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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, 2004.
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 1-9720
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 Securities Exchange Act of 1934).
Yes [ ] No [ X ]
The number of shares outstanding of registrant's common stock, as of
October 31, 2004 - 9,005,448 shares.
PAR TECHNOLOGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q, September 30, 2004
PART 1
FINANCIAL INFORMATION
Item Number
-----------
Item 1. Financial Statements (unaudited)
- Consolidated Statements of Income for
the three and nine months ended
September 30, 2004 and 2003
- Consolidated Statements of Comprehensive Income
for the three and nine months ended
September 30, 2004 and 2003
- Consolidated Balance Sheets at
September 30, 2004 and December 31, 2003
- Consolidated Statements of Cash Flows
for the nine months ended
September 30, 2004 and 2003
- Notes to Unaudited Interim
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 4. Submission of Matters to Vote of Security Holders
Item 6. Exhibits
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,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net revenues:
Product ........................... $ 18,507 $ 15,535 $ 54,212 $ 40,947
Service ........................... 11,613 10,104 32,490 27,207
Contract .......................... 12,515 10,367 36,756 30,405
--------- --------- --------- ---------
42,635 36,006 123,458 98,559
--------- --------- --------- ---------
Costs of sales:
Product ........................... 12,145 10,219 36,413 26,809
Service ........................... 10,050 8,380 28,079 22,789
Contract .......................... 11,633 9,887 34,245 29,056
--------- --------- --------- ---------
33,828 28,486 98,737 78,654
--------- --------- --------- ---------
Gross margin ................ 8,807 7,520 24,721 19,905
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative 4,882 4,702 15,143 13,813
Research and development .......... 1,269 1,418 3,914 3,839
--------- --------- --------- ---------
6,151 6,120 19,057 17,652
--------- --------- --------- ---------
Operating income ....................... 2,656 1,400 5,664 2,253
Other income, net ...................... 190 60 588 449
Interest expense ....................... (27) (117) (146) (412)
--------- --------- --------- ---------
Income from continuing operations
before provision for income taxes .... 2,819 1,343 6,106 2,290
Provision for income taxes ............. (1,085) (485) (2,324) (825)
--------- --------- --------- ---------
Income from continuing operations ...... 1,734 858 3,782 1,465
--------- --------- --------- ---------
Discontinued operations:
Loss from operations of
discontinued component ......... -- (71) -- (180)
Income tax benefit ................ -- 26 -- 65
--------- --------- --------- ---------
Loss on discontinued operations ... -- (45) -- (115)
--------- --------- --------- ---------
Net income ............................. $ 1,734 $ 813 $ 3,782 $ 1,350
========= ========= ========= =========
(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,
---------------------- ----------------------
2004 2003 2004 2003
--------- ---------- --------- ----------
Earnings per share:
Basic:
Income from continuing operations $ 0.20 $ 0.10 $ 0.44 $ 0.17
Loss from discontinued operations $ -- $ (0.01) $ -- $ (0.01)
Net income ................ $ 0.20 $ 0.10 $ 0.44 $ 0.16
Diluted:
Income from continuing operations $ 0.19 $ 0.10 $ 0.41 $ 0.17
Loss from discontinued operations $ -- $ (0.01) $ -- $ (0.01)
Net income ................ $ 0.19 $ 0.09 $ 0.41 $ 0.15
Weighted average shares outstanding
Basic ........................... 8,669 8,446 8,625 8,414
========= ========= ========= =========
Diluted ......................... 9,164 8,889 9,159 8,810
========= ========= ========= =========
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
For the three months For the nine months
ended September 30, ended September 30,
----------------- ------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income ................................... $ 1,734 $ 813 $ 3,782 $ 1,350
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 42 4 (192) 304
------- ------- ------- -------
Comprehensive income ......................... $ 1,776 $ 817 $ 3,590 $ 1,654
======= ======= ======= =======
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,
2004 2003
------------ -----------
Assets
Current assets:
Cash .................................................. $ 5,505 $ 1,467
Accounts receivable-net ............................... 28,052 31,876
Inventories-net ....................................... 31,086 31,894
Deferred income taxes ................................. 6,102 6,486
Other current assets .................................. 2,658 2,472
Total assets of discontinued operation ................ -- 20
-------- --------
Total current assets .............................. 73,403 74,215
Property, plant and equipment - net ........................ 7,307 7,240
Deferred income taxes ...................................... 1,467 2,857
Other assets ............................................... 3,397 2,855
-------- --------
$ 85,574 $ 87,167
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt ..................... $ 87 $ 89
Borrowings under lines of credit ...................... -- 6,989
Accounts payable ...................................... 10,081 8,301
Accrued salaries and benefits ......................... 6,029 5,461
Accrued expenses ...................................... 2,074 2,471
Deferred service revenue .............................. 5,506 5,947
Total liabilities of discontinued operation ........... 390 578
-------- --------
Total current liabilities ......................... 24,167 29,836
-------- --------
Long-term debt ............................................. 2,027 2,092
-------- --------
Commitments and contingent liabilities Shareholders' equity:
Preferred stock, $.02 par value,
1,000,000 shares authorized ......................... -- --
Common stock, $.02 par value,
19,000,000 shares authorized;
10,080,182 and 9,966,062 shares issued;
8,669,495 and 8,555,375 outstanding ................ 202 199
Capital in excess of par value ........................ 30,309 29,761
Retained earnings ..................................... 36,157 32,375
Accumulated other comprehensive loss .................. (235) (43)
Treasury stock, at cost, 1,410,687 shares ............. (7,053) (7,053)
-------- --------
Total shareholders' equity ........................ 59,380 55,239
-------- --------
$ 85,574 $ 87,167
======== ========
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,
-----------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income ............................................ $ 3,782 $ 1,350
Adjustments to reconcile net income to net
cash provided by operating activities:
Net loss from discontinued operations .............. -- 115
Depreciation and amortization ...................... 1,909 2,077
Provision for bad debts ............................ 943 691
Provision for obsolete inventory ................... 2,615 1,937
Deferred income taxes .............................. 1,917 658
Increase (decrease) from changes in:
Accounts receivable .............................. 2,881 (4,418)
Inventories ...................................... (1,807) 275
Other current assets ............................. (186) --
Other assets ..................................... (749) 337
Accounts payable ................................. 1,780 (1,758)
Accrued salaries and benefits .................... 568 448
Accrued expenses ................................. (397) (215)
Deferred service revenue ......................... (441) (513)
-------- --------
Net cash provided by continuing
operating activities ........................... 12,815 984
Net cash used in discontinued operations ........ (168) (181)
-------- --------
Net cash provided by operating activities ....... 12,647 803
-------- --------
Cash flows from investing activities:
Capital expenditures .................................. (1,172) (341)
Capitalization of software costs ...................... (597) (607)
-------- --------
Net cash used in investing activities ........... (1,769) (948)
-------- --------
Cash flows from financing activities:
Net proceeds (payments) under line-of-credit agreements (6,989) 711
Payments on long-term debt obligations ................ (67) (64)
Proceeds from the exercise of stock options ........... 551 276
-------- --------
Net cash provided (used) by
financing activities ........................... (6,505) 923
-------- --------
(Continued)
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(unaudited)
For the nine months
ended September 30,
-------------------
2004 2003
------- -------
Effect of exchange rate changes on cash and
cash equivalents ....................................... (335) 304
------- -------
Net increase in cash and cash equivalents ................ 4,038 1,082
Cash and cash equivalents at
beginning of year ...................................... 1,467 490
------- -------
Cash and cash equivalents at
end of period .......................................... $ 5,505 $ 1,572
======= =======
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest .............................................. $ 168 $ 417
Income taxes, net of refunds 390 237
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited interim consolidated financial statements have
been prepared by PAR Technology Corporation (the "Company" or "PAR") in
accordance with accounting principles generally accepted in the United
States of America for interim financial statements and with the
instructions to Form 10-Q and Regulation S-X pertaining to interim
financial statements. Accordingly, these interim financial statements do
not include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. 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, 2004 are not
necessarily indicative of the results of operations to be expected for any
future period. The consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial
statements and notes for the years ended in December 31, 2003 and 2002
included in the Company's December 31, 2003 Annual Report to the Securities
and Exchange Commission on Form 10-K.
2. On October 1, 2004, the Company completed its previously-announced
transaction with Springer- Miller Systems, Inc. ("Springer-Miller")
pursuant to which the Company acquired substantially all of the assets
(including the equity interests in each of Springer-Miller International,
LLC and Springer-Miller Canada, ULC), and assumed certain liabilities, of
Springer-Miller. The purchase price of the assets was $16.1 million plus
approximately $3.2 million (an amount equal to the cash and cash
equivalents held by Springer-Miller and its subsidiaries at the closing).
The purchase price consisted of $3 million worth of Company common stock
and the remainder in cash. The purchase price is subject to adjustment
based on the closing balance sheet of Springer-Miller.
Springer-Miller, based in Stowe, Vermont, is a developer of software for
hotel and restaurant management. Springer-Miller is a provider of property
management systems solutions that meet the technology needs of all types of
hospitality enterprises including city-center hotels, destination spa and
golf properties, timeshare properties and casino resorts worldwide.
Springer-Miller's product suite provides hotel/resort staff with the tools
needed to personalize services, exceed guest expectations, and increase
revenue. In addition, Springer-Miller provides the Spa industry with
management software solutions specifically designed to support and enhance
the unique needs of the resort spa and day spa markets, a rapidly growing
segment of the hospitality market.
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 has allowed the Company to
focus on its two core businesses, Hospitality technology solutions
(formally the Restaurant business) and Government contracting and IT
services. 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's Industrial business did not have common customers
with its Hospitality and Government businesses.
A summary of net revenues, net loss from operations of discontinued
component 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,
--------------------- -------------------
2004 2003 2004 2003
-------- --------- -------- -------
Net revenues ...................... $ -- $ -- $ -- $ 21
Net loss from operations of
discontinued component .......... $ -- $ (45) $ -- $ (115)
September 30, December 31,
2004 2003
------------ -----------
Discontinued assets-other .......... $ -- $ 20
============ ===========
Discontinued liabilities-other ..... $ 390 $ 578
============ ===========
4. Inventory maintained by the Company relates primarily to the manufacture
and service of Hospitality products. The components of inventory, net of
related reserves, consist of the following:
(in thousands)
September 30, December 31,
2004 2003
---------- ---------
Finished goods ............... $ 7,250 $ 7,430
Work in process .............. 1,376 1,623
Component parts .............. 5,540 5,585
Service parts ................ 16,920 17,256
--------- ---------
$ 31,086 $ 31,894
========= =========
At September 30, 2004 and December 31, 2003, the Company had recorded
reserves for shrinkage, excess and obsolete inventory of $3,095,000 and
$4,361,000, respectively.
5. The Company's products are sold with a standard warranty for defects in
material and workman-ship. The standard warranty offered by the Company is
for one year, although certain sales have shorter warranty periods. 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 are summarized as follows:
(in thousands)
For the three months For the nine months
ended September 30, ended September 30,
----------------- -------------------
2004 2003 2004 2003
------ ------- -------- -------
Balance at beginning of period ......... $(429) $(543) $(494) $(560)
Accruals for warranties issued
during the period .................... (345) (295) (849) (753)
Settlements made (in cash or
in kind) during the period ........... 311 314 880 789
----- ----- ----- -----
Balance at September 30 ................ $(463) $(524) $(463) $(524)
===== ===== ===== =====
6. Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compen-sation" (SFAS 123), encourages, but does not require
companies to record compensation cost for stock-based compensation plans at
fair value. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair values of the respective options on their
grant dates for those awards, consistent with the requirements of SFAS No.
123, the Company's net income and earnings per share would have been
adjusted to the proforma amounts indicated below:
(in thousands, except per share data)
For the three months For the nine months
ended September 30, ended September 30,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income ................. $ 1,734 $ 813 $ 3,782 $ 1,350
Compensation expense ....... (49) (32) (145) (88)
------- ------- ------- -------
Proforma net income ........ $ 1,685 $ 781 $ 3,637 $ 1,262
======= ======= ======= =======
Earnings per share:
As reported -- Basic $ .20 $ .10 $ .44 $ .16
-- Diluted $ .19 $ .09 $ .41 $ .15
Proforma -- Basic $ .19 $ .09 $ .42 $ .15
-- Diluted $ .18 $ .09 $ .40 $ .14
7. Earnings per share ("EPS") is calculated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share", which
specifies the computation, presentation, and disclosure requirements for
EPS. This standard also requires the presentation of basic and diluted EPS.
Basic EPS excludes all dilution and is based upon the weighted average
number of common shares outstanding during the period. Diluted EPS reflects
the potential dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
The following is a reconciliation of the weighted average shares
outstanding for the basic and diluted EPS computations:
(in thousands, except
per share data)
For the three months
ended September 30,
--------------------
2004 2003
------ ------
Net income ............................................... $1,734 $ 813
====== ======
Basic:
Shares outstanding at beginning of period ........... 8,655 8,443
Weighted average shares issued during the period .... 14 3
Weighted average common shares, basic ............... 8,669 8,446
====== ======
Earnings per common share, basic .................... $ .20 $ .10
====== ======
Diluted:
Weighted average common shares, basic ............... 8,669 8,446
Dilutive impact of stock options .................... 495 443
Weighted average common shares, diluted ............. 9,164 8,889
====== ======
Earnings per common share, diluted .................. $ .19 $ .09
====== ======
(in thousands, except
per share data)
For the nine months
ended September 30,
--------------------
2004 2003
---------- ---------
Net income ................................................. $ 3,782 $1,350
======= ======
Basic:
Shares outstanding at beginning of year ................ 8,555 8,360
Weighted average shares issued during the period ....... 70 54
----- -----
Weighted average common shares, basic .................. 8,625 8,414
===== =====
Earnings per common share, basic ........................ $ .44 $ .16
===== =====
Diluted:
Weighted average common shares, basic ................. 8,625 8,414
Dilutive impact of stock options ...................... _534 396
----- -----
Weighted average common shares, diluted ............... 9,159 8,810
===== =====
Earnings per common share, diluted .................... $ .41 $ .15
===== =====
There was no impact from discontinued operations to earnings per share in
the 2004 periods, and the impact from discontinued operations in the 2003
periods was a $.01 reduction in both basic and diluted earnings per share.
8. The Company's reportable segments are distinct business units that have
separate management teams and infrastructures and business strategies that
offer different products and services.
The Company has two reportable segments, Hospitality (formerly the
Restaurant segment) and Government. The Hospitality segment offers
integrated solutions to the hospitality 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, training, twenty-four hour telephone
support and depot repair. The Government segment develops advanced
technology systems for the Department of Defense and other United States
governmental agencies. Additionally, this segment provides information
technology and communications support services to the United States Navy,
Air Force and Army. The Company's Government segment is also involved in
developing technology to track mobile chassis in the interstate shipping
industry. Inter-segment sales and transfers are not significant.
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,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Hospitality .................. $ 30,120 $ 25,639 $ 86,702 $ 68,154
Government ................... 12,515 10,367 36,756 30,405
--------- --------- --------- ---------
Total .................. $ 42,635 $ 36,006 $ 123,458 $ 98,559
========= ========= ========= =========
Operating income (loss):
Hospitality .................. $ 1,692 $ 1,272 $ 3,185 $ 1,450
Government ................... 964 475 2,479 1,280
Other ........................ -- (347) -- (477)
--------- --------- --------- ---------
2,656 1,400 5,664 2,253
Other income, net ................. 190 60 588 449
Interest expense .................. (27) (117) (146) (412)
--------- --------- --------- ---------
Income from continuing operations
before provision for income taxes $ 2,819 $ 1,343 $ 6,106 $ 2,290
========= ========= ========= =========
Depreciation and amortization:
Hospitality .................. $ 414 $ 573 $ 1,498 $ 1,657
Government ................... 13 87 178 153
Other ........................ 94 52 233 267
--------- --------- --------- ---------
Total .................. $ 521 $ 712 $ 1,909 $ 2,077
========= ========= ========= =========
Capital expenditures:
Hospitality .................. $ 198 $ 99 $ 1,039 $ 121
Government ................... -- 46 -- 50
Other ........................ 22 102 133 170
--------- --------- --------- ---------
Total .................. $ 220 $ 247 $ 1,172 $ 341
========= ========= ========= =========
The following table presents revenues by geographic area based on the
location of the use of the product or services.
(in thousands)
For the three months For the nine months
ended September 30, ended September 30,
---------------------- -----------------------
2004 2003 2004 2003
-------- -------- --------- ---------
United States .............. $ 38,516 $ 32,014 $112,514 $ 88,207
Other Countries ............ 4,119 3,992 10,944 10,352
-------- -------- -------- --------
Total ................ $ 42,635 $ 36,006 $123,458 $ 98,559
======== ======== ======== ========
The following table represents identifiable assets by business segment:
(in thousands)
September 30, December 31,
2004 2003
---------- ----------
Identifiable assets:
Hospitality ................... $68,688 $70,550
Government .................... 7,825 10,475
Industrial .................... -- 20
Other ......................... 9,061 6,122
------- -------
Total ................... $85,574 $87,167
======= =======
The following table presents identifiable assets by geographic area based
on the location of the asset.
(in thousands)
September 30, December 31,
2004 2003
--------- ----------
United States ................... $79,999 $79,831
Other Countries ................. 5,575 7,336
------- -------
Total .................... $85,574 $87,167
======= =======
Customers comprising 10% or more of the Company's total revenues are
summarized as follows:
For the three months For the nine months
ended September 30, ended September 30,
----------------------------------------
2004 2003 2004 2003
------ ------- ------ -----
Hospitality Segment:
McDonald's Corporation ....... 34% 26% 31% 25%
YUM! Brands, Inc. ............ 18% 28% 20% 23%
Government Segment:
Department of Defense 29% 29% 30% 31%
All Others ....................... 19% 17% 19% 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" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934. Any statements in this document that do not
describe historical facts are forward-looking statements. Forward-looking
statements in this document (including forward-looking statements regarding the
continued health of the Hospitality industry, future information technology
outsourcing opportunities, an expected increase in funding by the United States
government relating to the Company's logistic management contracts, the impact
of current world events on our results of operations, 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. When we use
words such as "intend," "anticipate," "believe," "estimate," "plan," "will," or
"expect", we are making forward-looking statements. We believe that the
assumptions and expectations reflected in such forward-looking statements are
reasonable, based on information available to us on the date hereof, but we
cannot assure you that these assumptions and expectations will prove to have
been correct or that we will take any action that we presently may be planning.
We have disclosed certain important factors that could cause our actual future
results to differ materially from our current expectation, including a decline
in the volume of purchases made by one or a group of our major customers; risks
in technology development and commercialization; risks of downturns in economic
conditions generally, and in the quick-service sector of the hospitality market
specifically; risks associated with government contracts; risks associated with
competition and competitive pricing pressures; and risks related to foreign
operations. Forward-looking statements made in connection with this report are
necessarily qualified by these factors. We are not undertaking to update or
revise publicly any forward-looking statement if we obtain new information or
upon the occurrence of future events or otherwise.
Overview
PAR Technology Corporation ("PAR" or the "Company") is the parent company
of three wholly-owned subsidiary businesses: Par Tech, Inc., PAR Government
Systems Corporation and Rome Research Corporation.
Hospitality Segment
PAR's largest subsidiary, ParTech, Inc. is a provider of management
technology solutions, including hardware, software and professional services to
businesses in the hospitality and retail industries. Through ParTech, Inc., the
Company is a supplier of hospitality technology systems with over 35,000 systems
installed in 95 countries. PAR's management software assists in the operation of
hospitality businesses by managing data from end-to-end and improving
profitability through more efficient operations. The Company's professional
services mission is to assist businesses in achieving the full potential of
their hospitality technology systems.
PAR has maintained long-term relationships with the restaurant industry's
two largest corporations - McDonald's Corporation and Yum! Brands, Inc.
McDonald's has over 31,000 restaurants in over 120 countries and PAR has been a
selected provider of restaurant management technology systems and lifecycle
support services to McDonald's since 1980. Yum! Brands (which includes Taco
Bell, KFC, Pizza Hut, Long John Silvers and A & W Restaurants) has been a PAR
customer since 1983. Yum! Brands has nearly 33,000 restaurants globally. PAR is
the dominant supplier of restaurant management technology systems to Taco Bell,
as well as the point-of-sale vendor of choice to KFC Corporate restaurants. PAR
successfully sells restaurant management technology systems to all five of the
Yum! Brands concepts. PAR is also the point-of-sale vendor of choice to the
following other significant Hospitality brands: Boston Market, Chick-fil-A, CKE
Restaurants (including Hardees and Carl's Jr.), Whataburger, Carnival Cruise
Lines, Loews Cineplex and numerous large franchisees of those foregoing brands.
During 2003 and the first nine months of 2004, the quick-service restaurant
market continued to strengthen, as evidenced by reported improved results from
the Company's major customers, including McDonald's and Yum! Brands.
Additionally, the Company's business improved as it was named the primary
supplier to KFC for its corporate stores. During this period, the Company
recorded significant new business from Chick-fil-A, CKE Restaurants and
Bojangles' Restaurant, Inc.
Government Segment
PAR's subsidiaries, PAR Government Systems Corporation and Rome Research
Corporation, are government contractors. As a long-standing Government
contractor, the Company designs advanced technology systems for the Department
of Defense and other United States governmental agencies. Additionally, PAR
provides information technology and communications support services to the
United States Navy, Air Force and Army. PAR focuses its Government applied
technology business on providing computer-based system design services for
highly technical projects, ranging from experimental studies to advanced
operational systems, within a variety of areas to include radar, image and
signal processing, logistic management systems, and geospatial services and
products. The Company's technical services business provides information
technology and communications support services, engineering support, and
facilities operations and management. In addition, through government-sponsored
research and development, PAR has developed technologies with relevant
commercial uses. A prime example of this dual-use technological development is
the Company's point-of-sale technology, which was derived from research and
development involving microchip processing technology sponsored by the
Department of Defense.
During 2003, the Company secured its first information technology
outsourcing contract with the United States Army and now performs outsourcing
services for the three main branches of the United States military.
Summary
Throughout the remainder of 2004, the Company anticipates the continued
health of the Hospitality segment and additional information technology
outsourcing opportunities. Over the years, PAR has maintained its position in
the industries in which it competes through the utilization of several Company
strengths including market leadership, technological innovation, customer focus,
global reach and employee initiative. By focusing on these strengths, PAR is
able to help shape the marketplace, increase its customer base and continue to
expand worldwide.
The following table sets forth the Company's revenues by reportable
segment:
For the three months For the nine months
ended September 30, ended September 30,
-----------------------------------------
2004 2003 2004 2003
-------- -------- -------- ---------
Revenues:
Hospitality ......... $ 30,120 $ 25,639 $ 86,702 $ 68,154
Government .......... 12,515 10,367 36,756 30,405
-------- -------- -------- --------
Total consolidated revenue $ 42,635 $ 36,006 $123,458 $ 98,559
======== ======== ======== ========
The following discussion and analysis highlights items having a significant
effect on operations during the three and nine months ended September 30, 2004.
This discussion may not be indicative of future operations or earnings. It
should be read in conjunction with the unaudited interim consolidated financial
statements and notes thereto and other financial and statistical information
included in this report.
Results of Operations --Three Months Ended September 30, 2004 Compared to Three
Months Ended September 30, 2003
The Company reported revenues of $42.6 million for the quarter ended
September 30, 2004, an increase of 18% from the $36.0 million reported for the
quarter ended September 30, 2003. The Company's net income for the quarter ended
September 30, 2004 was $1.7 million, or $.19 diluted net income per share,
compared to net income of $813,000 and $.09 per diluted share for the same
period in 2003.
Product revenues from the Company's Hospitality segment were $18.5 million
for the quarter ended September 30, 2004, an increase of 19% from the $15.5
million recorded for the same period in 2003. The primary factor contributing to
the increase was sales to McDonald's which increased 62% or $3.2 million over
the same quarter of 2003. Due to its recent strong financial performance,
McDonald's is investing in capital equipment to upgrade its restaurants,
triggering increased sales of the Company's products. An additional factor
contributing to the increase in product revenues was a $1.5 million increase in
sales to CKE Restaurants. A partially offsetting factor was a 29% decline in
sales to Yum! Brands due to the timing of customer requirements.
Customer Service revenues are also generated by the Company's Hospitality
segment. The Company's service offerings include installation, training,
twenty-four hour help desk support and various depot and on-site service
options. Customer Service revenues were $11.6 million for the quarter ended
September 30, 2004, an increase of 15% from $10.1 million for the same period in
2003. This increase was due primarily to a 35% or $820,000 increase in
installation revenue that is directly related to the growth in the Company's
product revenue. Other service area revenues increased 7% or $689,000 primarily
due to increased support contracts and maintenance service activity relating to
the expansion of the Company's customer base.
Contract revenues from the Company's Government segment were $12.5 million
for the quarter ended September 30, 2004, an increase of 21% when compared to
the $10.4 million recorded in the same period in 2003. Contributing to this
growth was a $1.2 million or 21% increase in information technology outsourcing
revenue in contracts for facility operations at critical United States
Department of Defense telecommunication sites across the globe. These
outsourcing operations provided by the Company directly support United States
Navy, Air Force and Army operations as they seek to convert their military
information technology communications facilities into contractor-run operations
and meet new requirements with contractor support. Also contributing to this
increase was a $452,000 or 28% increase in revenue from research contracts
involving Imagery Information Technology.
Product margins for the quarter ended September 30, 2004 were 34.4%, an
increase from 34.2% for the quarter ended September 30, 2003. This increase
resulted from increased absorption of fixed manufacturing costs as production
volume increased. This was partially offset by the continuation of an
integration project for a major customer in the third quarter of 2004 that
involved lower margin peripheral hardware products.
Customer Service margins were 13.5% for the quarter ended September 30,
2004 compared to 17.1% for the same period in 2003. The lower margin in 2004 was
primarily due to the increased use of third parties (which results in lower
margins than installation performed by internal personnel) to assist the Company
with the major integration project discussed above.
Contract margins were 7.0% for the quarter ended September 30, 2004 versus
4.6 % for the same period in 2003. The increase in margins is primarily
attributable to favorable performance on certain fixed-price contracts due to
lower than expected contract costs. The most significant components of contract
costs in 2004 and 2003 were labor and fringe benefits. In 2004 labor and fringe
benefits were $8.7 million or 75% of contract costs. In 2003 labor and fringe
benefits were $7.2 million or 72% of contract costs. The growth in contract
costs is directly related to the growth in contract revenues.
Selling, general and administrative expenses are virtually all related to
the Company's Hospitality segment. Selling, general and administrative expenses
for the quarter ended September 30, 2004 were $4.9 million, an increase of 4%
from the $4.7 million expended for the same period in 2003. The increase was
primarily attributable to a $217,000 rise in selling expenses due to expansion
of our sales force and an increase in sales commission, a cost that is directly
related to product revenue growth.
Research and development expenses relate primarily to the Company's
Hospitality segment. However for the third quarter of 2003, 23% of these
expenses related to the Company's Logistics Management Program. Research and
development expenses were $1.3 million for the quarter ended September 30, 2004,
a decline of 10% from the $1.4 million recorded for the same period in 2003. The
decrease resulted from the Company's investment in the third quarter of 2003 in
the Cargo*Mate(R) Program during a temporary funding hiatus from the U.S.
Government. The Company has secured new funding on this program in the third
quarter of 2004. This decline was partially offset by an increase in Hospitality
development staff related to new product investments.
Other income, net, was $190,000 in the third quarter of 2004 compared to
$60,000 for the same period in 2003. Other income primarily includes rental
income and foreign currency gains and losses. The increase in the third quarter
of 2004 primarily resulted from a rise in foreign currency gains when compared
to 2003.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense
declined 77% to $27,000 for the quarter ended September 30, 2004, as compared to
$117,000 for the same period in 2003, primarily due to lower average amounts
outstanding in 2004 as compared to 2003.
The Company's effective tax rate was 38.5% for the quarter ended September
30, 2004 compared to the 36.1% rate for the same period in 2003. The rate
increase was primarily due to a reduced favorable impact of the Company's
extraterritorial income exclusion.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
The Company reported revenues of $123.5 million for the nine months ended
September 30, 2004, an increase of 25% from the $98.6 million reported for the
nine months ended September 30, 2003. The Company's net income for the nine
months ended September 30, 2004 was $3.8 million, or $.41 diluted net income per
share, compared to net income of $1.4 million and $.15 per diluted share for the
same period in 2003.
Product revenues from the Company's Hospitality segment were $54.2 million
for the nine months ended September 30, 2004, an increase of 32% from the $40.9
million recorded for the same period in 2003. Overall this increase was a result
of the healthy financial condition of the Hospitality marketplace. Sales to
McDonald's increased 81% or $10.5 million over the first nine months of 2003.
Due to its strong financial performance in 2004, McDonald's is investing in
capital equipment to upgrade its restaurants. Also contributing to this increase
was a growth in sales to CKE Restaurants of $4.6 million for the nine months
ended September 30, 2004 as compared to the same period in 2003.
Customer Service revenues are also generated by the Company's Hospitality
segment. The Company's service offerings include installation, training,
twenty-four hour help desk support and various depot and on-site service
options. Customer Service revenues were $32.5 million for the nine months ended
September 30, 2004, an increase of 19% from $27.2 million for the same period in
2003. This increase was primarily due to a 62% or $3.2 million increase in
installation revenue that is directly related to the growth in the Company's
product revenue. Other service area revenues increased 8% or $2.1 million during
the first nine months of 2004 primarily due to increased support contracts and
maintenance service activity relating to the expansion of the Company's customer
base.
Contract revenues from the Company's Government segment were $36.8 million
for the nine months ended September 30, 2004, an increase of 21% when compared
to the $30.4 million recorded for the same period in 2003. This increase
primarily resulted from a $4 million or 24% increase in information technology
outsourcing revenue for contracts for facility operations at critical United
States Department of Defense telecommunication sites across the globe. These
outsourcing operations provided by the Company directly support United States
Navy, Air Force and Army operations as they seek to both convert their military
information technology communications facilities into contractor-run operations
and meet new requirements with contractor support. Also contributing to this
growth was a $2.7 million or 75% increase in revenue from research contracts
involving Imagery Information Technology. This was partially offset by a $1.1
million decline in the Company's Logistic Management Program, due to reduced
funding from the United States government. The Company received new funding for
this project from the United States Government in the third quarter of 2004.
Product margins for the nine months ended September 30, 2004 were 32.8%, a
decline from 34.5% for the nine months ended September 30, 2003. The primary
reason for the decline was an integration project for a major customer in 2004
that involved lower margin peripheral hardware products. Also contributing to
this decline was lower software revenue in 2004 when compared to 2003.
Customer Service margins were 13.6% for the nine months ended September 30,
2004 compared to 16.2% for the same period in 2003. The lower margin in 2004 was
primarily due to higher installation expenses as a result of an increased use of
third parties in connection with a large integration project for a major
customer. Also contributing to the margin decline was a $261,000 increase in the
provision for service inventory obsolescence.
Contract margins were 6.8% for the nine months ended September 30, 2004
versus 4.4% for the same period in 2003. The increase in contract margins is
primarily attributable to a higher than anticipated performance-based award fee
on an imagery information technology contract. Additionally, the Company
received a favorable contract modification on a particular information
technology outsourcing contract and achieved lower than expected contract costs
on certain other fixed price contracts. The most significant components of
contract costs for 2004 and 2003 were labor and fringe benefits. For the nine
months ended September 30, 2004 labor and fringe benefits were $26.3 million or
77% of contract costs compared to $21.8 million or 75% of contract costs for the
same period in 2003.
Selling, general and administrative expenses are virtually all related to
the Company's Hospitality segment. Selling, general and administrative expenses
for the nine months ended September 30, 2004 were $15.1 million, an increase of
10% from the $13.8 million expended for the same period in 2003. The increase
was primarily attributed to a $838,000 rise in selling expenses due to a planned
addition to the sales force and an increase in sales commission, a cost that is
directly related to product revenue growth.
Research and development expenses relate primarily to the Company's
Hospitality segment. However for the first nine months of 2003, 12% of these
expenses related to the Company's Logistics Management Program. Research and
development expenses were $3.9 million for the nine months ended September 30,
2004, an increase of 2% from the $3.8 million recorded for the same period in
2003. This increase reflects an addition to the Hospitality development staff
related to new product investments. This was partially offset by a $456,000
decline in the Company's investment in its Logistics Management Program.
Other income, net, was $588,000 for the nine months ended September 30,
2004, an increase of 31% from $449,000 for the same period in 2003. Other
income, net primarily includes rental income and foreign currency gains and
losses. The increase was the result of larger currency gains in 2004 when
compared to 2003.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense
declined 65% to $146,000 for the nine months ended September 30, 2004, as
compared to $412,000 for the same period in 2003, due to lower average amounts
outstanding in 2004 as compared to 2003 and lower company interest rates on
borrowings in 2004 when compared to 2003.
The Company's effective tax rate was 38.1% for the nine months ended
September 30, 2004 compared to 36% for the same period in 2003. The rate
increase was primarily due to a reduced favorable impact of the Company's
extraterritorial income exclusion.
Liquidity and Capital Resources
The Company's primary source of liquidity has been cash flow from
operations and lines of credit with various banks. Cash provided by continuing
operations was $12.7 million for the nine months ended September 30, 2004
compared to $984,000 for the same period in 2003. In 2004, cash flow benefited
from a reduction in accounts receivable, operating profits for the period, and
timing of vendor payments for material purchases. In 2003, cash flow was
primarily generated from 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.
Cash used in investing activities was $1.8 for the nine months ended
September 30, 2004 versus $948,000 for the same period in 2003. In 2004, capital
expenditures were $1.2 million and were primarily for manufacturing equipment
and information technology equipment and software for internal use. Capitalized
software costs relating to software development of Restaurant segment products
were $597,000 in 2004. For the same period in 2003, capital expenditures were
$341,000 and were primarily for improvements to the Company's headquarter
facility, internal use software and upgrades to the Company's service facility.
Capitalized software costs were $607,000 for the corresponding period of 2003.
Cash used in financing activities was $6.5 million for the nine months
ended September 30, 2004 versus $923,000 of cash provided for the same period in
2003. During 2004, the Company reduced its short-term bank borrowings by $7
million and received $551,000 from the exercise of employee stock options. In
2003, the Company increased its short-term bank borrowings by $711,000, and
received $276,000 from the exercise of employee stock options.
The Company has an aggregate of $20,000,000 in bank lines of credit. One
line totaling $12,500,000 bears interest at the prime rate (4 3/4% at September
30, 2004) and is subject to loan covenants including a debt to tangible net
worth ratio of 1 to 1; a minimum working capital requirement of at least $25
million; and a debt coverage ratio of 4 to 1. 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 (b) 40% of the Company's inventory, excluding
work in process. This line expires on April 30, 2006. The remaining line of
$7,500,000 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
3/4% at September 30, 2004). This 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. This line expires on October 30, 2006.
Both lines are collateralized by certain accounts receivable and inventory. The
Company was in compliance with all loan covenants on September 30, 2004. At
September 30, 2004, there were no borrowings under these lines and an aggregate
of $20,000,000 was available under these lines.
On October 1, 2004, the Company increased its lines of credit with its two
banks by $5,000,000 each bringing its total bank lines of credit to $30,000,000.
This increase was done in conjunction with the acquisition of the assets of
Springer-Miller Systems. The Company used a combination of line of credit
borrowings and cash on hand to finance this acquisition. The additional $10
million increase in the lines expires on March 31, 2005. At that time the
Company will consider converting any remaining short-term debt into a long-term
loan.
During fiscal year 2004, the Company anticipates that its capital
requirements will be less than $2 million. The Company does not usually enter
into long term contracts with its major Hospitality segment 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. Although 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, funds available
through its lines of credit and the long-term credit facilities that 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 revenue
recognition, accounts receivable, 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. 104, "Revenue Recognition"
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. The Company recognizes revenue from the sale of
its products upon delivery to the customer's site when the Company installs its
point-of-sale systems (which primarily include hardware or hardware and
software) on behalf of its customers. The Company recognizes revenue at the time
of shipment for point-of-sale systems that are self-installed by the customer or
an unrelated third party and for component sales or supplies. 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 Hospitality segment, consisting of support and
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. 104, "Revenue Recognition". 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 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 primarily on a straight-line basis over the
life of the fixed-price contract. 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 United States government
representatives.
Accounts receivable
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. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based on our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and appropriate reserves have been established, we cannot guarantee
that we will continue to experience the same credit loss rates that we have
experienced in the past. Thus, if the financial condition of our customers were
to deteriorate, our actual losses may exceed our estimates, and additional
allowances would be required.
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.
Capitalized software development costs
The Company capitalizes certain costs related to the development of
computer software used in its Restaurant segment under the requirements of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed". Software
development costs incurred prior to establishing technological feasibility are
charged to operations and included in research and development costs. Software
development costs incurred after establishing feasibility are capitalized and
amortized when the product is available for general release to customers.
Goodwill
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
(SFAS 142). The Company adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangible assets, including
certain intangible assets recorded as a result of past business combinations,
was discontinued upon the adoption of SFAS 142. Instead, all goodwill is tested
for impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. The
Company has elected to test for impairment annually at December 31.
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 THE COMPANY'S MAJOR
CUSTOMERS WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
A small number of related customers have historically accounted for a
majority of the Company's net revenues in any given fiscal period. For the
fiscal years ended December 31, 2003, 2002 and 2001, aggregate sales to our top
two Hospitality segment customers, McDonald's and Yum! Brands, amounted to 50%,
51% and 51%, respectively, of total revenues. For the nine months ended
September 30, 2004 and 2003, sales to these customers were 51% and 48%,
respectively, of total revenues. Most of the Company's customers are not
obligated to provide us with any minimum level of future purchases or 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 affect the Company's 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 changes in
technology. Our competitors offer products that have an increasingly wider range
of features and capabilities. We believe that in order to compete effectively we
must provide 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
that the Company 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 also can 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, nor to the
revenue or profit margins realized by the Company 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 $1.6 million as of September 30,
2004.
WE GENERATE MUCH OF OUR REVENUE FROM THE HOSPITALITY 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 fiscal years ended December 31, 2003, 2002 and 2001, we derived
70%, 72% and 73%, respectively, of our total revenues from the Hospitality
industry, primarily the quick service restaurant marketplace. For the nine
months ended September 30, 2004 and 2003 revenues from the Hospitality industry
were 70% and 69%, respectively, of total revenues. Consequently, our Hospitality
technology product sales are dependent in large part on the health of the
Hospitality 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 Hospitality 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 quick service sector of the Hospitality
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, 2003, 2002 and 2001, we derived
30%, 28% and 27%, respectively, of our total revenues from contracts to provide
technical services to United States government agencies and defense contractors.
For the nine months ended September 30, 2004 and 2003 revenues from such
contracts were 30% and 31%, respectively. Contracts with United States
government agencies typically provide that such contracts are terminable at the
convenience of the United States government. If the United States 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 United States 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 changes in scope of work. Termination or modification of a
substantial number of our United States government contracts could have a
material adverse effect on our business, financial condition and results of
operations.
We perform work for various United States government agencies and
departments pursuant to firm fixed-price, cost-plus fixed fee and
time-and-material, prime contracts and subcontracts. The majority of our
government contracts are either firm fixed-price/time-and-material, or cost-plus
fixed fee contracts. Approximately 72% of the revenue that we derived from
government contracts for the year ended December 31, 2003 came from firm
fixed-price or time-and-material contracts. For the nine months ended September
30, 2004 approximately 65% of government contract revenue was derived from firm
fixed-price or time-and-material contracts. The balance of the revenue that we
derived from government contracts in 2003 and 2004 primarily came from cost-plus
fixed fee contracts. Most of our contracts are for one-year to five-year terms.
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. 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 of these types 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.
If we are unable to control costs incurred in performing under each type of
contract, inability to control costs could have a material adverse effect on our
financial condition and operating results. 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/OR DECREASED
DEMAND FOR OUR PRODUCTS AND SERVICES.
There are several suppliers who offer Hospitality management systems
similar to ours. Some of these competitors are larger than PAR and have access
to substantially greater financial and other resources and, consequently, may be
able to obtain more favorable terms than we can for components and subassemblies
incorporated into these Hospitality technology products. The rapid rate of
technological change in the hospitality industry makes it likely that we will
face competition from new products designed by companies not currently competing
with us. These new products may have features not currently available on our
Hospitality 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
hospitality technology market in the future.
Our Government contracting business has been focused on niche offerings,
primarily signal and image processing, information technology outsourcing and
engineering services. Many of our competitors are, or are subsidiaries of,
companies such as Lockheed-Martin, Raytheon, Northrop-Grumman, BAE, Harris,
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 fiscal years ended December 31, 2003, 2002 and 2001, our net
revenues from sales outside the United States were 11%, 11% and 14%,
respectively, of the Company's total revenues. For the nine months ended
September 30, 2004 and 2003, sales outside the United States were 9% and 11%,
respectively, of the Company's total 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 first
nine months of 2004. Management anticipates that it will maintain it margins at
acceptable levels to minimize the effects of inflation, if any.
INTEREST RATES
As of September 30, 2004, the Company has $2 million in variable long-term
debt. The Company believes that even an 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
(a) Evaluation of Disclosure Controls and Procedures.
As of September 30, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's President and Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures, as defined in Exchange Act Rule 15d-14(c). Based upon
the evaluation, the Company's President and Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in enabling the Company to identify, process, record
and report information required to be included in the Company's periodic SEC
filings within the required time period.
(b) Changes in Internal Controls.
There was no significant change in the Company's internal controls over
financial reporting, as defined in Rule 13a-15(f) of the Exchange Act during the
quarter ended September 30, 2004 that has materially affected, or is reasonably
likely to materially affect, such internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 4: Submission of Matters to Vote of Security Holders
None
Item 6. Exhibits
List of Exhibits
Exhibit No. Description of Instrument
----------- -------------------------
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
PAR TECHNOLOGY CORPORATION
FORM 10-Q, SEPTEMBER 30, 2004
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 15, 2004
Ronald J. Casciano
---------------------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer
and Treasurer
Exhibit Index
Sequential
Page
Exhibit Number
------- ------
31.1 - Certification Pursuant to 18 U.S.C. E-1
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-2
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-3
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 31.1
PAR TECHNOLOGY CORPORATION
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 circum-stances 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. 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
c. 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 that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
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:
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;
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 15, 2004
E-1
Exhibit 31.2
PAR TECHNOLOGY CORPORATION
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 circum-stances 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. 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 c.
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 that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
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:
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;
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 15, 2004
E-2
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, 2004 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, Vice President, Chief Financial Officer and Treasurer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, to best of our knowledge, that:
(1) The Report fully complies with the requirement 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 results of operations
of the Company.
/s/John W. Sammon
- ----------------------------------------
John W. Sammon
Chairman of the Board and
Chief Executive Officer
Date: November 15, 2004
/s/Ronald J. Casciano
- ----------------------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer
and Treasurer
Date: November 15, 2004
E-3