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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 1998
Commission file number 0-9993
MICROS SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
MARYLAND 52-1101488
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(State of incorporation) (I.R.S. Employer
Identification Number)
12000 Baltimore Avenue, Beltsville, Maryland 20705-1291
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 301-210-6000
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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 x NO
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As of March 31, 1998, there were 8,023,376 shares of Common Stock, $.025 par
value, outstanding.
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
PART I - Financial Information
Item 1. Financial Statements.
General
The information contained in this report is furnished for the Registrant, MICROS
Systems, Inc., and its subsidiaries (referred to collectively herein as "MICROS"
or the "Company"). In the opinion of management, the information in this report
contains all adjustments, consisting only of normal recurring adjustments, which
are necessary for a fair statement of the results for the interim periods
presented. The financial information presented herein should be read in
conjunction with the financial statements included in the Registrant's Form 10-K
for the fiscal year ended June 30, 1997 and its Forms 10-Q for the quarters
ended September 30, 1997 and December 31, 1997 for the fiscal year ending June
30, 1998, as filed with the Securities and Exchange Commission.
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
March 31, June 30,
1998 1997
---- ----
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 8,331 $ 10,864
Accounts receivable, net of allowance for
doubtful accounts of $2,362 at March 31,
1998 and $2,508 at June 30, 1997 77,199 64,541
Inventories 35,385 23,855
Deferred income taxes 3,425 3,437
Prepaid expenses and other current assets 9,070 5,053
--------- ---------
Total current assets 133,410 107,750
Property, plant and equipment, net of accumulated
depreciation and amortization of $18,421 at
March 31, 1998 and $15,303 at June 30, 1997 21,092 19,297
Deferred income taxes, non-current 4,642 5,026
Goodwill and intangible assets, net of
accumulated amortization of $8,019 at
March 31, 1998 and $5,731 at June 30, 1997 18,350 20,806
Purchased and internally developed software,
net of accumulated amortization of $6,124 at
March 31, 1998 and $4,825 at June 30, 1997 14,918 9,872
Other assets 694 799
--------- ---------
Total assets $ 193,106 $ 163,550
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Bank lines of credit $ 23,472 $ 11,740
Current portion of long-term debt 2,409 2,846
Current portion of capital lease obligation 216 210
Accounts payable 17,395 16,797
Accrued expenses and other current liabilities 26,412 30,567
Income taxes payable 9,419 5,182
Deferred service revenue 18,338 12,570
--------- ---------
Total current liabilities 97,661 79,912
Long-term debt, net of current portion 4,070 3,368
Capital lease obligation, net of current portion 3,424 3,711
Deferred income taxes 3,252 3,321
Minority interests 868 1,511
--------- ---------
Total liabilities 109,275 91,823
--------- ---------
Commitments and contingencies
Shareholders' equity (see Note 2):
Common stock, $.025 par; authorized 30,000
shares at March 31, 1998 and 10,000 shares at
June 30, 1997; issued and outstanding 8,023
at March 31, 1998 and 7,992 at June 30, 1997 201 200
Capital in excess of par 19,054 18,103
Retained earnings 69,607 56,126
Accumulated foreign currency translation
adjustments (5,031) (2,702)
--------- ---------
Total shareholders' equity 83,831 71,727
--------- ---------
Total liabilities and shareholders' equity $ 193,106 $ 163,550
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Revenue:
Hardware and software $ 46,545 $ 38,489
Service 24,536 18,221
--------- ---------
Total revenue 71,081 56,710
--------- ---------
Costs and expenses:
Cost of sales
Hardware and software 24,908 16,899
Service 12,442 9,332
--------- ---------
Total cost of sales 37,350 26,231
Selling, general and administrative
expenses 18,403 17,440
Research and development expenses 3,966 3,303
Depreciation and amortization 2,253 1,802
--------- ---------
Total costs and expenses 61,972 48,776
--------- ---------
Income from operations 9,109 7,934
Non-operating income (expense):
Interest income 66 99
Interest expense (538) (356)
Other income (expense), net 919 34
--------- ---------
Income before taxes, minority interest and equity in
net earnings of affiliates 9,556 7,711
Income tax expense 3,822 3,081
--------- ---------
Income before minority interest and equity in
net earnings of affiliates 5,734 4,630
Minority interest and equity in net
earnings of affiliates 115 (166)
--------- ---------
Net income $ 5,849 $ 4,464
========= =========
Diluted net income per common and common
equivalent share (see Note 2) $ 0.35 $ 0.27
========= =========
Basic net income per common share (see Note 2) $ 0.37 $ 0.28
========= =========
Weighted-average number of shares outstanding
(see Note 2):
Diluted 16,754 16,338
========= =========
Basic 16,027 15,919
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Nine Months Ended March 31,
---------------------------
1998 1997
---- ----
Revenue:
Hardware and software $ 126,143 $ 105,317
Service 70,793 54,866
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Total revenue 196,936 160,183
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Costs and expenses:
Cost of sales
Hardware and software 62,591 49,480
Service 36,790 27,795
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Total cost of sales 99,381 77,275
Selling, general and administrative
expenses 57,648 50,246
Research and development expenses 10,388 7,716
Depreciation and amortization 6,206 5,119
--------- ---------
Total costs and expenses 173,623 140,356
--------- ---------
Income from operations 23,313 19,827
Non-operating income (expense):
Interest income 265 318
Interest expense (1,210) (1,139)
Other income (expense), net 926 177
--------- ---------
Income before taxes and minority interest,
equity in net earnings of affiliates and
cumulative effect of accounting change 23,294 19,183
Income tax expense 9,316 7,673
--------- ---------
Income before minority interest, equity in
net earnings of affiliates and
cumulative effect of accounting change 13,978 11,510
Minority interest and equity in net
earnings of affiliates (85) (708)
--------- ---------
Net income before cumulative effect of
accounting change 13,893 10,802
Cumulative effect of change in accounting
principle, net of tax benefit of $274 (412) -
--------- ---------
Net income $ 13,481 $ 10,802
========= =========
Diluted net income per common and common
equivalent share (see Note 2):
Income before cumulative effect of
accounting change $ 0.84 $ 0.67
Cumulative effect of change in
accounting principle (.03) -
--------- ---------
Diluted net income per common and
common equivalent share $ 0.81 $ 0.67
========= =========
Basic net income per common share (see Note 2):
Income before cumulative effect of
accounting change $ 0.87 $ 0.68
Cumulative effect of change in
accounting principle (.03) -
--------- ---------
Basic net income per common share $ 0.84 $ 0.68
========= =========
Weighted-average number of shares outstanding
(see Note 2):
Diluted 16,610 16,070
========= =========
Basic 16,014 15,909
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Condensed and unaudited - in thousands)
Nine Months Ended March 31,
---------------------------
1998 1997
---- ----
Net cash flows (used in) provided by operating
activities: $ (1,716) $ 18,572
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and
equipment (5,648) (4,994)
Proceeds on dispositions of property,
plant and equipment 42 153
Purchased and internally developed
software costs (6,722) (4,486)
Proceeds on sale of subsidiary 100 -
Dividends to minority owners (351) (112)
Net cash paid for acquisitions and
minority interests (1,778) (1,206)
--------- ---------
Net cash used in investing activities (14,357) (10,645)
--------- ---------
Cash flows from financing activities:
Principal payments on line of credit (5,582) (1,897)
Principal payments on long-term debt
and capital lease obligation (2,386) (3,908)
Proceeds from line of credit 18,062 -
Proceeds from issuance of long term debt 2,852 59
Proceeds from issuance of stock 751 793
Income tax benefit from stock options
exercised 200 46
--------- ---------
Net cash provided by (used in)
financing activities 13,897 (4,907)
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Effect of exchange rate changes on cash (357) -
--------- ---------
Net (decrease) increase in cash and cash
equivalents (2,533) 3,020
Cash and cash equivalents at beginning of period 10,864 15,231
--------- ---------
Cash and cash equivalents at end of period $ 8,331 $ 18,251
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,165 $ 1,072
========= =========
Income taxes $ 3,128 $ 3,103
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 1998
(Unaudited)
1. Inventories
The components of inventories are as follows (in thousands):
March 31, 1998 June 30, 1997
-------------- -------------
Raw materials $ 5,370 $ 7,594
Work-in-process 1,831 3,515
Finished goods 28,184 12,746
----------- ----------
$ 35,385 $ 23,855
=========== ==========
2. Common Stock
On November 21, 1997, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation which increased the Company's
authorized shares from 10,000,000 to 30,000,000 shares.
In addition, on April 29, 1998, the Company's Board of Directors approved
a two-for-one stock split in the form of a stock dividend payable to
shareholders of record as of May 22, 1998. Accordingly, all per share and
share data contained in the Consolidated Statements of Operations and Note
5 to the Consolidated Financial Statements have been adjusted to give
retroactive effect to the stock split. Share data in the Consolidated
Balance Sheet has not been restated as the record date of the split is May
22, 1998.
3. Earnings per share
The Company adopted SFAS No. 128, "Earnings per Share", for the quarter
ending December 31, 1997 and has restated all prior period earnings per
share data in accordance with SFAS No. 128. Basic earnings per share
excludes the dilutive effect of all outstanding stock options and is
computed by dividing net income by the weighted average common shares
outstanding. Diluted earnings per share reflects the potential dilution
that could occur if outstanding stock options were exercised and is
computed by increasing the denominator of the basic calculation by the
weighted average number of shares to reflect the potentially dilutive
stock options outstanding.
For the three month and nine month periods ended March 31, 1998 and 1997,
respectively, all options outstanding were included in the above earnings
per share calculations as no options were anti-dilutive for these periods.
4. Minority Interest
During the third quarter of fiscal 1998, the Company increased its
interest from 51% to 75% in its Scandinavian Fidelio subsidiary group at a
cost of approximately $1.5 million. Goodwill approximated $1.1 million and
is being amortized over ten years.
5. Change in Accounting Principle
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board issued consensus ruling 97-13 which
requires certain business re-engineering and information technology
implementation costs that have previously been capitalized to now be
expensed as incurred. In addition, any previously capitalized costs which
are addressed by EITF 97-13 must also be written off as a cumulative
adjustment in the quarter containing November 20, 1997.
As a result of this ruling, the Company recorded a one-time after-tax
charge of $0.4 million, or $0.03 per common share in the quarter ending
December 31, 1997. The charge represents the business process
re-engineering costs capitalized through December 31, 1997 relating to
MICROS' installation of a new information system.
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 1998
(Unaudited)
6. Subsequent Event - Office closure
On April 2, 1998, MICROS announced the permanent closure of its facility
in Munich, Germany. The decision was made to reduce costs and consolidate
operations. The Munich office has served as a service and development
center for Fidelio hotel products. It is anticipated that the closure will
be effective June 30, 1998. Currently, approximately 124 employees are
based in the Munich office. While many employees have already accepted
relocation offers to other sites in Germany, the U.K. and Florida,
approximately 67 employees will be terminated. In accordance with German
labor law and practice, and in accordance with an agreement achieved with
the Munich office workers council, MICROS will pay certain severance
benefits to terminated employees. MICROS anticipates that the aggregate
cost of such severance benefits and other costs associated with the office
closure shall be in the range of $1.3 to $1.6 million, depending upon the
actual number of employees who are terminated. MICROS shall take a
one-time restructuring charge in the 1998 fiscal fourth quarter ending
June 30, 1998 for this liability. Additionally, MICROS will incur certain
other costs, currently estimated to be between $400,000 and $500,000,
in the fourth quarter of fiscal 1998 primarily associated with
the relocation of those Munich employees who are not terminated. See
additional comments pertaining to this matter in Management's discussion
and analysis of financial condition and results of operations.
7. Legal proceedings
MICROS is and has been involved in legal proceedings arising in the normal
course of business. The Company is of the opinion, based upon presently
available information and the advice of counsel concerning pertinent legal
matters, that any resulting liability should not have a material adverse
effect on the Company's results of operations or financial position.
On March 25, 1997, Budgetel Inns, Inc. ("Budgetel") filed suit against
MICROS in the United States Federal District Court in the Eastern District
of Wisconsin. Budgetel alleges, among other things, that MICROS breached a
March 1993 software support agreement by failing to provide full support
to this software package licensed to Budgetel in 1993. On March 19, 1998,
the Magistrate Judge recommended to the United States District Judge that
MICROS' motion to dismiss four of the seven causes of action be granted in
its entirety. Assuming this recommendation is adopted, to which the
plaintiff has objected, the plaintiff's primary remaining claim is a
standard breach of contract claim. While the ultimate outcome of
litigation is uncertain, and while litigation is inherently difficult to
predict, the Company is of the opinion, based upon presently available
information and the advice of counsel concerning pertinent legal matters,
that resulting liability, if any, should not have a material adverse
effect on the Company's results of operations or financial position.
Item 2. Management's discussion and analysis of financial condition and results
of operations
Liquidity and Capital Resources
The Company has a $35.0 million unsecured committed line of credit which
expires on December 31, 1998. This line of credit was increased from $25.0
million to $35.0 million pursuant to an amendment entered into on March
27, 1998. In addition, the Company has a DM 15.0 million (approximately
$8.1 million at the March 31, 1998 exchange rate) borrowing facility.
Under the terms of this facility, the Company may, at its option, borrow
in the form of a line of credit or in the form of term debt. For both of
these credit agreements, at March 31, 1998, the Company had borrowed
approximately $28.0 million and has approximately $15.1 million available.
Of the $28.0 million outstanding as of March 31, 1998, $23.5 million
represents line of credit borrowings, with the balance representing term
debt. The increase in the Company's borrowings during fiscal 1998 stems
primarily from an increase in working capital requirements during the past
two quarters of this fiscal year. The working capital increase was
primarily due to inventory build-up to meet anticipated demand
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
Liquidity and Capital Resources, Continued
in the next two quarters and increased stock associated with implementing
the outsourcing of manufacturing of certain hardware products to an
independent third-party. The Company believes it can operate at a lower
inventory level and believes it can achieve this during fiscal 1999. The
increase in working capital is also attributable to an increase
in accounts receivable.
As the Company has significant international operations, its
DM-denominated borrowings do not represent a significant foreign exchange
risk. On an overall basis, the Company monitors and adjusts its foreign
currency positions in an effort to reduce its foreign exchange risk.
Net cash used by operating activities for the nine months ended March 31,
1998 was $1.7 million. In addition, the Company used $12.4 million for
the purchase of property, plant and equipment and internally developed
software. Financing activities for the first nine months of fiscal 1998
provided $13.9 million, principally representing borrowings of
approximately $20.9 million along with debt and capital lease repayments
of approximately $8.0 million.
The Company anticipates that its cash flow from operations along with
available lines of credit, in conjunction with other lines of credit or
other commercial borrowings for which the Company may be eligible, are
sufficient to provide the current working capital needs of the Company.
The Company anticipates that its property, plant and equipment
expenditures for fiscal 1998 will continue to increase for the remainder
of the fiscal year and will be approximately $1.0 million less than its
1997 expenditures.
Results of Operations - Third Quarter and Nine Month Comparisons
The per share data presented herein has been restated to reflect the
two-for-one stock split discussed in Note 2 of the Notes To Consolidated
Financial Statements.
The Company recorded net income in the third quarter of fiscal 1998,
on a diluted basis, of $0.35 per common share compared with net income, on
a diluted basis, of $0.27 per share in the third quarter of fiscal 1997.
Income for the nine months ended March 31, 1998, on a diluted basis, was
$0.84 per share compared with net income, on a diluted basis, of $0.67 per
common share for the first nine months of fiscal 1997. The increased
income for both the quarter and the year-to-date was primarily due to
higher sales volumes partially offset by lower gross margins and higher
operating expenses.
Net income, on a diluted basis, for the third quarter and first nine
months of fiscal 1998 was $0.35 and $0.81, respectively, including a
second quarter one-time after-tax charge of $0.4 million, or $0.03 per
common share. This one-time cost stems from a charge taken in the second
quarter of fiscal 1998 in conjunction with a ruling issued by the
Financial Accounting Standards Board Emerging Issues Task Force, EITF
Issue No. 97-13. This ruling required all previously capitalized business
process re-engineering costs incurred in conjunction with a technology
transformation project to be immediately expensed in the quarter ending
December 31, 1997. Additionally, all such future costs are to be expensed
as incurred. The charge represents the business process re-engineering
costs capitalized through December 31, 1997 relating to MICROS'
installation of a new information system. Prior to this ruling, these
costs had been capitalized and were to be amortized over the useful life
of the system.
Revenue of $71.1 million for the third quarter of fiscal 1998 increased
$14.4 million, or 25.3%, compared to the same period last year. For the
first nine months of fiscal 1998, revenue increased $36.8 million to
$196.9 million, or 22.9%, over
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
Results of Operations - Third Quarter and Nine Month Comparisons,
Continued
the same period in fiscal 1997. A comparison of the sales mix for
fiscal years 1998 and 1997 is as follows:
Three Months Ended March 31, Nine months Ended March 31,
1998 1997 1998 1997
---- ---- ---- ----
Hardware 44.6% 46.2% 43.9% 44.8%
Software 20.9% 21.7% 20.1% 21.0%
Service 34.5% 32.1% 36.0% 34.2%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
While hardware sales represent a smaller proportion of total sales in
fiscal 1998 in comparison to the prior year, this category continued to
grow in absolute dollars. For the quarter and the year-to-date, software
sales continued to grow in absolute dollars, despite a minor decline as a
percentage of total sales. For the quarter and the year-to-date, the
increase in service sales, relative to total sales is primarily due to
continued growth in both installation and maintenance revenues in both the
POS and hotel businesses.
Combined hardware and software revenues for the third quarter of fiscal
1998 increased $8.1 million, or 20.9%, while service revenues increased
$6.3 million, or 34.7%, over the same period a year earlier. On a year-to-
date basis, hardware and software sales increased $20.8 million, or 19.8%,
while service revenues increased $15.9 million, or 29.0%, over the same
period a year earlier.
Cost of sales, as a percentage of revenue, increased to 52.6% from 46.3%
for the third quarter of fiscal 1998 compared to the third quarter of
fiscal 1997. For the first nine months of fiscal 1998 and 1997, cost of
sales, as a percentage of revenue, was 50.5% and 48.2% respectively. Cost
of sales for hardware and software products, as a percentage of related
revenue, was 53.5% in the third quarter of fiscal 1998 compared to 43.9%
for the same quarter a year earlier and 49.6% compared to 47.0% for the
first nine months of fiscal 1998 and 1997, respectively. For both the
quarter and year-to-date, these increases are due to a reduction in
hardware margins relative to the prior year while hardware sales continue
to grow in absolute dollars and at a rate comparable to software sales for
the third quarter and at a rate in excess of software sales for the
year-to-date. The decline in hardware margins is primarily due to
increased competition and general industry-wide hardware margin declines.
Service costs, as a percentage of service revenue, decreased to 50.7% in
the third quarter of fiscal 1998 compared to 51.2% in the same quarter in
fiscal 1997. Service costs, as a percentage of service revenue, increased
to 52.0% in the first nine months of fiscal 1998 compared to 50.7% for the
same period in fiscal 1997. The decreased costs for the quarter were
primarily the result of sales growth at a rate in excess of these
costs. The increased costs for the nine months were primarily due to
continued expansion of the Company's service organization and the initial
costs associated with adding additional personnel. During the third
quarter of fiscal 1998, the Company entered into a Service Contractor
Agreement with Vanstar Corporation ("Vanstar"), a California-based
company, capable of providing certain installation, repair and maintenance
services for certain MICROS major account and district customers. MICROS
believes that this four year agreement, which can be terminated for any
reason after two years, may enable it to better control or reduce its
service costs once Vanstar assumes full service responsibilities over
approximately the next nine months. Currently, these services are provided
through a national network of MICROS dealers and MICROS district offices.
Selling, general and administrative expenses increased $1.0 million, or
5.5%, in the third quarter of fiscal 1998 compared to the same period last
year. As a percentage of revenue, selling, general and administrative
expenses decreased to 25.9% in the third quarter of fiscal 1998 compared
to 30.8% in the third quarter of fiscal 1997. For the first nine months of
fiscal 1998, selling, general and administrative expenses, as a percentage
of revenue, were 29.3% compared to 31.4%
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MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
Results of Operations - Third Quarter and Nine Month Comparisons,
Continued
for the same period a year earlier. For both the quarter and the
year-to-date, the decreases are primarily the result of sales growth at a
rate in excess of these expenses. In an effort to reduce selling, general
and administrative expenses and consolidate operations, the Company
announced in April, 1998 that it will permanently close its Munich,
Germany facility effective June 30, 1998. As the Company will relocate
many employees as part of the closure of the Munich office, the Company,
in the fourth quarter of fiscal 1998, will record this relocation charge
as a general and administrative expense, which is currently estimated to
be between $400,000 and $500,000. The Company believes that the closure
will reduce its overall selling, general and administrative expenses on an
ongoing basis.
Research and development expenses (exclusive of capitalized software
development costs), which consist primarily of internal and sub-contracted
labor costs, increased $663,000, or 20.1%, in the third quarter of fiscal
1998 compared to the same period a year earlier. Actual research and
development expenditures, including capitalized software development costs
of $3.0 million in the third quarter of fiscal 1998 and $1.0 million in
the third quarter of fiscal 1997, increased $2.7 million, or 63.1%,
compared to the same period a year earlier. For the first nine months of
fiscal 1998, research and development expenses (exclusive of capitalized
software development costs), which consist primarily of internal and
sub-contracted labor costs, increased $2.7 million, or 34.6%, compared to
the same period a year earlier. Actual research and development
expenditures for the first nine months of fiscal 1998, including
capitalized software development costs of $6.7 million, increased $6.2
million, or 56.2%, compared to the same period a year earlier. The
increase in absolute dollars for both the three-month and nine-month
periods is primarily due to increased expenditures in both the POS and
hotel businesses. The Company currently anticipates its research and
development expenditures to remain at current dollar levels.
Income from operations for the third quarter of fiscal 1998 was $9.1
million, or 12.8% of revenue, compared to income of $7.9 million, or 14.0%
of revenue, in the same period a year earlier. For the first nine months
of fiscal 1998, income from operations was $23.3 million compared to
income of $19.8 million a year earlier. For both the third quarter and
first nine months of fiscal 1998, the Company's improved income from
operations is primarily due to higher sales partially offset by lower
gross margins and higher operating expenses.
Interest income for the third quarter of fiscal 1998 decreased $33,000 to
$66,000, or 33.3%, compared to $99,000 for the third quarter of fiscal
1997. The decrease in interest income for the period is primarily due to
lower average cash balances during the quarter. Interest expense increased
$182,000 to $538,000 for the third quarter of fiscal 1998 from $356,000
for the same period a year ago primarily due to the increase in the
Company's overall debt in the third quarter relative to the prior year.
Interest income for the first nine months in fiscal 1998 was $265,000
compared to $318,000, a decrease of 16.7%, for the comparable period in
fiscal 1997 as a result of a lower average investment balance year-to-date
during fiscal 1998. Interest expense for the first nine months in fiscal
1998 was $1.2 million compared to $1.1 million, an increase of 6.2%, for
the comparable period in fiscal 1997 primarily due to the increase in the
Company's overall debt during the first nine months of fiscal 1998 in
comparison to the same period in fiscal 1997.
The effective tax rate is 40.0% for both the third quarter and
year-to-date of fiscal years 1998 and 1997.
The year-to-date cumulative effect of a change in accounting principle
relates to a one-time after-tax charge of $412,000, or $.03 per common
share. This one-time charge, which was $686,000 on a pre-tax basis, stems
from a charge taken in the second quarter of fiscal 1998 in conjunction
with a ruling issued by the Financial Accounting Standards Board Emerging
Issues Task Force, EITF Issue No. 97-13. This ruling required all
previously capitalized business process re-engineering costs incurred in
conjunction with a technology transformation project to be immediately
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12
MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
Results of Operations - Third Quarter and Nine Month Comparisons,
Continued
expensed in the Company's quarter ending December 31, 1997. Additionally,
all such future costs are to be expensed as incurred. The charge
represents the business process re-engineering costs capitalized through
December 31, 1997 relating to MICROS' installation of a new management
information system. Prior to this ruling, these costs had been capitalized
and were to be amortized over the useful life of the system.
The Company is currently in the process of performing a review of its
business systems, and is querying its customers, vendors and resellers
with respect to Year 2000 compliancy issues. The "Year 2000 Issue" is the
result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's computer programs
that have a time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices, or engage in normal business activities.
Based on preliminary reviews from presently available information, it is
believed that with the Company's current installation of a new business
operating system, and the significant capital equipment purchases in
recent years to upgrade the Company's technological capabilities, the
additional costs of addressing potential problems are not expected to have
a material adverse impact on the Company's results of operations,
liquidity and capital resources. However, if the Company, its large
customers, or significant suppliers are unable to resolve such processing
issues in a timely manner, it could have a material impact on the results
of operations, liquidity or capital resources of the Company.
Finally, the Company is currently in the process of completing the testing
of its existing product offerings. While certain potential issues have
been identified, the expense of upgrading product applications to be Year
2000 compliant has not been material.
Summary
The Company has recently experienced rapid revenue growth at a rate that
it believes has significantly exceeded that of the global market for
point-of-sale computer systems and property management information systems
products for the hospitality industry, fueled in part by the acquisitions
consummated in calendar year 1995. Although the Company currently
anticipates continued revenue growth at a rate in excess of such market,
and therefore an increase in its overall market share, it does not expect
to maintain growth at recent levels and there can be no assurance that any
particular level of growth can be achieved. In addition, due to the
competitive nature of the market, the Company continues to experience
gross margin pressure on its products and service offerings, and the
Company expects product and service margins to decline. There can be no
assurance that the Company will be able to continue to increase
sufficiently sales of its higher margin products, including software, to
prevent future declines in the Company's overall gross margin.
Moreover, some of the statements contained herein not based on historic
facts are forward looking statements that involve risks and uncertainties.
Past performance is not necessarily a strong or reliable indicator of
future performance. Actual results could differ materially from past
results, estimates or projections. Some of the additional risks and
uncertainties are: product demand and market acceptance, including demand
and acceptance for the 3400 QSA and the 3700 POS systems; implementation
of a cost-effective service structure capable of servicing increasingly
complex software systems in increasingly more remote locations; achieving
increased sales of higher margin software products; hiring and retention
of qualified employees with sufficient technical expertise; adverse
economic or political conditions; unexpected currency fluctuations,
exacerbated in part by the fact that a large portion of the Company's
business is conducted abroad and denominated in foreign currencies; impact
of competitive products and pricing on
12
13
MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
Results of Operations - Third Quarter and Nine Month Comparisons,
Continued
margins; product development delays; technological difficulties associated
with new product releases, including those with respect to the Fidelio
next generation integrated property management and central reservation
system technologies; inflationary pressures in the labor markets,
especially in the high technology industry; and controlling expenses,
including those relating to infrastructure expansion. Other risks are
disclosed in the Company's press releases and periodic SEC filings.
13
14
MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
Part II - Other Information
Item 1. Legal Proceedings.
On March 25, 1997, Budgetel Inns, Inc. ("Budgetel") filed suit against
MICROS in the United States Federal District Court in the Eastern District
of Wisconsin. Budgetel alleges, among other things, that MICROS breached a
March 1993 software support agreement by failing to provide full support
to this software package licensed to Budgetel in 1993. On March 19, 1998,
the Magistrate Judge recommended to the United States District Judge that
MICROS' motion to dismiss four of the seven causes of action be granted in
its entirety. Assuming this recommendation is adopted, to which the
plaintiff has objected, the plaintiff's primary remaining claim is a
standard breach of contract claim. While the ultimate outcome of
litigation is uncertain, and while litigation is inherently difficult to
predict, the Company is of the opinion, based upon presently available
information and the advice of counsel concerning pertinent legal matters,
that resulting liability, if any, should not have a material adverse
effect on the Company's results of operations or financial position.
Items 2 through 4.
No events occurred during the quarter covered by the report that would
require a response to any of these items.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
14
15
MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended March 31, 1998
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)
May 15, 1998 s/ Gary C. Kaufman
- ---------------- ---------------
Gary C. Kaufman
Senior Vice President, Finance and
Administration/Chief Financial Officer
May 15, 1998 s/ Roberta J. Watson
- ---------------- -----------------
Roberta J. Watson
Vice President and Controller
15
16
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
11 Computation of Earnings Per Share 17
27 Financial Data Schedule 18
16