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 June 30, 2004.
OR
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number 1-9720
PAR TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 16-1434688
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
PAR Technology Park
8383 Seneca Turnpike
New Hartford, NY 13413-4991
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 738-0600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [ ] No [ X ]
The number of shares outstanding of registrant's common stock, as of July
31, 2004 - 8,669,245 shares.
PAR TECHNOLOGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q, June 30, 2004
PART 1
FINANCIAL INFORMATION
Item Number
-----------
Item 1. Financial Statements (unaudited)
- Consolidated Statements of Income for
the three and six months ended June 30, 2004 and 2003
- Consolidated Statements of Comprehensive Income for
the three and six months ended June 30, 2004 and 2003
- Consolidated Balance Sheets at
June 30, 2004 and December 31, 2003
- Consolidated Statements of Cash Flows
for the six months ended June 30, 2004 and 2003
- Notes to Unaudited Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II
OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net revenues:
Product ........................... $ 19,466 $ 13,059 $ 35,705 $ 25,412
Service ........................... 10,570 8,634 20,877 17,103
Contract .......................... 12,889 10,318 24,241 20,038
-------- -------- -------- --------
42,925 32,011 80,823 62,553
-------- -------- -------- --------
Costs of sales:
Product ........................... 13,231 8,528 24,268 16,590
Service ........................... 9,084 7,242 18,029 14,409
Contract .......................... 12,082 9,897 22,612 19,169
-------- -------- -------- --------
34,397 25,667 64,909 50,168
-------- -------- -------- --------
Gross margin ................ 8,528 6,344 15,914 12,385
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 5,245 4,700 10,261 9,111
Research and development .......... 1,302 1,262 2,645 2,421
-------- -------- -------- --------
6,547 5,962 12,906 11,532
-------- -------- -------- --------
Operating income ....................... 1,981 382 3,008 853
Other income, net ...................... 187 313 398 389
Interest expense ....................... (46) (152) (119) (295)
-------- -------- -------- --------
Income from continuing operations
before provision for income taxes .... 2,122 543 3,287 947
Provision for income taxes ............. (810) (192) (1,239) (340)
-------- -------- -------- --------
Income from continuing operations ...... 1,312 351 2,048 607
-------- -------- -------- --------
Discontinued operations:
Loss from operations of
discontinued component ......... -- (67) -- (109)
Income tax benefit ................ -- 24 -- 39
-------- -------- -------- --------
Loss on discontinued operations ... -- (43) -- (70)
-------- -------- -------- --------
Net income ............................. $ 1,312 $ 308 $ 2,048 $ 537
======== ======== ======== ========
(Continued)
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(in thousands except per share amounts)
(unaudited)
For the three months For the six months
ended June 30, ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Earnings per share:
Basic:
Income from continuing operations $ .15 $ .04 $ .24 $ .07
Loss from discontinued operations $ -- $ (.01) $ -- $ (.01)
Net income ................ $ .15 $ .04 $ .24 $ .06
Diluted:
Income from continuing operations $ .14 $ .04 $ .22 $ .07
Loss from discontinued operations $ -- $ -- $ -- $ (.01)
Net income ................ $ .14 $ .04 $ .22 $ .06
Weighted average shares outstanding
Basic ........................... 8,636 8,422 8,603 8,398
========= ========= ========= =========
Diluted ......................... 9,192 8,765 9,156 8,766
========= ========= ========= =========
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
For the three months For the six months
ended June 30, ended June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income ................................... $ 1,312 $ 308 $ 2,048 $ 537
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (71) 194 (234) 300
------- ------- ------- -------
Comprehensive income ......................... $ 1,241 $ 502 $ 1,814 $ 837
======= ======= ======= =======
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
June 30, December 31,
2004 2003
-------- --------
Assets
Current assets:
Cash .................................................. $ 2,619 $ 1,467
Accounts receivable-net ............................... 29,462 31,876
Inventories-net ....................................... 30,379 31,894
Deferred income taxes ................................. 6,320 6,486
Other current assets .................................. 2,086 2,472
Total assets of discontinued operation ................ -- 20
-------- --------
Total current assets .............................. 70,866 74,215
Property, plant and equipment - net ........................ 7,416 7,240
Deferred income taxes ...................................... 2,019 2,857
Other assets ............................................... 3,370 2,855
-------- --------
$ 83,671 $ 87,167
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt ..................... $ 92 $ 89
Borrowings under lines of credit ...................... -- 6,989
Accounts payable ...................................... 10,162 8,301
Accrued salaries and benefits ......................... 5,985 5,461
Accrued expenses ...................................... 2,073 2,471
Deferred service revenue .............................. 5,321 5,947
Total liabilities of discontinued operation ........... 429 578
-------- --------
Total current liabilities ......................... 24,062 29,836
-------- --------
Long-term debt ............................................. 2,045 2,092
-------- --------
Commitments and contingent liabilities Shareholders' Equity:
Preferred stock, $.02 par value,
1,000,000 shares authorized ......................... -- --
Common stock, $.02 par value,
19,000,000 shares authorized;
10,065,287 and 9,966,062 shares issued;
8,654,600 and 8,555,375 outstanding ................ 201 199
Capital in excess of par value ........................ 30,270 29,761
Retained earnings ..................................... 34,423 32,375
Accumulated other comprehensive loss .................. (277) (43)
Treasury stock, at cost, 1,410,687 shares ............. (7,053) (7,053)
-------- --------
Total shareholders' equity ........................ 57,564 55,239
-------- --------
$ 83,671 $ 87,167
======== ========
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months
ended June 30,
-------------------
2004 2003
------- --------
Cash flows from operating activities:
Net income .................................... $ 2,048 $ 537
Adjustments to reconcile net income to net
cash provided by operating activities:
Net loss from discontinued operations ...... -- 70
Depreciation and amortization .............. 1,388 1,365
Provision for bad debts .................... 801 441
Provision for obsolete inventory ........... 1,873 1,110
Deferred income taxes ...................... 1,365 (32)
Increase (decrease) from changes in:
Accounts receivable ...................... 1,613 1,940
Inventories .............................. (358) 629
Other current assets ..................... 386 365
Other assets ............................. (749) --
Accounts payable ......................... 1,861 (3,838)
Accrued salaries and benefits ............ 524 (260)
Accrued expenses ......................... (398) (87)
Deferred service revenue ................. (626) (917)
------- -------
Net cash provided by continuing
operating activities ................... 9,728 1,323
Net cash used in discontinued operations (129) (132)
------- -------
Net cash provided by operating activities 9,599 1,191
------- -------
Cash flows from investing activities:
Capital expenditures .......................... (952) (94)
Capitalization of software costs .............. (378) (410)
------- -------
Net cash used in investing activities ... (1,330) (504)
------- -------
Cash flows from financing activities:
Net payments under line-of-credit agreements .. (6,989) (173)
Payments on long-term debt obligations ........ (44) (44)
Proceeds from the exercise of stock options ... 313 257
------- -------
Net cash provided (used) by
financing activities ................... (6,720) 40
------- -------
(Continued)
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months
ended June 30,
------------------
2004 2003
------- -------
Effect of exchange rate changes on cash and
cash equivalents ........................ (397) 300
------- -------
Net increase in cash and cash equivalents . 1,152 1,027
Cash and cash equivalents at
beginning of year ....................... 1,467 490
------- -------
Cash and cash equivalents at
end of period ........................... $ 2,619 $ 1,517
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .................................. $ 142 $ 297
Income taxes, net of refunds .............. 228 (6)
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited interim consolidated financial statements have
been prepared by PAR Technology Corporation (the "Company" or "PAR") in
accordance with accounting principles generally accepted in the United
States of America for interim financial statements and with the
instructions to Form 10-Q and Regulation S-X pertaining to interim
financial statements. Accordingly, these interim financial statements do
not include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of the Company such unaudited statements include
all adjustments (which comprise only normal recurring accruals) necessary
for a fair presentation of the results for such periods. The results of
operations for the three and six months ended June 30, 2004 are not
necessarily indicative of the results of operations to be expected for any
future period. The consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial
statements and notes for the years ended in December 31, 2003 and 2002
included in the Company's December 31, 2003 Annual Report to the Securities
and Exchange Commission on Form 10-K.
2. During the third quarter of 2002, the Company decided to close down its
unprofitable Industrial business unit, Ausable Solutions, Inc., following a
trend of continuous losses. The overall downturn in the global economy and
specifically the manufacturing and warehousing industries, coupled with the
diminishing capital expenditures of the Company's industrial customers,
prevented the Company from being profitable in this particular business
segment. The decision to shut down this unit has allowed the Company to
focus on its two core businesses, Restaurant and Government. The Company
believes that the decision to exit the Industrial segment will not have a
negative impact on the Company's continuing operations. The Company's
Industrial business did not have common customers with its Restaurant and
Government contract businesses.
A summary of net revenues and pre-tax operating results and total assets
and liabilities of discontinued operations are detailed below
(in thousands)
For the three months For the six months
ended June 30, ended June 30,
-------------------- ---------------------
2004 2003 2004 2003
-------- --------- -------- --------
Net revenues .................... $ -- $ -- $ -- $ 21
Net loss from operations of
discontinued component ........ $ -- $ (43) $ -- $ (70)
June 30, December 31,
2004 2003
---------- -------- -
Discontinued assets-other ........... $ -- $ 20
========== =========
Discontinued liabilities-other ...... $ 429 $ 578
========== =========
3. Inventory maintained by the Company relates primarily to the manufacture
and service of Restaurant products. The components of inventory, net of
related reserves, consist of the following:
(in thousands)
June 30, December 31,
2004 2003
--------- ------------
Finished goods ...................... $ 6,763 $ 7,430
Work in process ..................... 1,554 1,623
Component parts ..................... 5,102 5,585
Service parts ....................... 16,960 17,256
------- -------
$30,379 $31,894
======= =======
At June 30, 2004 and December 31, 2003, the Company had recorded reserves
for shrinkage, excess and obsolete inventory of $3,095,000 and $4,361,000,
respectively.
4. The Company's products are sold with a standard warranty for defects in
material and workmanship. The standard warranty offered by the Company is
for one year, although certain sales have shorter warranty periods. The
Company establishes an accrual for estimated warranty costs at the time
revenue is recognized on the sale. This estimate is based on projected
product reliability using historical performance data.
The changes in the product warranty liability for the six months ended June
30 are summarized as follows:
(in thousands)
2004 2003
------- ------
Balance at beginning of year .......................... $(494) $(560)
Accruals for warranties issued during the period ...... (504) (458)
Settlements made (in cash or in kind) during the period 569 475
----- -----
Balance at June 30 .................................... $(429) $(543)
===== =====
5. Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), encourages, but does not require
companies to record compensation cost for stock-based compensation plans at
fair value. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair values of the respective options on their
grant dates for those awards, consistent with
the requirements of SFAS No. 123, the Company's net income and earnings per
share would have been adjusted to the proforma amounts indicated below:
(in thousands, except per share data)
For the three months For the six months
ended June 30, ended June 30,
--------------------- -------------------
2004 2003 2004 2003
--------- -------- -------- -------
Net income $ 1,312 $ 308 $ 2,048 $ 537
Compensation expense (49) (30) (96) (56)
--------- -------- -------- -------
Proforma net income $ 1,263 $ 278 $ 1,952 $ 481
========= ======== ======== =======
Earnings per share:
As reported - Basic $ .15 $ .04 $ .24 $ .06
- Diluted $ .14 $ .04 $ .22 $ .06
Proforma - Basic $ .15 $ .03 $ .23 $ .06
- Diluted $ .14 $ .03 $ .21 $ .05
6. Earnings per share ("EPS") is calculated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share", which
specifies the computation, presentation, and disclosure requirements for
EPS. This standard also requires the presentation of basic and diluted EPS.
Basic EPS excludes all dilution and is based upon the weighted average
number of common shares outstanding during the period. Diluted EPS reflects
the potential dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
The following is a reconciliation of the weighted average shares
outstanding for the basic and diluted EPS computations:
(in thousands,
except per share data)
For the three months
ended June 30,
---------------------
2004 2003
------ ------
Net income ............................................... $1,312 $ 308
====== ======
Basic:
Shares outstanding at beginning of period ........... 8,615 8,380
Weighted average shares issued during the period .... 21 42
------ ------
Weighted average common shares, basic ............... 8,636 8,422
====== ======
Earnings per common share, basic .................... $ 0.15 $ 0.04
====== ======
Diluted:
Weighted average common shares, basic ............... 8,636 8,422
Dilutive impact of stock options .................... 556 343
------ ------
Weighted average common shares, diluted ............. 9,192 8,765
====== ======
Earnings per common share, diluted .................. $ 0.14 $ 0.04
====== ======
(in thousands,
except per share data)
For the six months
ended June 30,
2004 2003
------- ------
Net income .............................................. $2,048 $ 537
====== ======
Basic:
Shares outstanding at beginning of year .............. 8,555 8,360
Weighted average shares issued during the period ..... 48 38
------ ------
Weighted average common shares, basic ................ 8,603 8,398
====== ======
Earnings per common share, basic ...................... $ 0.24 $ 0.06
====== ======
Diluted:
Weighted average common shares, basic ................. 8,603 8,398
Dilutive impact of stock options ...................... 553 368
------ ------
Weighted average common shares, diluted ............... 9,156 8,766
====== ======
Earnings per common share, diluted ................... $ 0.22 $ 0.06
====== ======
The loss from operations of a discontinued component had no effect on basic
or diluted earnings per share for the 2003 periods.
7. The Company's reportable segments are distinct business units that have
separate management teams and infrastructures and business strategies that
offer different products and services.
The Company has two reportable segments, Restaurant and Government. The
Restaurant segment offers integrated solutions to the hospitality industry.
These offerings include hardware and software applications utilized at the
point-of-sale, back of store and corporate office. This segment also offers
customer support including field service, installation, training,
twenty-four hour telephone support and depot repair. The Government segment
develops advanced technology systems for the Department of Defense and
other United States governmental agencies. Additionally, this segment
provides information technology and communications support services to the
United States Navy, Air Force and Army. The Company's Government segment is
also involved in developing technology to track mobile chassis in the
interstate shipping industry. As discussed in Note 2, the Company
discontinued its Industrial segment in the third quarter of 2002.
Accordingly, the results of this segment have been reported as discontinued
operations. Inter-segment sales and transfers are not significant.
Information as to the Company's operations in its segments is set forth
below:
(in thousands)
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Restaurant ................... $ 30,036 $ 21,693 $ 56,582 $ 42,515
Government ................... 12,889 10,318 24,241 20,038
-------- -------- -------- --------
Total .................. $ 42,925 $ 32,011 $ 80,823 $ 62,553
======== ======== ======== ========
Operating income (loss):
Restaurant ................... $ 1,152 $ 78 $ 1,493 $ 178
Government ................... 829 434 1,515 805
Other ........................ -- (130) -- (130)
-------- -------- -------- --------
1,981 382 3,008 853
Other income, net ................. 187 313 398 389
Interest expense .................. (46) (152) (119) (295)
-------- -------- -------- --------
Income from continuing operations
before provision for income taxes $ 2,122 $ 543 $ 3,287 $ 947
======== ======== ======== ========
Depreciation and amortization:
Restaurant ................... $ 519 $ 559 $ 1,084 $ 1,084
Government ................... 41 26 165 66
Other ........................ 110 114 139 215
-------- -------- -------- --------
Total .................. $ 670 $ 699 $ 1,388 $ 1,365
======== ======== ======== ========
Capital expenditures:
Restaurant ................... $ 538 $ -- $ 841 $ 22
Government ................... -- -- -- 4
Other ........................ 20 41 111 68
-------- -------- -------- --------
Total .................. $ 558 $ 41 $ 952 $ 94
======== ======== ======== ========
The following table presents revenues by geographic area based on the
location of the use of the product or services.
(in thousands)
For the three months For the six months
ended June 30, ended June 30,
---------------------------------------------------
2004 2003 2004 2003
--------- -------- ---------- ---------
United States ........... $39,261 $28,563 $73,998 $56,193
Other Countries ......... 3,664 3,448 6,825 6,360
------- ------- ------- -------
Total ............ $42,925 $32,011 $80,823 $62,553
======= ======= ======= =======
The following table represents identifiable assets by business segment:
(in thousands)
June 30, December 31,
2004 2003
--------- ---------
Identifiable assets:
Restaurant .............. $68,613 $70,550
Government .............. 7,878 10,475
Industrial .............. -- 20
Other ................... 7,180 6,122
------- -------
Total ............. $83,671 $87,167
======= =======
The following table presents identifiable assets by geographic area based
on the location of the asset.
(in thousands)
June 30, December 31,
2004 2003
--------- ---------
United States ........... $77,576 $79,831
Other Countries ......... 6,095 7,336
------- -------
Total ............ $83,671 $87,167
======= =======
Customers comprising 10% or more of the Company's total revenues are
summarized as follows:
For the three months For the six months
ended June 30, ended June 30,
---------------------------------------
2004 2003 2004 2003
---------------- -----------------
Restaurant Segment:
McDonald's Corporation ....... 34% 24% 30% 24%
YUM! Brands, Inc. ............ 17% 23% 21% 21%
Government Segment:
Department of Defense ........ 30% 32% 30% 32%
All Others ........................ 19% 21% 19% 23%
--- --- ---- ----
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 quick-service restaurant industry, future information
technology outsourcing opportunities, an expected increase in funding by the
United States government relating to the Company's Cargo*Mate(R) 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 restaurant market
specifically; risks associated with government contracts; risks associated with
competition and competitive pricing pressures; and risks related to foreign
operations. Forward-looking statements made in connection with this report are
necessarily qualified by these factors. We are not undertaking to update or
revise publicly any forward-looking statement if we obtain new information or
upon the occurrence of future events or otherwise.
Overview
PAR Technology Corporation ("PAR" or the "Company") is the parent company
of three wholly-owned subsidiary businesses: Par Tech, Inc., PAR Government
Systems Corporation and Rome Research Corporation.
Restaurant Segment
PAR's largest subsidiary, ParTech, Inc. is a provider of management
technology solutions, including hardware, software and professional services to
businesses in the restaurant, hospitality, and retail industries. Through
ParTech, Inc., the Company is a supplier of hospitality technology systems with
over 35,000 systems installed in 95 countries. PAR's hospitality management
software assists in the operation of hospitality and restaurant businesses by
managing data from end-to-end and improving profitability through more efficient
operations. The Company's professional services mission is to assist businesses
in achieving the full potential of their hospitality technology systems.
PAR has maintained long-term relationships with the restaurant industry's
two largest corporations - McDonald's Corporation and Yum! Brands, Inc.
McDonald's has over 31,000 restaurants in 119 countries and PAR has been a
selected provider of restaurant management technology systems and lifecycle
support services to McDonald's since 1980. Yum! Brands (which includes Taco
Bell, KFC, Pizza Hut, Long John Silvers and A & W Restaurants) has been a PAR
customer since 1983. Yum! Brands has nearly 33,000 restaurants globally. PAR is
the sole approved supplier of restaurant management technology systems to Taco
Bell, as well as the point-of-sale vendor of choice to KFC. PAR successfully
sells restaurant management technology systems to all five of the Yum! Brands
franchises. PAR is also the point-of-sale vendor of choice to the following
other significant restaurant chains: Boston Market, Chick-fil-A, CKE Restaurants
(including Hardees and Carl's Jr.), Carnival Cruise Lines, Loews Cineplex and
numerous large franchisees of those foregoing brands.
During 2003 and the first half of 2004, the Quick-Service Restaurant
("QSR") market continued to strengthen, as evidenced by reported improved
results from the Company's major customers, including McDonald's and Yum!
Brands. Additionally, the Company's business improved as it was named the
primary supplier to KFC for its corporate stores. The Company also recorded
significant new business from Chick-fil-A, CKE Restaurants and Bojangles'
Restaurant, Inc. Finally, during 2003, the Company released its new integrated
software suite, InFusion(TM).
Government Segment
PAR's two other subsidiaries, PAR Government Systems Corporation and Rome
Research Corporation, are government contractors. As a long-standing Government
contractor, PAR, through PAR Government Systems Corporation and Rome Research
Corporation, designs advanced technology systems for the Department of Defense
and other United States governmental agencies. Additionally, PAR provides
information technology and communications support services to the United States
Navy, Air Force and Army. PAR focuses its Government applied technology business
on providing computer-based system design services for highly technical
projects, ranging from experimental studies to advanced operational systems,
within a variety of areas to include radar, image and signal processing,
logistic management systems, and geospatial services and products. PAR's
Government technical services business provides information technology and
communications support services, engineering support, and facilities operations
and management. In addition, through government-sponsored research and
development, PAR has developed technologies with relevant commercial uses. A
prime example of this dual-use technological development is the Company's
point-of-sale technology, which was derived from research and development
involving microchip processing technology sponsored by the Department of
Defense.
During 2003, the Company secured its first information technology
outsourcing contract with the United States Army and now performs outsourcing
services for three of the main branches of the United States military.
Throughout the remainder of 2004, the Company anticipates the continued
health of the QSR market and additional information technology outsourcing
opportunities. Over the years, PAR has maintained its position in the industries
in which it competes through the utilization of several Company strengths
including market leadership, technological innovation, customer focus, global
reach and employee initiative. By focusing on these strengths, PAR is able to
help shape the marketplace, increase its customer base and continue to expand
worldwide.
The following table sets forth the Company's revenues by reportable
segment:
For the three months For the six months
ended June 30, ended June 30,
---------------------------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Restaurant .............. $ 30,036 $ 21,693 $ 56,582 $ 42,515
Government .............. 12,889 10,318 24,241 20,038
--------- --------- --------- ---------
Total consolidated revenue.... $ 42,925 $ 32,011 $ 80,823 $ 62,553
========= ========= ========= =========
The following discussion and analysis highlights items having a significant
effect on operations during the three and six months ended June 30, 2004. This
discussion may not be indicative of future operations or earnings. It should be
read in conjunction with the unaudited interim consolidated financial statements
and notes thereto and other financial and statistical information included in
this report.
Results of Operations -- Three Months Ended June 30, 2004 Compared to Three
Months Ended June 30, 2003
The Company reported revenues of $42.9 million for the quarter ended June
30, 2004, an increase of 34% from the $32 million reported for the quarter ended
June 30, 2003. The Company's net income for the three months ended June 30, 2004
was $1.3 million, or $.14 diluted net income per share, compared to net income
of $308,000 and $.04 per diluted share for the same period in 2003.
Product revenues from the Company's Restaurant segment were $19.5 million
for the quarter ended June 30, 2004, an increase of 49 % from the $13.1 million
recorded for the same period in 2003. The primary factor contributing to the
increase was sales to McDonald's which increased 133% or $5.5 million over the
same quarter of 2003. Due to its recent strong financial performance, McDonald's
is investing in capital equipment to upgrade its restaurants, triggering
increased sales of the Company's products. An additional factor contributing to
the increase in product revenues was a 96% or $869,000 increase in sales to CKE
Restaurants.
Customer Service revenues are also generated by the Company's Restaurant
segment. The Company's service offerings include installation, training,
twenty-four hour help desk support and various field and on-site service
options. Customer Service revenues were $10.6 million for the quarter ended June
30, 2004, an increase of 22% from $8.6 million for the same period in 2003. This
increase was due primarily to a 56% or $1.5 million increase in installation
revenue that is directly related to the growth in the Company's product revenue.
Other service area revenues increased 5% or $410,000 primarily due to increased
contracts relating to the expansion of the Company's customer base.
Contract revenues from the Company's Government segment were $12.9 million
for the quarter ended June 30, 2004, an increase of 25% when compared to the
$10.3 million recorded in the same period in 2003. Contributing to this growth
was a $2 million or 36% increase in information technology outsourcing revenue
for contracts for facility operations at critical United States Department of
Defense telecommunication sites across the globe. These outsourcing operations
provided by the Company directly support United States Navy, Army and Air Force
operations as they seek to both convert their military information technology
communications facilities into contractor-run operations and meet new
requirements with contractor support. Also contributing to this increase was a
$1.1 million or 98% increase in revenue from research contracts involving
Imagery Information Technology. This increase was partially offset by a $369,000
decline in the Company's Logistic Management Program, due to reduced funding
from the United States Government. This program involves the tracking of mobile
chassis under the Company's Cargo*Mate(R) contracts. The Company anticipates new
funding for this project from the Government later in 2004.
Product margins for the quarter ended June 30, 2004 were 32%, a decline
from 34.7% for the quarter ended June 30, 2003. This decline was caused
primarily by the continuation of an integration project for a major customer in
the second quarter of 2004 that involved lower margin peripheral hardware
products. Also contributing to this decline was lower software revenue for the
quarter ended June 30, 2004 when compared to the same period in 2003.
Customer Service margins were 14.1% for the quarter ended June 30, 2004
compared to 16.1% for the same period in 2003. The lower margin in 2004 was
primarily due to a $238,000 increase in the provision for service inventory
obsolescence. This was due to the Company's assessment of reserve requirements
based on current service inventory levels.
Contract margins were 6.3% for the quarter ended June 30, 2004 versus 4.1 %
for the same period in 2003. The increase in margins is primarily attributable
to a favorable performance-based award fee earned in this quarter on an imagery
information technology contract that did not occur in the corresponding period
in 2003. The most significant components of contract costs in 2004 and 2003 were
labor and fringe benefits. In 2004 labor and fringe benefits were $8.5 million
or 70% of contract costs. In 2003 labor and fringe benefits were $7.4 million or
75% of contract costs. The growth in contract costs is directly related to the
growth in contract revenues.
Selling, general and administrative expenses are virtually all related to
the Company's Restaurant segment. Selling, general and administrative expenses
for the quarter ended June 30, 2004 were $5.2 million, an increase of 12 % from
the $4.7 million expended for the same period in 2003. The increase was
primarily attributable to a $470,000 rise in selling expenses due to expansion
of our sales force and an increase in sales commission, a cost that is directly
related to product revenue growth.
Research and development expenses relate primarily to the Company's
Restaurant segment. Research and development expenses were $1.3 million for the
quarter ended June 30, 2004, an increase of 3% from the $1.26 million recorded
for the same period in 2003. This increase reflects a modest addition to the
development staff related to new product investments.
Other income, net, was $187,000 in the second quarter of 2004 compared to
$313,000 for the same period in 2003. Other income primarily includes rental
income and foreign currency gains and losses. The decrease in the second quarter
of 2004 primarily resulted from a reduction in foreign currency gains when
compared to 2003.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense
declined 70% to $46,000 for the quarter ended June 30, 2004, as compared to
$152,000 for the same period in 2003, primarily due to lower average amounts
outstanding in 2004 as compared to 2003. Additionally, there was a decline in
the Company's borrowing rate for the quarter ended June 30, 2004 compared to the
same period in 2003.
The Company's effective tax rate was 38.2% for the quarter ended June 30,
2004 compared to the 35.4% rate for the same period in 2003. The rate increase
was primarily due to a reduced favorable impact of the Company's
extraterritorial income exclusion.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
The Company reported revenues of $80.8 million for the six months ended
June 30, 2004, an increase of 29% from the $62.6 million reported for the six
months ended June 30, 2003. The Company's net income for the six months ended
June 30, 2004 was $2 million, or $.22 diluted net income per share, compared to
net income of $537,000 and $.06 per diluted share for the same period in 2003.
Product revenues from the Company's Restaurant segment were $35.7 million
for the six months ended June 30, 2004, an increase of 40% from the $25.4
million recorded for the same period in 2003. Overall this increase was a result
of the healthy financial condition of the quick service restaurant marketplace.
Sales to McDonald's increased 94% or $7.4 million over the first six months of
2003. Due to its recent strong financial performance, McDonald's is investing in
capital equipment to upgrade its restaurants. Also contributing to this increase
was a growth in sales to CKE Restaurants of $3.1 million. Product sales to Yum!
Brands increased 40% or $2.6 million over the same period in 2003. The principal
driver of this growth was the Company's selection as the primary supplier of
restaurant systems to Yum! Brands' KFC corporate-owned stores. These increases
were partially offset by a 27% or $2.7 million decline in sales to all other
customers. This decline was due to a large sale to a non-restaurant customer in
the first half of 2003 that did not recur in 2004.
Customer Service revenues are also generated by the Company's Restaurant
segment. The Company's service offerings include installation, training,
twenty-four hour help desk support and various field and on-site service
options. Customer Service revenues were $20.9 million for the six months ended
June 30, 2004, an increase of 22% from $17.1 million for the same period in
2003. This increase was primarily due to a 84% or $2.3 million increase in
installation revenue that is directly related to the growth in the Company's
product revenue. Other service area revenues increased 8% or $1.4 million during
the first half of 2004 primarily due to increased contracts relating to the
expansion of the Company's customer base.
Contract revenues from the Company's Government segment were $24.2 million
for the six months ended June 30, 2004, an increase of 21% when compared to the
$20 million recorded for the same period in 2003. This increase primarily
resulted from a $2.9 million or 27% increase in information technology
outsourcing revenue for contracts for facility operations at critical United
States Department of Defense telecommunication sites across the globe. These
outsourcing operations provided by the Company directly support United States
Navy, Army and Air Force operations as they seek to both convert their military
information technology communications facilities into contractor-run operations
and meet new requirements with contractor support. Also contributing to this
growth was a $2.2 million or 111% increase in revenue from research contracts
involving Imagery Information Technology. This was partially offset by a $1.1
million decline in the Company's Logistic Management Program, due to reduced
funding from the United States government. This program involves the tracking of
mobile chassis under the Company's Cargo*Mate(R) contracts. The Company
anticipates new funding for this project from the United States government later
in 2004.
Product margins for the six months ended June 30, 2004 were 32%, a decline
from 34.7% for the six months ended June 30, 2003. The primary reason for the
decline was an integration project for a major customer in 2004 that involved
lower margin peripheral hardware products. Also contributing to this decline was
lower software revenue in 2004 when compared to 2003.
Customer Service margins were 13.6% for the six months ended June 30, 2004
compared to 15.8% for the same period in 2003. The lower margin in 2004 was
primarily due to higher installation expenses as a result of an increased use of
third parties in certain installations. Also contributing to the margin decline
was a $313,000 increase in the provision for service inventory obsolescence.
Contract margins were 6.7% for the six months ended June 30, 2004 versus
4.3% for the same period in 2003. The increase in contract margins is primarily
attributable to a favorable performance-based award fee on an imagery
information technology contract that did not occur in 2003. Additionally, the
Company also received a favorable contract modification on a particular
information technology outsourcing contract. The most significant components of
contract costs for 2004 and 2003 were labor and fringe benefits. For the six
months ended June 30, 2004 labor and fringe benefits were $17.5 million or 77%
of contract costs compared to $14.6 million or 76% of contract costs for the
same period in 2003.
Selling, general and administrative expenses are virtually all related to
the Company's Restaurant segment. Selling, general and administrative expenses
for the six months ended June 30, 2004 were $10.3 million, an increase of 13%
from the $9.1 million expended for the same period in 2003. The increase was
primarily attributed to a $621,000 rise in selling expenses due to a planned
addition to the sales force and an increase in sales commission, a cost that is
directly related to product revenue growth. Also contributing to this increase
was a $231,000 increase in the provision for doubtful accounts.
Research and development expenses relate primarily to the Company's
Restaurant segment. Research and development expenses were $2.6 million for the
six months ended June 30, 2004, an increase of 9% from the $2.4 million recorded
for the same period in 2003. This increase reflects a modest addition to the
development staff related to new product investments.
Other income, net, was $398,000 for the six months ended June 30, 2004
virtually unchanged from $389,000 for the same period in 2003. Other income, net
primarily includes rental income and foreign currency gains and losses.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense
declined 60% to $119,000 for the six months ended June 30, 2004, as compared to
$295,000 for the same period in 2003, due to lower average amounts outstanding
in 2004 as compared to 2003 and lower company interest rates on borrowings in
2004 when compared to 2003.
The Company's effective tax rate was 37.7% for the six months ended June
30, 2004 compared to 35.9% for the same period in 2003. The rate increase was
primarily due to a reduced favorable impact of the Company's extraterritorial
income exclusion.
Liquidity and Capital Resources
The Company's primary source of liquidity has been cash flow from
operations and lines of credit with various banks. Cash provided by continuing
operations was $9.7 million for the six months ended June 30, 2004 compared to
$1.3 million for the same period in 2003. In 2004, cash flow benefited from a
reduction in accounts receivable, operating profits for the period, and timing
of vendor payments for material purchases. In 2003, cash flow was primarily
generated from a reduction in accounts receivable and operating profits,
partially offset by the timing of vendor payments.
Cash used in investing activities was $1.3 million for the six months ended
June 30, 2004 versus $504,000 for the same period in 2003. In 2004, capital
expenditures were $952,000 and were primarily for manufacturing equipment and
information technology equipment and software for internal use. Capitalized
software costs relating to software development of Restaurant segment products
were $378,000 in 2004. For the same period in 2003, capital expenditures were
$94,000 and were primarily for improvements to the Company's headquarter
facility. Capitalized software costs were $410,000 for the corresponding period
of 2003.
Cash used in financing activities was $6.7 million for the six months ended
June 30, 2004 versus $40,000 of cash provided for the same period in 2003.
During 2004, the Company reduced its short-term bank borrowings by $7 million
and received $313,000 from the exercise of employee stock options. In 2003, the
Company reduced its short-term bank borrowings by $173,000, and received
$257,000 from the exercise of employee stock options.
The Company has an aggregate of $20,000,000 in bank lines of credit. One
line totaling $12,500,000 bears interest at the prime rate (4% at June 30, 2004)
and is subject to loan covenants including a debt to tangible net worth ratio of
1 to 1; a minimum working capital requirement of at least $25 million; and a
debt coverage ratio of 4 to 1. The total amount of credit available under this
facility at a given time is based on (a) 80% of the Company's accounts
receivable under 91 days outstanding attributable to the Company's Restaurant
segment and (b) 40% of the Company's inventory, excluding work in process. This
line expires on April 30, 2005. The remaining line of $7,500,000 allows the
Company, at its option, to borrow funds at the LIBOR rate plus the applicable
interest rate spread or at the bank's prime lending rate (4% at June 30, 2004).
This facility contains certain loan covenants including a leverage ratio of not
greater than 4 to 1 and a fixed charge coverage ratio of not less than 4 to 1.
This line expires on October 30, 2005. Both lines are collateralized by certain
accounts receivable and inventory. The Company was in compliance with all loan
covenants on June 30, 2004. At June 30, 2004, there were no borrowings under
these lines and an aggregate of $20,000,000 was available under these lines.
During fiscal year 2004, the Company anticipates that its capital
requirements will be less than $2 million. The Company does not usually enter
into long term contracts with its major Restaurant segment customers. The
Company commits to purchasing inventory from its suppliers based on a
combination of internal forecasts and the actual orders from customers. This
process, along with good relations with suppliers, minimizes the working capital
investment required by the Company. Although the Company lists two major
customers, McDonald's and Yum! Brands, it sells to hundreds of individual
franchisees of these corporations, each of which is individually responsible for
its own debts. These broadly made sales substantially reduce the impact on the
Company's liquidity if one individual franchisee reduces the volume of its
purchases from the Company in a given year. The Company, based on internal
forecasts, believes its existing cash, line of credit facilities and its
anticipated operating cash flow will be sufficient to meet its cash requirements
through at least the next twelve months. However, the Company may be required,
or could elect, to seek additional funding prior to that time. The Company's
future capital requirements will depend on many factors including its rate of
revenue growth, the timing and extent of spending to support product development
efforts, expansion of sales and marketing, the timing of introductions of new
products and enhancements to existing products, and market acceptance of its
products. The Company cannot assure that additional equity or debt financing
will be available on acceptable terms or at all. The Company's sources of
liquidity beyond twelve months, in management's opinion, will be its cash
balances on hand at that time, funds provided by operations, funds available
through its lines of credit and the long-term credit facilities that it can
arrange.
Critical Accounting Policies
The Company's consolidated financial statements are based on the
application of accounting principles generally accepted in the United States of
America (GAAP). GAAP requires the use of estimates, assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenue and expense amounts reported. The Company believes
its use of estimates and underlying accounting assumptions adhere to GAAP and
are consistently applied. Valuations based on estimates are reviewed for
reasonableness and adequacy on a consistent basis throughout the Company.
Primary areas where financial information of the Company is subject to the use
of estimates, assumptions and the application of judgment include revenue
recognition, accounts receivable, inventories, intangible assets and taxes.
Revenue Recognition Policy
The Company recognizes revenue generated by the Restaurant segment using
the guidance from SEC Staff Accounting Bulletin No. 104, "Revenue Recognition"
and the AICPA Statement of Position (SOP) 97-2, "Software Revenue Recognition,"
and other applicable revenue recognition guidance and interpretations. Product
revenue in the Restaurant segment is generated from sales of the Company's
standard point-of-sale systems. The Company recognizes revenue from the sale of
its products upon delivery to the customer's site when the Company installs its
point-of-sale systems (which primarily include hardware or hardware and
software) on behalf of its customers. The Company recognizes revenue at the time
of shipment for point-of-sale systems that are self-installed by the customer or
an unrelated third party and for component sales or supplies. In addition to
product sales, the Company may provide installation and training services, and
also offers maintenance contracts to its customers. Installation and training
service revenues are recognized as the services are performed. The Company's
other service revenues in the Restaurant segment, consisting of support, field
and depot repair, are provided to customers either on a time-and-materials basis
or under its maintenance contracts. Services provided on a time and materials
basis are recognized as the services are performed. Service revenues from
maintenance contracts are deferred when billed and recognized ratably over the
related contract period.
The Company recognizes revenue in its Government segment using the guidance
from SEC Staff Accounting Bulletin No. 104, "Revenue Recognition". The Company's
contract revenues generated by the Government segment result primarily from
contract services performed for the United States government under a variety of
costs-plus fee, time-and-material and fixed-price contracts. Revenue on
cost-plus fixed fee contracts is recognized based on allowable costs for labor
hours delivered, as well as other allowable costs plus the applicable fee.
Revenue on time-and-material contracts is recognized by multiplying the number
of direct labor-hours delivered in the performance of the contract by the
contract billing rates and adding other direct costs as incurred. Revenue for
fixed-price contracts is recognized primarily on a straight-line basis over the
life of the fixed-price contract. The Company's obligation under these contracts
is simply to provide labor hours to conduct research or to staff facilities with
no other deliverables or performance obligations. Anticipated losses on all
contracts are recorded in full when identified. Unbilled accounts receivable are
stated in the Company's financial statements at their estimated realizable
value. Contract costs, including indirect expenses, are subject to audit and
adjustment through negotiations between the Company and United States government
representatives.
Accounts receivable
Allowances for doubtful accounts are based on estimates of probable losses
related to accounts receivable balances. The establishment of allowances
requires the use of judgment and assumptions regarding probable losses on
receivable balances. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based on our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and appropriate reserves have been established, we cannot guarantee
that we will continue to experience the same credit loss rates that we have
experienced in the past. Thus, if the financial condition of our customers were
to deteriorate, our actual losses may exceed our estimates, and additional
allowances would be required.
Inventories
The Company's inventories are valued at the lower of cost or market. The
Company uses certain estimates and judgments and considers several factors
(including product demand and changes in technology) to provide for excess and
obsolescence reserves to properly value inventory.
Capitalized software development costs
The Company capitalizes certain costs related to the development of
computer software used in its Restaurant segment under the requirements of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed". Software
development costs incurred prior to establishing technological feasibility are
charged to operations and included in research and development costs. Software
development costs incurred after establishing feasibility are capitalized and
amortized when the product is available for general release to customers.
Goodwill
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
(SFAS 142). The Company adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangible assets, including
certain intangible assets recorded as a result of past business combinations,
was discontinued upon the adoption of SFAS 142. Instead, all goodwill is tested
for impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. The
Company has elected to test for impairment annually at December 31.
Taxes The Company has significant amounts of deferred tax assets that are
reviewed for recoverability and valued accordingly. These assets are evaluated
by using estimates of future taxable income streams and the impact of tax
planning strategies. Valuations related to tax accruals and assets can be
impacted by changes to tax codes, changes in statutory tax rates and the
Company's estimates of its future taxable income levels.
Factors that could affect future results
A DECLINE IN THE VOLUME OF PURCHASES MADE BY ANY ONE OF THE COMPANY'S MAJOR
CUSTOMERS WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
A small number of related customers have historically accounted for a
majority of the Company's net revenues in any given fiscal period. For the
fiscal years ended December 31, 2003, 2002 and 2001, aggregate sales to our top
two Restaurant segment customers, McDonald's and Yum! Brands, amounted to 50%,
51% and 51%, respectively, of total revenues. For the six months ended June 30,
2004 and 2003, sales to these customers were 51% and 45%, 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 technological
change. 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 compatible systems incorporating new technologies at competitive
prices. There can be no assurance that we will be able to continue funding
research and development at levels sufficient to enhance our current product
offerings, or that the Company will be able to develop and introduce on a timely
basis new products that keep pace with technological developments and emerging
industry standards and address the evolving needs of customers. There also can
be no assurance that we will not experience difficulties that will result in
delaying or preventing the successful development, introduction and marketing of
new products in our existing markets, or that our new products and product
enhancements will adequately meet the requirements of the marketplace or achieve
any significant degree of market acceptance. Likewise, there can be no assurance
as to the acceptance of our products in new markets, nor can there be any
assurance as to the success of our penetration of these markets, nor to the
revenue or profit margins realized by the Company with respect to these
products. If any of our competitors were to introduce superior software products
at competitive prices, or if our software products no longer met the needs of
the marketplace due to technological developments and emerging industry
standards, our software products may no longer retain any significant market
share. If this were to occur, we could be required to record a charge against
capitalized software costs, which amount to $1.5 million as of June 30, 2004.
WE GENERATE MUCH OF OUR REVENUE FROM THE QUICK SERVICE RESTAURANT INDUSTRY AND
THEREFORE ARE SUBJECT TO DECREASED REVENUES IN THE EVENT OF A DOWNTURN EITHER IN
THAT INDUSTRY OR IN THE ECONOMY AS A WHOLE.
For the fiscal years ended December 31, 2003, 2002 and 2001, we derived
70%, 72% and 73%, respectively, of our total revenues from the restaurant
industry, primarily the quick service restaurant ("QSR") industry. For the six
months ended June 30, 2004 and 2003 revenues from the restaurant industry were
70% and 68%, respectively, of total revenues. Consequently, our restaurant
technology product sales are dependent in large part on the health of the QSR
industry, which in turn is dependent on the domestic and international economy,
as well as factors such as consumer buying preferences and weather conditions.
Instabilities or downturns in the QSR market could disproportionately impact our
revenues, as clients may either exit the industry or delay, cancel or reduce
planned expenditures for our products. Although we believe we can assist the QSR
sector of the restaurant industry in a competitive environment, given the
cyclical nature of that industry, there can be no assurance that our
profitability and growth will continue.
WE DERIVE A PORTION OF OUR REVENUE FROM GOVERNMENT CONTRACTS, WHICH CONTAIN
PROVISIONS UNIQUE TO PUBLIC SECTOR CUSTOMERS, INCLUDING THE GOVERNMENT'S RIGHT
TO MODIFY OR TERMINATE THESE CONTRACTS AT ANY TIME.
For the fiscal years ended December 31, 2003, 2002 and 2001, we derived
30%, 28% and 27%, respectively, of our total revenues from contracts to provide
technical services to United States government agencies and defense contractors.
For the six months ended June 30, 2004 and 2003 revenues from such contracts
were 30% and 32%, respectively. Contracts with United States government agencies
typically provide that such contracts are terminable at the convenience of the
United States government. If the United States government terminated a contract
on this basis, we would be entitled to receive payment for our allowable costs
and, in general, a proportionate share of our fee or profit for work actually
performed. Most United States government contracts are also subject to
modification or termination in the event of changes in funding. As such, we may
perform work prior to formal authorization, or the contract prices may be
adjusted for increased work scope or change orders. Termination or modification
of a substantial number of our United States government contracts could have a
material adverse effect on our business, financial condition and results of
operations.
We perform work for various United States government agencies and
departments pursuant to firm fixed-price, cost-plus fixed fee and
time-and-material, prime contracts and subcontracts. The majority of our
government contracts are either firm fixed-price/time-and-material, or cost-plus
fixed fee contracts. Approximately 72% of the revenue that we derived from
government contracts for the year ended December 31, 2003 came from firm
fixed-price or time-and-material contracts. For the six months ended June 30,
2004 approximately 65% of government contract revenue was derived from firm
fixed-price or time-and-material contracts. The balance of the revenue that we
derived from government contracts in 2003 and 2004 primarily came from cost-plus
fixed fee contracts. Most of our contracts are for one-year to five-year terms.
While firm fixed-price contracts allow us to benefit from cost savings,
they also expose us to the risk of cost overruns. If the initial estimates we
use for calculating the contract price are incorrect, we can incur losses on
those contracts. In addition, some of our governmental contracts have provisions
relating to cost controls and audit rights and, if we fail to meet the terms
specified in those contracts, then we may not realize their full benefits. Lower
earnings caused by cost overruns would have an adverse effect on our financial
results.
Under time-and-materials contracts, we are paid for labor at negotiated
hourly billing rates and for certain expenses. Under cost-plus fixed fee
contracts, we are reimbursed for allowable costs and paid a fixed fee. However,
if our costs under either of these types of contract exceed the contract ceiling
or are not allowable under the provisions of the contract or applicable
regulations, we may not be able to obtain reimbursement for all of our costs.
If we are unable to control costs incurred in performing under each type of
contract, inability to control costs could have a material adverse effect on our
financial condition and operating results. Cost over-runs also may adversely
affect our ability to sustain existing programs and obtain future contract
awards.
WE FACE EXTENSIVE COMPETITION IN THE MARKETS IN WHICH WE OPERATE, AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD RESULT IN PRICE REDUCTIONS AND DECREASED
DEMAND FOR OUR PRODUCTS AND SERVICES.
There are currently five major suppliers who offer restaurant management
systems similar to ours. Some of these competitors are larger than 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 restaurant 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 restaurant products. We believe that our competitive ability depends on
our total solution offering, our product development and systems integration
capability, our direct sales force and our customer service organization. There
is no assurance, however, that we will be able to compete effectively in the
hospitality technology market in the future.
Our Government contracting business has been focused on niche offerings,
primarily signal and image processing, information technology outsourcing and
engineering services. Many of our competitors are, or are subsidiaries of,
companies such as Lockheed-Martin, Raytheon, Northrop-Grumman, BAE, Harris,
Boeing and SAIC. These companies are larger and have substantially greater
financial resources than we do. We also compete with smaller companies that
target particular segments of the government market. These companies may be
better positioned to obtain contracts through competitive proposals.
Consequently, there are no assurances that we will continue to win government
contracts as a prime contractor or subcontractor.
WE MAY NOT BE ABLE TO MEET THE UNIQUE OPERATIONAL, LEGAL AND FINANCIAL
CHALLENGES THAT RELATE TO OUR INTERNATIONAL OPERATIONS, WHICH MAY LIMIT THE
GROWTH OF OUR BUSINESS.
For the fiscal years ended December 31, 2003, 2002 and 2001, our net
revenues from sales outside the United States were 11%, 11% and 14%,
respectively, of the Company's total revenues. For the six months ended June 30,
2004 and 2003, sales outside the United States were 8% and 10%, respectively, of
the Company's total revenues. We anticipate that international sales will
continue to account for a significant portion of sales. We intend to continue to
expand our operations outside the United States and to enter additional
international markets, which will require significant management attention and
financial resources. Our operating results are subject to the risks inherent in
international sales, including, but not limited to, regulatory requirements,
political and economic changes and disruptions, geopolitical disputes and war,
transportation delays, difficulties in staffing and managing foreign sales
operations, and potentially adverse tax consequences. In addition, fluctuations
in exchange rates may render our products less competitive relative to local
product offerings, or could result in foreign exchange losses, depending upon
the currency in which we sell our products. There can be no assurance that these
factors will not have a material adverse effect on our future international
sales and, consequently, on our operating results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
INFLATION
Inflation had little effect on revenues and related costs during the first
six months of 2004. Management anticipates that it will maintain it margins at
acceptable levels to minimize the effects of inflation, if any.
INTEREST RATES
As of June 30, 2004, the Company has $2.1 million in variable long-term
debt. The Company believes that even an adverse change in interest rates of 100
basis points would not have a material impact on our business, financial
conditions, results of operations or cash flows.
FOREIGN CURRENCY
The Company's primary exposures relate to certain non-dollar denominated
sales and operating expenses in Europe and Asia. These primary currencies are
the Euro, the Australian dollar and the Singapore dollar. Management believes
that foreign currency fluctuations should not have a significant impact on our
business, financial conditions, results of operations or cash flows due to the
low volume of business affected by foreign currencies.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As of June 30, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's President and Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures, as defined in Exchange Act Rule 15d-14(c). Based upon
the evaluation, the Company's President and Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in enabling the Company to identify, process, record
and report information required to be included in the Company's periodic SEC
filings within the required time period.
(b) Changes in Internal Controls.
There was no significant change in the Company's internal controls over
financial reporting, as defined in Rule 13a-15(f) of the Exchange Act during the
quarter ended June 30, 2004 that has materially affected, or is reasonably
likely to materially affect, such internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 4: Submission of Matters to Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 25, 2004.
The following individuals were nominated and elected to serve as directors:
Dr. John W. Sammon, Jr. (Class III Director), Charles A. Constantino (Class III
Director) and Kevin R. Jost (Class I Director).
The following individuals were directors as of the date of the meeting and will
be continuing as directors:
James A. Simms (Class I Director), Sangwoo Ahn (Class II Director) and J.
Whitney Haney (Class II Director).
The shareholders voted as follows on the following matters:
1. Election of directors. The voting results for each of the nominees are as
follows:
Election of Directors Votes For Votes Withheld
- --------------------- --------- --------------
Dr. John W. Sammon, Jr. 8,077,761 260,041
Charles A. Constantino 8,077,027 260,516
Kevin R. Jost 8,254,625 83,177
2. A proposal by the Audit Committee and the Board of Directors to appoint
KPMG LLP to serve as Independent Auditor for the Company. A total of
8,327,043 shares were voted for and 4,274 shares were voted against this
proposal. The holders of 6,485 shares abstained from voting.
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Instrument
----------- -------------------------
31.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
Reports on Form 8-K
On April 28, 2004, PAR Technology Corporation filed a report on Form 8-K
pursuant to Item 12 of that Form relating to its financial information for the
quarter ended March 31, 2004, as presented in a press release which was
furnished thereto as an exhibit.
PAR TECHNOLOGY CORPORATION
FORM 10-Q, JUNE 30, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAR TECHNOLOGY CORPORATION
--------------------------
(Registrant)
Date: August 11, 2004
Ronald J. Casciano
----------------------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer
and Treasurer
Exhibit Index
Sequential
Page
Exhibit Number
------- ------
31.1 - Certification Pursuant to 18 U.S.C. E-1
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 - Certification Pursuant to 18 U.S.C. E-2
Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 - Certification Pursuant to 18 U.S.C. E-3
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 31.1
PAR TECHNOLOGY CORPORATION
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John W. Sammon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PAR Technology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information;
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
John W. Sammon
-----------------------------------
John W. Sammon
Chairman of the Board
and Chief Executive Officer
Date: August 11, 2004
E-1
Exhibit 31.2
PAR TECHNOLOGY CORPORATION
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald J. Casciano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PAR Technology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information;
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Ronald J. Casciano
-----------------------------------
Ronald J. Casciano
VP, C.F.O. & Treasurer
Date: August 11, 2004
E-2
Exhibit 32.1
PAR TECHNOLOGY CORPORATION
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PAR Technology Corporation ("the
Company") on Form 10-Q for the period ending June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof ("the Report"), we, John
W. Sammon, Chairman of the Board and Chief Executive Officer and Ronald J.
Casciano, Vice President, Chief Financial Officer and Treasurer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, to best of our knowledge, that:
(1) The Report fully complies with the requirement of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
John W. Sammon
- -------------------------
John W. Sammon
Chairman of the Board and Chief Executive Officer
Date: August 11, 2004
Ronald J. Casciano
- -------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer and Treasurer
Date: August 11, 2004
E-3