Form 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

For the quarter ended September 30, 2004

 

Commission file number 0-9993

 

MICROS SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

 

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 report(s)), and (2) has been subject to such filing requirements for the past 90 days.

 

YES ý           NO o

 

Indicate by check mark whether the Registrant is an Accelerated Filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 

YES ý           NO o

 

At the close of business on October 31, 2004, there were issued and outstanding 18,509,797 shares of Registrant’s Common Stock at $.025 par value.

 

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES

Form 10-Q

For the Quarter Ended September 30, 2004

 

Part I - Financial Information

 

Item 1.             Financial Statements

 

General

 

The information contained in this report is furnished for the Registrant, MICROS Systems, Inc., and its subsidiaries (referred to collectively herein as “MICROS” or the “Company”).  In the opinion of management, the information in this report contains all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the results for the interim periods presented.  The financial information presented herein should be read in conjunction with the financial statements included in the Registrant’s Form 10-K for the fiscal year ended June 30, 2004, as filed with the Securities and Exchange Commission.

 

2

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 (Unaudited, in thousands, except per share data)

 

		September 30,			June 30,
		2004			2004
ASSETS
Current assets:
Cash and cash equivalents		$	98,952		$	91,451
Accounts receivable, net of allowance for doubtful accounts of $12,733 at September 30, 2004 and $11,903 at June 30, 2004		102,162			101,367
Inventories, net of allowance for obsolescence of $6,704 at September 30, 2004 and $6,380 at June 30, 2004		38,273			36,095
Deferred income taxes		9,905			9,396
Prepaid expenses and other current assets		16,685			16,242
Total current assets		265,977			254,551
Property, plant and equipment, net of accumulated depreciation and amortization of $60,398 at September 30, 2004 and $58,245 at June 30, 2004		20,150			19,550
Deferred income taxes, non-current		24,393			24,288
Goodwill, net of accumulated amortization of $29,070 at September 30, 2004 and $28,687 at June 30, 2004		70,813			70,715
Intangible assets, net of accumulated amortization of $2,469 at September 30, 2004 and $2,291 at June 30, 2004		5,321			5,476
Purchased and internally developed software costs, net of accumulated amortization of $32,569 at September 30, 2004 and $30,484 at June 30, 2004		41,226			41,112
Other investments		413			415
Other assets		2,664			2,785
Total assets		$	430,957		$	418,892
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Bank lines of credit		$	2,493		$	2,481
Current portion of capital lease obligations		181			139
Accounts payable		24,473			29,681
Accrued expenses and other current liabilities		53,081			58,693
Income taxes payable		2,351			1,541
Deferred income taxes		333			512
Deferred service revenue		53,596			43,019
Total current liabilities		136,508			136,066
Capital lease obligations, net of current portion		167			166
Deferred income taxes, non-current		15,547			15,544
Other non-current liabilities		1,431			1,401
Commitments and contingencies
Minority interests		2,881			2,742
Shareholders’ equity:
Common stock, $0.025 par; authorized 50,000 shares; issued and outstanding 18,411 at September 30, 2004 and 18,335 at June 30, 2004		459			457
Capital in excess of par		70,545			71,525
Retained earnings		195,321			185,660
Accumulated other comprehensive income		8,098			5,331
Total shareholders’ equity		274,423			262,973
Total liabilities and shareholders’ equity		$	430,957		$	418,892

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 (Unaudited, in thousands, except per share data)

 

		Three Months Ended September 30,
		2004			2003
Revenue:
Hardware		$	39,301		$	33,946
Software		22,878			17,838
Service		67,783			54,633
Total revenue		129,962			106,417
Cost of sales:
Hardware		26,211			23,742
Software		5,169			5,004
Service		33,448			25,536
Total cost of sales		64,828			54,282
Gross margin		65,134			52,135
Selling, general and administrative expenses		41,068			35,562
Research and development expenses		6,711			6,174
Depreciation and amortization		2,401			2,317
Total operating expenses		50,180			44,053
Income from operations		14,954			8,082
Non-operating income (expense):
Interest income		352			239
Interest expense		(49		)	(189		)
Other income, net		126			105
Total non-operating income		429			155
Income before taxes, minority interests and equity in net earnings of affiliates		15,383			8,237
Income tax provision		5,538			3,336
Income before minority interests and equity in net earnings of affiliates		9,845			4,901
Minority interests and equity in net earnings of affiliates		(184		)	(154		)
Net income		$	9,661		$	4,747
Net income per common share:
Basic		$	0.53		$	0.26
Diluted		$	0.50		$	0.25
Weighted-average number shares outstanding:
Basic		18,334			18,036
Diluted		19,309			18,940

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Months Ended September 30, 2004

 (Unaudited, in thousands)

 

													Accumulated
							Capital						Other
		Common Stock					in Excess			Retained			Comprehensive
		Shares		Amount			of Par			Earnings			Income			Total
Balance, June 30, 2004		18,335		$	457		$	71,525		$	185,660		$	5,331		$	262,973
Comprehensive income:
Net income		—		—			—			9,661			—			9,661
Foreign currency translation adjustments		—		—			—			—			2,767			2,767
Total comprehensive income		—		—			—			9,661			2,767			12,428
Stock issued upon exercise of options		244		6			4,404			—			—			4,410
Repurchases of stock		(168	)	(4		)	(7,881		)	—			—			(7,885		)
Income tax benefit from stock options exercised		—		—			2,497			—			—			2,497
Balance, September 30, 2004		18,411		$	459		$	70,545		$	195,321		$	8,098		$	274,423

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Condensed and unaudited, in thousands)

 

		Three Months Ended September 30,
		2004			2003
Net cash flows provided by operating activities:		$	15,122		$	11,027
Cash flows from investing activities:
Purchases of property, plant and equipment		(2,603		)	(1,652		)
Proceeds from dispositions of property, plant and equipment		3			1
Purchases of other investments		—			(500		)
Internally developed software		(1,352		)	(1,408		)
Net cash used in investing activities		(3,952		)	(3,559		)
Cash flows from financing activities:
Principal payments on line of credit		—			(2,814		)
Proceeds from lines of credit		19			3,000
Principal payments on shareholder loan		—			(363		)
Principal payments on capital lease obligations		(33		)	(23		)
Dividends to minority owners		(92		)	(46		)
Repurchases of stock		(7,885		)	(3,860		)
Proceeds from issuance of stock		4,410			3,244
Net cash used in financing activities		(3,581		)	(862		)
Effect of exchange rate changes on cash		(88		)	(28		)
Net increase in cash and cash equivalents		7,501			6,578
Cash and cash equivalents at beginning of period		91,451			45,682
Cash and cash equivalents at end of period		$	98,952		$	52,260

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6

 

1.                                       Basis of Presentation

 

The accompanying consolidated financial statements of MICROS Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.  Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations.  The information reflects all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position of the Company, and its results of operations for the interim periods set forth herein.  The results for the three months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year or any future period.  Certain amounts previously reported have been reclassified to conform to current year presentation.

 

2.                                       Stock-based compensation

 

The Company has incentive and non-qualified stock options outstanding that were granted to directors, officers, and other employees pursuant to authorization by the Board of Directors.  The exercise price of all options equals the market value on the date of the grant.  Substantially all of the options granted are exercisable pursuant to a three-year vesting schedule whereby one-third of the options vest upon the first anniversary of the grant, the second third of the options vest upon the second anniversary of the grant, and the final third of the options vest upon the third anniversary of the grant.  Currently, all outstanding options expire ten years from the date of grant.

 

The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” in accounting for the stock option awards.  The Company has not recognized any related compensation expense in the consolidated statements of operations because the fair value of the stock underlying the options granted did not exceed the exercise price of the options on the date of grant.  If compensation expense had been determined based on the weighted-average estimate of the fair value of each option granted consistent with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, the Company’s net income would be reduced to pro forma amounts as follows:

 

		Three Months Ended September 30,
		2004			2003
Net income - as reported		$	9,661		$	4,747
Add: stock-based compensation expense included in reported net income, net of tax		—			—
Deduct: total stock-based employee compensation expense determined under the fair value method, net of tax		(1,378		)	(1,268		)
Net income - pro forma		$	8,283		$	3,479
Basic net income per share
As reported		$	0.53		$	0.26
Pro forma		$	0.45		$	0.19
Diluted net income per share
As reported		$	0.50		$	0.25
Pro forma		$	0.43		$	0.18

 

7

 

The weighted average fair value of each option granted for the first quarter of fiscal 2005 and 2004 was $22.33 and $17.26, respectively.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

		Three Months Ended September 30,
		2004		2003
Risk-free interest rate		3.8	%	3.8	%
Expected life		6.0 years		6.0 years
Expected volatility		48	%	50	%
Expected dividend yield		0	%	0	%

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility.  The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years.  Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, existing models, including the Black-Scholes option-pricing model, do not necessarily provide a reliable single measure of the fair value of employee stock options.

 

3.                                       Inventories

 

The components of inventories are as follows:

 

		September 30, 2004			June 30, 2004
Raw materials		$	6,213		$	5,592
Work-in-process		60			91
Finished goods		32,000			30,412
		$	38,273		$	36,095

 

The Company maintains a reserve for obsolescence for inventory in the amount of $6,704 at September 30, 2004 compared to $6,380 at June 30, 2004.

 

4.                                       Recent accounting standards

 

In June 2004, the Financial Accounting Standards Board (“FASB”) issued an exposure draft entitled Fair Value Measurements that provides guidance on how to measure fair value of assets and liabilities.  The objective is to increase the consistency, reliability, and comparability of fair value measurements in applying general accepted accounting principles.  Valuation techniques consistent with the market approach, income approach and cost approach are to be considered for purposes of estimating fair value.  The proposed effective date is for financial statements issued for fiscal years beginning after June 15, 2005 and interim periods within those years, with earlier application encouraged.  The Company is currently evaluating the impact of the proposed standard.

 

In March 2004, the FASB issued an exposure draft of its proposed standard on accounting for stock compensation amending FASB Statement No. 123, “Accounting for Stock-Based Compensation.”  The exposure draft would require all grants of employee stock options to be expensed based on their fair values.  The FASB expects to issue a final standard by December 31, 2004 that would be effective for public companies for interim and annual periods beginning after June 15, 2005.  There is continued uncertainty and disagreement among the governing bodies as to how this matter will be addressed.  The Company is currently evaluating the impact of the proposed standard.

 

5.                                       Net income per share

 

Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding.  Diluted net income per share includes the dilutive effect of stock options.

 

8

 

A reconciliation of the weighted average number of common shares outstanding assuming dilution is as follows:

 

		Three Months Ended September 30,
		2004			2003
Net income		$	9,661		$	4,747
Average common shares outstanding		18,334			18,036
Dilutive effect of outstanding stock options		975			904
Average common shares outstanding assuming dilution		19,309			18,940
Basic net income per share		$	0.53		$	0.26
Diluted net income per share		$	0.50		$	0.25
Anti-dilutive weighted shares excluded from reconciliation		546			671

 

6.                                       Segment reporting data

 

The Company develops, manufactures, sells and services point-of-sale computer systems, property management systems, central reservation and central information systems products for the hospitality industry and information technology solutions for the specialty and general merchandise retail industry.  MICROS is organized and operates in two segments: U.S. and International.  The International segment is primarily in Europe, the Pacific Rim and Latin America.  For purposes of applying SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” management views the U.S. and International segments separately in operating the business, although the products and services are similar for each segment.

 

A summary of the Company’s operating segments is as follows:

 

		Three Months Ended September 30,
		2004			2003
Revenues (1):
United States		$	70,926		$	63,427
International		76,238			57,087
Intersegment eliminations		(17,202		)	(14,097		)
Total revenues		$	129,962		$	106,417
Income before taxes, minority interests and equity in net earnings of affiliates (1):
United States		$	6,042		$	3,523
International		22,780			15,829
Intersegment eliminations		(13,439		)	(11,115		)
Total income before taxes, minority interests and equity in net earnings of affiliates		$	15,383		$	8,237

 

		September 30,			June 30,
		2004			2004
Identifiable assets (2):
United States		$	225,270		$	232,577
International		205,687			186,315
Total identifiable assets		$	430,957		$	418,892

 

(1)          Amounts based on the location of the customer.

(2)          Amounts based on the location of the selling entity.

 

9

 

7.                                       Shareholders’ Equity

 

In fiscal year 2002, the Board of Directors authorized the purchase of up to one million shares of the Company’s common stock.  A summary of the cumulative number of whole shares purchased through September 30, 2004, is as follows:

 

 

8.                                       Subsequent Event

 

On October 20, 2004, MICROS filed with the Securities and Exchange Commission its Proxy Statement (the “Proxy”) in connection with its Annual Meeting of Stockholders scheduled to be held on November 19, 2004.  In its Proxy, the Company seeks shareholder approval with respect to the following three items: (1) the election of six directors to serve for a one-year term; (2) the approval of the appointment of PricewaterhouseCoopers LLP as independent public accountants for the 2005 fiscal year; and (3) the approval of an amendment to the Company’s 1991 Stock Option Plan, which serves to authorize the issuance of an additional 600,000 shares of Common Stock under the Option Plan.

 

10

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview:

 

The following should be read in conjunction with MICROS’s 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission, and with the unaudited condensed consolidated financial statements included in this Form 10-Q.

 

MICROS is a leading global provider of software and hardware systems, and associated goods and services, primarily to the hospitality industry and the specialty retail industry.  MICROS’s products include hotel information systems (e.g., property management systems, sales and catering systems, central reservation systems, and customer information systems), restaurant information systems (e.g., hospitality-oriented point-of-sale systems, specialized computer hardware, back office applications, and some centrally hosted applications), and specialty retail systems (e.g., retail-oriented point-of-sale systems, and loss prevention applications).  MICROS also provides services related to its products, including, e.g., installation, training, maintenance and support, custom development, and software hosting.   Over 150,000 MICROS restaurant information systems are currently installed in table and quick service restaurants, hotels, motels, casinos, leisure and entertainment, and retail operations in more than 130 countries, and on all seven continents.   In addition, MICROS has provided hotel information systems to more than 15,000 hotels worldwide, and retail systems to more than 50,000 specialty retail stores worldwide.  MICROS distributes its products and services directly and through its branch and subsidiary offices, as well as through a network of independent dealers and distributors.

 

MICROS operates in highly competitive markets.  MICROS’s products and services compete with those of numerous other third-party providers of hardware, software, and services geared toward the hospitality and retail industries, as well as systems developed and maintained by the customers themselves.  MICROS believes that its competitive strengths include its established global distribution and service network, its commitment to research and development, and the breadth of its product lines and services.

Over the most recent quarter, as detailed below, MICROS experienced growth in revenue and in net income.  The increases in revenue reflected some large major account installations of hotel information systems and restaurant information systems, both in the US and internationally, improved sales of the MICROS Workstation 4 proprietary hardware platform, and an increase in support and installation revenues commensurate with increases in the overall customer base.  In addition to the Company’s overall revenue growth, the increase in net income reflected, in part, improved gross margins, reduction in selling, general, and administrative expenses as a percentage of sales, and a decrease in the Company’s consolidated income tax rate, offset in part by additional administrative expenses associated with MICROS’s implementation of procedures mandated by section 404 of the Sarbanes-Oxley Act.

 

Results of Operations – Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

 

MICROS recorded diluted net income of $0.50 per common share in the first quarter of fiscal year 2005, compared with diluted net income of $0.25 per common share in the first quarter of fiscal year 2004.  As described more fully below, the increase was primarily due to increased sales volume partly due to improved market conditions and various roll out programs currently in progress.  It was also due to the decrease in the consolidated income tax rate.

 

An analysis of the change in revenues is as follows ($ in thousands):

 

		U.S. Three Months Ended September 30,						International Three Months Ended September 30,
(in thousands)		2004			2003			2004			2003
Hardware		$	23,629		$	21,247		$	15,672		$	12,699
Software		10,586			8,848			12,292			8,990
Service		35,207			28,441			32,576			26,192
Total Revenue		$	69,422		$	58,536		$	60,540		$	47,881

 

11

 

An analysis of the sales mix as a percentage of total revenue is as follows:

 

		Three Months Ended September 30,
		2004		2003
Hardware		30.2	%	31.9	%
Software		17.6	%	16.8	%
Service		52.2	%	51.3	%
Total		100.0	%	100.0	%

 

The Company’s total revenues increased $23.5 million to $130.0 million in the first quarter of fiscal year 2005 compared to $106.4 million in the first quarter of fiscal year 2004.  Of this increase, the U.S. reporting unit accounted for $10.9 million while the international reporting unit accounted for $12.6 million.  The increase in the U.S. was mainly due to sales from large major account installations in both the point-of-sale and property management system channels.  The increase in the international reporting unit was primarily due to large installations of  3700 software.

 

Hardware revenues increased primarily due to the continuing increase in sales volume of the Workstation 4 and third party hardware.  The increase in Workstation 4 was offset, to a degree, by a decrease in the sale of PC Workstations in connection with the slow down of a major customer rollout program. Software revenues increased primarily from the sale of point-of -sale and property management software products, including 3700, 9700 and Opera software.  Service revenues increased in the three months ended September 30, 2004 primarily due to increased support revenues and increased installation revenues from the continued expansion of our customer base.

 

An analysis of the change in cost of sales is as follows ($ in thousands):

 

		Three Months Ended September 30,
		2004			2003
Hardware		$	26,211		$	23,742
Software		5,169			5,004
Service		33,448			25,536
Total cost of sales		$	64,828		$	54,282

 

For the three months ended September 30, 2004, total cost of sales, as a percentage of revenue, decreased to 49.9% from 51.0% in the prior fiscal year.  Cost of sales for hardware, as a percentage of related revenue, decreased to 66.7% in three months ended September 30, 2004 compared to 69.9% for the same quarter a year earlier mainly due to the increase in the sale of the Workstation 4, which generates higher margins.  Software costs, as a percentage of related revenue, decreased to 22.6% from 28.1% in the prior year primarily due to large sales of the 9700 software product.  Service costs as a percentage of related revenue increased to 49.3% compared to 46.7% for the same quarter a year earlier, mainly due to increased labor and travel costs associated with large hotel roll outs.

 

Selling, general and administrative expenses increased by $5.5 million or 15.5% in the three months ended September 30, 2004, compared to the same period last year.  The U.S and foreign reporting units contributed $4.7 million of this increase due to increases in salaries and related expenses.  The remaining $0.8 million increase was mainly due to an increase in expenses related to Sarbanes-Oxley Section 404 preparations.  As a percentage of revenue, selling, general and administrative expenses decreased slightly to 31.6% in the three months ended September 30, 2004 from 33.4% in the same period last year.

 

Research and development (“R&D”) expenses consist primarily of labor costs less capitalized software development costs.  In the three months ended September 30, 2004, R&D expenses increased $0.5 million, or 8.7%, compared to the same period last year.  The increase was primarily due to Datavantage’s development of Xstore, which is a Java-based POS product.  As a percentage of revenue, R&D expenses decreased to 5.2% in three months ended September 30, 2004 compared to 5.8% in the same period last year.  Capitalized software development

 

12

 

costs decreased slightly in the first quarter of fiscal year 2005 compared to the same period last year.  A comparative summary of R&D activities is as follows ($ in thousands):

 

		Three Months Ended September 30,
		2004			2003			$Change
Total R&D		$	8,063		$	7,582		$	481
R&D capitalization		(1,352		)	(1,408		)	56
Total R&D expenses		$	6,711		$	6,174		$	537

 

Depreciation and amortization expense increased slightly by $0.1 million or 3.6% in the three months ended September 30, 2004 compared to the same period last year.

 

Income from operations for the first quarter of fiscal year 2005 was $15.0 million, or 11.5% of revenue, compared to $8.1 million, or 7.6% of revenue, in the first quarter of fiscal year 2004 mainly due to the overall increase in sales volume in all business aspects of the Company.

 

Non-operating income increased $0.2 million to $0.4 million in the first quarter of fiscal year 2005 primarily due to the increase in interest income.

 

Income before taxes increased $7.2 million to $15.4 million in the first quarter of fiscal year 2005 compared to $8.2 million in the previous year.  The U.S. reporting unit accounted for the $5.3 million increase, and the foreign reporting unit represented $1.9 million of the total increase.  The U.S. reporting unit increase was mainly due to increased sales volume.

 

The effective tax rate for the first quarter of fiscal year 2005 and 2004 was 36.0% and 40.5%, respectively.  The decrease was a direct result of consolidating functions and activities in jurisdictions where the mix of earnings is subjected to a lower than average tax rate.  The Company estimates that the 2005 fiscal year end tax rate to be between 36% and 36.5%.

 

Critical Accounting Policies

 

The Company’s discussion and analysis of its financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  On an ongoing basis, the Company evaluates its estimates, including those that impact revenue recognition and those related to capitalized software, intangible assets, allowance for doubtful accounts, allowance for obsolescence, income taxes, contingencies and litigation.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the consolidated financial statements.

 

Revenue recognition

 

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided to the customer, the fee is fixed or determinable, and collectibility is reasonably assured.  In instances where the customer specifies final acceptance, revenue is deferred until all acceptance criteria are met.  The Company reduces revenue for estimated customer returns and allowances.

 

Hardware

Revenue from hardware sales is recognized at the time of shipment.

 

13

 

Software

If a third party can install the software, revenue is recognized when shipped, with an appropriate deferral for any undelivered software contract elements.  However, if the Company is the sole party that has the proprietary knowledge to install the software, revenue is recognized upon installation and when ready to go live, with an appropriate deferral for any undelivered software contract elements.  This deferral is earned when significant obligations no longer exist.

 

Service

Service contract and hosting revenue is initially recorded as deferred service revenue and is recognized on a pro rata basis over the contract term.  Revenue for the installation of the product, programming and the training of customers’ staff is recognized as the work is performed.  Revenue from customer-specific development work is recognized under the completed contract method.

 

Multiple-element arrangements

The Company enters into transactions that include multiple-element arrangements, which may include any combination of hardware, software and/or services.  When some elements are delivered before others in an arrangement and all of the following criteria are met, revenue for the delivered elements is recognized upon delivery of such item.  Otherwise, revenue is deferred until the delivery of the last element.

 

•                  Vendor-specific objective evidence (VSOE) of fair value of undelivered elements is established;

•                  The functionality of delivered elements is not dependent on the undelivered elements;

•                  Delivery of the element(s) represents the culmination of the earning process.

 

Allowance for doubtful accounts

 

The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments.  These allowances are based on customer payment practices and history, inquiries, credit reports from third parties and other financial information.  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.

 

Capitalized software development costs

 

Software development costs, for software products to be licensed to others, incurred before establishing technological feasibility are charged to operations and included in research and development costs.  Software development costs incurred after establishing technological feasibility and purchased software costs are capitalized on a product-by-product basis until the product is available for general release to customers, at which time amortization begins.  Annual amortization, charged to cost of sales, is the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight-line method over the remaining estimated economic life of the product.

 

Long-lived assets

 

Long-lived assets

The Company periodically evaluates the recoverability of long-lived assets, including intangibles, whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the assets are evaluated in relation to the operating performance and future cash flows of the underlying business. Impairment is measured by the amount by which fair values are less than book value. Fair values are based on quoted market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. If the Company determines that any of the impairment indicators exist, and these assets are determined to be impaired, an adjustment to write down the long-lived assets would be charged to income in the period such determination is made.  The Company did not recognize any impairment losses for investments during the first quarter of fiscal year 2005.

 

14

 

Intangible assets other than goodwill

Identified intangible assets were valued based on management’s assumptions and other considerations for estimating fair values. These intangible assets are being amortized over their respective useful lives according to the estimated present value of the net earning potential of each asset category. The amortization expense related to intangible assets was $0.2 in the first quarter of fiscal 2005 and in fiscal year 2004.  The Company did not recognize any impairment loss during the three months ended September 30, 2004.

 

Goodwill

The Company assesses whether goodwill and trademarks are impaired on an annual basis during the first quarter of its fiscal year. Upon determining the existence of goodwill and/or trademark impairment, the Company measures that impairment based on the amount by which the book value of goodwill and/or trademarks exceeds its fair value.  The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the purchase price were being initially allocated.  Additional impairment assessments may be performed on an interim basis if the Company encounters events of changes in circumstances that would indicate that, more likely than not, the book value of goodwill and/or trademarks has been impaired.

 

The process of evaluating the potential impairment of goodwill and/or trademark is highly subjective and requires significant judgment at many points during the analysis.  In estimating the fair value of the reporting units with recognized goodwill for the purposes of our annual or periodic analyses, the Company makes estimates and judgments about the future cash flows of these businesses.  The cash flow forecasts are based on assumptions that are consistent with the plans and estimates used to manage the underlying reporting units. MICROS also considers its market capitalization (adjusted for unallocated monetary assets such as cash, marketable debt securities and debt) on the date the analysis is performed.

 

The Company completed the first step of its annual impairment analysis in the first quarter of fiscal year 2005.  As the estimated fair value of the U.S. and international reporting units exceed the carrying values, the Company concluded there was no impairment of goodwill or trademarks.  As of September 30, 2004, the net book value of goodwill and trademarks for the U.S. and international reporting units was $59.9 million and $10.9 million, respectively.

 

Income taxes

 

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities.  Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on the deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.  If the Company determines that it will not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination is made.

 

Foreign currency translation

 

The financial statements of the Company’s non-U.S. operations are translated into U.S. dollars for financial reporting purposes.  The assets and liabilities of non-U.S. operations whose functional currencies are not in U.S. dollars are translated at the quarter-end exchange rates, while revenues and expenses are translated at month-end exchange rates during the fiscal year.  The cumulative translation effects are reflected in shareholders’ equity.  Gains and losses on monetary transactions denominated in other than the functional currency of an operation are reflected in other income (expense).

 

Liquidity and Capital Resources

 

On July 17, 2003, the Company (and its subsidiaries) entered into two new credit agreements (the “Credit Agreements”) which in the aggregate offer a $65.0 million multi-currency committed line of credit, expiring on July

 

15

 

31, 2005.  The lenders (the “Lenders”) under the Credit Agreements are Bank of America, N.A., Wachovia Bank, N. A., and US Bank.  Simultaneously upon entering into the Credit Agreements, the Company entered into: (i) a security agreement, pursuant to which the Lenders were granted a security interest in all inventory and receivables located in the United States; and (ii) a pledge agreement and irrevocable stock powers, pursuant to which the Company pledges the stock of certain of its subsidiaries to the Lenders as collateral.

 

The interest rate under the Credit Agreements is calculated as follows: (i) if the advance is made in U.S. dollars, the greater of the federal funds rate, plus 50 basis points, or the Bank of America prime rate, plus an additional 25 to 150 basis points, depending upon the Company’s consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the immediately preceding four calendar quarters; and (ii) if the advance is made in a foreign currency, the LIBOR rate for the applicable denominated currency, plus an additional 150 to 250 basis points, depending upon the Company’s consolidated EBITDA for the immediately preceding four calendar quarters. The Credit Agreements also require that the Company pay immaterial commitment fees on the unused portion of the line of credit to the Lenders.

 

The Credit Agreements contain certain financial covenants and restrictions on the Company’s ability to assume additional debt and pay cash dividends.  The Company has not been in default under the Credit Agreement or requested a waiver from the Lenders with respect to any provision thereof.

 

The Company also has a credit relationship with a European bank in the amount of EUR 1.0 million (approximately $1.2 million at the September 30, 2004 exchange rate).  Under the terms of this facility, the Company may borrow in the form of either a line of credit or term debt.  As the Company has significant international operations, its Euro-denominated borrowings do not represent a significant foreign exchange risk.  On an overall basis, the Company monitors its cash and debt positions in each currency in an effort to reduce its foreign exchange risk.

 

As of September 30, 2004, the total outstanding balance on the lines of credit is $2.5 million consisting of: ZAR (South African Rand) 4.0 million (approximately $0.6 million at the September 30, 2004 exchange rate), SEK (Swedish Krona) 7.5 million (approximately $1.1 million at the September 30, 2004 exchange rate), and JPY (Japanese Yen) 90.0 million (approximately $0.8 million at the September 30, 2004 exchange rate).  As of September 30, 2004, the Company has approximately $63.7 million of borrowing capacity under the credit agreements and Euro-denominated Facility.

 

Net cash provided by operating activities for the first quarter of fiscal year 2005 was $15.3 million versus net cash provided by operating activities of $11.0 million for fiscal year 2004.   The Company used $4.0 million for investing activities for the purchase of property, plant, and equipment and internally developed software.  The Company used $3.6 million for financing activities, consisting primarily of proceeds from the issuance of stock of $4.4 million offset by $7.9 million in the repurchase of the Company’s stock.  All cash is being held for the operation and expansion of the business and the repurchase of the Company’s stock.

 

The Company anticipates that its cash flow from operations along with available lines of credit, in conjunction with other lines of credit for which the Company may be eligible or lines of credit to be renewed or converted into term debt, are sufficient to provide the working capital needs of the Company for the foreseeable future.  The Company anticipates that its property, plant and equipment expenditures for fiscal year 2005 will be approximately $2.0 million higher than in fiscal year 2004.

 

Summary

 

In light of current market conditions, and world political instability, it is difficult to determine whether the Company can continue to enjoy revenue and profitability growth in the next year.  Accordingly, there can be no assurance that any particular level of growth is reasonable or can be achieved.  In addition, due to the competitive nature of the market, the Company continues to experience gross margin pressure on its products and service offerings, and the Company expects product and service margins to decline.  There can be no assurance that the Company will be able to increase sufficiently sales of its higher margin products, including software, to prevent future declines in the Company’s overall gross margin.

 

Moreover, MICROS’s financial results in any single quarter are dependent upon the timing and size of customer orders and the shipment of products for large orders.  Large software orders from customers may account for more

 

16

 

than an insignificant portion of earnings in any quarter.  The customers with whom MICROS does the largest amount of business are expected to vary from year to year as a result of the timing for the roll-out of each customer’s system.  Furthermore, if a customer delays or accelerates its delivery requirements or a product’s completion is delayed or accelerated, revenues expected in a given quarter may be deferred or accelerated into subsequent or earlier quarters.

 

The market price of MICROS Common Stock is volatile, and may be subject to significant fluctuations in response to variations in MICROS’s quarterly operating results and other factors such as announcements of technological developments or new products by MICROS, customer roll-outs, technological advances by existing and new competitors, and general market conditions in the hospitality and retail industries.  In addition, conditions in the stock market in general and shares of technology companies in particular have experienced significant price and volume fluctuations which have at times been unrelated to the operating performance of companies.

 

Moreover, some of the statements contained herein not based on historic facts are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties.  Past performance is not necessarily a strong or reliable indicator of future performance.  Actual results could differ materially from past results, estimates or projections.  Some of the additional risks and uncertainties are: political and world instability created by the threat of subsequent terrorist attacks, which gravely impacts the travel and tourism industries; product demand and market acceptance, including demand and acceptance for the new OPERA products; implementation of a cost-effective service structure capable of servicing increasingly complex software systems in increasingly more remote locations; achieving increased sales of higher margin software products; risks and uncertainties associated with the Company’s recent acquisition of Datavantage; hiring and retention of qualified employees with sufficient technical expertise; unexpected currency fluctuations; impact of competitive products and pricing on margins; product development delays; technological difficulties associated with new product releases; and managing expenses, including those over which the Company exercises little or no control, such as health care costs.  These and other risks are disclosed in the Company’s releases and SEC filings, including in the section titled “Business and Investment Risks; Information Relating to Forward-Looking Statements”, in the Company’s Annual Report on Form 10-K for the Fiscal Year ended June 30, 2004.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

MICROS’s significant international business and presence exposes the Company to a multitude of market risks, such as currency, interest rate and political risks.  With respect to currency risk, the Company transacts business in 23 different currencies through its foreign subsidiaries.  The fluctuation of currencies impacts sales and profitability.  Frequently, sales and the costs associated with such sales are not always denominated in the same currency.  Given the fact that the Company transacts business in many different currencies, adverse declines in certain currencies can be offset by favorable advances in other currencies.  Recent weakness in certain Latin American currencies, including the Argentine Peso and the Brazilian Real, has adversely impacted the financial performance of the Company.  Strength in the Euro has helped to bolster sales and profitability in Europe; any subsequent decline will adversely impact year over year growth comparisons.

 

Additionally, the Company is subject to interest rate fluctuations in foreign countries to the extent that the Company elects to borrow in the local foreign currency.  In the past, this has not been an issue of concern as the Company has the capacity to elect to borrow in other currencies with more favorable interest rates.  While the Company has not to date invested in financial instruments designed to protect against interest rate fluctuations, the Company will continue to evaluate the need to do so in the future.

 

Further, the Company is subject to political risk, due in part to instability in the Middle East and the worldwide threat of terrorism, especially in developing countries with uncertain or unstable political structures or regimes.  Contributing to this risk factor is the adverse impact that political instability has on the travel and tourism industries. The Company is also subject to the effects of, and changes in, laws and regulations, other activities of governments, agencies and similar organizations.

 

17

 

Item 4.  Controls and Procedures

 

As of the end of the period covered by this quarterly report, the Company has conducted an evaluation of the effectiveness of the design and operation of the Company’s “Disclosure Controls and Procedures” (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934).  This evaluation was carried out under the supervision of the Company’s management, including A.L. Giannopoulos, MICROS’s Chairman, Chief Executive Officer and President, and Gary C. Kaufman, MICROS’s Executive Vice President and Chief Financial Officer. Disclosure Controls and Procedures are designed with the objective of ensuring that information required to be disclosed in the reports MICROS files or submits under the Securities Exchange Act of 1934 (Exchange Act), such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls and Procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

The Company does not expect that its Disclosure Controls and Procedures will prevent all errors and all fraud. Despite its level of sophistication, detail and thoroughness, a disclosure control system can provide only reasonable, not absolute, assurance that the objectives of the control system are satisfied.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected.

 

The evaluation of MICROS’s Disclosure Controls and Procedures included a review of the controls’ objectives and design, and the controls’ implementation and operational procedures. In the course of this evaluation, MICROS sought to identify and analyze the manner in which it collects information and requires its employees from the four worldwide regional headquarters (North America, Latin America, Europe/Africa/Middle East, and Asia Pacific) to produce such information. Once the information is collected, the Company evaluated how the information is analyzed for purposes of determining if, how, when and where to disclose such information. Finally, MICROS analyzed the forms and guidelines it has developed internally that are disseminated to all operations, and are required to be resubmitted to the finance operation. These forms and documents are designed to elicit pertinent financial and non-financial information from the operations on a worldwide basis.

 

MICROS has evaluated and will continue periodically to evaluate its Disclosure Controls and Procedures.  Based on its most recent evaluations, MICROS has concluded that, as of the end of the period covered by this quarterly report, its Disclosure Controls and Procedures currently in place are effective at such reasonable assurance level that material information relating to MICROS would be made known to the Chairman, President and Chief Executive Officer, and the Executive Vice President and Chief Financial Officer on a timely basis.

 

18

 

MICROS SYSTEMS, INC. AND SUBSIDIARIES

Form 10-Q

For the Quarter Ended September 30, 2004

 

Part II - Other Information

 

Item 1.             Legal Proceedings

 

MICROS is and has been involved in legal proceedings arising in the normal course of business.  The Company is of the opinion, based upon presently available information and the advice of counsel concerning pertinent legal matters, that any resulting liability should not have a material adverse effect on the Company’s results of operations or financial position.

 

Item 2.             Changes in Securities, Use of Proceeds and Issuer Purchase of Equity Securities

 

Issuer Purchases of Equity Securities (1)

 

		Total Number of Shares Purchased		Average Purchase Price			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
July 1 – 31, 2004		55,316		$	45.14		55,316		144,953
August 1 – 31, 2004		58,377		$	46.15		58,377		86,576
September 1 – 30, 2004		53,631		$	50.23		53,631		32,945
Total		167,324		$	47.12		167,324		32,945

 

(1) In fiscal year 2002, the Board of Directors of the Company authorized the purchase of up to one million shares of the Company’s common stock.  As of September 30, 2004, the Company has purchased 967,055 shares in the open market.

 

Items 3   (Defaults Upon Senior Securities), 4 (Submission of Matters to a Vote of Security Holders) and 5 (Other Information)

 

No events occurred during the quarter covered by the report that would require a response to any of these items.

 

Item 6.             Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

31.1 Certification by CEO pursuant to Rule 13A-14 or 15D of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Certification by CFO pursuant to Rule 13A-14 or 15D of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

19

 

(b)         Reports on Form 8-K

 

Report on Form 8-K was filed on August 26, 2004, regarding the release of financial results for the fiscal year ended June 30, 2004.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		MICROS SYSTEMS, INC.
		(Registrant)
November 9, 2004		/s/	Gary C. Kaufman
		Gary C. Kaufman
		Executive Vice President,
		Finance and Administration/
		Chief Financial Officer
November 9, 2004		/s/		Cynthia A. Russo
		Cynthia A. Russo
		Vice President and Corporate Controller

 

20