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, 2005. Commission File Number 1-9720
OR
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number __________
PAR TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 16-1434688
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
PAR Technology Park
8383 Seneca Turnpike
New Hartford, NY 13413-4991
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 738-0600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ]
No [ X ]
The number of shares outstanding of registrant's common stock, as of July
31, 2005 - 9,321,329 shares.
PAR TECHNOLOGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART 1
FINANCIAL INFORMATION
Item Number
-----------
Item 1. Financial Statements (Unaudited)
- Consolidated Statements of Income for the three and
six months ended June 30, 2005 and 2004
- Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2005 and 2004
- Consolidated Balance Sheets at
June 30, 2005 and December 31, 2004
- Consolidated Statements of Cash Flows
for the six months ended June 30, 2005 and 2004
- Notes to Unaudited Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
Item 1. Financial Statements
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,
------------------------------- -------------------------------
2005 2004 2005 2004
------------- ------------- --------------- -------------
Net revenues:
Product $ 22,930 $ 19,466 $ 43,931 $ 35,705
Service 14,416 10,570 27,818 20,877
Contract 13,874 12,889 28,228 24,241
------------- ------------- ------------- -------------
51,220 42,925 99,977 80,823
------------- ------------- ------------- -------------
Costs of sales:
Product 13,893 13,231 26,769 24,268
Service 10,923 9,084 21,370 18,029
Contract 12,944 12,082 26,509 22,612
------------- ------------- ------------- -------------
37,760 34,397 74,648 64,909
------------- ------------- ------------- -------------
Gross margin 13,460 8,528 25,329 15,914
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 7,323 5,245 14,716 10,261
Research and development 2,107 1,302 4,385 2,645
Amortization of identifiable
intangible assets 244 -- 490 --
------------- ------------- ------------- -------------
9,674 6,547 19,591 12,906
------------- ------------- ------------- -------------
Operating income 3,786 1,981 5,738 3,008
Other income, net 71 187 304 398
Interest expense (65) (46) (143) (119)
------------- ------------- ------------- -------------
Income before provision for income taxes 3,792 2,122 5,899 3,287
Provision for income taxes (1,441) (810) (2,242) (1,239)
------------- ------------- ------------- -------------
Net income $ 2,351 $ 1,312 $ 3,657 $ 2,048
============= ============= ============= =============
Earnings per share:
Basic $ .26 $ .15 $ .40 $ .24
Diluted $ .24 $ .14 $ .38 $ .22
Weighted average shares outstanding
Basic 9,116 8,636 9,035 8,603
============= ============= ============= =============
Diluted 9,761 9,192 9,673 9,156
============= ============= ============= =============
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,
----------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income $ 2,351 $ 1,312 $ 3,657 $ 2,048
Other comprehensive loss income, net of tax:
Foreign currency translation adjustments (228) (71) (365) (234)
----------- ----------- ----------- -----------
Comprehensive income $ 2,123 $ 1,241 $ 3,292 $ 1,814
=========== =========== =========== ===========
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,
2005 2004
Assets --------- ---------
Current assets:
Cash and cash equivalents .................... $ 3,045 $ 8,696
Accounts receivable-net ....................... 36,759 32,702
Inventories - net ............................. 28,263 27,047
Deferred income taxes ......................... 8,740 6,634
Other current assets .......................... 2,726 2,617
--------- ---------
Total current assets ...................... 79,533 77,696
Property, plant and equipment - net ................ 8,051 8,123
Goodwill ........................................... 15,379 15,379
Intangible assets-net .............................. 8,752 9,235
Other assets ....................................... 1,797 1,319
--------- ---------
$ 113,512 $ 111,752
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt ............. $ 58 $ 90
Borrowings under lines of credit .............. 1,900 10,246
Accounts payable .............................. 11,315 9,486
Accrued salaries and benefits ................. 7,982 8,072
Accrued expenses .............................. 3,535 2,998
Customer deposits ............................. 3,846 4,861
Deferred service revenue ...................... 10,109 9,083
Net liabilities of discontinued operation ..... 219 323
--------- ---------
Total current liabilities ................. 38,964 45,159
--------- ---------
Long-term debt ..................................... 2,003 2,005
--------- ---------
Deferred income taxes .............................. 450 194
--------- ---------
Other long-term liabilities ........................ 1,350 820
--------- ---------
Shareholders' Equity:
Preferred stock, $.02 par value,
1,000,000 shares authorized ................. -- --
Common stock, $.02 par value,
19,000,000 shares authorized;
10,490,147 and 10,139,132 shares issued;
9,286,471 and 8,935,456 outstanding ......... 209 203
Capital in excess of par value ................ 35,433 31,560
Retained earnings ............................. 41,667 38,010
Accumulated other comprehensive loss .......... (546) (181)
Treasury stock, at cost, 1,203,676 shares ..... (6,018) (6,018)
--------- ---------
Total shareholders' equity ................ 70,745 63,574
--------- ---------
$ 113,512 $ 111,752
========= =========
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months
ended June 30,
--------------------
2005 2004
--------- --------
Cash flows from operating activities:
Net income .......................................... $ 3,657 $ 2,048
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................... 1,834 1,388
Provision for bad debts .......................... 515 801
Provision for obsolete inventory ................. 2,077 1,873
Tax benefit of stock option exercises ............ 2,476 --
Deferred income tax (expense) benefit ............ (1,516) 1,365
Changes in operating assets and liabilities:
Accounts receivable ............................ (4,572) 1,613
Inventories .................................... (3,293) (358)
Other current assets ........................... (109) 386
Other assets ................................... (478) (749)
Accounts payable ............................... 1,829 1,861
Accrued salaries and benefits .................. (90) 524
Accrued expenses ............................... 537 (398)
Customer deposits .............................. (1,015) --
Deferred service revenue ....................... 1,026 (626)
Other long-term liabilities .................... 530 --
------- -------
Net cash provided by continuing
operating activities ......................... 3,408 9,728
Net cash used in discontinued operations ...... (104) (129)
------- -------
Net cash provided by operating activities ..... 3,304 9,599
------- -------
Cash flows from investing activities:
Capital expenditures ................................ (868) (952)
Capitalization of software costs .................... (411) (378)
------- -------
Net cash used in investing activities ......... (1,279) (1,330)
------- -------
Cash flows from financing activities:
Net payments under line-of-credit agreements ........ (8,346) (6,989)
Payments of long-term debt .......................... (34) (44)
Proceeds from the exercise of stock options ......... 1,403 313
------- -------
Net cash used in financing activities ......... (6,977) (6,720)
------- -------
Effect of exchange rate changes on cash and
cash equivalents ..................................... (699) (397)
------- -------
Net increase (decrease) in cash and cash equivalents ... (5,651) 1,152
Cash and cash equivalents at
beginning of period .................................. 8,696 1,467
------- -------
Cash and cash equivalents at
end of period ........................................ $ 3,045 $ 2,619
======= =======
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ......................................... $171 $142
Income taxes, net of refunds ..................... 672 228
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 six months ended June 30, 2005 are not necessarily
indicative of the results of operations to be expected for any future
period. The consolidated financial statements and notes thereto should be
read in conjunction with the audited consolidated financial statements and
notes for the year ended December 31, 2004 included in the Company's
December 31, 2004 Annual Report to the Securities and Exchange Commission
on Form 10-K.
2. On October 1, 2004, PAR Technology Corporation (the "Company") and its
wholly-owned subsidiary, PAR Springer-Miller Systems, Inc. (the
"Subsidiary"), completed their transaction with Springer-Miller Systems,
Inc. ("Springer-Miller") and John Springer-Miller pursuant to which the
Subsidiary acquired substantially all of the assets (including the equity
interests in each of Springer-Miller International, LLC and Springer-Miller
Canada, ULC), and assumed certain liabilities, of Springer-Miller.
Springer-Miller, based in Stowe, Vermont, is a provider of hospitality
management solutions for all types of hospitality enterprises including
resort hotels, destination spa and golf properties, timeshare properties
and casino resorts worldwide.
On an unaudited proforma basis, assuming the completed acquisition had
occurred as of the beginning of the period presented, the consolidated
results of the Company would have been as follows (in thousands, except per
share amounts):
For the three For the six
months ended months ended
June 30, 2004 June 30, 2004
------------- --------------
Net revenues ........................... $ 47,477 $ 89,179
Net income ............................. $ 1,552 $ 2,355
Earnings per share:
Basic ............................... $ .18 $ .27
Diluted ............................. $ .17 $ .25
The unaudited proforma financial information presented above gives effect
to purchase accounting adjustments which have resulted or are expected to
result from the acquisition. This proforma information is not necessarily
indicative of the results that would actually have been obtained had the
companies been combined for the period presented.
3. Inventories are primarily used in the manufacture and service of
Hospitality products. The components of inventory, net of related reserves,
consist of the following:
(In Thousands)
June 30, December 31,
2005 2004
-------- ---------
Finished goods ......................... $ 5,140 $ 4,745
Work in process ........................ 1,719 1,296
Component parts ........................ 4,722 4,568
Service parts .......................... 16,682 16,438
------- -------
$28,263 $27,047
======= =======
At June 30, 2005 and December 31, 2004, the Company had recorded reserves
for shrinkage, excess and obsolete inventory of $4,518,000 and $3,982,000,
respectively.
4. In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") and supercedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." In April 2005, the Securities and Exchange Commission released
a final rule "Amendment to Rule 4-01(a) of Regulation S-X Regarding the
Compliance Date for Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment". This rule defers the date for which
we will be required to adopt SFAS 123R until January 1, 2006. SFAS 123R
requires that all share-based payments to employees, including grants of
employee stock options, be recognized in the financial statements based on
their fair values. The pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial statement
recognition. We are currently evaluating the requirements of SFAS 123R and
its impact on our consolidated results of operations and earnings per
share. We have not yet determined the effect of adopting SFAS 123R, and it
has not been determined whether the adoption will result in amounts similar
to the current pro forma disclosures under SFAS 123.
Had compensation cost for the Company's stock-based compensation plans been
recorded based on the fair values of the respective options on their grant
dates for those awards, consistent with the requirements of SFAS No. 123,
the Company's net income and earnings per share would have been adjusted to
the proforma amounts indicated below (in thousands, except per share data):
(in thousands, except per share data)
For the three months For the six months
ended June 30, ended June 30,
-------------------------------- ----------------------------
2005 2004 2005 2004
------------- -------------- ------------- --------------
Net income $ 2,351 $ 1,312 $ 3,657 $ 2,048
Compensation expense (103) (49) (179) (96)
------------- -------------- ------------- --------------
Proforma net income $ 2,248 $ 1,263 $ 3,478 $ 1,952
============= ============== ============= ==============
Earnings per share:
As reported -- Basic $ .26 $ .15 $ .40 $ .24
-- Diluted $ .24 $ .14 $ .38 $ .22
Proforma -- Basic $ .25 $ .15 $ .38 $ .23
-- Diluted $ .23 $ .14 $ .36 $ .21
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 June 30,
------------------
2005 2004
------- ------
Net income .......................................... $2,351 $1,312
====== ======
Basic:
Shares outstanding at beginning of period ...... 8,985 8,615
Weighted average shares issued during the period 131 21
Weighted average common shares, basic .......... 9,116 8,636
====== ======
Earnings per common share, basic ............... $ .26 $ 0.15
====== ======
Diluted:
Weighted average common shares, basic .......... 9,116 8,636
Dilutive impact of stock options ............... 645 556
------ ------
Weighted average common shares, diluted ........ 9,761 9,192
====== ======
Earnings per common share, diluted ............. $ .24 $ 0.14
====== ======
For the six months
ended June 30,
------------------
2005 2004
------- ------
Net income .......................................... $3,657 $2,048
====== ======
Basic:
Shares outstanding at beginning of period ...... 8,935 8,555
Weighted average shares issued during the period 100 48
------ ------
Weighted average common shares, basic .......... 9,035 8,603
====== ======
Earnings per common share, basic ............... $ .40 $ 0.24
====== ======
Diluted:
Weighted average common shares, basic .......... 9,035 8,603
Dilutive impact of stock options ............... 638 553
------ ------
Weighted average common shares, diluted ........ 9,673 9,156
====== ======
Earnings per common share, diluted ............. $ .38 $ 0.22
====== ======
6. The Company's reportable segments are strategic business units that have
separate management teams and infrastructures that offer different products
and services.
The Company has two reportable segments, Hospitality and Government. The
Hospitality segment offers integrated solutions to the hospitality
industry. These offerings include industry leading hardware and software
applications utilized in point-of-sale, back of store and corporate office
applications as well as in the hotel/resort/spa marketplace. This segment
also offers customer support including field service, installation,
twenty-four hour telephone support and depot repair. The Government segment
develops advanced technology prototype systems primarily for the Department
of Defense and other Governmental agencies. It provides services for
operating and maintaining certain U.S. Government-owned communi-cation 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 six months
ended June 30, ended June 30,
-------------------- ---------------------
2005 2004 2005 2004
-------- -------- -------- ---------
Revenues:
Hospitality ............. $ 37,346 $ 30,036 $ 71,749 $ 56,582
Government .............. 13,874 12,889 28,228 24,241
-------- -------- -------- --------
Total ............. $ 51,220 $ 42,925 $ 99,977 $ 80,823
======== ======== ======== ========
Operating income:
Hospitality ............. $ 2,899 $ 1,152 $ 4,085 $ 1,493
Government .............. 887 829 1,653 1,515
-------- -------- -------- --------
3,786 1,981 5,738 3,008
Other income, net ............ 71 187 304 398
Interest expense ............. (65) (46) (143) (119)
-------- -------- -------- --------
Income before provision
for income taxes ........... $ 3,792 $ 2,122 $ 5,899 $ 3,287
======== ======== ======== ========
Depreciation and amortization:
Hospitality ............. $ 796 $ 519 $ 1,601 $ 1,084
Government .............. 22 41 42 165
Other ................... 96 110 191 139
-------- -------- -------- --------
Total ............. $ 914 $ 670 $ 1,834 $ 1,388
======== ======== ======== ========
Capital expenditures:
Hospitality ............. $ 485 $ 538 $ 721 $ 841
Government .............. 30 -- 30 --
Other ................... 41 20 117 111
-------- -------- -------- --------
Total ............. $ 556 $ 558 $ 868 $ 952
======== ======== ======== ========
The following table presents revenues by geographic area based on the
location of the use of the product or service:
(in thousands)
For the three months For the six months
ended June 30, ended June 30,
-------------------- ---------------------
2005 2004 2005 2004
------- ------- ------- ---------
United States ........ $45,864 $39,261 $89,969 $73,998
Other Countries ...... 5,356 3,664 10,008 6,825
------- ------- ------- -------
Total .......... $51,220 $42,925 $99,977 $80,823
======= ======= ======= =======
The following table represents identifiable assets by business segment:
(in thousands)
June 30, December 31,
2005 2004
--------- ---------
Identifiable assets:
Hospitality .............. $ 96,228 $ 91,432
Government ............... 9,708 9,909
Other .................... 7,576 10,411
-------- --------
Total ........................ $113,512 $111,752
======== ========
The following table presents identifiable assets by geographic area based
on the location of the asset:
(in thousands)
June 30, December 31,
2005 2004
----------- -----------
United States ................ $106,966 $105,073
Other Countries .............. 6,546 6,679
-------- --------
Total ................. $113,512 $111,752
======== ========
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,
-------------------- ------------------
2005 2004 2005 2004
------ ------ ------ -----
Restaurant Segment:
McDonald's Corporation ...... 29% 34% 29% 30%
YUM! Brands, Inc. ........... 13% 17% 12% 21%
Government Segment:
Department of Defense ....... 27% 30% 28% 30%
All Others ....................... 31% 19% 31% 19%
--- --- --- ---
100% 100% 100% 100%
=== === === ===
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statement
This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934. Any statements in this document that do not
describe historical facts are forward-looking statements. Forward-looking
statements in this document (including forward-looking statements regarding the
continued health of the Hospitality industry, future information technology
outsourcing opportunities, an expected increase in funding by the U.S.
Govern-ment relating to the Company's logistics management contracts, the impact
of current world events on our results of operations, the affects of inflation
on our margins, and the affects of interest rate and foreign currency
fluc-tuations on our results of operations) are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. When we use
words such as "intend," "anticipate," "believe," "estimate," "plan," "will," or
"expect", we are making forward-looking statements. We believe that the
assumptions and expecta-tions reflected in such forward-looking statements are
reasonable, based on information available to us on the date hereof, but we
cannot assure you that these assumptions and expectations will prove to have
been correct or that we will take any action that we presently may be planning.
We have disclosed certain important factors that could cause our actual future
results to differ materially from our current expectation, including a decline
in the volume of purchases made by one or a group of our major customers; risks
in technology development and commercialization; risks of downturns in economic
conditions generally, and in the quick-service restaurant sector of the
hospitality technology market specifically; risks associated with government
contracts; risks associated with competition and competitive pricing pressures;
and risks related to foreign operations. Forward-looking statements made in
connection with this report are necessarily qualified by these factors. We are
not undertaking to update or revise publicly any forward-looking statement if we
obtain new information or upon the occurrence of future events or otherwise.
Overview
We are the parent company of four wholly-owned subsidiary businesses:
ParTech, Inc., PAR Springer-Miller Systems, Inc., PAR Government Systems
Corporation and Rome Research Corporation.
Hospitality Segment
PAR's largest subsidiary, ParTech, Inc. is a recognized leader in
hospitality technology solutions, delivering products and solutions that
capture, move and manage information in real time to and from the point of
business activity. PAR solutions include hardware, software and professional
services to the hospitality industry including restaurants, hotels/resorts/spas,
and retail businesses. The Company's hospitality technology systems number
40,000 systems installed in over 100 countries. PAR's hospitality management
software technology assists in the operation of hospitality businesses by
managing data from end-to-end and improving profitability through more efficient
operations. The Company's professional services mission is to assist businesses
in achieving the full potential of their hospitality technology investments.
PAR manufactures products and provides services that capture mission
critical data, with long-term relationships with the hospitality industry's two
largest restaurant corporations - McDonald's Corporation and Yum! Brands, Inc.
McDonald's has over 32,000 restaurants in 121 countries and PAR has been a
preferred provider of hospitality management technology systems and lifecycle
support services to McDonald's since 1980. Yum! Brands, Inc. (which includes
Taco Bell, KFC, Pizza Hut, Long John Silvers and A & W Restaurants) has been a
PAR customer since 1983. Yum! has nearly 33,000 units globally and PAR is the
sole approved supplier of hospitality management technology systems to Yum's
Taco Bell restaurants as well as the point-of-sale ("POS") vendor of choice to
KFC. Other significant hospitality concepts where PAR is the POS vendor of
choice are: Boston Market, Chick-fil-A, CKE Restaurants (including Hardees,
Carl's Jr.), Carnival Cruise Lines, Loews Cineplex and large franchisees of each
of the foregoing brands.
In the fourth quarter 2004 PAR acquired Springer-Miller Systems, a global
leader in hospitality management solutions that meet/exceed the technology needs
of a wide variety of hotel/resort/spa enterprises including city-center hotels,
destination spa and golf properties, timeshare properties and casino resorts
worldwide. PAR's SMS|Host(R) Hospitality Management System is distinguished from
other property management systems with its truly integrated guest-centric design
and unique approach to guest service. The SMS|Host product suite, that includes
more than 20 seamlessly integrated application modules, provides respective
hotel/resort/spa staff with the tools they need to personalize service, exceed
guest expectations, and increase revenue. We are focused on delivering to our
customers our enterprise management products, solutions and services, which are
designed to increase efficiencies, increase cost-effectiveness and promote
faster execution of critical business processes. PAR maintains a distinguished
customer list in this business including: Pebble Beach Resorts, The Four
Seasons, Hard Rock Hotel & Casino, the Mandarin Oriental Hotel Group, and
Destination Hotels & Resorts.
Government Segment
PAR is also the parent of PAR Government Systems Corporation and Rome
Research Corporation, both of which are Government contractors. As a
long-standing Government contractor PAR provides information technology and
communications support services to the U.S. Navy, Air Force and Army.
Additionally, PAR serves clients in several other U.S. federal, state and local
government agencies. PAR focuses its applied technology on providing high
quality technical products and services, ranging from experimental studies to
advanced operational systems, within a variety of areas of research, including
radar, image and signal processing, logistics management systems, and geospatial
services and products. In addition, through Government-sponsored research and
development, PAR has developed technologies with relevant commercial uses. A
prime example of this "technology transfer" 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. The Company's high
quality services enable PAR to sustain winning repeat business and long-term
client relationships and also to compete effectively for new clients and new
contracts. The demand for PAR's services is created by the increasingly complex
systems and technology environments in which government agencies operate, and by
the need to stay current with emerging technology while increasing productivity
and performance.
Summary
- -------
During the first six months of 2005, the quick-service restaurant segment
of the hospitality technology market continued the positive trend set in 2004.
In 2004, the Company acquired Springer-Miller Systems which significantly added
to the Company's software product offerings in the hospitality technology
market.
The Company's Government business continues to win contracts in 2005
associated with I/T outsourcing for the U.S. Military. The Company performs
outsourcing for the three main branches of the military, as well as other
Federal Agencies including the International Broadcasting Bureau (IBB).
For the remainder of 2005, the Company anticipates the continued strong
business trends of the hospitality technology market and additional Government
I/T outsourcing opportunities. Over the years, PAR has sought to be a leader in
its two businesses 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 the Company's 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,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- --------
Revenues:
Hospitality ......... $37,346 $30,036 $71,749 $56,582
Government .......... 13,874 12,889 28,228 24,241
------- ------- ------- -------
Total consolidated revenue $51,220 $42,925 $99,977 $80,823
======= ======= ======= =======
The following discussion and analysis highlights items having a significant
affect on operations during the three and six months ended June 30, 2005. This
discussion may not be indicative of future operations or earnings. It should be
read in conjunction with the audited annual consolidated financial statements
and notes thereto and other financial and statistical information included in
this report.
Results of Operations --
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
The Company reported revenues of $51.2 million for the three months ended
June 30, 2005, an increase of 19% from the $42.9 million reported for the three
months ended June 30, 2004. The Company's net income for the three months ended
June 30, 2005 was $2.4 million, or $.24 diluted net income per share, compared
to net income of $1.3 million and $.14 per diluted share for the same period in
2004.
Product revenues from the Company's Hospitality segment were $22.9 million
for the three months ended June 30, 2005, an increase of 18% from the $19.5
million recorded in 2004. The principal reason for this increase was software
revenue from the Company's resort and spa customers. Also contributing was a
$1.5 million increase in sales to Chick-fil-A. In addition, the Company recorded
a 39% or $861,000 increase in restaurant product sales to several international
customers located in Asia, the Middle East and Latin America.
Customer service revenues are also generated by the Company's Hospitality
segment. The Company's service offerings include system integration,
installation, training, twenty-four hour help desk support, software maintenance
and various depot and on-site service options. Customer service revenues were
$14.4 million for the three months ended June 30, 2005, an increase of 36 % from
the $10.6 million for the same period in 2004. This increase was due primarily
to systems integration and software maintenance revenues associated with the
Company's resort and spa customers. Additionally, the Company increased its
field service and support center revenue for its restaurant customers by 15% or
$790,000.
Contract revenues from the Company's Government segment were $13.9 million
for the three months ended June 30, 2005, an increase of 8% when compared to the
$12.9 million recorded in the same period in 2004. The primary reason for this
growth was several contracts involving the Company's image and digital
processing capabilities.
Product margins for the three months ended June 30, 2005 were 39.4%, an
increase from 32% for the three months ended June 30, 2004. This increase in
margins was primarily attributable to higher software revenue. This software
revenue was generated from the Company's resort, spa and restaurant customers.
Customer Service margins were 24.2% for the three months ended June 30,
2005 compared to 14.1% for the same period in 2004. This increase was primarily
due to service integration and software maintenance revenue associated with the
Company's resort and spa products.
Contract margins were 6.7% for the three months ended June 30, 2005 versus
6.3% for the same period in 2004. This slight improvement was due to certain
favorable contract modifications. The most significant components of contract
costs in 2005 and 2004 were labor and fringe benefits. For the quarter ended
June 30, 2005 labor and fringe benefits were $9.5 million or 74% of contract
costs compared to $8.5 million or 70% of contract costs for the same period in
2004.
Selling, general and administrative expenses are virtually all related to
the Company's Hospitality segment. Selling, general and administrative expenses
for the three months ended June 30, 2005 were $7.3 million, an increase of 40%
from the $5.2 million expended for the same period in 2004. The increase was
primarily attributable to a rise in selling and marketing expenses due to sales
of the Company's resort and spa software products.
Research and development expenses relate primarily to the Company's
Hospitality segment. Research and development expenses were $2.1 million for the
three months ended June 30, 2005, an increase of 62% from the $1.3 million
recorded in 2004. The increase was primarily attributable to the Company's
development efforts in its resort and spa products. The Company also increased
its investment in its traditional hardware and software restaurant products.
Amortization of identifiable intangible assets was $244,000 for the quarter
ended June 30, 2005 and relates to the October 1, 2004 acquisition of Springer -
Miller Systems, Inc.
Other income, net, was $71,000 for the three months ended June 30, 2005
compared to $187,000 for the same period in 2004. Other income primarily
includes rental income and foreign currency gains and losses. The decline is due
to currency gains in 2004 that did not recur in 2005.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense was
$65,000 for the three months ended June 30, 2005 compared to $46,000 in the
second quarter of 2004. The increase is due to a higher average borrowing rate
in 2005.
For the three months ended June 30, 2005, the Company's effective tax rate
was 38%, compared to 38.2% in 2004. The variance from the federal statutory rate
in 2005 and 2004 was primarily due to state income taxes.
Results of Operations --
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
The Company reported revenues of $100 million for the six months ended June
30, 2005, an increase of 24% from the $80.8 million reported for the six months
ended June 30, 2004. The Company's net income for the six months ended June 30,
2005 was $3.7 million, or $.38 diluted net income per share, compared to net
income of $2 million and $.22 per diluted share for the same period in 2004.
Product revenues from the Company's Hospitality segment were $43.9 million
for the six months ended June 30, 2005, an increase of 23% from the $35.7
million recorded in 2004. The primary factor contributing to the increase was
software revenue from the Company's resort and spa customers. Also contributing
to this growth was sales to McDonald's which increased 15% or $2.2 million over
2004. An additional factor contributing to the increase in product revenues was
a $2.4 million increase in sales to CKE Restaurants.
Customer service revenues are also generated by the Company's Hospitality
segment. The Company's service offerings include system integration,
installation, training, twenty-four hour help desk support, software maintenance
and various depot and on-site service options. Customer service revenues were
$27.8 million for the six months ended June 30, 2005, an increase of 33% from
the $20.9 million for the same period in 2004. This increase was due primarily
to systems integration and software maintenance revenues associated with the
Company's resort and spa customers.
Contract revenues from the Company's Government segment were $28.2 million
for the six months ended June 30, 2005, an increase of 16% when compared to the
$24.2 million recorded in the same period in 2004. Contributing to this growth
was a $1.3 million or 22% increase in information technology outsourcing revenue
from contracts for facility operations at critical U.S. Department of Defense
telecommunication sites across the globe. These outsourcing operations directly
support U.S. Navy, Air Force and Army operations as the military seeks to
convert its information technology communications facilities into contractor-run
operations and to meet new requirements with contractor support. Also
contributing to this growth was an increase in revenue from the Company's
Logistics Management Program.
Product margins for the six months ended June 30, 2005 were 39.1%, an
increase from 32% for the six months ended June 30, 2004. This increase in
margins was primarily attributable to higher software revenue. This software
revenue was generated from the Company's resort, spa and restaurant customers.
Customer Service margins were 23.2% for the six months ended June 30, 2005
compared to 13.6% for the same period in 2004. This increase was primarily due
to service integration and software maintenance revenue associated with the
Company's resort and spa products.
Contract margins were 6.1% for the six months ended June 30, 2005 versus
6.7 % for the same period in 2004. The decline in contract margins is primarily
attributable to a higher than anticipated performance-based award fee on an
imagery information technology contract in 2004. The most significant components
of contract costs in 2005 and 2004 were labor and fringe benefits. For the six
months ended June 30, 2005 labor and fringe benefits were $19.4 million or 73%
of contract costs compared to $17.5 million or 77% of contract costs for the
same period in 2004.
Selling, general and administrative expenses are virtually all related to
the Company's Hospitality segment. Selling, general and administrative expenses
for the six months ended June 30, 2005 were $14.7 million, an increase of 43%
from the $10.3 million expended for the same period in 2004. The increase was
primarily attributable to a rise in selling and marketing expenses due to sales
of the Company's resort and spa software products and the Company's traditional
hardware products.
Research and development expenses relate primarily to the Company's
Hospitality segment. Research and development expenses were $4.4 million for the
six months ended June 30, 2005, an increase of 66% from the $2.6 million
recorded in 2004. The increase was primarily attributable to the Company's
development efforts in its newly acquired resort and spa products. The Company
also increased its investment in its traditional hardware and software products.
Amortization of identifiable intangible assets was $490,000 for the six
months ended June 30, 2005 and relates to the October 1, 2004 acquisition of
Springer-Miller Systems, Inc.
Other income, net, was $304,000 for the six months ended June 30, 2005
compared to $398,000 for the same period in 2004. Other income primarily
includes rental income and foreign currency gains and losses. The decline was
due to lower currency gains in 2005.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense was
$143,000 for the six months ended June 30, 2005 compared to $119,000 recorded in
2004. The increase was due to a greater average borrowing rate in 2005.
For the six months ended June 30, 2005, the Company's effective tax rate
was 38%, compared to 37.7% in 2004. The variance from the federal statutory rate
in 2005 and 2004 was primarily due to state income taxes.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been cash flow from
operations and lines of credit with various banks. Cash provided by continuing
operations was $3.4 million for the six months ended June 30, 2005 compared to
$9.7 million for 2004. In 2005, cash flow was generated from operating profits
and the timing of vendor payments for material purchases. This was partially
offset by an increase in accounts receivable and inventory. In 2004, cash flow
benefited from a reduction in accounts receivable, operating profits for the
period and timing of vendor payments.
Cash used in investing activities was $1.3 million for the six months ended
June 30, 2005 and 2004. In 2005, capital expenditures were $868,000 and were
principally for manufacturing and research and development equipment.
Capitalized software costs relating to software development of Hospitality
segment products were $411,000 in 2005. 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 Hospitality segment products were $378,000
in 2004.
Cash used in financing activities was $6.7 million for the six months ended
June 30, 2005 versus $6.7 million for the same period in 2004. In 2005, the
Company reduced its short-term bank borrowings by $8.3 million and received $1.4
million from the exercise of employee stock options. During 2004, the Company
reduced its short-term bank borrowings by $7 million and received $313,000 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 bank borrowing rate (5.4% at
June 30, 2005) and is subject to loan covenants including a debt to tangible net
worth ratio of 1.4 to 1; a minimum working capital requirement of at least $25
million; and a debt coverage ratio of 4 to 1. The total amount of credit
available under this facility at a given time is based on (a) 80% of the
Company's accounts receivable under 91 days outstanding attributable to the
Company's Hospitality segment and (b) 40% of the Company's inventory, excluding
work in process. This line expires on April 30, 2006. The second line of
$7,500,000 allows the Company, at its option, to borrow funds at the LIBOR rate
plus the applicable interest rate spread or at the bank's prime lending rate (6%
at June 30, 2005). This facility contains certain loan covenants including a
leverage ratio of not greater than 4 to 1 and a fixed charge coverage ratio of
not less than 4 to 1. This line expires on October 30, 2006. Both lines are
collateralized by certain accounts receivable and inventory. The Company was in
compliance with all loan covenants on June 30, 2005. At June 30, 2005, there
were borrowings under these lines of $1,900,000 and an aggregate of $18,100,000
was available under these lines.
During fiscal year 2005, the Company anticipates that its capital
requirements will be approximately $2 million. The Company does not usually
enter into long term contracts with its major Hospitality segment customers. The
Company commits to purchasing inventory from its suppliers based on a
combination of internal forecasts and the actual orders from customers. This
process, along with good relations with suppliers, minimizes the working capital
investment required by the Company. Although the Company lists two major
customers, McDonald's and Yum! Brands, it sells to hundreds of individual
franchisees of these corporations, each of which is individually responsible for
its own debts. These broadly made sales substantially reduce the impact on the
Company's liquidity if one individual franchisee reduces the volume of its
purchases from the Company in a given year. The Company, based on internal
forecasts, believes its existing cash, line of credit facilities and its
anticipated operating cash flow will be sufficient to meet its cash requirements
through at least the next twelve months. However, the Company may be required,
or could elect, to seek additional funding prior to that time. The Company's
future capital requirements will depend on many factors including its rate of
revenue growth, the timing and extent of spending to support product development
efforts, expansion of sales and marketing, the timing of introductions of new
products and enhancements to existing products, and market acceptance of its
products. The Company cannot assure that additional equity or debt financing
will be available on acceptable terms or at all. The Company's sources of
liquidity beyond twelve months, in management's opinion, will be its cash
balances on hand at that time, funds provided by operations, funds available
through its lines of credit and the long-term credit facilities that it can
arrange.
Critical Accounting Policies
The Company's consolidated financial statements are based on the
application of accounting principles generally accepted in the United States of
America (GAAP). GAAP requires the use of estimates, assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenue and expense amounts reported. The Company believes
its use of estimates and underlying accounting assumptions adhere to GAAP and
are consistently applied. Valuations based on estimates are reviewed for
reasonableness and adequacy on a consistent basis throughout the Company.
Primary areas where financial information of the Company is subject to the use
of estimates, assumptions and the application of judgment include revenue
recognition, accounts receivable, inventories, intangible assets and taxes.
Revenue Recognition Policy
The Company recognizes revenue generated by the Hospitality segment using
the guidance from SEC Staff Accounting Bulletin No. 104, "Revenue Recognition"
and the AICPA Statement of Position (SOP) 97-2, "Software Revenue Recognition,"
and other applicable revenue recognition guidance and interpretations. Product
revenue consists of sales of the Company's standard point-of-sale and property
management systems of the Hospitality segment. The Company recognizes revenue
from the sale of complete restaurant systems (which primarily includes hardware
or hardware and software) upon delivery to the customer site or upon
installation for certain software products. For restaurant systems that are
self-installed by the customer or an unrelated third party and for component
sales or supplies, the Company recognizes revenue at the time of shipment. In
addition to product sales, the Company may provide installation and training
services, and also offers maintenance contracts to its customers. Installation
and training service revenues are recognized as the services are performed. The
Company's other service revenues, consisting of support, field and depot repair,
are provided to customers either on a time and materials basis or under its
maintenance contracts. Services provided on a time and materials basis are
recognized as the services are performed. Service revenues from maintenance
contracts are deferred when billed and recognized ratably over the related
contract period.
The Company recognizes revenue in its Government segment using the guidance
from SEC Staff Accounting Bulletin No. 104, "Revenue Recognition." The Company's
contract revenues generated by the Government segment result primarily from
contract services performed for the U.S. Government under a variety of cost-plus
fixed fee, time-and-material and fixed-price contracts. Revenue on cost-plus
fixed fee contracts is recognized based on allowable costs for labor hours
delivered, as well as other allowable costs plus the applicable fee. Revenue on
time and material contracts is recognized by multiplying the number of direct
labor-hours delivered in the performance of the contract by the contract billing
rates and adding other direct costs as incurred. Revenue from fixed-price
contracts is recognized primarily on a straight-line basis over the life of the
fixed-price contract. The Company's obligation under these contracts is to
provide labor hours to conduct research or to staff facilities with no other
deliverables or performance obligations. Anticipated losses on all contracts are
recorded in full when identified. Unbilled accounts receivable are stated in the
Company's consolidated financial statements at their estimated realizable value.
Contract costs, including indirect expenses, are subject to audit and adjustment
through negotiations between the Company and U.S. Government representatives.
Accounts Receivable
Allowances for doubtful accounts are based on estimates of probable losses
related to accounts receivable balances. The establishment of allowances
requires the use of judgment and assumptions regarding probable losses on
receivable balances. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based on our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and appropriate reserves have been established, we cannot guarantee
that we will continue to experience the same credit loss rates that we have
experienced in the past. Thus, if the financial condition of our customers were
to deteriorate, our actual losses may exceed our estimates, and additional
allowances would be required.
Inventories
The Company's inventories are valued at the lower of cost or market. The
Company uses certain estimates and judgments and considers several factors
(including product demand and changes in technology) to provide for excess and
obsolescence reserves to properly value inventory.
Capitalized Software Development Costs
The Company capitalizes certain costs related to the development of
computer software used in its Hospitality segment under the requirements of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed". Software
development costs incurred prior to establishing technological feasibility are
charged to operations and included in research and development costs. Software
development costs incurred after establishing feasibility are capitalized and
amortized 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, through a comparison
of fair value to its carrying amount. The Company has elected to annually test
for impairment at December 31.
Taxes
The Company has significant amounts of deferred tax assets that are
reviewed for recoverability and valued accordingly. These assets are evaluated
by using estimates of future taxable income streams and the impact of tax
planning strategies. Valuations related to tax accruals and assets can be
impacted by changes to tax codes, changes in statutory tax rates and the
Company's estimates of its future taxable income levels.
Factors that could affect future results
A DECLINE IN THE VOLUME OF PURCHASES MADE BY ANY ONE OF THE COMPANY'S MAJOR
CUSTOMERS WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
A small number of related customers have historically accounted for a
majority of the Company's net revenues in any given fiscal period. For the
fiscal years ended December 31, 2004, 2003 and 2002, aggregate sales to our top
two Hospitality segment customers, McDonald's and Yum! Brands, amounted to 51%,
50% and 51%, respectively, of total revenues. For the six months ended June 30,
2005 and 2004, sales to those customers were 41% and 51%, respectively, of total
revenues. Most of the Company's customers are not obligated to provide us with
any minimum level of future purchases or with binding forecasts of product
purchases for any future period. In addition, major customers may elect to delay
or otherwise change the timing of orders in a manner that could adversely affect
the Company's quarterly and annual results of operations. There can be no
assurance that our current customers will continue to place orders with us, or
that we will be able to obtain orders from new customers.
AN INABILITY TO PRODUCE NEW PRODUCTS THAT KEEP PACE WITH TECHNOLOGICAL
DEVELOPMENTS AND CHANGING MARKET CONDITIONS COULD RESULT IN A LOSS OF MARKET
SHARE.
The products we sell are subject to rapid and continual changes in
technology. Our competitors offer products that have an increasingly wider range
of features and capabilities. We believe that in order to compete effectively we
must provide systems incorporating new technologies at competitive prices. There
can be no assurance that we will be able to continue funding research and
development at levels sufficient to enhance our current product offerings, or
that the Company will be able to develop and introduce on a timely basis new
products that keep pace with technological developments and emerging industry
standards and address the evolving needs of customers. There also can be no
assurance that we will not experience difficulties that will result in delaying
or preventing the successful development, introduction and marketing of new
products in our existing markets, or that our new products and product
enhancements will adequately meet the requirements of the marketplace or achieve
any significant degree of market acceptance. Likewise, there can be no assurance
as to the acceptance of our products in new markets, nor can there be any
assurance as to the success of our penetration of these markets, nor to the
revenue or profit margins realized by the Company with respect to these
products. If any of our competitors were to introduce superior software products
at competitive prices, or if our software products no longer met the needs of
the marketplace due to technological developments and emerging industry
standards, our software products may no longer retain any significant market
share. If this were to occur, we could be required to record a charge against
capitalized software costs, which amount to $4.1 million as of June 30, 2005.
WE GENERATE MUCH OF OUR REVENUE FROM THE HOSPITALITY INDUSTRY AND THEREFORE ARE
SUBJECT TO DECREASED REVENUES IN THE EVENT OF A DOWNTURN EITHER IN THAT INDUSTRY
OR IN THE ECONOMY AS A WHOLE.
For the fiscal years ended December 31, 2004, 2003 and 2002, we derived
71%, 70% and 72%, respectively, of our total revenues from the Hospitality
industry, primarily the quick service restaurant marketplace. For the six months
ended June 30, 2005 and 2004, revenues from the Hospitality industry were 72%
and 70%, respectively, of total revenues. Consequently, our Hospitality
technology product sales are dependent in large part on the health of the
Hospitality industry, which in turn is dependent on the domestic and
international economy, as well as factors such as consumer buying preferences
and weather conditions. Instabilities or downturns in the Hospitality market
could disproportionately impact our revenues, as clients may either exit the
industry or delay, cancel or reduce planned expenditures for our products.
Although we believe we can assist the quick service restaurant sector of the
Hospitality industry in a competitive environment, given the cyclical nature of
that industry, there can be no assurance that our profitability and growth will
continue.
WE DERIVE A PORTION OF OUR REVENUE FROM GOVERNMENT CONTRACTS, WHICH CONTAIN
PROVISIONS UNIQUE TO PUBLIC SECTOR CUSTOMERS, INCLUDING THE GOVERNMENT'S RIGHT
TO MODIFY OR TERMINATE THESE CONTRACTS AT ANY TIME.
For the fiscal years ended December 31, 2004, 2003 and 2002, we derived
29%, 30% and 28%, respectively, of our total revenues from contracts to provide
technical services to U.S. Government agencies and defense contractors. For the
six months ended June 30, 2005 and 2004, revenues from such contracts were 28%
and 30%, respectively, of total revenues. Contracts with U.S. Government
agencies typically provide that such contracts are terminable at the convenience
of the U.S. Government. If the U.S. Government terminated a contract on this
basis, we would be entitled to receive payment for our allowable costs and, in
general, a propor-tionate share of our fee or profit for work actually
performed. Most U.S. Government contracts are also subject to modification or
termination in the event of changes in funding. As such, we may perform work
prior to formal authorization, or the contract prices may be adjusted for
changes in scope of work. Termination or modification of a substantial number of
our U.S. Government contracts could have a material adverse effect on our
business, financial condition and results of operations.
We perform work for various U.S. Government agencies and departments
pursuant to fixed-price, cost-plus fixed fee and time-and-material, prime
contracts and subcontracts. Approximately 61% of the revenue that we derived
from Government contracts for the six months ended June 30, 2005 came from
fixed-price or time-and-material contracts. The balance of the revenue that we
derived from Government contracts in the first six months of 2005 primarily came
from cost-plus fixed fee contracts. Most of our contracts are for one-year to
five-year terms.
While fixed-price contracts allow us to benefit from cost savings, they
also expose us to the risk of cost overruns. If the initial estimates we use for
calculating the contract price are incorrect, we can incur losses on those
contracts. In addition, some of our governmental contracts have provisions
relating to cost controls and audit rights and, if we fail to meet the terms
specified in those contracts, then we may not realize their full benefits. Lower
earnings caused by cost overruns would have an adverse effect on our financial
results.
Under time-and-materials contracts, we are paid for labor at negotiated
hourly billing rates and for certain expenses. Under cost-plus fixed fee
contracts, we are reimbursed for allowable costs and paid a fixed fee. However,
if our costs under either of these types of contract exceed the contract ceiling
or are not allowable under the provisions of the contract or applicable
regulations, we may not be able to obtain reimbursement for all of our costs.
If we are unable to control costs incurred in performing under each type of
contract, such inability to control costs could have a material adverse effect
on our financial condition and operating results. Cost over-runs also may
adversely affect our ability to sustain existing programs and obtain future
contract awards.
WE FACE EXTENSIVE COMPETITION IN THE MARKETS IN WHICH WE OPERATE, AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD RESULT IN PRICE REDUCTIONS AND/OR DECREASED
DEMAND FOR OUR PRODUCTS AND SERVICES.
There are several suppliers who offer Hospitality management systems
similar to ours. Some of these competitors are larger than PAR and have access
to substantially greater financial and other resources and, consequently, may be
able to obtain more favorable terms than we can for components and subassemblies
incorporated into these Hospitality technology products. The rapid rate of
technological change in the Hospitality industry makes it likely that we will
face competition from new products designed by companies not currently competing
with us. These new products may have features not currently available on our
Hospitality products. We believe that our competitive ability depends on our
total solution offering, our product development and systems integration
capability, our direct sales force and our customer service organization. There
is no assurance, however, that we will be able to compete effectively in the
hospitality technology market in the future.
Our Government contracting business has been focused on niche offerings,
primarily signal and image processing, information technology outsourcing and
engineering services. Many of our competitors are, or are subsidiaries of,
companies such as Lockheed-Martin, Raytheon, Northrop-Grumman, BAE, Harris,
Boeing and SAIC. These companies are larger and have substantially greater
financial resources than we do. We also compete with smaller companies that
target particular segments of the Government market. These companies may be
better positioned to obtain contracts through competitive proposals.
Consequently, there are no assurances that we will continue to win Government
contracts as a prime contractor or subcontractor.
WE MAY NOT BE ABLE TO MEET THE UNIQUE OPERATIONAL, LEGAL AND FINANCIAL
CHALLENGES THAT RELATE TO OUR INTERNATIONAL OPERATIONS, WHICH MAY LIMIT THE
GROWTH OF OUR BUSINESS.
For the fiscal years ended December 31, 2004, 2003 and 2002, our net
revenues from sales outside the United States were 9%, 11% and 11%,
respectively, of the Company's total revenues. For the six months ended June 30,
2005 and 2004, sales outside the United States were 10% and 8%, respectively, of
the total revenues. We anticipate that international sales will continue to
account for a significant portion of sales. We intend to continue to expand our
operations outside the United States and to enter additional international
markets, which will require significant management attention and financial
resources. Our operating results are subject to the risks inherent in
international sales, including, but not limited to, regulatory requirements,
political and economic changes and disruptions, geopolitical disputes and war,
transportation delays, difficulties in staffing and managing foreign sales
operations, and potentially adverse tax consequences. In addition, fluctuations
in exchange rates may render our products less competitive relative to local
product offerings, or could result in foreign exchange losses, depending upon
the currency in which we sell our products. There can be no assurance that these
factors will not have a material adverse affect on our future international
sales and, consequently, on our operating results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
INFLATION
Inflation had little affect on revenues and related costs during the first
six months of 2005. Management anticipates that margins will be maintained at
acceptable levels to minimize the affects of inflation, if any.
INTEREST RATES
As of June 30, 2005, the Company has $2 million in variable long-term debt
and $2 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 June 30, 2005, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's President and Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Exchange Act Rule 15d-14(c).
Based upon the evaluation, the Company's President and Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures are effective in enabling the Company to identify, process,
record and report information required to be included in the Company's periodic
SEC filings within the required time period.
(b) Changes in Internal Controls.
There was no significant change in the Company's internal controls over
financial reporting, as defined in Rule 13a-15(f) of the Exchange Act during the
quarter ended June 30, 2005 that has materially affected, or is reasonably
likely to materially affect, such internal controls over financial reporting.
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Instrument
----------- -------------------------
31.1 Certification of Chairman of the Board and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President, Chief Financial Officer and Treasurer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman of the Board and Chief Executive Officer and
Vice President, Chief Financial Officer and Treasurer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
On April 27, 2005, PAR Technology Corporation furnished a report on Form
8-K pursuant to Item 2.02 (Results of Operations and Financial Condition) of
that Form relating to its financial information for the quarter ended March 31,
2005, as presented in a press release of April 27, 2005 and furnished thereto as
an exhibit.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAR TECHNOLOGY CORPORATION
--------------------------
(Registrant)
Date: August 12, 2005
RONALD J. CASCIANO
-------------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer
and Treasurer
Exhibit Index
Sequential
Page
Exhibit Number
- ------- ------
31.1 Certification of Chairman of the Board E-1
and Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Vice President, Chief E-2
Financial Officer and Treasurer Pursuant
to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Chairman of the Board E-3
and Chief Executive Officer and
Vice President, Chief Financial Officer
and Treasurer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.1
PAR TECHNOLOGY CORPORATION
STATEMENT OF EXECUTIVE OFFICER
I, John W. Sammon, Jr., certify that:
1. I have reviewed this report on Form 10-Q of PAR Technology Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. [Reserved]
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluations; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter and that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2005
John W. Sammon, Jr.
----------------------------------------
John W. Sammon, Jr.
Chairman of the Board and
Chief Executive Officer
E-1
Exhibit 31.2
PAR TECHNOLOGY CORPORATION
STATEMENT OF EXECUTIVE OFFICER
I, Ronald J. Casciano, certify that:
1. I have reviewed this report on Form 10-Q of PAR Technology Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. [Reserved]
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluations; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter and that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2005
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 June 30, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, John
W. Sammon, Jr. and Ronald J. Casciano, Chairman of the Board & Chief Executive
Officer and Vice President, Chief Financial Officer & Treasurer of the Company,
certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirement of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
John W. Sammon, Jr.
- -------------------------------
John W. Sammon, Jr.
Chairman of the Board & Chief Executive Officer
August 12, 2005
Ronald J. Casciano
- --------------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer & Treasurer
August 12, 2005
E-3