News Column

AGILYSYS INC - 10-Q - Managements' Discussion and Analysis of Financial Condition and Results of Operations

February 7, 2014

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 Condensed Consolidated Statements of Operations and Condensed 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 Quarterly Report on Form 10-Q updates information included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the Securities and Exchange Commission (SEC). This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes that appear in Item 1 of this Quarterly Report as well as our Annual Report for the year ended March 31, 2013. 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 34 of this Quarterly Report and Item 1A "Risk Factors" in Part I of our Annual Report for the fiscal year ended March 31, 2013 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 developer and marketer of proprietary enterprise software, services and solutions to the hospitality industry. The company specializes in market-leading point-of-sale, property management, inventory & procurement and mobile & wireless solutions that are designed to streamline operations, improve efficiency and enhance the guest experience. Agilysys serves casinos, resorts, hotels, foodservice venues, stadiums and cruise lines. Agilysys operates extensively throughout North America, Europe and Asia, with corporate services located in Alpharetta, GA, EMEA headquarters in Cheshire, UK, and APAC offices in Singapore, Hong Kong and Malaysia. Following the divestiture of the Retail Solutions Group (RSG) in July 2013, Agilysys operates as one operating segment and as a pure play software-driven solutions provider to the hospitality industry. 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 geographically and vertically, and to make select accretive acquisitions that can compliment or integrate with existing products. The primary objective of our ongoing strategic planning process is to create shareholder value by targeting accretive growth opportunities, by strengthening our competitive position within the highest value technology solutions we provide to the technology differentiated 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 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. 22



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Our strategic plan specifically focuses on:

• Differentiated service excellence, with strong customer focus

• Customer driven development,

• Industry led innovation, capitalizing on our intellectual property and

emerging technology trends. • Enabling lasting connections with our customers by driving guest preference awareness and memorable, valued experiences which result in creating end-customer relationships for life.



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 Condensed 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., an affiliate of Clearlake Capital Group, L.P. For financial reporting purposes, RSG's operating results for fiscal 2013 through the completion of the sale were classified within discontinued operations. Accordingly, the discussion and analysis presented below, reflects the continuing business of Agilysys. 23



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Results of Operations

Third Fiscal Quarter 2014 Compared to Third Fiscal Quarter 2013

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for continuing operations for the three months ended December 31, 2013 and 2012: Three months ended December 31, Increase (decrease) (Dollars in thousands) 2013 2012 $ % Net revenue: Products $ 8,693$ 12,467$ (3,774 ) (30.3 )% Support, maintenance and subscription services 13,607 12,245 1,362 11.1 % Professional services 3,707 3,478 229 6.6 % Total net revenue 26,007 28,190 (2,183 ) (7.7 )% Cost of goods sold: Products 4,663 8,135 (3,472 ) (42.7 )% Support, maintenance and subscription services 3,129 2,561 568 22.2 % Professional services 2,508 2,144 364 17.0 % Total net cost of goods sold 10,300 12,840 (2,540 ) (19.8 )% Gross profit 15,707 15,350 357 2.3 % Gross profit margin 60.4 % 54.5 % Operating expenses: Product development 6,074 6,260 (186 ) (3.0 )% Sales and marketing 3,400 3,667 (267 ) (7.3 )% General and administrative 5,981 5,852 129 2.2 % Depreciation of fixed assets 584 508 76 15.0 % Amortization of intangibles 2,365 806 1,559 193.4 % Asset impairments and related charges 309 - 309 nm Restructuring, severance and other charges 206 (31 ) 237 (764.5 )% Operating loss $ (3,212 )$ (1,712 )$ (1,500 ) 87.6 % Operating loss percentage (12.4 )% (6.1 )% 24



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The following table presents the percentage relationship of our Condensed Consolidated Statement of Operations line items to our consolidated net revenues for continuing operations for the periods presented:

Three months ended December 31, 2013 2012 Net revenue: Products 33.4 % 44.2 %



Support, maintenance and subscription services 52.3 43.4 Professional services

14.3 12.4 Total 100.0 100.0 Cost of goods sold: Products 17.9 28.9 Support, maintenance and subscription services 12.0 9.1 Professional services 9.6 7.6 Total 39.6 45.5 Gross profit 60.4 54.5 Operating expenses: Product development 23.4 22.2 Sales and marketing 13.1 13.0 General and administrative 23.0 20.8 Depreciation of fixed assets 2.2 1.8 Amortization of intangibles 9.1 2.9 Asset impairments and related charges 1.2 -



Restructuring, severance and other charges 0.8 (0.1 ) Operating loss

(12.4 )% (6.1 )% Net revenue. Total net revenue decreased $2.2 million, or 7.7%, during the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. Products revenue decreased $3.8 million, or 30.3%, primarily as a result of a reduction in large remarketed product sales in the third quarter of fiscal 2013 that did not recur in the third quarter of fiscal 2014. Support, maintenance and subscription services revenue increased $1.4 million, or 11.1%, as a result of continued focus on selling subscription based hosting revenue, and ongoing support from our growing proprietary product sales, offset by a reduction in remarketed support revenue due to a strategic change in one of our third party providers that lowered our costs and the costs to our customers. Professional services revenue increased $0.2 million or 6.6% due to timing of customer installations. Gross profit and gross profit margin. Our total gross profit increased $0.4 million, or 2.3%, for third quarter of fiscal 2014 and total gross profit margin increased 590 basis points to 60.4%. Products gross profit decreased $0.3 million while gross profit margin increased 1,160 basis points to 46.4% mainly as a result of certain developed technology amortization reaching its useful life during the fourth quarter of fiscal 2013 and the continued focus on higher margin proprietary software sales which made up a larger portion of total product sales in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013. Support, maintenance and subscription services gross profit increased $0.8 million while gross margin decreased 210 basis points to 77.0% due to a change in the mix of labor resources needed for maintenance of our products. Professional services gross margin decreased $0.1 million and gross profit margin decreased 600 basis points to 32.3% as a result of higher cost of labor required to meet the needs of timing of customer installations. 25



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Operating expenses

Operating expenses, excluding the charges for asset impairments and related charges and restructuring, severance and other charges, increased $1.3 million, or 7.7%, in the third quarter of fiscal 2014 compared with the third quarter of fiscal 2013. Product development. Product development includes all expenses associated with research and development. Product development decreased $0.2 million, or 3.0% in the third quarter of fiscal 2014 compared with the third quarter of fiscal 2013. This decrease is driven by a greater percentage of our third party costs being capitalized during the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 as we are in the later development stage activities of our next generation products. Certain research and development costs are capitalized as software development costs for future use. We capitalized approximately $4.3 million and $1.5 million during the three months ended December 31, 2013 and 2012, respectively. Sales and marketing. Sales and marketing decreased $0.3 million, or 7.3%, in the third quarter of fiscal 2014 compared with the third quarter of fiscal 2013. The decrease is due mainly to a general decline in personnel related fringe expenses corresponding with the end of the calendar year. General and administrative. General and administrative remained relatively flat reflecting the benefits of the initiatives implemented with the sale of RSG in the third quarter of fiscal 2014, which resulted in lower employee related costs and certain efficiencies in back-office processes, offset by certain software licenses fees incurred in the third quarter of fiscal 2014 that are not expected to recur.



Depreciation of fixed assets. Depreciation of fixed assets increased slightly due to the timing of asset acquisitions.

Amortization of intangibles. In October 2013, we initiated an internal enterprise resource planning (ERP) system replacement project and determined that amortization for our existing ERP system should be accelerated. We recorded approximately $1.6 million in the third quarter of fiscal 2014 of additional amortization in connection with this acceleration. The existing ERP system will be fully amortized as of May 31, 2014. Asset impairment and related charges. During the third quarter of fiscal 2014, in connection with the ERP system replacement project, we determined that certain internal use developed software would not be continued. As a result, we impaired $0.3 million. Restructuring, severance and other charges. In the third quarter of fiscal 2014, following the sale of RSG, we recorded additional restructuring charges of approximately $0.2 million for severance and related benefits for a restructuring plan initiated in the first quarter of fiscal 2014 in order to better align corporate functions with our HSG operating unit and to reduce costs. In the third quarter of fiscal 2013, we recorded a decrease of expense for severance and related benefits for the fiscal 2012 restructuring activity. We expect to incur minimal additional restructuring charges during the remainder of fiscal 2014 for the fiscal 2014 restructuring activity. Our restructuring actions are discussed further in Note 5, Restructuring Charges. Other (Income) Expenses Three months ended December 31, (Unfavorable) favorable (Dollars in thousands) 2013 2012 $ % Other (income) expenses: Interest income $ (19 ) $ - $ 19 nm Interest expense 44 (13 ) (57 ) 438.5 % Other (income) expense, net (5 ) 217 222 102.3 % Total other expense (income), net $ 20$ 204$ 184 90.2 % nm - not meaningful. 26



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Interest expense. Interest expense consists of costs associated with capital leases and loans on corporate-owned life insurance policies. Interest expense increased in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 due to an adjustment in the third quarter of fiscal 2013 related to the expiration and non-renewal of certain capital leases. Other income, net. Other income increased $0.2 million in the third quarter of fiscal 2014. This is primarily due to gains recognized as a result of movements in foreign currencies relative to the U.S. dollar in the third quarter of fiscal 2013. Income Taxes Three months ended December 31, (Unfavorable) favorable (Dollars in thousands) 2013 2012 $ % Income tax benefit $ (1,154 )$ (813 )$ 341 (41.9 )% Effective tax rate 35.7 % 42.4 % For the third quarter of 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. Other items affecting the rate include a decrease in unrecognized tax benefits attributable to the expiration of statute of limitations, recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, and other U.S. permanent book to tax differences. For the third quarter of fiscal 2013, the effective tax rate was different than the statutory rate due primarily to the intra-period tax allocation rules associated with the discontinued operations. Other items affecting the rate include recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, 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 $0.6 million of tax and zero to $0.3 million of interest based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are routinely audited; due to the ongoing nature of current examinations in multiple jurisdictions, other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time. 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 and the portion of the valuation allowance released are subject to change based on the level of profitability that we are able to achieve for the remainder of fiscal 2014 and our visibility into future period results. We expect that any release of the valuation allowance will be recorded as an income tax benefit or an adjustment to paid-in capital at the time of release, significantly increasing our reported net income. Our recorded tax rate may increase in subsequent periods following a significant release of the valuation allowance and our net income may be reduced in periods following the release. Any valuation allowance release will not affect the amount of cash paid for income taxes. 27



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Results of Operations

First Nine Months of Fiscal 2014 Compared to First Nine Months of Fiscal 2013

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for continuing operations for the nine months ended December 31, 2013 and 2012:

Nine months ended December 31, Increase (decrease) (Dollars in thousands) 2013 2012 $ % Net revenue: Products $ 26,294$ 26,757$ (463 ) (1.7 )% Support, maintenance and subscription services 39,945 37,147 2,798 7.5 % Professional services 10,847 10,907 (60 ) (0.6 )% Total net revenue 77,086 74,811 2,275 3.0 % Cost of goods sold: Products 12,443 15,555 (3,112 ) (20.0 )% Support, maintenance and subscription services 8,061 7,987 74 0.9 % Professional services 7,320 7,002 318 4.5 % Total net cost of goods sold 27,824 30,544 (2,720 ) (8.9 )% Gross profit 49,262 44,267 4,995 11.3 % 63.9 % 59.2 % Operating expenses: Product development 19,555 17,965 1,590 8.9 % Sales and marketing 11,014 10,798 216 2.0 % General and administrative 16,051 16,379 (328 ) (2.0 )% Depreciation of fixed assets 1,592 1,639 (47 ) (2.9 )% Amortization of intangibles 3,953 2,478 1,475 59.5 % Asset impairments and related charges 327 208 119 nm Restructuring, severance and other charges 822 1,524 (702 ) (46.1 )% Operating loss $ (4,052 )$ (6,724 )$ 2,672 (39.7 )% Operating loss percentage (5.3 )% (9.0 )% 28



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The following table presents the percentage relationship of our Condensed Consolidated Statement of Operations line items to our consolidated net revenues for continuing operations for the periods presented:

Nine months ended December 31, 2013 2012 Net revenue: Products 34.1 % 35.8 %



Support, maintenance and subscription services 51.8 49.7 Professional services

14.1 14.5 Total net revenue 100.0 100.0 Cost of goods sold: Products 16.1 20.8



Support, maintenance and subscription services 10.5 10.7 Professional services

9.5 9.4 Total net cost of goods sold 36.1 40.8 Gross profit 63.9 59.2 Operating expenses: Product development 25.4 24.0 Sales and marketing 14.3 14.4 General and administrative 20.8 21.9 Depreciation of fixed assets 2.1 2.2 Amortization of intangibles 5.1 3.3 Asset impairments and related charges 0.4 0.3



Restructuring, severance and other charges 1.1 2.0 Operating loss

(5.3 )% (9.0 )% Net revenue. Total net revenue increased $2.3 million, or 3.0%, during the first nine months of fiscal 2014 compared to the first nine months of fiscal 2013. Products revenue decreased $0.5 million, or 1.7%, primarily as a result of a reduction in large remarketed product sales in the third quarter of fiscal 2013 that did not recur in the third quarter of fiscal 2014, partially offset by an increase in proprietary product revenues. Support and maintenance and subscription services revenue increased $2.8 million, or 7.5%, as a result of continued focus on selling subscription based hosting revenue, and ongoing support from our growing proprietary product sales. This is offset by a reduction in remarketed support revenue due to a strategic change in one of our third party providers that lowered our costs and the costs to our customers in the first nine months of fiscal 2014. Professional services revenue decreased slightly due to timing of customer installations. Gross profit and gross profit margin. Our total gross profit increased $5.0 million, or 11.3%, for the first nine months of fiscal 2014 and total gross profit margin increased 470 basis points to 63.9%. Products gross profit increased $2.6 million and gross profit margin increased 1,080 basis points to 52.7% mainly as a result of certain developed technology amortization reaching its useful life during the first nine months of fiscal 2013 and the continued focus on higher margin proprietary software sales which made up a larger portion of total product sales in the first nine months of fiscal 2014 compared to the first nine months of fiscal 2013. Support, maintenance and subscription services gross profit increased $2.7 million and gross margin increased 130 basis points to 79.8% as less labor resources were needed for maintenance of our products. Professional services gross margin decreased $0.4 million and gross profit margin decreased 330 basis points to 32.5% as a result of higher cost of labor required to meet the needs of timing of customer installations. 29



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Operating expenses

Operating expenses, excluding the charges for asset impairments and related charges and restructuring, severance and other charges, increased $2.9 million, or 5.9%, in the first nine months of fiscal 2014 compared with the first nine months of fiscal 2013. Product development. Product development increased $1.6 million, or 8.9% in the first nine months of fiscal 2014 compared with the first nine months of fiscal 2013. This increase is driven by the continued investment in internal and third party resources to enhance the existing products as well as the early stage development of our future platforms. Certain research and development costs are capitalized as software development costs for future use. We capitalized approximately $10.0 million and $3.1 million during the nine months ended December 31, 2013 and 2012, respectively. Sales and marketing. Sales and marketing increased $0.2 million, or 2.0%, in the first nine months of fiscal 2014 compared with the first nine months of fiscal 2013. The increase is due to continued investment in domestic sales resources and incremental incentive compensation expense incurred in the first nine months of fiscal 2014 to finalize fiscal 2013 compensation plans. General and administrative. General and administrative decreased $0.3 million, or 2.0%, in the first nine months of fiscal 2014 compared to the first nine months of fiscal 2013. This is a result of initiatives implemented with the sale of RSG, which resulted in lower employee related costs and certain efficiencies in back-office processes, offset by certain software license fees incurred in the third quarter of fiscal 2014 that are not expected to recur. Depreciation of fixed assets. Depreciation of fixed assets was relatively flat for the first nine months of fiscal 2014 compared to the first nine months of fiscal 2013. Amortization of intangibles. In October 2013, we initiated an internal enterprise resource planning (ERP) system replacement project and determined that amortization for our existing ERP system should be accelerated. We recorded approximately $1.6 million in the first nine months of fiscal 2014 of additional amortization in connection with this acceleration. The existing ERP system will be fully amortized as of May 31, 2014. Asset impairment and related charges. During the third quarter of fiscal 2014, in connection with the ERP system replacement project, we determined that certain internal use developed software would not be continued. As a result, we impaired the entire asset and $0.3 million was recorded as an impairment charge. During fiscal 2013, we recorded $0.2 million of additional impairment charges from the fiscal 2012 impairment of certain developed technologies. Restructuring, severance and other charges. In the first nine months of fiscal 2014, following the sale of RSG, we recorded restructuring charges for severance and related benefits for a restructuring plan initiated in the first quarter of fiscal 2014 of approximately $0.8 million in order to better align corporate functions with our HSG operating unit and to reduce costs. In the first nine months of fiscal 2013, we recorded additional expense of $1.6 million for severance and related benefits for the fiscal 2012 restructuring activity. We expect to incur minimal additional restructuring charges during the remainder of fiscal 2014 for the fiscal 2014 restructuring activity. Our restructuring actions are discussed further in Note 5, Restructuring Charges. Other (Income) Expenses Nine months ended December 31, (Unfavorable) favorable (Dollars in thousands) 2013 2012 $ % Other (income) expenses: Interest income $ (52 )$ (8 )$ 44 nm Interest expense 150 231 81 35.1 % Other (income) expense, net (45 ) 201 246 nm



Total other (income) expenses, net $ 53$ 424 $

371 87.5 % nm - not meaningful. 30



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Interest expense. Interest expense consists of costs associated with capital leases and loans on corporate-owned life insurance policies. Interest expense decreased in the first nine months of fiscal 2014 compared to the first nine months of fiscal 2013 due to expiration and non-renewal of certain capital leases. Other (income) expense, net. Other income increased in the first nine months of fiscal 2014. This is primarily due to gains recognized as a result of movements in foreign currencies relative to the U.S. dollar in the first nine months of fiscal 2013. Income Taxes Nine months ended December 31, (Unfavorable) favorable (Dollars in thousands) 2013 2012 $ % Income tax benefit $ (1,760 )$ (1,975 )$ (215 ) 10.9 % Effective tax rate 42.9 % 27.6 % For the first nine months of 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. Other items affecting the rate include a decrease in unrecognized tax benefits attributable to the expiration of statute of limitations, recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, and other U.S. permanent book to tax differences. For the first nine months of fiscal 2013, the effective tax rate was different than the statutory rate due primarily to the intra-period tax allocation rules associated with the discontinued operations. Other items affecting the rate include recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, 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 $0.6 million of tax and zero to $0.3 million of interest based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are routinely audited; due to the ongoing nature of current examinations in multiple jurisdictions, other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time. 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 and the portion of the valuation allowance released are subject to change based on the level of profitability that we are able to achieve for the remainder of fiscal 2014 and our visibility into future period results. We expect that any release of the valuation allowance will be recorded as an income tax benefit or an adjustment to paid-in capital at the time of release, significantly increasing our reported net income. Our recorded tax rate may increase in subsequent periods following a significant release of the valuation allowance and our net income may be reduced in periods following the release. Any valuation allowance release will not affect the amount of cash paid for income taxes.



Acquisitions

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 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 six years and 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. The acquisition was funded with cash on hand. Management concluded that this acquisition was not a material 31 -------------------------------------------------------------------------------- acquisition under the provision of ASC 805, Business Combinations. The operations of the purchased business have been included in our Condensed Consolidated Financial Statements from the date of acquisition. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed from the acquisition: (In thousands) Current assets $ 327 Property and equipment 88 Goodwill 3,444 Developed technology 605 Total assets acquired 4,464 Total liabilities assumed (all current) 914 Net assets acquired $ 3,550 The goodwill of approximately $3.4 million arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of Agilysys and TMC. The goodwill from this acquisition is deductible for tax purposes over a period of 15 years. The following is a summary of the intangible asset acquired and the weighted-average useful life over which it will be amortized. Weighted-average Purchased assets useful life Developed technology $ 605 5 years Discontinued Operations



Sale of Assets of RSG - Fiscal 2014

On July 1, 2013, we completed the sale of our RSG business to, Kyrus, an affiliate of Clearlake Capital Group, L.P., for total consideration of approximately $37.6 million in cash, including a final 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 (TSA) with Kyrus, under which we provided certain transitional administrative and support services to Kyrus through January 31, 2014.



For the nine months ended December 31, 2013 and 2012 the income from discontinued operations was comprised of the following:

Three months ended Nine months ended (In thousands) 2013 2012 2013 2012 Discontinued operations: Net revenue $ - $ 39,258$ 24,315$ 99,035 Income from operations of RSG - $ 2,451 895 $ 5,451 Gain on sale of RSG - - 23,135 - Income of RSG - 2,451 24,030 5,451 Income tax expense 584 832



2,579 1,906 (Loss) income from discontinued operations $ (584 )$ 1,619$ 21,451$ 3,545

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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 December 31, 2013. We believe that cash flow from operating activities, cash on hand of $96.4 million as of December 31, 2013 and access to capital markets will provide adequate funds to meet our short-and long-term liquidity requirements in the next 12 months.



As of December 31, 2013 and March 31, 2013, our total debt was approximately $0.1 million, comprised of capital lease obligations in both periods.

At December 31, 2013, 100% of our cash and cash equivalents were deposited in bank accounts or invested in highly liquid investments with original maturities of three months or less, including investments in commercial paper, of which 92.0% is located in the United States. Therefore, we believe that credit risk is limited with respect to our cash and cash equivalents balances.


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