10-K 1 agys-3312016x10k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended March 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For transition period from to

Commission file number 0-5734
AGILYSYS, INC.
(Exact name of registrant as specified in its charter)
Ohio
34-0907152
State or other jurisdiction of incorporation or organization
(I.R.S. Employer Identification No.)
 
425 Walnut Street, Suite 1800, Cincinnati, Ohio
45,202
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code: (770) 810-7800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Shares, without par value
The NASDAQ Stock Market LLC

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 ¨     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 ¨     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 ¨

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 ¨ No ¨

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.  ¨

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):

Large accelerated filer ¨    Accelerated filer þ        Non-accelerated filer ¨    Smaller reporting company ¨
(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 ¨   No þ

The aggregate market value of Common Shares held by non-affiliates as of June 30, 2015 was $134,876,553.

As of May 27, 2016, 22,942,231 shares of the registrant's common stock were outstanding.





DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be used in connection with its 2016 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.





AGILYSYS, INC.
Annual Report on Form 10-K
Year Ended March 31, 2016

Table of Contents
 
 
Page
 
PART I
 
 
 
ITEM 1.
Business
ITEM 1A.
Risk Factors
ITEM 1B.
Unresolved Staff Comments
ITEM 2.
Properties
ITEM 3.
Legal Proceedings
ITEM 4.
Mine Safety Disclosures
 
 
 
 
PART II
 
 
 
ITEM 5.
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
ITEM 6.
Selected Financial Data
ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
ITEM 8.
Financial Statements and Supplementary Data
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A.
Controls and Procedures
ITEM 9B.
Other Information
 
 
 
PART III
 
 
 
ITEM 10.
Directors, Executive Officers and Corporate Governance
ITEM 11.
Executive Compensation
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
ITEM 14.
Principal Accountant Fees and Services
 
 
 
 
PART IV
 
 
 
ITEM 15.
Exhibits and Financial Statements
 
 
 
SIGNATURES
 
 
 
 
 
 
 



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Forward Looking Information

This Annual Report and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. These statements are based on management's current expectations, intentions, or beliefs and are subject to a number of factors, assumptions, and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A of this Annual Report. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events, or otherwise.


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Part I

Item 1. Business.

Overview
Agilysys is a leading technology company that provides innovative software for point-of-sale (POS), property management (PMS), inventory and procurement, workforce management, analytics, document management and mobile and wireless solutions and services to the hospitality industry. Our solutions and services allow property managers to better connect, interact and transact with their customers and enhance their customer relationships by streamlining operations, improving efficiency, increasing guest recruitment and wallet share, and enhancing the overall guest experience. We serve four major market sectors: Gaming, both corporate and tribal; Hotels, Resorts and Cruise; Foodservice Management; and Restaurants, Universities, Stadia and Healthcare. A significant portion of our consolidated revenue is derived from contract support, maintenance and subscription services.

We operate throughout North America, Europe and Asia, with corporate services located in Alpharetta, GA, and offices in Singapore, Hong Kong, Malaysia and the Philippines.

The sales of our Retail Solutions Group (RSG) business and United Kingdom business entity (UK entity) each represented a disposal of a component of an entity. As such, the operating results of RSG and the UK entity have been reported as a component of discontinued operations in the Consolidated Statement of Operations and the Consolidated Statement of Cash Flows for the twelve months ended March 31, 2014.

Our principal executive offices are located at 425 Walnut Street, Suite 1800, Cincinnati, Ohio, 45202 and our corporate services are located at 1000 Windward Concourse, Suite 250, Alpharetta, Georgia, 30005.

Reference herein to any particular year or quarter refers to periods within our fiscal year ended March 31. For example, fiscal 2016 refers to the fiscal year ended March 31, 2016.

History and Significant Events

Organized in 1963 as Pioneer-Standard Electronics, Inc., an Ohio corporation, we began operations as a distributor of electronic components and, later, enterprise computer solutions. Exiting the former in fiscal 2003 with the sale of our Industrial Electronic Division, we used the proceeds to reduce debt, fund growth of our enterprise solutions business and acquire businesses focused on higher-margin and more specialized solutions for the hospitality and retail industries. At the same time, we changed our name to Agilysys, Inc.

In fiscal 2004, we acquired Kyrus Corporation and became the leading provider of IBM retail solutions and services in the supermarket, chain drug, general retail, and hospitality segments. In that same year, the acquisition of Inter-American Data, Inc. allowed us to become the leading developer and provider of technology solutions for property and inventory management in the casino and resort industries.

In calendar 2007, we divested KeyLink Systems and exited the enterprise computer distribution business. We used the proceeds from that sale to return cash to shareholders and fund a number of acquisitions that broadened our solutions and capabilities portfolios. We acquired InfoGenesis and Visual One Systems Corp. in calendar 2007, significantly expanding our specialized offerings to the hospitality industry through enterprise-class, POS and software solutions tailored for a variety of applications in cruise, golf, spa, gaming, lodging, resort, and catering. These offerings feature highly intuitive, secure and robust solutions, easily scalable across multiple departments or property locations. In fiscal 2008, we began reporting three primary operating segments: Hospitality Solutions Group (HSG), Retail Solutions Group (RSG) and Technology Solutions Group (TSG).

In fiscal 2012, we sold our TSG segment and restructured our business model to focus on higher-margin, profitable growth opportunities in the hospitality and retail sectors. We also reduced our real-estate footprint and lowered overhead costs by relocating corporate services from Solon, Ohio to Alpharetta, Georgia, thus moving our senior management team closer to our operating units.

On June 10, 2013, we acquired the assets of TimeManagement Corporation, a privately-owned Minneapolis-based provider of enterprise-wide software and service solutions that streamline workforce management environments for hospitality operators.


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On July 1, 2013, we completed the sale of our RSG business to Kyrus Solutions, Inc. (Kyrus), an affiliate of Clearlake Capital Group, L.P. Following completion of the transaction, our business focused exclusively on hospitality solutions and the growth opportunities in the hospitality market.

On March 31, 2014, we completed the sale of our United Kingdom business entity (UK entity) to Verteda Limited (Verteda), led by the Company’s former European management team. In connection with the sale, we have entered into a multi-year distribution agreement, whereby Verteda distributes certain Agilysys products within the U.K. marketplace. We continue to manage all property management system accounts as well as key global accounts in the EMEA market.

Today, we are focused on providing state-of-the-art, end-to-end solutions that enhance guest experiences and allow our customers to promote their respective brands. We help our customers win the guest recruitment battle and, in turn, grow revenue, reduce costs and increase efficiency. This is accomplished by developing and deploying intuitive solutions that increase speed and accuracy, thereby enabling more effective management, intelligent upselling, reduced shrinkage, improved brand recognition and better control of the customer relationship. Our strategy is to increase the proportion of revenue we derive from ongoing support and maintenance agreements, software as a subscription services, cloud applications and professional services.

Products, Support and Professional Services

We are a leading developer and marketer of software enabled solutions and services to the hospitality industry, including: hardware and software products; support, maintenance and subscription services; and, professional services. Areas of specialization are point-of-sale, property management, inventory and procurement, workforce management, and mobile and wireless solutions designed to streamline operations, improve efficiency and enhance the guest experience.

We present revenue and costs of goods sold in three categories:

Products (hardware and software)
Support, maintenance and subscription services
Professional services

Total revenue from continuing operations for these three specific areas is as follows:
 
Year ended March 31,
 (In thousands)
2016
2015
2014
Products
$
41,445

$
31,846

$
34,629

Support, maintenance and subscription services
60,104

56,013

53,169

Professional services
18,817

15,655

13,463

 Total
$
120,366

$
103,514

$
101,261


Products:

The hospitality industry has long been focused on operating an end-to-end business, but the technology vendors that serviced the industry have been focused on product-centric solutions that make use of a high number of software modules and operating silos. We have evolved our approach to the industry to an integrated "platform" centric solutions for Lodging, Food & Beverage and Payments applications that looks to leverage the entire business, by investing in the development of an web services oriented architecture enterprise platform. Our rGuest™ platform is aimed at transitioning our product and services offerings to better address the needs of hospitality operators as they focus on building better connections with guests, pre-, during and post-visit. The rGuest platform facilitates an end-to-end solution that helps our customers improve guest services, increase top-line performance and reduce operating costs, which leads to opportunities for higher profitability. Our next-generation of products and services are aimed at helping hospitality operators recruit customers into their facilities, increase their wallet share from each customer and improve the overall guest experience from the initial customer touch point through the post-visit experience.

Our proprietary product suite is comprised of:







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The rGuest platform underlies our industry leading hospitality solutions that are being introduced to operators of all sizes and with varying needs. The rGuest platform is designed to run as a Software as a Service (“SaaS”)-based platform on the public cloud, private cloud, on-premise, or in a hybrid configuration where the infrastructure may be above premise but the data resides on premise. rGuest’s architecture seamlessly functions as well for a multi-property customer as it does for a single property.

The rGuest enterprise platform helps operators more efficiently manage their business and grow their sales by:

Identifying and tracking guest profile and behavior so that it may be used to create effective loyalty programs and the right promotions and offers to ensure the best guest experience while ensuring the property extracts the maximum wallet share from each customer;
Enabling historical analysis of data;
Allowing for real-time management through mobile and web interfaces for immediate remediation of business and guest related issues;
Creating a framework for core services for the delivery of business applications faster with the critical benefit of having fewer moving parts to manage;
Ensuring that all new rGuest modules will be written on top of the rGuest platform to create a common look/feel, functions and usage paradigms and reduce the overhead of managing and learning multiple systems, and,
Providing for easy integration with other hospitality management systems;
Incorporating key infrastructure design elements such as global and multi-language support, regulatory compliance and security, including authentication, authorization, encryption, tokenization, handling of payment & PII information and overall application data and user security.

Our rGuest product suite is designed to maximize the insight and value available in “big data” by:

Identifying the right data and determining how to best use it;
Empowering users to be capable of both working with new technologies and of interpreting the data to find meaningful business insights;
Creating data access and connectivity across the majority of customer touch points;
Providing an IT platform that can adapt to changes in the landscape in an efficient manner;
Working across functions organizational challenges and finding ways of collaborating across functions and businesses; and,
Implementing the highest levels of security to ensure data protection

The rGuest platform currently includes the following in-market solutions:

rGuest® Stay is the company’s groundbreaking cloud-based property management system that optimizes operational efficiency, increases revenue and enhances guest service. rGuest Stay is currently generally available for limited service and select service hotels and chains.

rGuest Stay is an innovative web-based property management system built using the revolutionary Agilysys rGuest hospitality platform. The guest-centric PMS leverages a standards-based solution on an open architecture with public APIs to enable richly integrated applications delivered from Agilysys, its partners and customers. rGuest Stay offers powerful capabilities for multi-property operations. Managers can view guest profiles, history and reservations, as well as room availability and operational reports, seamlessly across multiple properties.
 
Focused on improving revenue and streamlining operations, rGuest Stay is designed to enable hotels to gather and analyze guest information that can be used to create loyalty-generating offers and increase guest wallet share. In addition, running natively in a browser on both desktop and tablet devices, it delivers real-time operating metrics so that hotels can more accurately forecast demand and scale guest services accordingly.
 
To help improve property operations, rGuest Stay offers a next-generation housekeeping optimization engine built using the included rGuest workflow engine that assigns staff resources to balance guest needs and operational efficiency. In addition, its intuitive user interface and online help functionality reduce team training time and ensure superior guest service with rapid solution ROI.


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rGuest Buy is an enterprise-class self-service, and customer-facing point of sale solution for the hospitality industry. It is ideal for food & beverage venues such as Grab N Go, corporate cafeterias and food courts. It includes self-service “order and pay” kiosks, and kitchen workflow management systems. rGuest Buy is currently available in limited release.

rGuest Buy’s intuitive customer-facing order and pay experiences transfer the control and convenience to the end user. The self-service components reduce on-site labor needed to manage venue operations, while improving customer throughput, check size, order accuracy, customer experience and satisfaction. The platform-driven and cloud-based solution allows for easy deployments and management at scale resulting in a lowered overall cost of ownership.

rGuest Buy offers:

Extensibility & partner ecosystem: The technology architecture allows for rich data integrations for all Agilysys products (InfoGenesis, rGuest Pay, rGuest Analyze, etc.), as well as easy integrations for a partner development ecosystem, and customer applications.

“Self-managed” Cloud Solution: Fully managed cloud solution pushes latest releases, patches and features automatically to all rGuest Buy devices at the property. This ensures quicker support turn-around times, zero on-site IT resources for maintenance, robust security and uptimes.

“Always on” Business - No offline interruptions: rGuest Buy offers “always-on” customer experience with robust network tolerance and offline capabilities.

Manage at Scale: rGuest Buy allows to map a complex business structure in an intuitive way to support propagation of brands, concepts, and other policies.

Reduce Risk - PCI validated payment platform: rGuest Buy integrates with rGuest Pay, our secure payment platform. Protect brand value and avoid liability with our encrypted card data solution. Safeguard against fraud and chargebacks by implementing EMV solutions, and protect application data via SSL.

rGuest Pay is our innovative payments gateway. rGuest Pay protects guests’ financial data and reduces risk by leveraging point-to-point encryption (P2PE) and tokenization with every credit card transaction. rGuest Pay Gateway leverages one of the first payment gateways in the world to receive official PCI-P2PE validation, allowing us to offer PCI cost and scope reduction that other providers cannot. These security benefits are built on top of a full-featured, enterprise-grade gateway that offers broad support for U.S. credit card processors and a wide variety of payment device options for every use-case, including countertop, pay-at-table, EMV, mobile tablet, and signature capture scenarios.

rGuest Pay offers:
A full suite of credit card processing services
Industry-leading payment security through tokenization and P2PE
Flexible hardware supporting EMV and NFC contactless transactions
Integration with 3rd Party application through a simple-to-use API
Consolidated transaction reporting
Comprehensive payment processor support


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rGuest Seat is a guest centric table, reservation and wait list management solution that helps restaurants increase revenue by retaining repeat customers and providing a superior guest experience. Online dining reservations enable restaurants to increase bookings by allowing diners to reserve a table through the restaurant’s website or mobile app. Wait list management optimizes the restaurant’s use of tables and resources, helping staff estimate wait times more accurately and avoiding lost or dissatisfied customers.

rGuest Seat offers:
Streamlined online reservations increase guest bookings without tying staff up on the phone
Wait list automation to accurately predict wait times and meet guest expectations
Two way text communications with waiting guests
Toggle between restaurants within peer group to get a complete view of the reservation or wait list status
Accessibility of guest data based on their previous dining experiences to provide a much high level of guest service
Library of reconfigurable reports can be accessed in real time or received through email at a scheduled delivery time
Integrated POS automatically updates the status of the guest experience and imports valuable data about the guest
Real-time table status visibility to minimize table turn times and keep restaurant operations and reservations running smoothly

rGuest Analyze is a platform-based subscription data analysis service focused on the needs of the hospitality industry. It is a full business intelligence solution that is delivered through the cloud (SaaS). rGuest Analyze collects data from Agilysys point of sale and property management solutions and helps food & beverage and property operators gain critical insight into business operations and performance. Out-of-the-box analysis helps hospitality operators manage costs, minimize loss due to fraud, boost item sales, increase server productivity, occupancy, room revenue, and other profit enhancing capabilities.

rGuest Analyze offers:
Cross-enterprise and centralized reporting across sites, venues and profit centers
Slice-and-dice reporting without the need for IT/DBA resources immediately drives insight into food & beverage as well as lodging operations
Out-of-the-box customizable reports provide insight into sales, revenue, server/cashier activity, discounts, tenders, ADR, RevPAR, and Occupancy
Easy to learn, web-based reporting tool with simple drag-and-drop capabilities for fast data exploration and report generation
Design, publish and disseminate executive level dashboards as easily as creating a word document with both web and mobile views
 
Going forward, Agilysys plans to introduce additional functionality and modules for the rGuest platform.

As we move forward with a focus on selling the rGuest platform and modules, we are committed to providing our customers an upgrade and/or migration path from previously purchased Agilysys products to the new rGuest application.

Agilysys’ additional iconic offerings for point-of-sale, property management, inventory procurement, workforce management, document management and activity booking product and services include:

All POS products are available through traditional software licensing or via subscription.

Point-of Sale

Agilysys InfoGenesis®™ POS is award-winning point-of-sale software that combines powerful reporting and configuration capabilities in the back office with a fast, intuitive and easy-to-use terminal application. The flexible system is easy to set up, and its scalable architecture enables customers to add workstations without having to build out expensive infrastructure. The system's detailed and high-quality reporting capabilities give insight into sales data and guest purchasing trends. Other features include packages and prix fixe menus, signature capture and multi-language capability. InfoGenesis POS is available as an on-premise solution or through a subscription service.


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Agilysys InfoGenesis Flex is a mobility solution that offers full POS functionality on a Windows tablet, such as the Dell Venue 8 Pro. It provides a sleek, modern alternative to traditional POS installations and can be used as a slim fixed terminal or as a convertible simply by removing the tablet from its base.

Agilysys eCash takes traditional cashless payment and stored value card capabilities and integrates them directly with InfoGenesis POS, increasing consumers' payment options.

Property Management Systems (“PMS”)

Agilysys Lodging Management System® (LMS) is an on-premises, web-enabled PMS solution targeting the Casino/Gaming segment (also offered as a hosted solution). It runs 24/7 to automate every aspect of hotel operations in properties of 1,000 rooms or more, and has interfaces to all core casino management systems.. Its foundation expands to incorporate modules for sales and catering, activities scheduling, attraction ticketing and more.

Agilysys Visual One™ PMS is installed in hotels and resorts ranging from 50-1,500 rooms. It is a complete PMS solution enabling the resort to run its end-to-end operations, including Front Desk, House Keeping, Sales & Catering, Maintenance, Accounting, SPA, Golf and Activities. For complex resorts that require an enterprise-wide system, Visual One provides an integrated solution with interfaces to leading global distribution systems (GDSs) and our other products.

Agilysys Insight™ Mobile Manager is a mobile dashboard application that enables hotel managers to quickly view key property information - including arrivals and departures, VIPs, total guests, housekeeping, revenue and groups - from a mobile device. It is supported by iPad®, iPad mini and iPhone® mobile devices and integrates fully with the Agilysys LMS property management solution.

Inventory and Procurement

Agilysys Eatec® provides core purchasing, inventory, recipe, forecasting, production and sales analysis functions and is unique in offering catering, restaurant, buffet management and nutrition modules in a single web-enabled solution.

Agilysys EatecTouch is an optional software applet that operates on any MicroSoft®Windows®-based POS terminal, providing users with access to the Eatec application from any terminal location.

Agilysys EatecPocket is a Microsoft Windows Mobile compatible application designed to work on a handheld wireless device, enabling users to perform inventory transactions. The software incorporates barcode scanner functionality for mobile updates of the database.

Agilysys Stratton Warren System (SWS) integrates with all leading financial and POS software products. The software manages the entire procurement process via e-commerce, from business development to the management of enterprise-wide backend systems and daily operations.

Agilysys SWS Direct is an add-on module for SWS that provides a convenient, efficient and intuitive shopping cart experience to SWS users. SWS Direct streamlines operations, provides enhanced bidding and request for pricing services, and offers supplier registration tools and self-service maintenance capabilities.

Eatec and Stratton Warren System solutions are available through traditional software licensing or via subscription.


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Workforce Management

The Agilysys Workforce Management Solution™ (WMx®™) is a comprehensive enterprise-level labor management solution that helps hospitality organizations improve the efficiency and productivity of their workforce. WMx offers tools for performance-based scheduling, dynamic labor forecasting, embedded workflow for employee hiring, employee self-service, multiple time capture solutions and seamless integration to numerous POS, PMS, inventory and payroll systems.

The WMx solution is available through traditional software licensing or via subscription.

Document Management

Agilysys DataMagine™ is a U.S.-patented imaging module and archiving solution that allows users to securely capture and retrieve documents and system-generated information. DataMagine integrates with all of our products, adding functionality and increasing benefit to customers.

Activities

Agilysys GolfPro is a module that offers golf property managers complete pro shop management with tee time scheduling, member profile/billing, tournament management and Web and e-mail access bundled into one solution.

Agilysys Spa Management software covers all aspects of running a spa business, from scheduling guests for services to managing staff schedules. The software also integrates with our PMS solutions.

Agilysys LMS ARTS® interfaces with hotel guest data, allowing reservationists to pre-plan activities when booking a guest's room. The application also places canceled activities back into inventory for resale, resulting in optimum property utilization and profitability.

Agilysys Visual One Activities software streamlines the management of all of the amenities and activities a property has to offer. Staff can easily schedule and personalize reservations for guests; activities then appear on itinerary/confirmations.

Products revenue also includes remarketed hardware and proprietary and remarketed software that is deployed as an integral component of the solutions we provide.

Support, Maintenance and Subscription Services: Contracted technical support, maintenance and subscription services are a significant portion of our consolidated revenue and typically generate higher profit margins than products revenue. Growth has been driven by a strategic focus on developing and promoting these offerings while market demand for maintenance services and updates that enhance reliability, as well as the desire for flexibility in purchasing options, continue to reinforce this trend. Our commitment to exceptional service has enabled us to become a trusted partner with customers who wish to optimize the level of service they provide to their guests and maximize commerce opportunities both on- and off-premise.

Professional Services: We have industry-leading expertise in designing, implementing, integrating and installing customized solutions into both traditional and newly created platforms. For existing enterprises, we seamlessly integrate new systems and for start-ups and fast-growing customers, we become a partner that can manage large-scale rollouts and tight construction schedules. Our extensive experience ranges from staging equipment to phased rollouts as well as training staff in a manner that saves our customers time and money. Agilysys has recently added the ability to migrate on premise property lodging data to the LMS® Property Management System hosted solution. In addition, as part of the addition of a new consulting practice, we now can provide operational expertise to help achieve maximum effectiveness and efficiencies.

Representative Agilysys clients include:

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AVI Foodsystems, Inc.
The Cosmopolitan of Las Vegas
Resorts World Bimini
Banner Health
CSU Fullerton Auxiliary Services Corporation
Rosen Hotels & Resorts
Benchmarc Restaurants
Drury Hotels Company
Royal Caribbean International
Black Rock Resort
Farmers Restaurant Group
Royal Lahaina Resort
Boyd Gaming Corporation
Golden Nugget Lake Charles
Sands Casino Resort Bethlehem
BR Guest Hospitality
Grand Sierra Resort and Casino
SAVOR
The Breakers Palm Beach
Harbor Winds Hotel
The Sea Pines Resort
The Broadmoor's Ranch at Emerald Valley
Hialeah Park
Spooky Nook Sports
Caesars Entertainment
Ho-Chunk Gaming
Sugar Factory
Cal Dining at UC Berkeley
Maryland Live! Casino
SUNY Cobleskill
Camanche Nation of Oklahoma
Norwegian Cruise Line
The Venetian Resort Hotel Casino
Camelback Lodge & Waterpark
Oxford Casino
University of Akron
Compass Group North America
Palm Garden Hotel
Vail Resorts
Casa Ybel Resort
Pinehurst Resort
Valley View Casino & Hotel
Casino del Sol
Pinnacle Entertainment
Vanderbilt University
Copper Mountain
Prairie Band Casino & Resort
Yale University

Industry and Markets

We offer specific solutions for customers of varying sizes across four major market sectors: Gaming, both corporate and tribal; Hotels, Resorts and Cruise; Foodservice Management; and Restaurants, Universities, Stadia and Healthcare.

The hospitality industry encompasses a wide variety of market sectors and customers. We operate throughout North America, Europe and Asia, with corporate services located in Alpharetta, GA, and offices in Singapore, Hong Kong, Malaysia and the Philippines. Sales to customers outside of the United States represent approximately 5% of total sales.

The hospitality industry is highly fragmented and composed by a number of defined markets including lodging, casinos, cruise ships, resorts and spas, franchise operators, restaurant chains, stadiums, and arenas, among others. For example, in the lodging segment, no single hotel brand accounts for more than 4% of all hotel rooms in the United States. According to American Hotel & Lodging Association, the U.S. lodging industry generated approximately $176 billion in lodging revenue in calendar 2014, while PwC's, Hospitality Directions US 2016, reports an average of approximately 65.5% of approximately 4.9 million available rooms occupied at an average daily rate (ADR) of $120.04. This compares with 64.4% in 2014 at an ADR of $114.95. US lodging revenue further grew by 8% in 2015 (Travel Weekly).

The hospitality business is sensitive to the strength of domestic and global economic and credit conditions. Business and destination resort travel are highly correlated with the economic conditions in their respective markets. Competition is intense for consumer spending, and hospitality industry participants are seeking ways to increase their visibility and appeal as well as enhance the experience of their guests. Our products and solutions are meant to leverage the opportunity these challenges create by providing our customers with higher degree of guest connectivity and added engagement tools that will enable them to capitalize on their brand equity better and more profitably manage their operations, and grow their business. In addition to bespoke product solutions that are designed and customized to meet unique facility or multi-facility needs, we also provide an array of support and subscription options geared towards maintaining systems and professional services for implementation and rollouts.

We have a significant customer base in the commercial casino and gaming sector. According to Statista, US Gaming industry annual revenues surpassed $71 billion in 2015, as compared to approximately $68.7 billion in 2014. Amenities in contemporary casinos extend well beyond gaming to include a variety of entertainment and leisure options as well as modern convention centers and meeting facilities to attract the corporate market. International gaming markets are growing rapidly both in size and new jurisdictions. Asian gaming markets continue to generate robust growth. Gross gaming revenue in Macau exceeds that of the Las Vegas Strip, with a number of the current and planned properties in the region operated by U.S.-based companies. As the market share leader in providing PMS systems to casinos on the Las Vegas Strip, we are well positioned to benefit from these strong and long-standing relationships as our customer base expands into international markets. Additionally, as gaming operators migrate toward cashless operations and digital track-and-log of unique guest behavior, we are able to provide the requisite technologies and expertise to satisfy their needs.

We also have expertise in serving the unique needs of Cruise ship operators. Guests and potential customers are expecting an experience that reflects their unique tastes, preferences and travel habits and cruise operators have seen the need to adequately support the increasing level of personalization and detail required to capture the highest level of guest satisfaction. Our products and services can best help them to deliver on this critical part of their business. According to the Cruise Lines International Association and Cruise

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Market Watch, cruise lines continued the growth trends of recent years in 2015 with Total worldwide cruise capacity at the end of 2015 at 486,385 passengers (a 7.3% increase over 2014). The worldwide cruise ship fleet currently stands at 298 ships and the current order book, covering 2015-2020, includes 55 new builds. The industry carried over 22.2 million passengers in 2015, up from nearly 21.5 million passengers in 2014.

Customers

Our customers include large, medium-sized and boutique companies, and divisions or departments of large corporations in the hospitality industry. We concentrate on serving the needs of customers in a range of customer-focused settings where brand differentiation is important, particularly in the lodging, casino, destination resort, cruise line, foodservice industries where competition for guest recruitment is intense. Our current customer base is highly fragmented, with one customer representing approximately 10% of consolidated revenue from continuing operations as of March 31, 2016.

Seasonality

We have traditionally experienced seasonal revenue weakness during our fiscal first quarter ending June 30. Additionally, the timing of large one-time orders, such as those associated with significant remarketed product sales around large customer refresh cycles or significant volume rollouts, occasionally creates volatility in our quarterly results.

Competition

Our solutions face a highly competitive market. Competition exists with respect to developing and maintaining relationships with customers, pricing for products and solutions, and customer support and service.

We compete with other full-service providers that sell and service bundled POS and PMS solutions comprised of hardware, software, support and services. These companies, some of which are much larger than we are, include Oracle Corp., NCR, Constellation Software, Inc. and Infor. We also compete with software companies like IDeaS Revenue Solutions, POSitouch, Northwind and Xpient Solutions. In addition, we compete with PMS systems that are designed and maintained in-house by large hotel chains.

Environmental Matters

We believe we are in compliance in all material respects with all applicable environmental laws. Presently, we do not anticipate that such compliance will have a material effect on capital expenditures, earnings or competitive position with respect to any of our operations.

Employees

As of May 30, 2016, we had 553 employees. We are not a party to any collective bargaining agreements, have had no strikes or work stoppages and consider our employee relations to be good.

Access to Information

Our 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 our corporate website, 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 our website is not incorporated into this Annual Report on Form 10-K (Annual Report). Reports, proxy and information statements, and other information regarding issuers that file electronically, are maintained on the SEC website, http://www.sec.gov.

Item 1A.  Risk Factors.

Risks Relating to Our Business

Our future success will depend on our ability to develop new products, product upgrades and services that achieve market acceptance.

Our business is characterized by rapid and continual changes in technology and evolving industry standards. We believe that in order to remain competitive in the future we will need to continue to develop new products, product upgrades and services, requiring the investment of significant financial resources. If we fail to accurately anticipate our customer's needs and technological trends, or are otherwise unable to complete the development of a product or product upgrade on a timely basis, we will be unable to introduce new

12


products or product upgrades into the market on a timely basis, if at all, and our business and operating results would be materially and adversely affected.

The development process for most new products and product upgrades is complicated, involves a significant commitment of time and resources and is subject to a number of risks and challenges including:
 
Managing the length of the development cycle for new products and product enhancements, which has frequently been longer than we originally expected;

Adapting to emerging and evolving industry standards and to technological developments by our competitors and customers; and

Extending the operation of our products and services to new and evolving platforms, operating systems and hardware products, such as mobile devices.

If we are not successful in managing these risks and challenges, or if our new products, product upgrades, and services are not technologically competitive or do not achieve market acceptance, our business and operating results could be adversely affected.

Continuing challenging global economic conditions could adversely affect our business and financial results.

Global economic conditions continue to be challenging. Our revenue and profitability depend significantly on general economic conditions and the level of capital available to our customers. Our business trends and revenue growth continue to be affected by the challenging economic climate. These difficult economic conditions and the uncertainty about future economic conditions may adversely affect our customers' level of spending, ability to obtain financing for purchases, ability to make timely payments to us and adoption of new technologies, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding, lead to increased price competition and adversely affect our results of operations.

We face extensive competition in the markets in which we operate, and our failure to compete effectively could result in price reductions and/or decreased demand for our products and services.

Several companies offer products and services similar to ours. The rapid rate of technological change in the hospitality market makes it likely we will face competition from new products designed by companies not currently competing with us. We believe our competitive ability depends on our product offerings, our experience in the hospitality industry, our product development and systems integration capability, and our customer service organization. There is no assurance, however, that we will be able to compete effectively in the hospitality technology market in the future.

We compete for customers based on several factors, including price. In some cases, we may have to reduce our pricing to obtain business. If we are not able to maintain favorable pricing for our products and services, our profit margin and our profitability could suffer.

If we fail to meet our customers' performance expectations, our reputation may be harmed, and we may be exposed to legal liability.

Our ability to attract and retain customers depends to a large extent on our relationships with our customers and our reputation for high quality professional services and integrity. As a result, if a customer is not satisfied with our services or solutions, our reputation may be damaged. Moreover, if we fail to meet our clients' performance expectations, we may lose clients and be subject to legal liability, particularly if such failure adversely impacts our clients' businesses.

In addition, many of our projects are critical to the operations of our customers' businesses. While our contracts typically include provisions designed to limit our exposure to legal claims relating to our products and services, these provisions may not adequately protect us or may not be enforceable in all cases. The general liability insurance coverage that we maintain, including coverage for errors and omissions, is subject to important exclusions and limitations. We cannot be certain that this coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our profitability.

Actual or perceived security vulnerabilities in our software products may result in reduced sales or liabilities.


13


Our software may be used in connection with processing sensitive data (e.g., credit card numbers). It may be possible for the data to be compromised if our customer does not maintain appropriate security procedures. In those instances, the customer may attempt to seek damages from us. While we believe that all of our current software complies with applicable industry security requirements and that we take appropriate security measures to reduce the possibility of breach through our support and other systems, we cannot assure that our customers' systems will not be breached, or that all unauthorized access can be prevented. If a customer, or other person, seeks redress from us as a result of a security breach, our business could be adversely affected.

Our cloud-based solutions present execution and competitive risks.

Our solutions offered in the cloud accessible via the web without hardware installation or software downloads present new and difficult technology challenges. These offerings depend on integration of third-party hardware, software and cloud hosting vendors working together with our products. As a result, we may be subject to claims if customers experience service disruptions, breaches or other quality issues related to our cloud-based solutions.

Cloud-based platform and software applications presents increased security risks.

As we expand our cloud-based platform and software hosting capabilities, including our rGuest products, and offer more of our software applications to our customers on a cloud-based basis, our responsibility for data and system security with respect to data held in our hosting centers increases significantly. While we believe that our current platform, software applications and data centers comply with applicable laws and industry security requirements, and while we believe that we use appropriate security measures to reduce the possibility of unauthorized access or misuse of data in the data centers, we cannot provide absolute assurance that our cloud-based applications will not be breached, or that all unauthorized access can be prevented. If a security breach were to occur, a customer, regulatory agency, or other person could seek redress from us, which could adversely affect our business.

We may not be able to enforce or protect our intellectual property rights.

We rely on a combination of copyright, patent, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology. Any failure to protect our intellectual property rights would diminish or eliminate the competitive advantages that we derive from our proprietary technology.

We may be subject to claims of infringement of third-party intellectual property rights.

While we do not believe that our products and services infringe any patents or other intellectual property rights, from time to time, we receive claims that we have infringed the intellectual property rights of others. On April 6, 2012, Ameranth, Inc. filed a complaint against us for patent infringement in the United States District Court for the Southern District of California alleging that point-of-sale and property management and other hospitality information technology products sold by us infringe three patents owned by Ameranth.

This lawsuit and any other such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are found liable, we could be obligated to pay significant damages or enter into license agreements.

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 litigation. The results of such litigation are difficult to predict, and we may incur significant legal expenses if any such claim were filed. While we generally take steps to reduce the likelihood that disputes will result in litigation, litigation is very commonplace and could have an adverse effect on our business.

Our dependence on certain strategic partners makes us vulnerable to the extent we rely on them.

We rely on a concentrated number of vendors for the majority of our hardware and for certain software and related services needs. We do not have long term agreements with many of these vendors. If we can no longer obtain these hardware, software or services needs from our major suppliers due to mergers, acquisitions or consolidation within the marketplace, material changes in their partner programs, their refusal to continue to supply to us on reasonable terms or at all, and we cannot find suitable replacement suppliers, it may have a material adverse impact on our future operating results and gross margins.

If we acquire new businesses, 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 acquisitions. We can provide no assurance that we will be able to identify and acquire targeted businesses or obtain financing for such

14


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. If integration of our acquired businesses is not successful, we may not realize the potential benefits of an acquisition or suffer other adverse effects.

If we fail to retain key employees, our business may be harmed.

Our success depends on the skill, experience and dedication of our employees. If we are unable to retain and attract sufficiently experienced and capable personnel, especially in product development, sales and management, our business and financial results may suffer. For example, if we are unable to retain and attract a sufficient number of skilled technical personnel, our ability to develop high quality products and provide high quality customer service may be impaired. Experienced and capable personnel in the technology industry remain in high demand, and there is continual competition for their talents. When talented employees leave, we may have difficulty replacing them, and our business may suffer. There can be no assurance that we will be able to successfully retain and attract the personnel that we need.

We may incur goodwill, intangible asset and capitalized software development impairment charges that adversely affect our operating results.

We review our goodwill, intangible assets and capitalized software development costs for impairment on at least an annual basis. During the fourth quarter of fiscal 2016, we determined that the remaining net book value of our acquired developed technology WMx exceeded its net realizable value resulting in an impairment charge of $0.6 million. Our future operating results and the market price of our common stock could be materially adversely affected if we are required to further write down the carrying value of goodwill, intangible assets or capitalized software development in the future.

If we fail to maintain an effective system of internal controls, we may not be able to detect fraud, which could have a material adverse effect on our business.

While we believe our internal control over financial reporting is effective, a controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that control issues and instances of fraud, if any, within our company have been detected.

We have encountered risks associated with maintaining large cash balances.

While we have attempted to invest our cash balances in investments generally considered to be relatively safe, we nevertheless confront credit and liquidity risks. Bank failures could result in reduced liquidity or the actual loss of money held in deposit accounts in excess of federally insured amounts, if any.

We may have exposure to greater than anticipated tax liabilities.

Some of our products and services may be subject to sales taxes in states where we have not collected and remitted such taxes from our customers. We have reserves for certain state sales tax contingencies based on the likelihood of obligation. These contingencies are included in “Accrued liabilities” in our Consolidated Balance Sheets. We believe we have appropriately accrued for these contingencies. In the event that actual results differ from these reserves, we may need to make adjustments, which could materially impact our financial condition and results of operations.

Our business may be impacted by the recent bankruptcy filing of Caesars Entertainment Operating Company, Inc.

On January 12, 2015, an involuntary bankruptcy petition was filed against Caesars Entertainment Operating Company, Inc. (Caesars) under Chapter 11 of the U.S. Bankruptcy Code. On January 15, 2015, Caesars and certain of its affiliates filed a voluntary bankruptcy petition under Chapter 11. Those cases have been consolidated in the United States Bankruptcy Court for the Northern District of Illinois. As of May 26, 2015, we filed a proof of claim with the Bankruptcy Court identifying approximately $0.7 million of pre-petition claims still outstanding. In January 2016, we filed an amended proof of claim with the Bankruptcy Court identifying approximately $0.2 million of pre-petition claim in addition to those filed on May 26, 2015. As of March 31, 2016, approximately $0.7 million of pre-petition claims remain outstanding. Caesars entertainment properties have continued to operate in the ordinary course following the bankruptcy filing, and we have continued to do business with Caesars in the ordinary course. Our business with Caesars is subject to a number of risks, including our ability to collect outstanding accounts receivable, as well as the risks that Caesars’ bankruptcy restructuring may not be successful, or that Caesars ceases normal operations or seeks to renegotiate its existing obligations through bankruptcy protection or otherwise.

We have identified material weaknesses in our internal controls over financial reporting, and our business may be adversely affected if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.

15



We concluded that our disclosure controls and procedures were not effective as of March 31, 2015, and December 31, 2015, because of material weaknesses in our internal control over financial reporting. Specifically, at these times we had not adequately designed and maintained effective controls related to the review of significant assumptions used in the impairment tests related to the valuation of indefinite-lived intangible assets and capitalized software assets. Also, multiple out of quarter adjustments that were not detected and corrected on a timely basis by our review controls in fiscal year 2016 indicated that certain of our review controls were not then operating effectively. While these control deficiencies did not result in a material misstatement of previously filed annual or interim consolidated financial statements and have since been remediated, these control deficiencies suggest an underlying risk that a material misstatement of the annual or interim consolidated financial statements would not be prevented or detected on a timely basis. The existence of one or more additional material weaknesses or significant deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to address these and any other internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, and our business and operating results could be materially and adversely affected.

Risks Relating to the Industries We Serve

Our business depends to a significant degree on the hospitality industry and a weakening could adversely affect our business and results of operations.

Because our customer base is concentrated in the hospitality industry, our business is largely dependent on the health of that industry. Our sales are dependent in large part on the health of the hospitality industry, which in turn is dependent on the domestic and international economy.  Instabilities or downturns in the hospitality industry could disproportionately impact our revenue, as clients may exit the industry or delay, cancel or reduce planned expenditures for our products. A general downturn in the hospitality industry could disproportionately impact our revenue, as clients may exit the industry or delay, cancel or reduce planned expenditures for our products.

Higher oil and gas prices worldwide could have a material adverse impact on the hospitality industry, and indirectly, on our business.

Material increases in oil and gas prices tend to reduce discretionary spending by consumers, such as on travel and dining, as well as on retail spending generally. Reductions in discretionary spending by consumers adversely affect our customers and, indirectly, our business. Moreover, increases in oil and gas prices also directly adversely affect our customer base in other ways. For example, oil and gas price increases can result in higher ingredient and food costs for our restaurant customers.

Consolidation in the hospitality industry 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. The hospitality industry has experienced recent consolidations, including the hotel and casino sectors of the industry. Although recent consolidations in the hospitality industry have not materially adversely affected our business, there is no assurance that future consolidations will not have such affect. For example, if one of our current customers merges or consolidates with a company that relies on another provider's products or services, it could decide to reduce or cease its purchases of products or services from us, which could have an adverse effect our business.

Risks Relating to Our Stock

Our stock has been volatile and we expect that it will continue to be volatile.

Our stock price has been volatile, and we expect it will continue to be volatile. For example, during the year ended March 31, 2016, the trading price of our common stock ranged from a high of $12.56 to a low of $7.97. The volatility of our stock price may be due to factors other than those specific to our business, such as economic news or other events generally affecting the trading markets. Additionally, our ownership base has been and may continue to be concentrated in a few shareholders, which could increase the volatility of our common share price over time.


16


Our largest shareholder, MAK Capital, currently holds approximately 31% of our common shares, which could impact corporate policy and strategy, and MAK Capital's interests may differ from those of other shareholders.

Pursuant to the approval by shareholders of a control share acquisition proposal, MAK Capital holds approximately 31% of our outstanding common shares. As a significant shareholder whose responses could potentially affect the interests of Agilysys and the other shareholders, our Board may consider MAK Capital's potential response to a particular decision of the Board in considering the range of possible corporate policies and strategies in the future, potentially influencing corporate policy and strategic planning.

MAK entered into a Voting Trust Agreement with Computershare, as trustee, which provides that, for both strategic and other transactions requiring at least two-thirds of the voting power to approve, the trustee will vote a certain percentage of MAK Capital's shares in favor of, against, or abstaining from voting in the same proportion as all other shares voted by shareholders (including MAK Capital's shares not being voted by the trustee). If the Voting Trust Agreement, as amended, that MAK entered into with Computershare were to terminate for any reason, MAK Capital would have a level of control that would highly influence the approval or disapproval of transactions requiring under Ohio law the approval of two-thirds of the outstanding common shares, such as a business combination, or majority share acquisition involving the issuance of common shares entitling the holders to exercise one-sixth or more of the voting power of our common shares, each of which requires approval by two-thirds of the outstanding common shares. MAK Capital might also be able to initiate or substantially assist any such transaction. Even with the limitations on MAK Capital's voting power imposed by the Voting Trust Agreement, as amended, it would be more difficult for the other shareholders to approve such a transaction if MAK Capital opposed it, and MAK Capital's interests may differ from those of other shareholders.


17


Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties.

Our corporate services are located in Alpharetta, Georgia where we lease approximately 23,000 square feet of office space. In addition, we lease approximately 34,000 square feet of office space in Las Vegas, Nevada and 22,000 square feet of office space in Bellevue, Washington. Our major leases contain renewal options for periods of up to 10 years. We believe that our current facilities and office space are sufficient to meet our needs and do not anticipate any difficulty securing additional space as needed.

Item 3.  Legal Proceedings.

We are involved in legal actions that arise in the ordinary course of business. It is the opinion of management that the resolution of any current pending litigation will not have a material adverse effect on our financial position or results of operations.

On April 6, 2012, Ameranth, Inc. filed a complaint against us for patent infringement in the United States District Court for the Southern District of California. The complaint alleges, among other things, that point-of-sale and property management and other hospitality information technology products, software, components and/or systems sold by us infringe three patents owned by Ameranth purporting to cover generation and synchronization of menus, including restaurant menus, event tickets, and other products across fixed, wireless and/or internet platforms as well as synchronization of hospitality information and hospitality software applications across fixed, wireless and internet platforms. The complaint seeks monetary damages, injunctive relief, costs and attorneys’ fees. At this time, we are not able to predict the outcome of this lawsuit, or any possible monetary exposure associated with the lawsuit.  However, we dispute the allegations of wrongdoing and are vigorously defending ourselves in this matter.

Item 4. Mine Safety Disclosures.
Not applicable.

18




Part II

Item 5.   Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Our common shares, without par value, are traded on the NASDAQ Stock Market LLC under the symbol “AGYS”. The high and low sales prices for the common shares for each quarter during the past two fiscal years are presented in the table below.
2016
High
 
Low
Fourth quarter
$
11.77

 
$
8.50

Third quarter
$
12.56

 
$
9.62

Second quarter
$
12.19

 
$
7.97

First quarter
$
10.43

 
$
8.72

 
 
 
 
2015
 High
 
 Low
Fourth quarter
$
12.54

 
$
9.39

Third quarter
$
12.74

 
$
10.35

Second quarter
$
14.52

 
$
11.58

First quarter
$
15.02

 
$
11.89


The closing price of the common shares on May 27, 2016, was $11.68 per share. There were 1,688 active shareholders of record.

We did not pay dividends in fiscal 2016 or 2015 and are unlikely to do so in the foreseeable future. The current policy of the Board of Directors is to retain any available earnings for use in the operations of our business.


19



Shareholder Return Performance Presentation
The following chart compares the value of $100 invested in our common shares, including reinvestment of dividends, with a similar investment in the Russell 2000 Index (the “Russell 2000”) and with the companies listed in the SIC Code 7373-Computer Integrated Systems Design for the period March 31, 2011 through March 31, 2016. The stock price performance in this graph is not necessarily indicative of the future performance of our common shares.

Comparison of 5 Year Cumulative Total Return
INDEXED RETURNS
 
 
Fiscal Years Ended March 31,
 
Base Period
 
 
 
 
 
Company Name / Index
2011
2012
2013
2014
2015
2016
Agilysys, Inc.
$
100.00

$
156.62

$
173.17

$
233.45

$
171.43

$
177.87

Russell 2000
$
100.00

$
99.82

$
116.09

$
145.00

$
156.90

$
141.59

Peer Group
$
100.00

$
92.50

$
114.89

$
153.45

$
181.27

$
161.94


This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or incorporated by reference into any of our filings under the Securities Act of 1933, as amended, of the Exchange Act, except as shall be expressly set forth by specific reference in such filing.


20



Item 6.  Selected Financial Data.

The following selected consolidated financial and operating data was derived from our audited consolidated financial statements and the current and prior period operating results of our UK entity and RSG have been classified within discontinued operations for all periods presented as discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and Item 7 contained in Part II of this Annual Report.
 
Year ended March 31,
(In thousands, except per share data)
2016
2015
2014
2013
2012
Operating results 
 
 
 
 
 
Net revenue
$
120,366

$
103,514

$
101,261

$
94,008

$
82,051

Gross profit
68,106

60,081

64,040

57,619

49,626

Operating loss
(4,313
)
(12,467
)
(6,188
)
(9,307
)
(45,840
)
Loss from continuing operations, net of taxes
(3,765
)
(11,497
)
(2,895
)
(6,214
)
(37,493
)
Income from discontinued operations, net of taxes


19,992

4,916

14,710

Net (loss) income
$
(3,765
)
$
(11,497
)
$
17,097

$
(1,298
)
$
(22,783
)
 
 
 
 
 
 
Per share data (1)
 
 
 
 
 
Basic and diluted
 
 
 
 
 
Loss from continuing operations
$
(0.17
)
$
(0.51
)
$
(0.13
)
$
(0.28
)
$
(1.67
)
Income from discontinued operations


0.90

0.22

0.65

Net (loss) income
$
(0.17
)
$
(0.51
)
$
0.77

$
(0.06
)
$
(1.02
)
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
22,483

22,338

22,135

21,880

22,432

 
 
 
 
 
 
Balance sheet data at year end
 
 
 
 
 
Cash and cash equivalents
$
60,608

$
75,067

$
99,566

$
82,444

$
95,511

Working capital
41,401

54,407

81,711

72,122

76,286

Total assets
185,157

181,525

190,895

197,498

204,464

Total debt
333

189

335

86

384

Total shareholders’ equity
123,473

124,188

132,873

113,856

114,438


(1) When a loss is reported, the denominator of diluted earnings per share cannot be adjusted for the dilutive impact of share-based compensation awards because doing so would be anti-dilutive. In addition, when a loss from continuing operations is reported, adjusting the denominator of diluted earnings per share would also be anti-dilutive to the loss per share, even if the entity has net income after adjusting for a discontinued operation. Therefore, for all periods presented, basic weighted-average shares outstanding were used in calculating the diluted net loss per share.



21


Item 7. Managements’ Discussion and Analysis of Financial Condition and Results of Operations.

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 and subsidiaries including:

—    what factors affect our business;
—    what our earnings and costs were;
—    why those earnings and costs were different from the year before;
—    where the earnings came from;
—    how our financial condition was affected; and
—    where the cash will come from to fund future operations.

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 our consolidated financial condition and results of operations. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes that appear in Item 15 of this Annual Report 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” on page 3 of this Annual Report and Item 1A “Risk Factors” in Part I of this Annual Report for additional information concerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in Agilysys.

Overview

Agilysys is a leading technology company that provides innovative software for point-of-sale (POS), property management (PMS), inventory and procurement, workforce management, analytics, document management and mobile and wireless solutions and services to the hospitality industry. Our solutions and services allow property managers to better connect, interact and transact with their customers and enhance their customer relationships by streamlining operations, improving efficiency, increasing guest recruitment and wallet share, and enhancing the overall guest experience. Agilysys serves four major market sectors: Gaming, both corporate and tribal; Hotels, Resorts and Cruise; Foodservice Management; and Restaurants, Universities, Stadia and Healthcare. A significant portion of our consolidated revenue is derived from contract support, maintenance and subscription services.

Agilysys operates extensively throughout North America, Europe and Asia, with corporate services located in Alpharetta, GA, and offices in Singapore, Hong Kong, Malaysia and the Philippines. Agilysys is comprised of a single operating segment and operates as a pure play software-driven solutions provider to the hospitality industry.

Following the divestiture of the Retail Solutions Group (RSG) in July 2013, and our United Kingdom business entity (UK entity) in March 2014, Agilysys operates as one operating segment and as a pure play software-driven solutions provider to the hospitality industry. The sale of RSG and the UK entity each represented the disposal of a component of an entity. As such, the operating results of RSG and the UK entity have been reported as a component of discontinued operations in the Consolidated Financial Statements for the periods presented (see Note 4).

Our top priority is increasing shareholder value by improving operating and financial performance and profitability growing the business through superior products and services. To that end, we expect to invest a certain portion of our cash on hand to develop and market new software products, to fund enhancements to existing software products, to expand our customer breadth, both vertically and geographically.

Our strategic plan specifically focuses on:

•    Strong customer focus, with clear and realistic service commitments.
Growing sales of our proprietary offerings: products, support, maintenance and subscription services and professional services.
•    Diversifying our customer base across industries and geographies.
•    Capitalizing on our intellectual property and emerging technology trends.

The primary objective of our ongoing strategic planning process is to create shareholder value by exploiting growth opportunities and strengthening our competitive position within the specific technology solutions and in the end markets we service. The plan builds on our existing strengths and targets industry leading growth and peer beating financial and operating results driven by new technology trends and market opportunities. Industry leading growth and peer beating financial and operational results will be achieved through

22


tighter coupling and management of operating expenses of the business and sharpening the focus of our investments to concentrate on growth opportunities with the highest return by seeking the highest margin revenue opportunities in the markets in which we compete.

23


Revenue - Defined

As required by the SEC, we separately present revenue earned as products revenue, support, maintenance and subscription services revenue or professional services revenue in our Consolidated Statements of Operations. In addition to the SEC requirements, we may, at times, also refer to revenue as defined below. The terminology, definitions, and applications of terms we use to describe our revenue may be different from those used by other companies and caution should be used when comparing these financial measures to those of other companies. We use the following terms to describe revenue:

•    Revenue – We present revenue net of sales returns and allowances.
Products revenue – Revenue earned from the sales of hardware equipment and proprietary and remarketed software.
Support, maintenance and subscription services revenue – Revenue earned from the sale of proprietary and remarketed ongoing support, maintenance and subscription or hosting services.
Professional services revenue – Revenue earned from the delivery of implementation, integration and installation services for proprietary and remarketed products.

Matters Affecting Comparability

On July 1, 2013 we completed the sale of RSG to Kyrus Solutions, Inc. (Kyrus), an affiliate of Clearlake Capital Group, L.P. For financial reporting purposes, RSG’s operating results for all periods presented were classified within discontinued operations.

On March 31, 2014, we completed the sale of our UK entity to Verteda Limited (Verteda), a U.K. based company. In connection with the sale, we have entered into a multi-year distribution agreement, whereby Verteda will distribute certain of our products within the U.K. marketplace. We will continue to manage all property management system accounts as well as key global accounts in the EMEA market. For financial reporting purposes, the UK entity operating results for all period presented were classified within discontinued operations.

Accordingly, the discussion and analysis presented below, reflects our continuing operations only.


24


Results of Operations

Fiscal 2016 Compared with Fiscal 2015

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the fiscal years ended March 31, 2016 and 2015:
 
Year ended March 31,
 
  Increase (decrease)
(Dollars in thousands)
2016
 
2015
 
$
 
%
Net revenue:
 
 
 
 
 
 
 
Products
$
41,445

 
$
31,846

 
$
9,599

 
30.1
 %
Support, maintenance and subscription services
60,104

 
56,013

 
4,091

 
7.3
 %
Professional services
18,817

 
15,655

 
3,162

 
20.2
 %
Total net revenue
120,366

 
103,514

 
16,852

 
16.3
 %
Cost of goods sold:
 
 
 
 
 
 
 
Products, inclusive of developed technology amortization
23,326

 
18,732

 
4,594

 
24.5
 %
Support, maintenance and subscription services
15,394

 
12,461

 
2,933

 
23.5
 %
Professional services
13,540

 
12,240

 
1,300

 
10.6
 %
Total cost of goods sold
52,260

 
43,433

 
8,827

 
20.3
 %
Gross profit
68,106

 
60,081

 
8,025

 
13.4
 %
Gross profit margin
56.6
 %
 
58.0
 %
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Product development
26,688

 
25,316

 
1,372

 
5.4
 %
Sales and marketing
19,740

 
16,357

 
3,383

 
20.7
 %
General and administrative
21,818

 
21,668

 
150

 
0.7
 %
Depreciation of fixed assets
2,199

 
2,225

 
(26
)
 
(1.2
)%
Amortization of intangibles
1,243

 
3,461

 
(2,218
)
 
(64.1
)%
Restructuring, severance and other charges
283

 
1,836

 
(1,553
)
 
nm

Asset write-offs and other fair value adjustments
180

 
1,482

 
(1,302
)
 
nm

Legal settlements
268

 
203

 
65

 
100.0
 %
Operating loss
$
(4,313
)
 
$
(12,467
)
 
$
8,154

 
(65.4
)%
Operating loss percentage
(3.6
)%
 
(12.0
)%
 
 
 
 

nm - not meaningful


25



The following table presents the percentage relationship of our Consolidated Statement of Operations line items to our consolidated net revenues for the periods presented:
 
Year ended March 31,
 
2016
 
2015
Net revenue:
 
 
 
Products
34.4
 %
 
30.8
 %
Support, maintenance and subscription services
50.0

 
54.1

Professional services
15.6

 
15.1

Total net revenue
100.0

 
100.0

Cost of goods sold:
 
 
 
Products, inclusive of developed technology amortization
19.4

 
18.1

Support, maintenance and subscription services
12.8

 
12.0

Professional services
11.2

 
11.8

Total net cost of goods sold
43.4

 
42.0

Gross profit
56.6

 
58.0

Operating expenses:
 
 
 
Product development
22.2

 
24.5

Sales and marketing
16.4

 
15.8

General and administrative
18.1

 
20.9

Depreciation of fixed assets
1.8

 
2.1

Amortization of intangibles
1.0

 
3.3

Asset write-offs and other fair value adjustments
0.2

 
1.8

Restructuring, severance and other charges
0.1

 
1.4

Legal settlements
0.2

 
0.2

Operating loss
(3.6
)%
 
(12.0
)%


Net revenue.  Total revenue increased $16.9 million, or 16.3%, in fiscal 2016 compared to fiscal 2015. Products revenue increased $9.6 million, or 30.1%, with a significant portion of the growth coming from increased sales related to our existing on-premise proprietary offerings, including hardware replacement sales, as well as increased new logo hardware sales associated with our proprietary software sold as a service. Support, maintenance and subscription services revenue increased $4.1 million, or 7.3%, as a result of continued focus on selling hosted perpetual and subscription services revenue which increased 29.0% year over year, and ongoing support from our proprietary product sales. Hosted perpetual and subscription service revenue comprised 9% of total consolidated revenues in 2016 compared to 8% in 2015. Professional services revenue increased $3.2 million, or 20.2%, as a result of increased volume of customer installation and implementation projects associated with growth in overall proprietary product revenue.

Gross profit and gross profit margin. Our total gross profit increased $8.0 million, or 13.4%, in fiscal 2016 and total gross profit margin decreased 140 basis points to 56.6%. Products gross profit increased $5.0 million and gross profit margin increased 250 basis points to 43.7%  primarily as a result of a higher mix of lower margin hardware sales, offset by $0.3 million of software amortization benefit related to developed technology becoming fully amortized in the prior year period. Support, maintenance and subscription services gross profit increased $1.2 million and gross profit margin decreased 340 basis points to 74.4% due to a change in the mix of labor resources needed for maintenance of our products and continued investment in our subscription platform. Professional services gross profit increased $1.9 million and gross profit margin increased 620 basis points to 28.0% as a result of higher cost of labor required in the third and fourth quarter of fiscal 2015 to meet a customer commitment that did not recur in fiscal 2016.

Operating expenses

Operating expenses, excluding the charges for asset write-offs and other fair value adjustments, legal settlements and restructuring, severance and other charges, increased $2.7, or 3.9%, in fiscal 2016 compared with fiscal 2015. As a percent of total revenue, operating expenses have declined 7.1% in fiscal 2016 compared with fiscal 2015.

Product development.  Product development includes all expenses associated with research and development. Product development increased $1.4 million, or 5.4%, during fiscal 2016 as compared to fiscal 2015. This increase is primarily driven by our our continued investment in resources related to both our rGuest® and iconic product enhancements to expand the customer experience across our

26


install base as well as our future offerings with existing and new customers.  In addition, certain research and development costs are capitalized as software development costs upon achieving specific milestones in the development life-cycle. We capitalized approximately $14.2 million and $17.6 million during fiscal 2016 and 2015, respectively.

Sales and marketing.  Sales and marketing increased $3.4 million, or 20.7%, in fiscal 2016 compared with fiscal 2015. The change is due primarily to $3.9 million of costs related to an increase in headcount of quota carrying salespeople and commission expense in line with revenue achievements in fiscal 2016 compared to fiscal 2015.

General and administrative.  General and administrative remained relatively consistent increasing $0.2 million, or 0.7%, in fiscal 2016 compared to fiscal 2015. The change is primarily due to favorable reductions of $0.9 million as a result of fiscal 2016 and 2015 initiatives to continue to reduce operating costs in line with our company strategy, offset by an increase in incentive compensation of $1.3 million associated with overall improved financial results.

Depreciation of fixed assets.  Depreciation of fixed assets remained flat in fiscal 2016 as compared to fiscal 2015.

Amortization of intangibles.  Amortization of intangibles decreased $2.2 million, or 64.1%, in fiscal 2016 as compared to fiscal 2015. In October 2013, we initiated an internal ERP replacement project and determined that amortization for our existing ERP system should be accelerated. We recorded approximately $0.9 million in fiscal 2015 of additional amortization in connection with this acceleration. The existing ERP system was fully amortized as of June 30, 2014. Additionally, $1.1 million was recorded during fiscal 2015 related to assets becoming fully amortized and assets being replaced or impaired during fiscal 2015.

Asset write-offs and other fair value adjustments. Asset write-offs and other fair value adjustments decreased $1.5 million from $1.8 million in fiscal 2015 to $0.3 million in fiscal 2016. The net change was driven by the following factors:

Fiscal 2016 Activity:

Intangible write-off (Developed Technology). As of March 31, 2016, in connection with the partnership entered into to resell a third party workforce management solution, we determined that the remaining net book value of the acquired developed technology WMx®™ exceeded its net realizable value resulting in an impairment charge of $0.3 million.

Product transition cost fair value adjustment. During fiscal 2016, we recorded a gain of $0.2 million related to the write-off of product transition costs previously accrued for in connection with an impairment of our Guest 360™ property management solution in fiscal 2012. The customer associated with this residual reserve became insolvent during the second quarter of fiscal 2016.

Contingent consideration fair value adjustment. As of March 31, 2016, we adjusted the fair value of the TimeManagement Corporation (TMC) by $0.1 million to reflect expected settlement and early termination in connection with our strategic transition to enter into a partnership to resell a third party workforce management solution.

Fiscal 2015 Activity:

Internal use asset write-off. During the fourth quarter of fiscal 2015, a shift in customer preference for next generation offerings with more features and compatibility as compared to our Elevate™ POS hosted subscription solution, resulted in a write-off in the amount of $1.5 million. In fiscal 2014, we wrote off approximately $0.3 million related to certain internal use software in connection with the ERP system replacement project.

Intangible write-off (Developed Technology and Trade Name). As of March 31, 2015, determined that the remaining net book value of our InfoGenesis Mobile (IG Mobile) software exceeded its net realizable value resulting in an impairment charge of $1.4 million. This was driven primarily by customer preference for InfoGenesis Flex (IG Flex), another one of our InfoGenesis POS mobility solutions. In addition, during the fourth quarter of fiscal 2015, certain restructuring activities incurred to better align product development, sales and marketing and general and administrative functions impacted the expected remaining useful life of the products under the Eatec® trade name. The trade name was determined to have a finite life and subsequently written down to its fair value to be amortized over five years. The fair value of this trade name was calculated based on future cash flows over the remaining useful life resulting in an impairment charge of $0.6 million as of March 31, 2015.

Contingent consideration fair value adjustment. The fiscal 2015 write-offs were offset by a gain of $1.6 million recorded in fiscal 2015 to adjust the carrying value of the TimeManagement Corporation (TMC) contingent consideration to fair value. This adjustment was recorded as a result of a decrease in expected revenues associated with the contingent consideration.


27


Restructuring, severance and other charges. In the fourth quarter of fiscal 2016, we continued our efforts to better align product development and general and administrative functions with our company strategy and to reduce operating costs. To date, we have recorded $0.3 million in restructuring charges related to the Q4 fiscal 2016 restructuring activity, comprised of severance and other employee related benefits. As of March 31, 2016, we had a remaining liability of approximately $0.2 million recorded for the Q4 fiscal 2016 restructuring activity. We expect to record additional restructuring expense related to the Q4 fiscal 2016 restructuring event during fiscal 2017 as those obligations become present and the definition of a liability included in FASB Concepts Statement No. 6, Elements of Financial Statements, is met. These additional charges are not expected to exceed $0.2 million.

Our restructuring actions are discussed further in Note 5, Restructuring Charges.

Legal settlements. During fiscal 2016, we recorded $0.3 million in legal settlements for employment and other business related matters compared to $0.2 million in legal settlements recorded in fiscal 2015 to finalize legal disputes originally estimated and recorded in that fiscal year.

Other (Income) Expenses
 
Year ended March 31,
 
(Unfavorable) favorable
(Dollars in thousands)
2016
 
2015
 
$
 
%
Other (income) expense:
 
 
 
 
 
 
 
Interest income
$
(92
)
 
$
(110
)
 
$
(18
)
 
nm

Interest expense
29

 
48

 
19

 
39.6
%
Other (income) expense, net
(491
)
 
146

 
637

 
nm

Total other (income) expense, net
$
(554
)
 
$
84

 
$
638

 
nm


nm - not meaningful

Interest income.  Interest income remained relatively consistent during fiscal 2016 as compared to fiscal 2015.

Interest expense. Interest expense consists of costs associated with capital leases and loans on corporate-owned life insurance policies. Interest expense decreased in fiscal 2016 compared to fiscal 2015 due to expiration and non-renewal of certain capital leases.

Other income (expense), net.  Other income increased $0.5 million in fiscal 2016 compared to fiscal 2015 primarily due to $0.1 million of changes in cash surrender value of company owned life insurance policies and a $0.5 million gain on the redemption of company owned life insurance policies in 2016.

Income Taxes
 
Year ended March 31,
 
(Unfavorable)
favorable
(Dollars in thousands)
2016
 
2015
 
$
 
%
Income tax expense (benefit)
$
6

 
$
(1,054
)
 
$
(1,060
)
 
nm
Effective tax rate
(0.2
)%
 
8.4
%
 
 
 
 

nm - not meaningful

For fiscal 2016, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, receipt of death benefits on company owned life insurance, state taxes and other U.S. permanent book to tax differences.

For fiscal 2015, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, a decrease in unrecognized tax benefits attributable to expiration of statute of limitations, state taxes and other U.S. permanent book to tax differences.

Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of zero to less than $0.1 million as a result of the expiration of various statutes of limitations. We are routinely audited and the outcome of tax examinations could also result in a reduction in unrecognized tax benefits. Other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.


28


Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of our deferred tax assets. The amount of the valuation allowance, however, could be reduced in the near term. The exact timing will be based on the level of profitability that we are able to achieve and our visibility into future results. We expect that we may release $0.2M, the Hong Kong portion of the valuation allowance. We expect that the release of the valuation allowance will be recorded as an income tax benefit at the time of the release increasing our reported net income. Our recorded tax rate may increase in subsequent periods following a valuation release. Any valuation allowance release will not affect the amount of cash paid for income taxes.

Fiscal 2015 Compared to Fiscal 2014

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the fiscal years ended March 31, 2015 and 2014:
 
Year ended March 31,
 
  Increase (decrease)
(Dollars in thousands)
2015
 
2014
 
$
 
%
Net revenue:
 
 
 
 
 
 
 
Products
$
31,846

 
$
34,629

 
$
(2,783
)
 
(8.0
)%
Support, maintenance and subscription services
56,013

 
53,169

 
2,844

 
5.3
 %
Professional services
15,655

 
13,463

 
2,192

 
16.3
 %
Total net revenue
103,514

 
101,261

 
2,253

 
2.2
 %
Cost of goods sold:
 
 
 
 
 
 
 
Products, inclusive of developed technology amortization
18,732

 
17,027

 
1,705

 
10.0
 %
Support, maintenance and subscription services
12,461

 
10,786

 
1,675

 
15.5
 %
Professional services
12,240

 
9,408

 
2,832

 
30.1
 %
Total cost of goods sold
43,433

 
37,221

 
6,212

 
16.7
 %
Gross profit
60,081

 
64,040

 
(3,959
)
 
(6.2
)%
Gross profit margin
58.0
 %
 
63.2
 %
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Product development
25,316

 
25,212

 
104

 
0.4
 %
Sales and marketing
16,357

 
14,059

 
2,298

 
16.3
 %
General and administrative
21,668

 
20,750

 
918

 
4.4
 %
Depreciation of fixed assets
2,225

 
2,074

 
151

 
7.3
 %
Amortization of intangibles
3,461

 
6,414

 
(2,953
)
 
(46.0
)%
Restructuring, severance and other charges
1,836

 
327

 
1,509

 
nm

Asset write-offs and other fair value adjustments
1,482

 
1,392

 
90

 
6.5
 %
Legal settlements
203

 

 
203

 
nm

Operating loss
$
(12,467
)
 
$
(6,188
)
 
$
(6,279
)
 
101.5
 %
Operating loss percentage
(12.0
)%
 
(6.1
)%
 
 
 
 
nm - not meaningful

29


The following table presents the percentage relationship of our Consolidated Statement of Operations line items to our consolidated net revenues for the periods presented:
 
Year ended March 31,
 
2015
 
2014
Net revenue:
 
 
 
Products
30.8
 %
 
34.2
 %
Support, maintenance and subscription services
54.1

 
52.5

Professional services
15.1

 
13.3

Total net revenue
100.0

 
100.0

Cost of goods sold:
 
 
 
Products, inclusive of developed technology amortization
18.1

 
16.8

Support, maintenance and subscription services
12.0

 
10.7

Professional services
11.8

 
9.3

Total cost of goods sold
42.0

 
36.8

Gross profit
58.0

 
63.2

Operating expenses:
 
 
 
Product development
24.5

 
24.9

Sales and marketing
15.8

 
13.9

General and administrative
20.9

 
20.5

Depreciation of fixed assets
2.1

 
2.0

Amortization of intangibles
3.3

 
6.3

Restructuring, severance and other charges
1.8

 
0.3

Asset write-offs and other fair value adjustments
1.4

 
1.4

Legal settlements
0.2

 

Operating loss
(12.0
)%
 
(6.1
)%

Net revenue.  Total revenue increased $2.3 million, or 2.2%, in fiscal 2015 compared to fiscal 2014. Products revenue decreased $2.8 million, or 8.0%, primarily as a result of a slowing in product sales in line with our strategic initiatives to emphasize subscription based service revenue and new logo business. Support, maintenance and subscription services revenue increased $2.8 million, or 5.3%, as a result of continued focus on selling hosted perpetual and subscription based service revenue which was an increase of 11.3% year over year, and ongoing support from our proprietary product sales. Hosted perpetual and subscription based service revenue comprised 8% of total consolidated revenues in 2015 compared to 7% in 2014. Professional services revenue increased $2.2 million, or 16.3%, due to the timing of customer installations including two large service projects during fiscal 2015 that resulted in approximately $1.9 million in revenue.

Gross profit and gross profit margin. Our total gross profit decreased $4.0 million, or 6.2%, in fiscal 2015 and total gross profit margin decreased 520 basis points to 58.0%. Products gross profit decreased $4.5 million and gross profit margin decreased 960 basis points to 41.2% mainly as a result of lower sales of higher margin proprietary software sales which made up a smaller portion of total product sales during fiscal 2015 as compared to fiscal 2014. Also impacting gross profit margin was $1.0 million in incremental amortization expense of software products that were recently placed into service. Support, maintenance and subscription services gross profit increased $1.2 million and gross profit margin decreased 190 basis points to 77.8% due to a change in the mix of labor resources needed for maintenance of our products. Professional services gross profit decreased $0.6 million and gross profit margin decreased 830 basis points to 21.8% as a result of higher cost of labor required in the third and fourth quarter to meet a customer commitment.

Operating expenses

Operating expenses, excluding the charges for asset write-offs and other fair value adjustments, legal settlements and restructuring, severance and other charges, increased $0.5, or 0.7%, in fiscal 2015 compared with fiscal 2014.

Product development.  Product development includes all expenses associated with research and development. Product development remained consistent during fiscal 2015 as compared to fiscal 2014. Increases in labor costs as we continue investing in engineering resources to help achieve our planned milestones were offset by the increased capitalization year over year as certain research and development costs are capitalized as software development costs upon achieving specific milestones in the development life-cycle. We capitalized approximately $17.6 million and $13.7 million during fiscal 2015 and 2014, respectively.

30



Sales and marketing.  Sales and marketing increased $2.3 million, or 16.3%, in fiscal 2015 compared with fiscal 2014. The increase is due mainly to the timing of our sales reorganization as we continue to align and ramp our sales force to better serve our customers and our long term strategy and increased marketing activities surrounding the launch of our next generation product rGuest™.

General and administrative.  General and administrative increased $0.9 million, or 4.4%, in fiscal 2015 compared to fiscal 2014. as a result of $1.5 million of increased spend during the first half of fiscal 2015 surrounding the ongoing effort to streamline and rationalize our back-office processes, including the cost of resources involved in an ERP replacement project. This was offset by $0.6 million related to certain software licenses fees incurred in the third quarter of fiscal 2014 that did not recur in the current fiscal year.

Depreciation of fixed assets.  Depreciation of fixed assets increased $0.2 million, or 7.3%, in fiscal 2015 as compared to fiscal 2014 due to the timing of asset purchases.

Amortization of intangibles.  Amortization of intangibles decreased $3.0 million, or 46.0%, in fiscal 2015 as compared to fiscal 2014. In October 2013, we initiated an internal ERP replacement project and determined that amortization of our existing ERP system should be accelerated resulting in $3.2 million of additional amortization expense in fiscal 2014.

Asset write-offs and other fair value adjustments. Asset write-offs and other fair value adjustments increased $1.5 million in fiscal 2015 as compared to fiscal 2014. The net change was driven by the following factors:

Internal use asset write-off. During the fourth quarter of fiscal 2015, a shift in customer preference for next generation offerings with more features and compatibility as compared to our Elevate™ POS hosted subscription solution, resulted in a write-off in the amount of $1.5 million. In fiscal 2014, we wrote off approximately $0.3 million related to certain internal use software in connection with the ERP system replacement project.

Intangible write-off (Developed Technology and Trade Name). As of March 31, 2015, determined that the remaining net book value of our InfoGenesis Mobile (IG Mobile) software exceeded its net realizable value resulting in an impairment charge of $1.4 million. This was driven primarily by customer preference for InfoGenesis Flex (IG Flex), another one of our InfoGenesis POS mobility solutions. In addition, during the fourth quarter of fiscal 2015, certain restructuring activities incurred to better align product development, sales and marketing and general and administrative functions impacted the expected remaining useful life of the products under the Eatec® trade name. The trade name was determined to have a finite life and subsequently written down to its fair value to be amortized over five years. The fair value of this trade name was calculated based on future cash flows over the remaining useful life resulting in an impairment charge of $0.6 million as of March 31, 2015.

Contingent consideration fair value adjustment. The fiscal 2015 write-offs were offset by a gain of $1.6 million recorded in fiscal 2015 to adjust the carrying value of the TimeManagement Corporate (TMC) contingent consideration to fair value. This adjustment was recorded as a result of a decrease in expected revenues associated with the contingent consideration.

Restructuring, severance and other charges. In the fourth quarter of fiscal 2015, we announced additional restructuring actions designed to continue the effort to better align product development, sales and marketing and general and administrative functions with our company strategy and to reduce operating costs. To date, we have recorded $0.5 million in restructuring charges related to the Q4 fiscal 2015 restructuring activity, comprised of severance and other employee related benefits. As of March 31, 2015, we had a remaining liability of approximately $0.5 million recorded for the Q4 fiscal 2015 restructuring activity.

In the second quarter of fiscal 2015, we implemented restructuring actions to better align product development, sales and marketing and general and administrative functions and to reduce operating costs and recorded $0.2 million in restructuring charges during the first half of fiscal 2015, comprised of severance and other employee related benefits. As of March 31, 2015, there was no remaining liability related to the Q2 fiscal 2015 activity.

In fiscal 2014, following the sale of RSG, we recorded restructuring charges for severance and related employee benefits for a restructuring plan of approximately $0.7 million in order to better align corporate functions with our HSG operating unit and to reduce costs. We also initiated a sales and marketing restructuring plan in order to maximize sales effectiveness and more closely align sales and marketing efforts for targeted vertical growth, new product launches, and marketing alliances. We recorded restructuring charges for severance and related employee benefits of approximately $0.6 million related to the sales and marketing restructuring. During fiscal 2015, we recorded an additional $0.4 million related to the 2014 restructuring activity. As of March 31, 2015, there was no remaining liability related to the fiscal 2014 restructuring.

Our restructuring actions are discussed further in Note 5, Restructuring Charges.


31


Legal settlements. During fiscal 2015, we recorded $0.2 million in legal settlements to finalize legal disputes originally estimated and recorded in the current fiscal year.

Other Expense (Income)
 
Year ended March 31,
 
(Unfavorable) favorable
(Dollars in thousands)
2015
 
2014
 
$
 
%
Other (income) expenses
 
 
 
 
 
 
 
Interest income
$
(110
)
 
$
(123
)
 
$
(13
)
 
nm

Interest expense
48

 
184

 
136

 
73.9
%
Other (income) expense, net
146

 
(863
)
 
(1,009
)
 
nm

Total other expense (income), net
$
84

 
$
(802
)
 
$
(886
)
 
nm


nm - not meaningful

Interest income.  Interest income remained relatively consistent during fiscal 2015 as compared to fiscal 2014.

Interest expense. Interest expense consists of costs associated with capital leases and loans on corporate-owned life insurance policies. Interest expense decreased in fiscal 2015 compared to fiscal 2014 due to expiration and non-renewal of certain capital leases.

Other income, net.  Other income decreased in fiscal 2015 compared to fiscal 2014 primarily due to the gain on the redemption of a company owned life insurance policy of approximately $0.6 million in 2014. This was offset by the impact of foreign currency movement against the US dollar.

Income Taxes

 
Year ended March 31,
 
(Unfavorable) favorable
(Dollars in thousands)
2015
 
2014
 
$
 
%
Income tax benefit
$
(1,054
)
 
$
(2,491
)
 
$
(1,437
)
 
nm
Effective tax rate
8.4
%
 
46.2
%
 
 
 
 

nm - not meaningful

For fiscal 2015, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, a decrease in unrecognized tax benefits attributable to expiration of statute of limitations, state taxes and other U.S. permanent book to tax differences.

For fiscal 2014, the effective tax rate was different than the statutory rate due primarily to the intra-period tax allocation rules associated with the discontinued operations, the expiration of statute of limitations for unrecognized tax positions and recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance. Other items affecting the rate include state taxes and other U.S. permanent book to tax differences.

Acquisitions

Purchase of assets from Dining Ventures - Fiscal 2015

On July 3, 2014 we purchased certain assets from Dining Ventures, Inc. The acquired assets are the base for our rGuest® Seat product, a dining reservations and table management application. The purchase consideration consisted of approximately $3.8 million and was funded with cash on hand. Management concluded that this acquisition was not a material acquisition under the provisions of ASC 805, Business Combinations (ASC 805). The results derived from this purchased asset have been included in our Consolidated Financial Statements from the date of acquisition and did not have a material impact on our consolidated financial statements or related disclosures. 

Purchase of TimeManagement Corporation - Fiscal 2014

On June 10, 2013, Agilysys purchased certain assets and assumed certain liabilities of TimeManagement Corporation (TMC), a privately-owned Minneapolis-based technology provider with solutions that streamline workforce management environments for

32



hospitality operators. This technology based acquisition is consistent with the core value we provide to the industry and integrates with our point-of-sale, inventory and procurement systems, including InfoGenesis™ point of sale system and Eatec® inventory and procurement solution. The purchase consideration consisted of $1.8 million in cash paid and $1.8 million of contingent consideration. The fair value of the contingent consideration was estimated to be $1.8 million at the date of acquisition and is expected to be paid out over the next five years. Payments could vary based on actual revenue during that time. The fair value of the contingent consideration was determined by calculating the probability-weighted earn-out payments based on the assessment of the likelihood that certain milestones would be achieved. As of March 31, 2015, we recorded a gain of $1.6 million to adjust the carrying value of the TMC contingent consideration to fair value. This adjustment was recorded as a result of a decrease in expected revenues associated with the contingent consideration. As of March 31, 2016, we recorded an additional $0.1 million to reflect expected settlement and early termination of the liability in connection with our strategic transition to enter into a partnership to resell a third party workforce management solution. The adjustments are recorded within "Asset write-offs and other fair value adjustments" in the Consolidated Statements of Operations.

The acquisition was funded with cash on hand. Management concluded that this acquisition was not a material acquisition under the provisions of ASC 805, Business Combinations. The operations of the purchased business have been included in our Consolidated Financial Statements from the date of acquisition and did not have a material impact on our Consolidated Financial Statements or related disclosures.

Additional information regarding the acquisitions are provided in Note 3 to the Consolidated Financial Statements titled, Acquisitions.

Discontinued Operations

UK Entity – Fiscal 2014

In March 2014, we completed the sale of our UK entity to Verteda Limited (Verteda), a U.K. based company, for total consideration of approximately $0.6 million, comprised of $0.7 million in cash and a receivable due to us from Verteda of $0.8 million, net of cash on hand of $0.9 million. During fiscal 2016 we received full payment of the amount due to us from Verteda. In connection with the sale, we have entered into a multi-year distribution agreement whereby Verteda will distribute certain of our products within the U.K. We will continue to manage all property management system accounts as well as key global accounts in the EMEA market. The sale of our UK entity represented a disposal of a component of an entity. As such, the operating results of the UK entity have been reported as a component of discontinued operations in the Consolidated Statements of Operations for the periods presented. In addition, the assets and liabilities of the UK entity are classified as discontinued operations in our Consolidated Balance Sheets for the periods presented.

RSG – Fiscal 2014

In July 2013, we completed the sale of our RSG business to Kyrus Solutions, Inc. (Kyrus), an affiliate of Clearlake Capital Group, L.P., for total consideration of approximately $37.6 million in cash, including a working capital adjustment of $3.1 million. Upon the close of the transaction, the aggregate purchase price was reduced by fees of approximately $1.6 million for transaction related costs, resulting in net proceeds received of approximately $36.0 million. In addition to the purchase agreement, we entered into a transition services agreement with Kyrus, under which we provided certain transitional administrative and support services to Kyrus through January 31, 2014. The sale of RSG represented a disposal of a component of an entity. As such, the operating results of RSG have been reported as a component of discontinued operations in the Consolidated Statements of Operations for the periods presented.

Additional information regarding the discontinued operations are provided in Note 4 to the Consolidated Financial Statements titled, Discontinued Operations.

Restructuring and Related Charges

We recognize restructuring charges when a plan that materially changes the scope of our business or the manner in which that business is conducted is adopted and communicated to the impacted parties, and the expenses have been incurred or are reasonably estimable. In addition, we assess the property and equipment associated with the related facilities for impairment. The remaining useful lives of property and equipment associated with the related operations are re-evaluated based on the respective restructuring plan, resulting in the acceleration of depreciation and amortization of certain assets.

Additional information regarding restructuring charges is provided within the preceding Results of Operations section and in Note 5 to the Consolidated Financial Statements titled, Restructuring Charges.


33


Liquidity and Capital Resources

Overview

Our 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, 2016. We believe that cash flow from operating activities, cash on hand of $60.6 million as of March 31, 2016, and access to capital markets will provide adequate funds to meet our short-and long-term liquidity requirements.

As of March 31, 2016 and March 31, 2015, our total debt was approximately $0.3 million and $0.2 million, respectively, comprised of capital lease obligations in both periods.

At March 31, 2016, 100% of our cash and cash equivalents were deposited in bank accounts or invested in highly liquid investments with original maturity from date of acquisition of three months or less, including investments in commercial paper, of which 95% is located in the United States. Therefore, we believe that credit risk is limited with respect to our cash and cash equivalents balances.

Cash Flow
 
Year ended March 31,
(In thousands)
2016
 
2015
 
2014
Net cash (used in) provided by continuing operations:
 
 
 
 
 
Operating activities
$
7,218

 
$
(2,186
)
 
$
1,384

Investing activities
(21,013
)
 
(21,632
)
 
17,724

Financing activities
(577
)
 
(401
)
 
(883
)
Effect of exchange rate changes on cash
(87
)
 
(280
)
 
(44
)
Cash flows (used in) provided by continuing operations
(14,459
)
 
(24,499
)
 
18,181

Cash flows used in discontinued operations

 

 
(1,546
)
Net (decrease) increase in cash and cash equivalents
$
(14,459
)
 
$
(24,499
)
 
$
16,635


Cash flow provided by (used in) operating activities from continuing operations. Cash flows provided by operating activities were $7.2 million in fiscal 2016. The use of cash was attributable to $3.2 million in net working capital movements associated mainly with $3.2 million in increased collections on accounts receivable. Working capital movements were positively impacted by $4.1 million related to our operating loss adjusted for depreciation, amortization, share based compensation, asset write-offs and fair value adjustments, loss on disposal of property & equipment, and change in cash surrender value of company owned life insurance.

Cash flows used in operating activities were $2.2 million in fiscal 2015. This was mainly the result of our net loss after adding back certain non-cash items, including $2.2 million of depreciation, $4.8 million in amortization, and $1.8 million of asset write-offs and other fair value adjustments, offset by an overall net use in other operating assets and liabilities of $0.8 million. Change in operating assets and liabilities was driven primarily by increases in accounts receivable and prepaids of $2.5 million, offset by increase in accounts payable and accrued expenses of $1.7 million.

Cash flows provided by operating activities were $1.4 million in fiscal 2014.  This was mainly the result of our income after adding back certain non-cash items, including $10.9 million in depreciation, amortization which includes $3.2 million of accelerated amortization for the sun setting of our current ERP system, and stock-based compensation. This is offset by a $7.8 million increase in accounts receivable and a $2.7 million impact of the tax provision on taxes payable.

Cash flow (used in) provided by investing activities from continuing operations. Cash flows used in investing activities in fiscal 2016 were $21.0 million. This is primarily attributed to $16.1 million in development of proprietary software and $4.8 million for purchase of property and equipment, including internal use software.

Cash flows used in investing activities in fiscal 2015 were $21.6 million. This is primarily attributed to $15.8 million of capitalized software development costs, $4.7 million of fixed asset purchases, $3.8 million for the acquisition of developed technology for our rGuest Seat product, offset by $2.0 million and $0.8 million for proceeds from company owned life insurance policies and sale of the UK business unit, respectively.


In fiscal 2014, the $17.7 million in cash flows provided by investing activities were primarily comprised of $35.8 million net proceeds from the sale of RSG and our UK entity, offset by $1.8 million paid for the acquisition of TMC, $12.2 million was used for the development of proprietary software and $4.0 million for the enhancement of internal use software and the purchase of property and equipment.

34



Cash flow used in financing activities from continuing operations.  In fiscal 2016, the $0.6 million cash flows used in financing activities were primarily comprised of the repurchase of shares to satisfy employee tax withholding and to cover the exercise price of the options, and payments on capital lease obligations.

In fiscal 2015, the $0.4 million cash flows used in financing activities were primarily comprised of the repurchase of shares to satisfy employee tax withholding and exercise costs related to equity awards and payments of capital lease obligations.


In fiscal 2014, the $0.9 million cash flows used in financing activities were primarily comprised of the repurchase of shares to satisfy employee tax withholding and exercise costs related to equity awards and payments of capital lease obligations.

Investments
Investments in Corporate-Owned Life Insurance Policies

Agilysys invests in corporate-owned life insurance policies. Certain of these corporate-owned life insurance policies are endorsement split-dollar life insurance arrangements. We entered into a non-cancelable separate agreement with each of the former executives covered by these arrangements whereby we must maintain the life insurance policy for the specified amount and split a portion of the policy benefits with the former executive's designated beneficiary. Our investment in corporate-owned life insurance policies was recorded at their cash surrender value, which approximates fair value, at the balance sheet date. During fiscal 2016, we recorded $2.0 million related to the expected death benefit due to us on redemption of two of these policies within "Other current assets" in the Consolidated Balance Sheets.   The expected split portion due the executives designated beneficiary of $0.2 million was recorded within "Other current liabilities" in the Consolidated Balance Sheets. The cash surrender value of $0.8 million for the remaining policies were held in “Other non-current assets” at the balance sheet date. The present value of future proceeds owed to those executives designated beneficiary of $0.1 million, which approximates fair value, were recorded within "Other non-current liabilities" in the Consolidated Balance Sheets at the balance sheet date.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our 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 our contractual obligations as of March 31, 2016.
 
 
 
 
 
 
(In thousands)
Total
2017
2018-2019
2020-2021
Thereafter
Operating leases (1)
$
16,072

$
2,686

$
5,240

$
4,721

$
3,425

Contingent consideration
197

197







Restructuring liabilities
311

311




Capital leases
359

132

227



Asset retirement obligation
400



150

250

Total contractual obligations (2)
$
17,339

$
3,326

$
5,467

$
4,871

$
3,675

(1)
Operating lease obligations are presented net of contractually binding sub-lease arrangements. Additional information regarding our operating lease obligations is contained in Note 13, Commitments and Contingencies.
 
 
(2)
At March 31, 2016, we had a $1.47 million liability reserve for unrecognized income tax positions which is not reflected in the table above.  The timing of potential cash outflows related to the unrecognized tax positions is not reasonably determinable and therefore, is not scheduled. Substantially all of this reserve is included in Other non-current liabilities.   Additional information regarding unrecognized tax positions is provided in Note 11 to the Consolidated Financial Statements titled, Income Taxes.


We believe 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 our obligations and other commitments arising during the foreseeable future.


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Critical Accounting Policies

MD&A is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosure of contingent assets and liabilities. We regularly evaluate our estimates, including those related to bad debts, inventories, investments, intangible assets, income taxes, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe 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.

Our most significant accounting policies relate to the sale, purchase, and promotion of our products and services. The policies discussed below are considered by management to be critical to an understanding of our 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. 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.  We derive revenue from the sale of products (i.e., server, storage, and point of sale hardware, and software), support, maintenance and subscription services and professional 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 collection is reasonably assured. We reduce 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 is recorded net of any applicable taxes collected and remitted to governmental agencies.

We frequently enter into multiple-element arrangements with customers including hardware, software, professional consulting services and maintenance support services. For arrangements involving multiple deliverables, when deliverables include software and non-software products and services, we evaluate and separate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in our control.

Consideration is allocated to each unit of accounting based on the unit's relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to each deliverable: (i) vendor-specific objective evidence of selling price (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of selling price (BESP). VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. VSOE is established for our software maintenance services and we use TPE or BESP to establish selling prices for our non-software related services. BESP is primarily used for elements that are not consistently priced within a narrow range or TPE is not available. We determine BESP for a deliverable by considering multiple factors including product class, geography, average discount, and management's historical pricing practices. Amounts allocated to the delivered hardware and software elements are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the undelivered maintenance and other services elements are recognized as the services are provided or on a straight-line basis over the service period. In certain instances, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, revenue is not recognized until the customer acceptance is obtained. Delivery and acceptance generally occur in the same reporting period.

In situations where our solutions contain software that is more than incidental, revenue related to the software and software-related elements is recognized in accordance with authoritative guidance on software revenue recognition. For the software and software-related elements of such transactions, revenue is allocated based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, we use the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

Revenue recognition for complex contractual arrangements, especially those with multiple elements, requires a significant level of judgment and is based upon a review of specific contracts, past experience, the selling price of undelivered elements when sold

36



separately, creditworthiness of customers, international laws and other factors. Changes in judgments about these factors could impact the timing and amount of revenue recognized between periods.

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 our hardware sales involves shipment directly from its suppliers to the end-user customers. In these transactions, we are the primary obligor as we are 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 we bear the credit risk if the customer does not pay for the goods. As the principal contact with the customer, we recognize revenue and cost of goods sold when we are 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 or upon installation at the customer site.

We offer proprietary software as well as remarketed software for sale to our customers. We offer our customers the right to license the software under a variety of models. Our customers can license our software under a perpetual model for an upfront fee or a subscription model. For subscription arrangements, we allow customers the right to use software, receive unspecified products as well as unspecified upgrades and enhancements and entitle the customer to receive hosting services for a specified term.  The subscription revenue is generally recognized ratably over the term of the arrangement, typically three to five years.  Revenue from subscription service arrangements is included in Support, maintenance and subscription services in the Consolidated Statements of Operations. A majority of our software sales do not require significant production, modification, or customization at the time of shipment (physically or electronically) to the customer. Substantially all of our software license arrangements do not include acceptance provisions. As such, revenue from both proprietary and remarketed software sales is typically 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.

We also offer proprietary and third-party services to our customers. Proprietary services generally include: consulting, installation, integration and training. Many of our software arrangements include consulting services sold separately under consulting engagement contracts. When the arrangements qualify as service transactions, consulting revenue from these arrangements are accounted for separately from the software revenue. The significant factors considered in determining whether the revenue 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 revenue is deferred until the uncertainty is resolved.

For certain long-term proprietary service contracts with fixed or “not to exceed” fee arrangements, we estimate 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 revenue is 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 collections on uncompleted contracts in excess of related revenue is shown as a current liability.

If an arrangement does not qualify for separate accounting of the software and consulting services, then the software revenue is 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 revenue, significant modification or customization of the software, or provisions that tie the payment for the software to the performance of consulting services.

We also offer proprietary and third-party support to our customers. Support generally includes: support and maintenance of software and hardware products and subscription services. Revenue relating to proprietary support services is recognized evenly over the coverage period of the underlying agreement within support, maintenance and subscription revenue. In instances where we offer third-party support contracts to our customer, and the supplier is determined to be the primary obligor in the transaction, we report revenue at the time of the sale, 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.  We maintain allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of our 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 historic trends of the entire customer pool. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. To mitigate this credit risk we perform periodic credit evaluations of our customers.


37



Inventories. Our inventories are comprised of finished goods. 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. Our inventory is monitored to ensure appropriate valuation. Adjustments of inventories to the lower of cost or market, if necessary, are based upon contractual provisions such as 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. We provide 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. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are determined based on the enacted tax rates expected to apply in the periods in which the deferred tax assets or liabilities are anticipated to be settled or realized.

We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies.

We recorded a valuation allowance of $77.9 million as of March 31, 2016 and $76.4 million as of March 31, 2015, related to substantially all of our deferred income tax assets in jurisdictions where there is uncertainty as to the ultimate realization of a benefit from those assets. In the event that we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the tax valuation allowance would decrease tax expense in the period such determination was made.

We recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from uncertain tax positions are 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 this threshold. Interest related to uncertain tax positions is recognized as part of the provision for income taxes and is accrued beginning in the period that such interest would be applicable under relevant tax law until such time that the related tax benefits are recognized. Our income taxes are described further in Note 11 to Consolidated Financial Statements titled, Income Taxes.

Goodwill and Other Indefinite-Lived Intangible 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, unless it is determined after a qualitative assessment that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount. Goodwill is measured for impairment on an annual basis, or in interim periods if indicators of potential impairment exist. The Company is also required to compare the fair values of other indefinite-lived intangible assets to their carrying amounts at least annually, or when current events and circumstances require an interim assessment. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized.

For fiscal 2016 and 2015, we conducted a qualitative assessment (Step Zero Analysis) to determine whether it would be necessary to perform step one of the two-step goodwill impairment test. It was determined based on the Step Zero Analysis that it is more likely than not that the fair value exceeded the carrying amount as of February 1, 2016 and 2015. Additional information regarding our goodwill and impairment analyses is provided in Note 7, Goodwill and Intangible Assets.

We had two indefinite-lived intangible assets relating to purchased trade names. During the fourth quarter of fiscal 2015, one of the two trade names was determined to have a finite life and subsequently written down to its fair value to be amortized over five years. The remaining indefinite-lived intangible asset is not amortized; rather, it is tested for impairment at least annually by comparing the carrying amount of the asset with the fair value. An impairment loss is recognized if the carrying amount is greater than fair value. The income approach using “the relief from royalty method” was used to value the trade names as of February 1, 2016 and 2015. Additional information regarding our intangible assets and impairment analyses is provided in Note 7, Goodwill and Intangible Assets.

Restructuring Charges.  We recognize restructuring charges when a plan that materially changes the scope of our business, or the manner in which that business is conducted, is adopted and communicated to the impacted parties, and the expenses have been incurred or are reasonably estimable. Our restructuring 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. 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

38



maturity equivalent to the lease term. Our restructuring charges are described further in Note 5 to Consolidated Financial Statements titled, Restructuring Charges.

Share-Based Compensation. We have a stock incentive plan under which we may grant non-qualified stock options, incentive stock options, stock-settled stock appreciation rights, time-vested restricted shares, restricted share units, performance-vested restricted shares, and performance shares. Shares issued pursuant to awards under this plan may be made out of treasury or authorized but unissued shares.

We record compensation expense related to stock options, stock-settled stock appreciation rights, restricted shares, and performance shares granted to certain employees and non-employee directors based on the fair value of the awards on the grant date. The fair value of restricted share and performance share awards is based on the closing price of our common shares on the grant date. The fair value of stock option and stock-settled appreciation right awards is estimated on the grant date using the Black-Scholes-Merton option pricing model, which includes assumptions regarding the risk-free interest rate, dividend yield, life of the award, and the volatility of our common shares. Additional information regarding the assumptions used to value share-based compensation awards is provided in Note 15 to the accompanying Consolidated Financial Statements titled, Share-Based Compensation.

Capitalized Software Development Costs.  The capitalization of software development cost for external use begins when a product’s technological feasibility has been established. Capitalization ends when the resulting product is available for general market release. Amortization of the capitalized software is classified within products cost of goods sold in the Consolidated Statements of Operations. For each capitalized software product, the annual amortization is equal to the greater of: (i) the amount computed using the ratio that the software product’s current fiscal year gross revenue bears to the total current fiscal year and anticipated future gross revenues for that product or (ii) the amount computed based on straight-line method over the remaining estimated economic life of the product, which is a range between three and eight years. The amount by which unamortized software costs exceeds the net realizable value, if any, is recognized as a charge to income in the period it is determined. We capitalized approximately $13.3 million, $17.2 million and $13.7 million during fiscal 2016, 2015 and 2014, respectively. Amortization of non-acquired developed capitalized software was $0.9 million, $1.2 million and $0.2 million during fiscal 2016, 2015 and 2014, respectively.

Adopted and Recently Issued Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendments in this update involve several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are evaluating the impact of adopting this guidance on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers. The amendments in this update clarify the implementation guidance on principals versus agent considerations in FASB ASC 606. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 described below. We are evaluating the impact of adopting this guidance on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The amendments in this update include a new FASB ASC Topic 842, which supersedes Topic 840. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all entities as of the beginning of interim or annual reporting periods. We are evaluating the impact of adopting this guidance on our consolidated financial statements.

In June 2015, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-10, Technical Corrections and Updates. The amendments in this update cover a wide range of topics in the codification and are generally categorized as follows: Amendments Related to Differences between Original Guidance and the Codification; Guidance Clarification and Reference Corrections; Simplification; and, Minor Improvements. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, but not required; and at this time we are not early adopting. As the objectives of this standard are to clarify the codification; correct unintended application of guidance; eliminate inconsistencies; and, to improve the codification’s presentation of guidance, the adoption of this standard is not expected to have a material impact on our financial position or results of operations.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which converges the FASB and the International Accounting Standards Board standard on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. In August 2015, the FASB amended the effective date and early adoption is

39



permitted only for fiscal years beginning after December 15, 2016. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements or related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. We have early adopted for the period ended March 31, 2016. Upon adoption, we evaluated the effect this pronouncement will have on our consolidated financial statements and related disclosures and determined the adoption of this standard did not have a material impact based on current classification of deferred tax assets and liabilities. Prior periods were not retrospectively adjusted.

Management continually evaluates the potential impact, if any, of all recent accounting pronouncements on our consolidated financial statements or related disclosures and, if significant, makes the appropriate disclosures required by such new accounting pronouncements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We have assets, liabilities, and cash flows in foreign currencies creating foreign exchange risk. We sell products and services internationally and enter into transactions denominated in foreign currencies. As a result, we are subject to the variability that arises from exchange rate movements. For the fiscal years 2016, 2015 and 2014, revenue from international operations was 4%, 5% and 5%, respectively of total revenue. The effects of foreign currency on operating results did not have a material impact on our results of operations for the 2016, 2015 and 2014 fiscal years. At March 31, 2016, a hypothetical 10% weakening of the U.S. dollar would not materially affect our financial statements.

We believe that inflation has had a nominal effect on our results of operations in fiscal years 2016, 2015 and 2014 and do not expect inflation to be a significant factor in fiscal 2016.




40




Item 8.   Financial Statements and Supplementary Data.

Agilysys, Inc. and Subsidiaries

ANNUAL REPORT ON FORM 10-K

Year Ended March 31, 2016
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
Report of Independent Registered Public Accounting Firm - Grant Thornton LLP
 42
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
Consolidated Balance Sheets as of March 31, 2016 and 2015
Consolidated Statements of Operations for the years ended March 31, 2016, 2015, and 2014
 46
Consolidated Statements of Comprehensive Loss for the years ended March 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the years ended March 31, 2016, 2015 and 2014
 48
Consolidated Statements of Shareholders' Equity for the years ended March 31, 2016, 2015, and 2014
 49
Notes to Consolidated Financial Statements
 50
Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2016, 2015, and 2014
 76


41




Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Agilysys, Inc.

We have audited the accompanying consolidated balance sheet of Agilysys, Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of March 31, 2016, and the related consolidated statement of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the year then ended. Our audit of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Agilysys, Inc. and subsidiaries as of March 31, 2016, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 10, 2016 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP
Atlanta, GA
June 10, 2016


42


Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Agilysys, Inc.

We have audited the internal control over financial reporting of Agilysys, Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of March 31, 2016 based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s 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 Management’s Report 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.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended March 31, 2016, and our report dated June 10, 2016 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP
Atlanta, GA
June 10, 2016


43


Report of Independent Registered Public Accounting Firm

To Board of Directors and Shareholders of Agilysys, Inc.:

In our opinion, the consolidated balance sheet and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Agilysys, Inc. and its subsidiaries at March 31, 2015 and the results of their operations and their cash flows for each of the two years in the period ended March 31, 2015, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for each of the two years in the period ended March 31, 2015 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
June 5, 2015



44



AGILYSYS, INC.
CONSOLIDATED BALANCE SHEETS
 
As of March 31,
(In thousands, except share data)
2016
 
2015
 
 
 
 
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
60,608

 
$
75,067

Accounts receivable, net of allowance for doubtful accounts of $617 and $888, respectively
22,017

 
25,481

Inventories
2,692

 
641

Prepaid expenses and other current assets
10,184

 
3,828

Total current assets
95,501

 
105,017

Property and equipment, net
14,197

 
11,929

Goodwill
19,622

 
19,622

Intangible assets, net
8,576

 
9,006

Software development costs, net
44,215

 
31,818

Other non-current assets
3,046

 
4,133

Total assets
$
185,157

 
$
181,525

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,761

 
$
16,586

Deferred revenue
33,241

 
23,881

Accrued liabilities
12,980

 
10,001

Capital lease obligations, current
118

 
142

Total current liabilities
54,100

 
50,610

Deferred income taxes, non-current
3,075

 
3,053

Capital lease obligations, non-current
215

 
47

Other non-current liabilities
4,294

 
3,627

Commitments and contingencies (see Note 13)

 

Shareholders' equity:
 
 
 
Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,606,831 shares issued; and 22,942,586 and 22,789,355 shares outstanding at March 31, 2016 and March 31, 2015, respectively
9,482

 
9,482

Treasury shares, 8,664,245 and 8,817,477 at March 31, 2016 and March 31, 2015, respectively
(2,600
)
 
(2,646
)
Capital in excess of stated value
(7,645
)
 
(10,675
)
Retained earnings
124,413

 
128,178

Accumulated other comprehensive loss
(177
)
 
(151
)
Total shareholders' equity
123,473

 
124,188

Total liabilities and shareholders' equity
$
185,157

 
$
181,525


See accompanying notes to consolidated financial statements.

45



AGILYSYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

 
Year ended March 31,
(In thousands, except per share data)
2016
 
2015
 
2014
Net revenue:
 
 
 
 
 
Products
$
41,445

 
$
31,846

 
$
34,629

Support, maintenance and subscription services
60,104

 
56,013

 
53,169

Professional services
18,817

 
15,655

 
13,463

Total net revenue
120,366

 
103,514

 
101,261

Cost of goods sold:
 
 
 
 
 
Products, inclusive of developed technology amortization
23,326

 
18,732

 
17,027

Support, maintenance and subscription services
15,394

 
12,461

 
10,786

Professional services
13,540

 
12,240

 
9,408

Total cost of goods sold
52,260

 
43,433

 
37,221

Gross profit
68,106

 
60,081

 
64,040

Gross profit margin
56.6
%
 
58.0
%
 
63.2
%
Operating expenses:
 
 
 
 
 
Product development
26,688

 
25,316

 
25,212

Sales and marketing
19,740

 
16,357

 
14,059

General and administrative
21,818

 
21,668

 
20,750

Depreciation of fixed assets
2,199

 
2,225

 
2,074

Amortization of intangibles
1,243

 
3,461

 
6,414

Restructuring, severance and other charges
283

 
1,836

 
327

Asset write-offs and other fair value adjustments
180

 
1,482

 
1,392

Legal settlements
268

 
203

 

Operating loss
(4,313
)
 
(12,467
)
 
(6,188
)
Other (income) expense:
 
 
 
 
 
Interest income
(92
)
 
(110
)
 
(123
)
Interest expense
29

 
48

 
184

Other (income) expense, net
(491
)
 
146

 
(863
)
Loss before taxes
(3,759
)
 
(12,551
)
 
(5,386
)
Income tax expense (benefit)
6

 
(1,054
)
 
(2,491
)
Loss from continuing operations
(3,765
)
 
(11,497
)
 
(2,895
)
Income from discontinued operations, net of taxes

 

 
19,992

Net (loss) income
$
(3,765
)
 
$
(11,497
)
 
$
17,097

 
 
 
 
 
 
Weighted average shares outstanding - basic and diluted
22,483

 
22,338

 
22,135

 
 
 
 
 
 
Net (loss) income per share - basic and diluted:
 
 
 
 
 
Loss from continuing operations
$
(0.17
)
 
$
(0.51
)
 
$
(0.13
)
Income from discontinued operations

 

 
0.90

Net (loss) income per share
$
(0.17
)
 
$
(0.51
)
 
$
0.77


See accompanying notes to consolidated financial statements.

46



AGILYSYS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


 
Year ended March 31,
(In thousands)
 
2016
 
2015
 
2014
Net (loss) income
 
$
(3,765
)
 
$
(11,497
)
 
$
17,097

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
Unrealized foreign currency translation adjustments
 
(26
)
 
(9
)
 
220

Reclassification of foreign currency translation adjustments included in net income (loss)
 

 

 
745

Unrealized loss on sale of securities
 

 
(8
)
 

Total comprehensive (loss) income
 
$
(3,791
)
 
$
(11,514
)
 
$
18,062



See accompanying notes to consolidated financial statements.

47


AGILYSYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended March 31,
 
2016
 
2015
 
2014
Operating activities
 
 
 
 
 
Net (loss) income
$
(3,765
)
 
$
(11,497
)
 
$
17,097

Less: Income from discontinued operations

 

 
19,992

Loss from continuing operations
(3,765
)
 
(11,497
)
 
(2,895
)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
 
 
 
 
 
Net restructuring, severance and other charges
(333
)
 
134

 
(349
)
Net legal settlements
185

 
(1,511
)
 
(110
)
Asset write-offs and other fair value adjustments
87

 
3,454

 
327

Loss on disposal of property & equipment
381

 

 

Depreciation
2,199

 
2,225

 
2,074

Amortization
2,265

 
4,755

 
6,726

Share-based compensation
3,405

 
3,140

 
2,119

Contingent consideration adjustment
93

 
(1,619
)
 

Deferred income taxes
23

 
(371
)
 
(178
)
Change in cash surrender value of company owned life insurance policies
(564
)
 
(57
)
 
(600
)
Excess tax benefit from equity awards

 
(14
)
 
(37
)
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
3,237

 
(1,935
)
 
(7,846
)
Inventories
(2,051
)
 
(171
)
 
380

Prepaid expense
(4,532
)
 
(526
)
 
(498
)
Accounts payable
(7,896
)
 
5,528

 
1,073

Deferred revenue
9,364

 
1,146

 
2,784

Accrued liabilities
5,330

 
(3,868
)
 
1,624

Income taxes receivable
16

 
(823
)
 
(2,702
)
Other changes, net
(226
)
 
(176
)
 
(508
)
Net cash provided by (used in) operating activities from continuing operations
7,218

 
(2,186
)
 
1,384

Net cash used in operating activities from discontinued operations

 

 
(1,311
)
Net cash provided by (used in) operating activities
7,218

 
(2,186
)
 
73

Investing activities
 
 
 
 
 
Proceeds from sale of business units

 
809

 
35,846

Cash paid for acquisitions, net

 
(3,750
)
 
(1,812
)
Investment in marketable securities

 
(10,240
)
 

Proceeds from sale of marketable securities

 
10,107

 

Capital expenditures
(4,845
)
 
(4,650
)
 
(4,023
)
Capitalized software development costs
(16,103
)
 
(15,813
)
 
(12,200
)
Additional (investments in) proceeds from corporate-owned life insurance policies
(65
)
 
1,905

 
(87
)
Net cash (used in) provided by investing activities from continuing operations
(21,013
)
 
(21,632
)
 
17,724

Net cash used in investing activities from discontinued operations

 

 
(155
)
Net cash (used in) provided by investing activities
(21,013
)
 
(21,632
)
 
17,569

Financing activities
 
 
 
 
 
Principal payments under long-term obligations
(142
)
 
(144
)
 
(177
)
Exercise of employee stock options

 
102

 
169

Repurchase of common shares to satisfy employee tax withholding
(435
)
 
(373
)
 
(912
)
Excess tax benefit from equity awards

 
14

 
37

Net cash used in financing activities from continuing operations
(577
)
 
(401
)
 
(883
)
Net cash used in financing activities from discontinued operations

 

 
(80
)
Net cash used in financing activities
(577
)
 
(401
)
 
(963
)
Effect of exchange rate changes on cash
(87
)
 
(280
)
 
(44
)
Cash flows (used in) provided by continuing operations
(14,459
)
 
(24,499
)
 
18,181

Cash flows used in discontinued operations

 

 
(1,546
)
Net (decrease) increase in cash and cash equivalents
(14,459
)
 
(24,499
)
 
16,635

Cash and cash equivalents at beginning of period
75,067

 
99,566

 
82,931

Cash and cash equivalents at end of period
$
60,608

 
$
75,067

 
$
99,566


See accompanying notes to consolidated financial statements.

48


AGILYSYS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
 
 
 
 
Capital in
 
Accumulated
 
 
Common Shares
excess of
 
other