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, 2006. 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of registrant's common stock, as of October 31, 2006 - 14,181,232 shares.
PAR TECHNOLOGY CORPORATION TABLE OF CONTENTS FORM 10-Q PART I FINANCIAL INFORMATION Item Number ----------- Item 1. Financial Statements (unaudited) - Consolidated Statements of Income for the three and nine months ended September 30, 2006 and 2005 - Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2006 and 2005 - Consolidated Balance Sheets at September 30, 2006 and December 31, 2005 - Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 - 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 1A. Risk Factors Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit Index
PART I - FINANCIAL INFORMATION Item 1. Financial Statements PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 2006 2005 2006 2005 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net revenues: Product ...................................... $ 17,975 $ 22,855 $ 63,705 $ 66,786 Service ...................................... 15,092 15,065 43,723 42,883 Contract ..................................... 15,467 14,277 47,046 42,505 --------- --------- --------- --------- 48,534 52,197 154,474 152,174 --------- --------- --------- --------- Costs of sales: Product ...................................... 10,370 13,239 36,242 40,008 Service ...................................... 11,387 11,517 32,937 32,887 Contract ..................................... 14,600 13,284 43,844 39,793 --------- --------- --------- --------- 36,357 38,040 113,023 112,688 --------- --------- --------- --------- Gross margin ........................... 12,177 14,157 41,451 39,486 --------- --------- --------- --------- Operating expenses: Selling, general and administrative .......... 8,241 7,457 24,510 22,173 Research and development ..................... 2,613 2,483 8,348 6,868 Amortization of identifiable intangible assets 307 246 922 736 --------- --------- --------- --------- 11,161 10,186 33,780 29,777 --------- --------- --------- --------- Operating income .................................. 1,016 3,971 7,671 9,709 Other income, net ................................. 62 191 437 495 Interest expense .................................. (206) (41) (458) (184) --------- --------- --------- --------- Income before provision for income taxes .......... 872 4,121 7,650 10,020 Provision for income taxes ........................ (322) (1,578) (2,750) (3,820) --------- --------- --------- --------- Net income ........................................ $ 550 $ 2,543 $ 4,900 $ 6,200 ========= ========= ========= ========= Earnings per share Basic ........................................ $ .04 $ .18 $ .35 $ .45 Diluted ...................................... $ .04 $ .17 $ .33 $ .42 Weighted average shares outstanding Basic ........................................ 14,181 13,978 14,168 13,696 ========= ========= ========= ========= Diluted ...................................... 14,646 14,751 14,751 14,604 ========= ========= ========= ========= </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, ---------------------- ---------------------- 2006 2005 2006 2005 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net income $ 550 $ 2,543 $ 4,900 $ 6,200 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 62 (41) 183 (406) --------- --------- --------- --------- Comprehensive income $ 612 $ 2,502 $ 5,083 $ 5,794 ========= ========= ========= ========= </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, 2006 2005 Assets --------- ---------- Current assets: Cash and cash equivalents .................. $ 2,098 $ 4,982 Accounts receivable-net .................... 47,900 40,781 Inventories-net ............................ 34,839 29,562 Income tax refunds ......................... 2,353 879 Deferred income taxes ...................... 4,442 5,690 Other current assets ....................... 3,192 2,598 --------- --------- Total current assets ............... 94,824 84,492 Property, plant and equipment - net ............... 7,550 8,044 Goodwill .......................................... 20,885 20,622 Intangible assets - net ........................... 8,902 9,904 Other assets ...................................... 2,695 2,087 --------- --------- $ 134,856 $ 125,149 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt .......... $ 129 $ 76 Borrowings under lines of credit ........... 9,899 3,500 Accounts payable ........................... 12,913 12,703 Accrued salaries and benefits .............. 7,362 9,725 Accrued expenses ........................... 2,003 2,352 Customer deposits .......................... 3,545 3,973 Deferred service revenue ................... 10,616 11,332 --------- --------- Total current liabilities ........... 46,467 43,661 --------- --------- Long-term debt .................................... 1,889 1,948 --------- --------- Deferred income taxes ............................. 751 201 --------- --------- Other long-term liabilities ....................... 1,649 847 --------- --------- Shareholders' Equity: Preferred stock, $.02 par value, 1,000,000 shares authorized ............ -- -- Common stock, $.02 par value, 29,000,000 shares authorized; 15,959,536 and 15,914,958 shares issued; 14,181,232 and 14,136,654 outstanding .. 319 318 Capital in excess of par value ............. 37,799 37,271 Retained earnings .......................... 52,338 47,442 Accumulated other comprehensive loss ....... (428) (611) Treasury stock, at cost, 1,778,304 shares .. (5,928) (5,928) --------- --------- Total shareholders' equity .......... 84,100 78,492 --------- --------- $ 134,856 $ 125,149 ========= ========= See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <TABLE> <CAPTION> For the nine months ended September 30, --------------------- 2006 2005 -------- --------- <S> <C> <C> Cash flows from operating activities: Net income ................................................... $ 4,900 $ 6,200 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ........................... 2,858 2,780 Provision for bad debts ................................. 363 880 Provision for obsolete inventory ........................ 1,193 3,054 Equity based compensation ............................... 200 -- Tax benefit of stock option exercises ................... -- 2,853 Deferred income tax ..................................... 1,675 (272) Changes in operating assets and liabilities: Accounts receivable ................................. (7,482) (4,999) Inventories ......................................... (6,470) (5,638) Income tax refunds .................................. (1,474) -- Other current assets ................................ (594) 110 Other assets ........................................ (608) (578) Accounts payable .................................... 210 2,934 Accrued salaries and benefits ....................... (2,363) 210 Accrued expenses .................................... (349) (939) Customer deposits ................................... (428) (589) Deferred service revenue ............................ (716) 728 Other long-term liabilities ......................... 802 636 -------- -------- Net cash provided by (used in) operating activities (8,283) 7,370 -------- -------- Cash flows from investing activities: Capital expenditures ......................................... (962) (1,444) Capitalization of software costs ............................. (399) (528) -------- -------- Net cash used in investing activities ............. (1,361) (1,972) -------- -------- Cash flows from financing activities: Net borrowings (payments) under lines-of-credit agreements ... 6,399 (10,246) Payments of long-term debt ................................... (6) (51) Proceeds from the exercise of stock options .................. 160 1,503 Excess tax benefit of stock option exercises ................. 169 -- Cash dividend in lieu of fractional shares on stock split .... (4) -- -------- -------- Net cash provided by (used in) financing activities 6,718 (8,794) -------- -------- Effect of exchange rate changes on cash and cash equivalents ..... 42 (406) -------- -------- Net decrease in cash and cash equivalents ........................ (2,884) (3,802) Cash and cash equivalents at beginning of period ................. 4,982 8,696 -------- -------- Cash and cash equivalents at end of period ....................... $ 2,098 $ 4,894 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ..................................................... $ 426 $ 219 Income taxes, net of refunds ................................. 2,316 1,293 </TABLE> 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 U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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, 2006 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, 2005 included in the Company's December 31, 2005 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, valuation allowances for receivables, inventories and deferred income tax assets. Actual results could differ from those estimates. 2. On November 2, 2006, the Company acquired substantially all of the assets of SIVA(R)Corporation. The purchase price was $6.7 million and consisted of $1.1 million worth of Company stock (125,549 shares of PAR Technology Corporation common stock issued out of treasury) and the remainder in cash. The purchase price is also subject to price contingencies based upon future performance and other conditions. Based in Delray Beach, Florida, SIVA is the creator of point-of-sale, kitchen, back office and operations intelligence software that use web based next generation technologies to improve operational efficiency and reduce the cost of technology ownership for multi-unit restaurant operations. 3. 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 $542,000 in Company stock (27,210 shares of PAR Technology Corporation common stock issued out of treasury) a promissory note for $671,000 and the remainder in cash. The Company also incurred $344,000 in direct acquisition costs relating to this purchase. The purchase price is also subject to price contingencies based upon future revenue performance against certain established targets. 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. On December 6, 2005, the Company also acquired C(3)I Associates ("C(3)I"), a Government technology services business. The Company paid $589,000 in cash and assumed certain liabilities. On an unaudited proforma basis,
assuming the completed acquisitions 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, 2005 ended September 30, 2005 ------------------------ ------------------------ Net revenues ................. $ 53,761 $ 157,029 Net income ................... $ 2,620 $ 6,519 Earnings per share: Basic ..................... $ .19 $ .48 Diluted ................... $ .18 $ .45 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, 2006 2005 --------- --------- Finished goods ............... $ 9,874 $ 7,217 Work in process .............. 1,680 1,874 Component parts .............. 6,090 4,693 Service parts ................ 17,195 15,778 ------- ------- $34,839 $29,562 ======= ======= At September 30, 2006 and December 31, 2005, the Company had recorded reserves for shrinkage, excess and obsolete inventory of $3,985,000 and $4,189,000, respectively. 5. Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R Share-Based Payment (SFAS 123R) on a modified prospective basis. This standard requires the Company to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost is recognized as compensation expense over the vesting period of the awards. Total compensation expense included in operating expenses for the three and nine months ended September 30, 2006 was $62,000 and $200,000, respectively. As of September 30, 2006, there were 1,007,729 stock options outstanding. At September 30, 2006, the unrecognized compensation expense related to non vested option awards was $309,967 (net of estimated forfeitures). Prior to adopting SFAS 123R on January 1, 2006, the Company's equity based employee compensation awards were accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. For the three and nine months ended September 30, 2005, no equity option based employee compensation
cost is reflected in net income, as all options granted under the Company's stock option plans had an exercise price equal to the underlying common stock price on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions to equity based employee compensation (in thousands, except per share data): For the three months For the nine months ended September 30, ended September 30, 2005 2005 ------------------- ------------------- Net income $ 2,543 $ 6,200 Compensation expense, net of tax (117) (296) --------- --------- Proforma net income $ 2,426 $ 5,904 ========= ========= Earnings per share: As reported -- Basic $ .18 $ .45 -- Diluted $ .17 $ .42 Proforma -- Basic $ .17 $ .43 -- Diluted $ .16 $ .40 In 2005, the Company's 1995 Stock Option plan expired. The 2005 Equity Incentive Plan was approved by the shareholders at the Company's 2006 Annual Meeting. The Company has reserved 1,000,000 shares under its 2005 Equity Incentive Plan. Stock options under this Plan may be incentive stock options or nonqualified stock options. The Plan also provides for restricted stock grants. To date, there have been no restricted stock grants under this Plan. Stock options are nontransferable other than upon death. Option grants generally vest over a one to five year period after the grant and typically expire ten years after the date of the grant. Information with respect to this plan is as follows: Aggregate No. of Shares Weighted Average Intrinsic Value (in thousands) Exercise Price (in thousands) ------------- ---------------- -------------- Outstanding at December 31, 2005 1,037 $ 4.03 $ 15,008 Granted ..................... 15 14.71 (104) Exercised ................... (44) 3.58 660 Forfeited ................... -- -- -------- Outstanding at September 30, 2006 1,008 $ 4.21 $ 4,898 ======== ========= ======== Vested and expected to vest at September 30, 2006 ......... 999 $ 4.17 $ 4,897 ======== ========= ======== Total shares exercisable as of September 30, 2006 ...... 729 $ 3.21 $ 4,275 ======== ========= ========
During the nine months ended September 30, 2006 and 2005, the per-share weighted average fair value of the stock options granted was $1.75 and $4.78, respectively. The fair value of options at the date of the grant was estimated using the Black-Scholes model with the following assumptions for the respective period ending September 30: 2006 2005 -------- --------- Expected option life ........................... 2.3 years 4.9 years Weighted average risk-free interest rate ....... 4.8% 3.5% Weighted average expected volatility............ 62% 43% For the nine month periods ended September 30, 2006 and 2005, the expected option life was based on the Company's historical experience with similar type options. Expected volatility for the nine month periods ended September 30, 2006 and 2005, is based on historical volatility levels of the Company's common stock over the preceding period of time consistent with the expected life. The risk-free interest rate for the nine month period ended September 30, 2006 and 2005 is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life. Stock options outstanding at September 30, 2006 are summarized as follows: Number Range of Outstanding Weighted Average Weighted Average Exercise Prices (in thousands) Remaining Life Exercise Price --------------- -------- ------------- ---------------- $1.25 - $4.00 626 4.2 Years $ 2.32 $4.01 - $7.25 296 7.8 Years $ 5.94 $7.26 - $15.85 86 8.8 Years $ 11.99 -------------- ------ ------------ -------- $1.25 - $15.85 1,008 5.7 Years $ 4.21 ============== ====== ============ ======== 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 weighted average number of common shares utilized in the calculation of the diluted earnings per share does not include anti-dilutive shares aggregating 77,888 and 59,255 for the three and nine months ended September 30, 2006, respectively. There were no anti-dilutive shares for the same periods in 2005.
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, ------------------- 2006 2005 ------- ------- Net income .......................................... $ 550 $ 2,543 ======= ======= Basic: Shares outstanding at beginning of period ...... 14,181 13,929 Weighted average shares issued during the period -- 49 ------- ------- Weighted average common shares, basic .......... 14,181 13,978 ======= ======= Earnings per common share, basic ............... $ .04 $ .18 ======= ======= Diluted: Weighted average common shares, basic .......... 14,181 13,978 Dilutive impact of stock options ............... 465 773 ------- ------- Weighted average common shares, diluted ........ 14,646 14,751 ======= ======= Earnings per common share, diluted ............. $ .04 $ .17 ======= ======= For the nine months ended September 30, ------------------- 2006 2005 ------- ------- Net income .......................................... $ 4,900 $ 6,200 ======= ======= Basic: Shares outstanding at beginning of period ...... 14,137 13,402 Weighted average shares issued during the period 31 294 ------- ------- Weighted average common shares, basic .......... 14,168 13,696 ======= ======= Earnings per common share, basic ............... $ .35 $ .45 ======= ======= Diluted: Weighted average common shares, basic .......... 14,168 13,696 Dilutive impact of stock options ............... 583 908 ------- ------- Weighted average common shares, diluted ........ 14,751 14,604 ======= ======= Earnings per common share, diluted ............. $ .33 $ .42 ======= ======= 7. On November 14, 2005, the Company's Board of Directors declared a 3 for 2 stock split in the form of a stock dividend that was distributed on January 6, 2006 to shareholders of record on December 12, 2005. All share and per share data in these consolidated interim unaudited financial statements and footnotes have been retroactively restated as if the stock split had occurred as of the earliest period presented. 8. The Company's reportable segments are strategic business units that have separate management teams and infrastructures that offer different products and services. The Company has two reportable segments, 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, ---------------------- ---------------------- 2006 2005 2006 2005 --------- ---------- --------- ---------- Net revenues: Hospitality ............. $ 33,067 $ 37,920 $ 107,428 $ 109,669 Government .............. 15,467 14,277 47,046 42,505 --------- --------- --------- --------- Total ............. $ 48,534 $ 52,197 $ 154,474 $ 152,174 ========= ========= ========= ========= Operating income: Hospitality ............. $ 213 $ 3,063 $ 4,647 $ 7,148 Government .............. 803 908 3,024 2,561 --------- --------- --------- --------- 1,016 3,971 7,671 9,709 Other income, net ............ 62 191 437 495 Interest expense ............. (206) (41) (458) (184) --------- --------- --------- --------- Income before provision for income taxes ........... $ 872 $ 4,121 $ 7,650 $ 10,020 ========= ========= ========= ========= Depreciation and amortization: Hospitality ............. $ 835 $ 824 $ 2,531 $ 2,426 Government .............. 10 23 35 66 Other ................... 99 99 292 288 --------- --------- --------- --------- Total ............. $ 944 $ 946 $ 2,858 $ 2,780 ========= ========= ========= ========= Capital expenditures: Hospitality ............. $ 70 $ 468 $ 766 $ 1,189 Government .............. 10 11 10 41 Other ................... 15 94 186 214 --------- --------- --------- --------- Total ............. $ 95 $ 573 $ 962 $ 1,444 ========= ========= ========= ========= Revenues by geographic area: United States ........... $ 41,523 $ 47,414 $ 134,694 $ 137,383 Other Countries ......... 7,011 4,783 19,780 14,791 --------- --------- --------- --------- Total ............. $ 48,534 $ 52,197 $ 154,474 $ 152,174 ========= ========= ========= =========
The following table represents identifiable assets by business segment: (in thousands) September 30, December 31, 2006 2005 --------- ---------- Identifiable assets: Hospitality .............. $119,575 $106,529 Government ............... 9,774 9,015 Other .................... 5,507 9,605 -------- -------- Total ........................ $134,856 $125,149 ======== ======== The following table presents identifiable assets by geographic area based on the location of the asset: (in thousands) September 30, December 31, 2006 2005 -------- -------- United States ................ $127,388 $119,627 Other Countries .............. 7,468 5,522 -------- -------- Total ................. $134,856 $125,149 ======== ======== The following table represents Goodwill by business segment: (in thousands) September 30, December 31, 2006 2005 -------- -------- Hospitality .............. $ 20,349 $ 20,086 Government ............... 536 536 -------- -------- Total ........................ $ 20,885 $ 20,622 ======== ======== 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, ----- ------ ------- ------- 2006 2005 2006 2005 ----- ------ ------- ------- Restaurant Segment: McDonald's Corporation ....... 26% 25% 26% 27% YUM! Brands, Inc. ............ 15% 14% 12% 13% Government Segment: Department of Defense ........ 32% 27% 30% 28% All Others ........................ 27% 34% 32% 32% --- --- --- --- 100% 100% 100% 100% === === === ===
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 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 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 expectations, 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 was founded in 1968, and PAR's revenues since 1980 have been derived predominantly from the sale of hospitality management systems to a large number of customers in restaurants including hardware, software, professional and traditional lifecycle support services. The balance of revenues are driven through contracts from the federal government involving applied technology and I/T outsourcing of military and non-military federal communication facilities. Our Businesses The target market for our products and services is several areas within the hospitality industry, including restaurants, hotels, resorts and spas. PAR has been an approved vendor to McDonald's since 1980, Yum! Brands since 1983 and several other leading concepts over the past 2 1/2 decades. PAR's install base
is comprised of 40,000 plus restaurants around the globe in more than 100 countries, primarily in the quick-serve segment. The Company's management technology software enables the efficient operations of hospitality businesses by managing key data throughout the enterprise and can improve operating efficiencies, labor management and inventory planning. The Company's professional services capability can then assist customers in achieving the critical business functionality and operating return of their individual technology investment. In maintaining long term relationships with our customers and industry leaders, PAR has continued to lead the industry as technology provider to restaurants and the Company's niche in quick-serve stores. McDonald's has over 32,000 restaurants in 121 countries and PAR is currently one of only two approved vendors to market their point-of-sale systems to all of McDonald's stores. Yum!Brands, Inc. (which includes Taco Bell, KFC, Pizza Hut, Long John Silvers and A&W Restaurants) has over 33,000 stores worldwide and PAR is the sole approved management technology vendor to their Taco Bell restaurants as well as the point-of-sale (POS) technology vendor of choice to KFC. Other major hospitality concepts where PAR is the selected technology vendor of choice are: Boston Market, Chick-fil-A, CKE Restaurants (including Hardees and Carl's Jr.), Carnival Cruise Lines, Loews Cineplex and large franchisees of each of the previously mentioned brands. In the fourth quarter of 2005 PAR acquired PixelPoint(R) Technologies, Inc., a privately held hospitality technology company. PixelPoint is a provider of restaurant management software applications for full/table service dining. PixelPoint's product portfolio contains applications in multiple languages and markets this software globally. At the time of acquisition PixelPoint had over 5,000 installations of their software. In the fourth quarter 2004 the Company acquired Springer-Miller Systems, a leader in hospitality management solutions for city-center hotels, destination resorts and spas, golf, timeshare destinations, and casino resorts across the globe. Springer-Miller's Hospitality Management system sets itself apart from the competition through its integrated design and unique approach to guest service. Springer-Miller's product offerings include more than 20 modules that are seamlessly integrated to the Host application. These modules provide the property managers and their employees with the tools necessary to personalize service, surpass even the highest guest expectations and increase property revenues. PAR has maintained a very distinctive customer list including Pebble Beach Resorts, The Four Seasons, the Hard Rock Hotel & Casino, The Mandarin Oriental Hotel Group, and Destination Hotels & Resorts to name a select few. Approximately 30% of the Company's revenues are generated in our Government Business segment. This segment is comprised of two subsidiaries: PAR Government Systems Corporation and Rome Research Corporation. Through these two government contractors, the Company provides I/T and communications support services to the
three principal armed services of the United States: Navy, Air Force and Army. In addition, PAR also offers its services to several non-military U.S. federal, state and local agencies. The Company provides applied technology services to their customers. These services include experimental studies to advanced operational systems that span a broad range of research areas, including radar, image and signal processing, logistics management systems and geospatial services and products. The Company's high Government performance rating allows the Company to continually secure repeat business and long-term client-vendor relationships with their contract customers. This exceptional performance rating also allows the Company to successfully compete for new clients and contracts across the globe. PAR can provide its clients the expertise necessary to facilitate and operate the most complex technological systems and environments that government agencies utilize, while maintaining the highest standards of performance. Summary During the first nine months of 2006, the overall hospitality market continued the positive trend set the previous years as evidenced by the continued strong results reported for the Company's major customers, and in particular, the quick-service restaurant market, including McDonald's and Yum! Brands. In 2005, PAR acquired PixelPoint Technologies and provided the company with the necessary software to penetrate the table-service market. 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 2006 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). The following table sets forth the Company's net revenues by reportable segment (in thousands): For the three months For the nine months ended September 30, ended September 30, ------- -------- -------- -------- 2006 2005 2006 2005 -------- -------- -------- -------- Net revenues: Hospitality ......... $ 33,067 $ 37,920 $107,428 $109,669 Government .......... 15,467 14,277 47,046 42,505 -------- -------- -------- -------- Total consolidated revenue $ 48,534 $ 52,197 $154,474 $152,174 ======== ======== ======== ======== The following discussion and analysis highlights items having a significant effect on operations during the three and nine months ended September 30, 2006. Current performance and results of operation 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, 2006 Compared to Three Months Ended September 30, 2005 The Company reported revenues of $48.5 million for the quarter ended September 30, 2006, a decrease of 7% from the $52.2 million reported for the quarter ended September 30, 2005. The Company's net income for the quarter ended September 30, 2006 was $550,000, or $.04 diluted net income per share, compared to net income of $2.5 million and $.17 per diluted share for the same period in 2005. Product revenues from the Company's Hospitality segment were $18.0 million for the quarter ended September 30, 2006, a decrease of 21% from the $22.9 million recorded in 2005. This decrease was due to a $6.8 million decline in domestic product sales primarily due to lower hardware sales to Hospitality customers. This drop in domestic revenue was partially offset by a $2 million increase in international product sales. This increase was the result of growth in sales to the Company's restaurant customers in Asia and Europe. 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 and various depot and on-site service options. Customer service revenues were $15.1 million for the quarter ended September 30, 2006, virtually unchanged for the same period in 2005. The Company experienced modest growth in its depot, field service and support center revenues for its restaurant customers due to expansion of the Company's customer base. This was offset by a decline in installation revenue due to the timing of customer installations. Contract revenues from the Company's Government segment were $15.5 million for the quarter ended September 30, 2006, an increase of 8% when compared to the $14.3 million recorded in the same period in 2005. The primary factor contributing to the growth was a $722,000 increase in applied technology contracts including the Company's work in providing technical expertise for the development of battle planning software used by the Air Force. Also, contributing to the increase was revenue from the Company's information technology outsourcing contracts for facility operations at critical U.S. Department of Defense telecommunication sites across the globe. These outsourcing operations provided by the Company directly support U.S. Navy, Air Force and Army operations as they seek to convert their military information technology communications facilities into contractor-run operations and to meet new requirements with contractor support. Product margins for the quarter ended September 30, 2006 were 42.3%, an increase of 20 basis points from the 42.1% for the quarter ended September 30, 2005. This increase in margins was primarily attributable to improved hardware margins on the Company's restaurant products.
Customer Service margins were 24.5% for the quarter ended September 30, 2006 compared to 23.6% for the same period in 2005. This increase is due to lower material costs and continuous improvement in operational efficiencies in several service areas. Contract margins were 5.6% for the quarter ended September 30, 2006 versus 7% for the same period in 2005. The decrease is due to contract mix and a slight decline in performance on certain fixed price contracts. The most significant components of contract costs in 2006 and 2005 were labor and fringe benefits. For the quarter ended September 30, 2006, labor and fringe benefits were $11.4 million or 78% of contract costs compared to $9.6 million or 73% of contract costs for the same period in 2005. 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, 2006 were $8.2 million, an increase of 11% from the $7.5 million expense for the same period in 2005. This increase was primarily due to start up costs incurred in anticipation of a new service contract with a restaurant customer, which began on October 1, 2006. This increase is also due to a rise in sales and marketing expenses associated with restaurant products as the Company is planning for future growth including in international markets. The Company's 2005 acquisition of PixelPoint Technologies, Inc. also contributed to this increase. Research and development expenses relate primarily to the Company's Hospitality segment. Research and development expenses were $2.6 million for the quarter ended September 30, 2006, an increase of 5% from the $2.5 million recorded in 2005. The increase was primarily attributable to the Company's continued research and development in its hardware and software products for its restaurant, resort and spa customers. The increase also reflects the research and development of its recently acquired PixelPoint subsidiary. Amortization of identifiable intangible assets was $307,000 for the third quarter of 2006 compared to $246,000 for 2005. The increase is primarily due to amortization relating to the acquisition of PixelPoint Technologies, Inc. on October 4, 2005. Other income, net, was $62,000 for the quarter ended September 30, 2006 compared to $191,000 for the same period in 2005. Other income primarily includes rental income and foreign currency gains and losses. The decrease is primarily due to additional foreign currency losses in 2006 compared to 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 $206,000 for the quarter ended September 30, 2006 as compared to $41,000 in 2005. The Company experienced a higher borrowing interest rate and higher average borrowings in 2006 when compared to 2005. For the quarter ended September 30, 2006, the Company's effective income tax rate was 36.9%, compared to 38.3% in 2005. The variance from the federal statutory rate in 2006 and 2005 was primarily due to state income taxes, offset by benefits related to export sales as well as tax benefits related to domestic production activities. Results of Operations -- Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005 The Company reported revenues of $154.5 million for the nine months ended September 30, 2006, an increase of 1.5% from the $152.2 million reported for the nine months ended September 30, 2005. The Company's net income for the nine months ended September 30, 2006 was $4.9 million, or $.33 diluted net income per share, compared to net income of $6.2 million and $.42 per diluted share for the same period in 2005. Product revenues from the Company's Hospitality segment were $63.7 million for the nine months ended September 30, 2006, a decrease of 5% from the $66.8 million recorded in 2005. In the domestic restaurant market the Company experienced an increase in the sales of its software products which was more than offset by a decline in hardware sales resulting in $7.4 million decline in product revenue. Internationally, product revenues grew $4.3 million primarily due to hardware and software sales to restaurant customers in Asia and Europe. 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 and various depot and on-site service options. Customer service revenues were $43.7 million for the nine months ended September 30, 2006, an increase of 2% from the $42.9 million for the same period in 2005. The increase was due to a 10% or $2.2 million growth in the Company's field service and support center revenue for its restaurant customers due to expansion of the Company's customer base. Additionally, systems integration and software maintenance revenues from the Company's resort and spa customers contributed to its revenue growth. This was partially offset by a decline in installation revenue due to the timing of customer installations.
Contract revenues from the Company's Government segment were $47 million for the nine months ended September 30, 2006, an increase of 11% when compared to the $42.5 million recorded in the same period in 2005. This growth was primarily due to a $2.7 million increase in applied technology contracts including technical expertise for the development of battle planning software used by the Air Force. Also contributing to this growth was a $1.8 million 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 provided by the Company directly support U.S. Navy, Air Force and Army operations as they seek to convert their military information technology communications facilities into contractor-run operations and to meet new requirements with contractor support. Product margins for the nine months ended September 30, 2006 were 43.1%, an increase of 300 basis points from the 40.1% for the nine months ended September 30, 2005. 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 including license sales of the Company's newly acquired PixelPoint software. Customer Service margins were 24.7% for the nine months ended September 30, 2006 compared to 23.3% for the same period in 2005. The increase was due to continuous improvements in operational effectiveness in certain service areas offset by a decline in installation margins for restaurant customers due to the drop in installation revenue for the period. Contract margins were 6.8% for the nine months ended September 30, 2006 versus 6.4% for the same period in 2005. The margin increase resulted from a favorable cost share adjustment on our Logistics Management program and higher margins on certain fixed price contracts. The most significant components of contract costs in 2006 and 2005 were labor and fringe benefits. For the nine months ended September 30, 2006, labor and fringe benefits were $34.2 million or 78.1% of contract costs compared to $29 million or 73% of contract costs for the same period in 2005. 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, 2006 were $24.5 million, an increase of 11% from the $22.2 million expense for the same period in 2005. The increase was primarily attributable to a rise in selling and marketing expenses related to sales of the Company's traditional hardware and software products. Also contributing to the increase was the Company's 2005 acquisition of PixelPoint Technologies, Inc. and start up costs relating to a new service contract with a restaurant customer.
Research and development expenses relate primarily to the Company's Hospitality segment. Research and development expenses were $8.4 million for the nine months ended September 30, 2006, an increase of 22% from the $6.9 million recorded in 2005. The increase was primarily attributable to the Company's continuing research and development related to its hardware and software products for its restaurant, resort and spa customers also contributing to the increase was the Company's acquisition of PixelPoint in 2005. Amortization of identifiable intangible assets was $922,000 for the nine months ended September 30, 2006 compared to $736,000 for 2005. The increase is primarily due to amortization relating to the acquisition of PixelPoint Technologies, Inc. on October 4, 2005. Other income, net, was $437,000 for the nine months ended September 30, 2006 compared to $495,000 for the same period in 2005. Other income primarily includes rental income and foreign currency gains and losses. The decrease in 2006 resulted primarily from a decline in currency gains partially offset by an increase in rental income. Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense was $458,000 for the nine months ended September 30, 2006 as compared to $184,000 in 2005. The Company experienced a higher borrowing interest rate and higher average borrowings outstanding in 2006 which compared to 2005. For the nine months ended September 30, 2006, the Company's effective income tax rate was 35.9%, compared to 38.1% in 2005. The variance from the federal statutory rate in 2006 and 2005 was primarily due to state income taxes, offset by benefits related to export sales as well as tax benefits related to domestic production activities. 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 used in operations was $8.3 million for the nine months ended September 30, 2006 compared to cash provided by operations of $7.4 million for 2005. In 2006, cash was negatively impacted by the timing of customer receipts and by inventory purchases in anticipation of future demand. 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 purchases.
Cash used in investing activities was $1.4 million for the nine months ended September 30, 2006 compared to $2 million from the same period in 2005. In 2006, capital expenditures were $962,000 and were principally for manufacturing equipment and information technology equipment and software for internal use. Capitalized software costs relating to software development of Hospitality segment products were $399,000 in 2006. In 2005, capital expenditures were $1.4 million and were primarily for manufacturing and research and development equipment. Capitalized software costs relating to software development of Hospitality segment products were $528,000 in 2005. Cash provided by financing activities was $6.7 million for the nine months ended September 30, 2006 versus cash used by financing activities of $8.8 million in 2005. During 2006, the Company increased its short-term bank borrowings by $6.4 million and received $160,000 from the exercise of employee stock options. 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. The Company has an aggregate availability of $20,000,000 in unsecured bank lines of credit which expire in April, 2009. One line totaling $12,500,000 bears interest at the bank borrowing rate (6.3% at September 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 (6.3% at September 30, 2006). At September 30, 2006, there was $9,899,000 outstanding under these lines and $10,101,000 available under these lines. These facilities contain certain loan covenants including a leverage ratio of greater than 3.5 to 1 and a fixed charge coverage ratio of not greater than 4 to 1. During fiscal year 2006, 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, lines 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 U.S. generally accepted accounting principles (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 (SAB) No. 104, "Revenue Recognition" and the AICPA Statement of Position (SOP) 97-2, "Software Revenue Recognition". Product revenues consist of sales of the Company's standard point-of-sale and property management systems of the Hospitality segment. Product revenues include both hardware and software sales. 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. The Company also records service revenues relating to its standard point-of-sale and property management systems of the Hospitality segment. Service revenues include installation and training, support maintenance for both hardware and software products, and field and depot repair. For elements of service revenues, such as
installation and training, revenue is based upon standard hourly/daily rates and revenue is recognized as the services are performed. For hardware and software support maintenance, revenue is based on established renewal rates. Service revenues from maintenance contracts are recognized ratably over the related contract period. For depot repair, revenue is charged based on established flat rates for the items being repaired. The individual product and service offerings that are included in arrangements with our customers are identified and priced separately to the customer based upon the stand alone price for each individual product or service sold in the arrangement irrespective of the combination of products and services which are included in a particular arrangement. As such, the units of accounting are based on each individual product and service sold, and revenue is allocated to each element based on vendor specific objective evidence (VSOE) of fair value. VSOE of fair value for each individual product and service is based on separate individual prices of these products and services. The sales price used to establish fair value is the sales price of the element when it is sold individually in a separate arrangement and not as a separate element in a multiple element arrangement. 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 for fixed-price contracts is recognized as labor hours are delivered which approximates the straight-line basis of the life of the 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, with cost determined using the first-in, first-out (FIFO) method. 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 technological 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 in the fourth quarter of its fiscal year. 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 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.
Recent Accounting Pronouncements FASB Interpretation 48 was issued in July 2006 to clarify the criteria for recognizing tax benefits under FASB Statement No. 109, Accounting for Income Taxes. The Interpretation defines the threshold for recognizing the benefits of tax-return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority and will affect many companies' reported results and their disclosures of uncertain tax positions. The Interpretation does not prescribe the type of evidence required to support meeting the more-likely-than-not threshold, stating that it depends on the individual facts and circumstances. The benefit recognized for a tax position meeting the more-likely-than-not criterion is measured based on the largest benefit that is more than 50 percent likely to be realized. The measurement of the related benefit is determined by considering the probabilities of the amounts that could be realized upon ultimate settlement, assuming the taxing authority has full knowledge of all relevant facts and including expected negotiated settlements with the taxing authority. Interpretation 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006 (the Company's 2007 fiscal year). The Company is currently analyzing the financial statement impact of adopting this pronouncement. In September 2006, SEC Staff Accounting Bulletin No. 108 was issued to provide guidance on Quantifying Financial Statement Misstatements. Staff Accounting Bulletin No. 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. The SAB requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The SAB does not change the staff's previous guidance in SAB 99 on evaluating the materiality of misstatements. When the effect of initial adoption is determined to be material, the SAB allows registrants to record that effect as a cumulative-effect adjustment to beginning-of-year retained earnings. The requirements are effective for annual financial statements covering the first fiscal year ending after November 15, 2006 (the Company's 2006 fiscal year). 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 2006. Management anticipates that margins will be maintained at acceptable levels to minimize the affects of inflation, if any.
INTEREST RATES As of September 30, 2006, the Company has $2 million in variable long-term debt and $9.9 million in variable short-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 the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company's " disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) of the Company. These officers have concluded that our disclosure controls and procedures are effective. As such, we believe that all material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic filings with the Securities and Exchange Commission (i) is recorded, processed, summarized and reported within the required time period, and (ii) is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. (b) Changes in Internal Controls. There was no 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, 2006 that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting.
PART II - OTHER INFORMATION Item 1A. Risk Factors We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section describes some, but not all, of the risks and uncertainties that could have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock, and could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. 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, 2005, 2004 and 2003, aggregate sales to our top two Hospitality segment customers, McDonald's and Yum! Brands, amounted to 41%, 51% and 50%, respectively, of total revenues. For the nine months ended September 30, 2006 and 2005, sales to those customers were 38% and 40%, 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 $3.1 million as of September 30, 2006. 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, 2005, 2004 and 2003, we derived 73%, 71% and 70%, respectively, of our total revenues from the Hospitality industry, primarily the quick service restaurant marketplace. For the nine months ended September 30, 2006 and 2005, revenues from the Hospitality industry were 70% and 72%, 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, 2005, 2004 and 2003, we derived 27%, 29% and 30%, 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, 2006 and 2005, revenues from such contracts were 30% and 28%, 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 64% of the revenue that we derived from Government contracts for the year ended December 31, 2005 came from fixed-price or time-and-material contracts. The balance of the revenue that we derived from Government contracts in 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 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, 2005, 2004 and 2003, our net revenues from sales outside the United States were 11%, 9% and 11%, respectively, of the Company's total revenues. For the nine months ended September 30, 2006 and 2005, sales outside the United States were 13% and 10%, 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.
OUR BUSINESS DEPENDS ON A LARGE NUMBER OF HIGHLY QUALIFIED PROFESSIONAL EMPLOYEES AND, IF WE ARE NOT ABLE TO RECRUIT AND RETAIN A SUFFICIENT NUMBER OF THESE EMPLOYEES, WE WOULD NOT BE ABLE TO PROVIDE HIGH QUALITY SERVICES TO OUR CURRENT AND FUTURE CUSTOMERS, WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR REVENUES AND OPERATING RESULTS. We actively compete for qualified professional staff. The availability or lack thereof of qualified professional staff may affect our ability to develop new products and to provide services and meet the needs of our customers in the future. An inability to fulfill customer requirements due to a lack of available qualified staff at agreed upon salary rates may adversely impact our operating results in the future. A SIGNIFICANT PORTION OF OUR TOTAL ASSETS CONSISTS OF GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS, WHICH ARE SUBJECT TO A PERIODIC IMPAIRMENT ANALYSIS AND A SIGNIFICANT IMPAIRMENT DETERMINATION IN ANY FUTURE PERIOD COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS EVEN WITHOUT A SIGNIFICANT LOSS OF REVENUE OR INCREASE IN CASH EXPENSES ATTRIBUTABLE TO SUCH PERIOD. We have goodwill and identifiable intangible assets totaling approximately $20.9 million and $8.9 million at September 30, 2006, respectively, resulting primarily from several business acquisitions. At least annually, we evaluate goodwill and identifiable intangible assets for impairment based on the fair value of the operating business unit to which these assets relate. This estimated fair value could change if we are unable to achieve operating results at the levels that have been forecasted, the market valuation of such companies decreases based on transactions involving similar companies, or there is a permanent, negative change in the market demand for the services offered by the business unit. These changes could result in an impairment of the existing goodwill and identifiable intangible asset balances that could require a material non-cash charge to our results of operations. Item 4. Submission of Matters to a Vote of Security Holders None.
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 26, 2006, 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, 2006, as presented in a press release of July 27, 2006 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 9, 2006 /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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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 9, 2006 /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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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 9, 2006 /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, 2006 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 9, 2006 /s/Ronald J. Casciano - ------------------------------- Ronald J. Casciano Vice President, Chief Financial Officer & Treasurer November 9, 2006 E-3