**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended December 31,2004**

**Commission file number 0-9993**

 

**MICROS SYSTEMS, INC.**

(Exact name of Registrant as specified in its charter)

 
| **MARYLAND**                                                              |   | **52-1101488**                          |
|---------------------------------------------------------------------------|--------|-----------------------------------------|
| (State of incorporation)                                                  |   | (I.R.S. Employer Identification Number) |
|                                                                      |   |                                    |
| **7031 Columbia Gateway Drive, Columbia, Maryland**                       |   | **21046-2289**                          |
| (Address of principal executive offices)                                  |   | (Zip code)                              |
|                                                                      |   |                                    |
| Registrant’s telephone number, including area code: **443-285-6000** |

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such report(s)), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES ý           NO o

 

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

 

YES ý           NO o

 

As of January 31,2005, there were 37,847,280 shares (after stock split) of the RegistrantsCommon Stock, $0.0125 par value, issued & outstanding.

 

 

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

Form 10-Q

For the Quarter Ended December 31, 2004

 

Part I - Financial Information

 

**Item1.****           FinancialStatements**

 

General

 

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

 

2

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 (Unaudited, in thousands)

 
| ** **                                                                                                                                                  | ** ** | **December 31,  2004** | ** ** | **June 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ASSETS                                                                                                                                                      |       |                        |       |                    |       |
| Current assets:                                                                                                                                             |       |                        |       |                    |       |
| Cash and cash equivalents                                                                                                                                   |       | $                           | 106,681    |                    | $          | 91,451 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $14,861 at December 31, 2004 and $11,903 at June 30,  2004                        |       | 108,692                     |       | 101,367                 |       |
| Inventories, net of allowance for obsolescence of  $6,759 at December 31, 2004 and $6,380 at June 30, 2004                                        |       | 41,965                      |       | 36,095                  |       |
| Deferred income taxes                                                                                                                                       |       | 10,463                      |       | 9,396                   |       |
| Prepaid expenses and other current assets                                                                                                                   |       | 32,861                      |       | 16,242                  |       |
| Total current assets                                                                                                                                        |       | 300,662                     |       | 254,551                 |       |
|                                                                                                                                                        |       |                        |       |                    |       |
| Property, plant and equipment, net of accumulated  depreciation and amortization of $64,517 at December 31, 2004 and  $58,245 at June 30, 2004    |       | 20,326                      |       | 19,550                  |       |
| Deferred income taxes, non-current                                                                                                                          |       | 24,887                      |       | 24,288                  |       |
| Goodwill, net of accumulated amortization of $30,472  at December 31, 2004 and $28,687 at June 30, 2004                                           |       | 71,228                      |       | 70,715                  |       |
| Intangible assets, net of accumulated amortization  of $2,701 at December 31, 2004 and $2,291 at June 30, 2004                                    |       | 5,166                       |       | 5,476                   |       |
| Purchased and internally developed software costs,  net of accumulated amortization of $34,776 at December 31, 2004 and $30,484  at June 30, 2004 |       | 42,151                      |       | 41,112                  |       |
| Other investments                                                                                                                                           |       | 410                         |       | 415                     |       |
| Other assets                                                                                                                                                |       | 2,078                       |       | 2,785                   |       |
|                                                                                                                                                        |       |                        |       |                    |       |
| Total assets                                                                                                                                                |       | $                           | 466,908    |                    | $          | 418,892 |   |
|                                                                                                                                                        |       |                        |       |                    |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                   |       |                        |       |                    |       |
| Current liabilities:                                                                                                                                        |       |                        |       |                    |       |
| Bank lines of credit                                                                                                                                        |       | $                           | 2,729      |                    | $          | 2,481 |   |
| Current portion of capital lease obligations                                                                                                                |       | 184                         |       | 139                     |       |
| Accounts payable                                                                                                                                            |       | 26,481                      |       | 29,681                  |       |
| Accrued expenses and other current liabilities                                                                                                              |       | 55,442                      |       | 58,693                  |       |
| Income taxes payable                                                                                                                                        |       | 4,826                       |       | 1,541                   |       |
| Deferred income taxes                                                                                                                                       |       | 1,202                       |       | 512                     |       |
| Deferred service revenue                                                                                                                                    |       | 44,484                      |       | 43,019                  |       |
| Total current liabilities                                                                                                                                   |       | 135,348                     |       | 136,066                 |       |
|                                                                                                                                                        |       |                        |       |                    |       |
| Capital lease obligations, net of current portion                                                                                                           |       | 142                         |       | 166                     |       |
| Deferred income taxes, non-current                                                                                                                          |       | 15,537                      |       | 15,544                  |       |
| Other non-current liabilities                                                                                                                               |       | 1,493                       |       | 1,401                   |       |
|                                                                                                                                                        |       |                        |       |                    |       |
| Commitments and contingencies                                                                                                                               |       |                        |       |                    |       |
|                                                                                                                                                        |       |                        |       |                    |       |
| Minority interests                                                                                                                                          |       | 2,865                       |       | 2,742                   |       |
|                                                                                                                                                        |       |                        |       |                    |       |
| Shareholders’ equity:                                                                                                                                  |       |                        |       |                    |       |
| Common stock, $0.0125 par; authorized 50,000 shares;  issued and outstanding 37,710 at December 31, 2004 and 36,670 at June 30,  2004 (1)         |       | 471                         |       | 457                     |       |
| Capital in excess of par                                                                                                                                    |       | 87,079                      |       | 71,525                  |       |
| Retained earnings                                                                                                                                           |       | 207,074                     |       | 185,660                 |       |
| Accumulated other comprehensive income                                                                                                                      |       | 16,899                      |       | 5,331                   |       |
| Total shareholders’ equity                                                                                                                             |       | 311,523                     |       | 262,973                 |       |
|                                                                                                                                                        |       |                        |       |                    |       |
| Total liabilities and shareholders’ equity                                                                                                             |       | $                           | 466,908    |                    | $          | 418,892 |   |

 

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(1)  See Footnote 1 – Basis of Presentation

 

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

 

3

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 
| ** **                                                                        | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                                                          |       |                                      |       |                                    |       |   |   |   |   |
| Hardware                                                                          |       | $                                         | 42,631     |                                    | $          | 34,300 |   | $ | 81,933 |   | $ | 68,246 |   |
| Software                                                                          |       | 23,544                                    |       | 19,975                                  |       | 46,421 |   | 36,764 |   |
| Service                                                                           |       | 75,755                                    |       | 62,979                                  |       | 143,538 |   | 118,661 |   |
| Total revenue                                                                     |       | 141,930                                   |       | 117,254                                 |       | 271,892 |   | 223,671 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Cost of sales:                                                                    |       |                                      |       |                                    |       |   |   |   |   |
| Hardware                                                                          |       | 29,381                                    |       | 24,717                                  |       | 55,592 |   | 48,457 |   |
| Software                                                                          |       | 6,092                                     |       | 4,507                                   |       | 11,261 |   | 8,840 |   |
| Service                                                                           |       | 35,366                                    |       | 26,958                                  |       | 68,814 |   | 53,167 |   |
| Total cost of sales                                                               |       | 70,839                                    |       | 56,182                                  |       | 135,667 |   | 110,464 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Gross margin                                                                      |       | 71,091                                    |       | 61,072                                  |       | 136,225 |   | 113,207 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Selling, general and administrative expenses                                      |       | 44,790                                    |       | 38,129                                  |       | 85,858 |   | 73,691 |   |
| Research and development expenses                                                 |       | 6,951                                     |       | 7,160                                   |       | 13,662 |   | 13,334 |   |
| Depreciation and amortization                                                     |       | 2,544                                     |       | 2,430                                   |       | 4,946 |   | 4,747 |   |
| Total operating expenses                                                          |       | 54,285                                    |       | 47,719                                  |       | 104,466 |   | 91,772 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Income from operations                                                            |       | 16,806                                    |       | 13,353                                  |       | 31,759 |   | 21,435 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Non-operating income (expense):                                                   |       |                                      |       |                                    |       |   |   |   |   |
| Interest income                                                                   |       | 579                                       |       | 274                                     |       | 932 |   | 514 |   |
| Interest expense                                                                  |       | (182                                      | )          | (508                                    | )          | (231 | ) | (698 | ) |
| Other income, net                                                                 |       | 508                                       |       | 1,535                                   |       | 634 |   | 1,640 |   |
| Total non-operating income                                                        |       | 905                                       |       | 1,301                                   |       | 1,335 |   | 1,456 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Income before taxes, minority interests and equity  in net earnings of affiliates |       | 17,711                                    |       | 14,654                                  |       | 33,094 |   | 22,891 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Income tax provision                                                              |       | 5,714                                     |       | 5,935                                   |       | 11,252 |   | 9,271 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Income before minority interests and equity in net  earnings of affiliates        |       | 11,997                                    |       | 8,719                                   |       | 21,842 |   | 13,620 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Minority interests and equity in net earnings of  affiliates                      |       | (244                                      | )          | (148                                    | )          | (428 | ) | (302 | ) |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Net income                                                                        |       | $                                         | 11,753     |                                    | $          | 8,571 |   | $ | 21,414 |   | $ | 13,318 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Net income per common share (1):                                                  |       |                                      |       |                                    |       |   |   |   |   |
| Basic                                                                             |       | $                                         | 0.32       |                                    | $          | 0.24 |   | $ | 0.58 |   | $ | 0.37 |   |
| Diluted                                                                           |       | $                                         | 0.30       |                                    | $          | 0.22 |   | $ | 0.55 |   | $ | 0.35 |   |
|                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Weighted-average number shares outstanding (1):                                   |       |                                      |       |                                    |       |   |   |   |   |
| Basic                                                                             |       | 37,219                                    |       | 36,354                                  |       | 36,942 |   | 36,213 |   |
| Diluted                                                                           |       | 39,630                                    |       | 38,319                                  |       | 39,186 |   | 38,117 |   |

 

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(1)  See Footnote 1 – Basis of Presentation

 

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

 

4

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Six Months Ended December 31, 2004

(Unaudited, in thousands)

 
| ** **                                      | ** ** | **Common Stock** | ** ** | **Capital  in Excess** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------------------|------------|--------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                      | ** ** | **Shares (1)**   | ** ** | **Amount**             | ** ** | **of Par**   | ** ** | **Earnings**                          | ** ** | **Income** | ** ** | **Total** | ** ** |
| Balance, June 30, 2004                     |       | 36,670           |       | $                      | 457        |         | $          | 71,525                                |       | $          | 185,660    |   | $ | 5,331 |   | $ | 262,973 |   |
| Comprehensive income:                           |       |             |       |                   |       |         |       |                                  |       |       |       |   |   |
| Net income                                      |       | —           |       | —                 |       | —       |       | 21,414                                |       | —     |       | 21,414 |   |
| Foreign currency translation adjustments        |       | —           |       | —                 |       | —       |       | —                                |       | 11,568     |       | 11,568 |   |
| Total comprehensive income                      |       | —           |       | —                 |       | —       |       | 21,414                                |       | 11,568     |       | 32,982 |   |
| Stock issued upon exercise of options           |       | 1,410            |       | 18                     |       | 15,102       |       | —                                |       | —     |       | 15,120 |   |
| Repurchases of stock                            |       | (370             | )          | (4                     | )          | (8,748       | )          | —                                |       | —     |       | (8,752 | ) |
| Income tax benefit from stock options exercised |       | —           |       | —                 |       | 9,200        |       | —                                |       | —     |       | 9,200 |   |
| Balance, December 31, 2004                 |       | 37,710           |       | $                      | 471        |         | $          | 87,079                                |       | $          | 207,074    |   | $ | 16,899 |   | $ | 311,523 |   |

 

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(1)  See Footnote 1 – Basis of Presentation

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

5

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Condensed and unaudited, inthousands)

 
| ** **                                                   | ** ** | **Six Months Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                               | ** ** | **2003** | ** ** |
|                                                         |       |                                   |       |   |   |
| Net cash flows provided by operating activities:             |       | $                                      | 17,428     |   | $ | 30,284 |   |
|                                                         |       |                                   |       |   |   |
| Cash flows from investing activities:                        |       |                                   |       |   |   |
| Purchases of property, plant and equipment                   |       | (5,104                                 | )          | (3,128 | ) |
| Proceeds from dispositions of property, plant and  equipment |       | —                                 |       | 3 |   |
| Internally developed software                                |       | (2,874                                 | )          | (2,322 | ) |
| Purchases of other investments                               |       | —                                 |       | (500 | ) |
| Net cash used in investing activities                        |       | (7,978                                 | )          | (5,947 | ) |
|                                                         |       |                                   |       |   |   |
| Cash flows from financing activities:                        |       |                                   |       |   |   |
| Principal payments on lines of credit                        |       | (17                                    | )          | (11,544 | ) |
| Proceeds from lines of credit                                |       | 25                                     |       | 3,279 |   |
| Principal payments on pre-acquisition shareholder  loan      |       | —                                 |       | (363 | ) |
| Principal payments on capital lease obligations              |       | (61                                    | )          | (48 | ) |
| Dividends to minority owners                                 |       | (283                                   | )          | (161 | ) |
| Repurchases of stock                                         |       | (8,752                                 | )          | (6,837 | ) |
| Proceeds from issuance of stock from option  exercises       |       | 15,120                                 |       | 7,153 |   |
| Net cash provided by (used in) financing activities          |       | 6,032                                  |       | (8,521 | ) |
|                                                         |       |                                   |       |   |   |
| Effect of exchange rate changes on cash                      |       | (252                                   | )          | (210 | ) |
|                                                         |       |                                   |       |   |   |
| Net increase in cash and cash equivalents                    |       | 15,230                                 |       | 15,606 |   |
|                                                         |       |                                   |       |   |   |
| Cash and cash equivalents at beginning of period             |       | 91,451                                 |       | 45,682 |   |
|                                                         |       |                                   |       |   |   |
| Cash and cash equivalents at end of period                   |       | $                                      | 106,681    |   | $ | 61,288 |   |

 

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

 

6

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MICROS SYSTEMS, INC. ANDSUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

For the Quarter EndedDecember 31, 2004

(Unaudited, $ inthousands, except per share data)

 

1.                                       Basisof Presentation

 

The accompanying consolidated financial statements ofMICROS Systems, Inc. and its subsidiaries (collectively, the “Company”) havebeen prepared by the Company pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). This Quarterly Report on Form 10-Q should be read in conjunction withthe Company’s Annual Report on Form 10-K for the year ended June 30, 2004.

 

On January 5, 2005, the Company announced thatits Board of Directors approved a two-for-one stock split effected in the formof a 100 percent stock dividend. Stockholders received one additional share forevery share they owned as of the close of business on January 17, 2005.The additional shares were distributed on January 31, 2005 and reportingof the Company’s share price on a split-adjusted basis commenced shortlythereafter. As a result, the Company’s shares outstanding, as of January 31,2005, increased from approximately 18,923,640 shares to 37,847,280 shares. Allreferences in the consolidated financial statements to common shares, shareprices, per share amounts and stock plans have been retroactively restated forthe two-for-one stock split.

 

Certain information and footnote disclosures whichare normally included in financial statements prepared in accordance withgenerally accepted accounting principles have been condensed or omittedpursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments that, inthe opinion of management, are necessary for a fair presentation of thefinancial position of the Company, and its results of operations for theinterim periods set forth herein.  Theresults for the three- and six- months ended December 31, 2004 are notnecessarily indicative of the results to be expected for the full year or anyfuture period.  Certain amountspreviously reported have been reclassified to conform to the current yearpresentation.

 

2.                                       Stock-based compensation

 

TheCompany has incentive and non-qualified stock options outstanding that weregranted to directors, officers, and other employees pursuant to authorizationby the Board of Directors.  The exerciseprice of all options equals the market value on the date of the grant.  Substantially all of the options granted areexercisable pursuant to a three-year vesting schedule whereby one-third ofthe options vest upon the first anniversary of the grant, the second third ofthe options vest upon the second anniversary of the grant, and the final thirdof the options vest upon the third anniversary of the grant.  Pursuant to the employment agreement betweenMICROS and Mr. A.L. Giannopoulos, all options granted to Mr. Giannopoulos shallvest on the first year anniversary after grant. Currently, all outstanding options expire ten years from the date ofgrant.

 

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

 

7

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| ** **                                                                                                  | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income - as reported                                                                                    |       | $                                         | 11,753     |                                    | $          | 8,571 |   | $ | 21,414 |   | $ | 13,318 |   |
| Add: stock-based compensation expense included in  reported net income, net of tax                          |       | —                                    |       | —                                  |       | — |   | — |   |
| Deduct: total stock-based employee compensation  expense determined under the fair value method, net of tax |       | (1,237                                    | )          | (1,219                                  | )          | (2,615 | ) | (2,487 | ) |
| Net income - pro forma                                                                                      |       | $                                         | 10,516     |                                    | $          | 7,352 |   | $ | 18,799 |   | $ | 10,831 |   |
|                                                                                                        |       |                                      |       |                                    |       |   |   |   |   |
| Basic net income per share (1)                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| As reported                                                                                                 |       | $                                         | 0.32       |                                    | $          | 0.24 |   | $ | 0.58 |   | $ | 0.37 |   |
| Pro forma                                                                                                   |       | $                                         | 0.28       |                                    | $          | 0.20 |   | $ | 0.51 |   | $ | 0.30 |   |
|                                                                                                        |       |                                      |       |                                    |       |   |   |   |   |
| Diluted net income per share (1)                                                                            |       |                                      |       |                                    |       |   |   |   |   |
| As reported                                                                                                 |       | $                                         | 0.30       |                                    | $          | 0.22 |   | $ | 0.55 |   | $ | 0.35 |   |
| Pro forma                                                                                                   |       | $                                         | 0.27       |                                    | $          | 0.19 |   | $ | 0.48 |   | $ | 0.28 |   |

 

Theweighted average fair value of each option granted for the second quarter offiscal year 2005 and 2004 was $16.26 and $10.81, respectively (1).  The weighted average fair value of eachoption granted for the first six months of fiscal year 2005 and 2004 was $16.14and $10.76, respectively (1).  The fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions:

 
| ** **              | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free interest rate |       | 3.8                                       | %          | 3.7                                     | %          | 3.8 | % | 3.7 | % |
| Expected life           |       | 6.0 years                                 |       | 6.0 years                               |       | 6.0 years |   | 6.0 years |   |
| Expected volatility     |       | 46                                        | %          | 50                                      | %          | 46 | % | 50 | % |
| Expected dividend yield |       | 0                                         | %          | 0                                       | %          | 0 | % | 0 | % |

 

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

 

----

(1)  See Footnote 1 – Basis of Presentation

 

3.                                       Thecomponents of inventories are as follows:

 
| ** **      | ** ** | **December 31,  2004** | ** ** | **June 30,  2004** | ** ** |
|-----------------|------------|-----------------------------|------------|-------------------------|------------|
| Raw materials   |       | $                           | 6,205      |                    | $          | 5,592 |   |
| Work-in-process |       | 37                          |       | 91                      |       |
| Finished goods  |       | 35,723                      |       | 30,412                  |       |
|            |       | $                           | 41,965     |                    | $          | 36,095 |   |

 

TheCompany maintains a reserve for obsolescence for inventory in the amount of$6,759 at December 31, 2004 compared to $6,380 at June 30, 2004.

 

8

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4.                                       Recentaccounting standards

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” a revision ofSFAS No. 123, “Accounting for Stock-Based Compensation” and superseding APBOpinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R)requires the Company to expense grants made under the stock option program.That cost will be recognized over the vesting period of the plans. SFAS No.123(R) is effective for the first interim or annual period beginning after June 15,2005. Upon adoption of SFAS No. 123(R), amounts previously disclosed under SFASNo. 123 will be recorded in the consolidated income statement. The Company isevaluating the alternatives allowed under the standard, which the Company isrequired to adopt beginning in fiscal year 2006.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets” superseding APBOpinion No. 29, “Accounting for Nonmonetary transactions.” SFAS 153 is effectivefor nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. The Company is currently evaluating theimpact of the proposed standard.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs,” an amendment to AccountingResearch Bulletin (“ARB”) No. 43, Chapter 4,”Inventory Pricing.” SFAS No. 151is effective for inventory costs incurred during fiscal years beginning after June 15,2005. The Company has evaluated the standard and has concludedthat this standard will not have a material impact on the Company’s financialposition and results of operation.

 

On October 22,2004, the American Jobs Creation Act (“AJCA”) was signed into law by PresidentBush.  The AJCA broadly impacts theCompany in the following manner: the phase out of the Extraterritorial IncomeExclusion Act of 2000 (“ETI”) over a three year period, the introduction of aqualified manufacturing deduction, and a one-time election to repatriateforeign earnings.  At this time theCompany is evaluating the potential impact on the Company’s financial positionand results of operation from this legislation.

 

5.                                       Netincome per share

 

Basicnet income per common share is computed by dividing net income by the weightedaverage number of shares outstanding. Diluted net income per share includes the dilutive effect of stockoptions.

 

Areconciliation of the weighted average number of common shares outstandingassuming dilution is as follows(1):

 
| ** **                                                 | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                 |       | $                                         | 11,753     |                                    | $          | 8,571 |   | $ | 21,414 |   | $ | 13,318 |   |
|                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Average common shares outstanding                          |       | 37,219                                    |       | 36,354                                  |       | 36,942 |   | 36,213 |   |
| Dilutive effect of outstanding stock options               |       | 2,411                                     |       | 1,965                                   |       | 2,244 |   | 1,904 |   |
| Average common shares outstanding assuming dilution        |       | 39,630                                    |       | 38,319                                  |       | 39,186 |   | 38,117 |   |
|                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Basic net income per share                                 |       | $                                         | 0.32       |                                    | $          | 0.24 |   | $ | 0.58 |   | $ | 0.37 |   |
| Diluted net income per share                               |       | $                                         | 0.30       |                                    | $          | 0.22 |   | $ | 0.55 |   | $ | 0.35 |   |
|                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Anti-dilutive weighted shares excluded from reconciliation |       | 327                                       |       | 1,514                                   |       | 208 |   | 1,536 |   |

 

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(1)  See Footnote 1 – Basis of Presentation

 

9

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6.                                       Segmentreporting data

 

The Company develops, manufactures, sells and services point-of-salecomputer systems, property management systems, central reservation and centralinformation systems products for the hospitality industry and informationtechnology solutions for the specialty and general merchandise retail industry.  MICROS is organized and operates in two reportablesegments: U.S. and International.  TheInternational segment is primarily in Europe, Asia Pacific and LatinAmerica.  For purposes of applying SFASNo. 131, “Disclosures about Segments of an Enterprise and Related Information,”management views the U.S. and International segments separately in operatingthe business, although the products and services are similar for each segment.

 

Asummary of the Company’s operating segments is as follows:

 
| ** **                                                                              | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues (1):                                                                           |       |                                      |       |                                    |       |   |   |   |   |
| United States                                                                           |       | $                                         | 75,930     |                                    | $          | 64,557 |   | $ | 146,856 |   | $ | 128,026 |   |
| International                                                                           |       | 83,359                                    |       | 69,164                                  |       | 159,597 |   | 126,208 |   |
| Intersegment eliminations                                                               |       | (17,359                                   | )          | (16,467                                 | )          | (34,561 | ) | (30,563 | ) |
| Total revenues                                                                          |       | $                                         | 141,930    |                                    | $          | 117,254 |   | $ | 271,892 |   | $ | 223,671 |   |
|                                                                                    |       |                                      |       |                                    |       |   |   |   |   |
| Income before taxes, minority interests and equity  in net earnings of affiliates (1):  |       |                                      |       |                                    |       |   |   |   |   |
| United States                                                                           |       | $                                         | 6,744      |                                    | $          | 6,566 |   | $ | 12,786 |   | $ | 9,868 |   |
| International                                                                           |       | 24,140                                    |       | 21,151                                  |       | 46,920 |   | 37,201 |   |
| Intersegment eliminations                                                               |       | (13,173                                   | )          | (13,063                                 | )          | (26,612 | ) | (24,178 | ) |
| Total income before taxes, minority interests and  equity in net earnings of affiliates |       | $                                         | 17,711     |                                    | $          | 14,654 |   | $ | 33,094 |   | $ | 22,891 |   |

 
| ** **                | ** ** | **December 31,  2004** | ** ** | **June 30,  2004** | ** ** |
|---------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Identifiable assets (2):  |       |                        |       |                    |       |
| United States             |       | $                           | 272,238    |                    | $          | 232,577 |   |
| International             |       | 194,670                     |       | 186,315                 |       |
| Total identifiable assets |       | $                           | 466,908    |                    | $          | 418,892 |   |

 

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(1)          Amountsbased on the location of the customer.

(2)          Amountsbased on the location of the selling entity.

 

7.                                       Shareholders’ Equity

*(Sharesand average purchase price per share are presented prior to January 31,2005 stock split)*

 

In fiscal year 2002, the Board of Directors authorized thepurchase of up to one million shares of the Company’s common stock.Subsequently, during fiscal year 2005, the Board of Directors authorized thepurchase of an additional one million shares. A summary of the cumulativenumber of whole shares purchased through December 31, 2004, is as follows:

 
| ** **                                                       | ** ** | **Whole  Shares** | ** ** | **Average  Purchase Price** | ** ** | **Principal** | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------|------------|
| ** **                                                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **    | ** ** |
| Total  shares purchased as of June 30, 2004                 |       | 799,731           |       | $                           | 33.01      |          | $          | 26,403 |   |
| Shares purchased from July 1 – December 31,  2004 |       | 184,695           |       | $                           | 47.39      |          | 8,752      |   |
| Total shares purchased as December 31, 2004                 |       | 984,426           |       | $                           | 35.71      |          | $          | 35,155 |   |

 

10

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8.                                       PensionBenefits

 

On November 19,2004, the Company’s Board of Directors (with Messrs. A.L. Giannopoulos andLouis M. Brown, Jr. abstaining) authorized the establishment of a SupplementalExecutive Retirement Plan, to provide designated officers and executives of theCompany with benefits upon retirement effective as of August 25, 2004. Theplan is accounted for in accordance with Statement of Financial AccountingStandard (“SFAS”) 87 – Employers Accounting for Pensions.  Under the terms of the plan, participants whoare vested in the plan will receive 10 payments over nine years commencing 6months after retirement on or after age 62. The payment amount is determinedbased on the participant’s age at retirement and the base salary received bythe participant during the 12 months immediately preceding his or herretirement.

 

TheSupplemental Executive Retirement Plan is an unfunded plan providingsupplementary retirement benefits to higher level, longer-serviceemployees. Total pension cost for the six months ended December 31, 2004and 2003 includes the following components ($ in thousands):

 

| ** **                                    | ** ** | **Pension Costs**                       | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **Six Months Ended  December 31,** | ** ** |
| ** **                                    | ** ** | **2004**                                | ** ** | **2003** | ** ** |
|                                          |       |                                    |       |   |   |
| Service cost                                  |       | $                                       | 696        |   | $ | — |   |
| Interest cost on projected benefit obligation |       | 4                                       |       | — |   |
| Expected return on plan assets                |       | —                                  |       | — |   |
| Amortization of unrecognized actuarial loss.  |       | —                                  |       | — |   |
| Total pension cost                            |       | $                                       | 700        |   | $ | — |   |

 

9.                                       SubsequentEvents

 

On January 5,2005, MICROS Systems, Inc. (“MICROS”) acquired JTECH Communications, Inc (“JTECH”).  JTECH is headquartered in Boca Raton,Florida, and will be operated as a wholly-owned subsidiary of MICROS.  MICROS does not consider the financial resultsof JTECH to be material to the Company’s financial position and results ofoperations.

 

JTECHis one of the nation’s leading provider of on-premise wireless messagingsystems for the retail and hospitality industries.  Using a variety of wireless products, systemsand solutions, JTECH’s user list features over 50,000 installations spanningchain and independent restaurants, hotels, casino’s, cruise ships, retailstores, hospitals, churches, and pharmacies.

 

On January 5,2005, MICROS issued a press release to announce that its Board of Directors hadapproved a two-for-one split of the Company’s common stock, executed in theform of a stock dividend of one share for each share held.  Shareholders of record as of January 17,2005 were entitled to receive the additional shares. The transaction wasfinalized and as of January 31, 2005 there were approximately 37,847,280shares outstanding.

 

11

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**Item2.   Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

Forward-LookingStatements

 

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with the Condensed Consolidated Financial Statements andthe related notes and other financial information included elsewhere in thisQuarterly Report on Form 10-Q. The discussion and analysis containsforward-looking statements which are made in reliance upon safe harborprovisions of the Private Securities Litigation Reform Act of 1995. Our actualresults may differ materially from those anticipated in these forward-lookingstatements and other forward-looking statements made elsewhere in thisQuarterly Report on Form 10-Q as a result of specified factors, including thoseset forth under the caption “Factors that May Affect Future Results.”

 

Overview

 

MICROS is a leading global providerof software and hardware systems, and associated goods and services, primarilyto the hospitality industry and the specialty retail industry.  MICROS’s products include hotel informationsystems (e.g., property management systems, sales and catering systems, centralreservation systems, and customer information systems), restaurant informationsystems (e.g., hospitality-oriented point-of-sale systems, specialized computerhardware, back office applications, and some centrally hosted applications),and specialty retail systems (e.g., retail-oriented point-of-sale systems, andback-office loss prevention applications). MICROS also provides services related to its products, includinginstallation, training, maintenance and support, custom development, andsoftware hosting.   Over 200,000 MICROSrestaurant information systems are currently installed in table and quickservice restaurants, hotels, motels, casinos, leisure and entertainment, andretail operations in more than 140 countries, and on all seven continents.   In addition, MICROS has provided hotelinformation systems to more than 20,000 hotels worldwide, and retail systems tomore than 50,000 specialty retail stores worldwide.  MICROS distributes its products and servicesdirectly and through its district and subsidiary offices, as well as through anetwork of independent dealers and distributors.

 

MICROS operates in highlycompetitive markets.  MICROS’s productsand services compete with those of numerous other third-party providers ofhardware, software, and services geared toward the hospitality and retailindustries, as well as systems developed and maintained by the customersthemselves.  MICROS believes that itscompetitive strengths include its established global distribution and servicenetwork, its commitment to research and development, and the breadth of itsproduct lines and services.  MICROS continuesto experience growth in revenue and in net income.  The increases in revenue reflect increases insoftware sales, several large major account installations of hotel informationsystems and restaurant information systems, both in the US and internationally,improved sales of the MICROS Workstation 4 hardware platform, and an increasein support and installation revenues commensurate with increases in the overallcustomer base.  While software salesimproved, higher costs associated with sales of third party software productshave reduced gross margin contributions. Selling, general, and administrativeexpenses as a percentage of sales remain lower comparatively, but haveincreased worldwide in the second quarter due in part to merit increases,additional headcount, and administrative expenses associated with MICROS’simplementation of procedures mandated by Section 404 of the Sarbanes-Oxley Actof 2002.

 

**Resultsof Operations – Second Quarter and Six-Month Comparisons**

*(Earnings per share figures are presented on a stock split-adjustedbasis)*

 

MICROS recordeddiluted net income of $0.30 per common share in the second quarter of fiscalyear 2005, compared with diluted net income of $0.22 per common share in thesecond quarter of fiscal year 2004.  Forthe six-months ended December 31, 2004, diluted net income was $0.55 percommon share compared with diluted net income of $0.35 per common share for thesix-months ended December 31, 2003. The quarter and year to date increases were mainly due to increasedsales volume coupled with the favorable effects of currency exchange ratefluctuations. Software sales improved significantly, however higher costsassociated with sales of third party software products have, to a lesserextent, minimized gross margin contributions. Service revenues remain strong asmaintenance revenue and installation related revenues continue to grow as ourvolume increases. In addition, our overall tax rate decreased compared to lastyear.

 

Revenue increasedapproximately $24.7million, or 21.0% to $141.9 million in the second quarter offiscal year 2005 compared to last fiscal year 2004, while year to date revenueincreased $48.2 million, or 21.6%, to $271.9 million compared to the sameperiod last year.

 

12

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An analysis of thesales mix by reportable segments is as follows (total amounts are net ofintersegment eliminations and based on location of the selling entity):

 
| ** **          | ** ** | **U.S.  Three Months Ended  December 31,** | ** ** | **International  Three Months Ended  December 31,** | ** ** | **U.S.  Six Months Ended  December 31,** | ** ** | **International  Six Months Ended  December 31,** | ** ** |
|---------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in  thousands)** | ** ** | **2004**                                        | ** ** | **2003**                                                 | ** ** | **2004**                                      | ** ** | **2003**                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Hardware            |       | $                                               | 23,961     |                                                     | $          | 21,864                                        |       | $                                                      | 18,670     |   | $ | 12,436 |   | $ | 47,590 |   | $ | 44,286 |   | $ | 34,343 |   | $ | 23,960 |   |
|                |       |                                            |       |                                                     |       |                                          |       |                                                   |       |   |   |   |   |   |   |   |   |
| Software            |       | 10,762                                          |       | 11,075                                                   |       | 12,782                                        |       | 8,900                                                  |       | 21,348 |   | 20,538 |   | 25,073 |   | 16,226 |   |
|                |       |                                            |       |                                                     |       |                                          |       |                                                   |       |   |   |   |   |   |   |   |   |
| Service             |       | 36,160                                          |       | 32,287                                                   |       | 39,595                                        |       | 30,692                                                 |       | 71,367 |   | 62,376 |   | 72,171 |   | 56,285 |   |
|                |       |                                            |       |                                                     |       |                                          |       |                                                   |       |   |   |   |   |   |   |   |   |
| Total Revenue       |       | $                                               | 70,883     |                                                     | $          | 65,226                                        |       | $                                                      | 71,047     |   | $ | 52,028 |   | $ | 140,305 |   | $ | 127,200 |   | $ | 131,587 |   | $ | 96,471 |   |

 

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

 
| ** ** | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** ** | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Hardware   |       | 30.0                                      | %          | 29.3                                    | %          | 30.1 | % | 30.5 | % |
| Software   |       | 16.6                                      | %          | 17.0                                    | %          | 17.1 | % | 16.4 | % |
| Service    |       | 53.4                                      | %          | 53.7                                    | %          | 52.8 | % | 53.1 | % |
| Total      |       | 100.0                                     | %          | 100.0                                   | %          | 100.0 | % | 100.0 | % |

 

For the threemonths ended December 31, 2004, the U.S. reporting unit sales increasedapproximately $5.7 million while the international reporting unit salesincreased $19.0 million.  The increase inthe U.S. was due to several factors including an increase in service andsupport revenues from the continued expansion of the MICROS customer base aswell as recurring support revenue from existing customers coupled with improvedhardware sales, which increased primarily as a result of increased Workstation4 sales. The increase in the international reporting unit overall was primarilydue to several large account installations coupled with the favorable effectsof currency exchange rate fluctuations.

 

For the six monthsended December 31, 2004, the U.S. reporting unit sales increased $13.1million while the international reporting unit sales increased $35.1million.  The increase in the U.S. wasdue primarily from strong service and support revenues from the continuedexpansion of the MICROS customer base as well as recurring support revenue fromexisting customers. The increase in the international reporting unit wasprimarily due to large installations, increased service and support, and favorableeffects of currency exchange rate fluctuations.

 

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

 
| ** **          | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **          | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Hardware            |       | $                                         | 29,381     |                                    | $          | 24,717 |   | $ | 55,592 |   | $ | 48,457 |   |
| Software            |       | 6,092                                     |       | 4,507                                   |       | 11,261 |   | 8,840 |   |
| Service             |       | 35,366                                    |       | 26,958                                  |       | 68,814 |   | 53,167 |   |
| Total cost of sales |       | $                                         | 70,839     |                                    | $          | 56,182 |   | $ | 135,667 |   | $ | 110,464 |   |

 

MICROS’s cost ofsales increased $14.7 million, or 26.1%, to $70.8 million in the second quarterof fiscal year 2005 compared to the same period last year.  On a year to date basis, costs of salesincreased by $25.2 million, or 22.8%, to $135.7 million compared to $110.5million in the prior year. The increase in the quarter and year to date cost ofsales was mainly due to increased volume and costs associated with 3rdparty software; however annual merit

 

13

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increases,additional headcount, and the unfavorable effects of currency exchange ratefluctuations have had an impact on our cost of sales.

 

For the threemonths ended December 31, 2004, total cost of sales, as a percentage ofrevenue, increased to 49.9% from 47.9% in the prior fiscal year.  Cost of sales for hardware, as a percentageof related revenue, decreased to 68.9% compared to 72.1% for the same periodlast year. The hardware cost of sales decrease is a result of increasedWorkstation 4 sales, which generate slightly higher margins.  Software costs, as a percentage of relatedrevenue, increased to 25.9% from 22.6% for the same period last year. Thesoftware cost of sales increase is primarily due to third party software sales,which generate smaller margins.  Servicecosts as a percentage of related revenue increased to 46.7% compared to 42.8%for the same period last year. The service cost of sales increase is primarilydue to labor costs and the unfavorable effects of currency exchange ratefluctuations.

 

For the six monthsended December 31, 2004, total cost of sales, as a percentage of revenue, increasedslightly to 49.9% from 49.4% in the prior fiscal year.  Cost of sales for hardware, as a percentageof related revenue, decreased to 67.9% compared to 71.0% in the same periodlast year.  The hardware cost of salesdecrease is a result of increased Workstation 4 sales, which generate slightlyhigher margins.  Software costs, as apercentage of related revenue, increased to 24.3% from 24.0% for the sameperiod last year. The software cost of sales increase is primarily due to thirdparty software sales, which generate smaller margins. Service costs as apercentage of related revenue increased to 47.9% compared to 44.8% for the sameperiod last year. The service cost increase is primarily due to labor costs andthe unfavorable effects of currency exchange rate fluctuations.

 

Selling, generaland administrative expenses increased $6.7 million, or 17.5%, to $44.8 millionin the second quarter of fiscal year 2005 compared to $38.1 million for thesame period last year.  On a year to datebasis, selling, general and administrative expenses increased by $12.2 million,or 16.5%, to $85.9 million compared to $73.7 million in the prior year. Thequarter and year to date increases were mainly due to increases in salaries dueto annual merit increases and some additional headcount, expenses for outsideconsulting services associated with MICROS’s implementation of proceduresmandated by Section 404 of the Sarbanes-Oxley Act, and the unfavorableeffects of foreign currency exchange fluctuations.  As a percentage of revenue, selling, generaland administrative expenses decreased to 31.6% and 31.6% in the three- and six-months ended December 31, 2004 from 32.5% and 33.0% in the same periodsthe previous year, respectively.

 

Research anddevelopment (“R&D”) expenses consist primarily of labor costs lesscapitalized software development costs. On a quarter and year-to-date basis, Total R&D increased compared tothe prior year as a result of increased R&D associated with Datavantage’sdevelopment of Xstore, which is a Java-based POS product. As a percentage ofrevenue, R&D expenses decreased to 4.9% in second quarter of fiscal year2005 compared to 6.1% in the second quarter of fiscal year 2004.  On a year to date basis, R&D expenses was5.0% and 6.0% of revenue for fiscal year 2005 and 2004, respectively.  A comparative summary of R&D activitiesis as follows ($ in thousands):

 
| ** **             | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Total R&D          |       | $                                         | 8,472      |                                    | $          | 8,074 |   | $ | 16,536 |   | $ | 15,656 |   |
| R&D capitalization |       | (1,521                                    | )          | (914                                    | )          | (2,874 | ) | (2,322 | ) |
| Total R&D expense  |       | $                                         | 6,951      |                                    | $          | 7,160 |   | $ | 13,662 |   | $ | 13,334 |   |

 

Depreciation andamortization expense increased $0.1 million, or 4.7%, to $2.5 million in thesecond quarter of fiscal year 2005 compared to $2.4 million for the same periodlast year.  On a year to date basis,depreciation and amortization expense increased by $0.2 million, or 4.2%, to$4.9 million compared to $4.7 million in the prior year.  The slight increase in the quarter and yearto date is primarily the result of the unfavorable effects of currency exchangerate fluctuations.

 

Income fromoperations increased 25.9%, to $16.8 million in the second quarter of fiscalyear 2005 compared to $13.4 million for the same period last year.  On a year to date basis, income fromoperations increased 48.2%, to $31.8 million compared to $21.4 million in theprior year.  The quarter and year to dateincreases are mainly due to an overall increase in sales volume coupled withthe effects of favorable foreign currency exchange fluctuations. Theseincreases have been partially offset by increases in salaries and relatedexpenses due to merit increases and to a lesser extent additional headcount;expenses for outside consulting services associated with MICROS’s

 

14

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implementation ofprocedures mandated by Section 404 of the Sarbanes-Oxley Act; and a salesmix containing more third party software sales, which typically have highercosts.

 

Non-operatingincome decreased $0.4 million, or 30.4%, to $0.9 million in the second quarterof fiscal year 2005 compared to $1.3 million for the same period lastyear.  On a year-to-date basis,non-operating income decreased by $0.2 million, or 8.3%, to $1.3 millioncompared to $1.5 million in the prior year. The quarter decrease is mainly dueto a legal settlement that was recorded in the prior fiscal year in the netamount of approximately $1.2 million. This decrease compared to the prior yearwas partially offset by increases in interest income, which is due to highercash balances.

 

Income beforetaxes increased $3.1 million to $17.7 million in the second quarter offiscal.  The U.S. reporting unitaccounted for the $1.1 million increase, and the foreign reporting unitrepresented $2.0 million of the total increase. The U.S. reporting unit and the international reporting unit increasewas mainly due to increased sales volume. On a year-to-date basis, incomebefore taxes increased $10.2 million to $33.1 million also due to increasedsales volume.

 

The effective taxrate for the second quarter of fiscal year 2005 and 2004 was 32.3% and 40.5%,respectively.  The decrease was a directresult of consolidating functions and activities in jurisdictions where the mixof earnings is subjected to a lower than average tax rate.  On the basis of currently availableinformation, the Company estimates that the 2005 fiscal year-end tax rate willbe approximately 34%.

 

**CriticalAccounting Policies**

 

The accompanying discussion andanalysis of our financial condition and results of operations are based uponour Condensed Consolidated Financial Statements, which have been prepared inaccordance with accounting principles generally accepted in the U.S. Thepreparation of these financial statements requires that we make estimates andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses, and related disclosure of contingent assets and liabilities. We baseour estimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources.

 

Actual results could differ from theestimates made by management with respect to these and other items that requiremanagement’s estimates.

 

We believe that the followingaccounting policies are critical to understanding our historical and futureperformance, as these policies affect the reported amounts of revenue andrelate to the more significant areas involving management’s judgments andestimates:

 

**•****                 **revenue recognition and deferredrevenue;

**•****                 **allowance for doubtful accounts;

**•****                 **allowance for obsolescence;

**•****                 **capitalized software developmentcosts;

**•****                 **valuation of long-lived assets,including intangible assets and impairment review of goodwill;

**•****                 **contingencies and litigation;

**•****                 **income taxes;

**•****                 **stock-based compensation plans; and

**•****                 **foreign currency translation.

 

Our management has reviewed ourcritical accounting policies, our critical accounting estimates and the relateddisclosures with our Audit Committee. These policies and our procedures relatedto these policies are described further in our Annual Report on Form 10-Kfor the year ended June 30, 2004 in Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” under the heading “CriticalAccounting Policies.”

 

15

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**Liquidityand Capital Resources**

 

On July 17, 2003, weentered into two credit agreements (the “Credit Agreements”) which in theaggregate offer a $65.0 million multi-currency committed line of credit, expiringon July 31, 2005.  The lenders (the “Lenders”)under the Credit Agreements are Bank of America, N.A., Wachovia Bank, N. A.,and US Bank.  Simultaneously uponentering into the Credit Agreements, we entered into: (i) a security agreement,pursuant to which the Lenders were granted a security interest in all inventoryand receivables located in the United States; and (ii) a pledge agreement andirrevocable stock powers, pursuant to which we pledged the stock of certain ofour subsidiaries to the Lenders as collateral.

 

The interest rate underthe Credit Agreements is calculated as follows: (i) if the advance is made inU.S. dollars, the greater of the federal funds rate, plus 50 basis points, orthe Bank of America prime rate, plus an additional 25 to 150 basis points,depending upon the Company’s consolidated earnings before interest, taxes,depreciation and amortization (“EBITDA”) for the immediately preceding fourcalendar quarters; and (ii) if the advance is made in a foreign currency, theLIBOR rate for the applicable denominated currency, plus an additional 150 to250 basis points, depending upon the Company’s consolidated EBITDA for theimmediately preceding four calendar quarters. The Credit Agreements alsorequire that the Company pay immaterial commitment fees on the unused portionof the line of credit to the Lenders.

 

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

 

The Company also has acredit relationship with a European bank in the amount of EUR 1.0 million(approximately $1.4 million at the December 31, 2004 exchange rate).  Under the terms of this facility, the Companymay 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 December 31,2004, the total outstanding balance on the lines of credit is $2.7 millionconsisting of: ZAR (South African Rand) 4.0 million (approximately $0.7 millionat the December 31, 2004 exchange rate), SEK (Swedish Krona) 7.5 million(approximately $1.1 million at the December 31, 2004 exchange rate), andJPY (Japanese Yen) 90.0 million (approximately $0.9 million at the December 31,2004 exchange rate).  As of December 31,2004, the Company has approximately $63.7 million borrowing capacity under theCredit Agreement and Euro-denominated facility.

 

Net cash provided byoperating activities for fiscal year 2005 was $17.4 million versus $30.3million for fiscal year 2004. ** ** The Company used $8.0 million for investingactivities, including $5.1 million for the purchase of property, plant, andequipment and internally developed software. ** **The Company received $6.0 millionfrom financing activities, consisting primarily of proceeds of $15.1 from theissuance of stock option exercises offset by $8.8 million in the repurchase ofthe Company’s stock.  All cash is beingretained for the operation and expansion of the business and the repurchase ofthe Company’s stock.

 

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 next 12 months.  The Company anticipates that its property,plant and equipment expenditures for fiscal year 2005 will be approximately$2.0 million higher than in fiscal year 2004.

 

**Off-balancesheet arrangements**

 

The Company does not haveany off-balance sheet arrangements (as defined in the applicable regulations)that have or are reasonably likely to have a current or future effect on theCompany’s financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures, or capitalresources that is material to investors.

 

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**Factorsthat may affect future results**

 

In light ofcurrent market conditions, and world political and economic uncertainty, it isdifficult to determine whether the Company can continue to achieve revenue andprofitability growth in the next year. This is especially true since the primary industries MICROS serves, thehospitality, travel and restaurant industries, are highly sensitive toeconomic, political and environmental disturbances, all of which are not onlyoutside of the control of MICROS, but also extraordinarily difficult to predictwith any accuracy.  Accordingly, therecan be no assurance that any particular level of growth is reasonable or can beachieved.  In addition, due to thecompetitive nature of the market, the Company continues to experience grossmargin pressure on its products (both hardware and software) and serviceofferings, and the Company expects product and service margins to decline.  There can be no assurance that the Company willbe able to increase sufficiently sales of its higher margin products, includingsoftware, to prevent future declines in the Company’s overall grossmargin.  Additionally, given the factthat MICROS conducts business in many different currencies, currencyfluctuations directly impact the Company’s financial results.  While the Company recently has enjoyed someof the benefits of a strong Euro since the Company conducts significantbusiness in Europe, a weakening Euro will serve to adversely impact the Company’sfinancial performance.

 

Moreover, MICROS’sfinancial results in any single quarter are dependent upon the timing and sizeof customer orders and the shipment of products for large orders.  Large software orders from customers mayaccount for more than an insignificant portion of earnings in any quarter.  The customers with whom MICROS does thelargest amount of business are expected to vary from year to year as a resultof the timing for the roll-out of each customer’s system.  Furthermore, if a customer delays oraccelerates its delivery requirements or a product’s completion is delayed oraccelerated, revenues expected in a given quarter may be deferred oraccelerated into subsequent or earlier quarters, respectively.

 

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

 

Moreover, some of thestatements contained herein not based on historic facts are forward lookingstatements within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended, and Section 27A of theSecurities Act of 1933, as amended, that involve risks anduncertainties.  Past performance is notnecessarily a strong or reliable indicator of future performance.  Actual results could differ materially frompast results, estimates or projections. Some of the additional risks and uncertainties are: political and worldinstability created by the threat of subsequent terrorist attacks, whichgravely impacts the travel and tourism industries; environmental and healthdisasters, including the Tsunami disaster in Asia (while preliminary reportsindicate that the Tsunami disaster will adversely impact the financialperformance of MICROS’ Asia Pacific division for the next several quarters asrebuilding efforts commence, the impact is not expected to be material), theproduct demand and market acceptance, including demand and acceptance for theOPERA products which are more complex, implementation of a cost-effectiveservice structure capable of servicing increasingly complex software systems inincreasingly more remote locations; achieving increased sales of higher marginsoftware products; risks and uncertainties associated with the Company’s recentacquisition of JTECH; hiring and retention of qualified employees withsufficient technical expertise; unexpected currency fluctuations; impact ofcompetitive products and pricing on margins; product development delays;technological difficulties associated with new product releases; and managingexpenses, including those over which the Company exercises little or nocontrol, such as health care costs. These and other risks are disclosed in the Company’s releases and SECfilings, including in the section titled “Business and Investment Risks;Information Relating to Forward-Looking Statements”, in the Company’s AnnualReport on Form 10-K for the Fiscal Year ended June 30, 2004.

 

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

MICROS’s significantinternational business and presence exposes the Company to a multitude ofmarket risks, such as currency, interest rate and political risks.  With respect to currency risk, the Companytransacts business in 23 different currencies through its foreign subsidiaries.  The fluctuation of currencies impacts salesand profitability. Frequently, sales and the costs associated with such salesare not always denominated in the same currency.  Given the fact that the Company transactsbusiness in many different currencies, adverse declines in certain currenciescan

 

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be offset by favorableadvances in other currencies.  Strengthin the Euro has helped to bolster sales and profitability in Europe; anysubsequent decline will adversely impact year over year growth comparisons.

 

Additionally, the Companyis subject to interest rate fluctuations in foreign countries to the extentthat the Company elects to borrow in the local foreign currency.  In the past, this has not been an issue ofconcern as the Company has the capacity to elect to borrow in other currencieswith more favorable interest rates. While the Company has not to date invested in financial instrumentsdesigned to protect against interest rate fluctuations, the Company willcontinue to evaluate the need to do so in the future.

 

Further, the Company issubject to political risk, due in part to instability in the Middle East andthe worldwide threat of terrorism, especially in developing countries withuncertain or unstable political structures or regimes.  Contributing to this risk factor is theadverse impact that political instability has on the travel and tourismindustries. The Company is also subject to the effects of, and changes in, lawsand regulations, other activities of governments, agencies and similarorganizations.

 

**Item4.  Controls and Procedures**

 

As of the end of the period covered by this quarterlyreport, the Company has conducted an evaluation of the effectiveness of thedesign and operation of the Company’s “Disclosure Controls and Procedures” (asdefined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of1934).  This evaluation was carried outunder the supervision of the Company’s management, including A.L. Giannopoulos,MICROS’s Chairman, Chief Executive Officer and President, and Gary C. Kaufman,MICROS’s Executive Vice President and Chief Financial Officer. DisclosureControls and Procedures are designed with the objective of ensuring that informationrequired to be disclosed in the reports MICROS files or submits under theSecurities Exchange Act of 1934 (Exchange Act), such as this quarterly report,is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure Controls and Procedures arealso designed with the objective of ensuring that such information isaccumulated and communicated to management, including the Chief ExecutiveOfficer and Chief Financial Officer, to allow timely decisions regardingrequired disclosure.

 

The Company does not expect that its DisclosureControls and Procedures will prevent all errors and all fraud. Despite itslevel of sophistication, detail and thoroughness, a disclosure control systemcan provide only reasonable, not absolute, assurance that the objectives of thecontrol system are satisfied.  Because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been or will be detected.

 

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

 

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

 

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

Form 10-Q

For the Quarter Ended December 31, 2004

 

Part II - Other Information

 

**Item1.****           LegalProceedings**

 

MICROSis and has been involved in legal proceedings arising in the normal course ofbusiness.  The Company is of the opinion,based upon presently available information and the advice of counsel concerningpertinent legal matters, that any resulting liability should not have amaterial adverse effect on the Company’s results of operations or financialposition.

 

**Item2.****           UnregisteredSales of Equity Securities and Use of Proceeds**

 

IssuerPurchases of Equity Securities (1)

*(Shares and average purchase price per share are presented prior to January31, 2005 stock split)*

 
| ** **                                         | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Purchase  Price** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number of Shares  that May Yet be Purchased  Under the Plans or Programs** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| October 1 – 31, 2004                     |       | 17,371                                 |       | $                            | 49.92      |                                                                                     | 17,371     |                                                                                 | 1,015,574  |   |
| ** **                                         | ** ** | ** **                             | ** ** | ** **                   | ** ** | ** **                                                                               | ** ** | ** **                                                                           | ** ** |
| Total October 1 – December 31, 2004 |       | 17,371                                 |       | $                            | 49.92      |                                                                                     | 17,371     |                                                                                 | 1,015,574  |   |

 

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(1)          In fiscal year 2002, the Board ofDirectors of the Company authorized the purchase of up to one million shares ofthe Company’s common stock. Subsequently, during fiscal year 2005, the Board of Directors authorizedthe purchase of an additional one million shares. As of December 31, 2004,the Company has purchased 984,426 shares in the open market.

 

**Item 3.****          ****Defaults upon Senior Securities**

 

No events occurred during the quarter covered by this reportthat would require a response to this item.

 

**Item4.****           Submissionof Matters to a Vote of Security Holders**

 

Theannual meeting of shareholders was held on November 19, 2004.  A quorum was present (in person and/or byproxy) and shareholders voted on the following matters:

 

1.  Election of Directors

 

The management of theCompany nominated a slate of six persons to serve on the Board ofDirectors.  No other nominations weremade.  The nominees received thefollowing votes:

 
| **Nominee**         | ** ** | **For**    | ** ** | **Vote Withheld (Abstain)** | ** ** |
|---------------------|------------|------------|------------|-----------------------------|------------|
| A.L. Giannopoulos   |       | 16,221,272 |       | 284,238                     |       |
| Louis M. Brown, Jr. |       | 15,672,034 |       | 833,476                     |       |
| B. Gary Dando       |       | 16,259,823 |       | 245,687                     |       |
| John G. Puente      |       | 15,330,995 |       | 1,174,515                   |       |
| Dwight S. Taylor    |       | 15,050,771 |       | 1,414,739                   |       |
| William S. Watson   |       | 15,421,488 |       | 1,084,022                   |       |

 

The entire slateof directors nominated was elected by a majority of the shares present inperson or represented by proxy and entitled to vote.

 

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2.  Selection of Independent PublicAccountants

 

The Board ofDirectors of the Company selected PricewaterhouseCoopers LLP as the independentregistered public accounting firm for the Company for the fiscal year ending June 30,2005.  A proposal to approve theselection of PricewaterhouseCoopers LLP was approved by a majority of theshares present in person or represented by proxy and entitled to vote.  A total of 15,754,406 shares voted in theaffirmative; a total of 740,049 shares voted in the negative; and a total of11,055 shares abstained from the vote.

 

3.  Approval of Amendment to Stock Option Plan

 

The Board of Directorsproposed an amendment to the 1991 Stock Option Plan, which served to authorizethe issuance of an additional 600,000 shares of Common Stock.  The shareholders approved the proposedamendment to the 1991 Stock Option Plan, with 10,557,027 shares in theaffirmative, 3,673,702 shares in the negative, 28,380 shares affirmativelyabstained, and 2,246,401 shares not voting.

 

**Item 5.****           Other Information**

 

On January 5, 2005,the Company completed the acquisition of JTECH Communications, a leader inon-premises wireless paging solutions for hospitality, retail and othermarkets.  JTECH Communications isheadquartered in Boca Raton, Florida, and will be operated as a wholly-ownedsubsidiary of MICROS.

 

On January 5, 2005, MICROS announced that its Board of Directorsapproved a two-for-one stock split effected in the form of a 100 percent stockdividend.  Stockholders received oneadditional share for every share they owned as of the close of business on January 17,2005. The additional shares were distributed on January 31, 2005 andreporting of the Company’s share price on a split-adjusted basis commencedshortly thereafter.

 

**Item6.****           Exhibits**

 

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

 

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

 

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

 

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

 

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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)                             |
|                   |                                     |
| February 9,  2005 |                                     | /s/ Gary C.  Kaufman  |   |
|                   | Gary C. Kaufman                          |
|                   | Executive Vice  President,               |
|                   | Finance and  Administration/             |
|                   | Chief Financial  Officer                 |
|                   |                                     |
|                   |                                     |
| February 9,  2005 |                                     | /s/ Cynthia A.  Russo |   |
|                   | Cynthia A. Russo                         |
|                   | Vice President  and Corporate Controller |
|                        |                                          |                       |  |  |  |

 

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