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, 2005. Commission File Number 1-9720 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 Securities Exchange Act). Yes [ ] No [ X ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [ X ] The number of shares outstanding of registrant's common stock, as of October 31, 2005 - 9,328,679 shares.
PAR TECHNOLOGY CORPORATION TABLE OF CONTENTS FORM 10-Q PART 1 FINANCIAL INFORMATION Item Number ----------- Item 1. Financial Statements (Unaudited) - Consolidated Statements of Income for the three and nine months ended September 30, 2005 and 2004 - Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2005 and 2004 - Consolidated Balance Sheets at September 30, 2005 and December 31, 2004 - Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 - 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 6. Exhibits and Reports on Form 8-K Signatures Exhibit Index
Item 1. Financial Statements <TABLE> <CAPTION> 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, ---------------------- ---------------------- 2005 2004 2005 2004 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net revenues: Product ........................... $ 22,855 $ 18,507 $ 66,786 $ 54,212 Service ........................... 15,065 11,613 42,883 32,490 Contract .......................... 14,277 12,515 42,505 36,756 --------- --------- --------- --------- 52,197 42,635 152,174 123,458 --------- --------- --------- --------- Costs of sales: Product ........................... 13,239 12,145 40,008 36,413 Service ........................... 11,517 10,050 32,887 28,079 Contract .......................... 13,284 11,633 39,793 34,245 --------- --------- --------- --------- 38,040 33,828 112,688 98,737 --------- --------- --------- --------- Gross margin ................ 14,157 8,807 39,486 24,721 --------- --------- --------- --------- Operating expenses: Selling, general and administrative 7,457 4,882 22,173 15,143 Research and development .......... 2,483 1,269 6,868 3,914 Amortization of identifiable intangible assets ............... 246 -- 736 -- --------- --------- --------- --------- 10,186 6,151 29,777 19,057 --------- --------- --------- --------- Operating income ....................... 3,971 2,656 9,709 5,664 Other income, net ...................... 191 190 495 588 Interest expense ....................... (41) (27) (184) (146) --------- --------- --------- --------- Income before provision for income taxes 4,121 2,819 10,020 6,106 Provision for income taxes ............. (1,578) (1,085) (3,820) (2,324) --------- --------- --------- --------- Net income ............................. $ 2,543 $ 1,734 $ 6,200 $ 3,782 ========= ========= ========= ========= Earnings per share: Basic ............................. $ .27 $ .20 $ .68 $ .44 Diluted ........................... $ .26 $ .19 $ .64 $ .41 Weighted average shares outstanding Basic ............................. 9,319 8,669 9,131 8,625 ========= ========= ========= ========= Diluted ........................... 9,834 9,164 9,736 9,159 ========= ========= ========= ========= </TABLE> See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited) <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, ------------------ ------------------- 2005 2004 2005 2004 -------- ------- -------- ------- <S> <C> <C> <C> <C> Net income ................................... $ 2,543 $ 1,734 $ 6,200 $ 3,782 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (41) 42 (406) (192) ------- ------- ------- ------- Comprehensive income ......................... $ 2,502 $ 1,776 $ 5,794 $ 3,590 ======= ======= ======= ======= </TABLE> 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, Assets 2005 2004 --------- --------- Current assets: Cash and cash equivalents ................. $ 4,894 $ 8,696 Accounts receivable-net .................... 36,821 32,702 Inventories - net ............................... 29,631 27,047 Deferred income taxes ...................... 7,170 6,634 Other current assets ....................... 2,507 2,617 --------- --------- Total current assets ................... 81,023 77,696 Property, plant and equipment - net ............. 8,141 8,123 Goodwill ........................................ 15,379 15,379 Intangible assets-net ........................... 8,409 9,235 Other assets .................................... 1,897 1,319 --------- --------- $ 114,849 $ 111,752 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt .......... $ 82 $ 90 Borrowings under lines of credit ........... -- 10,246 Accounts payable ........................... 12,420 9,486 Accrued salaries and benefits .............. 8,282 8,072 Accrued expenses ........................... 2,190 2,998 Customer deposits .......................... 4,272 4,861 Deferred service revenue ................... 9,811 9,083 Net liabilities of discontinued operation .. 192 323 --------- --------- Total current liabilities .............. 37,249 45,159 --------- --------- Long-term debt .................................. 1,962 2,005 --------- --------- Deferred income taxes ........................... 458 194 --------- --------- Other long-term liabilities ..................... 1,456 820 --------- --------- Shareholders' Equity: Preferred stock, $.02 par value, 1,000,000 shares authorized .............. -- -- Common stock, $.02 par value, 19,000,000 shares authorized; 10,532,255 and 10,139,132 shares issued; 9,328,579 and 8,935,456 shares outstanding 211 203 Capital in excess of par value ............. 35,908 31,560 Retained earnings .......................... 44,210 38,010 Accumulated other comprehensive loss ....... (587) (181) Treasury stock, at cost, 1,203,676 shares .. (6,018) (6,018) --------- --------- Total shareholders' equity ............. 73,724 63,574 --------- --------- $ 114,849 $ 111,752 ========= ========= 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, --------------------- 2005 2004 --------- --------- Cash flows from operating activities: Net income ...................................... $ 6,200 $ 3,782 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................ 2,780 1,909 Provision for bad debts ...................... 880 943 Provision for obsolete inventory ............. 3,054 2,615 Tax benefit of stock option exercises ........ 2,853 -- Deferred income tax .......................... (272) 1,917 Changes in operating assets and liabilities: Accounts receivable ........................ (4,999) 2,881 Inventories ................................ (5,638) (1,807) Other current assets ....................... 110 (186) Other assets ............................... (578) (749) Accounts payable ........................... 2,934 1,780 Accrued salaries and benefits .............. 210 568 Accrued expenses ........................... (808) (397) Customer deposits .......................... (589) -- Deferred service revenue ................... 728 (441) Other long-term liabilities ................ 636 -- -------- -------- Net cash provided by continuing operating activities ..................... 7,501 12,815 Net cash used in discontinued operations .. (131) (168) -------- -------- Net cash provided by operating activities . 7,370 12,647 -------- -------- Cash flows from investing activities: Capital expenditures ............................ (1,444) (1,172) Capitalization of software costs ................ (528) (597) -------- -------- Net cash used in investing activities ..... (1,972) (1,769) -------- -------- Cash flows from financing activities: Net payments under line-of-credit agreements .... (10,246) (6,989) Payments of long-term debt ...................... (51) (67) Proceeds from the exercise of stock options ..... 1,503 551 -------- -------- Net cash used in financing activities ..... (8,794) (6,505) -------- -------- Effect of exchange rate changes on cash and cash equivalents ................................. (406) (335) -------- -------- Net increase (decrease) in cash and cash equivalents (3,802) 4,038 Cash and cash equivalents at beginning of period .............................. 8,696 1,467 -------- -------- Cash and cash equivalents at end of period .................................... $ 4,894 $ 5,505 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ........................................ $ 219 $ 168 Income taxes, net of refunds .................... 1,293 390 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 nine months ended September 30, 2005 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 year ended December 31, 2004 included in the Company's December 31, 2004 Annual Report to the Securities and Exchange Commission on Form 10-K. The preparation of consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include: the carrying amount of property, plant and equipment, identifiable intangible assets and goodwill, warranty reserve, valuation allowances for receivables, inventories and deferred income tax assets. Actual results could differ from those estimates. 2. On October 4, 2005, the Company and its wholly-owned Canadian subsidiary, PixelPoint, ULC (the "Canadian Subsidiary"), completed their acquisition of PixelPoint Technologies, Inc. ("PixelPoint") pursuant to which the Canadian Subsidiary acquired all of the stock of PixelPoint. The purchase price was $7.5 million and consisted of $422,000 worth of the Company stock (18,140 shares of PAR Technology Corporation common stock issued out of treasury) and the remainder in cash. The purchase price is subject to adjustment based on the closing balance sheet of PixelPoint. The purchase price is also subject to price contingencies based upon future performance. Based in suburban Toronto, Ontario, PixelPoint Technologies, Inc. is a premier supplier to the hospitality industry with over 5,000 installations in full-service restaurants around the globe. Their integrated software solution includes HeadOffice(R) enterprise management, PocketPOS(TM) a wireless application that is seamless to their connected capability and allows remote order taking in the dining room, Web-to-Go(TM) on-line ordering capability for customers via the internet, and MemberShare(TM) an in-store and enterprise level Loyalty and Gift Card information sharing application. 3. On October 1, 2004, the Company and its wholly-owned subsidiary, PAR Springer-Miller Systems, Inc. (the "Subsidiary"), completed their transaction with Springer-Miller Systems, Inc. ("Springer-Miller") and John Springer-Miller pursuant to which the Subsidiary 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. Springer-Miller, based in Stowe, Vermont, is a provider of hospitality management solutions for all types of hospitality enterprises including resort hotels, destination spa and golf properties, timeshare properties and casino resorts worldwide.
On an unaudited proforma basis, assuming the completed acquisition had occurred as of the beginning of the period presented, the consolidated results of the Company would have been as follows (in thousands, except per share amounts): For the three months For the nine months ended September 30, 2004 ended September 30, 2004 ------------------------ ------------------------ Net revenues $ 46,481 $ 135,660 Net income $ 1,308 $ 3,663 Earnings per share: Basic $ .15 $ .41 Diluted $ .14 $ .39 The unaudited proforma financial information presented above gives effect to purchase accounting adjustments which have resulted or are expected to result from the acquisition. This proforma information is not necessarily indicative of the results that would actually have been obtained had the companies been combined for the period presented. 4. Inventories are primarily used in 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, 2005 2004 ------------ ----------- Finished goods $ 4,998 $ 4,745 Work in process 1,484 1,296 Component parts 7,020 4,568 Service parts 16,129 16,438 --------- ---------- $ 29,631 $ 27,047 ========= ========== At September 30, 2005 and December 31, 2004, the Company had recorded reserves for shrinkage, excess and obsolete inventory of $4,385,000 and $3,982,000, respectively. 5. In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." In April 2005, the Securities and Exchange Commission released a final rule "Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment". This rule defers the date for which we will be required to adopt SFAS 123R until January 1, 2006. SFAS 123R requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. We are currently evaluating the requirements of SFAS 123R and its impact on our consolidated results of operations and earnings per share. We have not yet determined the effect of adopting SFAS 123R, and it has not been determined whether the adoption will result in amounts similar to the current pro forma disclosures under SFAS 123.
Had compensation cost for the Company's stock-based compensation plans been recorded 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, --------------------- --------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Net income $ 2,543 $ 1,734 $ 6,200 $ 3,782 Compensation expense, net of tax (117) (49) (296) (145) --------- --------- --------- -------- Proforma net income $ 2,426 $ 1,685 $ 5,904 $ 3,637 ========= ========= ========= ======== Earnings per share: As reported -- Basic $ .27 $ .20 $ .68 $ .44 Diluted $ .26 $ .19 $ .64 $ .41 Proforma -- Basic $ .26 $ .19 $ .65 $ .42 Diluted $ .25 $ .18 $ .61 $ .40 6. Earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share", which specifies the computation, presentation, and disclosure requirements for earnings per share (EPS). It 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, --------------------- 2005 2004 ------ ------ Net income .......................................... $2,543 $1,734 ====== ====== Basic: Shares outstanding at beginning of period ...... 9,286 8,655 Weighted average shares issued during the period 33 14 ------ ------ Weighted average common shares, basic .......... 9,319 8,669 ====== ====== Earnings per common share, basic ............... $ .27 $ 0.20 ====== ====== Diluted: Weighted average common shares, basic .......... 9,319 8,669 Dilutive impact of stock options ............... 515 495 ------ ------ Weighted average common shares, diluted ........ 9,834 9,164 ====== ====== Earnings per common share, diluted ............. $ .26 $ 0.19 ====== ======
For the nine months ended September 30, ---------------------- 2005 2004 ------ ------ Net income .......................................... $6,200 $3,782 ====== ====== Basic: Shares outstanding at beginning of period ...... 8,935 8,555 Weighted average shares issued during the period 196 70 ------ ------ Weighted average common shares, basic .......... 9,131 8,625 ====== ====== Earnings per common share, basic ............... $ .68 $ 0.44 ====== ====== Diluted: Weighted average common shares, basic .......... 9,131 8,625 Dilutive impact of stock options ............... 605 534 ------ ------ Weighted average common shares, diluted ........ 9,736 9,159 ====== ====== Earnings per common share, diluted ............. $ .64 $ 0.41 ====== ====== 7. 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, Hospitality and Government. The Hospitality segment offers integrated solutions to the hospitality industry. These offerings include industry leading hardware and software applications utilized in point-of-sale, back of store and corporate office applications as well as in the hotel/resort/spa marketplace. This segment also offers customer support including field service, installation, twenty-four hour telephone support and depot repair. The Government segment develops advanced technology prototype systems primarily for the Department of Defense and other Governmental agencies. 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. Intersegment sales and transfers are not significant.
Information as to the Company's segments is set forth below: (in thousands) For the three months For the nine months ended September 30, ended September 30, ---------------------- --------------------- 2005 2004 2005 2004 --------- --------- --------- -------- Revenues: Hospitality ............. $ 37,920 $ 30,120 $ 109,669 $ 86,702 Government .............. 14,277 12,515 42,505 36,756 --------- --------- --------- --------- Total ............. $ 52,197 $ 42,635 $ 152,174 $ 123,458 ========= ========= ========= ========= Operating income: Hospitality ............. $ 3,063 $ 1,692 $ 7,148 $ 3,185 Government .............. 908 964 2,561 2,479 --------- --------- --------- --------- 3,971 2,656 9,709 5,664 Other income, net ............ 191 190 495 588 Interest expense ............. (41) (27) (184) (146) --------- --------- --------- --------- Income before provision for income taxes ........... $ 4,121 $ 2,819 $ 10,020 $ 6,106 ========= ========= ========= ========= Depreciation and amortization: Hospitality ............. $ 824 $ 414 $ 2,426 $ 1,498 Government .............. 23 13 66 178 Other ................... 99 94 288 233 --------- --------- --------- --------- Total ............. $ 946 $ 521 $ 2,780 $ 1,909 ========= ========= ========= ========= Capital expenditures: Hospitality ............. $ 468 $ 198 $ 1,189 $ 1,039 Government .............. 11 -- 41 -- Other ................... 94 22 214 133 --------- --------- --------- --------- Total ............. $ 573 $ 220 $ 1,444 $ 1,172 ========= ========= ========= ========= The following table presents revenues by geographic area based on the location of the use of the product or service: (in thousands) For the three months For the nine months ended September 30, ended September 30, ---------------------- --------------------- 2005 2004 2005 2004 --------- --------- --------- -------- United States ................ $ 47,414 $ 38,516 $137,383 $112,514 Other Countries .............. 4,783 4,119 14,791 10,944 -------- -------- -------- -------- Total .................. $ 52,197 $ 42,635 $152,174 $123,458 ======== ======== ======== ========
The following table represents identifiable assets by business segment: (in thousands) September 30, December 31, 2005 2004 -------------------------- Identifiable assets: Hospitality ............ $ 99,000 $ 91,432 Government ............. 7,967 9,909 Other .................. 7,882 10,411 -------- -------- Total ..................... $114,849 $111,752 ======== ======== The following table presents identifiable assets by geographic area based on the location of the asset: (in thousands) September 30, December 31, 2005 2004 -------------------------- United States ............. $109,137 $105,073 Other Countries ............ 5,712 6,679 -------- -------- Total ................ $114,849 $111,752 ======== ======== 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, ------------------------------------------ 2005 2004 2005 2004 ----- ----- ----- ----- Restaurant Segment: McDonald's Corporation ..... 25% 34% 27% 31% YUM! Brands, Inc. .... 14% 18% 13% 20% Government Segment: Department of Defense ....... 27% 29% 28% 30% All Others ..................... 34% 19% 32% 19% --- --- --- --- 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 U.S. Government relating to the Company's logistics management contracts, the impact of current world events on our results of operations, the affects of inflation on our margins, and the affects 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 expecta-tions 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 restaurant sector of the hospitality technology 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 is the parent company of five wholly-owned subsidiary businesses: ParTech, Inc., PAR Springer-Miller Systems, Inc., PixelPoint, ULC, PAR Government Systems Corporation and Rome Research Corporation. Hospitality Segment - ------------------- PAR's largest subsidiary, ParTech, Inc. is an industry leader in hospitality in providing management technology solutions that capture and manage information in real time to and from the point of business activity. PAR product offerings cover the full spectrum of technology. Offerings include hardware, software and professional services to the hospitality industry including restaurants, hotels/resorts/spas, and retail businesses. The Company's
hospitality management technology systems number in excess of 40,000 systems installed in over 100 countries around the globe. PAR's management software technology enables the efficient operation of hospitality businesses by guiding pertinent data from end-to-end and improving profitability through efficient operations. PAR's professional services assist businesses in attaining the necessary business functionality and efficiencies of their hospitality technology investments. The Company creates these products and provides the necessary services that capture mission critical data, and has maintained long-term relationships with the hospitality industry's two largest restaurant corporations - McDonald's Corporation and Yum! Brands, Inc. McDonald's has over 32,000 restaurants in 121 countries and PAR has been a selected preferred provider of management technology systems and lifecycle support services to McDonald's since 1980. Yum! Brands, Inc. (which includes Taco Bell, KFC, Pizza Hut, Long John Silvers and A & W Restaurants) has been a customer since 1983. Yum! has over 33,000 units globally and PAR is the lone approved supplier of management technology systems to their Taco Bell restaurants as well as the point-of-sale ("POS") vendor of choice to KFC. Other major hospitality concepts where PAR is the selected POS vendor of choice are: Boston Market, Chick-fil-A, CKE Restaurants (including Hardees, Carl's Jr.), Carnival Cruise Lines, Loews Cineplex and large franchisees of each of the foregoing brands. In the fourth quarter 2004 PAR acquired Springer-Miller Systems, the leader in hospitality technology solutions for hotel/resort/spa enterprises including prominent city-center hotels, spa and golf destinations, timeshare properties and casino resorts worldwide. PAR's SMS|Host(R) Hospitality Management System is distinguished from other property management systems by its cutting edge guest-centric design and committed approach to guest service. The SMS|Host product suite of applications, that includes more than 20 seamlessly integrated application modules, provides the hotel/resort/spa personnel with the necessary technology features they need to service the guest individually, exceed guests' expectations, and increase property revenues through necessary operational efficiencies. PAR is focused on providing to our customers enterprise management products, solutions and services, that are created to maximize operational performance, augment cost-effectiveness and enhance faster execution of critical business processes. The Company maintains an impressive customer list in this business including: Pebble Beach Resorts, The Four Seasons, The Kingsmill Resort, Grand Cypress, Hard Rock Hotel & Casino, the Mandarin Oriental Hotel Group, and Destination Hotels & Resorts. Government Segment - ------------------ The Company's other subsidiaries, PAR Government Systems Corporation and Rome Research Corporation, are both Government contractors. As a Government contractor since 1968, PAR provides information technology and communications support services to the three principal armed services of the United States: Navy, Air Force and Army. Also, PAR serves clients in several additional U.S. federal, state and local government agencies. PAR focuses its applied technology
on providing high quality technical products and services, ranging from experimental studies to advanced operational systems, within a variety of areas of research, including radar, image and signal processing, logistics management systems, and geospatial services and products. In addition, through Government-sponsored research and development, PAR has developed technologies with useful commercial applications. A prime example of this "technology transfer" is the Company's hospitality point-of-sale technology, which was created from research and development involving microchip processing technology sponsored by the Department of Defense. The Company's high quality service allows PAR to continually secure repeat business and long-term client relationships and also to compete effectively for new clients and new contracts. The demand for PAR's services is created by the increasingly complex systems and technology environments in which government agencies operate, and by the need to stay up-to-date with new technologies while maintaining the highest standards of productivity and performance. Summary - ------- During the first nine months of 2005, the overall hospitality market continued the positive trend set in 2004 as evidenced by improved results reported for the Company's major customers, and in particular, the quick-service restaurant segment, including McDonald's and Yum! Brands. In 2004, PAR acquired the assets of Springer-Miller Systems which enhanced significantly the Company's software product offerings in the global hospitality technology market. PAR's Government segment continues to add business in 2005 associated with technical outsourcing for the U.S. Military. PAR provides outsourcing services for the three main branches of the U.S. military, as well as other Federal Government Agencies including the International Broadcasting Bureau (IBB) and the General Services Administration (GSA). For the remainder of 2005, the Company fully expects continued positive industry trends of the hospitality technology market and additional Government technical outsourcing opportunities. During the Company's history, PAR has been successful in establishing a leadership position in its two businesses through the application of several Company fundamentals including setting the pace of new technology introduction, outstanding customer service, expanding our markets across the globe and empowering the entire PAR team to produce positive results for the Company. By stressing these fundamentals, the Company can significantly influence the direction of the hospitality technology industry and continue to grow its business around the globe. 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, ------------------- ------------------- 2005 2004 2005 2004 -------- --------- -------- -------- Net revenues: Hospitality ............. $ 37,920 $ 30,120 $109,669 $ 86,702 Government .............. 14,277 12,515 42,505 36,756 -------- -------- -------- -------- Total consolidated net revenue $ 52,197 $ 42,635 $152,174 $123,458 ======== ======== ======== ========
The following discussion and analysis highlights items having a significant affect on operations during the three and nine months ended September 30, 2005. This discussion may not be indicative of future operations or earnings. It should be read in conjunction with the audited annual consolidated financial statements and notes thereto and other financial and statistical information included in this report. Results of Operations -- Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004 The Company reported revenues of $52.2 million for the three months ended September 30, 2005, an increase of 22% from the $42.6 million reported for the three months ended September 30, 2004. The Company's net income for the three months ended September 30, 2005 was $2.5 million, or $.26 diluted net income per share, compared to net income of $1.7 million and $.19 per diluted share for the same period in 2004. Product revenues from the Company's Hospitality segment were $22.9 million for the three months ended September 30, 2005, an increase of 23% from the $18.5 million recorded in 2004. The principal reason for this increase was sales to new and existing restaurant technology customers. Also contributing to this growth was sales to the Company's resort and spa customers. Customer service revenues are also generated by the Company's Hospitality segment. The Company's service offerings include system integration, installation, training, twenty-four hour help desk support, software maintenance and various depot and on-site service options. Customer service revenues were $15.1 million for the three months ended September 30, 2005, an increase of 30% from the $11.6 million for the same period in 2004. This increase was due primarily to systems integration and software maintenance revenues associated with the Company's resort and spa customers. Additionally, the Company increased its field service and support center revenue for its restaurant customers by 20% or $1 million. This was partially offset by a decline in installation revenue due to a greater number of customer's performing self-installation. Contract revenues from the Company's Government segment were $14.3 million for the three months ended September 30, 2005, an increase of 14% when compared to the $12.5 million recorded in the same period in 2004. The primary reason for this growth was an $829,000 or 12% increase in information technology outsourcing revenue for contracts for facility operations at U.S. Department of Defense Telecommunication sites throughout the world. Also, contributing to this increase was a $490,000 increase in revenue under the Company's Logistics Management Program. Product margins for the three months ended September 30, 2005 were 42.1%, an increase from 34.4% for the three months ended September 30, 2004. This increase in margins was primarily attributable to higher software revenue. This
software revenue was generated from the Company's resort, spa and restaurant customers. The increase was also due to a large integration project for a major customer in 2004 that involved lower margin peripheral hardware products. This project has been substantially completed. Customer Service margins were 23.6% for the three months ended September 30, 2005 compared to 13.5% for the same period in 2004. This increase was primarily due to service integration and software maintenance revenue associated with the Company's resort and spa products. The increase was also due to additional service contracts for the Company's restaurant customers. Contract margins were 7% for the three months ended September 30, 2005 unchanged from the same period in 2004. In 2005, the Company benefited by higher margins or certain fixed price jobs offset by higher than anticipated award fees in 2004 on certain image and digital processing contracts. The most significant components of contract costs in 2005 and 2004 were labor and fringe benefits. For the quarter ended September 30, 2005 labor and fringe benefits were $9.6 million or 73% of contract costs compared to $8.7 million or 75% of contract costs for the same period in 2004. Selling, general and administrative expenses are virtually all related to the Company's Hospitality segment. Selling, general and administrative expenses for the three months ended September 30, 2005 were $7.5 million, an increase of 53% from the $4.9 million expended for the same period in 2004. The increase was primarily attributable to a rise in selling and marketing expenses due to sales of the Company's resort and spa software products. Research and development expenses relate primarily to the Company's Hospitality segment. Research and development expenses were $2.5 million for the three months ended September 30, 2005, an increase of 96% from the $1.3 million recorded in 2004. The increase was primarily attributable to the Company's development efforts in its resort and spa products. The Company also increased its investment in its traditional hardware and software restaurant products. Amortization of identifiable intangible assets was $246,000 for the quarter ended September 30, 2005 and relates to the October 1, 2004 acquisition of Springer-Miller Systems, Inc. Other income, net, was $191,000 for the three months ended September 30, 2005 compared to $190,000 for the same period in 2004. Other income primarily includes rental income and foreign currency gains and losses. There were no significant variances in 2005 as compared to 2004.
Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense was $41,000 for the three months ended September 30, 2005 compared to $27,000 in the third quarter of 2004. The increase is due to a higher average borrowing rate in 2005 when compared to 2004. For the three months ended September 30, 2005, the Company's effective tax rate was 38.3%, compared to 38.5% in 2004. The variance from the federal statutory rate in 2005 and 2004 was primarily due to state income taxes. Results of Operations -- Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004 The Company reported revenues of $152.2 million for the nine months ended September 30, 2005, an increase of 23% from the $123.5 million reported for the nine months ended September 30, 2004. The Company's net income for the nine months ended September 30, 2005 was $6.2 million, or $.64 diluted net income per share, compared to net income of $3.8 million and $.41 per diluted share for the same period in 2004. Product revenues from the Company's Hospitality segment were $66.8 million for the nine months ended September 30, 2005, an increase of 23% from the $54.2 million recorded in 2004. The primary factor contributing to the increase was software revenue from the Company's resort and spa customers. Also contributing to this growth were sales to new and existing restaurant technology customers. Customer service revenues are also generated by the Company's Hospitality segment. The Company's service offerings include system integration, installation, training, twenty-four hour help desk support, software maintenance and various depot and on-site service options. Customer service revenues were $42.9 million for the nine months ended September 30, 2005, an increase of 32% from the $32.5 million for the same period in 2004. This increase was due primarily to systems integration and software maintenance revenues associated with the Company's resort and spa customers. Contract revenues from the Company's Government segment were $42.5 million for the nine months ended September 30, 2005, an increase of 16% when compared to the $36.8 million recorded in the same period in 2004. Contributing to this growth was a $1.5 million or 7% increase in information technology outsourcing revenue from contracts for facility operations at critical U.S. Department of Defense telecommunication sites across the globe. These outsourcing operations directly support U.S. Navy, Air Force and Army operations as the military seeks to convert its information technology communications facilities into contractor-run operations and to meet new requirements with contractor support. Also contributing to this growth was a $1.4 million increase in revenue from the Company's Logistics Management Program. The remainder of the increase is primarily due to contacts involving signal and processing technology.
Product margins for the nine months ended September 30, 2005 were 40.1%, an increase from 32.8% for the nine months ended September 30, 2004. This increase in margins was primarily attributable to higher software revenue. This software revenue was generated from the Company's resort, spa and restaurant customers. Customer Service margins were 23.3% for the nine months ended September 30, 2005 compared to 13.6% for the same period in 2004. This increase was primarily due to service integration and software maintenance revenue associated with the Company's resort and spa products. Contract margins were 6.4% for the nine months ended September 30, 2005 versus 6.8 % for the same period in 2004. The decline in contract margins is primarily attributable to a higher than anticipated performance-based award fee on an imagery information technology contract in 2004. The most significant components of contract costs in 2005 and 2004 were labor and fringe benefits. For the nine months ended September 30, 2005 labor and fringe benefits were $29 million or 73% of contract costs compared to $26.3 million or 77% of contract costs for the same period in 2004. 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, 2005 were $22.2 million, an increase of 46% from the $15.1 million expended for the same period in 2004. The increase was primarily attributable to a rise in selling and marketing expenses due to sales of the Company's resort and spa software products and the Company's traditional hardware products. Research and development expenses relate primarily to the Company's Hospitality segment. Research and development expenses were $6.9 million for the nine months ended September 30, 2005, an increase of 75% from the $3.9 million recorded in 2004. The increase was primarily attributable to the Company's development efforts in its newly acquired resort and spa products. The Company also increased its investment in its traditional hardware and software products. Amortization of identifiable intangible assets was $736,000 for the nine months ended September 30, 2005 and relates to the October 1, 2004 acquisition of Springer-Miller Systems, Inc. Other income, net, was $495,000 for the nine months ended September 30, 2005 compared to $588,000 for the same period in 2004. Other income primarily includes rental income and foreign currency gains and losses. The decline was due to lower currency gains in 2005.
Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense was $184,000 for the nine months ended September 30, 2005 compared to $146,000 recorded in 2004. The increase was due to a greater average borrowing rate in 2005. For the nine months ended September 30, 2005, the Company's effective tax rate was 38.1%, unchanged from 2004. The variance from the federal statutory rate in 2005 and 2004 was primarily due to state income taxes. Liquidity and Capital Resources The Company's primary sources of liquidity have been cash flow from operations and lines of credit with various banks. Cash provided by continuing operations was $7.5 million for the nine months ended September 30, 2005 compared to $12.8 million for 2004. In 2005, cash flow was generated primarily from operating profits and the timing of vendor payments for material purchases. This was partially offset by an increase in accounts receivable and inventory. In 2004, cash flow benefited from a reduction in accounts receivable, operating profits for the period and timing of vendor payments. Cash used in investing activities was $2 million for the nine months ended September 30, 2005 compared to $1.8 million for the same period in 2004. In 2005, capital expenditures were $1.4 million and were principally for manufacturing and research and development equipment. Capitalized software costs relating to software development of Hospitality segment products were $528,000 in 2005. 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 Hospitality segment products were $597,000 in 2004. Cash used in financing activities was $8.8 million for the nine months ended September 30, 2005 versus $6.5 million for the same period in 2004. In 2005, the Company reduced its short-term bank borrowings by $10.2 million and received $1.5 million from the exercise of employee stock options. During 2004, the Company reduced its short-term bank borrowings by $7 million and received $551,000 from the exercise of employee stock options. The Company has an aggregate availability of $20,000,000 in bank lines of credit. One line totaling $12,500,000 bears interest at the bank borrowing rate (6% at September 30, 2005) and is subject to loan covenants including a debt to tangible net worth ratio of 1.4 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 Hospitality segment and (b) 40% of the Company's inventory, excluding work in process. This line expires on April 30, 2006. The second 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 (6.75% at September 30, 2005). 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, 2005. At September 30, 2005, there were no borrowings under these lines. During fiscal year 2005, the Company anticipates that its capital requirements will be approximately $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 Hospitality 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 consists of sales of the Company's standard point-of-sale and property management systems of the Hospitality segment. The Company recognizes revenue from the sale of complete restaurant systems (which primarily includes hardware or hardware and software) upon delivery to the customer site or upon installation for certain software products. 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, 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. 104, "Revenue Recognition." The Company's contract revenues generated by the Government segment result primarily from contract services performed for the U.S. Government under a variety of cost-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 from 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 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 consolidated financial statements at their estimated realizable value. Contract costs, including indirect expenses, are subject to audit and adjustment through negotiations between the Company and U.S. 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 Hospitality 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 over the estimated economic life when the product is available for general release to customers. Goodwill Following Financial Accounting Standards Board issuance of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets", (SFAS 142), the Company tests all goodwill for impairment annually, or more frequently if circumstances indicate potential impairment. The Company has elected to annually test for impairment 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, 2004, 2003 and 2002, aggregate sales to our top
two Hospitality segment customers, McDonald's and Yum! Brands, amounted to 51%, 50% and 51%, respectively, of total revenues. For the nine months ended September 30, 2005 and 2004, sales to those customers were 40% and 51%, 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 $3.9 million as of September 30, 2005. 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, 2004, 2003 and 2002, we derived 71%, 70% and 72%, respectively, of our total revenues from the Hospitality industry, primarily the quick service restaurant marketplace. For the nine
months ended September 30, 2005 and 2004, revenues from the Hospitality industry were 72% and 70%, 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 restaurant 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, 2004, 2003 and 2002, we derived 29%, 30% and 28%, respectively, of our total revenues from contracts to provide technical services to U.S. Government agencies and defense contractors. For the nine months ended September 30, 2005 and 2004, revenues from such contracts were 28% and 30%, respectively, of total revenues. Contracts with U.S. Government agencies typically provide that such contracts are terminable at the convenience of the U.S. Government. If the U.S. 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 changes in scope of work. 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 various U.S. Government agencies and departments pursuant to fixed-price, cost-plus fixed fee and time-and-material, prime contracts and subcontracts. Approximately 62% of the revenue that we derived from Government contracts for the nine months ended September 30, 2005 came from fixed-price or time-and-material contracts. The balance of the revenue that we derived from Government contracts in the first nine months of 2005 primarily came from cost-plus fixed fee contracts. Most of our contracts are for one-year to five-year terms. While 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, such 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, 2004, 2003 and 2002, our net revenues from sales outside the United States were 9%, 11% and 11%, respectively, of the Company's total revenues. For the nine months ended September 30, 2005 and 2004, sales outside the United States were 10% and 9%,
respectively, of the 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 affect on our future international sales and, consequently, on our operating results. Item 3. Quantitative and Qualitative Disclosures about Market Risk INFLATION Inflation had little affect on revenues and related costs during the first nine months of 2005. Management anticipates that margins will be maintained at acceptable levels to minimize the affects of inflation, if any. INTEREST RATES As of September 30, 2005, the Company has $2 million in variable long-term debt. The Company believes that an adverse change in interest rates of 100 basis points would not have a material impact on our business, financial condition, 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, 2005, 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 the 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 the 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, 2005 that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting.
Item 6. Exhibits and Reports on Form 8-K List of Exhibits Exhibit No. Description of Instrument ----------- ------------------------- 31.1 Certification of Chairman of the Board and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Vice President, Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chairman of the Board and Chief Executive Officer and Vice President, Chief Financial Officer and Treasurer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Reports on Form 8-K On July 29, 2005, PAR Technology Corporation furnished a report on Form 8-K pursuant to Item 2.02 (Results of Operations and Financial Condition) of that Form relating to its financial information for the quarter ended June 30, 2005, as presented in a press release of July 29, 2005 and furnished thereto as an exhibit. On August 8, 2005, PAR Technology Corporation furnished a report on Form 8-K pursuant to Item 8.01 (Other Events) of that Form relating to the Company's intent to acquire PixelPoint Technologies, Inc. as presented in a press release of August 8, 2005 and furnished thereto as an exhibit.
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, 2005 /s/RONALD J. CASCIANO -------------------------- Ronald J. Casciano Vice President, Chief Financial Officer and Treasurer
Exhibit Index Sequential Page Exhibit Number ------- ------ 31.1 Certification of Chairman of the Board E-1 and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Vice President, Chief E-2 Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chairman of the Board E-3 and Chief Executive Officer and Vice President, Chief Financial Officer and Treasurer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.1 PAR TECHNOLOGY CORPORATION STATEMENT OF EXECUTIVE OFFICER I, John W. Sammon, Jr., certify that: 1. I have reviewed this report on Form 10-Q of PAR Technology Corporation; 2. Based on my knowledge, this 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. [Reserved] 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 evaluations; 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 and 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 the 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; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/John W. Sammon, Jr. ------------------------------- John W. Sammon, Jr. Chairman of the Board and Chief Executive Officer E-1
Exhibit 31.2 PAR TECHNOLOGY CORPORATION STATEMENT OF EXECUTIVE OFFICER I, Ronald J. Casciano, certify that: 1. I have reviewed this report on Form 10-Q of PAR Technology Corporation; 2. Based on my knowledge, this 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. [Reserved] 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 evaluations; 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 and 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 the 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; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/Ronald J. Casciano -------------------------- Ronald J. Casciano Vice President, Chief Financial Officer & Treasurer 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 quarter ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, John W. Sammon, Jr. and Ronald J. Casciano, Chairman of the Board & Chief Executive Officer and Vice President, Chief Financial Officer & 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, that to the best of our knowledge: (1) The Report fully complies with the requirement of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; 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, Jr. - ------------------------------- John W. Sammon, Jr. Chairman of the Board & Chief Executive Officer November 14, 2005 /s/Ronald J. Casciano - ------------------------------- Ronald J. Casciano Vice President, Chief Financial Officer & Treasurer November 14, 2005 E-3