Micros Systems (MCRS) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2007

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

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

YES þNO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þAccelerated filer oNon-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES oNO þ

As of April 30, 2007, there were issued and outstanding 40,519,998 shares of Registrant’s Common Stock, at $0.0125 par value.

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

Form 10-Q

For the three months and nine months ended March 31, 2007

PART I - FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

2

MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

	March 31, 2007		June 30, 2006
ASSETS
Current Assets:
Cash and cash equivalents	$	301,101	$	237,222
Accounts receivable, net of allowance for doubtful accounts of
$23,894 at March 31, 2007 and $20,335 at June 30, 2006		180,174		141,159
Inventory, net		44,229		46,637
Deferred income taxes		18,700		16,649
Prepaid expenses and other current assets		28,689		15,485
Total current assets		572,893		457,152
Property, plant and equipment, net of accumulated depreciation and
amortization of $73,124 at March 31, 2007 and $65,582 at June 30, 2006		26,977		23,794
Deferred income taxes, non-current		11,569		16,192
Goodwill		140,425		98,581
Intangible assets, net of accumulated amortization of $3,704 at March 31, 2007
and $2,592 at June 30, 2006		16,044		10,427
Purchased and internally developed software costs, net of accumulated
amortization of $49,940 at March 31, 2007 and $43,267 at June 30, 2006		37,759		38,328
Other assets		4,357		3,383
Total assets	$	810,024	$	647,857
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit	$	2,879	$	2,134
Accounts payable		34,097		36,022
Accrued expenses and other current liabilities		109,025		84,897
Current portion of capital lease obligations		427		89
Income taxes payable		7,480		12,416
Deferred income taxes		199		227
Deferred service revenue		92,406		68,246
Total current liabilities		246,513		204,031
Capital lease obligations, net of current portion		401		424
Deferred income taxes, non-current		15,527		14,998
Other non-current liabilities		9,663		8,146
Minority interests		4,014		3,142
Commitments and contingencies
Shareholders' Equity:
Common stock, $0.0125 par value; authorized 50,000 shares; issued and
outstanding 40,676 at March 31, 2007 and 38,980 at June 30, 2006		508		487
Capital in excess of par		155,083		100,723
Retained earnings		355,426		302,848
Accumulated other comprehensive income		22,889		13,058
Total shareholders' equity		533,906		417,116
Total liabilities and shareholders' equity	$	810,024	$	647,857

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

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2007			2006			2007			2006
Revenue:
Hardware	$	58,541		$	56,087		$	168,144		$	152,585
Software		34,032			28,788			94,540			85,045
Services		107,983			86,266			301,448			249,493
Total revenue		200,556			171,141			564,132			487,123
Cost of sales:
Hardware		37,745			38,234			107,981			103,371
Software		7,597			6,051			21,593			18,458
Service		50,199			41,773			142,020			119,978
Total cost of sales		95,541			86,058			271,594			241,807
Gross margin		105,015			85,083			292,538			245,316
Selling, general and administrative expenses		65,897			54,163			186,624			157,851
Research and development expenses		8,943			6,548			23,834			19,305
Depreciation and amortization		2,961			2,450			9,122			7,557
Total operating expenses		77,801			63,161			219,580			184,713
Income from operations		27,214			21,922			72,958			60,603
Non-operating income (expense):
Interest income		2,689			1,289			7,521			3,276
Interest expense		(94	)		(32	)		(284	)		(107	)
Other income (expense), net		136			173			120			(561	)
Total non-operating income, net		2,731			1,430			7,357			2,608
Income before taxes, minority interests and equity in net earnings of affiliates		29,945			23,352			80,315			63,211
Income tax provision		10,156			7,589			26,893			20,544
Income before minority interests and equity in net earnings of affiliates		19,789			15,763			53,422			42,667
Minority interests and equity in net earnings of affiliates		(339	)		(169	)		(844	)		(517	)
Net income	$	19,450		$	15,594		$	52,578		$	42,150
Net income per common share:
Basic	$	0.48		$	0.40		$	1.32		$	1.09
Diluted	$	0.47		$	0.38		$	1.28		$	1.04
Weighted-average number of shares outstanding:
Basic		40,582			38,914			39,802			38,619
Diluted		41,673			40,730			41,196			40,648

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

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Nine Months Ended March 31,
	2007			2006
Net cash flows provided by operating activities	$	67,245		$	67,931
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(35,994	)		(13,200	)
Purchases of property, plant and equipment		(9,058	)		(8,281	)
Internally developed software		(1,381	)		(3,410	)
Purchases of other intangible assets		-			(575	)
Disposal of property, plant and equipment		331			101
Net cash flows used in investing activities		(46,102	)		(25,365	)
Cash flows from financing activities:
Proceeds from stock option exercises		31,369			15,897
Realized excess tax benefits from stock option exercises		15,653			12,195
Repurchases of stock		(2,395	)		(40,205	)
Principal payments on lines of credit		(3,124	)		(628	)
Proceeds from lines of credit		1,650			-
Dividends to minority owners		(299	)		(262	)
Net decrease in capital lease obligations		(88	)		(70	)
Net cash flows provided by (used in) financing activities		42,766			(13,073	)
Effect of exchange rate changes on cash and cash equivalents		(30	)		(16	)
Net increase in cash and cash equivalents		63,879			29,477
Cash and cash equivalents at beginning of period		237,222			153,521
Cash and cash equivalents at end of period	$	301,101		$	182,998

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

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

(Unaudited, in thousands)

												Accumulated
							Capital					Other
	Common Stock						in Excess			Retained		Comprehensive
	Shares			Amount			of Par			Earnings		Income		Total
Balance, June 30, 2006		38,980		$	487		$	100,723		$	302,848	$	13,058	$	417,116
Comprehensive income:
Net income		-			-			-			52,578		-		52,578
Foreign currency translation adjustments		-			-			-			-		9,831		9,831
Total comprehensive income															62,409
Share-based compensation		-			-			9,273			-		-		9,273
Stock issued upon exercise of options		1,758			22			31,347			-		-		31,369
Repurchases of stock		(62	)		(1	)		(2,394	)		-		-		(2,395	)
Income tax benefit from options exercised		-			-			16,134			-		-		16,134
Balance, March 31, 2007		40,676		$	508		$	155,083		$	355,426	$	22,889	$	533,906

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

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MICROS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and nine months ended March 31, 2007

(unaudited)

1.Basis of presentation

The accompanying condensed consolidated financial statements of MICROS Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2006.

Certain information and footnote disclosures that are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by SEC rules and regulations. The condensed consolidated financial statements included in this report reflect all normal and recurring adjustments that, in the opinion of management, are necessary for a fair statement of the financial position of the Company, its results of operations and cash flows for the interim periods set forth herein. The results for the three and nine months ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year or any future periods.

2.Acquisitions

In January 2007, the Company acquired the RedSky IT Hospitality-Travel and RedSky IT Retail subsidiaries (together “RedSky”) of RedSky IT for a total cash purchase price of approximately $30.5 million. Approximately $4.8 million of the total purchase price is currently held in escrow to satisfy certain claims the Company may have against RedSky. Any amounts remaining in the escrow account 13 months after closing on RedSky will be paid to the sellers. Headquartered in the United Kingdom, the acquired companies provide hotel property management software solutions targeted toward the limited-service, independent and economy hotel markets, and software solutions for the grocery industry. Goodwill of approximately $30.9 million and intangible assets of approximately $8.9 million were recorded in connection with the acquisition. The purchase price allocation is not finalized and is subject to adjustments.

Additionally, during the nine months ended March 31, 2007, the Company acquired various distributors of MICROS products and services and two other companies with complementary products and services. The aggregate cash purchase price for these acquisitions was approximately $9.7 million, which includes certain amounts that were held back to be released on either an agreed upon date or upon the resolution of contractual indemnity obligations of the sellers.

The aggregate total assets acquired in acquisitions discussed above included total cash of approximately $1.9 million, total goodwill of approximately $40.1 million and total intangible assets of approximately $10.3 million. The pro forma effect on operating results due to these acquisitions was not material to the consolidated financial position and results of operations presented herein.

3.Share-based compensation

The Company has incentive and non-qualified stock options outstanding that were granted to directors, officers, and other employees pursuant to authorization by the Board of Directors. Currently, options are granted to those directors who are either employees of or consultants to the Company. The exercise price per share of each option equals the market value of a share of the Company’s common stock on the date of the grant. Substantially all of the options granted are exercisable pursuant to a three-year vesting schedule whereby one-third of the options vest upon the first anniversary of the grant, the second third of the options vest upon the second anniversary of the grant, and the final third of the options vest upon the third anniversary of the grant. All outstanding options expire ten years from the date of grant. Since its inception in 1991, the Company has authorized approximately 16.4 million shares for issuance upon exercise of options, of which approximately 1.6 million shares were available for future grants as of March 31, 2007. As of March 31, 2007, options to purchase approximately 3.7 million shares were outstanding, including currently exercisable options to purchase approximately 2.2 million shares.

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The Company accounts for its option awards in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.” The estimated fair value of awards granted under the stock option program are measured, and non-cash share-based compensation expense adjusted for expected pre-vesting forfeitures are recognized ratably over the requisite service period of options in the consolidated statements of operations. In addition, non-cash share-based compensation expense is recognized for the non-vested portion of awards that were granted before the effective date of SFAS No. 123(R) as those options become vested. The non-cash share-based compensation expenses, net of tax, reduced the diluted earnings per share by $0.07 and $0.06 for the three months ended March 31, 2007 and 2006, respectively, and by $0.17 and $0.12 for the nine months ended March 31, 2007 and 2006, respectively.

The non-cash share-based compensation expenses included in the condensed consolidated statements of operations are as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)	2007		2006		2007		2006
Cost of sales	$	0	$	25	$	0	$	25
Selling, general and administrative		3,581		2,329		8,851		6,359
Research and development		182		73		422		143
Non-cash share-based compensation expense	$	3,763	$	2,427	$	9,273	$	6,527

The non-cash share-based compensation expenses for the three and nine months ended March 31, 2007 include a one-time charge of approximately $0.7 million resulting from the accelerated vesting of unvested options due to the death of an officer of the Company. Under the Company’s stock option plan, options immediately vest upon death. No compensation expense was capitalized for the three and nine months ended March 31, 2007 and 2006 because no stock options had been granted to employees whose labor costs were capitalized as software development costs.

The Company values stock options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. In determining the expected term, the Company separates groups of employees that have historically exhibited similar behavior with regard to option exercises and post-vesting cancellations. The option-pricing model requires the input of highly subjective assumptions, including assumptions about volatility rates, expected term of options, and applicable interest rates.

Expected volatility is based on historical stock prices. The expected term of options granted is based on historical data, adjusted for the remaining option life cycle by assuming ratable exercise of any unexercised vested options over the remaining term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The total expense to be recorded in future periods will depend on several variables, including the number of share-based awards that vest, pre-vesting cancellations and the estimated fair value of those vested awards.

The estimated fair values of options granted during the three and nine months ended March 31, 2007 and 2006 were estimated on the date of grant using the following assumptions:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2007			2006			2007			2006
Weighted-average expected volatility		36	%		36	%		37	%		42	%
Expected volatility		36	%		36	%		36% - 38	%		34% - 46	%
Expected term		4.6 years			4.8 years			4.6 - 5.7 years			4.0 - 5.7 years
Expected dividend yield		0	%		0	%		0	%		0	%
Risk-free interest rate		4.9	%		4.5	%		4.5% - 4.9	%		3.9% - 4.5	%

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The following is a summary of option activity:

(in thousands, except per share data and number of years)	Number of Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at June 30, 2006		4,810		$	25.34
Granted		695		$	52.61
Exercised		(1,758	)	$	17.84
Forfeited or expired		(22	)	$	44.89
Outstanding at March 31, 2007		3,725		$	33.85		6.9	$	75,004
Exercisable at March 31, 2007		2,223		$	25.03		5.6	$	64,362

The weighted-average grant-date estimated fair value per share of options granted during the nine months ended March 31, 2007 and 2006 was $21.32 and $20.83, respectively. The total intrinsic value, the difference between the exercise price and the market price on the date of exercise, of options exercised during the nine months ended March 31, 2007 and 2006 was approximately $57.0 million and $33.8 million, respectively.

As of March 31, 2007, there were approximately $25.5 million in non-cash share-based compensation costs related to non-vested awards not yet recognized in the Company’s consolidated statements of operations. This cost is expected to be recognized over a weighted-average period of 2.3 years.

Cash received from options exercised during the nine months ended March 31, 2007 and 2006 was approximately $31.4 million and $15.9 million, respectively.

4.Inventory

The components of inventory are as follows:

(in thousands)	March 31, 2007		June 30, 2006
Raw materials	$	9,909	$	8,290
Work-in-process		13		20
Finished goods		34,307		38,327
	$	44,229	$	46,637

The Company maintained a reserve for obsolescence for inventory of approximately $9.2 million at March 31, 2007 compared to approximately $9.9 million at June 30, 2006. The Company reserved approximately $2.1 million and $2.9 million during the nine months ended March 31, 2007 and 2006, respectively, related to older products. Inventory balance as of March 31, 2007 was increased by foreign currency translation adjustments of approximately $0.2 million as compared to June 30, 2006.

5.Goodwill and intangible assets

During the three months ended September 30, 2006, the Company completed its annual impairment tests on its goodwill and trademarks as of July 1, 2006. Based on its annual impairment test results, the Company determined that no impairment of goodwill or trademarks existed as of July 1, 2006.

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6.Other comprehensive income

The components of comprehensive income, net of tax, were as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)	2007		2006		2007		2006
Net income	$	19,450	$	15,594	$	52,578	$	42,150
Other comprehensive income (loss):
Change in cumulative translation
adjustment, net of tax		2,277		3,175		9,831		(129	)
	$	21,727	$	18,769	$	62,409	$	42,021

7.Line of credit

The Company has two credit agreements (the “Credit Agreements”), an international facility and a U.S. facility, that, in the aggregate, provide a $65.0 million multi-currency committed line of credit that expires on July 31, 2009. The international facility is secured by 65% of the capital stock of the Company’s main operating Ireland subsidiary and 100% of all of the capital stock of the Company’s other major foreign subsidiaries. The U.S. facility is secured by 100% of the capital stock of the Company’s major U.S. subsidiaries as well as all of the Company’s inventory and receivables located in the U.S.

For borrowings in U.S. currency, the interest rate under the Credit Agreements is equal to the higher of the prime rate or the federal funds rate plus 50 basis points. For borrowings in foreign currencies, the interest rate is determined by a LIBOR-based formula, plus an additional margin of 125 to 200 basis points depending upon the Company’s consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the immediately preceding four calendar quarters. The Company is required to pay insignificant commitment fees on the unused portion of the line of credit to the Lenders. The Credit Agreements also contain certain financial covenants and restrictions on the Company’s ability to assume additional debt, repurchase stock, sell subsidiaries or acquire companies. In case of an event of default, as defined in the Credit Agreements, that is not cured within the applicable cure period (with respect to those defaults for which the Credit Agreements provide a cure period), the Lenders’ remedies include their ability to declare all outstanding loans, plus interest and other related amounts owed, to be immediately due and payable in full, and to pursue all rights and remedies available to them under the Credit Agreements or under applicable law.

As of March 31, 2007, the Company had approximately $2.9 million outstanding and had approximately $62.1 million available for future borrowings under the above lines of credit. The total outstanding balance consisted of the following:

· JPY (Japanese Yen) - 165.0 million (approximately $1.4 million at the March 31, 2007 exchange rate);

· SEK (Swedish Krona) - 4.0 million (approximately $0.6 million at the March 31, 2007 exchange rate), and

· NZD (New Zealand Dollar) - 1.3 million (approximately $0.9 million at the March 31, 2007 exchange rate).

The Company also has a credit relationship with a European bank in the amount of EUR 1.0 million (approximately $1.3 million at the March 31, 2007 exchange rate). Under the terms of this facility, the Company may borrow in the form of either a line of credit or term debt. As of March 31, 2007, there were no balances outstanding on this credit facility, but approximately EUR 0.2 million (approximately $0.2 million at the March 31, 2007 exchange rate) of the credit facility has been utilized for guarantees. As of March 31, 2007, approximately $1.1 million is available for future borrowings.

As of March 31, 2007, the Company had approximately $63.2 million available to borrow under all of its credit facilities available at that time. The weighted-average interest rate on the outstanding balances under the lines of credit as of March 31, 2007 was 4.7%.

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8.Recent accounting pronouncements

SFAS No. 159

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which allows entities to choose to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently reviewing the impact of the adoption of the SFAS 159 on the Company’s consolidated financial position, results of operations and cash flows.

SFAS No. 158

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. SFAS No. 158 will not change the amount of net periodic benefit expense recognized in an entity’s results of operations. Application of this statement at June 30, 2006 would have required adjustment to the Company’s accrued pension liability relating to its Supplemental Executive Retirement Plan (the “SERP Plan”), resulting in an increase to accrued employee benefit liabilities of approximately $4.8 million and a decrease in stockholders’ equity of approximately $4.8 million, net of tax. The effect at June 30, 2007, the adoption date, or any other future date could significantly differ depending on the measurement of pension obligations at such date, but the Company does not believe SFAS No. 158 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) to establish a framework for measuring fair value under generally accepted accounting principles and to expand disclosures on fair value measurements. The statement applies to previously established valuation pronouncements, but is to be applied prospectively, so that it does not require the changing of any previous fair value measurements. SFAS No. 157 may cause some valuation procedures used by the Company to change after its adoption. Under SFAS No. 157, fair value is established by the price that would be received to sell the item or the amount to be paid to transfer the liability or the asset (an exit price), as opposed to the price to be paid for the asset or received to assume the liability (an entry price). SFAS No. 157 is effective for all assets valued in financial statements for fiscal years beginning after November 15, 2007. The Company is currently reviewing the impact of the adoption of the SFAS 157 on the Company’s consolidated financial position, results of operations and cash flows.

SAB 108

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on the process of quantifying financial statement misstatements. The provisions under SAB 108 will be applied in the first fiscal year ending after November 15, 2006, which is the Company’s current fiscal year. The Company does not believe SAB 108 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

FIN 48

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, ‘Accounting for Income Taxes’” (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions.  FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006. As required, the Company will adopt FIN 48 in fiscal year 2008.  The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable.  The Company is currently reviewing the impact of the adoption of FIN 48 on the Company’s consolidated financial position, results of operations and cash flows.

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9.Net income per share

Basic net income per common share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted net income per share includes the dilutive effect of stock options. A reconciliation of the weighted-average number of common shares outstanding assuming dilution is as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands, except per share data)	2007		2006		2007		2006
Net income	$	19,450	$	15,594	$	52,578	$	42,150
Average common shares outstanding		40,582		38,914		39,802		38,619
Dilutive effect of outstanding stock options		1,091		1,816		1,394		2,029
Average common shares outstanding
assuming dilution		41,673		40,730		41,196		40,648
Basic net income per share	$	0.48	$	0.40	$	1.32	$	1.09
Diluted net income per share	$	0.47	$	0.38	$	1.28	$	1.04
Anti-dilutive weighted shares excluded
from reconciliation		947		776		1,154		418

10.Segment reporting data

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments. This standard requires segmentation based on the Company’s internal organization and reporting of financial results. The Company’s financial reporting systems present various data for management to run the business. The segments are designed to allocate resources internally and provide a framework to determine management responsibility. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Company’s Chief Executive Officer.

The Company manages its business geographically and is organized and operates in four operating segments: U.S., Europe, the Pacific Rim and Latin America regions. For the purposes of applying SFAS No. 131, the Company has identified U.S. as a separate reportable segment and has aggregated its three international operating segments into one reportable segment, International, as the three international operating segments share many similar economic characteristics. Management views the U.S. and International segments separately in operating the business, although the products and services are similar for each segment.

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

	Three Months Ended March 31,						Nine Months Ended March 31,
(in thousands)	2007			2006			2007			2006
Revenue(1):
U.S.	$	93,226		$	90,422		$	269,594		$	261,436
International		147,718			106,487			403,988			311,091
Intersegment eliminations		(40,388	)		(25,768	)		(109,450	)		(85,404	)
	$	200,556		$	171,141		$	564,132		$	487,123

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Income before taxes, minority interests and equity
in net earnings of affiliates(1):
U.S.	$	8,437		$	8,191		$	22,733		$	18,634
International		55,082			36,168			147,434			113,264
Intersegment eliminations		(33,574	)		(21,007	)		(89,852	)		(68,687	)
	$	29,945		$	23,352		$	80,315		$	63,211

(in thousands)	March 31, 2007		June 30, 2006
Identifiable assets (2):
U.S.	$	400,498	$	383,663
International		409,526		264,194
	$	810,024	$	647,857

(1)Amounts based on the location of the selling entity, and include export sales.

(2)Amounts based on the physical location of the asset.

11.Shareholders’ equity

In fiscal year 2005, the Board of Directors authorized the purchase of up to two million shares of the Company’s common stock. Since the inception of the repurchase programs, the Company has incurred approximately $0.1 million in fees related to the programs. A summary of the cumulative number of shares purchased and retired since the inception of the current repurchase program through March 31, 2007, plus the shares purchased and retired under the previous repurchase program, is as follows:

	Number of Shares		Average Purchase Price Per Share		Total Purchase Value (in thousands)
Total shares purchased as of June 30, 2006		3,417,999	$	27.33	$	93,414
July 2006 - March 2007		62,100	$	38.56		2,395
		3,480,099	$	27.53	$	95,809

12.Pension benefits

The Company’s SERP plan provides designated officers and executives of the Company with benefits upon retirement or immediate vesting of benefits upon a participant’s pre-retirement death. The Company funds the benefits under the plan with corporate owned life insurance policies held by a segregated trust (known as a “Rabbi Trust”), whose assets are subject to the claims of creditors of the Company. The plan is accounted for in accordance with SFAS No. 87, “Employers Accounting for Pensions.” The components of net period pension cost are as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)	2007		2006		2007		2006
Service cost	$	139	$	127	$	418	$	381
Interest cost		174		124		521		373
Amortization of prior service cost		137		124		411		371
	$	450	$	375	$	1,350	$	1,125

During the three months ended March 31, 2007, an officer of the Company who was a participant in the SERP plan died. The pre-retirement death benefit will be funded by the death benefit to be received from the corporate owned life insurance policy.

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13.Contingencies

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

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

Forward-looking statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, and are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of specified factors, including those set forth below under the heading “Factors that May Affect Future Results.”

Examples of such forward-looking statements include:

·      our expectation that product and service margins may decline in response to the competitive nature of our market;

·      our statements regarding the effects of currency fluctuations (in particular, Euro fluctuations) on our financial performance;

·      our expectations that the customers with whom we do the largest amount of business will fluctuate from year to year, and our statements about the effects of large customer orders on our quarterly earnings, revenues, and total revenues;

·      our statements concerning the fluctuations in the market price of our common stock, whether as a result of variations in our quarterly operating results or other factors;

·      our belief that any existing legal claims or proceedings will not have a material adverse effect on our results of operations or financial position;

·      our expectations regarding the impact or lack of impact on our financial position and results of operations of the application of recent accounting standards;

·      our expectations about the adequacy of our cash flows and our available lines of credit to meet our working capital needs, and our ability to raise additional funds if and when needed;

·      our expectations that our exposure to interest rate risk will not materially change in the future;

·      our expectation that we will evaluate our need to invest in instruments to protect against interest rate fluctuations and our exposure to such interest rate risk;

·      our statements about the effects on our revenue recognition as a result of changes to a customers’ delivery requirements or a products’ completion;

·      our statements regarding our ability to increase sales of our higher margin products;

·      our expected costs associated with modifying our products to comply with applicable legal rules, regulations, and guidelines, including the credit card associations’ security and data protection rules; and

·      our statements and expectations regarding our effective tax rates for the current fiscal year and future periods.

Factors that may affect future results

Current market conditions, and world political and economic uncertainty, make it difficult to predict whether we can continue to achieve revenue and profitability growth over the remainder of the current fiscal year. One reason for this difficulty is that our primary customers - the hospitality, travel, restaurant, and retail industries - are highly sensitive to economic, political, and environmental disturbances, all of which are not only outside of our (and, frequently, their own) control, but also are very difficult to predict with any accuracy. Accordingly, there can be no assurance that any particular level of growth is reasonable or can be achieved.

We continue to experience gross margin pressure on our hardware and software products, and our service offerings, due to the highly competitive nature of the market for our products and services, and we expect that product and service margins generally will tend to decline. There can be no assurance that we will be able to increase sufficiently the sales of our higher margin products, including software, to prevent future declines in our overall gross margin.

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Currency fluctuations directly affect our financial results because we conduct business in many different currencies. In particular, a weakening or strengthening Euro could significantly affect our financial performance due to the volume of business that we conduct in the European market.

Our quarterly financial results are dependent upon the timing and size of customer orders. Large software orders from customers may account for more than an insignificant portion of earnings in any quarter. Based on past experience, we expect that the customers with whom we do the largest amount of business will vary from year to year, in part as a result of the timing of the rollouts of each customer’s systems. Further, if a customer delays or accelerates its delivery requirements, or if a product’s completion is delayed or accelerated, revenues that we may have expected in one quarter could be deferred or accelerated into a subsequent or earlier quarter.

The market price of our common stock is volatile. It may be subject to significant fluctuations in response to variations in our quarterly operating results, and also may vary as a result of other factors, such as announcements of technological developments or new products by us or by our competitors, customer rollouts, the emergence of new competitors and consolidations of our existing competitors, and general market conditions in the hospitality, travel, restaurant, and retail industries. In addition, conditions in the stock market in general, and shares of technology companies in particular, have experienced significant price and volume fluctuations, which we believe have, at times, been unrelated to the operating performance of the companies.

Because of the nature of the industries in which our customers operate, we are subject to political risk, including as a result of instability in the Middle East and the worldwide threat of terrorism, and especially in developing countries with uncertain or unstable political structures or regimes. Additionally, we are subject to the effects of, and changes in, laws and regulations, and other activities of governments, agencies and similar regulatory organizations. Moreover, to be able to offer commercially viable and competitive products, we must also assure that our products and services comply with applicable rules of the credit card associations, including their security and data protection rules. These rules have changed over time, and may change again in the future; we anticipate that we will continue to incur costs associated with modifying our products and services to become and remain compliant with these rules.

Past performance is not necessarily a strong or reliable indicator of future performance. Actual results could differ materially from past results, estimates, or projections, or forward-looking statements made by, or on behalf of us.

The foregoing is in addition to those other risks and uncertainties disclosed in our periodic press releases and SEC filings, including those disclosed under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the Fiscal Year ended June 30, 2006.

Overview

We are a leading worldwide designer, manufacturer, marketer and servicer of enterprise information solutions for the global hospitality and specialty retail industries. The information solutions consist of application-specific software and hardware systems, supplemented by a wide range of services including installation, training, maintenance and support, customer development and software hosting. Our enterprise solutions comprise three major areas:

Hotel information systems - consist of software encompassing property management systems, sales and catering systems, central reservation systems, and customer information systems; we have provided hotel information systems to more than 20,000 hotels worldwide.

Restaurant information systems - consist of hardware and software for point-of-sale and operational applications, a suite of back office applications, including inventory, labor and financial management, and certain centrally hosted enterprise applications; we have installed over 200,000 systems in table and quick service restaurants, hotels, motels, casinos, leisure and entertainment, and retail operations in more than 140 countries and on all seven continents.

Specialty retail information systems - consist of software encompassing point-of-sale, loss prevention, business analytics, customer gift cards, and enterprise applications; we have provided specialty retail information systems to more than 50,000 specialty retail stores worldwide.

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In addition to our software enterprise solutions and hardware products, we offer a wide range of support services to our customers. These services include installation, operator and manager training, on-site hardware maintenance, customized software development, application software support, credit card software support, help desk, systems configuration, network support, consulting and software hosting. We distribute our products and services directly and through our district and subsidiary offices, as well as through a network of independent dealers and distributors.

The markets in which we operate are highly competitive. We compete on various bases, including product functionality, service capabilities, price and geography. There are at least 40 competitors worldwide that offer some form of sophisticated restaurant point-of-sale system, over 100 hotel systems competitors and over 50 retail systems competitors. We believe that our competitive strengths include our established global distribution and service network, our ability to offer a broad array of hardware, software and service products to the hospitality and retail industry and our corporate focus on providing specialized information systems solutions.

We manage our business geographically and are organized and operate in two reportable segments: U.S. and International. The International reportable segment is primarily in Europe, the Pacific Rim and Latin America. For purposes of applying Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” management views the U.S. and International reportable segments separately in operating our business, although the products and services are similar for each segment.

Results of Operations

Revenue:

Three Months Ended March 31, 2007:

An analysis of the sales mix by reportable segments is as follows (based on location of the selling entity, and include export sales; intersegment sales are eliminated):

	Three Months Ended March 31,
	U.S.				International				Total
(in thousands)	2007		2006		2007		2006		2007		2006
Hardware	$	29,878	$	32,109	$	28,663	$	23,978	$	58,541	$	56,087
Software		12,406		12,049		21,626		16,739		34,032		28,788
Service		48,090		43,430		59,893		42,836		107,983		86,266
	$	90,374	$	87,588	$	110,182	$	83,553	$	200,556	$	171,141

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

	Three Months Ended March 31,
	2007			2006
Hardware		29.2	%		32.8	%
Software		17.0	%		16.8	%
Service		53.8	%		50.4	%
		100.0	%		100.0	%

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For the three months ended March 31, 2007, total revenue increased approximately $29.4 million, or 17.2% to approximately $200.6 million compared to the same period last year. The increase in revenue was a result of the following:

·      approximately $21.7 million or 25% increase in services primarily due to additional revenue generated from various acquisitions and the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through additional services). We acquired the RedSky IT Hospitality-Travel and RedSky IT Retail subsidiaries of RedSky IT in January 2007 and various distributors of MICROS products and services and two other companies with complementary products and services during the nine months ended March 31, 2007. Additionally, we acquired CommercialWare, Inc. in February 2006;

·      approximately $5.2 million or 18% increase in software primarily due to additional revenue generated from the acquisitions, as discussed above, and the foreign currency translation mainly between the Euro and U.S. dollar; and,

·      approximately $2.5 million or 4% increase in hardware primarily due to the foreign currency translation and additional revenue generated from the acquisitions, both as discussed above. These increases were partially offset by a decrease in overall sales volume.

The recurring support revenue contributed 54.9% and the increase in installation revenue contributed 25.7% of the total service revenue increase of approximately $21.7 million for the three months ended March 31, 2007 compared to the same period last year.

The International segment sales for the three months ended March 31, 2007 increased approximately $26.6 million, which was a result of the following:

·      approximately $17.1 million or 40% increase in services primarily due to additional revenue generated from the acquisitions and the foreign currency translation, both as discussed above;

·      approximately $4.9 million or 29% increase in software due to foreign currency translation, additional revenue generated from the acquisitions, both as discussed above and increased sales volume; and,

·      approximately $4.6 million or 20% increase in hardware primarily due to foreign currency translation and the acquisitions, both as discussed above.

U.S. segment sales for the three months ended March 31, 2007 increased approximately $2.8 million due to an increase in service revenue from continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through additional services) and additional revenue generated from the acquisitions, as discussed above. These increases were partially offset by a decrease in overall hardware sales volume.

Nine Months Ended March 31, 2007:

An analysis of the sales mix by reportable segments is as follows (based on location of the selling entity, and including export sales; intersegment sales are eliminated):

	Nine Months Ended March 31,
	U.S.				International				Total
(in thousands)	2007		2006		2007		2006		2007		2006
Hardware	$	86,875	$	90,338	$	81,269	$	62,247	$	168,144	$	152,585
Software		35,613		37,294		58,927		47,751		94,540		85,045
Service		137,554		126,546		163,894		122,947		301,448		249,493
	$	260,042	$	254,178	$	304,090	$	232,945	$	564,132	$	487,123

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

	Nine Months Ended March 31,
	2007			2006
Hardware		29.8	%		31.3	%
Software		16.8	%		17.5	%
Service		53.4	%		51.2	%
		100.0	%		100.0	%

For the nine months ended March 31, 2007, total revenue increased approximately $77.0 million, or 15.8% to approximately $564.1 million compared to the same period last year. The increase in revenue was a result of the following:

·      approximately $52.0 million or 21% increase in services primarily due to the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through additional services) and additional revenue generated through the acquisitions, as discussed above, and;

·      approximately $15.5 million or 10% increase in hardware primarily due to foreign currency translation and additional revenue generated through the acquisitions, both as discussed above; and,

·      approximately $9.5 million or 11% increase in software primarily due to additional revenue generated through the acquisitions and foreign currency translation, both as discussed above.

The recurring support revenue contributed 58.9% and the increase in installation revenue contributed 22.9% of the total service revenue increase of approximately $52.0 million for the nine months ended March 31, 2007 compared to the same period last year.

The International segment sales for the nine months ended March 31, 2007 increased approximately $71.1 million which was a result of the following:

·      approximately $40.9 million or 33% increase in services due to the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through additional services), additional revenue generated through the acquisitions and foreign currency translation, as discussed above;

·      approximately $19.0 million or 31% increase in hardware primarily due to increased sales volume and foreign currency translation, as discussed above; and,

·      approximately $11.2 million or 23% increase in software due to foreign currency translation, increased sales volume and additional revenue generated from the acquisitions.

U.S. segment sales increased approximately $5.9 million for the nine months ended March 31, 2007 compared to the same period last year primarily resulting from additional revenue generated through the acquisitions, as discussed above, and an increase in services revenue due to the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through additional services). These increases were partially offset by decreases in hardware and software revenues resulting from decreases in sales volume.

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Cost of Sales:

Three Months Ended March 31, 2007:

An analysis of the cost of sales is as follows:

	Three Months Ended March 31,
	2007					2006
(in thousands)	Cost of Sales		% of Related Revenue			Costs of Sales		% of Related Revenue
Hardware	$	37,745		64.5	%	$	38,234		68.2	%
Software		7,597		22.3	%		6,051		21.0	%
Service		50,199		46.5	%		41,773		48.4	%
	$	95,541		47.6	%	$	86,058		50.3	%

For the three months ended March 31, 2007, cost of sales as a percent of revenue decreased 270 basis points to 47.6% compared to the same period last year. Hardware cost of sales as a percent of related revenue decreased approximately 370 basis points compared to the same period last year. The decrease is primarily as a result of an improvement in Workstation 4 margin percentage, coupled with an increased percentage of revenue attributable to Workstation 4 compared to the same period last year. Workstation 4 generate higher margin than other hardware products.

Software cost of sales as a percent of related revenue increased approximately 130 basis points primarily as a result of a decrease in the third party software margin percentage compared to the comparable period last year. Service costs as a percent of related revenue decreased approximately 190 basis points compared to the same period last year primarily due to decrease in travel expenses.

Nine Months Ended March 31, 2007:

An analysis of the cost of sales is as follows:

	Nine Months Ended March 31,
	2007					2006
(in thousands)	Cost of Sales		% of Related Revenue			Costs of Sales		% of Related Revenue
Hardware	$	107,981		64.2	%	$	103,371		67.7	%
Software		21,593		22.8	%		18,458		21.7	%
Service		142,020		47.1	%		119,978		48.1	%
	$	271,594		48.1	%	$	241,807		49.6	%

For the nine months ended March 31, 2007, cost of sales as a percent of revenue decreased 150 basis points to 48.1% compared to the same period last year. Hardware cost of sales as a percent of related revenue decreased approximately 350 basis points compared to the same period last year. The decrease is primarily as a result of an improvement in Workstation 4 margin compared to the same period last year, coupled with an increased percentage of revenues attributable to Workstation 4, compared to the same period last year. As discussed above, Workstation 4 generate higher margin than other hardware products.

Software cost of sales as a percent of related revenue increased approximately 110 basis points primarily as a result of a decrease in the third party software margin percentage compared to the comparable period last year. Service costs as a percent of related revenue decreased approximately 100 basis points compared to the same period last year.

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Selling, General and Administrative (“SG&A”) Expenses:

Three Months Ended March 31, 2007:

SG&A expenses, as a percent of revenue, increased 130 basis points to 32.9% compared to the same period last year. This increase reflects the following:

·      Higher SG&A expenses as a percent of related revenue for the acquisitions as discussed above in Revenue; and,

·      Increase in non-cash share-based compensation expenses of approximately $1.3 million recorded as a component of SG&A expenses for the three months ended March 31, 2007 compared to the same period last year. The non-cash share-based compensation expenses include a one-time charge of approximately $0.7 million resulting from accelerated vesting of unvested options due to the death of an officer of the Company. See “Share-Based Compensation Expense” below for further discussion.

Nine Months Ended March 31, 2007:

SG&A expenses, as a percent of revenue, increased 70 basis points to 33.1% compared to the same period last year. This increase reflects the following:

·      Higher SG&A expenses as a percent of related revenue for the acquisitions as discussed above in Revenue; and,

·      Increase in non-cash share-based compensation expenses of approximately $2.5 million recorded as a component of SG&A expenses for the nine months ended March 31, 2007 compared to the same period last year. The non-cash share-based compensation expenses include a one-time charge of approximately $0.7 million resulting from accelerated vesting of unvested options due to the death of an officer of the Company. See “Share-Based Compensation Expense” below for further discussion.

Research and Development (“R&D”):

R&D expenses consist primarily of labor costs less capitalized software development costs. Non-cash share-based compensation expenses allocated to R&D were not capitalized as software development costs during the three and nine months ended March 31, 2007 and 2006 because stock options were not granted to employees whose labor costs were capitalized as software development costs. An analysis of R&D activities is as follows:

	Three Months Ended March 31,						Nine Months Ended March 31,
(in thousands)	2007			2006			2007			2006
Total R&D incurred	$	9,467		$	7,638		$	25,215		$	22,715
Capitalized software development costs		(524	)		(1,090	)		(1,381	)		(3,410	)
Total R&D expenses	$	8,943		$	6,548		$	23,834		$	19,305
% of Revenue		4.5	%		3.8	%		4.2	%		4.0	%

The decreases in total R&D capitalized software development costs for the nine months ended March 31, 2007 is primarily due to the release of our retail capitalized software product in December of 2005. As a result, the volume of costs for development of products that had reached the technological feasibility stage but were not yet complete and ready for general release had declined.

Depreciation and Amortization Expenses:

Depreciation and amortization expenses for the three months ended March 31, 2007 increased approximately $0.5 million to approximately $3.0 million compared to the same period last year. Depreciation and amortization expenses for the nine months ended March 31, 2007 increased approximately $1.6 million to approximately $9.1 million compared to the same period last year. The increases are primarily due to additional depreciation expenses on assets capitalized since March 31, 2006 and due to the acquisitions discussed above. Additionally, foreign currency fluctuation increased depreciation and amortization expenses for the three and nine months ended March 31, 2007 by approximately $0.2 million and $0.4 million, respectively.

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Share-Based Compensation Expenses:

We account for our option awards in accordance with SFAS No. 123(R), “Share-Based Payment.” The estimated fair value of awards granted under the stock option program are measured and non-cash share-based compensation expenses, adjusted for expected forfeitures, are recognized ratably over the requisite service period of options in the consolidated statements of operations. In addition, non-cash share-based compensation expense is recognized for the non-vested portion of awards that were granted before the effective date of SFAS No. 123(R) as those options become vested. The non-cash share-based compensation expenses, net of tax, reduced our diluted earnings per share by $0.07 and $0.06 for the three months ended March 31, 2007 and 2006, respectively, and by $0.17 and $0.12 for the nine months ended March 31, 2007 and 2006, respectively.

The SG&A expenses and R&D expenses discussed above include the following allocations of non-cash share-based compensation expense:

	Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)	2007		2006		2007		2006
Cost of sales	$	0	$	25	$	0	$	25
SG&A		3,581		2,329		8,851		6,359
R&D		182		73		422		143
	$	3,763	$	2,427	$	9,273	$	6,527

The non-cash share-based compensation expenses allocated to SG&A for the three and nine months ended March 31, 2007 include a one-time charge of approximately $0.7 million resulting from accelerated vesting of unvested options due to the death of an officer of the Company. Under the Company’s stock option plan, options immediately vest upon death.

Income from Operations:

Income from operations for the three months ended March 31, 2007 increased approximately $5.3 million or 24.1%, to approximately $27.2 million, compared to the same period last year. Income from operations for the nine months ended March 31, 2007 increased approximately $12.4 million or 20.4%, to approximately $73.0 million, compared to the same period last year. The increases were mainly due to increased revenues and higher margins, partially offset by increase in SG&A expenses as a percent of revenue.

Non-operating Income:

Net non-operating income for the three months ended March 31, 2007 increased approximately $1.3 million to approximately $2.7 million compared to the same period last year. Net non-operating income for the nine months ended March 31, 2007 increased approximately $4.7 million to approximately $7.4 million compared to the same period last year. The increases were primarily due to increases in interest income resulting from overall higher cash and cash equivalents balances and overall higher interest rates earned on these balances.

Income Tax Provisions:

The effective tax rates for the three months ended March 31, 2007 and 2006 were 33.9% and 32.5%, respectively. The effective tax rates for the nine months ended March 31, 2007 and 2006 were 33.5% and 32.5%, respectively. The increases in tax rates were primarily attributable to the negative impact of the changes in legislation related to the exclusion of certain qualified foreign income (extra-territorial income exclusions) as well as the non-deductible nature of certain non-cash share-based compensation items and other non-deductible compensation items, foreign withholding taxes and enacted tax rate changes in foreign jurisdictions. These negative factors for the three and nine months ended March 31, 2007 were partially offset by the benefit recognized from an increase in the proportion of earnings from jurisdictions that have a lower statutory tax rate than the U.S., renewal of the research and development tax credit, and the phase-in of the deduction for domestic production activities.

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Based on currently available information, we estimate that the fiscal year 2007 effective tax rate will be approximately 33.5% compared to fiscal year 2006 effective tax rate of 32.9%. The increase is primarily attributable to the negative impact of the changes in legislation related to the exclusion of certain qualified foreign income (extra-territorial income exclusions) as well as the non-deductible nature of certain non-cash share-based compensation items and other non-deductible compensation items, foreign withholding taxes and enacted tax rate changes in foreign jurisdictions.

We believe that due to changes in the mix of earnings among jurisdictions, the fluctuation of earnings and the impact of certain discrete items, there will always be some degree of adjustment to the effective tax rate on a quarterly basis.

Liquidity and capital resources

We have two credit agreements (the “Credit Agreements”) that, in the aggregate, provide a $65.0 million multi-currency committed line of credit which expires on July 31, 2009. The international facility is secured by 65% of the capital stock of our main operating Ireland subsidiary and 100% of all of the major foreign subsidiaries. The U.S. facility is secured by 100% of the capital stock of our major U.S. subsidiaries as well as all inventory and receivables located in the U.S.

For borrowings in U.S. currency, the interest rate under the Credit Agreements is equal to the higher of the federal funds rate plus 50 basis points or the prime rate. For borrowings in foreign currencies, the interest rate is determined by a LIBOR-based formula, plus an additional margin of 125 to 200 basis points depending upon our consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the immediately preceding four calendar quarters. Under the terms of the Credit Agreements, we are required to pay insignificant commitment fees on the unused portion of the line of credit to the Lenders. The Credit Agreements also contain certain financial covenants and restrictions on our ability to assume additional debt, repurchase stock, sell subsidiaries or acquire companies. In case of an event of default, as defined in the Credit Agreements, that is not cured within the applicable cure period (with respect to those defaults for which the Credit Agreements provide a cure period), the Lenders’ remedies include their ability to declare all outstanding loans, plus interest and other related amounts owed, to be immediately due and payable in full, and to pursue all rights and remedies available to them under the Credit Agreements or under applicable law.

As of March 31, 2007, we had approximately $2.9 million outstanding on the lines of credit and had approximately $62.1 million available for future borrowings under the above lines of credit. The total outstanding balance consisted of the following:

·      JPY (Japanese Yen) - 165.0 million (approximately $1.4 million at the March 31, 2007 exchange rate);

·      SEK (Swedish Krona) - 4.0 million (approximately $0.6 million at the March 31, 2007 exchange rate), and

·      NZD (New Zealand Dollar) - 1.3 million (approximately $0.9 million at the March 31, 2007 exchange rate).

We also have a credit relationship with a European bank in the amount of EUR 1.0 million (approximately $1.3 million at the March 31, 2007 exchange rate). Under the terms of this facility, we may borrow in the form of either a line of credit or term debt. As of March 31, 2007, there were no balances outstanding on this credit facility, but approximately EUR 0.2 million (approximately $0.2 million at the March 31, 2007 exchange rate) of the credit facility has been utilized for guarantees. As of March 31, 2007, approximately $1.1 million is available for future borrowings.

As of March 31, 2007, we had approximately $63.2 million borrowing capacity under all of the credit facilities described above. The weighted-average interest rate on the outstanding balances under the lines of credit as of March 31, 2007 was 4.7%.

Net cash provided by operating activities for the nine months ended March 31, 2007 was approximately $67.2 million as compared to approximately $67.9 million for the nine months ended March 31, 2006. The decrease is primarily due to additional income tax payments made during the nine months ended March 31, 2007 compared to the same period last year. This decrease was substantially offset by an increase in net income. We also used approximately $46.1 million in investing activities, consisting primarily of approximately $36.0 million for acquisitions, of which approximately $29.8 million was for the acquisition of RedSky in January 2007 and approximately $6.2 million was for acquisitions of various distributors of MICROS products and services and two other companies with complementary products and services. We also used approximately $9.1 million to purchase property, plant, and equipment, and approximately $1.4 million to internally develop software. Net cash provided by financing activities was approximately $42.8 million, consisting primarily of proceeds from the issuance of stock upon exercise of stock options of approximately $31.4 million and tax benefits realized from stock option exercises of approximately $15.7 million, partially offset by our repurchases of stock of approximately $2.4 million.

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We believe that our cash and cash equivalents, cash generated from operations, and our available lines of credit will be sufficient to provide our working capital needs for the foreseeable future. Nevertheless, if we need to raise additional funds, we believe we will be able to raise the necessary amounts either by entering into additional financing agreements or through the issuance of our common stock. We currently anticipate that our property, plant, and equipment expenditures for fiscal year 2007 will be approximately $12 million.

Recent accounting standards

SFAS No. 159

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which allows entities to choose to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing the impact of the adoption of the SFAS 159 on our consolidated financial position, results of operations and cash flows.

SFAS No. 158

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. SFAS No. 158 will not change the amount of net periodic benefit expense recognized in an entity’s results of operations. Application of this statement at June 30, 2006 would have required adjustment to our accrued pension liability relating to our Supplemental Executive Retirement Plan (“SERP Plan”), resulting in an increase to accrued employee benefit liabilities of approximately $4.8 million and a decrease in stockholders’ equity of approximately $4.8 million, net of tax. The effect at June 30, 2007, the adoption date, or any other future date could significantly differ depending on the measurement of pension obligations at such date, but we do not believe SFAS No. 158 will have a material impact on our consolidated financial position, results of operations and cash flows.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) to establish a framework for measuring fair value under generally accepted accounting principles and to expand disclosures on fair value measurements. The statement applies to previously established valuation pronouncements, but is to be applied prospectively, so that it does not require the changing of any fair value measurements. SFAS No. 157 may cause some valuation procedures used by the Company to change after its adoption. Under SFAS No. 157, fair value is established by the price that would be received to sell the item or the amount to be paid to transfer the liability or the asset (an exit price), as opposed to the price to be paid for the asset or received to assume the liability (an entry price). SFAS No. 157 is effective for all assets valued in financial statements for fiscal years beginning after November 15, 2007. We are currently reviewing the impact of the adoption of the SFAS 157 on our consolidated financial position, results of operations and cash flows.

SAB 108

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on the process of quantifying financial statement misstatements. The provisions under SAB 108 will be applied in the first fiscal year ending after November 15, 2006, which is our current fiscal year. We do not believe SAB 108 will have a material impact on our consolidated financial position, results of operations and cash flows.

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FIN 48

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, ‘Accounting for Income Taxes’” (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions.  FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.   As required, the Company will adopt FIN 48 in fiscal year 2008.  The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable.  We are currently reviewing the impact of the adoption of FIN 48 on our consolidated financial position, results of operations and cash flows.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company recorded foreign sales, including exports from the United States, of approximately $304.1 million and approximately $232.9 millionduring the nine months ended March 31, 2007 and 2006, respectively, to customers located primarily in Europe and Asia.

The Company’s international business exposes the Company to certain market risks, such as currency fluctuation, interest rate changes, and political risks. With respect to currency risk, the Company transacts business in different currencies through its foreign subsidiaries. The fluctuation of currencies affects reported sales and profitability. Frequently, sales and the costs associated with those sales are not denominated in the same currency.

In the nine months ended March 31, 2007 and 2006, the Company transacted business in 34 currencies and 27 currencies, respectively.

The relative currency mix for the three and nine months ended March 31, 2007 and 2006 were as follows:

	% of Reported Revenue
	Three Months Ended March 31,						Nine Months Ended March 31,						Exchange Rates March 31,
Revenues by currency (1):	2007			2006			2007			2006			2007		2006
United States Dollar		51	%		57	%		52	%		59	%		1.0000		1.0000
European Euro		26	%		23	%		24	%		21	%		1.3358		1.2121
British Pound Sterling		7	%		5	%		7	%		5	%		1.9679		1.7366
Australian Dollar		3	%		2	%		3	%		2	%		0.8092		0.7167
Mexican Peso		2	%		2	%		2	%		1	%		0.0906		0.0918
All Other Currencies (2), (3)		11	%		11	%		12	%		12	%		0.0259		0.0274
Total		100	%		100	%		100	%		100	%

 

(1) Calculated using weighted average exchange rates for the period.

(2) The “% of Reported Revenue” for “All Other Currencies” is calculated based on the weighted average three and nine months’ exchange rates for all other currencies.

(3) The “Exchange Rates as of March 31” for “All Other Currencies” represents the weighted average March 31 exchange rates for all other currencies based on the nine months revenue.

A 10% increase or decrease in the value of the Euro in relation to the U.S. dollar in the three and nine months ended March 31, 2007, would have affected total revenues by approximately $5.3 million, or 2.6%, and approximately $13.4 million, or 2.4%, respectively. The sensitivity analysis assumes a weighted average 10% change in the exchange rate during the respective periods with all other variables being held constant. This sensitivity analysis does not consider the effect of exchange rate changes on either cost of sales, operating expenses, or income taxes, and accordingly, is not necessarily an indicator of the effect of potential exchange rate changes on the Company’s net income.

The Company is also subject to interest rate fluctuations in foreign countries to the extent that the Company elects to borrow in the local foreign currency. In the past, this has not been an issue of concern as the Company has the capacity to elect to borrow in other currencies with more favorable interest rates.

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The Company’s committed lines of credit bear interest at a floating rate, which exposes the Company to interest rate risks. The Company manages its exposure to this risk by minimizing, to the extent feasible, overall borrowing and monitoring available financing alternatives. The Company’s interest rate risk has not changed materially from June 30, 2006, and the Company does not foresee any significant changes in exposure or in how it manages this exposure in the near future. For borrowings in U.S. currency, the interest rate under the Credit Agreements is equal to the higher of the federal funds rate plus 50 basis points or the prime rate. For borrowings in foreign currencies, the interest rate is determined by a LIBOR-based formula, plus an additional margin of 125 to 200 basis points depending upon the Company’s EBITDA for the immediately preceding four calendar quarters. At March 31, 2007, the Company had total borrowings of approximately $2.9 million, and had not entered into any instruments to hedge the resulting exposure to interest-rate risk. While the Company has not invested in financial instruments designed to protect against interest rate fluctuations, the Company will continue to evaluate the need to do so in the future. Management believes that the fair value of the debt approximates its carrying value at March 31, 2007. The Company’s exposure to fluctuations in interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under the line of credit.

The Company invests its excess cash in overnight deposits, money market funds and short term highly liquid investments with original maturities of three months or less. These instruments are classified as cash and cash equivalents for financial reporting purposes and also have minimal or no interest risk due to their short-term nature. Additionally to minimize the Company’s exposure to credit risk associated with these instruments, the Company invests with high-credit-quality institutions. Substantial balance of the Company’s cash and cash equivalents are held outside of U.S. and are not necessarily available for use by U.S. operations as a result of funds necessary to support foreign operations and tax implications, among others.

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ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 6.EXHIBITS

3(i)	Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3 to the Annual Report on Form 10-K of the Company for the Fiscal Year ended June 30, 1990.
3(i)(a)	Articles of Amendment to Articles of Incorporation are incorporated herein by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q of the Company for the period ended December 31, 1997.
3(i)(b)	Articles of Amendment to Articles of Incorporation are incorporated herein by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q of the Company for the period ended December 31, 1998.
3(ii)(a)	By-laws of the Company are incorporated herein by reference to Exhibit 3 to the Annual Report on Form 10-K of the Company for the Fiscal Year ended June 30, 1990.
3(ii)(b)	By-laws of the Company, as amended, are incorporated herein by reference to Exhibit 3(ii) to the Form 8-K filed on August 30, 2004.
31.1	Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, and 18 U.S.C. Section 1350.
32.2	Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, and 18 U.S.C. Section 1350.

*Filed herewith.

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

	MICROS SYSTEMS, INC. (Registrant)
Date: May 8, 2007	/s/ Gary C. Kaufman
	Gary C. Kaufman Executive Vice President, Finance and Administration/ Chief Financial Officer

Date: May 8, 2007	/s/ Cynthia A. Russo
	Cynthia A. Russo Vice President and Corporate Controller

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