**Form 10-Q**

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**Quarterly Report Pursuant to Section 13 or15(d)**

**ofthe Securities Exchange Act of 1934**

 

**For the quarter ended March 31, 2003**

** **

**Commission file number 0-9993**

 

**MICROSSYSTEMS, INC.**

(Exact name of Registrant as specified in its charter)

 

| **MARYLAND**              |   | **52-1101488**                          |
|---------------------------|--------|-----------------------------------------|
| (State of  incorporation) |   | (I.R.S. Employer  IdentificationNumber) |

 

**7031 Columbia Gateway Drive, Columbia, Maryland21046-2289**

(Address of principal executive offices) (Zip code)

 

Registrant’s telephone number, including area code: **443-285-6000**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch report(s)), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES ý    NOo

 

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

 

YES ý    NOo

 

As of April 30, 2003,there were 17,339,908 shares of Common Stock, $0.025 par value, outstanding.

 

 

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**Form 10-Q**

**For the Quarter Ended March 31, 2003**

 

**Part I - Financial Information**

 

 

**Item 1.    Financial Statements**

 

**General**

 

The information contained in this report is furnishedfor the Registrant, MICROS Systems, Inc., and its subsidiaries (referred tocollectively herein as “MICROS” or the “Company”).  In the opinion of management, the information in this reportcontains all adjustments, consisting only of normal recurring adjustments,which are necessary for a fair statement of the results for the interim periodspresented.  The financial informationpresented herein should be read in conjunction with the financial statementsincluded in the Registrant’s Form 10-K for the fiscal year ended June 30, 2002,as filed with the Securities and Exchange Commission.

 

2

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited,in thousands, except per share data)**

 
|                                                                                                                                           |   | **March 31,  2003** |    | **June 30,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------------------|--------|
| ASSETS                                                                                                                                         |   |                |    |               |   |
| Current assets:                                                                                                                                |   |                |    |               |   |
| Cash and cash  equivalents                                                                                                                     |   | $                   | 56,531  |               | $      | 66,638 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $10,846 at March 31,  2003 and $8,981 at June 30, 2002                         |   | 91,439              |    | 86,918             |   |
| Inventories, net  of allowance for obsolescence of $5,933 at March 31, 2003 and $4,957 at June  30, 2002                                       |   | 33,832              |    | 31,211             |   |
| Deferred income  taxes                                                                                                                         |   | 7,103               |    | 7,008              |   |
| Prepaid expenses  and other current assets                                                                                                     |   | 15,403              |    | 12,756             |   |
| Total current  assets                                                                                                                          |   | 204,308             |    | 204,531            |   |
|                                                                                                                                           |   |                |    |               |   |
| Property, plant  and equipment, net of accumulated depreciation and amortization of $46,303 at  March 31, 2003 and $42,669 at June 30, 2002    |   | 19,562              |    | 21,467             |   |
| Deferred income  taxes, non-current                                                                                                            |   | 20,307              |    | 20,707             |   |
| Goodwill and  intangible assets, net of accumulated amortization of $27,478 at March 31,  2003 and $28,025 at June 30, 2002                    |   | 30,237              |    | 32,055             |   |
| Purchased and  internally developed software costs, net of accumulated amortization of  $22,476 at March 31, 2003 and $18,248 at June 30, 2002 |   | 32,092              |    | 30,303             |   |
| Other assets                                                                                                                                   |   | 3,207               |    | 3,767              |   |
| Total assets                                                                                                                                   |   | $                   | 309,713 |               | $      | 312,830 |   |
|                                                                                                                                           |   |                |    |               |   |
| LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                                                     |   |                |    |               |   |
| Current  liabilities:                                                                                                                          |   |                |    |               |   |
| Bank lines of  credit                                                                                                                          |   | $                   | 4,131   |               | $      | 18,699 |   |
| Current portion  of capital lease obligations                                                                                                  |   | 131                 |    | 147                |   |
| Accounts payable                                                                                                                               |   | 20,338              |    | 25,955             |   |
| Accrued expenses  and other current liabilities                                                                                                |   | 33,391              |    | 34,554             |   |
| Income taxes  payable                                                                                                                          |   | 3,497               |    | 7,303              |   |
| Deferred income  taxes                                                                                                                         |   | 797                 |    | 547                |   |
| Deferred service  revenue                                                                                                                      |   | 41,935              |    | 33,841             |   |
| Total current  liabilities                                                                                                                     |   | 104,220             |    | 121,046            |   |
|                                                                                                                                           |   |                |    |               |   |
| Capital lease  obligations, net of current portion                                                                                             |   | 284                 |    | 279                |   |
| Deferred income  taxes, non-current                                                                                                            |   | 9,716               |    | 9,933              |   |
| Other  non-current liabilities                                                                                                                 |   | 1,441               |    | 1,232              |   |
| Commitments and  contingencies:                                                                                                                |   |                |    |               |   |
| Minority  interests                                                                                                                            |   | 2,326               |    | 1,978              |   |
|                                                                                                                                           |   |                |    |               |   |
| Shareholders’  equity:                                                                                                                    |   |                |    |               |   |
| Common stock,  $0.025 par; authorized 50,000 shares; issued and outstanding 17,315 at March  31, 2003 and 17,521 at June 30, 2002              |   | 433                 |    | 438                |   |
| Capital in  excess of par                                                                                                                      |   | 52,140              |    | 56,867             |   |
| Retained  earnings                                                                                                                             |   | 143,594             |    | 130,599            |   |
| Accumulated  other comprehensive loss                                                                                                          |   | (4,441              | )       | (9,542             | )      |
| Total  shareholders’ equity                                                                                                               |   | 191,726             |    | 178,362            |   |
|                                                                                                                                           |   |                |    |               |   |
| Total  liabilities and shareholders’ equity                                                                                               |   | $                   | 309,713 |               | $      | 312,830 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

3

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited,in thousands, except per share data)**

 
|                                                                             |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                             |   | **2003**                          |   | **2002** |   |
| Revenue:                                                                         |   |                              |   |   |   |
| Hardware and  software                                                           |   | $                                 | 49,825 |   | $ | 50,028 |   |
| Service                                                                          |   | 47,765                            |   | 42,350 |   |
| Total revenue                                                                    |   | 97,590                            |   | 92,378 |   |
|                                                                             |   |                              |   |   |   |
| Costs and  expenses:                                                             |   |                              |   |   |   |
| Cost of sales                                                                    |   |                              |   |   |   |
| Hardware and  software                                                           |   | 28,149                            |   | 27,720 |   |
| Service                                                                          |   | 22,062                            |   | 20,816 |   |
| Total cost of  sales                                                             |   | 50,211                            |   | 48,536 |   |
|                                                                             |   |                              |   |   |   |
| Selling, general  and administrative expenses                                    |   | 31,626                            |   | 30,702 |   |
| Research and  development expenses                                               |   | 4,245                             |   | 4,587 |   |
| Depreciation and  amortization                                                   |   | 1,995                             |   | 4,025 |   |
| Total costs and  expenses                                                        |   | 88,077                            |   | 87,850 |   |
|                                                                             |   |                              |   |   |   |
| Income from  operations                                                          |   | 9,513                             |   | 4,528 |   |
|                                                                             |   |                              |   |   |   |
| Non-operating  (expense) income:                                                 |   |                              |   |   |   |
| Interest income                                                                  |   | 278                               |   | 165 |   |
| Interest expense                                                                 |   | (47                               | )      | (106 | ) |
| Other (expense)  income, net                                                     |   | (670                              | )      | 991 |   |
| Total  non-operating (expense) income                                            |   | (439                              | )      | 1,050 |   |
|                                                                             |   |                              |   |   |   |
| Income before  taxes, minority interests and equity in netearnings of affiliates |   | 9,074                             |   | 5,578 |   |
|                                                                             |   |                              |   |   |   |
| Income tax  provision                                                            |   | 3,631                             |   | 1,770 |   |
|                                                                             |   |                              |   |   |   |
| Income before  minority interests and equity in netearnings of affiliates        |   | 5,443                             |   | 3,808 |   |
|                                                                             |   |                              |   |   |   |
| Minority  interests and equity in net earnings of affiliates                     |   | (74                               | )      | (123 | ) |
|                                                                             |   |                              |   |   |   |
| Net income                                                                       |   | $                                 | 5,369  |   | $ | 3,685 |   |
|                                                                             |   |                              |   |   |   |
| Net income per  common share:                                                    |   |                              |   |   |   |
| Basic                                                                            |   | $                                 | 0.31   |   | $ | 0.21 |   |
| Diluted                                                                          |   | $                                 | 0.31   |   | $ | 0.21 |   |
|                                                                             |   |                              |   |   |   |
| Weighted-average  number shares outstanding:                                     |   |                              |   |   |   |
| Basic                                                                            |   | 17,351                            |   | 17,516 |   |
| Diluted                                                                          |   | 17,575                            |   | 17,888 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

4

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited,in thousands, except per share data)**

 
|                                                                             |   | **Nine  Months Ended March 31,** |    |
|----------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                             |   | **2003**                         |    | **2002** |   |
| Revenue:                                                                         |   |                             |    |   |   |
| Hardware and  software                                                           |   | $                                | 143,996 |   | $ | 140,223 |   |
| Service                                                                          |   | 135,653                          |    | 126,565 |   |
| Total revenue                                                                    |   | 279,649                          |    | 266,788 |   |
|                                                                             |   |                             |    |   |   |
| Costs and  expenses:                                                             |   |                             |    |   |   |
| Cost of sales                                                                    |   |                             |    |   |   |
| Hardware and  software                                                           |   | 81,120                           |    | 78,475 |   |
| Service                                                                          |   | 62,163                           |    | 61,329 |   |
| Total cost of  sales                                                             |   | 143,283                          |    | 139,804 |   |
|                                                                             |   |                             |    |   |   |
| Selling, general  and administrative expenses                                    |   | 93,752                           |    | 89,732 |   |
| Research and  development expenses                                               |   | 13,380                           |    | 14,148 |   |
| Depreciation and  amortization                                                   |   | 6,170                            |    | 11,856 |   |
| Total costs and  expenses                                                        |   | 256,585                          |    | 255,540 |   |
|                                                                             |   |                             |    |   |   |
| Income from  operations                                                          |   | 23,064                           |    | 11,248 |   |
|                                                                             |   |                             |    |   |   |
| Non-operating  (expense) income:                                                 |   |                             |    |   |   |
| Interest income                                                                  |   | 1,093                            |    | 678 |   |
| Interest expense                                                                 |   | (631                             | )       | (533 | ) |
| Other (expense)  income, net                                                     |   | (1,335                           | )       | 42 |   |
| Total  non-operating (expense) income                                            |   | (873                             | )       | 187 |   |
|                                                                             |   |                             |    |   |   |
| Income before  taxes, minority interests and equity in netearnings of affiliates |   | 22,191                           |    | 11,435 |   |
|                                                                             |   |                             |    |   |   |
| Income tax  provision                                                            |   | 8,877                            |    | 3,996 |   |
|                                                                             |   |                             |    |   |   |
| Income before  minority interests and equity in netearnings of affiliates        |   | 13,314                           |    | 7,439 |   |
|                                                                             |   |                             |    |   |   |
| Minority  interests and equity in net earnings of affiliates                     |   | (319                             | )       | (390 | ) |
|                                                                             |   |                             |    |   |   |
| Net income                                                                       |   | $                                | 12,995  |   | $ | 7,049 |   |
|                                                                             |   |                             |    |   |   |
| Net income per  common share:                                                    |   |                             |    |   |   |
| Basic                                                                            |   | $                                | 0.75    |   | $ | 0.40 |   |
| Diluted                                                                          |   | $                                | 0.74    |   | $ | 0.40 |   |
|                                                                             |   |                             |    |   |   |
| Weighted-average  number shares outstanding:                                     |   |                             |    |   |   |
| Basic                                                                            |   | 17,408                           |    | 17,504 |   |
| Diluted                                                                          |   | 17,663                           |    | 17,785 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

5

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

**For thePeriod Ended March 31, 2003**

**(Unaudited,in thousands)**

 
|                                             |   | **Common Stock** |   | **Capital  in Excess  of Par** |      | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Loss** |   |   |    |
|--------------------------------------------------|--------|------------------|--------|--------------------------------|-----------|------------------------|--------|---------------------------------------------|--------|--------|---------|
|                                             |   | **Shares**       |   | **Amount**                     | **Total** |                   |
| Balance, June  30, 2002                          |   | 17,521           |   | $                              | 438       |                   | $      | 56,867                                      |   | $      | 130,599 |   | $ | (9,542 | ) | $ | 178,362 |   |
| Comprehensive  income                            |   |             |   |                           |      |                   |   |                                        |   |   |    |   |   |
| Net income                                       |   | —           |   | —                         |      | —                 |   | 12,995                                      |   | — |    | 12,995 |   |
| Foreign currency  translation adjustments        |   | —           |   | —                         |      | —                 |   | —                                      |   | 5,101  |    | 5,101 |   |
| Total  comprehensive income                      |   | —           |   | —                         |      | —                 |   | —                                      |   | — |    | 18,096 |   |
| Stock issued  upon exercise of options           |   | 16               |   | —                         |      | 273                    |   | —                                      |   | — |    | 273 |   |
| Stock retired                                    |   | (222             | )      | (5                             | )         | (5,039                 | )      | —                                      |   | — |    | (5,044 | ) |
| Income tax  benefit from stock options exercised |   | —           |   | —                         |      | 39                     |   | —                                      |   | — |    | 39 |   |
| Balance,  March 31, 2003                         |   | 17,315           |   | $                              | 433       |                   | $      | 52,140                                      |   | $      | 143,594 |   | $ | (4,441 | ) | $ | 191,726 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Condensedand unaudited, in thousands)**

 
|                                                                                 |   | **Nine  Months Ended March 31,** |   |
|--------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                 |   | **2003**                         |   | **2002** |   |
|                                                                                 |   |                             |   |   |   |
| Net cash flows  provided by operating activities:                                    |   | $                                | 17,552 |   | $ | 20,768 |   |
|                                                                                 |   |                             |   |   |   |
| Cash flows from  investing activities:                                               |   |                             |   |   |   |
| Purchases of  property, plant and equipment                                          |   | (4,918                           | )      | (3,950 | ) |
| Proceeds from  dispositions of property, plant and equipment                         |   | 108                              |   | 66 |   |
| Internally  developed software                                                       |   | (3,035                           | )      | (2,461 | ) |
| Proceeds from  settlement                                                            |   | —                           |   | 200 |   |
| Proceeds from  sale of subsidiary                                                    |   | 286                              |   | — |   |
| Purchase of  equity interest in investees                                            |   | —                           |   | (51 | ) |
| Net cash paid  for acquisitions, minority interests and contingent earn-out payments |   | —                           |   | (3,832 | ) |
| Net cash used in  investing activities                                               |   | (7,559                           | )      | (10,028 | ) |
|                                                                                 |   |                             |   |   |   |
| Cash flows from  financing activities:                                               |   |                             |   |   |   |
| Principal  payments on lines of credit                                               |   | (18,140                          | )      | (10,346 | ) |
| Proceeds from  lines of credit                                                       |   | 3,125                            |   | 15,807 |   |
| Principal  payments on long-term debt and capital lease obligations                  |   | (112                             | )      | (3,602 | ) |
| Dividends to  minority owners                                                        |   | (13                              | )      |   |   |
| Repurchase of  stock                                                                 |   | (5,044                           | )      | — |   |
| Proceeds from  issuance of stock                                                     |   | 273                              |   | 744 |   |
| Net cash (used  in) provided by financing activities                                 |   | (19,911                          | )      | 2,603 |   |
|                                                                                 |   |                             |   |   |   |
| Effect of  exchange rate changes on cash                                             |   | (189                             | )      | 23 |   |
|                                                                                 |   |                             |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                                |   | (10,107                          | )      | 13,366 |   |
| Cash and cash  equivalents at beginning of period                                    |   | 66,638                           |   | 26,456 |   |
|                                                                                 |   |                             |   |   |   |
| Cash and cash  equivalents at end of period                                          |   | $                                | 56,531 |   | $ | 39,822 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

7

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**Forthe Quarter Ended March 31, 2003**

**(Unaudited,in thousands, except per share data)**

** **

1.                                       Inventories

 

The components of inventories are as follows:

 
|            |   | **March 31,  2003** |   | **June 30,  2002** |   |
|-----------------|--------|---------------------|--------|--------------------|--------|
| Raw  materials  |   | $                   | 7,237  |               | $      | 6,850 |   |
| Work-in-process |   | 224                 |   | 986                |   |
| Finished  goods |   | 26,371              |   | 23,375             |   |
|            |   | $                   | 33,832 |               | $      | 31,211 |   |

 

2.                                       New accounting standards

 

In December 2002, Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148,“Accounting for Stock-Based Compensation - Transition and Disclosure anAmendment of FASB Statement No. 123.” SFAS No. 148 provides alternative methods of transition for companiesmaking a voluntary change to the fair value based method of accounting forstock-based employee compensation. Effective for interim periods beginning after December 15, 2002, SFASNo. 148 requires disclosure of pro-forma results as if the Company had appliedthe fair value recognition provisions of SFAS No. 123.  See Note 7 for pro-forma disclosure.

 

In July 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 nullifies the guidance inEmerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).”  Under EITF No. 94-3, an entity recognized aliability for an exit cost on the date that the entity committed itself to anexit plan.  In SFAS No. 146, the FASBacknowledges that an entity’s commitment to a plan does not, by itself, createa present obligation.  It alsoestablishes that fair value is the objective for the initial measurement of theliability.  SFAS No. 146 was effectivefor exit or disposal activities initiated after December 31, 2002.  The adoption of SFAS No. 146 had noimpact on the Company’s consolidated financial statements.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” which wasadopted by the Company in fiscal year 2002. This Statement supersedes SFAS No. 121, “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and theaccounting and reporting provisions of Accounting Principles Board Opinion No.30, “Reporting the Results of Operations — Reporting the Effects of Disposal ofa Segment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions”, for the disposal of a segment of a business.  SFAS No. 144 expands the reporting ofdiscontinued operations to include any component of an entity with operationsand cash flows that can be clearly distinguished from the rest of theentity.  This Statement also requiresthat any net assets to be disposed of by sale be reported at the lower ofcarrying value or fair market value less costs to sell.  The adoption of SFAS No. 144 had noimpact on the Company’s consolidated financial statements.

 

In June 2001, the FASB issued SFAS No. 141, “BusinessCombinations” and No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 requires that all businesscombinations initiated after June 30, 2002, be accounted for under the purchasemethod and requires certain acquired intangible assets to be recognized asassets apart from goodwill.  SFAS No.142 requires that intangible assets with finite lives be amortized whilegoodwill and intangible assets with indefinite lives not be amortized but betested annually for impairment.  TheCompany adopted SFAS 142 on July 1, 2002, and at that time, ceased amortizinggoodwill.  Going forward, the Companywill review goodwill for potential impairment on an annual basis.

 

The followingtable represents the impact of SFAS No. 142 on net income, basic and dilutednet income per share had SFAS No. 142 been in effect in the three and ninemonths ended March 31, 2002.

 

8

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|                                          |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-----------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                          |   | **2003**                           |   | **2002**                          |   | **2003** |   | **2002** |   |
| **Net income**                                |   |                               |   |                              |   |   |   |   |   |
| Reported net  income                          |   | $                                  | 5,369  |                              | $      | 3,685 |   | $ | 12,995 |   | $ | 7,049 |   |
| Goodwill  amortization, net of tax            |   | —                             |   | 1,410                             |   | — |   | 3,942 |   |
| Adjusted net  income                          |   | $                                  | 5,369  |                              | $      | 5,095 |   | $ | 12,995 |   | $ | 10,991 |   |
|                                          |   |                               |   |                              |   |   |   |   |   |
| **Basic net income per common share**         |   |                               |   |                              |   |   |   |   |   |
| Reported net  income per common share         |   | $                                  | 0.31   |                              | $      | 0.21 |   | $ | 0.75 |   | $ | 0.40 |   |
| Goodwill  amortization, net of tax            |   | —                             |   | 0.08                              |   | — |   | 0.23 |   |
| Adjusted basic  net income per common share   |   | $                                  | 0.31   |                              | $      | 0.29 |   | $ | 0.75 |   | $ | 0.63 |   |
|                                          |   |                               |   |                              |   |   |   |   |   |
| **Diluted net income per common share**       |   |                               |   |                              |   |   |   |   |   |
| Reported net  income per common share         |   | $                                  | 0.31   |                              | $      | 0.21 |   | $ | 0.74 |   | $ | 0.40 |   |
| Goodwill  amortization, net of tax            |   | —                             |   | 0.08                              |   | — |   | 0.22 |   |
| Adjusted diluted  net income per common share |   | $                                  | 0.31   |                              | $      | 0.29 |   | $ | 0.74 |   | $ | 0.62 |   |
|                                          |   |                               |   |                              |   |   |   |   |   |
| **Weighted average shares outstanding**       |   |                               |   |                              |   |   |   |   |   |
| Basic                                         |   | 17,351                             |   | 17,516                            |   | 17,408 |   | 17,504 |   |
| Diluted                                       |   | 17,575                             |   | 17,888                            |   | 17,663 |   | 17,785 |   |

 

3.                                       Legal proceedings

 

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

 

4.                                       Net income per share

 

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

 

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

 
|                                                |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-----------------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                                |   | **2003**                           |   | **2002**                          |   | **2003** |   | **2002** |   |
|                                                |   |                               |   |                              |   |   |   |   |   |
| Net income                                          |   | $                                  | 5,369  |                              | $      | 3,685 |   | $ | 12,995 |   | $ | 7,049 |   |
|                                                |   |                               |   |                              |   |   |   |   |   |
| Average common  shares outstanding                  |   | 17,351                             |   | 17,516                            |   | 17,408 |   | 17,504 |   |
| Dilutive effect  of outstanding stock options       |   | 224                                |   | 372                               |   | 255 |   | 281 |   |
| Average common  shares outstandingassuming dilution |   | 17,575                             |   | 17,888                            |   | 17,663 |   | 17,785 |   |
| Basic net income  per share                         |   | $                                  | 0.31   |                              | $      | 0.21 |   | $ | 0.75 |   | $ | 0.40 |   |
| Diluted net  income per share                       |   | $                                  | 0.31   |                              | $      | 0.21 |   | $ | 0.74 |   | $ | 0.40 |   |

 

For the three- andnine-month period ended March 31, 2003, 2,220 options and 2,142 options,respectively, were excluded from the above reconciliation as these options wereanti-dilutive for these periods.  Forthe 

 

9

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three- andnine-month period ended March 31, 2002, 1,562 options and 2,003 options,respectively, were excluded from the above reconciliation as these options wereanti-dilutive for these periods.

 

5.                                       Segment reporting data

 

The Company develops, manufactures, sells and servicespoint-of-sale computer systems, property management systems, centralreservation and central information systems products for the hospitalityindustry.  MICROS is organized andoperates in two segments: U.S. and International.  The International segment is primarily in Europe, the Pacific Rimand Latin America.  For purposes ofapplying SFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” management views the U.S. and International segments separatelyin operating the business, although the products and services are similar foreach segment.

 

A summary of the Company’s operating segments is asfollows:

 
|                                                                                    |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                                                                    |   | **2003**                           |   | **2002**                          |   | **2003** |   | **2002** |   |
| Revenues (1):                                                                           |   |                               |   |                              |   |   |   |   |   |
| United States                                                                           |   | $                                  | 52,911 |                              | $      | 52,533 |   | $ | 155,147 |   | $ | 151,662 |   |
| International                                                                           |   | 60,855                             |   | 50,464                            |   | 166,077 |   | 151,190 |   |
| Intersegment  eliminations                                                              |   | (16,176                            | )      | (10,619                           | )      | (41,575 | ) | (36,064 | ) |
| Total revenues                                                                          |   | $                                  | 97,590 |                              | $      | 92,378 |   | $ | 279,649 |   | $ | 266,788 |   |
|                                                                                    |   |                               |   |                              |   |   |   |   |   |
| Income before  taxes, minority interests and equity in net earnings of affiliates (1):  |   |                               |   |                              |   |   |   |   |   |
| United States                                                                           |   | $                                  | 3,491  |                              | $      | (1,185 | ) | $ | 6,005 |   | $ | (8,432 | ) |
| International                                                                           |   | 17,858                             |   | 13,885                            |   | 47,235 |   | 42,947 |   |
| Intersegment  eliminations                                                              |   | (12,275                            | )      | (7,122                            | )      | (31,048 | ) | (23,080 | ) |
| Total income  before taxes, minority interests and equity in net earnings of affiliates |   | $                                  | 9,074  |                              | $      | 5,578 |   | $ | 22,192 |   | $ | 11,435 |   |

 

(1)                                  Amounts based on the location of thecustomer.

 
|                       |   | **March 31,  2003** |    | **June 30,  2002** |   |
|----------------------------|--------|---------------------|---------|--------------------|--------|
| Identifiable  assets (2):  |   |                |    |               |   |
| United States              |   | $                   | 123,618 |               | $      | 133,653 |   |
| International              |   | 186,095             |    | 179,177            |   |
| Total  identifiable assets |   | $                   | 309,713 |               | $      | 312,830 |   |

 

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

 

10

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6.                                       Shareholders’ Equity

 

Infiscal 2002, the Board of Directors authorized the purchase of up to onemillion shares of the Company’s common stock. A summary of the cumulative number of whole shares retired through March31, 2003 is as follows:

 

|                                       |   | **Whole  Shares** |   | **Total  Cost** |   |
|--------------------------------------------|--------|-------------------|--------|-----------------|--------|
| Total shares  retired as of June 30, 2002  |   | 95,600            |   | $               | 2,610  |   |
| Shares retired  in Q1                      |   | 71,900            |   | 1,731           |   |
| Shares retired  in Q2                      |   | 82,500            |   | 1,779           |   |
| Shares retired  in Q3                      |   | 68,000            |   | 1,534           |   |
| Total shares  retired as of March 31, 2003 |   | 318,000           |   | $               | 7,654  |   |

 

7.                                       Stock Options

 

The Company has incentive and non-qualified stockoptions outstanding that were granted to directors, officers, and otheremployees pursuant to authorization by the Board of Directors.  The exercise price of all options equals themarket value on the date of the grant. Substantially all of the options granted are exercisable pursuant to athree-year vesting schedule whereby one-third of the options vest upon thefirst anniversary of the grant, the second third of the options vest upon thesecond anniversary of the grant, and the final third of the options vest uponthe third anniversary of the grant. Currently, all outstanding options expire ten years from the date ofgrant.

 

The Company applies the intrinsic value based methodof accounting prescribed by Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” in accounting for the stock optionawards.  Accordingly, the Company hasnot recognized any related compensation expense in the consolidated statementsof operations.

 

Had compensation cost been determined based on theweighted-average estimate of the fair value of each option granted in the thirdquarter of fiscal 2003 and 2002, respectively, consistent with the provisionsof SFAS No. 123 as amended by SFAS No. 148, the Company’s net income would bereduced to pro forma amounts as follows:

 
|                          |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                          |   | **2003**                           |   | **2002**                          |   | **2003** |   | **2002** |   |
| Net income                    |   |                               |   |                              |   |   |   |   |   |
| As reported                   |   | $                                  | 5,369  |                              | $      | 3,685 |   | $ | 12,995 |   | $ | 7,049 |   |
| Pro forma                     |   | $                                  | 4,063  |                              | $      | 1,574 |   | $ | 8,554 |   | $ | 620 |   |
|                          |   |                               |   |                              |   |   |   |   |   |
| Basic net income  per share   |   |                               |   |                              |   |   |   |   |   |
| As reported                   |   | $                                  | 0.31   |                              | $      | 0.21 |   | $ | 0.75 |   | $ | 0.40 |   |
| Pro forma                     |   | $                                  | 0.23   |                              | $      | 0.09 |   | $ | 0.49 |   | $ | 0.04 |   |
|                          |   |                               |   |                              |   |   |   |   |   |
| Diluted net  income per share |   |                               |   |                              |   |   |   |   |   |
| As reported                   |   | $                                  | 0.31   |                              | $      | 0.21 |   | $ | 0.74 |   | $ | 0.40 |   |
| Pro forma                     |   | $                                  | 0.23   |                              | $      | 0.09 |   | $ | 0.48 |   | $ | 0.03 |   |

 

11

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The weighted average fair value of each option grantedfor the third quarter of fiscal 2003 and 2002 was $10.77 and $12.36,respectively.  The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions:

 

|                     |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|--------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                     |   | **2003**                           |   | **2002**                          |   | **2003** |   | **2002** |   |
| Risk-free  interest rate |   | 3.2                                | %      | 4.4                               | %      | 3.0 | % | 4.4 | % |
| Expected life            |   | 6.0 years                          |   | 5.9 years                         |   | 6.0 years |   | 5.9 years |   |
| Expected  volatility     |   | 51                                 | %      | 51                                | %      | 51 | % | 51 | % |
| Expected  dividend yield |   | 0                                  | %      | 0                                 | %      | 0 | % | 0 | % |

 

The Black-Scholes option-pricing model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable. In addition, option-pricing models require the input of highlysubjective assumptions including the expected stock price volatility.  The Company uses projected volatility rates,which are based upon historical volatility rates, trended into futureyears.  Because the Company’s employeestock options have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, existing models,including the Black-Scholes option-pricing model, do not necessarily provide areliable single measure of the fair value of employee stock options.

 

8.                                       Subsequent Event

 

Effective May 1,2003, the Company entered into the Stock Purchase Agreement by and among thestockholders (individually and collectively, the “Stockholders”) of DatavantageCorporation and DV Technology Holdings Corporation (individually andcollectively, “Datavantage”), pursuant to which MICROS acquired, directly orindirectly, all of the issued and outstanding shares of Datavantage on theterms and conditions stated in the Stock Purchase Agreement.  Consequently, MICROS will control all assetsof Datavantage, subject to the terms and conditions of the Stock PurchaseAgreement.   The consideration paid byMICROS was approximately $52 million, subject to adjustments, modifications,and other conditions as stated in the Stock Purchase Agreement.  The consideration consists of the following:(i) $28.6 million paid at closing; (ii) $5.2 million, to be paid 18 monthsafter closing, subject to certain holdback rights; and (iii) 719,360 wholeshares of MICROS common stock.  Exceptfor the transactions described in the Stock Purchase Agreement, there was nomaterial relationship between Datavantage and MICROS, its directors, officers,affiliates, or associates thereof.  Thesource of funds was $16.6 million from general corporate funds, $12.0 millionfrom the MICROS line of credit in effect with Bank of America, and unregisteredshares of MICROS common stock. Datavantage’s primary business is point-of-sale software and businessintelligence software designed for the retail industry.  Any tangible assets acquired as part of thistransaction will continue to be used for those purposes.

 

12

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

 

**Critical Accounting Policies**

 

The Company’s discussion and analysis of its financialcondition and results of operations are based on the consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires the Company tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses.  Onan ongoing basis, the Company evaluates its estimates, including those thatimpact 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 variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.  Actual results may differ forthese estimates under different assumptions or conditions.

 

Management believes the following critical accountingpolicies affect its more significant judgments and estimates used in thepreparation of the consolidated financial statements.

 

**Revenue recognition**

 

Revenue from hardware sales is recognized at the timeof shipment with a provision for estimated returns and allowances.  Revenue from licensed software sales isrecognized in accordance with Statement ofPosition (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9,“Modification of SOP 97-2, Software Revenue Recognition with Respect to CertainTransactions.”  If a third party caninstall the software, revenue is recognized when shipped, with anappropriate deferral for any undelivered software contract elements.  However, if MICROS is the sole party thathas the proprietary knowledge to install the software, revenue is recognizedupon installation and when ready to go live, with an appropriate deferral forany undelivered software contract elements. This deferral is earned when significant obligations no longerexist.  Revenue from customer-specificdevelopment work is recognized under the completed contract method.  Service contract revenue is initiallyrecorded as deferred service revenue and is recognized on a pro rata basis overthe contract term.  Revenue for theinstallation of the product and the training of customers’ staff is recognizedas the work is performed.

 

**Capitalized software development costs**

 

Software development costs, for software products tobe licensed to others, incurred prior to establishing technological feasibilityare charged to operations and included in research and development costs.  Software development costs incurred afterestablishing technological feasibility and purchased software costs arecapitalized on a product-by-product basis until the product is available forgeneral release to customers upon which amortization begins.  Annual amortization, charged to cost ofsales, is the greater of the amount computed using the ratio that current grossrevenues for a product bear to the total of current and anticipated futuregross revenues for that product, or the straight-line method over the remainingestimated economic life of the product.

 

**Goodwill and intangible assets**

 

On July 1, 2002, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets.”  Under SFAS No. 142, theCompany ceased amortizing goodwill.  Onan annual basis, the Company will test goodwill for potential impairment.

 

**Allowance for doubtful accounts**

 

MICROS maintains allowances for doubtful accounts forestimated losses that may result from the inability of our customers to makerequired payments.  These allowances arebased on customer payment practices and history, inquiries, credit reports fromthird parties and other financial information. If the financial

 

13

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condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required.

 

**Income taxes**

 

Incometaxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the expected future tax consequences attributable to the differencesbetween the financial statement carrying amounts and the tax basis of assetsand liabilities.  Deferred tax assetsand liabilities are measured using the enacted tax rates in effect for the yearin which those temporary differences are expected to be recovered orsettled.  The effect on the deferred taxassets and liabilities of a change in tax rate is recognized in income in theperiod that includes the enactment date. Valuation allowances are established when necessary to reduce deferredtax assets to the amounts more likely than not to be realized.  If the Company determines that it will notbe able to realize all or part of its net deferred tax asset in the future, anadjustment to the deferred tax asset would be charged to income in the periodsuch determination is made.

 

**Foreign currency translation**

 

The financial statements of MICROS’s non-U.S.operations are translated into U.S. dollars for financial reportingpurposes.  The assets and liabilities ofnon-U.S. operations whose functional currencies are not in U.S. dollars aretranslated at the fiscal year-end exchange rates, while revenues and expensesare translated at month-end exchange rates during the fiscal year.  The cumulative translation effects arereflected in shareholders’ equity.  Gainsand losses on transactions denominated in other than the functional currency ofan operation are reflected in other income (expense).

 

**Results of Operations - Third Quarter and Nine-MonthComparisons**

 

The Company recorded adiluted net income of $0.31 per common share in the third quarter of fiscal2003, compared with a diluted net income of $0.21 per common share in the thirdquarter of fiscal 2002.  For thenine-months ended March 31, 2003, diluted net income was $0.74 per common sharecompared with diluted net income of $0.40 per common share for the nine-monthsended March 31, 2002.  The quarter andyear to date increases were mainly due to increases in software and servicesales, improved service margins, and the discontinuation of goodwill amortizationaccording to SFAS 142.

 

Revenue increased by $5.2million or 5.6% to $97.6 million for the third quarter of fiscal 2003 comparedto the same period last year.  For thefirst nine months of fiscal year 2003, revenue increased $12.9 million or 4.8%to $279.6 million over the same period in fiscal year 2002.  A comparison of the sales mix for fiscalyears 2003 and 2002 is as follows:

 

|     |   | **Three Months Ended  March 31,** |   | **Nine Months Ended  March 31,** |   |
|----------|--------|-----------------------------------|--------|----------------------------------|--------|
|     |   | **2003**                          |   | **2002**                         |   | **2003** |   | **2002** |   |
| Hardware |   | 33.3                              | %      | 37.6                             | %      | 34.1 | % | 36.3 | % |
| Software |   | 17.8                              | %      | 16.5                             | %      | 17.4 | % | 16.3 | % |
| Service  |   | 48.9                              | %      | 45.9                             | %      | 48.5 | % | 47.4 | % |
|     |   | 100.0                             | %      | 100.0                            | %      | 100.0 | % | 100.0 | % |

 

Combined hardwareand software revenues for the third quarter of fiscal 2003 decreased $0.2million, or 0.4%, but service revenues increased $5.4 million, or 12.8%, overthe same period a year earlier.  On ayear to date basis, combined hardware and software revenues increased $3.8million, or 2.7%, and service revenues increased $9.1 million, or 7.2%, overthe same period a year earlier.

 

14

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Combined hardwareand software sales decreased slightly in the third quarter of fiscal 2003 incomparison to the prior year mainly due to the decrease in hardware sales.  This decrease is a result of the wind downof a large roll out program.

 

Service revenuesincreased primarily due to the increase in recurring maintenance servicerevenues, which accounted for $28.6 million and $81.5 million of the thirdquarter and year to date service revenue of fiscal 2003, respectively.  In fiscal 2002, the third quarter and yearto date recurring maintenance service revenue was $25.6 million and $73.0million, respectively.

 

Overall cost ofsales, as a percentage of revenue, decreased to 51.5% for the third quarter offiscal 2003 from 52.5% for the third quarter of fiscal 2002.  For the first nine months of fiscal 2003 and2002, cost of sales, as a percentage of revenue, was 51.2% and 52.4%,respectively.

 

Cost of sales forhardware and software products, as a percentage of related revenue, increasedto 56.5% in the third quarter of fiscal 2003 compared to 55.4% for the samequarter a year earlier.  On a year todate basis, cost of sales for hardware and software products, as a percentageof related revenue, increased slightly to 56.3% compared to 56.0 in the prioryear.  The quarterly and year to dateincreases in cost of sales, in relation to related revenue, was mainly due tothe increase in software cost of sales.

 

Service costs, asa percentage of service revenue, decreased to 46.2% in the third quarter offiscal 2003 compared to 49.2% in the same quarter in fiscal 2002.  In the first nine months of fiscal 2003,service costs, as a percentage of service revenue, decreased to 45.8% comparedto 48.5% in the prior year.  The quarterand year to date decreases were mainly due to the continued increase inrecurring maintenance service revenue while maintaining approximately the samelevel of cost.

 

Selling, generaland administrative (“SG&A”) expenses increased by $0.9 million or 3.0%, inthe third quarter of fiscal 2003 compared to the same period last year.  As a percentage of revenue, selling, generaland administrative expenses decreased to 32.4% in the third quarter of fiscal2003 compared to 33.2% in the third quarter of fiscal 2002.  On a year to date basis, selling, generaland administrative expenses increased $4.0 million or 4.5%.  As a percentage of revenue, selling, generaland administrative expenses decreased to 33.5% in the first nine months offiscal 2003 compared to 33.6% in the same period of the prior year.  The quarter increase in SG&A was mainlydue to the strengthening of foreign currencies over the US Dollar.  The year to date increase was primarily dueto the annual salary merit increases and the strengthening of foreigncurrencies over the US Dollar.  Theannual salary merit increases in fiscal 2003 were higher than the previous yeardue to reduced personnel turnover, which serves to increase the number of employeeseligible for salary increases.

 

Research and development(“R&D”) expenses consist primarily of labor costs less capitalized softwaredevelopment costs.  In the third quarterof fiscal 2003, R&D expenses decreased $0.3 million, or 7.5%, to $4.2million.  Capitalized softwaredevelopment costs increased to $1.2 million in the third quarter of fiscal 2003from $0.7 million in the third quarter of fiscal 2002.  For the third quarter of fiscal 2003, totalresearch and development expenditures, including capitalized softwaredevelopment costs, increased $0.2 million, or 3.5%, compared to the thirdquarter a year earlier.

 

On a year to date basis,R&D expenses decreased $0.8 million, or 5.4%, to $13.4 million.  Year to date total research and developmentexpenditures, including capitalized software development costs of $3.0 millionand $2.5 million for fiscal 2003 and 2002, respectively, decreased to $16.4million.  A summary of R&Dactivities is as follows:

*** ***

|                    |   | **Three Months Ended  March 31,** |   | **Nine Months Ended  March 31,** |   |
|-------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                    |   | **2003**                          |   | **2002**                         |   | **2003** |   | **2002** |   |
| Total R&D           |   | $                                 | 5,452  |                             | $      | 5,265 |   | $ | 16,415 |   | $ | 16,610 |   |
| R&D  capitalization |   | (1,207                            | )      | (678                             | )      | (3,035 | ) | (2,462 | ) |
| Total R&D expenses  |   | $                                 | 4,245  |                             | $      | 4,587 |   | $ | 13,380 |   | $ | 14,148 |   |

 

15

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Depreciation and amortization expense decreased by$2.0 million or 50.4% in the third quarter of fiscal 2003 and $5.7 million or48.0% on a year to date basis compared to the same periods in fiscal 2002.  The decrease is primarily due to the adoptionof SFAS 142, “Goodwill and Other Intangible Assets.”  For further discussion, see Note 2 in the Notes to theConsolidated Financial Statements.

 

Income from operationsfor the third quarter of fiscal 2003 was $9.5 million, or 9.8% of revenue,compared to $4.5 million, or 4.9% of revenue, in the third quarter of fiscal2002.  For the first nine months offiscal 2003, income from operations was $23.1 million, or 8.3% of revenue,compared to $11.2 million, or 4.2% of revenue in the same period of the prioryear.  The quarter and year to date increaseswere mainly due to the overall increase in software and service sales, theincrease in gross margins generated from service sales and the decrease ofgoodwill amortization from the adoption of SFAS 142.

 

In the third quarter offiscal 2003, non-operating expense was $0.4 million compared to non-operatingincome of $1.0 million in the third quarter of fiscal 2002.  For the first nine months of fiscal 2003,non-operating expense was $0.9 million compared to non-operating income of $0.2million for the first nine months of fiscal 2002.  This increase in non-operating expense was primarily due to theincrease in foreign exchange loss.

 

The effective tax ratefor the third quarter of fiscal 2003 and fiscal 2002 was 40.0% and 31.7%,respectively.  The year to dateeffective tax rate for fiscal 2003 and fiscal 2002 was 40.0% and 34.9%,respectively.  The quarter and year todate effective tax rate increases were mainly due to a shift in earningsbetween domestic and international regions for the applicable periods.

 

The EU filed a challenge against the U.S. ForeignSales corporation (“FSC”) tax provisions with the World Trade Organization(“WTO”).  On August 30, 2002, the WTOarbitrator issued a final decision upholding this challenge.  The arbitrator’s decision allows the EU toimpose sanctions on imports of U.S. goods into EU member countries.  The EU has not begun to impose suchsanctions, nor has it indicated when or if it will begin such charges.  Legislative bodies in the U.S. have made therevision of the international tax provisions of the Internal Revenue Code ahigh priority on the legislative agenda. It is uncertain when or if such legislative actions will mitigate thesanctions ruled upon by the WTO.  It iscurrently not possible to predict what impact, if any, this issue will have onfuture earnings pending final resolution of the matter with the WTO, EU, andthe United States.

 

***Euro Conversion***

 

OnJanuary 1, 1999, certain member nations of the EMU adopted a common currency,the Euro.  For a three-year transitionperiod, both the Euro and individual participants’ currencies remained incirculation.  Since March 1, 2002, theEuro has become the sole legal tender for the twelve participating EMUcountries, and is in use in certain other countries and territories.  The adoption of the Euro has affected amultitude of financial systems and business applications as the commerce ofthese nations is now transacted in the Euro. Of the twelve participating countries currently using the Euro as theirsole legal tender, the Company has subsidiary operations in seven of thosecountries and distributor relationships in the remaining five countries.

 

**Liquidity and Capital Resources**

 

The Company currently hasa $45.0 million multi-currency committed line of credit expiring on June 30,2003.  Prior to this upcoming expirationdate, the Company anticipates that it will renew this line of credit for anadditional two-year period.  The Companyis currently in active discussion with its current lender and with several otherpotential lenders on this subject.  Thefinancing agreement includes a security interest in inventory and receivableslocated in the United States.  Interestdue under the line of credit is calculated as follows:  (i) if the advance is in U.S. dollars, atthe option of the Company, either the bank’s prime rate minus an amount asstipulated in the loan agreement based on Company performance, or the LIBORrate plus an additional LIBOR rate percentage; and (ii) if the advance is madein a foreign currency, the LIBOR rate for the applicable denominated currency,plus an additional LIBOR rate percentage. The Company has a one-time option to convert the line of credit into athree-year secured term loan upon expiration of the line of credit.  Interest due under the three-year securedterm loan shall be, at the option of the Company, the prime rate plus onequarter of one percent (0.25%) or the floating LIBOR rate.  Under the terms of the current loanagreement, the Company may borrow up to $45.0 million less the amount of

 

16

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outstanding letters ofcredit and a fixed amount equal to $1.5 million if the Company enters into anyexchange contracts.  The agreement alsorequires the Company to satisfy certain financial covenants and limits theassumption of additional debt and restricts the Company’s payment of dividendsother than stock dividends.

 

The Company also has acredit relationship with a European bank in the amount of EUR 7.6 million(approximately $8.3 million at the March 31, 2003 exchange rate).  Under the terms of this facility, theCompany may borrow in the form of either a line of credit or term debt.  As the Company has significant internationaloperations, its Euro denominated borrowings do not represent a significantforeign exchange risk.  On an overallbasis, the Company monitors its cash and debt positions in each currency in aneffort to reduce its foreign exchange risk.

 

As of March 31, 2003, thetotal outstanding line of credit is $4.1 million consisting of: ZAR (SouthAfrican Rand) 13.0 million (approximately $1.6 million at the March 31, 2003exchange rate), SEK (Swedish Krona) 12.0 million (approximately $1.4 million atthe March 31, 2003 exchange rate), AUD (Australian Dollar) 0.5 million (approximately$0.3 million at the March 31, 2003 exchange rate) and JPY (Japanese Yen) 90.0million (approximately $0.8 million at the March 31, 2003 exchange rate).  The Company has approximately $49.2 millionavailable to borrow.

 

Net cash providedby operating activities for fiscal 2003 was $17.6 million versus $20.8 millionfor fiscal 2002. ** **The Company used $7.6million for investing activities in fiscal 2003 mainly for the purchase ofproperty, plant, and equipment and internally developed software. ** **The Company used $19.9 million infinancing activities for fiscal 2003 mainly for the net reduction of $15.0million on the line of credit and the repurchase of $5.0 million in commonstock.  All cash is being held for theoperation and expansion of the business and the repurchase of the Company’sstock.

 

The Company anticipatesthat its cash flow from operations along with available lines of credit, inconjunction with other lines of credit for which the Company may be eligible orlines of credit to be renewed or converted into term debt, are sufficient toprovide the working capital needs of the Company for the foreseeablefuture.  The Company anticipates thatits property, plant and equipment expenditures for fiscal 2003 will beapproximately $6.0 million.

 

**Summary**

 

Until the first quarter of calendar year 2001, theCompany had experienced rapid revenue growth at a rate that it believes hadexceeded that of the global market for point-of-sale computer systems andproperty management information systems products for the hospitalityindustry.  In light of weaker marketconditions, the Company’s growth rate declined from previous years.  Currently, given the weak worldwide economicconditions, and the general financial and political uncertainty triggered inpart by the Iraqi armed conflict, the North Korean crisis, terrorist attacks(including the attacks on September 11, 2001, and in Bali), and the SARS(Severe Acute Respiratory Syndrome) crisis in Asia,  there can be no assurance that any particular level of growth canbe achieved.  In addition, due to thecompetitive nature of the market, the Company continues to experience grossmargin pressure on its products and service offerings.  There can be no assurance that the Companywill be able to continue to increase sufficiently sales of its higher marginproducts, including software, to prevent future declines in the Company’soverall gross margin.

 

Moreover, MICROS’s financial results in any singlequarter are dependent upon the timing and size of customer orders and theshipment of products for large orders. Large software orders from customers may account for more than aninsignificant portion of earnings in any quarter.  The customers with whom MICROS does the largest amount ofbusiness are expected to vary from year to year as a result of the timing forthe roll-out of each customer’s system. Furthermore, if a customer delays or accelerates its deliveryrequirements or a product’s completion is delayed or accelerated, revenuesexpected in a given quarter may be deferred or accelerated into subsequent orearlier quarters.

 

The market price of MICROS Common Stock is volatile,and may be subject to significant fluctuations in response to variations inMICROS’s quarterly operating results and other factors such as announcements oftechnological developments or new products by MICROS, customer roll-outs,technological advances by existing

 

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and new competitors, and general market conditions in the hospitalityindustry.  In addition, conditions inthe stock market in general and shares of technology companies in particularhave experienced significant price and volume fluctuations which have at timesbeen unrelated to the operating performance of companies.

 

Moreover, some of the statements contained herein notbased 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 offuture performance.  Actual resultscould differ materially from past results, estimates, or projections.  Some of the additional risks anduncertainties are: political and world instability created by the Iraqi andNorth Korean crises, SARS (Severe Acute Respiratory Syndrome), and additionalterrorist attacks, which gravely impacts the travel and tourism industries;product demand and market acceptance, including demand and acceptance for thenew OPERA products and the newest versions of the 3700 RES; implementation of acost-effective service structure capable of servicing increasingly complexsoftware systems in increasingly more remote locations; achieving increasedsales of higher margin software products; hiring and retention of qualifiedemployees with sufficient technical expertise; unexpected currencyfluctuations; impact of competitive products and pricing on margins; productdevelopment delays; technological difficulties associated with new productreleases; and controlling expenses. Additionally, MICROS’s recently announced acquisition of Datavantageposes additional risks to MICROS insofar as there are risks inherent in anyacquisition activities, which such risks may not be identifiable during the duediligence phase of the target or the markets it serves.  These and other risks are disclosed in theCompany’s releases and SEC filings, including in the section titled “Businessand Investment Risks; Information Relating to Forward-Looking Statements”, inthe Company’s Annual Report on Form 10-K for the fiscal year ended June 30,2002.

 

Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk

 

MICROS’s significant international business and presenceexposes the Company to a multitude of market risks, such as currency, interestrate and political risks.  With respectto currency risk, the Company transacts business in 23 different currenciesthrough its foreign subsidiaries.  Thefluctuation of currencies impacts sales and profitability.  Frequently, sales and the costs associatedwith such sales are not always denominated in the same currency.  Given the fact that the Company transactsbusiness in many different currencies, adverse declines in certain currenciescan be offset by favorable advances in other currencies.  Recent weakness in certain Latin Americancurrencies, including the Argentine Peso and the Brazilian Real, has adverselyimpacted the financial performance of the Company.  However, in the past quarter, the strengthening of the Euro hashelped offset this adverse impact.

 

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

 

Further, the Company is subject to political risk, asdemonstrated by the terrorist attacks in the United States of September 11,2001.  More recently, the terroristattacks in Bali, Indonesia in October 2002 has adversely impacted the Company’ssales for the foreseeable future in Indonesia, Australia, and other parts ofAsia, as there has been a marked decline in travel and tourism in Asia sincethe Bali attacks (further exacerbated by the outbreak of SARS (Sudden AcuteRespiratory Syndrome).  Globally, thearmed conflict with Iraq, and the post Saddam Hussein era in Iraq, have createdadditional uncertainty, which suppresses businesses for two reasons: (i)capital expenditures are delayed since buyers are concerned by the impact ofworld instability on their businesses; and (ii) reduction in consumer buyinghabits out of concern for additional terrorist attacks in response to theUnited State’s actions in Iraq.  Ashistory shows, worldwide tourism in general and American tourism in particularhave declined substantially during periods of actual armed conflict.  Accordingly, political and economicinstability and uncertainty caused by health crises, such as with SARS (SevereAcute Respiratory Syndrome), terrorism, and the resultant conflicts designed tothwart terrorism, may materially adversely impact the travel, tourism andhospitality industries that the Company serves.  The Company is also subject to the effects of, and changes in,laws and regulations, other activities of governments, agencies and similarorganizations.

 

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Item 4.  Controls and Procedures

 

Background.  As required by Rule 13a-15 under theExchange Act, within the 90 days prior to the filing date of this report, theCompany conducted an evaluation of the effectiveness of the design andoperation of the Company’s “Disclosure Controls and Procedures.”  This evaluation was carried out under thesupervision of the Company’s management, including A.L. Giannopoulos, MICROS’Chairman, Chief Executive Officer and President, and Gary C. Kaufman, MICROS’Executive Vice President and Chief Financial Officer.  Disclosure Controls and Procedures are designed with theobjective of ensuring that information required to be disclosed in the reportsMICROS files or submits under the Securities Exchange Act of 1934 (ExchangeAct), such as this quarterly report, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s (SEC) rules and forms. Disclosure Controls and Procedures are also designed with the objectiveof ensuring that such information is accumulated and communicated tomanagement, including the Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosure.

 

Limitations.  MICROS does not expect that its DisclosureControls and Procedures will prevent all errors and all fraud.  Despite its level of sophistication, detailand thoroughness, a disclosure control system can provide only reasonable, notabsolute, assurance that the objectives of the control system aresatisfied.  Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been or will be detected.

 

Scope of the ControlsEvaluation. The evaluation of MICROS’ Disclosure Controls and Procedures includeda 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 analyzethe manner in which it collects information and requires its employees from thefour worldwide regional headquarters (North America, Latin America,Europe/Africa/Middle East, and Asia Pacific) to produce such information.  Once the information is collected, theCompany evaluated how the information is analyzed for purposes of determiningif, how, when and where to disclose such information.  Finally, MICROS analyzed the forms and guidelines it hasdeveloped internally that are disseminated to all operations, and are requiredto be resubmitted to the finance operation. These forms and documents are designed to elicit pertinent financialinformation from the operations on a worldwide basis.

 

Conclusions.  MICROS has evaluated its Disclosure Controlsand Procedures.  The effectiveness ofthe Disclosure Controls and Procedures will be evaluated quarterly.  Based on the evaluation as of a date within90 days of the filing of this Form 10-Q, MICROS has concluded that DisclosureControls and Procedures (as defined in Rules 13a-14 and 15d-14 under theSecurities and Exchange Act of 1934) currently in place are effective to ensurethat material information relating to MICROS would be made known to theChairman, President and Chief Executive Officer, and the Executive VicePresident and Chief Financial Officer on a timely basis.  No significant changes were made to MICROS’internal controls or in the other factors that could significantly affect thesecontrols subsequent to the date of the evaluation and there were no requiredcorrective actions with regard to significant deficiencies or materialweaknesses of these controls.

 

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**Form 10-Q**

**For the Quarter Ended March 31, 2003**

 

**Part II - Other Information**

 

Item 1.             Legal Proceedings

 

MICROS is and has been involved in legal proceedings arisingin the normal course of business.  TheCompany is of the opinion, based upon presently available information and theadvice of counsel concerning pertinent legal matters, that any resultingliability should not have a material adverse effect on the Company’s results ofoperations or financial position.

 

Items 2 (Changesin Securities and Use of Proceeds), 3 (Defaults Upon Senior Securities), 4(Submission of Matters to a Vote of Security Holders), and 5 (Other Information).

 

Noevents occurred during the quarter covered by the report that would require aresponse to any of these items.

 

Item 6.             Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

99.1         Certification of Chief Executive Officerpursuant to Section 906 of the Sarbanes-Oxley Act.

99.2         Certification of Chief Financial Officerpursuant to Section 906 of the Sarbanes-Oxley Act.

 

(b)         Reports on Form 8-K

 

Report on Form 8-Kwas filed on January 30, 2003, regarding the release of financial results forthe quarter ending December 31, 2002, and also the Company’s balance sheet.

 

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**MICROSSYSTEMS, INC. AND SUBSIDIARIES**

**Form 10-Q**

**For the Quarter Ended March 31, 2003**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|         |   |   |   |   |   | MICROS SYSTEMS, INC.                     |
|--------------|--------|--------|--------|--------|--------|------------------------------------------|
|         |   |   |   |   |   | (Registrant)                             |
|         |   |   |   |   |   |                                     |
| May 15, 2003 |   |   |   |   |   | /s/ Gary C. Kaufman                      |
|         |   |   |   |   |   | Gary C. Kaufman                          |
|         |   |   |   |   |   | Executive Vice  President,               |
|         |   |   |   |   |   | Finance and  Administration/             |
|         |   |   |   |   |   | Chief Financial Officer                  |
|         |   |   |   |   |   |                                     |
|         |   |   |   |   |   |                                     |
| May 15, 2003 |   |   |   |   |   | /s/ Cynthia A. Russo                     |
|         |   |   |   |   |   | Cynthia A. Russo                         |
|         |   |   |   |   |   | Vice President and  Corporate Controller |

 

 

**CERTIFICATIONS**

 

I, A.L. Giannopoulos, certify that:

 

1.  I have reviewed thisquarterly report on Form 10-Q of MICROS Systems, Inc. (the “Registrant”);

 

2.  Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this report; and

 

3.  Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, andfor, the period presented in this quarterly report.

 

4.  TheRegistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Registrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the Registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b) evaluated the effectiveness of theRegistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.  TheRegistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the Registrant’s auditors and the audit committee ofRegistrant’s board of directors (or persons performing the equivalentfunction):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the Registrant’sability to record, process, summarize and report financial data and haveidentified for the Registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theRegistrant’s internal controls; and

 

6.  TheRegistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|               | By: /s/ A.L. Giannopoulos                       |
|--------------------|-------------------------------------------------|
|               | A.L. Giannopoulos                               |
|               | Chairman, President and Chief Executive Officer |
|               |                                            |
| Date: May 15, 2003 |                                            |

 

 

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I, Gary C.Kaufman, certify that: 

 

1. I have reviewed this quarterly report on Form 10-Q of MICROS Systems,Inc. (the “Registrant”);

 

2. Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this report;and 

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theRegistrant as of, and for, the period presented in this quarterly report.

 

4.  TheRegistrant's other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Registrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the Registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b) evaluated the effectiveness of theRegistrant's disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the "EvaluationDate"); and

 

c) presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.  TheRegistrant's other certifying officers and I have disclosed, based on our mostrecent evaluation, to the Registrant's auditors and the audit committee ofRegistrant's board of directors (or persons performing the equivalentfunction):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the Registrant'sability to record, process, summarize and report financial data and haveidentified for the Registrant's auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theRegistrant's internal controls; and

 

6.  TheRegistrant's other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|               | By: /s/ Gary  C. Kaufman    |
|--------------------|-----------------------------|
|               | Gary C. Kaufman             |
|               | Executive Vice President,   |
|               | Finance and Administration, |
| Date: May 15, 2003 | and Chief Financial Officer |

 

 

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