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, 2007. 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, 2007 - 14,379,330 shares.
PAR TECHNOLOGY CORPORATION TABLE OF CONTENTS FORM 10-Q PART I FINANCIAL INFORMATION Item Number ----------- Item 1. Financial Statements (unaudited) - Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006 - Consolidated Statements of Comprehensive Income (Loss)for the three and nine months ended September 30, 2007 and 2006 - Consolidated Balance Sheets at September 30, 2007 and December 31, 2006 - Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 - 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 5. Other Information Item 6. Exhibits Signatures Exhibit Index
PART I - FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 2007 2006 2007 2006 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net revenues: Product ...................................... $ 18,066 $ 17,975 $ 53,092 $ 63,705 Service ...................................... 17,006 15,092 48,635 43,723 Contract ..................................... 16,505 15,467 47,558 47,046 --------- --------- --------- --------- 51,577 48,534 149,285 154,474 --------- --------- --------- --------- Costs of sales: Product ...................................... 10,681 10,370 31,688 36,242 Service ...................................... 13,238 11,387 37,290 32,937 Contract ..................................... 15,256 14,600 44,462 43,844 --------- --------- --------- --------- 39,175 36,357 113,440 113,023 --------- --------- --------- --------- Gross margin ................................. 12,402 12,177 35,845 41,451 --------- --------- --------- --------- Operating expenses: Selling, general and administrative .......... 8,581 8,241 26,476 24,510 Research and development ..................... 4,562 2,613 12,763 8,348 Amortization of identifiable intangible assets 397 307 1,181 922 --------- --------- --------- --------- 13,540 11,161 40,420 33,780 --------- --------- --------- --------- Operating income (loss) ........................... (1,138) 1,016 (4,575) 7,671 Other income, net ................................. 350 62 744 437 Interest expense .................................. (310) (206) (769) (458) --------- --------- --------- --------- Income (loss) before provision for income taxes ... (1,098) 872 (4,600) 7,650 Benefit (provision) for income taxes .............. 236 (322) 1,409 (2,750) --------- --------- --------- --------- Net income (loss) ................................. $ (862) $ 550 $ (3,191) $ 4,900 ========= ========= ========= ========= Earnings (loss) per share Basic ........................................ $ (.06) $ .04 $ (.22) $ .35 Diluted ...................................... $ (.06) $ .04 $ (.22) $ .33 Weighted average shares outstanding Basic ........................................ 14,351 14,181 14,340 14,168 ========= ========= ========= ========= Diluted ...................................... 14,351 14,646 14,340 14,751 ========= ========= ========= ========= </TABLE> See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited) <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 2007 2006 2007 2006 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net income (loss) ................................. $ (862) $ 550 $ (3,191) $ 4,900 Other comprehensive income, net of tax: Foreign currency translation adjustments ..... 505 62 1,034 183 --------- --------- --------- --------- Comprehensive income (loss) ....................... $ (357) $ 612 $ (2,157) $ 5,083 ========= ========= ========= ========= </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, 2007 2006 ------------- ------------ Assets Current assets: Cash and cash equivalents ................... $ 4,506 $ 4,273 Accounts receivable-net ..................... 39,398 46,791 Inventories-net ............................. 38,282 35,948 Income tax refunds .......................... 983 1,103 Deferred income taxes ....................... 6,355 5,139 Other current assets ........................ 3,328 2,737 --------- --------- Total current assets ................... 92,852 95,991 Property, plant and equipment - net .............. 7,215 7,535 Goodwill ......................................... 26,767 25,734 Intangible assets - net .......................... 10,163 10,695 Other assets ..................................... 3,526 2,841 --------- --------- $ 140,523 $ 142,796 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt ........... $ 694 $ 240 Borrowings under lines of credit ............ 5,421 7,713 Accounts payable ............................ 11,463 12,470 Accrued salaries and benefits ............... 7,820 8,279 Accrued expenses ............................ 2,791 1,861 Customer deposits ........................... 4,589 3,656 Deferred service revenue .................... 12,413 12,254 --------- --------- Total current liabilities ............... 45,191 46,473 --------- --------- Long-term debt ................................... 7,182 7,708 --------- --------- Deferred income taxes ............................ 899 653 --------- --------- Other long-term liabilities ...................... 2,878 1,879 --------- --------- Shareholders' Equity: Preferred stock, $.02 par value, 1,000,000 shares authorized ............... -- -- Common stock, $.02 par value, 29,000,000 shares authorized; 16,031,035 and 15,980,486 shares issued; 14,378,280 and 14,327,731outstanding ..... 321 320 Capital in excess of par value .............. 39,048 38,602 Retained earnings ........................... 49,968 53,159 Accumulated other comprehensive income (loss) 545 (489) Treasury stock, at cost, 1,652,755 shares ... (5,509) (5,509) --------- --------- Total shareholders' equity .............. 84,373 86,083 --------- --------- $ 140,523 $ 142,796 ========= ========= See notes to unaudited interim consolidated financial statements
<TABLE> <CAPTION> PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the nine months ended September 30, ------------------- 2007 2006 ------- ------- <S> <C> <C> Cash flows from operating activities: Net income (loss) ........................................................ $(3,191) $ 4,900 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ....................................... 2,915 2,858 Provision for bad debts ............................................. 1,395 363 Provision for obsolete inventory .................................... 1,998 1,193 Equity based compensation ........................................... 328 200 Deferred income tax ................................................. (1,577) 1,675 Changes in operating assets and liabilities: Accounts receivable ............................................. 5,998 (7,482) Inventories ..................................................... (4,332) (6,470) Income tax refunds .............................................. 120 (1,474) Other current assets ............................................ (591) (594) Other assets .................................................... (685) (608) Accounts payable ................................................ (1,034) 210 Accrued salaries and benefits ................................... (459) (2,363) Accrued expenses ................................................ 930 (349) Customer deposits ............................................... 933 (428) Deferred service revenue ........................................ 159 (716) Other long-term liabilities ..................................... 999 802 ------- ------- Net cash provided by (used in) operating activities ........... 3,906 (8,283) ------- ------- Cash flows from investing activities: Capital expenditures ..................................................... (1,049) (962) Capitalization of software costs ......................................... (788) (399) ------- ------- Net cash used in investing activities ......................... (1,837) (1,361) ------- ------- Cash flows from financing activities: Net borrowings (payments) under line-of-credit agreements ................ (2,292) 6,399 Payments of long-term debt ............................................... (72) (6) Proceeds from the exercise of stock options .............................. 119 160 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 ........... (2,245) 6,718 ------- ------- Effect of exchange rate changes on cash and cash equivalents ................. 409 42 ------- ------- Net increase (decrease) in cash and cash equivalents ......................... 233 (2,884) Cash and cash equivalents at beginning of period ............................. 4,273 4,982 ------- ------- Cash and cash equivalents at end of period ................................... $ 4,506 $ 2,098 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................................. $ 725 $ 426 Income taxes, net of refunds ............................................. (145) 2,316 See notes to unaudited interim consolidated financial statements </TABLE>
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, 2007 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, 2006 included in the Company's December 31, 2006 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 amounts 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, equity based compensation and valuation allowances for receivables, inventories and deferred income taxes. Actual results could differ from those estimates. 2. On November 2, 2006, PAR Technology Corporation (the "Company") and its wholly owned subsidiary, Par-Siva Corporation (f/k/a PAR Vision Systems Corporation) (the "Subsidiary") acquired substantially all of the assets and assumed certain liabilities of SIVA Corporation ("SIVA"). The purchase price of the assets was approximately $6.9 million including estimated acquisition costs of approximately $177,000. The purchase price consisted of $1.1 million worth of PAR common stock (125,549 shares of PAR common stock issued out of treasury) and the remainder in cash. The agreement provides for additional contingent purchase price payments based on certain sales based milestones and other conditions. SIVA, based in Delray Beach, Florida, is a developer of software solutions for multi-unit restaurant operations. On an unaudited proforma basis, assuming the completed acquisition had occurred as of the beginning of the periods 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, 2006 ended September 30, 2006 ------------------------ ------------------------ Net revenues ............ $ 48,677 $ 155,669 Net income (loss) ....... $ (245) $ 2,435 Earnings (loss) per share: Basic ................. $ (.02) $ .17 Diluted ............... $ (.02) $ .16
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 periods presented. 3. Inventories are primarily used in the manufacture and service of Hospitality products. The compo-nents of inventory, net of related reserves, consist of the following: (in thousands) September 30, December 31, 2007 2006 ---------- -------- Finished goods ............ $ 9,674 $ 9,533 Work in process ........... 2,056 1,667 Component parts ........... 8,229 7,119 Service parts ............. 18,323 17,629 --------- -------- $ 38,282 $ 35,948 ========= ======== At September 30, 2007 and December 31, 2006, the Company had recorded reserves for shrinkage, excess and obsolete inventory of $4,963,000 and $3,658,000, respectively. 4. 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, 2007 was $57,000 and $328,000, respectively. Total compensation expense included in operating expenses for the three and nine months ended September 30, 2006 was $62,000 and $200,000, respectively. At September 30, 2007, the unrecognized compensation expense related to non-vested option awards was $660,000 (net of estimated forfeitures). 5. 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, -------------------- 2007 2006 -------- -------- Net income (loss) ................................... $ (862) $ 550 ======== ======== Basic: Shares outstanding at beginning of period ...... 14,349 14,181 Weighted average shares issued during the period 2 -- -------- -------- Weighted average common shares, basic .......... 14,351 14,181 ======== ======== Earnings (loss) per common share, basic ........ $ (.06) $ .04 ======== ======== Diluted: Weighted average common shares, basic .......... 14,351 14,181 Dilutive impact of stock options ............... -- 465 -------- -------- Weighted average common shares, diluted ........ 14,351 14,646 ======== ======== Earnings (loss) per common share, diluted ...... $ (.06) $ .04 ======== ======== For the nine months ended September 30, -------------------- 2007 2006 -------- -------- Net income (loss) ................................... $ (3,191) $ 4,900 ======== ======== Basic: Shares outstanding at beginning of period ...... 14,310 14,137 Weighted average shares issued during the period 30 31 -------- -------- Weighted average common shares, basic .......... 14,340 14,168 ======== ======== Earnings (loss) per common share, basic ........ $ (.22) $ .35 ======== ======== Diluted: Weighted average common shares, basic .......... 14,340 14,168 Dilutive impact of stock options ............... -- 583 -------- -------- Weighted average common shares, diluted ........ 14,340 14,751 ======== ======== Earnings (loss) per common share, diluted ...... $ (.22) $ .33 ======== ======== For the three and nine months ended September 30, 2007, 418,016 and 446,372, respectively, of incremental shares from the assumed exercise of stock options and 23,594 restricted stock awards are not included in the computation of diluted earnings per share because of the anti-dilutive effect on earnings per share. 6. The Company has adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) effective January 1, 2007. The Company's adoption of FIN 48 on January 1, 2007, did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. As of September 30, 2007 and January 1, 2007, the Company had an insignificant amount of unrecognized tax benefits. The Company's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the consolidated statements of operations. The amount of interest and penalties for the nine months ended September 30, 2007 was deemed immaterial by the Company. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. Federal or state income tax examinations by tax authorities for tax years prior to 2003.
7. Interest Rate Swap In September 2007, the Company entered into an interest rate swap agreement associated with a $6,000,000 variable rate loan with principal and interest payments due through August 2012. At September 30, 2007, the notional principal amount totaled $6,000,000. This instrument was utilized by the Company to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Company did not adopt hedge accounting under the provision of FASB Statement No 133, Accounting for Derivative Instruments and Hedging Activities, but rather records the fair market value adjustments through the consolidated statements of operations each period. The associated fair value adjustment included within the consolidated statements of operations for the three and nine-months ended September 30, 2007 was not material and is included within interest expense. 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 provides technical expertise in the development of 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, ---------------------- --------------------- 2007 2006 2007 2006 --------- --------- --------- --------- Revenues: Hospitality ............. $ 35,072 $ 33,067 $ 101,727 $ 107,428 Government .............. 16,505 15,467 47,558 47,046 --------- --------- --------- --------- Total ........................ $ 51,577 $ 48,534 $ 149,285 $ 154,474 ========= ========= ========= ========= Operating income(loss): Hospitality ............. $ (2,213) $ 213 $ (7,108) $ 4,647 Government .............. 1,132 803 2,861 3,024 Other ................... (57) -- (328) -- --------- --------- --------- --------- (1,138) 1,016 (4,575) 7,671 Other income, net ............ 350 62 744 437 Interest expense ............. (310) (206) (769) (458) --------- --------- --------- --------- Income (loss) before provision for income taxes ........... $ (1,098) $ 872 $ (4,600) $ 7,650 ========= ========= ========= ========= Depreciation and amortization: Hospitality ............. $ 829 $ 835 $ 2,580 $ 2,531 Government .............. 43 10 60 35 Other ................... 88 99 275 292 --------- --------- --------- --------- Total ............. $ 960 $ 944 $ 2,915 $ 2,858 ========= ========= ========= ========= Capital expenditures: Hospitality ............. $ 366 $ 70 $ 943 $ 766 Government .............. 26 10 58 10 Other ................... 8 15 48 186 --------- --------- --------- --------- Total ............. $ 400 $ 95 $ 1,049 $ 962 ========= ========= ========= ========= Revenues by geographic area: United States ........... $ 44,464 $ 41,523 $ 127,968 $ 134,694 Other Countries ......... 7,113 7,011 21,317 19,780 --------- --------- --------- --------- Total ............. $ 51,577 $ 48,534 $ 149,285 $ 154,474 ========= ========= ========= ========= The following table represents identifiable assets by business segment: (in thousands) September 30, December 31, 2007 2006 -------- -------- Identifiable assets: Hospitality ................ $119,584 $123,958 Government ................. 11,230 10,898 Other ...................... 9,709 7,940 -------- -------- Total .......................... $140,523 $142,796 ======== ========
The following table presents identifiable assets by geographic area based on the location of the asset: (in thousands) September 30, December 31, 2007 2006 ---------- ------------ United States ................. $ 127,570 $ 135,337 Other Countries ............... 12,953 7,459 ---------- ---------- Total $ 140,523 $ 142,796 ========== ========== The following table represents Goodwill by business segment: (in thousands) September 30, December 31, 2007 2006 ------------- ------------ Hospitality ................... $ 26,171 $ 25,138 Government .................... 596 596 ---------- ---------- Total $ 26,767 $ 25,734 ========== ========== 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, ------------------- ------------------ 2007 2006 2007 2006 ------- ------- ------- ------ Restaurant Segment: McDonald's Corporation ........ 24% 26% 25% 26% Yum! Brands, Inc. ............. 16% 15% 14% 12% Government Segment: Department of Defense ......... 32% 32% 32% 30% All Others ......................... 28% 27% 29% 32% --- --- --- --- 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, continued 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 expectation, including a decline in the volume of purchases made by one or a group of our major customers; risks in technology development and commercialization; risks of downturns in economic conditions generally, and in the quick-service sector of the hospitality market specifically; risks associated with government contracts; risks associated with competition and competitive pricing pressures; and risks related to foreign operations. Forward-looking statements made in connection with this report are necessarily qualified by these factors. We are not undertaking to update or revise publicly any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise. Overview PAR is a leading provider of technology systems for the restaurant, hotel/resort, hospitality and specialty retail industries. PAR continues as a leader in supplying information technology outsourcing and applied technology to the Federal Government. The Company's hospitality technology products are used in several vertical markets in a variety of applications by numerous customers. The Company encounters competition in all of its markets (restaurants, hotels, theaters, specialty retail, etc.) and competes primarily on the basis of product design, features/functions, product quality/reliability, price, customer service and delivery capability. Recent trends among hospitality organizations has been to
consolidate their lists of approved vendors to companies that have a global capability, can achieve high quality and delivery standards, have multiple product offerings, R&D capability, and are competitive with their pricing. PAR is confident that its global presence as a technology provider is a crucial competitive advantage as the Company provides innovative products/solutions, with a significant global delivery capability to its multinational customers like McDonald's, Yum! Brands and Mandarin Oriental Hotel Group. In the fourth quarter of 2006 PAR acquired the assets of SIVA Corporation, a privately held hospitality software company and a cutting edge provider of web-based service oriented architected software applications to large hospitality organizations in table-service dining and theme park resorts. Several organizations in hospitality technology believe that the value in restaurant technology occurs at the point-of-sale. PAR understands fully that to successfully run an enterprise business, a wide range of operational information is necessary--and that information has high strategic value to the individual stores, managers, and corporate employees beyond just accounting and cash management. Par-Siva's applications collect data at the site and then deliver it to wherever it is required throughout the organization--not as an add-on module, but as an integral component of every application's design. Today's hospitality organizations are integrated and connected like never before. Par-Siva's offering was designed from the ground up to utilize the operational knowledge and experience PAR has in hospitality and specifically restaurants. Par-Siva's applications automate core restaurant processes such as order entry, food preparation, inventory control, and labor management. The applications can deliver action prompts and performance scorecards. From tracking to monitoring equipment performance, Par-Siva's offerings support operations. PAR's go-forward strategy is to provide totally integrated technology systems, professional services and high level lifecycle support in the industries in which it competes. The Company continues to focus its research and development efforts on developing new technical products (software and hardware) that meet and exceed our customers' needs and have high probability for broader market appeal and success. PAR focuses upon efficiency in its operations and controlling costs. PAR operates two wholly-owned subsidiaries in the Government business segment, PAR Government Systems Corporation (PGSC) and Rome Research Corporation (RRC). As a long-standing Government contractor, PAR designs advanced technology systems for the U.S. Department of Defense and other U.S. Governmental agencies. Additionally, PAR provides information technology and communications support services to the U.S. Navy, U.S. Air Force and U.S. Army. The Company concentrates its computer-based system design capabilities on providing high quality technical expertise and services, ranging from experimental studies to
advanced operational systems, within a variety of areas of research, including radar, image and signal processing, logistic management systems, and geospatial services and products. The Company will continue to execute its strategy of leveraging its core technical capabilities and performance into related technical areas and an expanding customer base. The Company will seek to accelerate this growth through strategic acquisitions of businesses that broaden the Company's technology and/or business base. PAR's future business plan is to continue to expand the Company's customer base and solidify its leading position in the industries to which it markets by: o Developing integrated solutions o Continuing to grow global presence in growth markets o Concentrating on customer needs o Encouraging and rewarding entrepreneurial corporate attitude and spirit o Fostering a mindset of controlling cost o Pursuing strategic acquisitions Summary The Company believes it can continue to be successful in its two core business segments -Hospitality and Government. The Company's focus and industry expertise will enable this to happen. PAR will continue its three pronged investment initiative for the remainder of 2007 in these particular areas: the continued development of the newly acquired SIVA software platform for table service and quick serve restaurant chains; increasing the Company's distribution channel for hospitality markets; and investing in the international business infrastructure, in particular in the Asia-Pacific Rim region. The Company will benefit from its efficient supply chain and economies of scale as it leverages suppliers and distribution operations. PAR remains committed to streamlining operations and improving return on invested capital through a variety of initiatives. Results of Operations -- Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006 The Company reported revenues of $51.6 million for the quarter ended September 30, 2007, an increase of 6% from the $48.5 million reported for the quarter ended September 30, 2006. The Company's net loss for the quarter ended September 30, 2007 was $862,000, or $.06 diluted loss per share, compared to net income of $550,000 and $.04 diluted income per share for the same period in 2006. Product revenues from the Company's Hospitality segment were $18.1 million for the quarter ended September 30, 2007, an increase of less than 1% from the $18.0 million recorded in 2006. This increase was due to 1% improvement in domestic product sales primarily due to Yum! Brands. Domestic sales continued to be impacted by a continued delay in hardware orders from a major customer pending the release of that customer's new third party software. This increase in domestic revenue was partially offset by a 1% decline in international product sales. This decrease was due to the timing of restaurant customer orders in Asia partially offset by a growth in sales to Canada.
Customer service revenues are also generated by the Company's Hospitality segment. The Company's service offerings include installation, software maintenance, training, twenty-four hour help desk support and various depot and on-site service options. Customer service revenues were $17 million for the quarter ended September 30, 2007, a 13% increase from $15.1 million reported for the same period in 2006. The growth is primarily related to the award of a new service contract with a major customer in October of 2006. Contract revenues from the Company's Government segment were $16.5 million for the quarter ended September 30, 2007, an increase of 7% when compared to the $15.5 million recorded in the same period in 2006. This increase was primarily due to the start of a new contract in the information technology outsourcing area. 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, 2007 were 40.9%, a decrease of 140 basis points from the 42.3% for the quarter ended September 30, 2006. This decrease in margins was primarily attributable to hardware product mix partially offset by an increase in software revenue to both restaurant and resort and spa customers. Customer service margins were 22.2% for the quarter ended September 30, 2007 a decrease of 230 basis points compared to 24.5% for the same period in 2006. Service margins declined primarily to the obsolescence of service parts for a discontinued product line. This was partially offset by an increase in software maintenance margins due to increased revenue in this area. Contract margins were 7.6% for the quarter ended September 30, 2007, an increase of 200 basis points compared to 5.6% for the same period in 2006. This increase was primarily due to a one time favorable adjustment associated with a contractual claim on a fixed price contact. This was partially offset by start up costs on a new Information Technology outsourcing contract with the Navy. The most significant components of contract costs in 2007 and 2006 were labor and fringe benefits. For 2007, labor and fringe benefits were $11.3 million or 74% of contract costs compared to $11.4 million or 78% of contract costs for the same period in 2006.
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, 2007 were $8.6 million, an increase of 4% from the $8.2 million for the same period in 2006. This increase was primarily due to a rise in sales and marketing expenses associated with restaurant products as the Company is investing in its international infrastructure and in the expansion of its dealer channel. The increase is also due to higher bad debt expense in 2007 versus 2006. This was partially offset by start up costs incurred in 2006 in anticipation of a new service contract with a restaurant customer that did not recur in 2007. Research and development expenses relate primarily to the Company's Hospitality segment. Research and development expenses were $4.6 million for the quarter ended September 30, 2007, an increase of 75% from the $2.6 million recorded in 2006. The increase was primarily attributable to the Company's continued research and development in its next generation software products for its restaurant customers. The platform for this next generation of products was acquired from SIVA Corporation in the fourth quarter of 2006. Amortization of identifiable intangible assets was $397,000 for the quarter ended September 30, 2007 compared to $307,000 for 2006. The increase is primarily due to the amortization of intangible assets acquired from SIVA Corporation in the fourth quarter of 2006. Other income, net, was $350,000 for the quarter ended September 30, 2007 compared to $62,000 for the same period in 2006. Other income primarily includes rental income and foreign currency gains and losses. This increase is primarily due to higher rental income in 2007 compared to 2006 and an increase in foreign currency gains in 2007 versus 2006. Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense was $310,000 for the quarter ended September 30, 2007 as compared to $206,000 in 2006. The increase was due to a $6 million term loan in the fourth quarter of 2006 to finance the SIVA acquisition. In addition, the Company's borrowing rate increased in 2007 compared to 2006. This is partially offset by lower average borrowings in 2007 under the Company's lines of credit with banks when compared to 2006. For the quarter ended September 30, 2007, the Company's effective income tax rate was 21.5%, compared to 36.9% in 2006. The decrease is due to the impact of state income taxes and non-deductible expenses on a projected pretax loss for 2007 versus pretax income for 2006. Also contributing to this decrease is the impact of foreign capital taxes, non-deductible foreign losses and reduced export sales benefits claimed on the 2006 tax return.
Results of Operations -- Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006 The Company reported revenues of $149.3 million for the nine months ended September 30, 2007, a decrease of 3% from the $154.5 million reported for the nine months ended September 30, 2006. The Company's net loss for the nine months ended September 30, 2007 was $3.2 million, or $.22 diluted loss per share, compared to net income of $4.9 million and $.33 diluted income per share for the same period in 2006. Product revenues from the Company's Hospitality segment were $53.1 million for the nine months ended September 30, 2007, a decrease of 17% from the $63.7 million recorded in 2006. This decrease was due to an $11.5 million decline in domestic product sales primarily due to a continued delay in hardware orders from a major customer pending the release of that customer's new third party software. The decline was also due to the Company's delay in replacing hardware and software business associated with last year's orders from two new customers. This drop in domestic revenue was partially offset by a $900,000 increase in international product sales. This increase was the result of growth in sales to the Company's restaurant customers in Asia and Canada. Customer service revenues are also generated by the Company's Hospitality segment. The Company's service offerings include installation, software maintenance, training, twenty-four hour help desk support and various depot and on-site service options. Customer service revenues were $48.6 million for the nine months ended September 30, 2007, an 11% increase from $43.7 million reported for the same period in 2006. The growth is primarily related to the award of a new service contract with a major customer in October of 2006. Also contributing to the growth was an increase in software maintenance contracts. Contract revenues from the Company's Government segment were $47.6 million for the nine months ended September 30, 2007, an increase of 1% when compared to the $47 million recorded in the same period in 2006. This increase was due to the timing of new awards in the information technology outsourcing area, partially offset by the completion of some older contracts. Product margins for the nine months ended September 30, 2007 were 40.3%, a decrease of 280 basis points from the 43.1% for the nine months ended September 30, 2006. This decrease in margins was primarily attributable to lower software revenue in 2007 when compared to 2006 and to unfavorable absorption of fixed manufacturing costs as the result of a decline in production volume.
Customer service margins were 23.3% for the nine months ended September 30, 2007, a decrease of 140 basis points compared to 24.7% for the same period in 2006. This decline is due to lower than planned installation revenue as a result of the decrease in product sales and the obsolescence of service parts for a discontinued product line. This was partially offset by an increase in software maintenance. Contract margins were 6.5% for the nine months ended September 30, 2007, a decline of 30 basis points versus 6.8% for the same period in 2006. The decrease was due to a favorable cost share adjustment on the Company's Logistics Management program in 2006. The decrease was also attributable to start up costs incurred on a new Information Technology outsourcing contract with the Navy. Partially offsetting these declines was a one time favorable adjustment associated with a contractual claim on a fixed price contract. The most significant components of contract costs in 2007 and 2006 were labor and fringe benefits. For 2007, labor and fringe benefits were $35.4 million or 79% of contract costs compared to $34.2 million or 78% of contract costs for the same period in 2006. 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, 2007 were $26.5 million, an increase of 8% from the $24.5 million for the same period in 2006. This increase was due to a rise in sales and marketing expenses associated with restaurant products as the Company is investing in its international infrastructure and in the expansion of its dealer channel. The increase was also due to a rise in bad debt expense and stock based compensation expense. Research and development expenses relate primarily to the Company's Hospitality segment. Research and development expenses were $12.8 million for the nine months ended September 30, 2007, an increase of 53% from the $8.3 million recorded in 2006. The increase was primarily attributable to the Company's continued research and development in its next generation software products for its restaurant customers. The platform for this next generation of products was acquired from SIVA Corporation in the fourth quarter of 2006. Amortization of identifiable intangible assets was $1.2 million for the nine months ended September 30, 2007 compared to $922,000 for 2006. The increase is primarily due to the amortization of intangible assets acquired from SIVA Corporation in the fourth quarter of 2006. Other income, net, was $744,000 for the nine months ended September 30, 2007 compared to $437,000 for the same period in 2006. Other income primarily includes rental income and foreign currency gains and losses. This increase is primarily due to higher foreign currency gains in 2007 compared to 2006.
Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense was $769,000 for the nine months ended September 30, 2007 as compared to $458,000 in 2006. This increase is primarily due to a $6 million term loan executed in the fourth quarter of 2006 to finance the SIVA acquisition. For the nine months ended September 30, 2007, the Company's effective income tax rate was 30.6%, compared to 35.9% in 2006. The decrease is due to the impact of state income taxes and non-deductible expenses on a projected pretax loss for 2007 versus pretax income for 2006. Also contributing to this decrease is the impact of foreign capital taxes, non-deductible foreign losses and reduced export sales benefits claimed on the 2006 tax return. 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 operations was $3.9 million for the nine months ended September 30, 2007 compared to cash used of $8.3 million for 2006. In 2007, cash was generated through collection of accounts receivables. This was partially offset by a growth in inventory and the timing of payments to vendors. In 2006, cash flow was negatively impacted by the timing of customer receipts and by inventory purchases in anticipation of future demand. Cash used in investing activities was $1.8 million for the nine months ended September 30, 2007 versus $1.4 million for the same period in 2006. In 2007, capital expenditures were $1 million and were primarily for manufacturing and research and development equipment. Capitalized software costs relating to software development of Hospitality segment products were $788,000 in 2007. In 2006, capital expenditures were $962,000 and were principally for manufacturing 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. Cash used in financing activities was $2.2 million for the nine months ended September 30, 2007 versus cash provided of $6.7 million in 2006. In 2007, the Company reduced its short-term borrowings by $2.3 million and decreased its long-term debt by $72,000. The Company also benefited $119,000 from the exercise of employee stock options. In 2006, the Company increased its short-term bank borrowings by $6.4 million and benefited $160,000 from the exercise of employee stock options.
The Company has an aggregate availability of $20,000,000 in unsecured bank lines of credit. One line totaling $12,500,000 bears interest at the bank borrowing rate (7.3% at September 30, 2007). 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 (7.4% at September 30, 2007). In June, 2007 these credit agreements were amended to waive the existing leverage and fixed charge coverage ratios for the remainder of 2007. Under the amendment, the Company is required to meet an EBITDA covenant for the balance of 2007. These lines expire in April 2009. The Company was in compliance with its EBITDA covenant on September 30, 2007. At September 30, 2007, there was $5,421,000 outstanding under these lines. The weighted average interest rate paid by the Company during 2007 was 6.6% and 6.7% during 2006. In 2006, the Company borrowed $6,000,000 under an unsecured term loan agreement with a bank in connection with the asset acquisition from SIVA Corporation. The loan provides for interest only payments in the first year and escalating principal payments through 2012. The loan bears interest at the LIBOR rate plus the applicable interest rate spread (7.3 % at September 30, 2007). In September 2007, the Company entered into an interest rate swap agreement associated with a $6,000,000 variable rate loan with principal and interest payments due through August 2012. At September 30, 2007, the notional principal amount totaled $6,000,000. This instrument was utilized by the Company to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Company did not adopt hedge accounting under the provision of FASB Statement No 133, Accounting for Derivative Instruments and Hedging Activities, but rather records the fair market value adjustments through the consolidated statements of operations each period. The associated fair value adjustment included within the consolidated statements of operations for the three and nine-months ended September 30, 2007 was not material and is included within interest expense. The Company has a $1,877,000 mortgage collateralized by certain real estate. The annual mortgage payment including interest totals $226,000. The mortgage bears interest at a fixed rate of 7% and matures in 2010. During fiscal year 2007, the Company anticipates that its capital requirements will be less than $2 million. The Company does not usually enter into long term contracts with its major Hospitality segment customers. The Company commits to purchasing inventory from its suppliers based on a combin-ation 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 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, taxes and equity-based compensation. 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 also records service revenues relating to its standard point-of-sale and property management systems of the Hospitality segment. Hardware Revenue recognition on hardware sales occurs upon delivery to the customer site (or when shipped for systems that are not installed by the Company) as under SAB 104, persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured.
Software Revenue recognition on software sales generally occurs upon delivery to the customer site (or when shipped for systems that are not installed by the Company) as under SOP 97-2, persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. For software sales where the Company is the sole party that has the proprietary knowledge to install the software, revenue is recognized upon installation and when the system is ready to go live. Service Service revenue consists of installation and training services, support maintenance, and field and depot repair. Installation and training service revenue are based upon standard hourly/daily rates and revenue is recognized as the services are performed. Support maintenance and field and depot repair are provided to customers either on a time and materials basis or under a maintenance contract. Services provided on a time and materials basis are recognized as the services are performed. Service revenues from maintenance contracts are recognized ratably over the underlying contract period. 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. Contracts 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 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-Allowance for Doubtful Accounts 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. Equity-Based Compensation The Company accounts for equity based compensation by recognizing expense over the vesting period for any non-vested stock option awards granted. Stock option grants are valued by using a Black-Scholes method at the date of the grant. There are assumptions and estimates made by management which go into the valuation of the options granted, such as volatility, vesting period, and forfeiture rate. The Company recognizes expense on options granted using a ratable method over the vesting period. Restricted stock grants are expensed over the vesting period, which is determined at the date of the grant. Interest Rate Swap The Company utilizes an interest rate swap agreement associated with a portion of their variable rate debt. The Company did not adopt hedge accounting under the provision of FASB Statement No 133, Accounting for Derivative Instruments and Hedging Activities, but rather records the fair market value adjustments through the consolidated statements of operations each period. Recent Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which provides guidance for measuring the fair value of assets and liabilities, as well as requires expanded disclosures about fair value measurements. SFAS 157 indicates that fair value should be determined based on the assumptions marketplace participants would use in pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement. The Company will be required to adopt SFAS 157 on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact of adopting SFAS 159 on its consolidated financial statements.
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 2007. Management anticipates that margins will be maintained at acceptable levels to minimize the affects of inflation, if any. INTEREST RATES As of September 30, 2007, the Company has $5.4 million in variable long-term debt and $6 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, 2007 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 The Company is exposed to certain risk factors that may effect operations and/or financial results. The significant factors known to the Company are described in the Company's most recently filed Annual Report on Form 10-K. There have been no material changes from the risk factors as previously disclosed in the Company's Annual Report on Form 10-K. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information On July 26, 2007, 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, 2007, as presented in a press release of July 26, 2007 and furnished thereto as an exhibit. Item 6. Exhibits 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.
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, 2007 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 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, 2007 John W. Sammon ----------------------------------- John W. Sammon 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, 2007 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, 2007 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. John W. Sammon - ------------------------------ John W. Sammon Chairman of the Board & Chief Executive Officer November 9, 2007 Ronald J. Casciano - ------------------------------ Ronald J. Casciano Vice President, Chief Financial Officer & Treasurer November 9, 2007 E-3