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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2003. Commission File Number 001-09720
OR
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number __________
PAR TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 16-1434688
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
PAR Technology Park
8383 Seneca Turnpike
New Hartford, NY 13413-4991
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 738-0600
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 [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The number of shares outstanding of registrant's common stock, as of
October 31, 2003 - 8,496,525 shares.
PAR TECHNOLOGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART 1
FINANCIAL INFORMATION
Item Number
Item 1. Interim Financial Statements (Unaudited)
- Consolidated Statements of Income for
the three and nine months ended September 30, 2003 and 2002
- Consolidated Statements of Comprehensive Income (Loss) for
the three and nine months ended September 30, 2003 and 2002
- Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002
- Consolidated Statements of Cash Flows
for the nine months ended September 30, 2003 and 2002
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
Restated Restated
2003 2002 2003 2002
-------- -------- -------- --------
Net revenues:
Product ........................... $ 15,535 $ 13,159 $ 40,947 $ 43,733
Service ........................... 10,104 9,222 27,207 27,666
Contract .......................... 10,367 9,404 30,405 28,019
-------- -------- -------- --------
36,006 31,785 98,559 99,418
-------- -------- -------- --------
Costs of sales:
Product ........................... 10,219 8,661 26,809 29,635
Service ........................... 8,380 7,296 22,789 22,669
Contract .......................... 9,887 8,602 29,056 26,032
-------- -------- -------- --------
28,486 24,559 78,654 78,336
-------- -------- -------- --------
Gross margin ................ 7,520 7,226 19,905 21,082
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 4,702 5,050 13,813 13,973
Research and development .......... 1,418 1,225 3,839 3,992
-------- -------- -------- --------
6,120 6,275 17,652 17,965
-------- -------- -------- --------
Operating income from
continuing operations ............. 1,400 951 2,253 3,117
Other income, net ...................... 60 255 449 565
Interest expense ....................... (117) (235) (412) (660)
-------- -------- -------- --------
Income from continuing operations
before provision for income taxes .... 1,343 971 2,290 3,022
Provision for income taxes ............. (485) (245) (825) (762)
-------- -------- -------- --------
Income from continuing operations ...... 858 726 1,465 2,260
-------- -------- -------- --------
Discontinued operations:
Loss from operations of
discontinued component ......... (71) (1,329) (180) (2,446)
Income tax benefit ................ 26 335 65 617
-------- -------- -------- --------
Loss on discontinued operations ... (45) (994) (115) (1,829)
-------- -------- -------- --------
Net income (loss) ...................... $ 813 $ (268) $ 1,350 $ 431
======== ======== ======== ========
Continued
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(In Thousands Except Per Share Amounts)
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
Restated Restated
2003 2002 2003 2002
--------- --------- --------- ---------
Earnings per share:
Basic:
Income from continuing operations $ 0.10 $ 0.09 $ 0.17 $ 0.29
Loss from discontinued operations $ (0.01) $ (0.13) $ (0.01) $ (0.23)
Net income (loss) ......... $ 0.10 $ (0.03) $ 0.16 $ 0.05
Diluted:
Income from continuing operations $ 0.10 $ 0.09 $ 0.17 $ 0.28
Loss from discontinued operations $ (0.01) $ (0.12) $ (0.01) $ (0.22)
Net income (loss) ......... $ 0.09 $ (0.03) $ 0.15 $ 0.05
Weighted average shares outstanding
Basic ........................... 8,446 7,901 8,414 7,891
========= ========= ========= =========
Diluted ......................... 8,889 8,328 8,810 8,216
========= ========= ========= =========
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Loss)
(In Thousands)
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
Restated Restated
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) .................... $ 813 $ (268) $ 1,350 $ 431
Other comprehensive income,
net of tax:
Foreign currency translation
adjustments .................... 4 22 304 435
------ ------ -------- ---------
Comprehensive income (loss) .......... $ 817 $ (246) $ 1,654 $ 866
====== ====== ======== =========
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
(Unaudited)
September 30, December 31,
2003 2002
Assets ------------ -----------
Current Assets:
Cash ...................................... $ 1,572 $ 490
Accounts receivable-net ................... 29,570 25,843
Inventories-net ........................... 32,062 34,274
Deferred income taxes - net ............... 5,796 5,766
Other current assets ...................... 2,301 2,638
Total assets of discontinued operation .... 20 59
-------- --------
Total current assets .................. 71,321 69,070
Property, plant and equipment - net ............ 7,559 8,455
Deferred income taxes - net .................... 3,698 4,386
Other assets ................................... 2,978 3,211
-------- --------
$ 85,556 $ 85,122
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt ......... $ 88 $ 85
Borrowings under lines-of-credit .......... 10,260 9,549
Accounts payable .......................... 6,613 8,371
Accrued salaries and benefits ............. 5,063 4,615
Accrued expenses .......................... 1,862 2,077
Deferred service revenue .................. 6,191 6,704
Total liabilities of discontinued operation 237 342
-------- --------
Total current liabilities ............. 30,314 31,743
-------- --------
Long-term debt ................................. 2,114 2,181
-------- --------
Shareholders' Equity:
Preferred stock, $.02 par value,
1,000,000 shares authorized ............. -- --
Common stock, $.02 par value,
19,000,000 shares authorized;
9,860,212 and 9,770,262 shares issued
8,449,525 and 8,359,575 outstanding
at September 30, 2003 and
December 31, 2002, respectively ....... 197 195
Capital in excess of par value ............ 29,200 28,926
Retained earnings ......................... 31,296 29,946
Accumulated other comprehensive loss ...... (512) (816)
Treasury stock, at cost, 1,410,687 shares
at September 30, 2003 and
December 31, 2002, respectively ....... (7,053) (7,053)
-------- --------
Total shareholders' equity ............ 53,128 51,198
-------- --------
$ 85,556 $ 85,122
======== ========
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the nine months
ended September 30,
-------------------
Restated
2003 2002
------- ---------
Cash flows from operating activities:
Net income .............................................. $ 1,350 $ 431
Adjustments to reconcile net income to net
cash provided by operating activities:
Net loss from discontinued operations ................ 115 1,829
Depreciation and amortization ........................ 2,077 2,176
Provision for bad debts .............................. 691 1,241
Provision for obsolete inventory ..................... 1,937 1,728
Deferred income taxes ................................ 658 (476)
Increase (decrease) from changes in:
Accounts receivable ................................ (4,418) 8,980
Inventories ........................................ 275 (8,096)
Income tax refund claims ........................... -- 554
Other current assets ............................... 337 81
Accounts payable ................................... (1,758) (4,597)
Accrued salaries and benefits ...................... 448 (117)
Accrued expenses ................................... (215) 558
Deferred service revenue ........................... (513) (113)
------- -------
Net cash provided by continuing
operating activities ............................. 984 4,179
Net cash used in discontinued operations .......... (181) (1,125)
------- -------
Net cash provided by operating activities ......... 803 3,054
------- -------
Cash flows from investing activities:
Capital expenditures .................................... (341) (977)
Capitalization of software costs ........................ (607) (546)
------- -------
Net cash used in investing activities ............. (948) (1,523)
------- -------
Cash flows from financing activities:
Net borrowings (payments) under line-of-credit agreements 711 (1,858)
Payments on long-term debt obligations .................. (64) (44)
Proceeds from the exercise of stock options ............. 276 49
------- -------
Net cash provided (used) by
financing activities ............................. 923 (1,853)
------- -------
Continued
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(Unaudited)
For the nine months
ended September 30,
-------------------
Restated
2003 2002
------- ---------
Effect of exchange rate changes on cash and
cash equivalents ......................................... 304 435
------ ------
Net increase in cash and cash equivalents .................. 1,082 113
Cash and cash equivalents at
beginning of year ........................................ 490 879
------ ------
Cash and cash equivalents at
end of period ............................................ $1,572 $ 992
====== ======
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 417 $ 656
Income taxes paid, net of refunds 237 66
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The statements for the three and nine months ended September 30, 2003 and
2002 are unaudited; in the opinion of the Company such unaudited statements
include all adjustments (which comprise only normal recurring accruals)
necessary for a fair presentation of the results for such periods. The
results of operations for the three and nine months ended September 30,
2003 are not necessarily indicative of the results of operations to be
expected for the year ending December 31, 2003. The unaudited interim
consolidated financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the years ended in
December 31, 2002 and 2001 included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission.
2. As discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, the results for the three and nine months ended
September 30, 2002 have been restated to reflect the change in the
Company's revenue recognition policy.
3. During the third quarter of 2002, the Company decided to close down its
unprofitable Industrial business unit, Ausable Solutions, Inc., following a
trend of continuous losses. The overall downturn in the global economy and
specifically the manufacturing and warehousing industries, coupled with the
diminishing capital expenditures of the Company's industrial customers,
prevented the Company from being profitable in this particular business
segment. The decision to shut down this unit will allow the Company to
focus on its two core businesses, Restaurant and Government. The Company
believes that the decision to exit the industrial segment will not have a
negative impact on the Company's continuing operations. The Company notes
that its industrial business did not have common customers with its
Restaurant and Government Contract businesses.
A summary of net revenues and pre-tax operating results and total assets
and liabilities of discontinued operations are detailed below (in
thousands):
For the three months For the nine months
ended September 30, ended September 30,
------------------- ------------------
2003 2002 2003 2002
-------- -------- ------- -------
Net revenues .............. $ -- $ 239 $ 21 $ 1,366
Net loss from operations of
discontinued component . $ (45) $ (994) $ (115) $(1,829)
September 30,
2003
(Unaudited)
-----------
Discontinued Assets:
Other current assets .............. $ 20
======
Discontinued Liabilities:
Other current liabilities ......... $ 237
======
4. Inventories are primarily used in the manufacture and service of Restaurant
products. The components of inventory, net of related reserves, consist of
the following:
(In Thousands)
--------------
September 30, December 31,
2003 2002
------------ ------------
Finished goods .................. $ 8,396 $10,892
Work in process ................. 986 1,700
Component parts ................. 4,758 4,923
Service parts ................... 17,922 16,759
------- -------
$32,062 $34,274
======= =======
At September 30, 2003 and December 31, 2002, the Company had recorded
reserves for shrinkage, excess and obsolete inventory of $4,011,000 and
$4,094,000, respectively.
5. The Company's products are sold with a standard warranty for defects in
material and workman-ship. The warranty offered by the Company ranges from
sixty days to one year. The Company establishes an accrual for estimated
warranty costs at the time revenue is recognized on the sale. This estimate
is based on projected product reliability using historical performance data
The changes in the product warranty liability for the nine months ended
September 30, 2003 are summarized as follows: (in thousands)
Dollar Amount of
Liability
Debit/(Credit)
--------------
Balance at December 31, 2002 .......................... $(560)
Accruals for warranties issued during the period ...... (753)
Settlements made (in cash or in kind) during the period 789
-----
Balance at September 30, 2003 ......................... $(524)
=====
6. The Company accounts for its stock-based compensation plan under the
provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees". No compensation expense has
been recognized in the accompanying financial statements relative to the
Company's stock option plan. Pro forma information regarding net income and
earnings per share is required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. The Company
granted 79,000 stock options in the nine months ended September 30, 2003
with a weighted average exercise price of $4.98 per share compared to
109,000 stock options granted in the nine months ended September 30, 2002
with a weighted average exercise price of $2.77 per share. The weighted
average fair value of options granted in the nine months ended September
30, 2003 and September 30, 2002 was $1.52 and $1.10, respectively. The fair
value of these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following weighted-average
assumptions for 2003 and 2002 being as follows:
2003 2002
------- -------
Risk-free interest rate ............. 2.0% 4.2%
Dividend yield ...................... N/A N/A
Volatility factor ................... 43% 44%
Weighted average expected life ...... 5 Years 6 Years
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
Restated Restated
2003 2002 2003 2002
------- ------- -------- --------
Net income (loss) $ 813 $ (268) $ 1,350 $ 431
Compensation (expense) benefit (32) 30 (88) 88
------- ------- -------- ------
Proforma net income (loss) $ 781 $ (238) $ 1,262 $ 519
======= ======= ======== ======
Earnings per share:
As reported -- Basic $ .10 $ (.03) $ .16 $ .05
-- Diluted $ .09 $ (.03) $ .15 $ .05
Proforma -- Basic $ .09 $ (.03) $ .15 $ .07
-- Diluted $ .09 $ (.03) $ .14 $ .06
7. In December 2002, the Emerging Issues Task Force (EIFT) issued EITF 00-21,
Revenue Arrangements with Multiple Deliveries (EITF 00-21). EITF 00-21
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. It also addresses
how arrangement consideration should be measured and allocated to the
separate units of accounting in an arrangement. EITF 00-21 does not apply
to deliverables in arrangements to the extent the accounting for such
deliverables is within the scope of other existing higher-level
authoritative accounting literature. EITF 00-21 is effective for revenue
arrangements entered into beginning after July 1, 2003. The adoption of
EITF 00-21 did not have an impact on the interim unaudited consolidated
financial statements and the Company does not anticipate that the adoption
of EITF 00-21 will have any near term impact on the interim unaudited
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidated of
Variable Interest Entities (FIN 46). FIN 46 provides guidance for
identifying a controlling interest in a Variance Interest Entity (VIE)
established by means other than voting interests. FIN 46 also requires
consolidation of a VIE by an enterprise that holds such controlling
interest. The Company is required to adopt the provisions of FIN 46 for any
variable interest entity created prior to February 1, 2003, by the end of
the current fiscal year. Based on our review of FIN 46, the Company does
not have any interest qualifying as VIE's and does not anticipate that the
provisions of FIN 46 will have any near term impact on the interim
unaudited consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is generally effective for
contracts entered into our modified after June 30, 2003. The adoption of
SFAS No. 149 did not have an impact on the Company's interim unaudited
consolidated financial statements. The Company does not expect the adoption
of SFAS No. 149 to have a significant impact on the Company's future
results of operations or financial condition.
In May, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150). SFAS No. 150 established standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity, SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective beginning in the third quarter of 2003. The adoption of SFAS No.
150 did not have an impact on the interim unaudited consolidated financial
statements and the Company does not anticipate SFAS No. 150 will have any
near term impact on the interim unaudited consolidated financial
statements.
8. The Company's reportable segments are strategic business units that have
separate management teams and infrastructures that offer different products
and services.
The Company has two reportable segments, Restaurant and Government. The
Restaurant Segment offers integrated solutions to the restaurant industry.
These offerings include hardware and software applications utilized at the
point-of-sale, back-of-store and corporate office. This segment also offers
customer support, including field service, installation, twenty-four hour
telephone support and depot repair. The Government segment performs
research related to advanced technology computer software systems primarily
for military and intelligence agency applications. It provides services for
operating and maintaining certain U.S. Government-owned communication and
test sites, and for planning, executing and evaluating experiments
involving new or advanced radar systems. It is also involved in developing
technology to track mobile chassis. As discussed in Note 3, the Company
discontinued its Industrial segment in the third quarter of 2002.
Inter-segment sales and transfers are not material.
Information as to the Company's operations in its segments is set forth
below (in thousands):
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
Restated Restated
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Restaurant .............. $ 25,639 $ 22,381 $ 68,154 $ 71,399
Government .............. 10,367 9,404 30,405 28,019
-------- -------- -------- --------
Total ............. $ 36,006 $ 31,785 $ 98,559 $ 99,418
======== ======== ======== ========
Operating income (loss) from
continuing operations:
Restaurant .............. $ 1,272 $ 219 $ 1,450 $ 1,260
Government .............. 475 732 1,280 1,882
Corporate ............... (347) -- (477) (25)
-------- -------- -------- --------
1,400 951 2,253 3,117
Other income, net ............ 60 255 449 565
Interest expense ............. (117) (235) (412) (660)
-------- -------- -------- --------
Income before provision
for income taxes .......... $ 1,343 $ 971 $ 2,290 $ 3,022
======== ======== ======== ========
Depreciation and amortization:
Restaurant .............. $ 573 $ 538 $ 1,657 $ 1,701
Government .............. 87 22 153 76
Corporate ............... 52 163 267 399
-------- -------- -------- --------
Total ............. $ 712 $ 723 $ 2,077 $ 2,176
======== ======== ======== ========
Capital expenditures:
Restaurant .............. $ 99 $ 356 $ 121 $ 784
Government .............. 46 -- 50 35
Corporate ............... 102 43 170 158
-------- -------- -------- --------
Total ............. $ 247 $ 399 $ 341 $ 977
======== ======== ======== ========
The following table presents revenues (in thousands) by geographic area
based on the location of the use of the product or services:
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
Restated Restated
2003 2002 2003 2002
-------- -------- -------- --------
United States ................ $ 32,014 $ 28,179 $ 88,207 $ 88,958
Other Countries .............. 3,992 3,606 10,352 10,460
------- -------- -------- --------
Total .................. $ 36,006 $ 31,785 $ 98,559 $ 99,418
======== ======== ======== ========
September 30, December 31,
2003 2002
-------- --------
Identifiable assets:
Restaurant ............... $ 72,280 $ 71,725
Government ............... 6,898 6,568
Industrial ............... 20 59
Other .................... 6,358 6,770
-------- --------
Total .............. $ 85,556 $ 85,122
======== ========
The following table presents (in thousands) property by geographic area
based on the location of the asset:
September 30, December 31,
2003 2002
--------- ----------
United States ............ $ 78,983 $ 75,640
Other Countries ............... 6,573 9,482
-------- --------
Total .................. $ 85,556 $ 85,122
======== ========
Customers comprising 10% or more of the Company's total revenues (in
thousands) are summarized as follows:
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
Restated Restated
2003 2002 2003 2002
------ ------ ------ ------
Restaurant Segment:
McDonald's Corporation ......... 26% 33% 25% 29%
YUM! Brands, Inc. .............. 28% 24% 23% 22%
Government Segment:
Department of Defense .......... 29% 30% 31% 28%
All Others .......................... 17% 13% 21% 21%
--- --- --- ---
100% 100% 100% 100%
=== === === ===
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statement
This document contains forward-looking statements. Any statements in this
document that do not describe historical facts are forward-looking statements.
Forward-looking statements in this release (including forward-looking statements
regarding future sales to McDonald's restaurants, the impact of current world
events on our results of operation, the effects of inflation on our margins and
the effects of interest rate and foreign currency fluctuations on our results of
operations.) are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including without
limitation, further delays in new product introduction; risks in technology
development and commercialization; risks in product development and market
acceptance of, and demand for, the Company's products; risks associated with
government contracts; risks of downturns in economic conditions generally, and
in the quick service sector of the restaurant market specifically; risks
associated with foreign sales and high customer concentration; risks associated
with competition and competitive pricing pressures; and other risks detailed in
the Company's filings with the Securities and Exchange Commission. Any
forward-looking statements should be considered in light of all of these
factors.
The following discussion and analysis highlights items having a significant
effect on operations during the quarter and nine months ended September 30,
2003. It may not be indicative of future operations or earnings. It should be
read in conjunction with the Interim Unaudited Consolidated Financial Statements
and Notes thereto and other financial and statistical information appearing
elsewhere in this report.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
The Company reported revenues of $36.0 million for the quarter ended
September 30, 2003, an increase of 13% from the $31.8 million reported for the
corresponding period in 2002. Income from continuing operations for the three
months ended September 30, 2003 was $858,000, an 18% increase from the $726,000
earned in the corresponding period in 2002. The Company reported diluted net
income per share from continuing operations for the three months ended September
30, 2003 of $.10, an 11% increase from the $.09 reported for the same period a
year earlier. Basic net income per share from continuing operations for the
three months ended September 30, 2003 was $.10 compared to $.09 for the
corresponding period in 2002. The Company's net income for the quarter ended
September 30, 2003 was $813,000, or $.09 diluted net income per share, compared
to a net loss of $268,000 and $.03 loss per diluted share for the same period in
2002.
Product revenues from the Company's Restaurant segment were $15.5 million
for the three months ended September 30, 2003, an increase of 18% from the $13.2
million recorded in the corresponding period in 2002. The primary reason for
this increase was a 35% growth in sales to YUM! Brands as a result of the
Company being recently selected as this customer's primary supplier of
Restaurant systems to KFC Corporate stores. Additionally, sales to Chick-fil-A
contributed to the growth in sales as the Company was also selected as the major
supplier to this restaurant enterprise.
Customer service revenues are also generated by the Company's Restaurant
segment. The Company's service offerings include installation, training,
twenty-four hour help desk support and various field and on-site service
options. Customer service revenues were $10.1 million in the third quarter of
the 2003 fiscal year, an increase of 10% from $9.2 million in the corresponding
period in 2002. This increase was primarily due to a $963,000 rise in
installation revenue associated with new system installations in the quarter
ended September 30, 2003 compared to the same period in 2002. This was partially
offset by a minor decline in other service areas.
Contract revenues from the Company's Government segment were $10.4 million
for the quarter ended September 30, 2003, an increase of 10% when compared to
the $9.4 million recorded in the same period in 2002. This increase primarily
resulted from a 19% increase in information technology outsourcing revenue for
contracts for facility operations at strategic U.S. Department of Defense
Telecommunication sites across the globe. These outsourcing operations provided
by the Company directly support U.S. Navy, Army and Air Force operations as they
seek to convert their military information technology communications facilities
into contractor-run operations. Also contributing to this growth was a 75%
increase in revenue from research contracts involving Imagery Information
Technology. This was partially offset by a 95% decline in the Company's
Logistics Management Program, due to lack of funding from the government. The
program which involves the tracking of mobile chassis under the Company's
Cargo*Mate(TM) contracts. The Company anticipates new funding from the
government in 2004.
Product margins for the quarter ended September 30, 2003 were 34.2%,
unchanged from the same period in 2002. Consistent with the trend experienced in
the first half of 2003, margins benefited from higher software content in
product sales in the third quarter of 2003 when compared to 2002. This was
offset by lower absorption of fixed manufacturing costs due to reduced
production volume in 2003.
Customer service margins were 17.1% for the quarter ended September 30,
2003 compared to 20.9% for the same period in 2002. This decline in service
margin is attributed to a lower cost per call on certain service contracts in
2002 when compared to 2003. The decline is also the result of start up expenses
in 2003 related to a new call center program with a customer. The margin decline
was partially offset by improved efficiencies in the Company's depot repair and
installation operations.
Contract margins were 4.6% for the quarter ended September 30, 2003 versus
8.5% for the same period in 2002. In the third quarter of 2002, the Company
recognized additional profit on certain fixed price contracts that were
completed in the period. This profit was the result of incurring lower costs at
the completion of the job than previously estimated. The significant components
of contract costs in the third quarter of 2003 were 69% for labor and fringe
benefits, 7% for supplies, and 2% for subcontract costs. For the same period in
2002, these costs were 67%, 6%, and 5%, respectively of contract costs. The
balance of contract costs for 2003 and 2002 included consulting, facilities,
communications and corporate overhead costs. Margins on the Company's government
contract business historically run between 5% and 6%.
Selling, general and administrative expenses are virtually all related to
the Company's Restaurant segment. Selling, general and administrative expenses
for the third quarter of 2003 were $4.7 million, a decline of 7% from the $5.0
million expended in the third quarter of 2002. The decline was due to a
reduction in selling expenses as a result of improved efficiencies and a reduced
provision for doubtful accounts. This was partially offset by minor increases in
benefit costs and legal and accounting fees.
Research and development expenses relate primarily to the Company's
Restaurant segment. However for the third quarter of 2003, 23% of these expenses
related to the Company's Logistics Management Program (Cargo*Mate(TM)). Research
and development expenses were $1.4 million for the quarter ended September 30,
2003, an increase of 16% from the $1.2 million recorded for the same period in
2002. This increase resulted from the Company's investment in its Cargo*Mate(TM)
Program. The Company is investing in this technology during a temporary funding
hiatus from the U.S. Government. This was partially offset by a small reduction
in the development staff as a result of certain efficiency improvements.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense
declined 50% to $117,000 for the quarter ended September 30, 2003 as compared to
the corresponding period in the prior year due to a reduced interest rate and
lower average amount outstanding in the third quarter of 2003 compared to the
third quarter of 2002.
For the quarter ended September 30, 2003, the Company's effective tax rate
was 36.1%, compared to 25.2% in the third quarter of 2002. The variance from the
statutory rate in 2002 was due to the extraterritorial income exclusion and an
adjustment to prior year's accruals. This adjustment was due to the favorable
completion of United States federal tax audits through the year 2000. The
adjustment was offset by a $329,000 valuation allowance recorded in the third
quarter of 2002 against certain foreign tax credits, due to the fact that the
Company anticipates these foreign tax credits will expire prior to utilization.
For the quarter ended September 30, 2003, the Company recorded an after tax
loss of $45,000 and $994,000 in the third quarter of 2002 from the discontinued
operation of its Industrial segment. In 2002, the Company decided to close down
its unprofitable Industrial business unit, Ausable Solutions, Inc., due to
substantial continuing losses, an inability to penetrate the market and a long
sales cycle. The overall downturn in a global economy and specifically the
manufacturing and warehousing industries, coupled with the diminishing capital
expenditures of the Company's industrial customers, prevented the Company from
being profitable in this particular business segment. As a result, the Company
concluded that it would be prudent to take decisive action and return the
Company's focus to its core businesses of hospitality technology and government
services and research and development. The Company believes that the decision to
exit the industrial segment will not have a negative impact on the Company's
continuing operations. The Company notes that its industrial business did not
have common customers with its Restaurant or Government Contract businesses.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
The Company reported revenues of $98.6 million for the nine months ended
September 30, 2003, a decrease of 1% from the $99.4 million reported in the
corresponding period in 2002. Additionally, for the nine months ended September
30, 2003, income from continuing operations was $1.5 million, a 35% decrease
from the $2.3 million earned in the corresponding period in 2002. During the
same period, the Company reported diluted net income per share from continuing
operations of $.17, compared to $.28 reported for the corresponding period in
the prior year. The Company's net income for the nine months ended September 30,
2003 was $1.4 million, or $.15 diluted net income per share, compared to net
income of $431,000 and $.05 per diluted share for the corresponding period in
2002.
Product revenues from the Company's Restaurant segment were $40.9 million
for the nine months ended September 30, 2003, a decrease of 6% from the $43.7
million recorded in the corresponding period in 2002. This decline was primarily
due to reduced sales to McDonald's and YUM! Brands, Inc. McDonald's sales were
down 22%, which is attributed to a slowdown in the first half of 2003 in capital
expenditures by franchisees while McDonald's Corporate Management reviewed its
strategic options relating to the upgrading of franchise stores. Recently, the
Company has witnessed a more positive trend in sales to McDonald's with quarter
to quarter sequential growth, and expects this positive trend to continue as
McDonald's Corporate Management is now implementing the recovery and operating
plans it developed for both their corporate and franchisee restaurants. Although
benefiting from the new business with Corporate KFC restaurants, sales to YUM!
Brands declined 7% for the nine months ended September 30, 2003 as compared to
the corresponding period in the prior year, due primarily to a significant sale
to the largest KFC franchisee in 2002. The Company also recorded large sales to
Boston Market and Carnival Cruise Lines in the first nine months of 2002. Also
offsetting some of the declines were increased sales to several new and existing
customers, including Loew's Cineplex, Rare Hospitality, CKE, Chick-fil-A and
Bojangles.
The Company's Restaurant segment also generates service revenues from its
various service offerings, which include installation, training, twenty-four
hour help desk support and various field and on-site service options. Customer
service revenues were $27.2 million for the nine months ended September 30,
2003, a decrease of 2% from the $27.7 million recorded in the corresponding
period of 2002. This decline was caused primarily by a 12% reduction in
installation revenue associated with fewer new system installs in the first nine
months of 2003 compared to the same period in 2002. This decrease was partially
offset by an 8% increase in call center revenue.
Contract revenues from the Company's Government segment were $30.4 million
for the nine months ended September 30, 2003, an increase of 9% when compared to
the $28.0 million recorded in the corresponding period in 2002. This increase
primarily resulted from 26% increase in information technology outsourcing
revenue for contracts for facility operations at strategic U.S. Department of
Defense Telecommunication sites across the globe. These outsourcing operations
provided by the Company directly support U.S. Navy, Army and Air Force
operations as they seek to convert their military information technology
communications facilities into contractor-run operations. Also contributing to
this growth was a 63% increase in revenue from research contracts involving
Imagery Information Technology. This was partially offset by a 57% decline in
funding for the Company's Logistics Management Program, which involves the
tracking of mobile chassis under the Company's Cargo*Mate(TM) contracts. The
Company anticipates new funding in 2004.
Product margins were 34.5% for the nine months ended September 30, 2003
compared to 32.2% for the corresponding period in 2002. This improvement was due
to higher software content in product sales for 2003 when compared to 2002. This
was partially offset by lower absorption of fixed manufacturing costs due to
lower production volume in the first nine months of 2003.
Customer service margins were 16.2% for the nine months ended September 30,
2003 compared to 18.1% for the corresponding period in 2002. This decline can be
attributed to a decrease in utilization of the Company's installation team
resulting from fewer installation requirements in 2003 compared to 2002. The
decline is also due to the start up expenses relating to a new call center
program with a customer.
Contract margins were 4.4% for the nine months ended September 30, 2003
versus 7.1% for the corresponding period in 2002. In 2002, the Company
recognized additional profit due to cost underruns on certain fixed price
contracts that were completed in the period. The Company's fixed price contracts
generally span multiple years, sometimes extending for as long as four to five
years. The Company sometimes recognizes an additional profit on these fixed
price contracts as the Company nears completion of the contract when the Company
determines that its contract expenditures will be less than it had previously
estimated. In 2002, the primary reason for cost underruns was lower than
anticipated overhead rates. In this instance, during 2002, the Company won
several new contracts that resulted in an increase in the base of direct labor
and a corresponding decline in the Company's overhead rates. Also, during 2002,
the Company realized a higher than expected profit margin on some of its fixed
price information technology outsourcing contracts, as a result of incurring
lower costs at the completion of the contract than originally estimated.
The significant components of contract costs for the nine months ended
September 30,2003 were 72% for labor and fringe benefits, 6% for supplies, and
2% for subcontract costs. For the corresponding period in 2002, these costs were
67%, 7% and 5%, respectively, of contract costs. The balance of contract costs
for the applicable periods of 2003 and 2002 included consulting, facilities,
communications and corporate overhead costs.
Selling, general and administrative expenses are virtually all related to
the Company's Restaurant segment. Selling, general and administrative expenses
were $13.8 million for the nine months ended September 30, 2003 versus $14.0
million for the corresponding period in 2002, a decrease of 1%. The decline was
due to a reduction in selling expenses as a result of improved efficiencies and
a reduced provision for doubtful accounts. This was partially offset by
increases in benefit costs and legal and accounting fees.
Research and development expenses typically relate to the Company's
Restaurant segment. However for the nine-month period ended September 30, 2003,
12% of these expenses related to the Company's Logistics Management Program
(Cargo*Mate(TM)). Research and development expenses were $3.8 million for the
first three quarters of 2003, a decrease of 4% from the $4 million recorded for
the corresponding period in 2002. This decrease was due to a small reduction in
the development staff as a result of certain efficiency improvements. This
decline was partially offset by the Company's investment in its Cargo*Mate(TM)
Program.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense
declined 38% to $412,000 for the first three quarters of 2003 due to a reduced
interest rate and lower average amount outstanding when compared to the
corresponding period in 2002.
For the nine months ended September 30, 2003, the Company's effective tax
rate was 36%, compared to 25.2% in the corresponding period 2002. The variance
from the statutory rate in 2002 was due to the extraterritorial income exclusion
and an adjustment to prior year's accruals. This adjustment was due to the
favorable completion of federal tax audits through the year 2000. These items
were partially offset by a $329,000 valuation allowance recorded in 2002 against
certain foreign tax credits, due to the fact that the Company anticipates these
foreign tax credits will expire prior to utilization.
The Company recorded an after tax loss of $115,000 for the first three
quarters of 2003 and $1.8 million for the first three quarters of 2002 from the
discontinued operation of its Industrial segment. As noted above, in 2002, the
Company decided to close down its unprofitable Industrial business unit, Ausable
Solutions, Inc., following a trend of continuous losses.
Liquidity and Capital Resources
The Company's primary source of liquidity has been from cash flow from
operations and lines of credit with various banks. Cash provided by continuing
operations was $984,000 in the first three quarters of 2003 compared to $4
million in the first three quarters of 2002. In the first three quarters of
2003, cash flow was generated primarily by operating profits. This was partially
offset by an increase in accounts receivable due to the revenue growth
experienced in the third quarter of 2003 and an increase in payments to vendors.
In the first three quarters of 2002, cash flow benefited from a reduction in
accounts receivable and the operating profits for the period. The Company was
able to improve its ability to collect trade receivables by adding staff and by
implementing more stringent collection procedures. This was partially offset by
an increase in customer service inventory requirements to support the Company's
current product line and expanded customer base.
Cash used in investing activities was $948,000 for the nine months ended
September 30, 2003 versus $1.5 million for the nine months ended September 30,
2002. During this period in 2003, capital expenditures were $341,000, primarily
for improvements to the Company's headquarters facility, internal use software
and upgrades to the Company's service facility. Capitalized software costs
relating to software development of restaurant products were $607,000 during
this period in 2003. For the first three quarters of 2002, capital expenditures
were $977,000 and were primarily for improvements to the Company's headquarters
facility, for costs related to vehicles used in support of certain government
contracts, and for normal operational needs in the Restaurant segment, including
internal use software and a phone system upgrade. Capitalized software costs
were $546,000 during this period in 2002.
Cash provided by financing activities was $923,000 for the first three
quarters of 2003 compared to cash used of $1.9 million in the corresponding
period of 2002. During this period, in 2003, the Company increased its
short-term bank borrowings by $714,000 and received $276,000 from the exercise
of employee stock options. During the corresponding period in 2002, the Company
reduced its short-term bank borrowings by $1.9 million, and received $49,000
from the exercise of employee stock options.
The Company has an aggregate of $20 million in bank lines of credit. One
line totaling $12,500,000 bears interest at the prime rate (4% at September 30,
2003) and is subject to loan covenants. These covenants include a debt to
tangible net worth ratio of 1 to 1; working capital of at least $25 million; and
a debt coverage ratio of 4 to 1. The Company was in compliance with these
covenants as of September 30, 2003. The availability of this facility is
determined based on the amount of certain receivables and inventory.
Specifically, the total amount of credit available under this facility at a
given time is based on (a) 80% of the Company's accounts receivable under 91
days outstanding attributable to the Company's Restaurant segment and (2) 40% of
the Company's inventory, excluding work in progress. This line expires on April
30, 2005. The remaining line of $7,500,000 also bears interest at the prime
rate. Both lines are collateralized by certain accounts receivable and
inventory. On October 31, 2003, the bank line for $7,500,000 was renewed for two
years. This new facility allows the Company, at its option, to borrow funds at
the LIBOR rate plus the applicable interest rate spread or at the bank's prime
lending rate (4% at September 30, 2003). This new facility contains certain loan
covenants including a leverage ratio of not greater than 4 to 1 and a fixed
charge coverage ratio of not less than 4 to 1. At September 30, 2003, an
aggregate of $10,260,000 was outstanding and an aggregate of $9,740,000 was
available under these lines.
Over the next twelve months, the Company has anticipated capital
requirements and non-cancelable lease commitments that are expected to be less
than $2 million in the aggregate. The Company does not usually enter into long
term contracts with its major restaurant customers. The Company commits to
purchasing inventory from its suppliers based on a combination of internal
forecasts and the actual orders from customers. This process, along with good
relations with suppliers, minimizes the working capital investment required by
the Company. While the Company lists two major customers, McDonald's and
Yum!Brands, it sells to hundreds of individual franchisees of these
corporations, each of which is individually responsible for its own debts. These
broadly-made sales substantially reduce the impact on the Company's liquidity if
one individual franchisee reduces the volume of its purchases from the Company
in a given year. The Company, based on internal forecasts, believes its existing
cash, line of credit facilities and its anticipated operating cash flow will be
sufficient to meet its cash requirements through at least the next twelve
months. However, the Company may be required, or could elect, to seek additional
funding prior to that time. The Company's future capital requirements will
depend on many factors, including its rate of revenue growth, the timing and
extent of spending to support product development efforts, expansion of sales
and marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of its products. The Company cannot
assure that additional equity or debt financing will be available on acceptable
terms or at all. The Company's sources of liquidity beyond twelve months, in
management's opinion, will be its cash balances on hand at that time, funds
provided by operations and whatever long-term credit facilities it can arrange.
Critical Accounting Policies
The Company's consolidated financial statements are based on the
application of accounting principles generally accepted in the United States of
America (GAAP). GAAP requires the use of estimates, assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenue and expense amounts reported. The Company believes
its use of estimates and underlying accounting assumptions adhere to GAAP and
are consistently applied. Valuations based on estimates are reviewed for
reasonableness and adequacy on a consistent basis throughout the Company.
Primary areas where financial information of the Company is subject to the use
of estimates, assumptions and the application of judgment include revenues,
receivables, inventories, intangible assets and taxes.
Revenue Recognition Policy
The Company recognizes revenue generated by the Restaurant segment using
the guidance from SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" and the AICPA Statement of Position (SOP) 97-2, "Software
Revenue Recognition," and other applicable revenue recognition guidance and
interpretations. Product revenue in the Restaurant segment is generated from
sales of the Company's standard Point-of-Sale systems. When the Company installs
its restaurant systems (which primarily includes hardware or hardware and
software) on behalf of its customers, the Company recognizes revenue from the
sale of its restaurant systems upon delivery to the customer's site. For
restaurant systems that are self-installed by the customer or an unrelated third
party and for component sales or supplies, the Company recognizes revenue at the
time of shipment. In addition to product sales, the Company may provide
installation and training services, and also offers maintenance contracts to its
customers. Installation and training service revenues are recognized as the
services are performed. The Company's other service revenues in the Restaurant
segment, consisting of support, field and depot repair, are provided to
customers either on a time and materials basis or under its maintenance
contracts. Services provided on a time and materials basis are recognized as the
services are performed. Service revenues from maintenance contracts are deferred
when billed and recognized ratably over the related contract period.
The Company recognizes revenue in its Government segment using the guidance
from SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." The Company's contract revenues generated by the Government segment
result primarily from contract services performed for the United States
Government under a variety of costs-plus fixed fee, time-and-material and
fixed-price contracts. Revenue on cost-plus fixed fee contracts is recognized
based on allowable costs for labor hours delivered, as well as other allowable
costs plus the applicable fee. Revenue on time and material contracts is
recognized by multiplying the number of direct labor-hours delivered in the
performance of the contract by the contract billing rates and adding other
direct costs as incurred. Revenue for fixed price contracts is recognized as
earned based upon the measure of cost output, which is primarily hours
delivered. The Company's obligation under these contracts is simply to provide
labor hours to conduct research or to staff facilities with no other
deliverables or performance obligations. Anticipated losses on all contracts are
recorded in full when identified. Unbilled accounts receivable are stated in the
Company's financial statements at their estimated realizable value. Contract
costs, including indirect expenses, are subject to audit and adjustment through
negotiations between the Company and government representatives.
Receivables
Allowances for doubtful accounts are based on estimates of probable losses
related to accounts receivable balances. The establishment of allowances
requires the use of judgment and assumptions regarding probable losses on
receivable balances.
Inventories
The Company's inventories are valued at the lower of cost or market. The
Company uses certain estimates and judgments and considers several factors
including product demand and changes in technology to provide for excess and
obsolescence reserves to properly value inventory.
Intangible Assets and Taxes
The Company has intangible assets on its balance sheet that include
computer software costs and goodwill resulting from acquisitions. The valuation
of these assets and the assignment of useful amortization lives for the computer
software costs involve significant judgments and the use of estimates. The
testing of these intangibles for impairment under established accounting
guidelines also requires significant use of judgment and assumptions. Changes in
business conditions could potentially require future adjustments to asset
valuations.
Taxes
The Company has significant amounts of deferred tax assets that are
reviewed for recoverability and valued accordingly. These assets are evaluated
by using estimates of future taxable income streams and the impact of tax
planning strategies. Valuations related to tax accruals and assets can be
impacted by changes to tax codes, changes in statutory tax rates and the
Company's estimates of its future taxable income levels.
Factors That Could Affect Future Results
A DECLINE IN THE VOLUME OF PURCHASES MADE BY ANY ONE OF OUR MAJOR CUSTOMERS
WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
A small number of customers has historically accounted for a majority of
our net revenues in any given fiscal period. For the fiscal years ended December
31, 2002, 2001 and 2000, aggregate sales to our top two Restaurant segment
customers, McDonald's and Yum!Brands, amounted to 51%, 51% and 56%,
respectively, of net revenues. For the nine months ended September 30, 2003 and
2002 sales to these customers were 48% and 51%, respectively, of net revenues.
Most customers are not obligated to make any minimum level of future purchases
from us or to provide us with binding forecasts of product purchases for any
future period. In addition, major customers may elect to delay or otherwise
change the timing of orders in a manner that could adversely effect quarterly
and annual results of operations. There can be no assurance that our current
customers will continue to place orders with us, or that we will be able to
obtain orders from new customers.
AN INABILITY TO PRODUCE NEW PRODUCTS THAT KEEP PACE WITH TECHNOLOGICAL
DEVELOPMENTS AND CHANGING MARKET CONDITIONS COULD RESULT IN A LOSS OF MARKET
SHARE.
The products we sell are subject to rapid and continual technological
change. The products that are available from our competitors have increasingly
offered a wider range of features and capabilities. We believe that in order to
compete effectively we must provide compatible systems incorporating new
technologies at competitive prices. There can be no assurance that we will be
able to continue funding research and development at levels sufficient to
enhance our current product offerings, or will be able to develop and introduce
on a timely basis new products that keep pace with technological developments
and emerging industry standards and address the evolving needs of customers.
There can also be no assurance that we will not experience difficulties that
will result in delaying or preventing the successful development, introduction
and marketing of new products in our existing markets, or that our new products
and product enhancements will adequately meet the requirements of the
marketplace or achieve any significant degree of market acceptance. Likewise,
there can be no assurance as to the acceptance of our products in new markets,
nor can there be any assurance as to the success of our penetration of these
markets, or to the revenue or profit margins with respect to these products. If
any of our competitors were to introduce superior software products at
competitive prices, or if our software products no longer met the needs of the
marketplace due to technological developments and emerging industry standards,
our software products may no longer retain any significant market share. If this
were to occur, we could be required to record a charge against capitalized
software costs, which amount to $1.9 million as of September 30, 2003.
WE GENERATE MUCH OF OUR REVENUE FROM THE QUICK SERVICE RESTAURANT INDUSTRY AND
THEREFORE ARE SUBJECT TO DECREASED REVENUES IN THE EVENT OF A DOWNTURN EITHER IN
THAT INDUSTRY OR IN THE ECONOMY AS A WHOLE.
For the nine months ended September 30, 2003 and 2002, we derived 69% and
72%, respectively, of our net revenues from the restaurant industry, primarily
Quick Service Restaurant (QSR) industry. Consequently, our restaurant technology
product sales are dependent in large part on the health of the QSR industry,
which in turn is dependent on the domestic and international economy, as well as
factors such as consumer buying preferences and weather conditions.
Instabilities or downturns in the restaurant market could disproportionately
impact our revenues, as clients may either exit the industry or delay, cancel or
reduce planned expenditures for our products. Although we believe we can assist
the QSR sector of the restaurant industry in a competitive environment, given
the cyclical nature of that industry, there can be no assurance that our
profitability and growth will continue.
WE DERIVE A PORTION OF OUR REVENUE FROM GOVERNMENT CONTRACTS, WHICH CONTAIN
PROVISIONS UNIQUE TO PUBLIC SECTOR CUSTOMERS, INCLUDING THE GOVERNMENT'S RIGHT
TO MODIFY OR TERMINATE THESE CONTRACTS AT ANY TIME.
For the fiscal years ended December 31, 2002, 2001 and 2000, we derived
28%, 27% and 25%, respectively, of our net revenues from contracts to provide
technical products and services to United States government agencies and defense
contractors. For the nine months ended September 30, 2003 and 2002 revenues from
such contracts were 31% and 28%, respectively, of net revenues. Contracts with
United States government agencies typically provide that such contracts are
terminable at the convenience of the government. If the government terminated a
contract on this basis, we would be entitled to receive payment for our
allowable costs and, in general, a proportionate share of our fee or profit for
work actually performed. Most U.S. government contracts are also subject to
modification or termination in the event of changes in funding. As such, we may
perform work prior to formal authorization, or the contract prices may be
adjusted for increased work scope or change orders. Termination or modification
of a substantial number of our U.S. government contracts could have a material
adverse effect on our business, financial condition and results of operations.
We perform work for the United States government pursuant to firm
fixed-price, cost-plus fixed fee, time-and-material, and incentive-type prime
contracts and subcontracts. The majority of our government contracts are either
firm fixed-price or cost-plus fixed fee contracts. Approximately 66% of the
revenue that we derived from government contracts for the nine months ended
September 30, 2003 came from firm fixed-price or time-and-material contracts.
The balance of the revenue that we derived from government contracts in 2003
primarily came from cost-plus fixed fee contracts. Most of our contracts are for
one-year to five-year terms, and all of the revenue that we derive from
government contracts is derived from funded contracts.
While firm fixed-price contracts allow us to benefit from cost savings,
they also expose us to the risk of cost overruns. If the initial estimates we
use for calculating the contract price are incorrect, we can incur losses on
those contracts. In addition, some of our governmental contracts have provisions
relating to cost controls and audit rights and, if we fail to meet the terms
specified in those contracts, then we may not realize their full benefits. Our
ability to manage costs on these contracts may effect our financial condition.
Lower earnings caused by cost overruns would have an adverse effect on our
financial results.
Under time and materials contracts, we are paid for labor at negotiated
hourly billing rates and for certain expenses. Under cost-plus fixed fee
contracts, we are reimbursed for allowable costs and paid a fixed fee. However,
if our costs under either type of contract exceed the contract ceiling or are
not allowable under the provisions of the contract or applicable regulations, we
may not be able to obtain reimbursement for all of our costs.
Under each type of contract, if we are unable to control costs we incur in
performing under the contract, our financial condition and operating results
could be materially adversely affected. Cost over-runs also may adversely affect
our ability to sustain existing programs and obtain future contract awards.
WE FACE EXTENSIVE COMPETITION IN THE MARKETS IN WHICH WE OPERATE, AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD RESULT IN PRICE REDUCTIONS AND DECREASED
DEMAND FOR OUR PRODUCTS AND SERVICES.
There are currently five major suppliers who offer restaurant management
systems similar to ours. Some of these competitors are larger than we are and
have access to substantially greater financial and other resources than we do,
and consequently may be able to obtain more favorable terms than we can for
components and subassemblies incorporated into their restaurant technology
products. The rapid rate of technological change in the restaurant market makes
it likely that we will face competition from new products designed by companies
not currently competing with us. Such products may have features not currently
available on our restaurant products. We believe that our competitive ability
depends on our total solution offering, our product development and systems
integration capability, our direct sales force and our customer service
organization. There is no assurance, however, that we will be able to compete
effectively in the restaurant technology market in the future.
Our government contracting business has been focused on niche offerings,
primarily signal and image processing and engineering services. Many of our
competitors are, or are subsidiaries of, companies such as Lockheed-Martin,
Raytheon, Northrop-Grumman (which includes Litton-PRC-TASC), BAE, Boeing and
SAIC. These companies are larger and have substantially greater financial
resources than we do. We also compete with smaller companies that target
particular segments of the government market. These companies may be better
positioned to obtain contracts through competitive proposals. Consequently,
there are no assurances that we will continue to win government contracts as a
prime contractor or subcontractor.
WE MAY NOT BE ABLE TO MEET THE UNIQUE OPERATIONAL, LEGAL AND FINANCIAL
CHALLENGES THAT RELATE TO OUR INTERNATIONAL OPERATIONS, WHICH MAY LIMIT THE
GROWTH OF OUR BUSINESS.
For the years ended December 31, 2002, 2001 and 2000, our net revenues from
sales outside the United States were 11%, 14% and 19%, respectively, of the
Company's net revenues. For the nine months ended September 30, 2003 and 2002
sales outside the United States were 11% of the Company's net revenues. We
anticipate that international sales will continue to account for a significant
portion of sales. We intend to continue to expand our operations outside the
United States and to enter additional international markets, which will require
significant management attention and financial resources. Our operating results
are subject to the risks inherent in international sales, including, but not
limited to, regulatory requirements, political and economic changes and
disruptions, geopolitical disputes and war, transportation delays, difficulties
in staffing and managing foreign sales operations, and potentially adverse tax
consequences. In addition, fluctuations in exchange rates may render our
products less competitive relative to local product offerings, or could result
in foreign exchange losses, depending upon the currency in which we sell our
products. There can be no assurance that these factors will not have a material
adverse effect on our future international sales and, consequently, on our
operating results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
INFLATION
Inflation had little effect on revenues and related costs during the third
quarter of 2003. Management anticipates that margins will be maintained at
acceptable levels to minimize the effects of inflation, if any.
INTEREST RATES
As of September 30, 2003, the Company has $2.1 million in variable
long-term debt and $10.3 million in variable short-term debt. The Company
believes that adverse change in interest rates of 100 basis points would not
have a material impact on our business, financial conditions, results of
operations or cash flows.
FOREIGN CURRENCY
The Company's primary exposures relate to certain non-dollar denominated
sales and operating expenses in Europe and Asia. These primary currencies are
the Euro, the Australian dollar and the Singapore dollar. Management believes
that foreign currency fluctuations should not have a significant impact on our
business, financial conditions, results of operations or cash flows due to the
low volume of business affected by foreign currencies.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were effective, in all material respects, to ensure that information
required to be disclosed in the reports the Corporation files and submits under
the Exchange Act of 1934 is recorded, processed, summarized and reported as and
when required.
During the period covered by this report, there have been no significant
changes in the Company's internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the Company's
internal control over financial reporting.
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit No. Description of Instrument
----------- -------------------------
11 Statement re computation
of per-share earnings
31.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
On July 23, 2003, PAR Technology Corporation furnished a report on Form 8-K
pursuant to Item 9 (Regulation FD Disclosure) of that Form relating to its
financial information for the quarter ended June 30, 2003, as presented in a
press release July 23, 2003 and furnished thereto as an exhibit.
On August 27, 2003 PAR Technology Corporation filed a report on Form 8-K
pursuant to Item 4 (Changes in Registrant's Certifying Accountant) of that Form
relating to PricewaterhouseCoopers' resignation from serving as the Company's
independent public accountants.
On October 14, 2003, PAR Technology Corporation filed a report on Form 8-K
pursuant to Item 4 (Changes in Registrant's Certifying Accountant) of that Form
relating to the engagement of KPMG LLP as the Company's independent public
accountants
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.
PAR TECHNOLOGY CORPORATION
--------------------------
(Registrant)
Date: November 14, 2003
/s/ Ronald J. Casciano
--------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer and
Principal Accounting
Officer and Duly Authorized Officer)
Exhibit Index
Sequential
Page
Exhibit Number
------- ------
11 - Statement re computation E-1, E-2
of per-share earnings
31.1 - Certification Pursuant to 18 U.S.C. E-3
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 - Certification Pursuant to 18 U.S.C. E-4
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 - Certification Pursuant to 18 U.S.C. E-5
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 11
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK
(In Thousands)
For the three months
ended September 30,
------------------------
2003 2002
-------- --------
Basic Earnings Per Share:
Weighted average shares of
Common stock outstanding:
Balance outstanding - beginning of period.. 8,443 7,901
Weighted average shares issued upon
Exercise of employee stock options ........ 3 --
----- -----
Weighted balance - end of period .......... 8,446 7,901
===== =====
For the three months
ended September 30,
------------------------
2003 2002
-------- --------
Diluted Earnings Per Share:
Weighted average shares of
Common stock outstanding:
Balance outstanding - beginning of period .. 8,443 7,901
Weighted average shares issued upon
Exercise of employee stock options ......... 3 --
Incremental shares of common stock
outstanding giving effect to stock options . 443 427
----- -----
Weighted balance - end of period ........... 8,889 8,328
====== ======
E-1
Exhibit 11
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK
(In Thousands)
For the nine months
ended September 30,
------------------------
2003 2002
-------- --------
Basic Earnings Per Share:
Weighted average shares of
Common stock outstanding:
Balance outstanding - beginning of period .. 8,360 7,881
Weighted average shares issued upon
Exercise of employee stock options ......... 54 10
----- -----
Weighted balance - end of period ........... 8,414 7,891
====== ======
For the nine months
ended September 30,
------------------------
2003 2002
-------- --------
Diluted Earnings Per Share:
Weighted average shares of
Common stock outstanding:
Balance outstanding - beginning of period .. 8,360 7,881
Weighted average shares issued upon
Exercise of employee stock options ......... 54 10
Incremental shares of common stock
outstanding giving effect to stock options . 396 325
----- -----
Weighted balance - end of period ........... 8,810 8,216
====== ======
E-2
Exhibit 31.1
CERTIFICATION
I, John W. Sammon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PAR Technology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. [Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986.]
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions): a. All
significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and b. Any fraud, whether or not material,
that involves management or other employees who have a significant role in
the registrant's internal controls over financial reporting.
/s/ John W. Sammon
----------------------------
John W. Sammon
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2003
E-3
Exhibit 31.2
CERTIFICATION
I, Ronald J. Casciano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PAR Technology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. [Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986.] c. Evaluated the effectiveness of
the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
/s/ Ronald J. Casciano
----------------------------
Ronald J. Casciano
VP, C.F.O. & Treasurer
Date: November 14, 2003
E-4
Exhibit 32.1
PAR TECHNOLOGY CORPORATION
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PAR Technology Corporation (the
"Company") on Form 10-Q for the period ending September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), we,
John W. Sammon, Chairman of the Board and Chief Executive Officer, and Ronald J.
Casciano, VP, C.F.O. & Treasurer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, to
our knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ John W. Sammon
- ----------------------
John W. Sammon
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2003
/s/ Ronald J. Casciano
- ----------------------
Ronald J. Casciano
VP, C.F.O. & Treasurer
Date: November 14, 2003
E-5