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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the transition period from ________________________ to ________________________.

Commission file number  0-5734

Agilysys, Inc.
(Exact name of registrant as specified in its charter)

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

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

Yes  X  No      

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

Yes  X  No      

Indicate the number of shares outstanding of each of the issuer’s classes of Common Shares, as of the latest practical date: Common Shares, without par value, as of November 1, 2003: 32,115,614. (Includes 3,589,940 Common Shares subscribed by the Agilysys Stock Benefit Trust.)

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AGILYSYS, INC.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

See accompanying notes to unaudited condensed consolidated financial statements.

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See accompanying notes to unaudited condensed consolidated financial statements.

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During the six-month period ended September 30, 2002, investments in available for sale securities depreciated in value by $2.1 million. Such securities were sold in September 2003.

See accompanying notes to unaudited condensed consolidated financial statements.

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AGILYSYS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(Table Amounts in Thousands, Except Per Share Data)

1.     NAME CHANGE

On September 12, 2003, the shareholders of Pioneer-Standard Electronics, Inc. approved an amendment to the Company’s Amended Articles of Incorporation to change the Company’s name to Agilysys, Inc. The name change became effective on September 15, 2003. Prior to September 16, 2003, Agilysys, Inc. traded on the National Association of Securities Dealers and Automated Quotations (NASDAQ) Stock Market as Pioneer-Standard Electronics, Inc. under the symbol “PIOS.” On September 16, 2003, Agilysys, Inc. began trading on the NASDAQ Stock Market under the symbol “AGYS.” Agilysys, Inc. and its subsidiaries are referred to herein as the “Company.”

2.     BASIS OF PRESENTATION

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.

The condensed consolidated balance sheet as of September 30, 2003, the condensed consolidated statements of operations and the condensed consolidated statements of cash flows for the periods ended September 30, 2003, and September 30, 2002, have been prepared by the Company without audit. The financial statements have been prepared on the same basis as those in the audited annual financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations, financial position, and cash flows have been made. The results of operations for the three and six-month periods ended September 30, 2003 are not necessarily indicative of the operating results for the full year.

Reclassifications. Certain reclassifications have been made to conform prior years’ data to the current presentation. These reclassifications had no effect on reported earnings.

Summary of Significant Accounting Policies. A detailed description of our significant accounting policies can be found in the Company’s audited financial statements for the year ended March 31, 2003, included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

3.     ACQUISITION

On September 30, 2003, pursuant to an Agreement and Plan of Merger entered into as of September 15, 2003, the Company completed the acquisition of Kyrus Corporation (“Kyrus”). The acquisition was accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations.” Accordingly, the estimated fair values of assets acquired and liabilities assumed in the acquisition are included in the Company’s Unaudited Condensed Consolidated Balance Sheet as of September 30, 2003.

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Kyrus, based in Greenville, South Carolina is an IBM® Master Distributor and Premier Business Partner in retail store solutions. The Company acquired Kyrus as part of its recently announced strategic plan to focus solely on the enterprise solutions business. The acquisition of Kyrus establishes the Company as the leading provider of IBM retail solutions and services, across two major market segments, supermarkets and chain drug.

As consideration for all the outstanding common stock of Kyrus, the Company paid $29.6 million ($28.7 million, net of cash acquired), including legal fees and other costs directly related to the acquisition. The purchase was funded through the Company’s available cash. As a result of the purchase, the Company recorded approximately $29 million of goodwill on its Unaudited Condensed Consolidated Balance Sheet at September 30, 2003. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the goodwill will not be amortized and will be tested for impairment using a fair value approach at least annually.

The Company is in the process of finalizing its plans to integrate the Kyrus operations. Such activities may include exiting duplicative facilities and the involuntary termination or relocation of certain employees. The Company’s plans in this regard will be finalized in the third quarter of Fiscal 2004. The acquisition-related restructuring liabilities will be accounted for under EITF 95-3 and therefore included in the purchase price allocation of the cost to acquire Kyrus. The Company has accrued a preliminary estimate of $1.0 million relating to the involuntary termination of Kyrus employees. The workforce reductions eliminated 71 operations and administrative positions. Any changes to this estimate will result in an increase or decrease to the accrued restructuring charges and a corresponding increase or decrease to goodwill.

4.     RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This Statement, the provisions of which are to be applied prospectively, is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 on July 1, 2003, had no impact on the Company’s consolidated financial statements.

In April 2001, the FASB issued EITF No. 01-03, “Accounting in a Purchase Business Combination for Deferred Revenue of an Acquiree.” EITF 01-03 provides guidance regarding the recognition of deferred revenue as a liability with respect to business combinations. In March 2002, the FASB reached consensus that an acquiring entity should recognize a liability related to a revenue arrangement of an acquired entity only if it has assumed a legal obligation to provide goods, services, or other consideration to a customer. The amount assigned to this liability should be based on its fair value at the date of the acquisition. The Company adopted the guidelines set forth in EITF 01-03 to record deferred revenues purchased in connection with the Kyrus acquisition in September 2003. (See Note 3).

5.     DISCONTINUED OPERATIONS

On February 28, 2003, the Company completed the sale of substantially all of the assets and liabilities of its Industrial Electronics Division (“IED”), which distributed semiconductors and other electronic components in North America and Germany. Cash proceeds from the sale of IED are estimated to total $240 million, subject to purchase price adjustments, of which approximately $227 million has been collected as of September 30, 2003. The assets sold consisted primarily of accounts

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receivable and inventories and the Company’s shares of common stock in World Peace Industrial Co. Ltd, an Asian distributor of electronic components. The buyer also assumed certain liabilities.

In addition, as of the sale date, the Company announced its strategic transformation to focus solely on its enterprise computer solutions business. As a result, Agilysys’ majority owned subsidiary, Aprisa, Inc. (“Aprisa”), an Internet-based start-up corporation, which created customized software for the electronic components market ceased to provide strategic value to the Company and the operations were discontinued.

The disposition of IED and discontinuation of Aprisa’s operations represent a disposal of a “component of an entity” as defined by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the Company’s consolidated financial statements and related notes have been presented to reflect IED and Aprisa as discontinued operations for all periods.

For the six-month periods ended September 30, 2003 and 2002, the Company realized a loss from discontinued operations of $1.1 million, net of $0.6 million in income taxes and income from discontinued operations of $5.0 million, net of $2.1 million in income taxes, respectively.

In the fourth quarter of Fiscal 2003, Agilysys recognized a pre-tax gain on the sale of IED of $53.5 million. This gain was offset by the following charges which relate solely to the discontinued operations and assets of IED:

Severance costs relate to the severance and other employee benefit costs to be paid to approximately 525 employees previously employed by IED and not re-hired by the purchaser. Facilities costs represent the present value of qualifying exit costs, offset by an estimate for future sublease income provided by external brokers, for approximately 30 vacated locations no longer required as a result of the sale. These leases have expiration dates extending to 2010. During the six-month period ended September 30, 2003, the Company closed five IED facilities.

The asset impairment charge represents the write-down to fair value of assets that were abandoned or classified as “held-for-sale,” as a result of the disposition and discontinuance of IED and Aprisa, respectively. This write-down was for assets that were not included in the IED sale transaction but related to IED.

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The following table summarizes the activity during the six months ended September 30, 2003, related to IED disposition accruals provided in Fiscal 2002 and Fiscal 2003:

6.     RESTRUCTURING CHARGES

During the fourth quarter of Fiscal 2003, concurrent with the sale of IED, the Company announced that it would restructure its remaining enterprise computer solutions business and facilities to reduce overhead and eliminate assets that were inconsistent with the Company’s strategic plan and were no longer required. In connection with this reorganization, the Company recorded restructuring charges totaling $20.7 million related to impairment of facilities and other assets no longer required, and severance, incentives and other employee benefit costs, including amounts accrued for payments that were made pursuant to certain tax “gross up” provisions of executive restricted stock award agreements, incurred in connection with downsizing the corporate structure.

Severance, incentives and other employee benefit costs are to be paid to approximately 110 personnel. Facilities costs represent the present value of qualifying exit costs, offset by an estimate for future sublease income provided by an external broker, for a vacant warehouse that represents excess capacity as a result of the sale. The lease on this facility extends through 2017. The asset impairment charge represented the write-down to fair value of assets that were abandoned as part of the Corporate restructuring since they were inconsistent with the Company’s ongoing strategic plan.

The following table summarizes the activity during the six months ended September 30, 2003 related to this restructuring:

During the three- and six-month periods ended September 30, 2003, the Company recorded additional restructuring charges and made payments of $0.7 million and $1.2 million, respectively. These restructuring charges relate primarily to ancillary facility costs incurred as a result of current year activities associated with the Fiscal 2003 reorganization.

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7.     GOODWILL

On April 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” and discontinued the amortization of goodwill in accordance with SFAS No. 142.

As required by SFAS No. 142, the Company identified and evaluated its reporting units for impairment as of April 1, 2002, the first day of the Company’s fiscal year 2003, using a two-step process and engaged an independent valuation consultant to assist in this process. The first step involved identifying the reporting units with carrying values, including goodwill, in excess of fair value. The fair value of the reporting unit was estimated using a combination of a discounted cash flow valuation model, incorporating a discount rate commensurate with the risks involved for each reporting unit, and a market approach of guideline companies in similar transactions. As a result of completing the first step of the process, it was determined that there was an impairment of goodwill at the date of adoption. This was due primarily to market conditions and relatively low levels of sales. In the second step of the process, the implied fair value of the affected reporting unit’s goodwill was compared with its carrying value in order to determine the amount of impairment, that is, the amount by which the carrying amount exceeded the fair value. As a result, the Company recorded an impairment charge of $36.7 million, before tax, which was recorded as a cumulative effect of change in accounting principle in the first quarter of Fiscal 2003 and is reflected in the accompanying Unaudited Condensed Consolidated Statement of Operations for the six months ended September 30, 2002.

On September 30, 2003, the Company acquired Kyrus Corporation. As a result of this purchase, the Company recognized approximately $29 million in goodwill on its Unaudited Condensed Consolidated Balance Sheet at September 30, 2003. The value of the goodwill is based on the preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date.

8.     CONTINGENCIES

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

9.     MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES

In March and April 1998, Pioneer-Standard Financial Trust (the “Pioneer-Standard Trust”) issued 2,875,000 shares relating to $143.7 million of 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (the “Trust preferred securities”). The Pioneer-Standard Trust, a statutory business trust, is a wholly-owned consolidated subsidiary of the Company, with its sole asset being $148.2 million aggregate principal amount of 6.75% Junior Convertible Subordinated Debentures due March 31, 2028 of Pioneer-Standard Electronics, Inc. (the “Trust Debentures”). The Company has executed a guarantee with regard to the Trust preferred securities. The guarantee, when taken together with the Company’s obligations under the Trust Debentures, the indenture pursuant to which the Trust Debentures were issued

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and the applicable trust document, provide a full and unconditional guarantee of the Pioneer-Standard Trust’s obligations under the Trust preferred securities.

The Trust preferred securities are non-voting (except in limited circumstances), pay quarterly distributions at an annual rate of 6.75%, carry a liquidation value of $50 per share and are convertible into the Company’s Common Shares at any time prior to the close of business on March 31, 2028, at the option of the holder. After March 31, 2003, the Trust preferred securities are redeemable, at the option of the Company, for a redemption price of 103.375% of par reduced annually by 0.675% to a minimum of $50 per Trust preferred security. During the first quarter of Fiscal 2004, the Company repurchased 365,000 Trust preferred securities, approximating $18.3 million face value, for a cash purchase price of approximately $17.0 million. The difference between the face value and cash paid, offset by the write-off of related deferred financing fees, resulted in a net gain of $734,000. As of September 30, 2003, a total of 369,761 Trust preferred securities had been redeemed.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how a Company classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that a company classify certain financial instruments, such as instruments in the form of shares that are mandatorily redeemable, as a liability (or an asset in some circumstances). Many of such instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. During the first quarter of Fiscal 2004, the Company evaluated SFAS No. 150 and determined that this Statement does not apply to the Company’s Trust preferred securities since they are convertible into the Company’s Common Shares at any time prior to the close of business on March 31, 2028, at the option of the holder.

10.     SENIOR NOTES

In July 2003, the Company repurchased $28.5 million of 9.5% Senior Notes which are due in August 2006. The premium paid and the deferred costs written-off upon the repurchase of this debt aggregated approximately $3.3 million.

11.     COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) for the three and six months ended September 30, 2003 and 2002 are as follows:

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12.     EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Securities or other contracts to issue common shares are included in the per share calculations where the effect of their inclusion would be dilutive.

The computation of basic and diluted income (loss) per share for the three- and six-month periods ended September 30, 2003 and 2002 are as follows:

Not included in the computation of diluted earnings per share for the three months ended September 30, 2003 and 2002 was 7,963,492, and 9,122,222 common shares, respectively, issuable upon conversion of Trust Preferred Securities, and 3,040,495 and 3,483,432 common shares, respectively, issuable upon exercise of stock options that could potentially dilute basic earnings per share in the future. For the six months ended September 30, 2003 and 2002 the computation of diluted earnings per share excluded 8,140,784 and 9,122,222 common shares, respectively, issuable upon conversion of Trust Preferred Securities, and 3,304,895 and 4,227,184 common shares, respectively, issuable upon exercise of stock options that could potentially dilute basic earnings per share in the future. These were not included in the computation of diluted earnings per share because to do so would have been antidilutive.

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13.     STOCK-BASED COMPENSATION

As permitted by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” the Company continues to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby the options are granted at market price, and therefore no compensation costs are recognized, and the options are not recognized in the financial statements until they are exercised.

If compensation expense for the Company’s stock option plans had been determined based upon fair value at the grant dates for awards under the option plans in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s pro forma net loss and basic and diluted loss per share would have been as follows:

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AGILYSYS, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

General

On September 12, 2003, the shareholders of Pioneer-Standard Electronics, Inc. approved an amendment to the Company’s Amended Articles of Incorporation to change the Company’s name to Agilysys, Inc. The name change became effective on September 15, 2003. Prior to September 16, 2003, Agilysys, Inc. traded on the National Association of Securities Dealers and Automated Quotations (NASDAQ) Stock Market as Pioneer-Standard Electronics, Inc. under the symbol “PIOS.” On September 16, 2003, Agilysys, Inc. began trading on the NASDAQ Stock Market under the symbol “AGYS.” Agilysys, Inc. and its subsidiaries are referred to herein as the “Company.”

Following is certain financial data for the three- and six-month periods ended September 30, 2003 as compared with the three- and six-month periods ended September 30, 2002. The Company’s Consolidated Financial Statements and related notes have been presented to reflect the disposition of the Company’s Industrial Electronics Division (“IED”) and discontinuance of Aprisa, Inc.’s (“Aprisa”) operations as discontinued operations for all periods. As such, management’s discussion and analysis excludes discontinued operations and focuses on the results of the Company’s continuing operations, the enterprise computer solutions business.

Management’s discussion and analysis should be read in conjunction with the same discussion in the Company’s Fiscal 2003 Annual Report on Form 10-K. References also should be made to the financial statements in this Form 10-Q.

Results of Operations

Three Months Ended September 30, 2003 Compared with the Three Months Ended
September 30, 2002

Net Sales. Consolidated net sales of $292.7 million for the three-month period ended September 30, 2003 increased $32.0 million or 12.3% over the prior fiscal year second quarter. The largest contributor to this growth was a stronger demand for servers as the Company’s suppliers continue to aggressively pursue market share gains through incentive pricing. These improvements more than offset lower sales volume in storage products and software products in the current quarter versus the comparable quarter last year.

Gross Margin. Consolidated gross margin was 11.9% at September 30, 2003 as compared with 13.4% at September 30, 2002. The reduced gross margin percentage resulted primarily from competitive pricing

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pressures in the marketplace, and a higher level of sales to resellers, through the Company’s distribution business, which carry a lower percentage gross profit than the Company’s sales made directly to end-use customers.

Selling, General and Administrative Expenses. Selling, general and administrative expenses of $31.7 million were 5.7% lower than the second quarter last year of $33.6 million. The decrease was a result of lower compensation costs, occupancy costs and software amortization as a result of the Company’s reorganization of continuing operations.

Restructuring Charges. The Company recorded a $0.7 million charge for restructuring activities during the first half of Fiscal 2004. These restructuring charges relate primarily to ancillary facility costs incurred as a result of current year activities associated with the Fiscal 2003 reorganization.

Six Months Ended September 30, 2003 Compared with the Six Months Ended September 30, 2002