

 

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in determining how to allocate resources and in assessing performance. Operating segments can be aggregated for segment reporting purposes so long as certain economic and operating aggregation criteria are met. With the divestiture of KSG in 2007, the continuing operations of the company represented one business segment that provided IT solutions to corporate and public-sector customers. In 2008, the company evaluated its business groups and developed a structure to support the company’s strategic direction as it has transformed to a pervasive solution provider largely in the North American IT market. With this transformation, the company now has three reportable segments: HSG, RSG, and TSG. See Note 13 to Consolidated Financial Statements titled, Business Segments, for a discussion of the company’s segment reporting.

 

Customers

Agilysys’ customers include large and medium-sized companies, divisions or departments of corporations in the Fortune 1000, and public-sector institutions. The company serves customers in a wide range of industries, including telecommunications, education, finance, government, healthcare, hospitality, manufacturing and retail. In 2009, Verizon Communications, Inc. represented approximately 22.7% of Agilysys’ total sales and 32.6% of TSG’s total sales. In 2008, Verizon Communications, Inc. represented approximately 11.7% of the company’s total sales and 16.3% of TSG’s total sales. No single customer accounted for more than 10% of Agilysys’ total sales or the total sales of any reporting business segment during 2007.

 

Uneven Sales Patterns and Seasonality

The company experiences a disproportionately large percentage of quarterly sales in the last month of its fiscal quarters. In addition, TSG experiences a seasonal increase in sales during its fiscal third quarter ending December 31st. Third quarter sales were 31%, 33%, and 33% of annual revenues for 2009, 2008, and 2007, respectively. Agilysys believes that this sales pattern is industry-wide. Although the company

is unable to predict whether this uneven sales pattern will continue over the long term, the company anticipates that this trend will remain in the foreseeable future.

 

Backlog

The company historically has not had a significant backlog of orders. There was no significant backlog at March 31, 2009.

 

Competition

The reselling of innovative computer technology solutions is competitive, primarily with respect to price, but also with respect to service levels. The company faces competition with respect to developing and maintaining relationships with customers. Agilysys competes for customers with other solution providers and occasionally with some of its suppliers.

There are very few large, public enterprise product reseller companies in the IT solution provider market. As such, Agilysys’ competition is typically small or regional, privately held technology solution providers with $50 million to $200 million in revenues. The company competes with large companies such as Berbee Information Networks Corporation (a division of CDW Corporation), Forsythe Solutions Group, Inc., and Logicalis Group within TSG, and Micros Systems, Inc. and Radiant Systems, Inc. within HSG.

 

Employees

As of June 1, 2009, Agilysys had approximately 1,250 employees. The company is not a party to any collective bargaining agreements, has had no strikes or work stoppages and considers its employee relations to be excellent.

 

Markets

Agilysys sells its products principally in the United States and Canada and entered the China, Hong Kong and U.K. markets through acquisitions. Sales to customers outside of the United States and Canada are not a significant portion of the company’s sales. In January 2009, the company sold the stock of TSG’s operations in China and certain assets of TSG’s Hong Kong operations. However, HSG still continues to operate and grow in Asia, specifically in Hong Kong, Macau, and Singapore.

 

Access to Information

Agilysys’ annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports are available free of charge through its Internet site (http://www.agilysys.com) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The information posted on the company’s Internet site is not incorporated into this Annual Report on Form 10-K. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

Our business could be materially adversely affected if we cannot successfully implement changes to our information technology to support a changed business.

Our current information systems environment was principally designed for the distribution business. We are in the process of converting legacy business information systems to a single Enterprise Resource Planning system. We committed significant resources to this conversion, which began in fiscal 2009 and is expected to be completed in fiscal 2010. This conversion is complex and while we are using a controlled project plan, we may not be able to successfully implement changes to and manage our internal systems, procedures and controls. If we are unable to successfully complete this implementation in an efficient or timely manner, it could materially adversely affect our business.

 

Our profitability is partly dependent upon restructuring and executing planned cost savings.

Recently, we initiated actions intended to reduce our cost structure and improve profitability. Specifically, we implemented the following restructuring actions over the past year:

If our cost reduction efforts are ineffective or our estimates of cost savings are inaccurate, our revenues and profitability could be negatively impacted. We may not be successful in achieving the operating efficiencies and operating cost reductions expected from these

efforts, and may experience business disruptions associated with the restructuring and cost reduction activities. These efforts may not produce the full efficiency and cost reduction benefits that we expect. Further, such benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated.

 

We are dependent on a single customer for a significant portion of our revenues.

In 2009 and 2008 more than 10% of our revenues were derived from Verizon Communications, Inc. (“Verizon”). If we were to lose Verizon as a customer, or if Verizon was to become insolvent or otherwise unable to pay for products and services, or was to become unwilling or unable to make payments in a timely manner, it could have a material adverse effect on the company’s business, results of operations, financial condition or liquidity. A further or extended economic downturn could reduce profitability and cash flow.

 

We are highly dependent on key suppliers and supplier programs.

We presently depend on a small number of key suppliers, including IBM, HP and Sun Microsystems. Our contracts with these suppliers vary in duration and are generally terminable by either party at will upon notice. The loss of any of these suppliers or a combination of certain other suppliers could have a material adverse effect on the company’s business, results of operations and financial condition. From time to time, a supplier may terminate the company’s right to sell some or all of a supplier’s products or change the terms and conditions of the supplier relationship or reduce or discontinue the incentives or programs offered. Any termination or the implementation of these changes could have a material negative impact on the company’s results of operations.

 

We are dependent on a long-term product procurement agreement with Arrow Electronics, Inc.

We have entered into a long-term product procurement agreement to purchase a wide variety of products totaling a minimum of $330 million per year until 2012 from Arrow Electronics, Inc. Our success will be dependent on competitive pricing, the availability of products on a timely basis and maintenance of certain service levels by Arrow.

 

Prolonged economic weakness causes a decline in spending for information technology, adversely affecting our financial results.

Our revenue and profitability depend on the overall demand for our products and services and continued growth in the use of technology in business by our customers, their customers, and suppliers. In challenging economic environments, our customers may reduce or defer their spending on new technologies. At the same time, many companies have already invested substantial resources in their current technological resources, and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel, processes and infrastructures. Delays or reductions in demand for information technology by end users could have a material adverse effect on the demand for our products and services. In the last year, we have experienced weakening in the demand for our products and services. If the markets for our products and services continue to soften, our business, results of operations or financial condition could be materially adversely affected.

 

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or timely or detect fraud, which could have a material adverse effect on our business. While we believe that our plans to remediate our 2009 material weakness in internal controls over financial reporting, discussed in Item 9A of this report, will return us to the status of having adequate internal controls over financial reporting, we continue to be exposed to risks that those internal controls may be inadequate and we may have difficulty accurately reporting our financial results on a timely basis.

An effective internal control environment is necessary for the company to produce reliable financial reports and is an important part of its effort to prevent financial fraud. Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements and to remediate internal control deficiencies and material weaknesses.

While management evaluates the effectiveness of the company’s internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure in human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks. In the event that our chief executive officer, chief financial officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we may be unable to produce reliable financial reports or prevent fraud, which could materially adversely affect our business. In addition, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC or NASDAQ. Any such actions could affect investor perceptions of the company and result in an adverse reaction in the

financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or limit our access to capital.

 

We make estimates and assumptions in connection with the preparation of the company’s Consolidated Financial Statements, and any changes to those estimates and assumptions could have a material adverse effect on our results of operations.

In connection with the preparation of the company’s Consolidated Financial Statements, we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report and we describe other significant accounting policies in Note 1 to Consolidated Financial Statements titled, Operations and Summary of Significant Accounting Policies, which are included in Part II, Item 15 of this Annual Report. In addition, as discussed in Note 12 to Consolidated Financial Statements titled, Commitments and Contingencies, we make certain estimates under the provisions of SFAS No. 5 “Accounting for Contingencies,” including decisions related to provisions for legal proceedings and other contingencies. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material adverse effect on our results of operations.

 

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

The markets in which the company competes are characterized by ongoing technological change, new product introductions, evolving industry standards and changing needs of customers. Our competitive position and future success will depend on our ability to anticipate and adapt to changes in technology and industry standards. If we fail to successfully manage the challenges of rapidly changing technology, the company’s results of operations could be materially adversely affected.

 

Our profitability could suffer if we are not able to maintain favorable pricing.

Our profitability is dependent on the rates we are able to charge for our services. If we are not able to maintain favorable pricing for our services, our profit margin and our profitability could suffer. The rates we are able to charge for our services are affected by a number of factors, including:

 

Capital markets are currently experiencing a period of dislocation and instability, which has had and could continue to have a negative impact on our business and operations.

The general disruption in the U.S. capital markets has impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole. These conditions could persist for a prolonged period of time or worsen in the future. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations and our ability to obtain and manage our liquidity. Any such developments could have a material adverse impact on our business, financial condition and results of operations.

 

Credit market developments may adversely affect our business and results of operations by reducing availability under our credit agreement.

In the current volatile state of the credit markets, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. On May 5, 2009, we entered into a new credit facility, as discussed in Item 7 of this Annual Report titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the subsection titled, “Liquidity and Capital Resources” and in Note 8 to Consolidated Financial Statements titled, Financing Arrangements. Although we do not intend to borrow in the near term, if our lender fails to honor its legal commitments under our credit facility, it could be difficult in

the current environment to replace this facility on similar terms. The failure of the lender under the company’s credit facility may impact the company’s ability to borrow money to finance its operating activities.

 

Disruptions in the financial and credit markets may adversely impact the spending of our customers, which could adversely affect our business, results of operations and financial condition.

Demand for our products and services depends in large part upon the level of capital of our customers. Decreased customer spending could have a material adverse effect on the demand for our services and our business, results of operations and financial condition. In addition, the disruptions in the financial markets may also have an adverse impact on regional economies or the world economy, which could negatively impact the capital and maintenance expenditures of our customers. There can be no assurance that government responses to the disruptions on the financial markets will restore confidence, stabilize markets or increase liquidity and the availability of credit. These conditions may reduce the willingness or ability of our customers and prospective customers to commit funds to purchase our products and services, or their ability to pay for our products and services after purchase.

 

When we make acquisitions, we may not be able to successfully integrate them or attain the anticipated benefits.

As part of our operating history and growth strategy, we have acquired other businesses. In the future, we may continue to seek acquisition candidates in selected markets and from time to time engage in exploratory discussions with suitable candidates. We can provide no assurance that we will be able to identify and acquire targeted businesses or obtain financing for such acquisitions on satisfactory terms. The process of integrating acquired businesses into our operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention. In particular, the integration of acquired technologies with our existing products could cause delays in the introduction of new products. In connection with future acquisitions, we may incur significant charges to earnings as a result of, among other things, the write-off of purchased research and development.

Future acquisitions may be financed through the issuance of common stock, which may dilute the ownership of our shareholders, or through the incurrence of additional indebtedness. Furthermore, we can provide no assurance that competition for acquisition candidates will not escalate, thereby increasing the costs of making acquisitions or making suitable acquisitions unattainable. Acquisitions involve numerous risks, including the following:

For example, until we actually assume operating control of the business assets and operations, it is difficult to ascertain with precision the actual value or the potential liabilities of our acquisitions. If we are unsuccessful in integrating our acquisitions, or if the integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our business or the acquisition. In addition, we may not realize all of the anticipated benefits from our acquisitions, which could result in an impairment of goodwill or other intangible assets.

 

Consolidation in the industries that we serve could adversely affect our business.

Customers that we serve may seek to achieve economies of scale and other synergies by combining with or acquiring other companies. If two or more of our current customers combine their operations, it may decrease the amount of work that we perform for these customers. If one of our current clients merges or consolidates with a company that relies on another provider for its consulting, systems integration and technology, or outsourcing services, we may lose work from that client or lose the opportunity to gain additional work. If two or more of our suppliers merge or consolidate operations, the increased market power of the larger company could also increase our product costs and place competitive pressures on us. Any of these possible results of industry consolidation could adversely affect our business.

 

We May Incur Additional Goodwill and Intangible Asset Impairment Charges that Adversely Affect Our Operating Results.

We review goodwill for impairment annually and more frequently if events and circumstances indicate that our goodwill and other indefinite-lived intangible assets may be impaired and that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative

industry or economic trends, a significant decline in our stock price for a sustained period, and decreases in our market capitalization below the recorded amount of our net assets for a sustained period.

As a result of significant declines in macroeconomic conditions, there has been a decline in global equity valuations since April 2008 that impacted our market capitalization. Based upon the results of impairment tests performed during fiscal 2009, we concluded that a portion of our goodwill and identifiable intangible assets were impaired. As such, we recognized total non-cash impairment charges in the first, second, and fourth quarters of 2009 for goodwill and intangible assets of $231.9 million, not including $20.6 million that related to the CTS business acquired in May 2005 that was classified as restructuring charges, as of March 31, 2009. The impairment charge did not impact our consolidated cash flows, liquidity, or capital resources. See Note 1 to Consolidated Financial Statements titled, Operations and Summary of Significant Accounting Policies and the subsection titled, “Critical Accounting Policies, Estimates & Assumptions” in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) for further discussion of the impairment testing of goodwill and identifiable intangible assets.

A continued decline in general economic conditions or global equity valuations, could impact the judgments and assumptions about the fair value of our businesses and we could be required to record additional impairment charges in the future, which would impact our consolidated balance sheet, as well as our consolidated statement of operations. If we were required to recognize an additional impairment charge in the future, the charge would not impact our consolidated cash flows, current liquidity, or capital resources.

 

We are subject to litigation, which may be costly.

As a company that does business with many customers, employees and suppliers, we are subject to a variety of legal and regulatory actions, including, but not limited to, claims made by or against us relating to taxes, health and safety, employee benefit plans, employment discrimination, contract compliance, intellectual property rights, and intellectual property licenses. The results of such legal and regulatory actions are difficult to predict. Although we are not aware of any instances of non-compliance with laws, regulations, contracts, or agreements and we do not believe that any of our products and services infringe any property rights or licenses, we may incur significant legal expenses if any such claim were filed. If we are unsuccessful in defending a claim, it could have a material adverse effect on our business, financial condition, or results of operations.

 

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations and the operations of our significant suppliers could be subject to power shortages, telecommunications failures, fires, extreme weather conditions, medical epidemics, and other natural or manmade disasters or business interruptions. The occurrence of any of these business disruptions could have a material adverse effect on our results of operations. While we maintain disaster recovery plans and insurance with coverages we believe to be adequate, claims may exceed insurance coverage limits, may not be covered by insurance, or insurance may not continue to be available on commercially reasonable terms.

 

We may be unable to hire enough qualified employees or we may lose key employees.

We rely on the continued service of our senior management, including our Chief Executive Officer, members of our executive team and other key employees and the hiring of new qualified employees. In the technology services industry, there is substantial and continuous competition for highly-skilled personnel. We also may experience increased compensation costs that are not offset by either improved productivity or higher prices. We may not be successful in recruiting new personnel and in retaining and motivating existing personnel. With rare exceptions, we do not have long-term employment or non-competition agreements with our employees. Members of our senior management team have left the company recently, and we cannot assure you that there will not be additional departures, which may be disruptive to our operations.

Part of our total compensation program includes share-based compensation. Share-based compensation is an important tool in attracting and retaining employees in our industry. If the market price of our stock declines or remains low, it may adversely affect our ability to retain or attract employees. In addition, because we expense all share-based compensation, we may in the future change our share-based and other compensation practices. Some of the changes we consider from time to time include the reduction in the number of employees granted options, a reduction in the number of options granted per employee and a change to alternative forms of share-based compensation. Any changes in our compensation practices or changes made by competitors could affect our ability to retain and motivate existing personnel and recruit new personnel.

 

As a publicly traded company, our stock price is subject to certain market trends that are out of our control and that may not reflect our actual intrinsic value.

We can experience short-term increases and declines in our stock price due to factors other than those specific to our business, such as economic news or other events generally affecting the trading markets. These fluctuations could favorably or unfavorably impact our

business, financial condition, or results of operations. Our ownership base has been and may continue to be concentrated in a few shareholders, which could increase the volatility of our stock price over time.

 

We may be required to adopt International Financial Reporting Standards (“IFRS”). The ultimate adoption of such standards could negatively impact our business, financial condition or results of operations.

Although not yet required, we could be required to adopt IFRS which is different from accounting principles generally accepted in the United States of America for our accounting and reporting standards. The implementation and adoption of new standards could favorably or unfavorably impact our business, financial condition, or results of operations.

None.

The company’s principal corporate offices are located in a 100,000 square foot facility in Solon, Ohio. As of March 31, 2009, the company owned or leased a total of approximately 353,266 square feet of space for its continuing operations, of which approximately 332,307 square feet is devoted to product warehouse and sales offices. The company’s major leases contain renewal options for periods of up to 8 years. On December 2, 2008, the Boca Raton, Florida facility was closed and the company is looking for a tenant to sublease the facility. For information concerning the company’s rental obligations, see the discussion of contractual obligations under Item 7 contained in Part II, as well as Note 7 to Consolidated Financial Statements contained in Part IV, of this Annual Report on Form 10-K. The company believes that its product warehouse and office facilities are well maintained, are suitable and provide adequate space for the operations of the company.

The company’s materially important facilities as of March 31, 2009, are set forth in the table below:

 

In 2006, the company filed a lawsuit against the former shareholders of CTS, a company that was purchased by Agilysys in May 2005. In the lawsuit, Agilysys alleged that principals of CTS failed to disclose pertinent information during the acquisition, representing a material breach in the representations of the acquisition purchase agreement. On January 30, 2009, a jury ruled in favor of the company, finding the former shareholders of CTS liable for breach of contract, and awarded damages in the amount of $2.3 million. The jury also awarded to Agilysys its reasonable attorney’s fees in an amount to be determined at a later hearing. Judgment will be entered upon an award of attorney’s fees, at which time the parties have thirty days to file an appeal. No amounts have yet been accrued or received from the former shareholders of CTS or their insurance company.

The 2008 Annual Meeting of Shareholders of Agilysys, Inc. (“2008 Annual Meeting”) was held on March 26, 2009. The following Directors were re-elected to serve until the annual meeting in 2011:

 

On March 11, 2009, the company and Ramius LLC and its affiliates entered into an agreement (the “Settlement Agreement”) to settle the proxy contest regarding the election of Directors at the company’s 2008 Annual Meeting. For information regarding the Settlement Agreement and the company’s expenses related to the solicitation, please refer to the company’s Schedule 14A filed with the SEC on March 17, 2009.

The term of office for the following Directors continued after the 2008 Annual Meeting: Martin F. Ellis, Keith M. Kolerus, Robert A. Lauer, Robert G. McCreary, III, John Mutch, and Steve Tepedino. Effective May 21, 2009, Steve Tepedino tendered his resignation from the company’s Board of Directors for professional reasons.

Also at the 2008 Annual Meeting, shareholders voted to ratify the appointment of Ernst & Young LLP as the company’s independent registered public accounting firm for the fiscal year ended March 31, 2009. Shareholders voted as follows:

 

The information provided below is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K. The following table sets forth the name, age, current position and principal occupation and employment during the past five years through June 1, 2009, of the company’s executive officers.

There is no relationship by blood, marriage or adoption among the listed officers. Mr. Ellis holds office until terminated as set forth in his employment agreement. All other executive officers serve until terminated.

 

Executive Officers of the Registrant

 

 

part II

 

 

The company’s common shares, without par value, are traded on the NASDAQ Stock Market LLC. Common share prices are quoted daily under the symbol “AGYS.” The high and low market prices and dividends per share for the common shares for each quarter during the past two fiscal years are presented in the table below.

 

 

As of May 29, 2009, there were 22,639,773 common shares of the company outstanding, and there were 2,156 shareholders of record. However, the company believes that there is a larger number of beneficial holders of its common shares. The closing price of the common shares on May 29, 2009, was $6.46 per share.

The company pays cash dividends on common shares quarterly upon authorization by the Board of Directors. Regular payment dates have been the first day of August, November, February and May.

The company maintains a Dividend Reinvestment Plan whereby cash dividends and additional monthly cash investments up to a maximum of $5,000 per month may be invested in the company’s common shares at no commission cost.

The company adopted a Shareholder Rights Plan in 1999 that expired on May 10, 2009. For further information about the Shareholder Rights Plan, see Note 14 to Consolidated Financial Statements titled, Shareholders’ Equity and contained in Part IV hereof.

No repurchases of common shares were made by or on behalf of the Company during the fourth quarter of fiscal 2009.

Shareholder Return Performance Presentation

 

The following chart compares the value of $100 invested in the company’s common shares, including reinvestment of dividends, with a similar investment in the Russell 2000 Index (the “Russell 2000”) and the companies listed in the SIC Code 5045-Computer and Computer Peripheral Equipment and Software (the company’s “Peer Group”) for the period March 31, 2004, through March 31, 2009:

 

Comparison of Cumulative Five Year Total Return

 

 

The following selected consolidated financial and operating data was derived from the audited consolidated financial statements of the company and should be read in conjunction with the company’s Consolidated Financial Statements and Notes thereto, and Item 7 contained in part II of this Annual Report on Form 10-K.

 

In “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (“MD&A”), management explains the general financial condition and results of operations for Agilysys, Inc. and its subsidiaries including:

The MD&A analyzes changes in specific line items in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding the company’s consolidated financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements and related Notes that appear in Item 15 of this Annual Report on Form 10-K titled, “Financial Statements and Supplementary Data.” Information provided in the MD&A may include forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to be materially different from those contained in the forward-looking statements. See “Forward-Looking Information” below and Item 1A “Risk Factors” in Part I of this Annual Report on Form 10-K for additional information concerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in the company.

 

Overview

 

Agilysys, Inc. (“Agilysys” or the “company”) is a leading provider of innovative IT solutions to corporate and public-sector customers, with special expertise in select markets, including retail and hospitality. The company uses technology — including hardware, software and services — to help customers resolve their most complicated IT needs. The company possesses expertise in enterprise architecture and high availability, infrastructure optimization, storage and resource management, and business continuity, and provides industry-specific software, services and expertise to the retail and hospitality markets. Headquartered in Solon, Ohio effective October 2008, Agilysys operates extensively throughout North America, with additional sales offices in the United Kingdom and Hong Kong. Agilysys has three reportable segments: Hospitality Solutions (“HSG”), Retail Solutions (“RSG”), and Technology Solutions (“TSG”). See Note 13 to Consolidated Financial Statements titled, Business Segments, which is included in Item 15, for additional discussion.

In July 2008, the company decided to exit TSG’s portion of the Hong Kong and China businesses. HSG continues to operate in Hong Kong. In January 2009, the company closed the sale of the stock of TSG’s China operations and certain assets of TSG’s Hong Kong operations, receiving proceeds of $1.4 million. As disclosed in previous filings, the company sold KSG in March 2007 and now operates solely as an IT solutions provider. The following long-term goals were established by the company with the divestiture of KSG:

As a result of the decline in GDP growth, a weak macroeconomic environment, significant risk in the credit markets, and changes in demand for IT products, the company will not achieve its long-term revenue goals announced in early 2007, and is re-evaluating its long-term revenue goals and acquisition strategy. The company remains committed to its gross margin, earnings before interest, taxes, depreciation and amortization margins and target long-term return on invested capital goals. Given the current economic conditions, the company is focused on aligning cost structure with current and expected revenue levels, improving efficiencies, and increasing cash flows.

Fiscal 2009 was a transitional year for the company, as the company’s headquarters were relocated back to Ohio and new leaders stepped into the company’s executive officer roles. In fiscal 2009, the company experienced a slowdown in sales as a result of the softening of the IT market in North America, with net sales decreasing 3.9% year-over-year. The decline in net sales was tempered by a contribution of $72.2 million in incremental sales during the year from recently acquired businesses. Gross margin as a percentage of sales increased 370 basis points year-over-year to 27.2% at March 31, 2009 versus 23.5% at March 31, 2008, which exceeded the company’s long-term goal of achieving gross margins in excess of 20% within three years.

For financial reporting purposes, the current and prior period operating results of KSG and TSG’s Hong Kong and China businesses have been classified within discontinued operations for all periods presented. Accordingly, the discussion and analysis presented below, including the comparison to prior periods, reflects the continuing business of Agilysys.

 

Results of Operations

 

2009 Compared with 2008

 

Net Sales and Operating Loss

 

nm — not meaningful.

Net sales.  The $29.4 million decrease in net sales was driven by a decline in hardware revenues resulting from lower volumes. These lower volumes were attributable to a general decrease in IT spending as a result of weakening macroeconomic conditions, which particularly affected TSG. Hardware revenue decreased $53.6 million year-over-year. The decrease in hardware revenue was partially offset by increases of $5.1 million and $19.1 million in software and services revenues, respectively.

TSG’s sales decreased $36.7 million primarily due to lower hardware volumes, primarily due to lower hardware sales volumes. RSG’s sales decreased $7.6 million primarily due to a large single customer sale in 2008 that did not repeat in 2009. HSG’s sales increased $14.8 million driven by the incremental sales attributable to the InfoGenesis and Eatec acquisitions, which contributed $12.5 million and $4.6 million, respectively.

Gross margin.  The $20.2 million increase in gross margin was driven by a favorable product mix and vendor rebates. The decrease in product gross margin reflects the lower volumes of hardware sales combined with a higher proportion of proprietary software sales, which carry lower costs for the company, and a change in customer mix. The decrease in service gross margin reflects the integration of InfoGenesis, including conformity with HSG’s practices, as well as a change in the TSG service model as a result of the 2009 restructuring actions.

TSG’s gross margin increased $5.2 million driven by the Innovative acquisition, which incrementally contributed $17.6 million. RSG’s gross margin increased $3.1 million, which is attributable to a favorable mix of service revenues. HSG’s gross margin increased $13.3 million primarily due to the InfoGenesis and Eatec acquisitions, which contributed $12.1 million and $3.3 million, respectively.

Operating Expenses.  The company’s operating expenses consist of selling, general, and administrative (“SG&A”) expenses, asset impairment charges, and restructuring charges (credits). SG&A expenses increased $9.7 million attributable to increases of $9.4 million, $1.3 million, and $2.6 million in HSG, RSG, and TSG, respectively, partially offset by a reduction in corporate SG&A expenses of $3.6 million. The increase in HSG’s operating expenses is primarily a result of the acquisitions of InfoGenesis, Eatec, and Triangle which contributed $2.4 million, $3.7 million, and $1.5 million in incremental expenses, respectively, with the remainder of the increase due to salaries and wages expenses for the segment’s organic business. The increase in RSG’s SG&A expenses is primarily related to an increase in salaries and wages expenses of $1.9 million. The increase in TSG’s operating expenses is primarily due to incremental expenses incurred with respect to Innovative, which was acquired in the second quarter of 2008. The reduction in corporate operating expenses is a direct result of the restructuring actions taken in 2009. From March 31, 2008 to March 31, 2009, the Company reduced it’s total workforce by approximately 9%. In addition, the Company suspended wage increases for fiscal 2010.

The company’s asset impairment charges consist of goodwill impairment charges of $229.5 million, not including goodwill impairment of $16.8 million and a $3.8 million in finite-lived intangible asset impairment charges classified within restructuring charges, and an indefinite-lived intangible asset impairment charge of $2.4 million. The goodwill and intangible asset impairment charges are discussed further in Note 4 to Consolidated Financial Statements titled, Restructuring Charges (Credits) and in Note 5 to Consolidated Financial Statements titled, Goodwill and Intangible Assets.

The company recorded restructuring charges of $40.8 million during 2009. The restructuring charges consist of $23.5 million recorded during the first two quarters of 2009 related to the professional services restructuring actions, $13.4 million recorded during the third quarter of 2009 related to the third quarter management restructuring actions and relocation of the company’s headquarters from Boca Raton, Florida to Solon, Ohio, and $3.9 million recorded during the fourth quarter of 2009 related to both the third and the fourth quarter management restructuring actions. The restructuring credits in 2008 resulted from an adjustment to previously accrued severance amounts and a write-off of certain leasehold improvements, net of adjustments related to actual and accrued sub-lease income and common area costs. The company’s restructuring actions in 2009 and 2008 are discussed further in the Restructuring Charges (Credits) subsection of this MD&A and in Note 4 to Consolidated Financial Statements titled, Restructuring Charges (Credits).

 

Other Expenses (Income)

 

Other expenses (income), net.  In 2009, the $2.6 million in other expenses primarily included $3.0 million in impairment charges recorded for the company’s investment in The Reserve Fund’s Primary Fund. These impairment charges are discussed further in the subsection of this MD&A below titled, Investments, and in Note 1 to Consolidated Financial Statements titled, Operations and Summary of Significant Accounting Policies. In 2008, the $6.6 million in other income primarily included a $15.1 million gain on the sale of the Magirus investment, which was partially offset by the company’s share of Magirus’ annual operating losses of $6.2 million and an impairment charge of $4.9 million recorded to write down the company’s equity method investment in Magirus to fair value. Other income in 2008 also included $1.4 million gain the company recognized on the redemption of an investment in an affiliated company.

Interest income.  The $12.6 million unfavorable change in interest income was due to a lower average cash and cash equivalent balances in 2009 compared to 2008. The higher cash and cash equivalent balance in 2008 was driven by the sale of KSG for $485.0 million on March 31, 2007. However, the company’s cash and cash equivalent balance declined during 2008 and 2009, as the company used the cash to acquire businesses and purchase its common shares for treasury.

Interest expense.  Interest expense increased $0.3 million in 2009 compared to 2008 due to a non-cash charge for unamortized deferred financing fees recorded in the third quarter of 2009 as a result of the termination of the company’s then existent revolving credit facility, as discussed in Liquidity and Capital Resources below.

Income Taxes

The company recorded an income tax benefit from continuing operations at an effective tax rate of 0.4% in 2009 compared with an income tax benefit at an effective rate of 381.1% in 2008. The effective tax rate for 2009 is lower than the statutory rate primarily due to the impairment of nondeductible goodwill and an increase in the valuation allowance for federal and state deferred tax assets. The effective tax rate for 2008 was higher than the statutory rate principally due to the reversal of the valuation allowance associated with Magirus, the settlement of an IRS audit, and other changes in liabilities related to state taxes that were partially offset by higher meals and entertainment expenses incurred in marketing the company’s products.

 

2008 Compared with 2007

 

Net Sales and Operating Loss

 

Net sales.  The $306.4 million increase in net sales was largely driven by an increase in hardware revenue. Hardware revenue increased $233.9 million year-over-year. The increase in hardware revenue was principally due to higher revenues generated from the acquisitions which contributed $205.7 million. Innovative contributed $162.0 million of the $205.7 million.

TSG’s sales increased $222.9 million primarily due to the Innovative and Stack acquisitions, which contributed $175.3 million and $46.2 million, respectively. HSG’s sales increased $46.9 million primarily due to the InfoGenesis and Eatec acquisitions, which contributed $30.9 and $0.8 million respectively. RSG’s sales increased $37.0 million primarily due to sales volume increases.

Gross Margin.  The $59.7 million increase in gross margin was driven by the overall increase in sales. Changes in product mix, pricing under our procurement agreement with Arrow and margins of our acquisitions all contributed to the lower gross margin percentage.

TSG’s gross margin increased $32.5 million primarily due to the Innovative and Stack acquisitions, which contributed $35.6 million and $6.1 million, respectively. HSG’s gross margin increased $24.1 million primarily due to the InfoGenesis and Eatec acquisitions, which contributed $15.0 and $0.7 million, respectively. RSG’s gross margin increased $5.1 million, which can be directly attributable to the increase in sales.

Operating Expenses.  The company’s operating expenses consist of selling, general, and administrative (“SG&A”) expenses and restructuring credits. The $66.8 million increase in SG&A expenses was mainly driven by the following key factors: incremental operating expenses of $0.4 million, $23.3 million, $16.4 million, and $8.3 million related to the acquisitions of Eatec, Innovative, InfoGenesis, and Stack, respectively, outside services expense of $4.3 million, and rental expense of $2.6 million. The remaining increase in SG&A was principally due to higher stock-based compensation and benefits costs in 2008.

Restructuring credits decreased $2.5 million during 2008. The decline was principally due to the $4.9 million reversal of the remaining restructuring liability that was initially recognized in 2003 for an unutilized leased facility. In connection with the sale of KSG, management determined that the company would utilize the formerly abandoned leased facility to house the majority of its remaining IT Solutions Business and corporate personnel. Accordingly, the reversal of the remaining restructuring liability was classified as a restructuring credit in the consolidated statement of operations in 2007. The 2007 restructuring credit was offset by a charge of approximately $1.7 million for the termination of a facility lease that was previously exited as part of a prior restructuring effort and a $0.5 million charge for one-time termination benefits resulting from a workforce reduction that was executed in connection with the sale of KSG.

 

Other (Income) Expenses

 

Other (income) expense, net.  The $12.6 million favorable change in other (income) expense, net, was due to a $1.4 million gain recognized on the redemption of the company’s investment in an affiliated company in the first quarter of 2008. The company recognized a $1.4 million increase in foreign currency transaction gains during 2008 compared with 2007 due to changes in exchange rates. Additionally, there was a $9.8 million year-over-year increase in earnings from the company’s equity method investment that included a 2008 fourth quarter gain of $15.1 million as a result of the sale by Magirus the investment of a portion of its distribution business. In the fourth quarter of 2008, the company recognized a $4.9 million impairment charge to write down the company’s equity method investment to its fair value compared to a $5.9 million impairment charge for the write down of the company’s equity method investment to its estimated realizable value in 2007. The write-down was driven by changing market conditions and the equity method investee’s recent operating losses that indicated an other-than-temporary loss condition and the eventual sale of the investment in 2009.

Interest income.  The $8.0 million favorable change in interest income was due to higher average cash and cash equivalent balance in 2008 compared with 2007. The higher cash and cash equivalent balance was driven by the sale of KSG for $485.0 million on March 31, 2007. However, the company’s cash and cash equivalent balance has declined during 2008 as the company has used cash to acquire several businesses and purchase common shares for treasury.

 

Income Taxes

The company recorded an income tax benefit from continuing operations at an effective tax rate of 381.1% in 2008 compared with an income tax benefit at an effective rate of 14.3% in 2007. The increase in the effective tax rate is primarily attributable to the reversal of the valuation allowance associated with Magirus, the settlement of an IRS audit, and other changes in liabilities related to state taxes which were partially offset by higher meals and entertainment expenses incurred in marketing the company’s products.

 

Off-Balance Sheet Arrangements

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

Contractual Obligations

The following table provides aggregate information regarding the company’s contractual obligations as of March 31, 2009.

 

 

The company anticipates that cash on hand, funds from continuing operations, and access to capital markets will provide adequate funds to finance capital spending and working capital needs and to service its obligations and other commitments arising during the foreseeable future.

 

Liquidity and Capital Resources

 

Overview

The company’s operating cash requirements consist primarily of working capital needs, operating expenses, capital expenditures and payments of principal and interest on indebtedness outstanding, which primarily consists of lease and rental obligations at March 31, 2009. The company believes that cash flow from operating activities, cash on hand, availability under the credit facility as discussed below, and access to capital markets will provide adequate funds to meet its short-and long-term liquidity requirements. Additional information regarding the company’s financing arrangements is provided in Note 8 to Consolidated Financial Statements titled, Financing Arrangements.

As of March 31, 2009 and 2008, the company’s total debt was approximately $0.4 million and $0.5 million, respectively, comprised of capital lease obligations in both periods.

Revolving Credit Facility

As of January 20, 2009, the company terminated its $200 million unsecured credit facility with Bank of America, N.A. (as successor to LaSalle Bank National Association), as lead arranger, book runner and administrative agent, and certain other lenders party thereto (the “Credit Facility”). The Credit Facility included a $20 million sub-facility for letters of credit issued by Bank of America, N.A., or one of its affiliates, and a $20 million sub-facility for swingline loans, which are short-term loans generally used for working capital requirements. The Credit Facility was available to the company for refinancing debt existing at the time, providing for working capital requirements, capital expenditures and general corporate purposes of the company, including acquisitions. As of October 17, 2008, the company’s ability to borrow under its Credit Facility was suspended due to the company’s failure to timely file its Annual Report on Form 10-K for the fiscal year ended March 31, 2008, and other technical defaults. The company had not borrowed under the Credit Facility since it was entered into in October of 2005. The company decided to terminate the Credit Facility in January 2009. There were no penalties associated with early termination of the Credit Facility, however $0.4 million of deferred debt fees were immediately expensed during the third quarter as a result of the termination.

The company executed a Loan and Security Agreement dated May 5, 2009 (the “New Credit Facility”) with Bank of America, N.A., as agent for the lenders from time to time party thereto (“Lenders”). The company’s obligations under the New Credit Facility are secured by the company’s assets (as defined in the new Credit Facility). This New Credit Facility replaces the company’s previous credit facility, which was terminated on January 20, 2009. The company also maintained an unsecured inventory financing agreement (the “Floor Plan Financing Facility”) with International Business Machines. This Floor Plan Financing Facility was terminated on May 4, 2009, and the company will primarily fund working capital through open accounts payable provided by its trade vendors.

The May 5, 2009 New Credit Facility provides $50 million of credit (which may be increased to $75 million by a $25 million “accordion provision”) for borrowings and letters of credit and will mature May 5, 2012. The New Credit Facility establishes a borrowing base for availability of loans predicated on the level of the company’s accounts receivable meeting banking industry criteria. The aggregate unpaid principal amount of all borrowings, to the extent not previously repaid, is repayable at maturity. Borrowings also are repayable at such other earlier times as may be required under or permitted by the terms of the New Credit Facility. LIBOR Loans bear interest at LIBOR for the applicable interest period plus an applicable margin ranging from 3.0% to 3.5%. Base rate loans (as defined in the New Credit Facility) bear interest at the Base Rate (as defined in the New Credit Facility) plus an applicable margin ranging from 2.0% to 2.5%. Interest is payable on the first of each month in arrears. There is no premium or penalty for prepayment of borrowings under the New Credit Facility.

The New Credit Facility contains normal mandatory repayment provisions, representations, and warranties and covenants for a secured credit facility of this type. The New Credit Facility also contains customary events of default upon the occurrence of which, among other remedies, the Lenders may terminate their commitments and accelerate the maturity of indebtedness and other obligations under the New Credit Facility.

As of June 5, 2009, the company had no amounts outstanding under the New Credit Facility and $50.0 million was available for future borrowings. The company has no intention to borrow amounts under the New Credit Facility in the near term.

 

Cash Flow

 

Cash flow (used for) provided by operating activities.  The $86.1 million in cash used for operating activities in 2009 included funds used for the $35.0 million payment of the Innovative earn-out that reduced accrued liabilities, a decrease in accounts payable of $74.5 million due to the establishment of the IBM floor plan financing agreement in February 2008, which was recorded as a financing activity, and was partially offset by a $14.9 million reduction in accounts receivable and other changes in working capital. The $159.5 million in cash used for operating activities in 2008 included $123.4 million used for federal income taxes paid primarily for the gain on the sale of KSG, with the remainder used for changes in working capital.

Cash flow (used for) provided by investing activities.  In 2009, the $5.4 million in cash used for investing activities primarily represents $5.2 million that was reclassified from cash equivalents to long-term investments for the company’s remaining claim on The Reserve Fund’s Primary Fund, $2.4 million paid for the acquisition of Triangle, and $7.1 million for the purchase of property, plant, and equipment, partially offset by $9.5 million received from the sale of the Magirus investment. The 2008 investing activities principally reflect the $236.2 million in cash (net of cash acquired) that the company paid for the acquisitions of Eatec, Innovative, InfoGenesis, and Stack. In 2007, cash provided by investing activities of $470.0 million was attributable to the $485.0 million in proceeds received from the sale of KSG, partially offset by $10.6 million paid for the acquisition of Visual One.

Cash flow provided by (used for) financing activities.  The $56.8 million in cash provided by financing activities in 2009 resulted from $59.6 million in proceeds related to the company’s floor plan financing agreement, partially offset by $2.7 million in dividends paid. The $137.4 million in cash used by financing activities in 2008 was principally driven by the $150.0 million repurchase of the company’s common shares and $3.4 million in dividends paid, partially offset by $14.6 million in proceeds related to the floor plan financing agreement and $1.4 million in proceeds from stock options exercised. The 2007 cash used for financing activities primarily was attributable to $59.6 million in principal payments under long term obligations, including $59.4 million related to retiring the company’s senior notes, partially offset by $10.1 million in proceeds from stock options exercised.

 

Critical Accounting Policies, Estimates & Assumptions

MD&A is based upon the company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company regularly evaluates its estimates, including those related to bad debts, inventories, investments, intangible assets, income taxes, restructuring and contingencies, litigation and supplier incentives. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

The company’s most significant accounting policies relate to the sale, purchase, and promotion of its products. The policies discussed below are considered by management to be critical to an understanding of the company’s consolidated financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. No significant adjustments to the company’s accounting policies were made in 2009. Specific risks for these critical accounting policies are described in the following paragraphs.

For all of these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.

Revenue recognition.  The company derives revenue from three primary sources: server, storage and point of sale hardware, software, and services. Revenue is recorded in the period in which the goods are delivered or services are rendered and when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. The company reduces revenue for estimated discounts, sales incentives, estimated customer returns and other allowances. Discounts are offered based on the volume of products and services purchased by customers. Shipping and handling fees billed to customers are recognized as revenue and the related costs are recognized in cost of goods sold.

Revenue for hardware sales is recognized when the product is shipped to the customer and when obligations that affect the customer’s final acceptance of the arrangement have been fulfilled. A majority of the company’s hardware sales involves shipment directly from its suppliers to the end-user customers. In such transactions, the company is responsible for negotiating price both with the supplier and the customer, payment to the supplier, establishing payment terms and product returns with the customer, and bears credit risk if the customer does not pay for the goods. As the principal contact with the customer, the company recognizes revenue and cost of goods sold when it is notified by the supplier that the product has been shipped. In certain limited instances, as shipping terms dictate, revenue is recognized upon receipt at the point of destination.

The company offers proprietary software as well as remarketed software for sale to its customers. A majority of the company’s software sales do not require significant production, modification, or customization at the time of shipment (physically or electronically) to

the customer. Substantially all of the company’s software license arrangements do not include acceptance provisions. As such, revenue from both proprietary and remarketed software sales is recognized when the software has been shipped. For software delivered electronically, delivery is considered to have occurred when the customer either takes possession of the software via downloading or has been provided with the requisite codes that allow for immediate access to the software based on the U.S Eastern time zone time stamp.

The company also offers proprietary and third-party services to its customers. Proprietary services generally include: consulting, installation, integration, training, and maintenance. Revenue relating to maintenance services is recognized evenly over the coverage period of the underlying agreement. Many of the company’s software arrangements include consulting services sold separately under consulting engagement contracts. When the arrangements qualify as service transactions as defined in AICPA Statement of Position No. 97-2 (“SOP 97-2”), “Software Revenue Recognition,” consulting revenues from these arrangements are accounted for separately from the software revenues. The significant factors considered in determining whether the revenues should be accounted for separately include the nature of the services (i.e., consideration of whether the services are essential to the functionality of the software), degree of risk, availability of services from other vendors, timing of payments, and the impact of milestones or other customer acceptance criteria on revenue realization. If there is significant uncertainty about the project completion or receipt of payment for consulting services, the revenues are deferred until the uncertainty is resolved.

For certain long-term proprietary service contracts with fixed or “not to exceed” fee arrangements, the company estimates proportional performance using the hours incurred as a percentage of total estimated hours to complete the project consistent with the percentage-of-completion method of accounting. Accordingly, revenue for these contracts is recognized based on the proportion of the work performed on the contract. If there is no sufficient basis to measure progress toward completion, the revenues are recognized when final customer acceptance is received. Adjustments to contract price and estimated service hours are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of billings on uncompleted contracts in excess of related costs is shown as a current asset.

If an arrangement does not qualify for separate accounting of the software and consulting services, then the software revenues are recognized together with the consulting services using the percentage-of-completion or completed contract method of accounting. Contract accounting is applied to arrangements that include: milestones or customer-specific acceptance criteria that may affect the collection of revenues, significant modification or customization of the software, or provisions that tie the payment for the software to the performance of consulting services.

In addition to proprietary services, the company offers third-party service contracts to its customers. In such instances, the supplier is the primary obligor in the transaction and the company bears credit risk in the event of nonpayment by the customer. Since the company is acting as an agent or broker with respect to such sales transactions, the company reports revenue only in the amount of the “commission” (equal to the selling price less the cost of sale) received rather than reporting revenue in the full amount of the selling price with separate reporting of the cost of sale.

Allowance for Doubtful Accounts.  The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk, as well as historical trends of the entire customer pool. If the financial condition of the company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. To mitigate this credit risk the company performs periodic credit evaluations of its customers.

Inventories.  Inventories are stated at the lower of cost or market, net of related reserves. The cost of inventory is computed using a weighted-average method. The company’s inventory is monitored to ensure appropriate valuation. Adjustments of inventories to lower of cost or market, if necessary, are based upon contractual provisions governing turnover and assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable than those projected by management, additional adjustments to inventory valuations may be required. The company provides a reserve for obsolescence, which is calculated based on several factors including an analysis of historical sales of products and the age of the inventory. Actual amounts could be different from those estimated.

Income Taxes.  Income tax expense includes U.S. and foreign income taxes and is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. The carrying value of the company’s deferred tax assets is dependent upon the company’s ability to generate sufficient future taxable income in certain tax jurisdictions. Should the company determine that it is not able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets is expensed in the period such determination is made to an amount that is more likely than not to be realized. The company presently records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that the company were to determine that it would be able to realize its deferred tax assets in the future in

excess of its net recorded amount (including valuation allowance), an adjustment to the tax valuation allowance would decrease tax expense in the period such determination was made.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” (“FAS 109”). FIN 48 provides guidance for the accounting for uncertainty in income taxes recognized in our financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The determination of whether or not it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, management presumes that the position will be examined by the appropriate tax authority and that the tax authority will have full knowledge of all relevant information. The second step is measurement: A tax position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to recognize in the financial statements. The measurement process requires the determination of the range of possible settlement amounts and the probability of achieving each of the possible settlements. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do not meet the more-likely-than-not threshold. Tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which the threshold is no longer met. In addition, FIN 48 requires the cumulative effect of adoption to be recorded as an adjustment to the opening balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. The company adopted FIN 48 effective April 1, 2007, as required and recognized a cumulative effect of accounting change of approximately $2.9 million, which decreased beginning retained earnings in the accompanying Consolidated Statements of Shareholders’ Equity for the year ended March 31, 2008 and increased accrued liabilities in the accompanying Consolidated Balance Sheets as of March 31, 2008. The company’s income taxes and the impact of adopting FIN 48 are described further in Note 10 to Consolidated Financial Statements, Income Taxes.

Goodwill and Long-Lived Assets.  Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. Goodwill is subject to impairment testing at least annually. Goodwill is also subject to testing as necessary, if changes in circumstances or the occurrence of certain events indicate potential impairment. In assessing the recoverability of the company’s goodwill, identified intangibles, and other long-lived assets, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets must be made, as well as the related estimated useful lives. The fair value of goodwill and long-lived assets is estimated using a discounted cash flow valuation model. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, the company may be required to record impairment charges for these assets in the period such determination was made.

Restructuring and Other Special Charges.  The company records reserves in connection with the reorganization of its ongoing business. The reserves principally include estimates related to employee separation costs and the consolidation and impairment of facilities that will no longer be used in continuing operations. Actual amounts could be different from those estimated. Determination of the asset impairments is discussed above in Goodwill and Long-Lived Assets. Facility reserves are calculated using a present value of future minimum lease payments, offset by an estimate for future sublease income provided by external brokers. Present value is calculated using a credit-adjusted risk-free rate with a maturity equivalent to the lease term.

Valuation of Accounts Payable.  The company’s accounts payable has been reduced by amounts claimed by vendors for amounts related to incentive programs. Amounts related to incentive programs are recorded as adjustments to cost of goods sold or operating expenses, depending on the nature of the program. There is a time delay between the submission of a claim by the company and confirmation of the claim by our vendors. Historically, the company’s estimated claims have approximated amounts agreed to by vendors.

Supplier Programs.  The company receives funds from suppliers for product sales incentives and marketing and training programs, which are generally recorded, net of direct costs, as adjustments to cost of goods sold or operating expenses according to the nature of the program. The product sales incentives are generally based on a particular quarter’s sales activity and are primarily formula-based. Some of these programs may extend over one or more quarterly reporting periods. The company accrues supplier sales incentives and other supplier incentives as earned based on sales of qualifying products or as services are provided in accordance with the terms of the related program. Actual supplier sales incentives may vary based on volume or other sales achievement levels, which could result in an increase or reduction in the estimated amounts previously accrued, and can, at times, result in significant earnings fluctuations on a quarterly basis.

Recently Issued Accounting Pronouncements

In December 2008, the FASB issued Staff Position No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets” an amendment of SFAS 132(R) (“FSP FAS 132(R)-1”). This standard requires disclosure about an entity’s investment policies and strategies, the categories of plan assets, concentrations of credit risk and fair value measurements of plan assets. The standard is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The company is currently evaluating the impact, if any, that the adoption of FSP FAS 132(R)-1 will have on its financial position, results of operations, or cash flows.

In November 2008, the FASB’s Emerging Issues Task Force published Issue No. 08-6, Equity Method Investment Accounting Considerations (“EITF 08-06”). This issue addresses the impact that FAS 141(R) and FAS 160 might have on the accounting for equity method investments, including how the initial carrying value of an equity method investment should be determined, how it should be tested for impairment, and how changes in classification from equity method to cost method should be treated. EITF 08-06 is to be implemented prospectively and is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The standard will have an impact on the company only for acquisitions and investments in noncontrolling interests made after April 1, 2009. The company is currently evaluating the impact, if any, the adoption of EITF 08-06 will have on its financial position, results of operations, or cash flows.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). FAS 162 directs the U.S. GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with U.S. GAAP. FAS 162 is effective November 15, 2008. The adoption of FAS 162 did not have a significant impact on the company’s financial position, results of operations, or cash flows.

In April 2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within that fiscal year, or fiscal 2010 for the company. Early adoption is prohibited. FSP 142-3 applies prospectively to intangible assets acquired after adoption. The company does not expect the adoption of FSP FAS 142-3 to have a significant impact on its financial position, results of operations, or cash flows.

In December 2007, the FASB issued Statement No. 141(R), Business Combinations (“Statement 141(R)”). Statement 141(R) significantly changes the accounting for and reporting of business combination transactions. Statement 141(R) is effective for fiscal years beginning after December 15, 2008, or fiscal 2010 for the company. The standard will have an impact on the company only for acquisitions made after April 1, 2009. The company is currently evaluating the impact that Statement 141(R) will have on its financial position, results of operations and cash flows.

In December 2007, the FASB issued Statement No. 160, Accounting and Reporting for Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“Statement 160”). Statement 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Statement 160 is effective for the first annual reporting period beginning after December 15, 2008, or fiscal 2010 for the company. The company is currently evaluating the impact that Statement 160 will have on its financial position, results of operations and cash flows.

 

Business Combinations

 

2009 Acquisition

 

Triangle Hospitality Solutions Limited

On April 9, 2008, the company acquired all of the shares of Triangle Hospitality Solutions Limited (“Triangle”), the UK-based reseller and specialist for the company’s InfoGenesis products and services for $2.7 million, comprised of $2.4 million in cash and $0.3 million of assumed liabilities. Accordingly, the results of operations for Triangle have been included in the accompanying Consolidated Financial Statements from that date forward. Triangle enhanced the company’s international presence and growth strategy in the UK, as well as solidified the company’s leading position in the hospitality and stadium and arena markets without increasing InfoGenesis’ ultimate customer base. Triangle added to the company’s hospitality solutions suite with the ability to offer customers the Triangle mPOS solution, which is a handheld point-of-sale solution which seamlessly integrates with InfoGenesis products. Based on management’s preliminary allocation of the acquisition cost to the net assets acquired (accounts receivable, inventory, and accounts payable), approximately $2.7 million was originally assigned to goodwill. Due to a purchase price adjustment during the third quarter of fiscal 2009 of $0.4 million,

the goodwill attributed to the Triangle acquisition is $3.1 million at March 31, 2009. Goodwill resulting from the Triangle acquisition will be deductible for income tax purposes.

 

2008 Acquisitions

 

Eatec

On February 19, 2008, the company acquired all of the shares of Eatec Corporation (“Eatec”), a privately held developer and marketer of inventory and procurement software. Accordingly, the results of operations for Eatec have been included in the accompanying Consolidated Financial Statements from that date forward. Eatec’s software, EatecNetX (now called Eatec Solutions by Agilysys), is a recognized leading, open architecture-based, inventory and procurement management system. The software provides customers with the data and information necessary to enable them to increase sales, reduce product costs, improve back-office productivity and increase profitability. Eatec customers include well-known restaurants, hotels, stadiums and entertainment venues in North America and around the world as well as many public service institutions. The acquisition further enhances the company’s position as a leading inventory and procurement solution provider to the hospitality and foodservice markets. Eatec was acquired for a total cost of $25.0 million. Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $18.3 million was assigned to goodwill.

During the second quarter of 2009, management completed its purchase price allocation and assigned $6.2 million of the acquisition cost to identifiable intangible assets as follows: $1.4 million to non-compete agreements, which will be amortized between two and seven years; $2.2 million to customer relationships, which will be amortized over seven years; $1.8 million to developed technology, which will be amortized over five years; and $0.8 million to trade names, which has an indefinite life.

During the first, second and fourth quarters of 2009, goodwill impairment charges were taken relating to the Eatec acquisition in the amounts of $1.3 million, $14.4 million, and $3.4 million, respectively. As of March 31, 2009, $1.7 million remains on the company’s balance sheet in goodwill relating to the Eatec acquisition.

 

Innovative Systems Design, Inc.

On July 2, 2007, the company acquired all of the shares of Innovative Systems Design, Inc. (“Innovative”), the largest U.S. commercial reseller of Sun Microsystems servers and storage products. Accordingly, the results of operations for Innovative have been included in the accompanying Consolidated Financial Statements from that date forward. Innovative is an integrator and solution provider of servers, enterprise storage management products and professional services. The acquisition of Innovative establishes a new and significant relationship between Sun Microsystems and the company. Innovative was acquired for an initial cost of $108.6 million. Additionally, the company was required to pay an earn-out of two dollars for every dollar of earnings before interest, taxes, depreciation, and amortization, or EBITDA, greater than $50.0 million in cumulative EBITDA over the first two years after consummation of the acquisition. The earn-out was limited to a maximum payout of $90.0 million. As a result of existing and anticipated EBITDA, during the fourth quarter of 2008, the company recognized $35.0 million of the $90.0 million maximum earn-out, which was made in April 2008. In addition, due to certain changes in the sourcing of materials, the company amended its agreement with the Innovative shareholders whereby the maximum payout available to the Innovative shareholders was limited to $58.65 million, inclusive of the $35.0 million paid. The EBITDA target required for the shareholders to be eligible for an additional payout is now $67.5 million in cumulative EBITDA over the first two years after the close of the acquisition. No amounts have been accrued as of March 31, 2008, as it is not probable that any additional payout will be made.

During the fourth quarter of 2008, management completed its purchase price allocation and assigned $29.7 million of the acquisition cost to identifiable intangible assets as follows: $4.8 million to non-compete agreements, $5.5 million to customer relationships, and $19.4 million to supplier relationships which will be amortized over useful lives ranging from two to five years.

Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $97.8 million was assigned to goodwill. Goodwill resulting from the Innovative acquisition will be deductible for income tax purposes. During the fourth quarter of 2009, a goodwill impairment charge was taken relating to the Innovative acquisition for $74.5 million. As of March 31, 2009, $23.3 million remains on the company’s balance sheet as goodwill relating to the Innovative acquisition.

 

InfoGenesis

On June 18, 2007, the company acquired all of the shares of IG Management Company, Inc. and its wholly-owned subsidiaries, InfoGenesis and InfoGenesis Asia Limited (collectively, “InfoGenesis”), an independent software vendor and solution provider to the hospitality market. Accordingly, the results of operations for InfoGenesis have been included in the accompanying Consolidated Financial Statements from that date forward. InfoGenesis offers enterprise-class point-of-sale solutions that provide end users a highly intuitive, secure and easy way to process customer transactions across multiple departments or locations, including comprehensive corporate and store reporting. InfoGenesis has a significant presence in casinos, hotels and resorts, cruise lines, stadiums and foodservice. The acquisition provides the

company a complementary offering that extends its reach into new segments of the hospitality market, broadens its customer base and increases its software application offerings. InfoGenesis was acquired for a total acquisition cost of $90.6 million.

InfoGenesis had intangible assets with a net book value of $15.9 million as of the acquisition date, which were included in the acquired net assets to determine goodwill. Intangible assets were assigned values as follows: $3.0 million to developed technology, which will be amortized between six months and three years; $4.5 million to customer relationships, which will be amortized between two and seven years; and $8.4 million to trade names, which have an indefinite life. Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $71.8 million was assigned to goodwill. Goodwill resulting from the InfoGenesis acquisition will not be deductible for income tax purposes. During the first, second, and fourth quarters of 2009, goodwill impairment charges were taken relating to the InfoGenesis acquisition in the amounts of $3.9 million, $57.4 million, and $3.8 million, respectively. As of March 31, 2009, $6.7 million remains on the company’s balance sheet as goodwill relating to the InfoGenesis acquisition.

 

Pro Forma Disclosure of Financial Information

The following table summarizes the company’s unaudited consolidated results of operations as if the InfoGenesis and Innovative acquisitions occurred on April 1:

 

 

Stack Computer, Inc.

On April 2, 2007, the company acquired all of the shares of Stack Computer, Inc. (“Stack”). Stack’s customers include leading corporations in the financial services, healthcare and manufacturing industries. Accordingly, the results of operations for Stack have been included in the accompanying Consolidated Financial Statements from that date forward. Stack also operates a highly sophisticated solution center, which is used to emulate customer IT environments, train staff and evaluate technology. The acquisition of Stack strategically provides the company with product solutions and services offerings that significantly enhance its existing storage and professional services business. Stack was acquired for a total acquisition cost of $25.2 million.

Management made an adjustment of $0.8 million to the fair value of acquired capital equipment and assigned $11.7 million of the acquisition cost to identifiable intangible assets as follows: $1.5 million to non-compete agreements, which will be amortized over five years using the straight-line amortization method; $1.3 million to customer relationships, which will be amortized over five years using an accelerated amortization method; and $8.9 million to supplier relationships, which will be amortized over ten years using an accelerated amortization method.

Based on management’s allocation of the acquisition cost to the net assets acquired, approximately $13.3 million was assigned to goodwill. Goodwill resulting from the Stack acquisition is deductible for income tax purposes. During the first and second quarters of 2009, goodwill impairment charges were taken relating to the Stack acquisition in the amounts of $7.8 million and $2.1 million, respectively. As of March 31, 2009, $3.4 million remains on the company’s balance sheet as goodwill relating to the Stack acquisition.

 

2007 Acquisition

 

Visual One Systems Corporation

On January 23, 2007, the company acquired all the shares of Visual One, a leading developer and marketer of Microsoft^® Windows^®-based software for the hospitality industry. Accordingly, the results of operations for Visual One have been included in the accompanying Consolidated Financial Statements from that date forward. The acquisition provides the company additional expertise around the development, marketing and sale of software applications for the hospitality industry, including property management, condominium, golf course, spa, point-of-sale, and sales and catering management applications. Visual One’s customers include well-known North American

and international full-service hotels, resorts, conference centers and condominiums of all sizes. The aggregate acquisition cost was $14.4 million.

During the second quarter of 2008, management assigned $4.9 million of the acquisition cost to identifiable intangible assets as follows: $3.8 million to developed technology, which will be amortized over six years using the straight-line method; $0.6 million to non-compete agreements, which will be amortized over eight years using the straight-line amortization method; and $0.5 million to customer relationships, which will be amortized over five years using an accelerated amortization method.

Based on management’s allocation of the acquisition cost to the net assets acquired, including identified intangible assets, approximately $9.4 million was assigned to goodwill. Goodwill resulting from the Visual One acquisition is not deductible for income tax purposes. During the first, second, and fourth quarters of 2009, goodwill impairment charges were taken relating to the Visual One acquisition in the amounts of $0.5 million, $7.5 million, and $0.5 million, respectively. As of March 31, 2009, $0.9 million remains on the company’s balance sheet as goodwill relating to the Visual One acquisition.

 

Discontinued Operations

 

China and Hong Kong Operations

In July, 2008, the company met the requirements of FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”) to classify TSG’s China and Hong Kong operations as held-for-sale and discontinued operations, and began exploring divestiture opportunities for these operations. Agilysys acquired TSG’s China and Hong Kong businesses in December 2005. During January 2009, the company sold the stock related to TSG’s China operations and certain assets of TSG’s Hong Kong operations, receiving proceeds of $1.4 million, which resulted in a pre-tax loss on the sale of discontinued operations of $0.8 million. The assets and liabilities of these operations are classified as discontinued operations on the company’s Consolidated Balance Sheets, and the operations are reported as discontinued operations for the periods presented in accordance with Statement 144. The remaining unsold assets and liabilities of TSG’s China and Hong Kong operations have been classified as discontinued operations on the company’s balance sheet as of March 31, 2009 and 2008.

 

Sale of Assets and Operations of KeyLink Systems Distribution Business

During 2007, the company sold the assets and operations of KSG for $485.0 million in cash, subject to a working capital adjustment. At March 31, 2007, the final working capital adjustment was $10.8 million. Through the sale of KSG, the company exited all distribution-related businesses and now exclusively sells directly to end-user customers. By monetizing the value of KSG, the company significantly increased its financial flexibility and has redeployed the proceeds to accelerate the growth of its ongoing business both organically and through acquisition. The sale of KSG represented a disposal of a component of an entity. As such, the operating results of KSG, along with the gain on sale, have been reported as a component of discontinued operations.

 

Restructuring Charges (Credits)

 

2009 Restructuring Activity

Fourth Quarter Management Restructuring.  During the fourth quarter of 2009, the company took additional steps to realign its cost and management structure. During the quarter, an additional four company vice presidents were terminated, as well as other support and sales personnel. These actions resulted in a restructuring charge of $3.7 million during the quarter, comprised mainly of termination benefits for the above-mentioned management changes. Also included in the restructuring charges was a non-cash charge for a curtailment loss of $1.2 million under the company’s SERP. These restructuring charges are included in the Corporate segment.

Third Quarter Management Restructuring.  During the third quarter of 2009, the company took steps to realign its cost and management structure. During October 2008, the company’s former Chairman, President and CEO announced his retirement, effective immediately. In addition, four company vice presidents were terminated, as well as other support personnel. The company also relocated its headquarters from Boca Raton, Florida, to Solon, Ohio, where the company has a facility with a large number of employees, and cancelled the lease on its financial interests in two airplanes. These actions resulted in a restructuring charge of $13.4 million as of December 31, 2008, comprised mainly of termination benefits for the above-mentioned management changes and the costs incurred to relocate the corporate headquarters. Also included in the restructuring charges was a non-cash charge for a curtailment loss of $4.5 million under the company’s SERP. An additional $0.2 million expense was incurred in the fourth quarter of 2009 as a result of an impairment to the leasehold improvements at the company’s former headquarters in Boca Raton. These restructuring charges are included in the Corporate segment.

First Quarter Professional Services Restructuring.  During the first quarter of 2009, the company performed a detailed review of the business to identify opportunities to improve operating efficiencies and reduce costs. As part of this cost reduction effort, management reorganized the professional services go-to-market strategy by consolidating its management and delivery groups. The company will continue to offer specific proprietary professional services, including identity management, security, and storage virtualization; however, it

will increase the use of external business partners. The cost reduction resulted in a $2.5 million and $0.4 million charge for one-time termination benefits relating to a workforce reduction in the first and second quarters of 2009, respectively. The workforce reduction was comprised mainly of service delivery personnel. Payment of these one-time termination benefits was substantially complete in 2009. This restructuring also resulted in a $20.6 million impairment to goodwill and intangible assets in the first quarter of 2009, related to the company’s 2005 acquisition of CTS. The entire $23.5 million restructuring charge relates to TSG.

The three restructuring actions discussed above resulted in a $40.8 million restructuring charge for the year ended March 31, 2009.

 

2007 Restructuring Activity

During 2007, the company recorded a restructuring charge of approximately $0.5 million for one-time termination benefits resulting from a workforce reduction that was executed in connection with the sale of KSG. The workforce reduction was comprised mainly of corporate personnel. Payment of the one-time termination benefits was substantially complete in 2008.

 

Investments

 

The Reserve Fund’s Primary Fund

At September 30, 2008, the company had $36.2 million invested in The Reserve Fund’s Primary Fund. Due to liquidity issues associated with the bankruptcy of Lehman Brothers, Inc., The Primary Fund temporarily ceased honoring redemption requests, but the Board of Trustees of The Primary Fund subsequently voted to liquidate the assets of the fund and approved a distribution of cash to the investors. As of March 31, 2009, the company has received $31.0 million of the investment, with $5.2 million remaining in The Primary Fund. As a result of the delay in cash distribution, we have reclassified the remaining $5.2 million from cash and cash equivalents to investments in other non-current assets on the balance sheet, and, accordingly, have presented the reclassification as a cash outflow from investing activities in the consolidated statements of cash flows. In addition, as of March 31, 2009, the company estimated and recorded a loss on its investment in the fund. The loss was estimated as 8.3% of the company’s original investment in the fund, resulting in a $3.0 million charge to other expense. In April 2009, the company received an additional distribution of $1.6 million from The Primary Fund. The company is unable to estimate the timing of future distributions, which are expected to aggregate to approximately $0.6 million.

This investment is a financial instrument that falls within the scope of FASB Statement No. 157, Fair Value Measurements (“FAS 157”), and accordingly, was measured at its fair value of $2.2 million at March 31, 2009, which is net of the impairment charges recorded during 2009. FAS 157 classifies the inputs used to measure fair value into three levels as follows:

—  Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities;

—  Level 3: Unobservable inputs for the asset or liability.

The company’s investment in The Primary Fund was classified as a Level 2 financial instrument at March 31, 2009, as its fair value was determined using information other than quoted prices that is available on The Reserve Fund’s website.

 

Investment in Marketable Securities

The company invests in marketable securities to satisfy future obligations of its employee benefit plans. The marketable securities are held in a Rabbi Trust and are classified within “Other non-current assets” on the company’s Consolidated Balance Sheets. The company’s investment in marketable equity securities are held for an indefinite period and thus are classified as available for sale. The aggregate fair value of the securities was $37,000 and $0.1 million at March 31, 2009 and 2008, respectively. During 2009, sales proceeds and realized losses were $0.1 million and $24,000, respectively. During 2008, sale proceeds and realized gain were $6.1 million and $0.2 million, respectively. The company used the sale proceeds to fund corporate-owned life insurance policies.

 

Investment in Magirus — Sold in November 2008

In November 2008, the company sold its 20% ownership interest in Magirus, a privately owned European enterprise computer systems distributor headquartered in Stuttgart, Germany, for $2.3 million. In addition, the company received a dividend from Magirus (as a result of Magirus selling a portion of its distribution business in fiscal 2008) of $7.3 million in July 2008, resulting in $9.6 million of total proceeds received in fiscal 2009. The company adjusted the fair value of the investment as of March 31, 2008, to the net present value of the subsequent cash proceeds, resulting in fourth quarter 2008 charges of (i) a $5.5 million reversal of the cumulative currency translation adjustment in accordance with EITF 01-5, Application of FASB Statement No. 52 to an Investment Being Evaluated for Impairment That Will Be Disposed of, and (ii) an impairment charge of $4.9 million to write the held-for-sale investment to its fair value less cost to sell.

The company had decided to sell its 20% investment in Magirus prior to March 31, 2008, and met the qualifications to consider the asset as held for sale. As a result, the company reclassified its Magirus investment to investment held for sale at March 31, 2008 in accordance with FAS 144.

Because of the company’s inability to obtain and include audited financial statements of Magirus for fiscal years ended March 31, 2008 and 2007 as required by Rule 3-09 of Regulation S-X, the SEC has stated that it will not permit effectiveness of any new securities registration statements or post-effective amendments, if any, until such time as the company files audited financial statements that reflect the disposition of Magirus and the company requests and the SEC grants relief to the company from the requirements of Rule 3-09. As part of this restriction, the company is not permitted to file any new securities registration statements that are intended to automatically go into effect when they are filed, nor can the company make offerings under effective registration statements or under Rules 505 and 506 of Regulation D where any purchasers of securities are not accredited investors under Rule 501(a) of Regulation D. These restrictions do not apply to the following: offerings or sales of securities upon the conversion of outstanding convertible securities or upon the exercise of outstanding warrants or rights; dividend or interest reinvestment plans; employee benefit plans, including stock option plans; transactions involving secondary offerings; or sales of securities under Rule 144.

On April 1, 2008, the company invoked FASB Interpretation No. 35, Criteria for Applying the Equity Method of Accounting for Investments in Common Stock (“FIN 35”), for its investment in Magirus. The invocation of FIN 35 required the company to account for its investment in Magirus via cost, rather than equity accounting. FIN 35 clarifies the criteria for applying the equity method of accounting for investments of 50% or less of the voting stock of an investee enterprise. The cost method was used by the company because management did not have the ability to exercise significant influence over Magirus, which is one of the presumptions in APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, necessary to account for an investment in common stock under the equity method.

 

Investment in Affiliated Companies

During 2008, the investment in an affiliated company was redeemed by the affiliated company for $4.8 million in cash, resulting in a $1.4 million gain on redemption of the investment. The gain was classified within “other income (expense), net” in the consolidated statement of operations.

 

Stock Based Compensation

The company accounts for stock based compensation in accordance with the fair value recognition provisions of FASB Statement 123R, Share-Based Payment (“FAS 123R”), which was adopted on April 1, 2006. The company adopted the provisions of FAS 123R using the modified prospective application and, accordingly, results for prior periods have not been restated. Prior to April 1, 2006, the company accounted for stock based compensation in accordance with the intrinsic value method. As such, no stock based employee compensation cost was recognized by the company for stock option awards, as all options granted to employees had an exercise price equal to the market value of the underlying stock on the date of grant.

Compensation cost charged to operations relating to stock based compensation during 2009 was $0.5 million. This included $3.5 million in reversals of stock based compensation expense in 2009 due to actual forfeitures of non-vested shares and performance shares, and a change in the estimate of the forfeiture rate which was updated due to the management restructuring actions. As of March 31, 2009, total unrecognized stock based compensation expense related to unvested stock options was $0.5 million, which is expected to be recognized over a weighted-average period of 18 months. In addition, as of March 31, 2009, total unrecognized stock based compensation expense related to non-vested shares and performance shares was $0.1 million and $0.2 million, respectively, which is expected to be recognized over a weighted-average period of 12 months.

 

Risk Control and Effects of Foreign Currency and Inflation

The company extends credit based on customers’ financial condition and, generally, collateral is not required. Credit losses are provided for in the Consolidated Financial Statements when collections are in doubt.

The company sells internationally and enters into transactions denominated in foreign currencies. As a result, the company is subject to the variability that arises from exchange rate movements. The effects of foreign currency on operating results did not have a material impact on the company’s results of operations for the 2009, 2008 or 2007 fiscal years.

The company believes that inflation has had a nominal effect on its results of operations in fiscal 2009, 2008 and 2007 and does not expect inflation to be a significant factor in fiscal 2010.

 

Forward Looking Information

This Annual Report on Form 10-K contains certain management expectations, which may constitute forward-looking information within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities and Exchange Act of 1934 and the Private Securities Reform Act of 1995. Forward-looking information speaks only as to the date of this presentation and may be identified by use of words such as “may,” “will,” “believes,” “anticipates,” “plans,” “expects,” “estimates,” “projects,” “targets,” “forecasts,” “continues,” “seeks,” or the negative of those terms or similar expressions. Many important factors could cause actual results to be materially different from those in forward-looking information including, without limitation, competitive factors, disruption of supplies, changes in market conditions, pending or future claims or litigation, or technology advances. No assurances can be provided as to the outcome of cost

reductions, business strategies, future financial results, unanticipated downturns to our relationships with customers, unanticipated difficulties integrating acquisitions, new laws and government regulations, interest rate changes, and unanticipated deterioration in economic and financial conditions in the United States and around the world. We do not undertake to update or revise any forward-looking information even if events make it clear that any projected results, actions, or impact, express or implied, will not be realized.

Other potential risks and uncertainties that may cause actual results to be materially different from those in forward-looking information are described in this Annual Report on Form 10-K filed with the SEC, under Item 1A, “Risk Factors.” Copies are available from the SEC or the Agilysys web site.

 

 

The company has assets, liabilities and cash flows in foreign currencies creating foreign exchange risk. Systems are in place for continuous measurement and evaluation of foreign exchange exposures so that timely action can be taken when considered desirable. Reducing exposure to foreign currency fluctuations is an integral part of the company’s risk management program. Financial instruments in the form of forward exchange contracts are employed, when deemed necessary, as one of the methods to reduce such risk. There were no foreign currency exchange contracts executed by the company during 2009, 2008, or 2007.

As discussed within Liquidity and Capital Resources in the MD&A, on January 20, 2009, the company terminated its five-year $200 million revolving credit facility. At the time of the termination, there were no amounts outstanding under this credit facility. Therefore, the company did not have a revolving credit facility in place at March 31, 2009. There were no amounts outstanding under this credit facility in 2009, 2008, or 2007. On May 5, 2009, the company entered into a new $50 million revolving credit facility. While the company is exposed to interest rate risk from the floating-rate pricing mechanisms on its new revolving credit facility, it does not expect interest rate risk to have a significant impact on its business, financial condition, or results of operations during 2010.

 

 

The information required by this item is set forth in the Financial Statements and Supplementary Data contained in Part IV of this Annual Report on Form 10-K.

 

 

None.

 

 

 

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the material weakness related to the company’s hospitality and retail order processing operations, identified in 2008 has been remediated. In addition, the CEO and CFO concluded that our disclosure controls and procedures as of the end of the period covered by this report are not effective solely because of the material weakness relating to the company’s internal control over financial reporting as described below in “Management’s Report on Internal Controls Over Financial Reporting.” In light of the 2008 and 2009 material weaknesses, the company performed additional analysis and post-closing procedures to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Management’s Report on Internal Control Over Financial Reporting

The management of the company, under the supervision of the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2009 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, management has concluded

that the company did not maintain effective internal control over financial reporting as of March 31, 2009, due to the material weakness discussed below.

Revenue Recognition Controls — The aggregation of several errors in the company’s revenue recognition cycle, primarily related to the set-up of specific customer terms and conditions, resulted in a material weakness in the operating effectiveness of revenue recognition controls.

Management has performed a review of the company’s internal control processes and procedures surrounding the revenue recognition cycle. As a result of this review, the company has taken and continues to implement the following steps to prevent future errors from occurring:

1. The company will conduct a comprehensive review of all existing customer terms and conditions compared to existing customer set-up within the customer database.

2. Implement enhanced process and controls around new customer set-up and customer maintenance.

3. Increase quarterly sales cut-off testing procedures to include a review of terms and conditions of customer sales contracts.

4. Implement quarterly physical inventory counts at specific company warehouses to account for and properly reverse revenue relating to the consolidation and storage of customer owned product.

5. Implement a more extensive analysis and enhance the reconciliation and review process related to revenue and cost of goods sold accounts.

Ernst & Young LLP, our independent registered public accounting firm, has issued their report regarding the company’s internal control over financial reporting as of March 31, 2009, which is included elsewhere herein.

 

Change in Internal Control over Financial Reporting

In 2009, control improvements were implemented in an effort to remediate the errors in the company’s hospitality and retail segments’ order processing operations that resulted in a material weakness in the operating effectiveness of revenue recognition controls as of March 31, 2008. These control improvements included:

1. Mandatory ongoing training for sales operations personnel including procedure and process review, as well as the awareness and significance of key controls.

2. Sales Operations Management review and approval process for all transactions greater than $100,000.

3. Comprehensive documentation checklist that is required to be completed prior to the processing of a sales transaction.

4. Enhanced monthly sales cut-off testing by the company’s Internal Audit Department to ensure the proper and timely processing of a transaction.

5. Sales Operations Management personnel restructuring.

Also during 2009, in an effort to remediate the material weakness that was reported in the third quarter of 2009, control improvements were implemented over the calculation of stock based compensation and the recognition of expense for a defined benefit plan curtailment. These control improvements included:

1. Perform a secondary quarterly review of stock compensation and defined benefit plan activity, and the related accounting.

2. Upon the termination or retirement of an executive employee, perform an additional revaluation of the accounting for such defined benefit plans to determine propriety of accounting and expense recognition.

As a result of these control improvements and other measures the company has taken to date, management believes that the material weaknesses reported as of March 31, 2008, and December 31, 2008, have been remediated as of March 31, 2009.

The company continues to integrate each acquired entity’s internal controls over financial reporting into the company’s own internal controls over financial reporting, and will continue to review and, if necessary, make changes to each acquired entity’s internal controls over financial reporting until such time as integration is complete. Other than the items described above, no changes in our internal control over financial reporting occurred during the company’s last quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, during the first quarter of 2010, the company began implementing the remedial measures related to the material weakness identified as of March 31, 2009, described above.

 

 

None.

part III

 

 

Information required by this Item as to the Directors of the company, the Audit Committee and the procedures by which shareholders may recommend nominations appearing under the headings “Election of Directors” and “Corporate Governance and Related Matters” in the company’s Proxy Statement to be used in connection with the company’s 2009 Annual Meeting of Shareholders to be held on July 31, 2009 (the “2009 Proxy Statement”) is incorporated herein by reference. Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 by the company’s Directors, executive officers, and holders of more than five percent of the company’s equity securities will be set forth in the 2009 Proxy Statement under the heading “Section 16 (a) Beneficial Ownership Reporting Compliance.” Information required by this Item as to the executive officers of the company is included as Item 4A in Part I of this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K.

The company has adopted a code of ethics that applies to the Chief Executive Officer, Chief Financial Officer, and Controller known as the “Code of Ethics for Senior Financial Officers” as well as a code of business conduct that applies to all employees of the company known as the “Code of Business Conduct.” Each of these documents is available on the company’s website at http://www.agilysys.com.

 

 

 

The information required by this Item is set forth in the company’s 2009 Proxy Statement under the headings, “Executive Compensation” and “Corporate Governance Related Matters,” which is incorporated herein by reference.

 

 

 

The information required by this Item is set forth in the company’s 2009 Proxy Statement under the headings “Share Ownership,” and “Equity Compensation Plan Information,” which information is incorporated herein by reference.

 

 

 

The information required by this item is set forth in the company’s 2009 Proxy Statement under the headings “Corporate Governance and Related Matters” and “Related Person Transactions,” which information is incorporated herein by reference.

 

 

 

The information required by this Item is set forth in the company’s 2009 Proxy Statement under the heading “Independent Registered Public Accounting Firm,” which information is incorporated herein by reference.

 

 

part IV

 

 

 

(a)(1) Financial statements.  The following consolidated financial statements are included herein and are incorporated by reference in Part II, Item 8 of this Annual Report on Form 10-K:

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

Consolidated Statements of Operations for the years ended March 31, 2009, 2008, and 2007

Consolidated Balance Sheets as of March 31, 2009 and 2008

Consolidated Statements of Cash Flows for the years ended March 31, 2009, 2008, and 2007

Consolidated Statements of Shareholders’ Equity for the years ended March 31, 2009, 2008, and 2007

Notes to Consolidated Financial Statements

(a)(2) Financial statement schedule.  The following financial statement schedule is included herein and is incorporated by reference in Part II, Item 8 of this Annual Report on Form 10-K:

Schedule II — Valuation and Qualifying Accounts

All other schedules have been omitted since they are not applicable or the required information is included in the consolidated financial statements or notes thereto.

(a)(3) Exhibits.  Exhibits included herein and incorporated by reference are contained in the Exhibit Index of this Annual Report on Form 10-K.

signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Agilysys, Inc. has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on June 5, 2009.

 

AGILYSYS, INC.

 

Martin F. Ellis

President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities as of June 5, 2009.

 

agilysys, inc. and subsidiaries

 

 

ANNUAL REPORT ON FORM 10-K

Year Ended March 31, 2009

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

report of ernst & young llp, independent registered public accounting firm

The Board of Directors and Shareholders

of Agilysys, Inc. and Subsidiaries

 

We have audited the accompanying consolidated balance sheets of Agilysys, Inc. and subsidiaries as of March 31, 2009 and 2008, and the related consolidated statements of operations, cash flows and shareholders’ equity for each of the three years in the period ended March 31, 2009. We have also audited the accompanying financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Agilysys, Inc. and subsidiaries at March 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Notes 1, 10 and 11 to Consolidated Financial Statements, on April 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes and on March 31, 2007, the Company adopted Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Agilysys, Inc.’s internal control over financial reporting as of March 31, 2009, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 8, 2009 expressed an adverse opinion thereon.

 

 

Cleveland, Ohio

June 8, 2009

report of ernst & young llp, independent registered public accounting firm on internal control over financial reporting

The Board of Directors and Shareholders

of Agilysys, Inc. and Subsidiaries

 

We have audited Agilysys, Inc. and subsidiaries’ internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Agilysys, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The aggregation of several errors in the Company’s customer set-up process for terms and conditions over new product sales of the retail and hospitality segments resulted in a material weakness in the operating effectiveness of revenue recognition controls.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 consolidated financial statements, and this report does not affect our report dated June 8, 2009, on those financial statements. In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Agilysys, Inc. and subsidiaries have not maintained effective internal control over financial reporting as of March 31, 2009, based on the COSO criteria.

We have also audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Agilysys, Inc. and Subsidiaries as of March 31, 2009 and 2008, and the related consolidated statements of operations shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2009 and our report dated June 8, 2009 expressed an unqualified opinion thereon.

 

 

Cleveland, Ohio

June 8, 2009

agilysys, inc. and subsidiaries

 

Consolidated Statements of Operations

 

 

See accompanying notes to consolidated financial statements.

agilysys, inc. and subsidiaries

 

 

 

See accompanying notes to consolidated financial statements.

agilysys, inc. and subsidiaries

 

 

 

See accompanying notes to consolidated financial statements.

agilysys, inc. and subsidiaries