MCRS (MM)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2012.

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X, promulgated by the Securities and Exchange Commission. Accordingly, they do not include all disclosures required by U.S. generally accepted accounting principles for complete financial statements.

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 presentation of the financial position of the Company, its results of operations and cash flows for the interim periods set forth herein. The results for the three and six months ended December 31, 2012 are not necessarily indicative of the results to be expected for the full year or any future periods.

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). The following hierarchy 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:

The following table provides information regarding the financial assets accounted for at fair value and the type of inputs used to value the assets:

At December 31, 2012 and June 30, 2012, the Company’s investments, other than the Company’s investment in auction rate securities, were recognized at fair value determined based upon observable input information provided by the Company’s pricing service vendors for identical or similar assets. For these investments, cost approximated fair value. During the three and six months ended December 31, 2012 and 2011, the Company did not recognize any gains or losses on its investments other than those related to the Company’s investments in auction rate securities. See “Auction Rate Securities” below for further discussion on the valuation of the Company’s investments in auction rate securities.

The contractual maturities of investments held at December 31, 2012 are as follows:

AUCTION RATE SECURITIES

The Company’s investment in one remaining auction rate security, carried at estimated fair value, was its only assets valued on the basis of Level 3 inputs at December 31, 2012. Auction rate securities are long-term debt instruments with variable interest rates that are designed to reset to prevailing market interest rates every 7 to 35 days through the auction process. The one remaining auction rate security held by the Company is secured by student loans for which repayment is guaranteed by the Federal Family Education Loan Program (“FFELP”). Before February 2008, due to the liquidity previously provided by the interest rate reset mechanism and the anticipated short-term nature of the Company’s investment, the auction rate securities were classified as short-term investments available-for-sale in the Company’s consolidated balance sheets. Beginning in February 2008, auctions for these securities failed to obtain sufficient bids to establish a clearing rate, and the securities were not saleable in auction, thereby no longer providing short-term liquidity. The auction rate securities have been classified as long-term investments available-for-sale since February 2008 instead of being classified as short-term investments, as was the case before February 2008.

During the quarter ended December 31, 2012, the Company sold auction rate securities having a cost basis of approximately $46.6 million and a carrying value of approximately $32.6 million. As a result of the transaction, the Company recognized a gain of approximately $4.1 million.

A summary of the sale of auction rate securities during the three and six month periods ended December 31, 2012 and 2011 were as follows:

As of December 31, 2012, following a series of disposals in the three months ended December 31, 2012, described in the table above, the Company had one auction rate security remaining with an original cost of $6.0 million. The Company updated its assessment as of December 31, 2012 as to whether it would likely recover the entire cost basis of this security, whether the security had incurred an other-than-temporary impairment, and the amount of the other-than-temporary impairment attributable to credit loss. The fair value assessment was based on a contingent written offer from the issuer of the security to repurchase the security, and the Company’s decision to sell it to the issuer. This assessment is subject to change based on the underlying contingent terms of the offer and market conditions. Based on its evaluation, the Company determined that the cumulative other-than-temporary impairment loss of approximately $0.6 million as of December 31, 2012 was credit based, and recorded the $0.6 million loss in the Company’s statement of operations for the three and six months ended December 31, 2012.

The following table contains a reconciliation of changes in the fair value of auction rate securities, and the related unrealized losses for the six months ended December 31, 2012 and 2011:

The Company plans to continue to monitor its investment, including the liquidity and creditworthiness of the issuer, of its one remaining auction rate security on an ongoing basis for indications of further impairment and, if an impairment is identified, for proper classification of the impairment. Based on the Company’s expected operating cash flows and sources of cash, the Company does not believe that any reduction in the liquidity of its auction rate security will have a material impact on its overall ability to meet its liquidity needs.

During the three months ended September 30, 2012, the Company determined, based on its assessment of qualitative factors as of July 1, 2012, the date of the annual goodwill impairment test, that none of its reporting units met the “more likely than not” threshold requiring that the Company perform the first step of the two-step goodwill impairment test. Accordingly, the Company did not perform any further analysis.

 During the three months ended September 30, 2012, the Company also completed its annual impairment tests on its indefinite-lived trademarks as of July 1, 2012. Based on its annual impairment test results, the Company determined that no impairment losses existed for its indefinite-lived trademarks as of July 1, 2012.

 Subsequent to the annual impairment analysis date of July 1, 2012, there have been no events or circumstances that caused the Company to determine that it is more likely than not that the fair values of the Company’s reporting units are less than their respective carrying values. Subsequent to July 1, 2012, there have not been any events or circumstances that caused the Company to determine that it is more likely than not that its indefinite-lived trademarks have been impaired.

The Company has two credit agreements (the “Credit Agreements”) that, through July 31, 2013, provide an aggregate $50.0 million multi-currency committed line of credit. The lenders under the Credit Agreements are Bank of America, N.A., Wells Fargo N.A. and US Bank N.A. (“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 a number of the Company’s 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 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 any applicable cure period, the Lenders’ remedies include their ability to declare all outstanding loans, plus interest and other related amounts owed, to be immediately due and payable in full, and to pursue all rights and remedies available to them under the Credit Agreements or under applicable law.

 As of December 31, 2012, the Company had no balances outstanding under the Credit Agreements and has applied approximately $0.6 million to guarantees. A total of approximately $49.4 million was available for future borrowings as of December 31, 2012.

 The Company also has a credit relationship with a European bank in the amount of EUR 1.0 million (approximately $1.3 million at the December 31, 2012 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 December 31, 2012, there were no balances outstanding on this credit facility, but approximately EUR 0.4 million (approximately $0.5 million at the December 31, 2012 exchange rate) of the credit facility has been used for guarantees.

 As of December 31, 2012, the Company had an aggregate borrowing capacity of approximately $50.2 million available under all of the credit facilities described above.

No non-cash share-based compensation expense has been capitalized for the three and six months ended December 31, 2012 and 2011. As of December 31, 2012, there was approximately $31.2 million (net of estimated forfeitures) in non-cash share-based compensation expense related to non-vested awards that is expected to be recognized in the Company’s consolidated statements of operations over a weighted-average period of 2.0 years.

Basic net income per share attributable to MICROS Systems, Inc. common shareholders is computed by dividing net income available to MICROS Systems, Inc. by the weighted-average number of shares outstanding. Diluted net income per share attributable to MICROS Systems, Inc. common shareholders includes additional dilution from shares of common stock issuable upon the exercise of outstanding stock options.

 The following table provides a reconciliation of the net income available to MICROS Systems, Inc. to basic and diluted net income per share:

Results for the three months ended December 31, 2012 and 2011 include approximately $7.3 million ($4.9 million, net of tax) and $5.8 million ($3.8 million, net of tax), in non-cash share-based compensation expense, respectively. These non-cash share-based compensation expenses reduced diluted net income per share attributable to MICROS Systems, Inc. common shareholders by $0.06 and $0.05 for the three months ended December 31, 2012 and 2011, respectively.

 Results for the six months ended December 31, 2012 and 2011 include approximately $11.5 million ($7.9 million, net of tax) and $8.8 million ($5.9 million, net of tax), in non-cash share-based compensation expense, respectively. These non-cash share-based compensation expenses reduced diluted net income per share attributable to MICROS Systems, Inc. common shareholders by $0.10 and $0.07 for the six months ended December 31, 2012 and 2011, respectively.

The effective tax rate for the three months ended December 31, 2012 and 2011 was 32.5% and 31.4%, respectively. The increase in effective tax rate for the three months ended December 31, 2012 compared to the same period last year was primarily attributable to an increase in taxes associated with changes in the Company’s earnings mix among jurisdictions.

 The effective tax rate for the six months ended December 31, 2012 and 2011 was 28.6% and 32.2%, respectively. The decrease in effective tax rate for the six months ended December 31, 2012 compared to the same period last year was primarily attributable to an increase in tax benefits realized upon the expiration of statutes of limitation or settlements with tax authorities, partially offset by an increase due to changes in the Company’s earnings mix among jurisdictions. The Company has recognized a decrease in unrecognized tax benefits for the six months ended December 31, 2012 as compared to the same period last year, which resulted in a reduction in income tax expense of approximately $6.3 million and a reduction in the effective tax rate of 5.4%. This reduction was primarily due to favorable settlements with tax authorities.

 The Company estimates that within the next 12 months, its unrecognized income tax benefits will decrease by between approximately $3.8 million and approximately $5.8 million due to the expiration of statues of limitations and settlements with tax authorities. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty. Over the next 12 months, it is reasonably possible that the Company’s tax positions will continue to generate liabilities related to uncertain tax positions.

  The Company currently has no plans to repatriate to the U.S. its cumulative unremitted foreign earnings, as it intends to permanently reinvest such earnings internationally. If the Company changes its strategy in the future and repatriate such funds, the amount of any taxes, which could be significant, and the application of any tax credits, would be determined based on the appropriate jurisdictional income tax laws at the time of such repatriation. Due to the extent of uncertainty as to which remittance structure would be used should a decision be made in the future to repatriate, the availability and the complexity of calculating foreign tax credits, and the implications of indirect taxes, including withholding taxes, determination of the unrecognized deferred income tax liability related to these unremitted earnings is not practicable.

 The Company’s income tax returns are no longer subject to examination by the U.S. tax authorities for tax years ending before June 2011, by the U.K. tax authorities for tax years ending before June 2009, by the German tax authorities for tax years ending before June 2007 and the Irish tax authorities for tax years ending before June 2008. Certain periods prior to these dates, however, could be subject to adjustment as a result of the competent authority process or due to the impact of items such as carryback or carryforward claims.

Recently Adopted Accounting Pronouncements 

On July 1, 2012, the Company adopted Financial Accounting Standards Board (“FASB”) guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. The new guidance requires that changes in other comprehensive income be presented either in a single continuous statement of net income and other comprehensive income or in two separate but consecutive statements.  In accordance with the new guidance, the Company has presented two separate but consecutive statements which include the components of net income and other comprehensive income. The adoption of this new guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In July 2012, the FASB issued revised guidance on how an entity tests indefinite-lived intangible assets for impairment. Under the new guidance, an entity is no longer required to calculate the fair value of the indefinite-lived intangible assets and perform the quantitative impairment test unless the entity determines, based on a qualitative assessment, that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. This revised guidance is effective for the Company beginning in its fiscal year 2014. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

The Company is organized and operates in four operating segments: U.S./Canada, Europe, the Pacific Rim, and Latin America regions. The Company has identified U.S./Canada as a separate reportable segment and has aggregated its three international operating segments into one reportable segment, International, as the three international operating segments share many similar economic characteristics. Management views the U.S./Canada and International segments separately in operating its business, although the products and services are similar for each segment. The Company’s chief operating decision maker is the Company’s Chief Executive Officer.

 Historically, all of the Company’s new business acquisitions have been incorporated into the existing operating segments, based on their respective geographic locations, and are subsequently operated and managed as part of that operating segment.

 A summary of certain financial information regarding the Company’s reportable segments is set forth below:

The Company’s Board of Directors periodically authorizes the purchase of up to a specified number of shares of the Company’s common stock, to be purchased from time to time over the ensuing three years depending on market conditions and other corporate considerations as determined by management. As of December 31, 2012, approximately 0.4 million additional shares remain available for purchases under the most recent authorization.

 The following table summarizes the cumulative number of shares purchased under all purchase authorizations. All of the purchased shares were retired and reverted to the status of authorized but unissued shares:

On January 22, 2013, the Company’s Board of Directors authorized the purchase of up to 2 million additional shares of the Company’s common stock, to be purchased from time to time over the ensuing three years.

On May 22, 2008, a jury returned verdicts against the Company in the consolidated actions of Roth Cash Register v. MICROS Systems, Inc., et al. (the “Roth Matter”) and Shenango Systems Solutions v. MICROS Systems, Inc., et al. (the “Shenango Matter”). The cases initially were filed in 2000 in the Court of Common Pleas of Allegheny County, Pennsylvania. 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. The plaintiffs claimed that, as a result, the Company was liable for, among other things, breach of contract and tortious interference with existing and prospective contractual relationships. Both parties appealed the original verdicts on various grounds. On December 30, 2010, the Superior Court of Pennsylvania reversed and remanded the trial court judgment as to $4.5 million of the award and affirmed the trial court judgment as to the remaining $3.0 million of the award. Following the denial of appeals of the Superior Court decision by the Pennsylvania Supreme Court on April 10, 2012, the Company accrued a charge of $3.0 million in its selling, general and administrative expenses. The matter was subsequently remanded to the Court of Common Pleas (the trial court) for further proceedings consistent with the appellate decisions. On June 7, 2012, the Company paid an aggregate of approximately $3.5 million to the two plaintiffs, reflecting all amounts that were determined to be owed to the plaintiff in the Shenango Matter and all amounts that were no longer in dispute and that were payable to the plaintiff in the Roth Matter, including as to each payment (i) interest that had accrued at the statutory rate of 6% per annum, and (ii) certain reductions and offsets that were approved by the Court of Common Pleas. Upon the conclusion of the post-appeal proceedings in the trial court, the Court of Common Pleas entered an order amending the judgment in favor of the plaintiff in the Roth Matter, which had been in the amount of $4.5 million before the appeal, to an award of approximately $2.8 million. The Company has appealed the amended judgment.

 The Company is and has been involved in legal proceedings arising in the normal course of business, and the Company is of the opinion, based upon presently available information and the advice of counsel concerning pertinent legal matters, that any resulting liability should not have a material adverse effect on the Company’s results of operations, financial position, or cash flows. However, litigation is subject to many uncertainties, and the outcome of litigation is not predictable with assurance. An adverse outcome in current or future litigation could have a material adverse effect on the Company’s business, financial condition, results of operations, and liquidity.