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 September 30, 2008
Commission
file number 0-9993
(Exact
name of Registrant as specified in its charter)
MARYLAND
|
|
52-1101488
|
(State
of incorporation)
|
|
(IRS
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 reports), and (2) has been subject to such filing requirements
for
the past 90 days.
YES
þ
NO
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definition of “accelerated filer”, “large accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
þ
|
Accelerated
filer
o
|
|
|
Non-accelerated
filer
o
|
Smaller
Reporting Company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
o
NO
þ
As
of
October 31, 2008, there were issued and outstanding 80,380,632 shares of
Registrant’s Common Stock at $0.00625 par value.
MICROS
SYSTEMS, INC. AND SUBSIDIARIES
Form
10-Q
For
the
three months ended September 30, 2008
PART
I – FINANCIAL INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
MICROS
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited,
in thousands, except per share data)
|
|
Sept.
30,
2008
|
|
June
30,
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
325,441
|
|
$
|
381,964
|
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
|
|
|
|
|
|
$29,021
at September 30, 2008 and $28,348 at June 30, 2008
|
|
|
203,153
|
|
|
192,445
|
|
Inventory,
net
|
|
|
52,795
|
|
|
64,575
|
|
Deferred
income taxes
|
|
|
17,528
|
|
|
18,724
|
|
Prepaid
expenses and other current assets
|
|
|
27,417
|
|
|
29,737
|
|
Total
current assets
|
|
|
626,334
|
|
|
687,445
|
|
|
|
|
|
|
|
|
|
Investments,
non-current
|
|
|
62,662
|
|
|
65,216
|
|
Property,
plant and equipment, net of accumulated depreciation and
|
|
|
|
|
|
|
|
amortization
of $78,457 at September 30, 2008 and $78,505 at June 30,
2008
|
|
|
31,308
|
|
|
29,165
|
|
Deferred
income taxes, non-current
|
|
|
8,261
|
|
|
7,108
|
|
Goodwill
|
|
|
186,895
|
|
|
159,722
|
|
Intangible
assets, net of accumulated amortization of $7,844 at September 30,
2008
|
|
|
|
|
|
|
|
and
$7,401 at June 30, 2008
|
|
|
21,568
|
|
|
16,168
|
|
Purchased
and internally developed software costs, net of
accumulated
|
|
|
|
|
|
|
|
amortization
of $60,432 at September 30, 2008 and $61,691 at June 30,
2008
|
|
|
32,045
|
|
|
30,846
|
|
Other
assets
|
|
|
8,249
|
|
|
7,336
|
|
Total
assets
|
|
$
|
977,322
|
|
$
|
1,003,006
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Bank
lines of credit
|
|
$
|
987
|
|
$
|
989
|
|
Accounts
payable
|
|
|
41,895
|
|
|
46,843
|
|
Accrued
expenses and other current liabilities
|
|
|
116,045
|
|
|
124,913
|
|
Income
taxes payable
|
|
|
4,099
|
|
|
6,363
|
|
Deferred
revenue
|
|
|
122,059
|
|
|
115,398
|
|
Total
current liabilities
|
|
|
285,085
|
|
|
294,506
|
|
|
|
|
|
|
|
|
|
Income
taxes payable, non-current
|
|
|
18,438
|
|
|
18,302
|
|
Deferred
income taxes, non-current
|
|
|
3,382
|
|
|
2,181
|
|
Other
non-current liabilities
|
|
|
10,183
|
|
|
8,103
|
|
Total
liabilities
|
|
|
317,088
|
|
|
323,092
|
|
|
|
|
|
|
|
|
|
Minority
interests and minority ownership put arrangement
|
|
|
6,702
|
|
|
6,898
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
Common
stock, $0.00625 par value; authorized 120,000 shares; issued
and
|
|
|
|
|
|
|
|
outstanding
80,629 shares at September 30, 2008 and 80,898 shares at June 30,
2008
|
|
|
504
|
|
|
506
|
|
Capital
in excess of par
|
|
|
126,347
|
|
|
131,517
|
|
Retained
earnings
|
|
|
505,468
|
|
|
480,777
|
|
Accumulated
other comprehensive income
|
|
|
21,213
|
|
|
60,216
|
|
Total
shareholders' equity
|
|
|
653,532
|
|
|
673,016
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
977,322
|
|
$
|
1,003,006
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MICROS
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited,
in thousands, except per share data)
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
63,693
|
|
$
|
64,901
|
|
Software
|
|
|
37,576
|
|
|
30,851
|
|
Services
|
|
|
142,800
|
|
|
120,730
|
|
Total
revenue
|
|
|
244,069
|
|
|
216,482
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
Hardware
|
|
|
43,059
|
|
|
39,938
|
|
Software
|
|
|
7,300
|
|
|
8,509
|
|
Services
|
|
|
67,766
|
|
|
54,793
|
|
Total
cost of sales
|
|
|
118,125
|
|
|
103,240
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
125,944
|
|
|
113,242
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
76,801
|
|
|
70,895
|
|
Research
and development expenses
|
|
|
10,471
|
|
|
9,416
|
|
Depreciation
and amortization
|
|
|
4,087
|
|
|
3,846
|
|
Total
operating expenses
|
|
|
91,359
|
|
|
84,157
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
34,585
|
|
|
29,085
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,254
|
|
|
3,514
|
|
Interest
expense
|
|
|
(146
|
)
|
|
(63
|
)
|
Other
income (expense), net
|
|
|
687
|
|
|
(129
|
)
|
Total
non-operating income, net
|
|
|
3,795
|
|
|
3,322
|
|
|
|
|
|
|
|
|
|
Income
before taxes, minority interests and equity in net earnings of
affiliates
|
|
|
38,380
|
|
|
32,407
|
|
Income
tax provision
|
|
|
13,049
|
|
|
10,856
|
|
Income
before minority interests and equity in net earnings of
affiliates
|
|
|
25,331
|
|
|
21,551
|
|
Minority
interests and equity in net earnings of affiliates, net of
taxes
|
|
|
(449
|
)
|
|
(247
|
)
|
Net
income (1)
|
|
$
|
24,882
|
|
$
|
21,304
|
|
|
|
|
|
|
|
|
|
Net
income per common share (1)(2):
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
$
|
0.26
|
|
Diluted
|
|
$
|
0.30
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares outstanding (2):
|
|
|
|
|
|
|
|
Basic
|
|
|
80,688
|
|
|
81,584
|
|
Diluted
|
|
|
82,196
|
|
|
83,512
|
|
(1)
See
Note 9, "Share-based Compensation" in Notes to Condensed Consolidated Financial
Statements.
(2)
All
share data has been retroactively adjusted for a two-for-one stock split
effective February 5, 2008.
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MICROS
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
Net
cash flows provided by operating activities
|
|
$
|
29,658
|
|
$
|
24,676
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by investing activities:
|
|
|
|
|
|
|
|
Net
cash paid for acquisitions
|
|
|
(32,288
|
)
|
|
(11,562
|
)
|
Purchases
of property, plant and equipment
|
|
|
(3,343
|
)
|
|
(4,031
|
)
|
Internally
developed software
|
|
|
(125
|
)
|
|
(611
|
)
|
Disposal
of property, plant and equipment
|
|
|
190
|
|
|
103
|
|
Purchases
of investments
|
|
|
-
|
|
|
(308,000
|
)
|
Proceeds
from sales of investments
|
|
|
3,375
|
|
|
270,025
|
|
Net
cash flows used in investing activities
|
|
|
(32,191
|
)
|
|
(54,076
|
)
|
|
|
|
|
|
|
|
|
Cash
flows provided by financing activities:
|
|
|
|
|
|
|
|
Principal
payments on line of credit and long-term debt
|
|
|
(18,124
|
)
|
|
-
|
|
Repurchases
of stock
|
|
|
(10,352
|
)
|
|
-
|
|
Proceeds
from stock option exercises
|
|
|
1,363
|
|
|
12,513
|
|
Realized
tax benefits from stock option exercises
|
|
|
77
|
|
|
6,357
|
|
Other
|
|
|
(474
|
)
|
|
(90
|
)
|
Net
cash flows (used in) provided by financing activities
|
|
|
(27,510
|
)
|
|
18,780
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(26,480
|
)
|
|
8,446
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(56,523
|
)
|
|
(2,174
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
381,964
|
|
|
242,702
|
|
Cash
and cash equivalents at end of period
|
|
$
|
325,441
|
|
$
|
240,528
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MICROS
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' 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, 2008
|
|
|
80,898
|
|
$
|
506
|
|
$
|
131,517
|
|
$
|
480,777
|
|
$
|
60,216
|
|
$
|
673,016
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,882
|
|
|
-
|
|
|
24,882
|
|
Foreign
currency translation adjustments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,517
|
)
|
|
(39,517
|
)
|
Changes
in unrealized losses on non-current investments, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
514
|
|
|
514
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,121
|
)
|
Minority
interest put arrangement
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(191
|
)
|
|
-
|
|
|
(191
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
-
|
|
|
3,733
|
|
|
-
|
|
|
-
|
|
|
3,733
|
|
Stock
issued upon exercise of options
|
|
|
78
|
|
|
-
|
|
|
1,363
|
|
|
-
|
|
|
-
|
|
|
1,363
|
|
Repurchases
of stock
|
|
|
(347
|
)
|
|
(2
|
)
|
|
(10,350
|
)
|
|
-
|
|
|
-
|
|
|
(10,352
|
)
|
Income
tax benefit from options exercised
|
|
|
-
|
|
|
-
|
|
|
84
|
|
|
-
|
|
|
-
|
|
|
84
|
|
Balance,
September 30, 2008
|
|
|
80,629
|
|
$
|
504
|
|
$
|
126,347
|
|
$
|
505,468
|
|
$
|
21,213
|
|
$
|
653,532
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MICROS
SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the
three months ended September 30, 2008
(unaudited)
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, 2008.
The
year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. 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.
All
references to share data in the accompanying condensed consolidated financial
statements and throughout these notes have been retroactively adjusted to
reflect the February 2008 two-for-one stock split.
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 months ended September 30, 2008 are not necessarily
indicative of the results to be expected for the full year or any future
periods.
During
the three month period ended September 30, 2008, the Company acquired Fry,
Inc.
(“Fry”) for a total cash purchase price of approximately $32.3 million, net of
cash acquired.
The
Company also assumed debt of approximately $18.1 million, which was paid off
immediately after the acquisition.
Approximately $6.0 million of the
total purchase price is currently held in escrow and, if specified Company
claims against Fry arise, such amounts may be used to satisfy these claims.
Any
amounts then remaining after the satisfaction of any such claims will be paid
in
two installments, at 12 and 18 months after closing. The selling Fry
shareholders are eligible to earn up to an additional $17 million in earn out
payments over the next approximately two year period, which are payable based
upon meeting specified financial targets. Fry is an e-commerce design,
development and managed services provider headquartered in Ann Arbor, Michigan.
In connection with the acquisition, the Company recorded goodwill of
approximately $33.2 million, intangible assets of approximately $7.0 million
and
capitalized software of approximately $4.7 million. The purchase price
allocation is not finalized and is subject to the final working capital
adjustments, which are currently not expected to be material. The acquisition
of
Fry has been included in the Company’s results since the acquisition date. The
pro forma effect of this acquisition on operating results is not material to
the
consolidated financial position and results of operations presented
herein.
The
components of inventory are as follows:
(in
thousands)
|
|
September 30,
2008
|
|
June 30,
2008
|
|
Raw
materials
|
|
$
|
4,637
|
|
$
|
5,521
|
|
Work-in-process
|
|
|
8
|
|
|
21
|
|
Finished
goods
|
|
|
48,150
|
|
|
59,033
|
|
Total
inventory
|
|
$
|
52,795
|
|
$
|
64,575
|
|
The
Company maintains a reserve for obsolescence for inventory of approximately
$12.3 million at September 30, 2008, compared to approximately $11.5 million
at
June 30, 2008. During the three months ended September 30, 2008 and September
30, 2007, the Company reserved approximately $1.5 million and approximately
$0.5
million, respectively. All reserves related to potentially obsolete and slow
moving products. Approximately $1.0 million of the reserve recorded during
the
three months ended September 30, 2008 related to a potential obsolete product
which will be replaced with a new product currently being developed by the
Company. Foreign currency translation decreased the reserve for obsolescence
for
inventory by approximately $0.5 million as of September 30,
2008.
4.
|
Investments,
non-current
|
As
of
September 30, 2008,
the
Company continues to hold auction rate securities that are classified as
available for sale, investments, non-current. These investments are classified
as non-current as auctions for these securities failed to obtain sufficient
bids
to establish a clearing rate. As a result, the securities were not saleable
in
the auction, thereby no longer providing short-term liquidity. In the absence
of
a liquid market or a negotiated sales transaction, the Company engaged an
independent valuation firm to update the valuation of its auction rate
securities as of September 30, 2008. The valuation firm used a mark to model
approach to arrive at this valuation, which the Company reviewed and to which
it
agreed. Based on the fair value determination described in Note 5, Fair value
measurement, below, the fair value decreased compared to cost, but improved
by
approximately $0.7 million compared to June 30, 2008 fair value related to
those
investments still held as of September 30, 2008. The Company updated its
temporary unrealized losses on these investments to approximately $3.4 million
(approximately $2.1 million, net of tax) in the other comprehensive income
component of stockholders’ equity. During the three months ended September 30,
2008, the Company redeemed approximately $3.4 million of its auction rate
securities at their par value. The Company recognized no gains or losses related
to the sale of its investments in auction rate securities during the three
months ended September 30, 2008 and 2007.
5.
|
Fair
value measurement
|
The
Company adopted the Financial Accounting Standards Board’s (FASB) Statement of
Financial Accounting Standards (SFAS) 157, “Fair Value Measurements,” effective
July 1, 2008, for financial assets and liabilities and for non-financial assets
and liabilities recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). Additionally, the Company
also adopted FASB Staff Position (FSP) No.157-2, which delayed the effective
date of SFAS No. 157 by one year for other non-financial assets and liabilities.
As defined in SFAS No. 157, fair value is the price that would be received
to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). SFAS No. 157
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. To increase consistency and comparability in fair
value
measurements and related disclosure, SFAS No. 157 establishes a hierarchy that
prioritizes the inputs (generally, assumptions that market participants use
in
pricing an asset or liability) used to measure fair value based on the quality
and reliability of the information provided by the inputs, as follows:
·
|
Level
1 - Unadjusted quoted prices in active markets that are accessible
at the
measurement date for identical, unrestricted assets or liabilities.
The
Company considers active markets as those in which transactions for
the
assets or liabilities occur with sufficient frequency and volume
to
provide pricing information on an ongoing
basis.
|
·
|
Level
2 - Quoted prices in markets that are not active, or inputs that
are
observable, either directly or indirectly, for substantially the
full term
of the asset or liability. This category includes those derivative
instruments that the Company values using observable market data.
Substantially all of these inputs are observable in the marketplace
throughout the full term of the derivative instrument, can be derived
from
observable data or supported by observable levels at which transactions
are executed in the marketplace. Instruments in this category include
non-exchange traded derivatives such as over-the-counter commodity
price
swaps, investments and interest rate
swaps.
|
·
|
Level
3 - Measured based on prices or valuation models that require inputs
that
are both significant to the fair value measurement and less observable
from objective sources (i.e., supported by little or no market activity).
|
The
Company’s investments in auction rate securities, classified as investments,
non-current, are its only Level 3 assets. The Company engaged an independent
valuation firm to update the valuation of its auction rate securities as of
September 30, 2008. The Company’s valuation methodology for investments is a
discounted cash flow model that considers various inputs including: (a) the
coupon rate specified under the debt instruments, (b) the current credit
ratings of the underlying issuers, (c) collateral characteristics and
(d) risk adjusted discount rates. The valuation firm used a mark to model
approach to arrive at this valuation, which the Company reviewed and agreed
to.
The measurement was made in compliance with FSP No. 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active,” which
FASB issued in October 2008. FSP No. 157-3 clarified the application of SFAS
No.
157 in determining the fair value of an asset where the market for that asset
is
not active. FSP No. 157-3 provides an example to illustrate key considerations
in determining the fair value of a financial asset when the market for that
financial asset is not active.
The
Company reviews impairments in accordance with Emerging Issues Task Force 03-1
and FSP 115-1 and FAS 124-1, each of which is titled “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments” to
determine the classification of the impairment as temporary or
other-than-temporary. A temporary impairment charge results in an unrealized
loss being recorded in the other comprehensive income component of stockholders'
equity. Such an unrealized loss does not reduce net income for the applicable
accounting period because the loss is viewed as temporary. Unrealized losses
are
recognized in the statement of operations when a decline in fair value is
determined to be other-than-temporary. Determination of whether the impairment
is temporary or other-than-temporary requires significant judgment. The primary
factors that are considered in classifying the impairment include the extent
to
which and time period during which the fair value of each investment has been
below cost, the expected holding or recovery period for each investment, and
the
Company’s intent and ability to hold each investment until
recovery.
The
financial assets and liabilities accounted for at fair value as of September
30,
2008 are as follows (does not include cash on hand or assets and liabilities
that are measured at historical cost or any basis other than fair
value):
(in
thousands)
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Cash
equivalents
|
|
$
|
189,247
|
|
$
|
-
|
|
$
|
-
|
|
$
|
189,247
|
|
Investments,
non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities
|
|
|
-
|
|
|
-
|
|
|
62,661
|
|
|
62,661
|
|
Balance
at September 30, 2008
|
|
$
|
189,247
|
|
$
|
-
|
|
$
|
62,661
|
|
$
|
251,908
|
|
Cash
equivalents consist primarily of certificate of deposits, in addition to money
markets funds and overnight repurchase agreements.
A
reconciliation of changes in the fair value of investments, non-current,
classified as Level 3, and the related unrealized losses included in other
comprehensive income is as follows:
(in
thousands)
|
|
Cost
|
|
Temporary
Unrealized
Loss
|
|
Fair
Value
|
|
Balance
at June 30, 2008
|
|
$
|
69,450
|
|
$
|
(4,234
|
)
|
$
|
65,216
|
|
Changes
in unrealized losses related to investments:
|
|
|
|
|
|
|
|
|
|
|
Still
held at September 30, 2008
|
|
|
-
|
|
|
675
|
|
|
675
|
|
Redeemed
during the period
|
|
|
(3,375
|
)
|
|
145
|
|
|
(3,230
|
)
|
Balance
at September 30, 2008
|
|
$
|
66,075
|
|
$
|
(3,414
|
)
|
$
|
62,661
|
|
During
the three months ended September 30, 2008, the Company redeemed approximately
$3.4 million of its auction rate securities at their par value. The Company
recognized no gains or losses related to the sale of its investments in auction
rate securities during the three months ended September 30, 2008 and 2007.
6.
|
Goodwill
and intangible assets
|
During
the three month period ended September 30, 2008, the Company completed its
annual impairment tests on its goodwill and trademarks as of July 1, 2008.
Based
on its annual impairment test results, the Company determined that no impairment
of goodwill or trademarks existed as of July 1, 2008.
7.
|
Other
comprehensive income (loss)
|
The
components of comprehensive income (loss), net of tax, were as
follows:
|
|
Three
Months Ended
September
30,
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
Net
income
|
|
$
|
24,882
|
|
$
|
21,304
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(39,517
|
)
|
|
11,331
|
|
Unrealized
loss on non-current investments
|
|
|
514
|
|
|
—
|
|
Amortization
of prior year pension costs
|
|
|
—
|
|
|
162
|
|
Total
comprehensive (loss) income
|
|
$
|
(14,121
|
)
|
$
|
32,797
|
|
The
foreign currency translation adjustments of approximately $39.5 million and
approximately $11.3 million for the three months ended September 30, 2008 and
2007 were primarily due to foreign currency exchange rate fluctuation, mainly
between the Euro and the U.S. dollar.
The
Company has 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 lenders under the Credit Agreements are Bank
of
America, N.A., Wachovia Bank, N.A., and US Bank (“Lenders”). The international
facility is secured by 65% of the capital stock of the Company’s main operating
Ireland subsidiary and 100% of the capital stock of all of the remaining 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 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 the Company’s consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”) for the immediately preceding four
calendar quarters. Under the terms of the Credit Agreements, the Company is
required to pay to the Lenders insignificant commitment fees on the unused
portion of the line of credit. 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 including
those
not cured within the applicable cure period, if applicable, 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
September 30, 2008, the Company had approximately $1.0 million outstanding
under
the Credit Agreements and had approximately $64.0 million available for future
borrowings. The total outstanding balance consisted of 105.0 million in JPY
(Japanese Yen) (approximately $1.0 million at the September 30, 2008 exchange
rate).
The
Company also has a credit relationship with a European bank in the amount of
EUR
1.0 million (approximately $1.4 million at the September 30, 2008 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 September 30, 2008, there were
no
balances outstanding on this credit facility, but approximately EUR 0.1 million
(approximately $0.2 million at the September 30, 2008 exchange rate) of the
credit facility has been used for guarantees.
As
of
September 30, 2008, the Company had approximately $65.2 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 September 30, 2008 was 2.2% per annum.
9.
|
Share-based
compensation
|
The
Company has incentive and non-qualified stock options outstanding that were
granted to directors, officers, and other employees. With respect to directors,
the Company’s policy and practice during the relevant period was that only those
directors who are either employees of or consultants to the Company were
eligible to receive options. 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 the inception of the stock option plan in 1991, the Company
has
authorized 34.0 million shares for issuance upon exercise of options, of which
approximately 3.1 million shares are available for future grants as of September
30, 2008. On that date, options to purchase approximately 6.2 million shares
were outstanding, including currently exercisable options to purchase
approximately 3.6 million shares.
The
Company accounts for its option awards in accordance with FASB Statement of
Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.” The
estimated fair value of option awards is measured as of the date of grant,
and
non-cash share-based compensation expenses adjusted for expected pre-vesting
forfeitures are recognized ratably over the requisite service (i.e. vesting)
period of options in the consolidated statements of operations. In addition,
for
the three months ended September 30, 2007, non-cash share-based compensation
expenses adjusted for expected pre-vesting forfeitures are also recognized
for
the non-vested portion of awards that were granted before the effective date
of
SFAS No. 123(R) as those options incrementally vest.
The
non-cash share-based compensation expenses included in the condensed
consolidated statements of operations are as follows:
|
|
Three
Months Ended
September
30,
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
Selling,
general and administrative
|
|
$
|
3,525
|
|
$
|
3,542
|
|
Research
and development
|
|
|
208
|
|
|
302
|
|
Total
non-cash share-based compensation expense
|
|
|
3,733
|
|
|
3,844
|
|
Income
tax benefit
|
|
|
(841
|
)
|
|
(841
|
)
|
Total
non-cash share-based compensation expense, net of tax
benefit
|
|
$
|
2,892
|
|
$
|
3,003
|
|
|
|
|
|
|
|
|
|
Impact
on diluted net income per share
|
|
$
|
0.04
|
|
$
|
0.04
|
|
No
compensation expense was capitalized for the three months ended September 30,
2008 and 2007 because no stock options were granted to employees whose labor
costs were capitalized as software development costs.
As
of
September 30, 2008, there was approximately $16.4 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 1.7 years.
Basic
net
income per common share is computed by dividing net income available to common
shareholders by the weighted-average number of shares outstanding. Diluted
net
income per share includes the dilutive effect of stock options. A reconciliation
of the net income available to common shareholders and the weighted-average
number of common shares outstanding assuming dilution is as
follows:
|
|
Three
Months Ended
September
30,
|
|
(in
thousands, except per share data)
|
|
2008
|
|
2007
|
|
Net
income
|
|
$
|
24,882
|
|
$
|
21,304
|
|
Effect
of minority put arrangement
|
|
|
(191
|
)
|
|
(158
|
)
|
Net
income available to common shareholders
|
|
$
|
24,691
|
|
$
|
21,146
|
|
|
|
|
|
|
|
|
|
Average
number of common shares outstanding
|
|
|
80,688
|
|
|
81,584
|
|
Dilutive
effect of outstanding stock options
|
|
|
1,508
|
|
|
1,928
|
|
Average
number of common shares outstanding assuming dilution
|
|
|
82,196
|
|
|
83,512
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.31
|
|
$
|
0.26
|
|
Diluted
net income per share
|
|
$
|
0.30
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
weighted average number of shares excluded from
reconciliation
|
|
|
1,482
|
|
|
1,314
|
|
Net
income for the three months ended September 30, 2008 and 2007 include
approximately $3.7 million ($2.9 million, net of tax) and $3.8 million ($3.0
million, net of tax), respectively, in non-cash share-based compensation
expense. These non-cash share-based compensation expenses reduced diluted net
income per share by $0.04 for both the three months ended September 30, 2008
and
September 30, 2007.
11.
|
Recent
accounting pronouncements
|
FSP
142-3
In
April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
the Useful Life of Intangible Assets,” which amends the factors that should be
considered in developing renewal or extension assumptions used to determine
the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets” (“SFAS No. 142”). The intent of this FSP is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R), “Business Combinations,” and other
GAAP. This FSP is effective for fiscal years beginning after December 15,
2008 (the Company’s fiscal year 2010), and interim periods within those fiscal
years. The Company is currently reviewing the impact of the adoption of FSP
FAS
142-3 on its consolidated financial position, results of operations and cash
flows.
SFAS
No. 161
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133,” which
requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on our
financial position, financial performance, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 (the Company’s fiscal year 2010). Historically
the Company has not had material hedging transactions. If the Company continues
that practice, then the impact of the adoption of SFAS No. 161 on its
consolidated financial position, results of operations and cash flows will
not
be material. However, the impact of the adoption of SFAS No. 161 cannot
currently be determined, as it will depend on the nature and extent of any
hedging transactions that are in effect at the time of the adoption or
thereafter.
SFAS
No. 141(R)
In
December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations”
(“SFAS No. 141(R)”)
,
which
establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquired business.
SFAS No. 141(R) also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and disclosing information to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for business
combinations for which the acquisition dates are on or after the beginning
of
the first annual reporting period beginning on or after December 15, 2008
(the Company’s fiscal year 2010). The Company is currently reviewing the impact
of the adoption of SFAS No. 141(R) on the Company’s consolidated financial
position, results of operations and cash flows.
SFAS
No. 160
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an Amendment of ARB 51”, (“SFAS No.
160”). This statement amends Accounting Research Bulletin No. 51 to establish
accounting and reporting standards for the noncontrolling interest (minority
interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS
No.
160 establishes accounting and reporting standards that require noncontrolling
interests to be reported as a component of equity, changes in a parent’s
ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, and any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary initially be measured at
fair value. SFAS No. 160 is effective for business combinations for which the
acquisition dates are on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 (the Company’s fiscal year
2010). The Company is currently reviewing the impact of the adoption of SFAS
No.
160 on the Company’s consolidated financial position, results of operations and
cash flows.
12.
|
Segment
reporting data
|
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information,”
establishes standards for reporting information about operating segments. SFAS
No. 131 requires segmentation based on the Company’s internal organization and
reporting of financial results. 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 is organized and operates in four operating segments: U.S., Europe,
the
Pacific Rim, and Latin America. For the purposes of applying SFAS No. 131,
the
Company has identified the 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. The management views the U.S. and
international segments separately in operating its business, although the
products and services are similar for each segment.
All
of
the Company’s recent business acquisitions involved companies that offer similar
or complementary products and services to those currently offered by the
Company; accordingly, the acquired businesses have been incorporated into the
existing four operating segments based on their geographic locations, and they
are then operated, managed, and evaluated as a part of the applicable operating
segment.
A
summary
of the Company’s reportable segments is as follows:
|
|
Three
Months Ended
September
30,
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
Revenue
(1)
:
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
116,245
|
|
$
|
99,986
|
|
International
|
|
|
181,984
|
|
|
163,443
|
|
Intersegment
eliminations
|
|
|
(54,160
|
)
|
|
(46,947
|
)
|
Total
revenue
|
|
$
|
244,069
|
|
$
|
216,482
|
|
|
|
|
|
|
|
|
|
Income
before taxes, minority interests and equity in net earnings of
affiliates
(1)
:
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
12,095
|
|
$
|
9,873
|
|
International
|
|
|
70,303
|
|
|
60,766
|
|
Intersegment
eliminations
|
|
|
(44,018
|
)
|
|
(38,232
|
)
|
Total
income before taxes, minority interests and equity in net earnings
of
affiliates
|
|
$
|
38,380
|
|
$
|
32,407
|
|
|
|
As
of
|
|
(in
thousands)
|
|
September
30,
2008
|
|
June
30,
2008
|
|
Identifiable
assets
(2)
:
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
455,996
|
|
$
|
466,028
|
|
International
|
|
|
521,326
|
|
|
536,978
|
|
Total
identifiable assets
|
|
$
|
977,322
|
|
$
|
1,003,006
|
|
(1)
Amounts
are based on the location of the selling entity, and include export
sales.
(2)
Amounts
are based on the physical location of the asset.
During
the period from fiscal year 2002 through fiscal year 2007, the Board of
Directors authorized the purchase of up to an aggregate of 10 million shares
of
the Company’s common stock. The Company completed the repurchases of 10 million
shares as of July 2008. On July 9, 2008, the Board of Directors authorized
the
repurchase of up to an additional two million shares of the Company’s common
stock over the next three years, to be purchased from time to time depending
on
market conditions and other corporate considerations as determined by
management. The Company has incurred an aggregate of approximately $0.2 million
in fees related to all stock repurchases. As of September 30, 2008,
approximately 1.8 million additional shares may be repurchased under the most
recent authorization.
The
following table provides a summary of the cumulative number of shares purchased
since the inception of the current repurchase program through September 30,
2008, plus the shares purchased under the previous repurchase programs. All
repurchased shares reverted to the status of authorized but unissued
shares.
|
|
Number of
Shares
|
|
Purchase
Price per
Share
|
|
Total Price
Paid
(in thousands)
|
|
Total
shares purchased as of June 30, 2008
|
|
|
9,862,500
|
|
$
|
18.82
|
|
$
|
185,587
|
|
July
1, 2008 – September 30, 2008
|
|
|
346,900
|
|
$
|
29.84
|
|
|
10,352
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shares purchased as of September 30, 2008
|
|
|
10,209,400
|
|
$
|
19.19
|
|
$
|
195,939
|
|
The
Company’s Supplemental Executive Retirement Plan (“SERP Plan”) provides
designated officers and executives of the Company with benefits upon retirement
or immediate vesting of benefits upon a participant’s death before retirement.
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.” As previously disclosed in the Company’s Form 10-K for the fiscal
year ended June 30, 2008, the Board of Directors approved the removal of all
participants that were not vested as of June 30, 2008, and as a result, there
are only 3 participants in the SERP Plan. Additionally, as of June 30, 2008,
the
SERP Plan has been fully funded.
The
components of net period pension cost are as follows:
|
|
Three
Months Ended
September
30,
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
Service
cost
|
|
$
|
-
|
|
$
|
162
|
|
Interest
cost
|
|
|
71
|
|
|
217
|
|
Amortization
of prior service cost
|
|
|
-
|
|
|
162
|
|
Net
periodic pension cost
|
|
$
|
71
|
|
$
|
541
|
|
In
Part
I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2008 (the “Form 10-K”), the Company provided disclosure regarding a
case pending in the U.S. District Court for the Northern District of Georgia,
styled
Ware
v. Abercrombie & Fitch Stores, Inc. et al
.
Although the Company is not a party to that case, the Company may have some
obligation to indemnify certain of the defendants who are its customers, based
on the terms of its contracts with those customers. The plaintiff has alleged
that the defendants are infringing a patent relating to the processing of credit
card transactions. The defendants include approximately 107 individual
retailers, 13 of whom are our customers for retail point-of-sale software.
The
Company is currently providing indemnity coverage to five of the defendants
who
are the Company’s customers in accordance with applicable provisions of the
contracts between the Company and those customers. The indemnity coverage
estimated as of September 30, 2008 is immaterial. Through September 30, 2008,
the Company’s legal fees with respect to indemnity coverage for this matter have
not been material. Currently, the case is subject to a court-ordered stay
pending the completion of the United States Patent and Trademark Office’s
reexamination of the patent that is the subject of the lawsuit. There were
no
material developments to this proceeding during the three-month period ended
September 30, 2008.
On
November 26, 2007, Heartland Payment Systems, Inc., filed an action in the
U.S.
District Court for the District of New Jersey naming as defendants MICROS
Systems, Inc., Merchant Link LLC, and Chase Paymentech Solutions, LLC. The
case
is styled
Heartland
Payment Systems, Inc. v. MICROS Systems, Inc., et al
.
In its
complaint, Heartland claims that MICROS, Merchant Link, and Paymentech have
engaged in an anti-competitive arrangement relating to credit and debit card
payment processing for restaurant point-of-sale systems, and further claims
that
this arrangement violates federal antitrust law and applicable New Jersey state
laws. Heartland claims it has been damaged by virtue of being required to deal
with Merchant Link if it wishes to provide services to users of MICROS POS
software, by being required to pay fees to Merchant Link that it claims are
inappropriate or excessive, and by being competitively disadvantaged relative
to
Chase Paymentech’s services. Heartland seeks monetary damages in excess of $12
million, and also injunctive and other equitable relief. As noted in Part I,
Item 3 of the Form 10-K, the Company moved to dismiss the complaint on various
grounds. Subsequent to the filing of the Form 10-K, on September 29, 2008,
the
court denied the motion. Accordingly, the Company and the other defendants
have
filed answers to the complaint, in which the Company has denied all material
allegations, and has asserted counterclaims, in which it alleges that Heartland
has engaged in tortious activity by defaming and libeling the Company, and
by
improperly interfering with the Company’s customer contracts and customer
relationships. No trial date has been set in this matter.
In
Part
I, Item 3 of the Form 10-K, we also provided disclosure regarding two
consolidated cases pending in the Court of Common Pleas of Allegheny County,
Pennsylvania, styled
Roth
Cash Register v. MICROS Systems, Inc., et al.
,
and
Shenango
Systems Solutions v. MICROS Systems, Inc., et al.
On May
22, 2008, a jury returned a combined verdict of $7.5 million against the Company
in those actions. The cases initially were filed in 2000, and the complaints
both related to the non-renewal of dealership agreements in the year 2000
between the Company and the respective plaintiffs. The agreements were
non-renewed as part of a restructuring of the dealer channel. The plaintiffs
alleged that the Company and certain of its subsidiaries and employees entered
into a plan to eliminate the plaintiffs as authorized dealers and improperly
interfere with the plaintiffs' relationships with their respective existing
and
potential future clients and customers without compensation to the plaintiffs.
As a result, the plaintiffs claimed that the Company was liable for, among
other
things, breach of contract and tortious interference with existing and
prospective contractual relationships. The Company moved for judgment
notwithstanding the verdict and for a new trial, and the plaintiffs also moved
for judgment notwithstanding the verdict and for a new trial. On October 30,
2008, the court held a hearing at which the parties argued the motions. The
court has not yet issued a decision on any of the pending motions. There are
no
other litigation matters relating to the restructuring of the dealer channel
in
the year 2000.
The
Company is and has been involved in legal proceedings arising in the normal
course of business, and, subject to the matters referenced above, 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 or cash flows.
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. 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
assumptions regarding the materiality of any subsequent adjustments
to the
purchase price of our acquisitions during the relevant
period;
|
·
|
Our
expectations regarding the effect of the adoption of various accounting
pronouncements;
|
·
|
Our
expectations regarding the impact of competition on product and service
margins;
|
·
|
Our
statements regarding the effects of currency fluctuations (in particular,
Euro fluctuations) on our financial
performance;
|
·
|
Our
expectation that customers with which we do the largest amount of
business
will change from period to period;
|
·
|
Our
belief that our reserve against future indemnity expenditures will
be
sufficient;
|
·
|
Our
statements about the effects of larger customer orders on our quarterly
earnings and revenues;
|
·
|
Our
statements regarding the costs associated with maintaining compliance
with
applicable legal, financial, and industry requirements and
standards;
|
·
|
Our
beliefs regarding the effects on our results of operations or financial
position of any current legal proceedings in which we may be
involved;
|
·
|
Our
expectations regarding effective tax rates in future periods, and
the
effects of tax audits in certain jurisdictions;
|
·
|
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
beliefs regarding impairment of our investments in auction rate
securities, and our intention and ability to retain those investments
under current market conditions;
|
·
|
Our
expectations regarding our exposure to interest rate risk;
and
|
·
|
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.
|
Factors
that may affect future results
Current
market and economic 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 and future
periods. Further, 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.
Wildly vacillating and unpredictable oil and gas prices, and other deep economic
concerns relating to liquidity, fluctuations in the stock market and worldwide
recession, also directly and indirectly can have a significant impact on our
customers, and, accordingly, on our business. 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) control, but also are very difficult
to
predict with any accuracy. These disturbances may affect our financial position
and the results of our operations.
The
market for our products and services is highly competitive, which, among other
things, results in gross margin pressure on our hardware and software products.
Margins on services and on existing products have tended generally to decline
over time, and we expect that trend to continue.
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.
We
have
invested a portion of our cash in auction rate securities, which, in light
of
current market conditions, are subject to constraints on liquidity. There is
also the possibility that the underlying security and collateral could have
their ratings further downgraded by the applicable credit rating agencies,
which
could further impair the value of our investment.
Our
quarterly financial results frequently are dependent upon the timing and size
of
customer orders, because larger orders have at times accounted for a meaningful
portion of quarterly earnings.
We
expect
that the customers with whom we do the largest amount of business will change
from year to year and sometimes from quarter to quarter, depending on the timing
of the roll-outs of their systems. Moreover, any changes to a customer’s
delivery requirements could affect the timing of our recognition of the
associated revenue.
Changes
to the schedule for completion and release of new products and services can
also
directly affect our quarterly financial results – if, for example, a product’s
expected general release date must be delayed, revenues that we may have
expected in a particular quarter may not be realized until a subsequent
quarter.
Our
products and services must continually be updated to comply with applicable
new
laws, regulations, and industry standards, including, by way of example, the
security and data protection rules promulgated by the credit card associations,
and to comply with changes to existing laws, regulations, and standards. Because
laws, regulations, and standards, and the interpretation and application of
those laws, regulations, and standards frequently change, we expect to continue
to incur costs associated with modifying our products and services to become
and
remain compliant. It is difficult to reliably predict the magnitude of those
costs.
The
foregoing discussion of factors that may affect future results is in addition
to
those other risks and uncertainties disclosed in this report and our other
SEC
filings, including in the section titled “Business and Investment Risks;
Information Relating to Forward-Looking Statements,” in Item 1A, “Risk Factors”
in our Annual Report on Form 10-K for the Fiscal Year ended June 30, 2008.
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:
(1)
Hotel
information systems, which include software encompassing property management
systems, sales and catering systems, central reservation systems, customer
information systems, revenue management systems, and an Internet/Global
Distribution System based hotel reservation service;
(2)
Restaurant information systems, which include 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; and
(3)
Specialty retail information systems, which include retail store software
automation systems and business intelligence applications, including software
encompassing point-of-sale, loss prevention, business analytics, and customer
gift cards, as well as enterprise applications.
In
addition to our software and hardware products, we offer an extensive array
of
related 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.
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 focus on providing specialized information systems
solutions.
We
manage
our business geographically and are organized and operate in two reportable
segments for financial reporting purposes: U.S. and International. International
reportable segment operations are 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. In each of these two reportable segments, we have
developed an infrastructure through which we license and sell all of our
products and services. While the products and services that are sold must be
customized to address local issues, laws, tax requirements and customer
preferences, the products and services are substantially similar
worldwide.
Results
of Operations
All
references to share data in this Item 2 have been adjusted to reflect the
two-for-one stock split effected on February 5, 2008.
Revenue:
An
analysis of the sales mix by reportable segments is as follows (amounts are
net
of intersegment eliminations, based on location of the selling entity, and
include export sales):
|
|
Three
Months Ended September 30,
|
|
|
|
U.S.
|
|
International
|
|
Total
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Hardware
|
|
$
|
32,243
|
|
$
|
33,043
|
|
$
|
31,450
|
|
$
|
31,858
|
|
$
|
63,693
|
|
$
|
64,901
|
|
Software
|
|
|
13,940
|
|
|
12,178
|
|
|
23,636
|
|
|
18,673
|
|
|
37,576
|
|
|
30,851
|
|
Service
|
|
|
67,404
|
|
|
51,417
|
|
|
75,396
|
|
|
69,313
|
|
|
142,800
|
|
|
120,730
|
|
|
|
$
|
113,587
|
|
$
|
96,638
|
|
$
|
130,482
|
|
$
|
119,844
|
|
$
|
244,069
|
|
$
|
216,482
|
|
An
analysis of the total sales mix as a percent of total revenue is as
follows:
|
|
Three
Months Ended
September
30,
|
|
|
|
2008
|
|
2007
|
|
Hardware
|
|
|
26.1
|
%
|
|
30.0
|
%
|
Software
|
|
|
15.4
|
%
|
|
14.3
|
%
|
Service
|
|
|
58.5
|
%
|
|
55.7
|
%
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
For
the
three months ended September 30, 2008, total revenue was approximately $244.1
million, an increase of approximately $27.6 million, or 12.7% compared to the
same period last year, of which approximately $2.4 million was a result of
favorable foreign currency exchange rate fluctuation, mainly between the Euro
and the U.S. dollar. The increase in total revenue is due primarily to an
increase in service revenue. The increase in our service revenue primarily
resulted from an increase in installation revenue resulting from expansion
of
our customer base, increases in the volume of our support services that reflect
increased recurring support revenue from existing customers, and additional
revenue generated from Fry, Inc., a company we acquired in August 2008. The
increase in recurring support revenue contributed 42.7% and the increase in
installation revenue relating to the expansion of our customer base contributed
54.9% of the service revenue increase.
The
increase in international segment sales for the three months ended September
30,
2008 of approximately $10.6 million is also due primarily to an increase in
service revenue. The increase in international services revenue primarily
resulted from expansion of our customer base coupled with increased recurring
support revenue from existing customers.
U.S.
segment sales increased approximately $16.9 million for the three months ended
September 30, 2008 compared to the same period last year. The increase was
primarily the result of an increase in service revenues (support and
installation) from expansion of our customer base, coupled with recurring
support revenue from existing customers and additional revenue generated as
a
result of the acquisition of Fry, Inc. in August 2008.
Cost
of Sales:
An
analysis of the cost of sales is as follows:
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
(in
thousands)
|
|
Cost
of
Sales
|
|
%
of
Related
Revenue
|
|
Costs
of
Sales
|
|
%
of
Related
Revenue
|
|
Hardware
|
|
$
|
43,059
|
|
|
67.6
|
%
|
$
|
39,938
|
|
|
61.5
|
%
|
Software
|
|
|
7,300
|
|
|
19.4
|
%
|
|
8,509
|
|
|
27.6
|
%
|
Service
|
|
|
67,766
|
|
|
47.5
|
%
|
|
54,793
|
|
|
45.4
|
%
|
|
|
$
|
118,125
|
|
|
48.4
|
%
|
$
|
103,240
|
|
|
47.7
|
%
|
For
the
three months ended September 30, 2008 and 2007, cost of sales as a percent
of
revenue were 48.4% and 47.7%, respectively. Hardware cost of sales as a percent
of related revenue for the three months ended September 30, 2008 increased
6.1%
compared to the same period last year primarily as a result of a lower margin
realized on the sale of third party hardware and Workstation 4. Additionally,
the margin realized during the three months ended September 30, 2008 on the
sale
of Workstation 5 was lower than the margin realized on the sale of Workstation
4
during the three months ended September 30, 2007. Workstation 5 was released
in
October 2007 and is the larger version of the next generation Workstation 4.
Software cost of sales as a percent of related revenue decreased approximately
8.2% compared to the same period last year. The decrease was primarily as a
result of a 53% increase in the sale of Opera suite software products, which
is
an internally developed software application. Service costs as a percent of
related revenue increased approximately 2.1% compared to the same period last
year primarily due to increased labor costs.
Selling,
General and Administrative (“SG&A”) Expenses:
SG&A
expenses, as a percentage of revenue, for the three months ended September
30,
2008, were 31.5%, a decrease of 1.2% compared to the same period last year.
This
decrease primarily was due to our ability to leverage our costs with the
increase in total revenue.
Research
and Development (“R&D”):
R&D
expenses consist primarily of labor costs less capitalized software development
costs. An analysis of R&D activities is as follows:
|
|
Three
Months Ended
September
30,
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Total
R&D incurred
|
|
$
|
10,596
|
|
$
|
10,027
|
|
Capitalized
software development costs
|
|
|
(125
|
)
|
|
(611
|
)
|
Total
R&D expenses
|
|
$
|
10,471
|
|
$
|
9,416
|
|
|
|
|
|
|
|
|
|
%
of Revenue
|
|
|
4.3
|
%
|
|
4.3
|
%
|
Depreciation
and Amortization Expenses:
Depreciation
and amortization expenses for the three months ended September 30, 2008
increased approximately $0.2 million to approximately $4.1 million compared
to
the same period last year. The increase is primarily due to additional
depreciation expense on capital expenditures since September 30, 2008 and recent
acquisitions.
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 as of the date of grant, and non-cash share-based
compensation expenses, adjusted for expected pre-vesting forfeitures, are
recognized ratably over the requisite service (i.e. vesting) period of options
in the consolidated statements of operations. In addition, for the three months
ended September 30, 2007, non-cash share-based compensation expenses, adjusted
for expected pre-vesting forfeitures, is also 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 SG&A expenses and R&D expenses
discussed above include the following allocations of non-cash share-based
compensation expense:
|
|
Three
Months Ended
September
30,
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
SG&A
|
|
$
|
3,525
|
|
$
|
3,542
|
|
R&D
|
|
|
208
|
|
|
302
|
|
Total
non-cash share-based compensation expense
|
|
|
3,733
|
|
|
3,844
|
|
Income
tax benefit
|
|
|
(841
|
)
|
|
(841
|
)
|
Total
non-cash share-based compensation expense, net of tax
benefit
|
|
$
|
2,892
|
|
$
|
3,003
|
|
|
|
|
|
|
|
|
|
Impact
on diluted net income per share
|
|
$
|
0.04
|
|
$
|
0.04
|
|
Non-operating
Income:
Net
non-operating income for the three months ended September 30, 2008, was
approximately $3.8 million, an increase of approximately $0.5 million compared
to the same period last year. The increase was primarily due to foreign exchange
transaction gains of approximately $0.5 million for the three months ended
September 30, 2008 compared to foreign exchange transaction losses of
approximately $0.3 million for the three months ended September 30,
2007.
Income
Tax Provisions:
The
effective tax rates for the three months ended September 30, 2008 and 2007
were
34.0% and 33.5%, respectively. The effective tax rates for the three months
ended September 30, 2008 and September 30, 2007 were less than the 35.0% U.S.
statutory federal income tax rate, mainly due to the mix of earnings from
jurisdictions that have a lower statutory tax rate than the U.S. and from the
phase-in of the deduction for domestic production activities under the Internal
Revenue Code. These benefits were partially offset by the
non-deductible nature of certain non-cash share-based compensation items, other
non-deductible compensation items, foreign withholding taxes and the inclusion
of foreign income in our U.S. tax base. The increase in tax rate from 33.5%
to
34.0% was primarily attributable to changes in the mix of earnings from foreign
jurisdictions included in our U.S. tax base, partially offset by the increase
in
utilizable foreign tax credits and Net Operating Loss Carryforwards as well
as
proportional reduction of non-deductible non-cash share based compensation
and
other non-deductible compensation items as compared to the prior fiscal
period.
Based
on
currently available information, we estimate that the fiscal year 2009 effective
tax rate will be approximately 34.0%. We believe that due to changes in
the mix of earnings among jurisdictions, the fluctuation of earnings, and the
impact of certain discrete items recognized in accordance with the interim
reporting requirements of FASB Interpretation No. 18, “Accounting for Income
Taxes in Interim Periods,” there may be some degree of adjustment to the
effective tax rate on a quarterly basis.
Recent
accounting pronouncements
FSP
142-3
In
April
2008, the FASB issued FSP
FAS
142-3,
“Determination of the Useful Life of Intangible Assets,” which amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS No. 141(R), “Business
Combinations,” and other GAAP. This FSP is effective for fiscal years beginning
after December 15, 2008 (our fiscal year 2010), and interim periods within
those fiscal years. We are currently reviewing the impact of the adoption of
FSP
FAS 142-3 on our consolidated financial position, results of operations and
cash
flows.
SFAS
No. 161
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No.
161”), which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for
such
instruments under SFAS No. 133 and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on our
financial position, results of operations, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 (our fiscal year 2010). Historically we have
not had material hedging transactions. If we continue that practice, then the
impact of the adoption of SFAS No. 161 on our consolidated financial position,
results of operations and cash flows will not be material. However, the impact
of the adoption of SFAS No. 161 cannot currently be determined, as it will
depend on the nature and extent of any hedging transactions that are in effect
at the time of the adoption or thereafter.
SFAS
No. 141(R)
In
December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations”
(“SFAS No. 141(R)”), which establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements
the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquired business. SFAS No. 141(R) also provides guidance for
recognizing and measuring the goodwill acquired in the business combination
and
disclosing information to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R)
is
effective for business combinations for which the acquisition dates are on
or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008 (our fiscal year 2010). We are currently reviewing the
impact of the adoption of SFAS No. 141(R) on our consolidated financial
position, results of operations and cash flows.
SFAS
No. 160
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an Amendment of ARB 51”, (“SFAS No.
160”). This statement amends Accounting Research Bulletin No. 51 to establish
accounting and reporting standards for the noncontrolling interest (minority
interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS
No.
160 establishes accounting and reporting standards requiring that noncontrolling
interests be reported as a component of equity, changes in a parent’s ownership
interest while the parent retains its controlling interest be accounted for
as
equity transactions, and any retained noncontrolling equity investment upon
the
deconsolidation of a subsidiary initially be measured at fair value. SFAS No.
160 is effective for business combinations for which the acquisition dates
are
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008 (our fiscal year 2010). We are currently reviewing
the impact of the adoption of SFAS No. 160 on our consolidated financial
position, results of operations and cash flows.
Critical
accounting policies and estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
U.S.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenue
and
expenses and related disclosure of contingent assets and liabilities. We base
our estimates and judgments on historical experience and on various assumptions
that we believe to be reasonable under the circumstances. Different assumptions
would affect these estimates, and actual results may differ from these
estimates.
We
believe the following are our accounting policies and estimates that involve
our
more significant judgments and estimates used in the preparation of the
condensed financial statements:
·
|
Revenue
recognition and deferred
revenue;
|
·
|
Allowance
for doubtful accounts;
|
·
|
Investment,
non-current;
|
·
|
Non-cash
share-based compensation;
|
·
|
Capitalized
software development costs;
|
·
|
Valuation
of long-lived assets, including intangible assets and impairment
review of
goodwill;
|
·
|
Contingencies
and litigation;
|
·
|
Foreign
currency translation.
|
We
have
reviewed our critical accounting policies and estimates and the related
disclosures with our Audit Committee. These policies and procedures are
described further in our Annual Report on Form 10-K for the year ended June
30,
2008 in Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” under the heading “Critical Accounting
Estimates.”
Liquidity
and capital resources
Sources
and Uses of Cash and Cash Equivalents
The
Company’s consolidated statements of cash flows summary is as
follows:
|
|
Three
Months Ended
September
30,
|
|
(in
thousands)
|
|
2008
|
|
2007
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
29,658
|
|
$
|
24,676
|
|
Investing
activities
|
|
|
(32,191
|
)
|
|
(54,076
|
)
|
Financing
activities
|
|
|
(27,510
|
)
|
|
18,780
|
|
Operating
activities:
Net
cash
provided by operating activities for the three months ended September 30, 2008
increased approximately $5.0 million compared to the three months ended
September 30, 2007 due primarily to an increase in net income of approximately
$3.6 million and net changes in substantially all current assets and
liabilities, the most significant of which are an approximately $15.4 million
decrease in accrued expenses and other current liabilities, partially offset
by
an approximately $14.6 million decrease in inventory. The decrease in accrued
expenses and other current liabilities is primarily due to decreases in
compensation related accruals.
Investing
activities:
Net
cash
used in investing activities for the three months ended September 30, 2008
was
approximately $32.2 million, as a result of approximately $32.3 million used
for
our acquisition of Fry, Inc. and approximately $3.5 million used to purchase
property, plant and equipment and internally developed software to be licensed
to others. During the three months ended September 30, 2008, we redeemed $3.4
million of our auction rate securities at par value. See “Capital Resources,”
below, for a discussion of our investments in auction rate
securities.
Net
cash
used in investing activities for the three months ended September 30, 2007
was
approximately $54.1 million, primarily as a result of our net investment in
auction rate securities of approximately $38.0 million. We also used
approximately $11.6 million in connection with our acquisition of Check-in
Data
AG. Additionally, approximately $4.6 million was also used to purchase property,
plant and equipment and to internally developed software to be licensed to
others.
Financing
activities:
Net
cash
used in financing activities for the three months ended September 30, 2008
was
approximately $27.5 million, primarily due to principal payments on line of
credit and long-term debt of approximately $18.1 million that we assumed as
a
result of our acquisition of Fry, Inc. in August 2008. Additionally, we used
approximately $10.4 million for our stock repurchases during the three-month
period ended September 30, 2008.
Net
cash
provided by financing activities for the three months ended September 30, 2007
was approximately $18.8 million, primarily reflecting proceeds from stock option
exercises of approximately $12.5 million and realized tax benefits from stock
option exercises of approximately $6.4 million. We did not repurchase any of
our
stock during the three-month period ended September 30, 2007.
At
September 30, 2008, all cash and cash equivalents were being retained for the
operation and expansion of the business, as well as for the repurchase of our
common stock.
Capital
Resources
At
September 30, 2008, we had approximately $325.4 million in cash and cash
equivalents. Additionally, we continued to hold auction rate securities
(long-term instruments with variable interest rates that are designed to
periodically reset to prevailing market rates every 7 to 35 days through an
auction process) with a fair value of approximately $62.7 million. These
securities are supported by student loans for which repayment is either backed
by the Federal Family Education Loan Program or insured by AMBAC Financial
Group. Due to the liquidity previously provided by the interest reset mechanism
and the short-term nature of our investments, we classified the auction rate
securities as short-term investments. Beginning in February 2008, there were
insufficient bids in the auctions for these auction rate securities to establish
a clearing rate, and the securities were not saleable in the auction. As a
result, the auction process no longer provided short-term liquidity. As a
result, the auction rate securities have been classified as non-current
investments available-for-sale as of September 30, 2008 and June 30, 2008.
We
also engaged an independent valuation firm to update the valuation as of
September 30, 2008. The valuation reflected a decrease in fair value compared
to
cost, but an improvement in fair value of approximately $0.7 million compared
to
June 30, 2008 fair value related to those investments still held as of September
30, 2008. We do not believe the decrease in fair value to be
other-than-temporary based on the extent and time the fair value of each
investment has been below cost, the expected holding or recovery period for
each
investment, and the our intention and ability to hold each investment until
recovery. Based on the valuation, we have updated the temporary unrealized
losses on these investments to approximately $3.4 million (approximately $2.1
million, net of tax). We plan to continue to monitor the liquidity situation
in
the marketplace and the creditworthiness of our holdings and will perform
periodic impairment analysis.
See
Note
8 to the condensed consolidated financial statements included in this report
for
information regarding our credit agreements (the “Credit
Agreements”).
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. In light of current economic conditions
generally and in light of the overall performance of the stock market in recent
months, we cannot assume that funds would be available from other sources if
required to fund acquisitions, or any unanticipated and substantial cash needs.
We currently anticipate that our property, plant, and equipment expenditures
for
fiscal year 2009 will be approximately $14 million.
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
recorded foreign sales, including exports from the United States, of
approximately $130.5 million and approximately $119.8 million
during
the three months ended September 30, 2008 and September 30, 2007, respectively.
Since
a
substantial portion of our business is conducted in foreign countries, a
downturn in the economies of foreign countries could adversely affect our
financial results. Our significant international business and presence expose
us
to certain market risks, such as currency fluctuation, interest rate changes,
and political risks. While, under certain circumstances, reliance on foreign
operations can have a moderating impact (as one region’s improving conditions
can offset another region’s declining conditions), our foreign businesses
nonetheless add a degree of uncertainty to our planning and forecasting
process.
With
respect to currency risk, we transact business in different currencies through
our foreign subsidiaries. The fluctuation of currencies affects sales and
profitability. Frequently, sales and the costs associated with those sales
are
not denominated in the same currency.
In
the
three months ended September 30, 2008 and September 30, 2007, we transacted
business in 37 currencies. The relative currency mix for the three months ended
September 30, 2008 and September 30, 2007 were as follows:
|
|
%
of Reported Revenue
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Exchange Rates
(in U.S. Dollars)
As of September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenues
by currency (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States Dollar
|
|
|
53
|
%
|
|
50
|
%
|
|
1.0000
|
|
|
1.0000
|
|
European
Euro
|
|
|
21
|
%
|
|
21
|
%
|
|
1.4076
|
|
|
1.4259
|
|
British
Pound Sterling
|
|
|
8
|
%
|
|
9
|
%
|
|
1.7778
|
|
|
2.0461
|
|
Mexican
Peso
|
|
|
2
|
%
|
|
2
|
%
|
|
0.0916
|
|
|
0.0914
|
|
Australian
Dollar
|
|
|
2
|
%
|
|
2
|
%
|
|
0.7903
|
|
|
0.8874
|
|
Canadian
Dollar
|
|
|
1
|
%
|
|
4
|
%
|
|
0.9398
|
|
|
1.0055
|
|
All
Other Currencies (2), (3)
|
|
|
13
|
%
|
|
12
|
%
|
|
0.2773
|
|
|
0.2490
|
|
Total
|
|
|
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 months’ exchange rates for all other
currencies.
(3)
The
“Exchange Rates as of September 30” for “All Other Currencies” represents the
weighted average September 30 exchange rates for all other currencies based
on
the three month revenue.
A
10%
increase or decrease in the value of the Euro in relation to the U.S. dollar
in
the three months ended September 30, 2008 would have affected total revenues
by
approximately $5.1 million, or 2.1%. The sensitivity analysis assumes a weighted
average 10% change in the exchange rate during the respective period 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 our net income.
We
are
also subject to interest rate fluctuations in foreign countries to the extent
that we elect to borrow in the local foreign currency. In the past, this has
not
been an issue of concern as we have the capacity to elect to borrow in other
currencies with more favorable interest rates. We will continue to evaluate
the
need to invest in financial instruments designed to protect against interest
rate fluctuations.
Our
committed lines of credit bear interest at a floating rate, which exposes us
to
interest rate risks. We manage our exposure to this risk by minimizing, to
the
extent feasible, overall borrowing and monitoring available financing
alternatives. Our interest rate risk has not changed materially from June 30,
2008, and we do not currently foresee any significant changes in exposure or
in
how we manage this exposure in the near future. For borrowings in U.S. currency,
the Credit Agreements bear interest at 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 for the immediately preceding
four calendar quarters. At September 30, 2008, we had total borrowings of
approximately $1.0 million, and had not entered into any instruments to hedge
the resulting exposure to interest-rate risk. Management believes that the
fair
value of the debt equals its carrying value at September 30, 2008. Our exposure
to fluctuations in interest rates will be affected by the outstanding amount
under the Credit Agreements, the applicable interest rate, and any outstanding
instruments to hedge exposure to interest rate risk. As our total borrowing
as
of September 30, 2008 was approximately $1.0 million, a 1% change in interest
rate would have resulted in an immaterial impact on our consolidated financial
position, results of operations and cash flows.
To
minimize our exposure to credit risk associated with financial instruments,
we
place our temporary cash investments with high-credit-quality institutions,
typically maintaining an investment grade rating from at least one of the three
credit rating institutions. See “Capital Resources,” in Item 2 above for a
discussion of our investments in auction rate securities.
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.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
In
Part
I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended June
30,
2008 (the “Form 10-K”), we provided disclosure regarding a case pending in the
U.S. District Court for the Northern District of Georgia, styled
Ware
v. Abercrombie & Fitch Stores, Inc. et al.
;
as
noted in the Form 10-K, we are not a party to that case, we may have some
obligation to indemnify certain of the defendants who are our customers. There
were no material developments to this proceeding during the three-month period
ended September 30, 2008.
On
November 26, 2007, Heartland Payment Systems, Inc., filed an action in the
U.S.
District Court for the District of New Jersey naming as defendants MICROS
Systems, Inc., Merchant Link LLC, and Chase Paymentech Solutions, LLC. The
case
is styled
Heartland
Payment Systems, Inc. v. MICROS Systems, Inc., et al
.
A
description of the complaint in that action is included in Part I, Item 3 of
the
Form 10-K. As noted in the Form 10-K, we moved to dismiss the complaint on
various grounds. Subsequent to the filing of the Form 10-K, on September 29,
2008, the court denied the motion. Subsequent to that, we and the other
defendants filed answers to the complaint, in which we denied all material
allegations, and asserted counterclaims, in which we allege that Heartland
has
engaged in tortious activity by defaming and libeling us, and by improperly
interfering with our customer contracts and customer relationships. No trial
date has been set in this matter.
In
Part
I, Item 3 of the Form 10-K, we also provided disclosure regarding two
consolidated cases pending in the Court of Common Pleas of Allegheny County,
Pennsylvania, styled
Roth
Cash Register v. MICROS Systems, Inc., et al.
,
and
Shenango
Systems Solutions v. MICROS Systems, Inc., et al.
A
description of the claims in that action, and the jury verdict that was returned
against us, is included in Part I, Item 3 of the Form 10-K. We moved for
judgment notwithstanding the verdict, and for a new trial, and the plaintiffs
also moved for judgment notwithstanding the verdict and for a new trial. On
October 30, 2008, the court held a hearing at which the parties argued the
motions. The court has not yet issued a decision on any of the pending
motions.
We
are
and have been involved in legal proceedings arising in the normal course of
business, and, subject to the matters referenced above, we are 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 our results of operations or financial position or cash flows.
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)
|
Amendment
to Articles of Incorporation is 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)
|
Amendment
to Articles of Incorporation is 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(i)(c)
|
Amendment
to Articles of Incorporation is incorporated herein by reference
to
Exhibit 3(i) to the Form 8-K filed on November 16,
2007.
|
3(ii)
|
By-laws
of the Company, as amended, are incorporated herein by reference
to
Exhibit 3(ii) to the Form 8-K filed on October 17,
2007.
|
31(a)
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)under the
Securities Exchange Act of 1934 (filed herewith).
|
31(b)
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 (filed herewith).
|
32(a)
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934 and 18 U.S.C. 1350 (filed
herewith).
|
32(b)
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934 and 18 U.S.C. 1350 (filed
herewith).
|
SIGNATURES
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:
November 6, 2008
|
/s/
|
Gary
C. Kaufman
|
|
|
Gary
C. Kaufman
|
|
|
Executive
Vice President,
|
|
|
Finance
and Administration/
|
|
|
Chief
Financial Officer
|
|
|
|
Date:
November 6, 2008
|
/s/
|
Cynthia
A. Russo
|
|
|
Cynthia
A. Russo
|
|
|
Senior
Vice President and
|
|
|
Corporate
Controller
|
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