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 March 31, 2006. Commission File Number 1-9720
OR
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number __________
PAR TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 16-1434688
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
PAR Technology Park
8383 Seneca Turnpike
New Hartford, NY 13413-4991
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 738-0600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one): Large Accelerated Filer [ ] Accelerated Filer [X]
Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of registrant's common stock, as of April
30, 2006 - 14,162,282 shares.
PAR TECHNOLOGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART I
FINANCIAL INFORMATION
Item Number
-----------
Item 1. Financial Statements (unaudited)
- Consolidated Statements of Income for
the three months ended March 31, 2006 and 2005
- Consolidated Statements of Comprehensive Income for
the three months ended March 31, 2006 and 2005
- Consolidated Balance Sheets at
March 31, 2006 and December 31, 2005
- Consolidated Statements of Cash Flows
for the three months ended March 31, 2006 and 2005
- Notes to Unaudited Interim Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II
OTHER INFORMATION
Item 1A. Risk Factors
Item 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
ended March 31,
---------------------
2006 2005
--------- ---------
Net revenues:
Product ...................................... $ 23,020 $ 21,001
Service ...................................... 13,745 13,402
Contract ..................................... 15,832 14,354
-------- --------
52,597 48,757
-------- --------
Costs of sales:
Product ...................................... 12,798 12,876
Service ...................................... 10,710 10,447
Contract ..................................... 14,726 13,565
-------- --------
38,234 36,888
-------- --------
Gross margin ........................... 14,363 11,869
-------- --------
Operating expenses:
Selling, general and administrative .......... 8,075 7,393
Research and development ..................... 2,899 2,278
Amortization of identifiable intangible assets 307 246
-------- --------
11,281 9,917
-------- --------
Operating income .................................. 3,082 1,952
Other income, net ................................. 157 233
Interest expense .................................. (85) (78)
-------- --------
Income before provision for income taxes .......... 3,154 2,107
Provision for income taxes ........................ (1,142) (801)
-------- --------
Net income ........................................ $ 2,012 $ 1,306
======== ========
Earnings per share
Basic ........................................ $ .14 $ .10
Diluted ...................................... $ .14 $ .09
Weighted average shares outstanding
Basic ........................................ 14,151 13,431
======== ========
Diluted ...................................... 14,806 14,312
======== ========
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
ended March 31,
---------------------
2006 2005
--------- ---------
Net income $ 2,012 $ 1,306
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 71 (137)
-------- --------
Comprehensive income $ 2,083 $ 1,169
======== ========
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
March 31, December 31,
2006 2005
------- -----------
Assets
Current assets:
Cash and cash equivalents ........................... $ 2,322 $ 4,982
Accounts receivable-net ............................. 46,495 40,781
Inventories-net ..................................... 29,922 29,562
Income tax refunds .................................. 1,528 879
Deferred income taxes ............................... 4,235 5,690
Other current assets ................................ 2,878 2,598
--------- ---------
Total current assets ......................... 87,380 84,492
Property, plant and equipment - net ........................ 8,009 8,044
Goodwill ................................................... 20,620 20,622
Intangible assets - net .................................... 9,462 9,904
Other assets ............................................... 2,438 2,087
--------- ---------
$ 127,909 $ 125,149
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt ................... $ 79 $ 76
Borrowings under lines of credit .................... 7,123 3,500
Accounts payable .................................... 11,384 12,703
Accrued salaries and benefits ....................... 7,626 9,725
Accrued expenses .................................... 2,471 2,352
Customer deposits ................................... 3,367 3,973
Deferred service revenue ............................ 11,495 11,332
--------- ---------
Total current liabilities .................... 43,545 43,661
--------- ---------
Long-term debt ............................................. 1,926 1,948
--------- ---------
Deferred income taxes ...................................... 441 201
--------- ---------
Other long-term liabilities ................................ 1,238 847
--------- ---------
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;
15,935,924 and 15,914,958 shares issued;
14,157,620 and 14,136,654 outstanding ........... 319 318
Capital in excess of par value ...................... 37,458 37,271
Retained earnings ................................... 49,450 47,442
Accumulated other comprehensive loss ................ (540) (611)
Treasury stock, at cost, 1,778,304 shares ........... (5,928) (5,928)
--------- ---------
Total shareholders' equity ................... 80,759 78,492
--------- ---------
$ 127,909 $ 125,149
========= =========
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the three months ended March 31,
------------------------------------
2006 2005
---- ----
Cash flows from operating activities:
Net income ............................................................... $ 2,012 $ 1,306
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ....................................... 985 920
Provision for bad debts ............................................. 354 250
Provision for obsolete inventory .................................... 540 955
Equity based compensation ........................................... 43 --
Tax benefit of stock option exercises ............................... -- 127
Deferred income tax ................................................. 1,638 538
Changes in operating assets and liabilities:
Accounts receivable ............................................. (6,068) (840)
Inventories ..................................................... (900) (1,358)
Income tax refunds .............................................. (649) --
Other current assets ............................................ (280) (168)
Other assets .................................................... (351) (353)
Accounts payable ................................................ (1,319) 1,383
Accrued salaries and benefits ................................... (2,099) (325)
Accrued expenses ................................................ 119 (337)
Customer deposits ............................................... (606) (393)
Deferred service revenue ........................................ 163 954
Other long-term liabilities ..................................... 391 370
------- -------
Net cash (used in) provided by operating activities ........... (6,027) 3,029
------- -------
Cash flows from investing activities:
Capital expenditures ..................................................... (448) (312)
Capitalization of software costs ......................................... (60) (223)
------- -------
Net cash used in investing activities ......................... (508) (535)
------- -------
Cash flows from financing activities:
Net borrowings (payments) under line-of-credit agreements ................ 3,623 (7,691)
Payments of long-term debt ............................................... (19) (19)
Proceeds from the exercise of stock options .............................. 96 214
Tax benefit of stock option exercises .................................... 49 --
Cash dividend in lieu of fractional shares on stock split ................ (4) --
------- -------
Net cash provided by (used in) financing activities ........... 3,745 (7,496)
------- -------
Effect of exchange rate changes on cash and cash equivalents ................. 130 (332)
------- -------
Net decrease in cash and cash equivalents .................................... (2,660) (5,334)
Cash and cash equivalents at beginning of period ............................. 4,982 8,696
------- -------
Cash and cash equivalents at end of period ................................... $ 2,322 $ 3,362
======= =======
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ................................................................. $ 68 $ 98
Income taxes, net of refunds ............................................. 132 121
See notes to unaudited interim consolidated financial statements
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited interim consolidated financial statements have
been prepared by PAR Technology Corporation (the "Company" or "PAR") in
accordance with U.S. generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Regulation
S-X pertaining to interim financial statements. Accordingly, these interim
financial statements do not include all information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of the Company such unaudited statements include
all adjustments (which comprise only normal recurring accruals) necessary
for a fair presentation of the results for such periods. The results of
operations for the three months ended March 31, 2006 are not necessarily
indicative of the results of operations to be expected for any future
period. The consolidated financial statements and notes thereto should be
read in conjunction with the audited consolidated financial statements and
notes for the year ended December 31, 2005 included in the Company's
December 31, 2005 Annual Report to the Securities and Exchange Commission
on Form 10-K.
The preparation of consolidated financial statements requires management of
the Company to make a number of estimates and assumptions relating to the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the period.
Significant items subject to such estimates and assumptions include: the
carrying amount of property, plant and equipment, identifiable intangible
assets and goodwill, warranty reserve, valuation allowances for
receivables, inventories and deferred income tax assets. Actual results
could differ from those estimates.
2. On October 4, 2005, the Company and its wholly-owned Canadian subsidiary,
PixelPoint, ULC (the "Canadian Subsidiary"), completed their acquisition of
PixelPoint Technologies, Inc. ("PixelPoint") pursuant to which the Canadian
Subsidiary acquired all of the stock of PixelPoint. The purchase price was
$7.5 million and consisted of $542,000 in Company stock (27,210 shares of
PAR Technology Corporation common stock issued out of treasury) a
promissory note for $671,000 and the remainder in cash. The Company also
incurred $344,000 in direct acquisition costs relating to this purchase.
The purchase price is also subject to price contingencies based upon future
revenue performance against certain established targets. Based in suburban
Toronto, Ontario, PixelPoint Technologies, Inc. is a premier supplier to
the hospitality industry with over 5,000 installations in full-service
restaurants around the globe.
On December 6, 2005, the Company also acquired C(3)I Associates (C(3)I), a
Government technology services business. The Company paid $589,000 in cash
and assumed certain liabilities.
On an unaudited proforma basis, assuming the completed acquisitions had
occurred as of the beginning of the period presented, the consolidated
results of the Company would have been as follows (in thousands, except per
share amounts):
For the three months ended
March 31, 2005
--------------------------
Net revenues $ 50,320
==========
Net income $ 1,393
==========
Earnings per share:
Basic $ .10
==========
Diluted $ .10
==========
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)
--------------
March 31, December 31,
2006 2005
--------- ----------
Finished goods $ 7,469 $ 7,217
Work in process 1,679 1,874
Component parts 4,287 4,693
Service parts 16,487 15,778
--------- ---------
$ 29,922 $ 29,562
========= =========
At March 31, 2006 and December 31, 2005, the Company had recorded reserves
for shrinkage, excess and obsolete inventory of $4,100,000 and $4,189,000,
respectively.
4. Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123R
Share-Based Payment (SFAS 123R) on a modified prospective basis. This
standard requires the Company to measure the cost of employee services
received in exchange for equity awards based on the grant date fair value
of the awards. The cost is recognized as compensation expense over the
vesting period of the awards. Total compensation expense included in
operating expenses for the three months ended March 31, 2006 is $43,000.
As of March 31, 2006, there were 1,015,893 stock options outstanding. At
March 31, 2006, the unrecognized compensation expense related to non vested
options awards was $412,000 (net of estimated forfeitures). There were no
options granted or forfeited during the first three months of 2006. Option
grants issued prior to January 1, 2006 have been valued using a
Black-Scholes option valuation model.
Prior to adopting SFAS 123R on January 1, 2006, the Company's equity based
employee compensation awards were accounted for under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. For the three months ended March
31, 2005, no equity option based employee compensation cost is reflected in
net income, as all options granted under the Company's stock option plans
had an exercise price equal to the underlying common stock price on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123R to equity based employee compensation (in
thousands, except per share data):
For the three months ended
March 31, 2005
--------------------------
Net income $ 1,306
Compensation expense, net of tax (75)
---------
Proforma net income $ 1,231
=========
Earnings per share:
As reported - Basic $ .10
- Diluted $ .09
Proforma - Basic $ .09
- Diluted $ .09
The Company's 1995 Stock Option Plan expired in 2005. In 2005, the Board of
the Directors of the Company approved the 2005 Equity Incentive Plan,
subject to shareholder approval at the 2006 Annual Meeting. Under this
Plan, the Company has reserved 200,000 shares. Stock options under this
Plan may be incentive stock options or nonqualified stock options. The Plan
also provides for restricted stock grants. To date, there have been no
grants under this Plan. Stock options are nontransferable other than upon
death. Option grants generally vest over a three to five year period after
the grant and typically expire ten years after the date of the grant.
Aggregate
No. of Shares Weighted Average Intrinsic Value
(in thousands) Exercise Price (in thousands)
-------------- -------------- ---------------
Outstanding at December 31, 2004 .. 1,684 $ 3.13
Granted ....................... 70 11.40
Exercised ..................... (706) 2.59
Forfeited ..................... (11) 5.75
----- ---------
Outstanding at December 31, 2005 .. 1,037 4.03 $15,019
=======
Granted ....................... -- --
Exercised ..................... (21) 4.56
Forfeited ..................... -- --
----- ---------
Outstanding at March 31, 2006 ..... 1,016 $ 4.01 $13,944
===== ========= =======
Shares remaining
available for grant ........ 200
=====
Total shares vested and exercisable
as of March 31, 2006 .............. 667 $ 2.80 $ 9,955
===== ========= =======
Stock options outstanding at March 31, 2006 are summarized as follows:
Number
Range of Outstanding Weighted Average Weighted Average
Exercise Prices (in thousands) Remaining Life Exercise Price
- --------------- ------------- -------------- --------------
$1.25 - $4.00 648 4.7 Years $ 2.31
$4.01 - $7.25 298 8.3 Years $ 5.94
$11.40 70 9.3 Years $ 11.40
- ---------------- ----- ----------- ---------
$1.25 - $11.40 1,016 6.1 Years $ 4.01
================ ===== =========== =========
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 March 31,
-------------------
2006 2005
---- ----
Net income ........................................... $ 2,012 $ 1,306
======= =======
Basic:
Shares outstanding at beginning of period ...... 14,137 13,402
Weighted average shares issued during the period 14 29
------- -------
Weighted average common shares, basic .......... 14,151 13,431
======= =======
Earnings per common share, basic ............... $ .14 $ .10
======= =======
Diluted:
Weighted average common shares, basic .......... 14,151 13,431
Dilutive impact of stock options ............... 655 881
------- -------
Weighted average common shares, diluted ........ 14,806 14,312
======= =======
Earnings per common share, diluted ............. $ .14 $ .09
======= =======
6. On November 14, 2005, the Company's Board of Directors declared a 3 for 2
stock split in the form of a stock dividend that was distributed on January
6, 2006 to shareholders of record on December 12, 2005. All share and per
share data in these consolidated interim unaudited financial statements and
footnotes have been retroactively restated as if the stock split had
occurred as of the earliest period presented.
7. The Company's reportable segments are strategic business units that have
separate management teams and infrastructures that offer different products
and services.
The Company has two reportable segments, Hospitality and Government. The
Hospitality segment offers integrated solutions to the hospitality
industry. These offerings include industry leading hardware and software
applications utilized in point-of-sale, back of store and corporate office
applications as well as in the hotel/resort/spa marketplace. This segment
also offers customer support including field service, installation,
twenty-four hour telephone support and depot repair. The Government segment
develops advanced technology prototype systems primarily for the Department
of Defense and other Governmental agencies. It provides services for
operating and maintaining certain U.S. Government-owned communication and
test sites, and for planning, executing and evaluating experiments
involving new or advanced radar systems. It is also involved in developing
technology to track mobile chassis. Intersegment sales and transfers are
not significant.
Information as to the Company's segments is set forth below:
For the three months
ended March 31,
(in thousands)
-------------------
2006 2005
---- ----
Revenues:
Hospitality .............. $ 36,765 $ 34,403
Government ............... 15,832 14,354
-------- --------
Total ............... $ 52,597 $ 48,757
======== ========
Operating income:
Hospitality .............. $ 2,016 $ 1,186
Government ............... 1,066 766
-------- --------
3,082 1,952
Other income, net ............ 157 233
Interest expense ............. (85) (78)
-------- --------
Income before provision
for income taxes ........... $ 3,154 $ 2,107
======== ========
Revenues by geographic area:
United States ............ $ 47,290 $ 44,105
Other Countries .......... 5,307 4,652
-------- --------
Total ............... $ 52,597 $ 48,757
======== ========
Depreciation and amortization:
Hospitality .............. $ 900 $ 805
Government ............... 15 20
Other .................... 70 95
-------- --------
Total ............... $ 985 $ 920
======== ========
Capital expenditures:
Hospitality .............. $ 388 $ 236
Government ............... -- --
Other .................... 60 76
-------- --------
Total ............... $ 448 $ 312
======== ========
The following table represents identifiable assets by business segment:
March 31, December 31,
(in thousands)
--------------------------
2006 2005
---- ----
Identifiable assets:
Hospitality .... $108,298 $106,529
Government ..... 12,691 9,015
Other .......... 6,920 9,605
-------- --------
Total .............. $127,909 $125,149
======== ========
The following table presents identifiable assets by geographic area based
on the location of the asset:
March 31, December 31,
(in thousands)
--------------------------
2006 2005
---- ----
United States ..... $120,739 $119,627
Other Countries ... 7,170 5,522
-------- --------
Total ...... $127,909 $125,149
======== ========
The following table represents Goodwill by business segment:
March 31, December 31,
(in thousands)
--------------------------
2006 2005
---- ----
Hospitality .... $ 20,084 $ 20,086
Government ..... 536 536
-------- --------
Total $ 20,620 $ 20,622
======== ========
Customers comprising 10% or more of the Company's total revenues are
summarized as follows:
For the three months
ended March 31,
---------------------
2006 2005
---- ----
Hospitality Segment:
McDonald's Corporation ..... 25% 29%
YUM! Brands, Inc............ 10% 11%
Government Segment:
Department of Defense ...... 30% 29%
All Others ..................... 35% 31%
--- ---
100% 100%
=== ===
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934. Any statements in this document that do not
describe historical facts are forward-looking statements. Forward-looking
statements in this document (including forward-looking statements regarding the
continued health of the Hospitality industry, future information technology
outsourcing opportunities, an expected increase in funding by the U.S.
Government relating to the Company's logistics management contracts, the impact
of current world events on our results of operations, the effects of inflation
on our margins, and the effects of interest rate and foreign currency
fluctuations on our results of operations) are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. When we use
words such as "intend," "anticipate," "believe," "estimate," "plan," "will," or
"expect", we are making forward-looking statements. We believe that the
assumptions and expectations reflected in such forward-looking statements are
reasonable, based on information available to us on the date hereof, but we
cannot assure you that these assumptions and expectations will prove to have
been correct or that we will take any action that we presently may be planning.
We have disclosed certain important factors that could cause our actual future
results to differ materially from our current expectation, including a decline
in the volume of purchases made by one or a group of our major customers; risks
in technology development and commercialization; risks of downturns in economic
conditions generally, and in the quick-service sector of the hospitality market
specifically; risks associated with government contracts; risks associated with
competition and competitive pricing pressures; and risks related to foreign
operations. Forward-looking statements made in connection with this report are
necessarily qualified by these factors. We are not undertaking to update or
revise publicly any forward-looking statement if we obtain new information or
upon the occurrence of future events or otherwise.
Overview
PAR is a global designer, manufacturer and marketer of hospitality
technology systems. We also are a provider to the Federal Government, and its
agencies, of engineering services and applied technology. The primary end
markets for our products and services are:
o restaurant, hotel/resort, entertainment, and retail industries for the
integrated technologies of transaction processing and data capture for
certain enterprises
o the U.S. military and a broad range of government agencies
The Company's hospitality technology products are used in a variety of
applications by numerous customers. The Company encounters competition in all of
its markets (restaurants, hotels, theaters, etc.) and competes primarily on the
basis of product design/features, product quality/reliability, price, customer
service and delivery capability. There has been a trend amongst our hospitality
customers to consolidate their lists of approved vendors to companies that have
a global reach, can achieve quality and delivery standards, have multiple
product offerings, R&D capability, and be competitive with their pricing. PAR
believes that its global presence as a hospitality technology provider is an
important competitive advantage as it allows the Company to provide innovative
products, with a significant delivery capability, globally to its multinational
customers like McDonald's, Yum! Brands and Mandarin Oriental Hotel Group. During
2005 the Company acquired PixelPoint Technologies of Toronto, Ontario, Canada.
PixelPoint designs software specifically for the table service segment of the
restaurant industry and the Company views this business as a natural progression
of the Company to be the dominant supplier of hospitality technology across
several vertical industries. During the first quarter of 2006, the Company was
awarded the Corner Bakery Cafe account by CBC Restaurant Corp. CBC Restaurant
selected the Company's integrated hospitality management technology solution for
its restaurant operations specifying the PixelPoint software application suite
operating on the Company's new VIGO POS(TM) hardware terminals for their cafes.
The Company also announced a contract with the Hamilton Island resort in
Australia for its resort software. Additionally, the Company became an approved
supplier of integrated restaurant technology solutions to more than 11,000
Burger King restaurants around the world.
PAR's strategy is to provide complete integrated technology systems and
services and a high level of customer service in the markets in which it
competes. The Company focuses its research and development efforts to develop
cutting-edge products that meet and exceed our customers' needs and also have
high probability for broader market appeal and success. PAR also focuses upon
efficiency in our operations and controlling costs. This is achieved through the
investment in modern production technologies, managing purchasing processes and
functions.
PAR operates two wholly-owned subsidiaries in the Government business
segment, PAR Government Systems Corporation (PGSC) and Rome Research Corporation
(RRC). As a long-standing Government contractor, PAR develops advanced
technology systems for the U.S. Department of Defense and other U.S.
Governmental agencies. Additionally, PAR provides information technology and
communications support services to the U.S. Navy, U.S. Air Force and U.S. Army.
PAR focuses its computer-based system design services 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, logistic management systems, and geospatial
services and products. PAR's Government engineering service business provides
management and engineering services that include facilities operation and
management. In December 2005, PAR acquired C(3)I Associates, a government
technology services business and PAR will continue to seek out similar companies
for partnership or acquisition as we expand our depth in this segment. In 2005
PAR was awarded several new contracts with the U.S. Navy, including one for the
operation of a Navy I/T facility in Italy, several awards with the General
Services Administration and the International Broadcast Bureau. In the first
quarter of 2006, the Company was awarded a $3.8 million contract with the
Government's Defense Finance and Accounting Service to provide Information
Technology instruction and helpdesk services. The Company will continue to
execute its strategy of leveraging its core technical capabilities and
performance into related technical areas and an expanding customer base. The
Company will seek to accelerate this growth through strategic acquisitions of
businesses that broaden the Company's technology and/or business base.
The Company's intention is to continue to expand our customer base and
solidify our leading position in the industries to which we market by:
o Developing integrated solutions o Continuing to grow our global
presence in growth markets
o Focusing on customer needs
o Encouraging entrepreneurial corporate attitude and spirit
o Fostering a mindset of controlling cost o Pursuing strategic
acquisitions
Summary
We believe we can continue to be successful in our two core business
segments -Hospitality Technology and Government Contracting- because of our
focus and industry expertise. In addition, our operations will benefit from our
efficient supply chain and economies of scale as we leverage our suppliers and
distribution operations. We remain committed to streamlining our operations and
improving our return on invested capital through a variety of initiatives.
The following table sets forth the Company's net revenues by reportable
segment for the quarter ended March 31 (in thousands):
2006 2005
---- ----
Net revenues:
Hospitality $ 36,765 $ 34,403
Government 15,832 14,354
---------- ----------
Total consolidated net revenues $ 52,597 $ 48,757
========== ==========
The following discussion and analysis highlights items having a significant
effect on operations during the three month period ended March 31, 2006. 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 March 31, 2006 Compared to Three Months Ended March 31, 2005
The Company reported revenues of $52.6 million for the quarter ended March
31, 2006, an increase of 8% from the $48.8 million reported for the quarter
ended March 31, 2005. The Company's net income for the quarter ended March 31,
2006 was $2 million, or $.14 diluted net income per share, compared to net
income of $1.3 million and $.09 per diluted share for the same period in 2005.
Product revenues from the Company's Hospitality segment were $23 million
for the quarter ended March 31, 2006, an increase of 10% from the $21 million
recorded in 2005. This increase of $2 million is due to a $1.6 million increase
in sales to domestic customers. Key restaurant customers contributing to this
increase were Corner Bakery and Papa Murphy's. The balance of the increase was
due to international customers, primarily McDonald's. Sales to the Company's
resort and spa customers also contributed to the international growth.
Customer service revenues are also generated by the Company's Hospitality
segment. The Company's service offerings include system integration,
installation, training, twenty-four hour help desk support and various depot and
on-site service options. Customer service revenues were $13.7 million for the
quarter ended March 31, 2006, an increase of 3% from the $13.4 million for the
same period in 2005. The increase was due to a 17% or $900,000 growth in the
Company's field service and support center revenue for its restaurant customers
due to expansion of the Company's customer base. Additionally, systems
integration and software maintenance revenues from the Company's resort and spa
customers contributed to its revenue growth. This was partially offset by a
decline in installation revenue due to the timing of customer installations.
Contract revenues from the Company's Government segment were $15.8 million
for the quarter ended March 31, 2006, an increase of 10% when compared to the
$14.4 million recorded in the same period in 2005. This growth was primarily due
to a $700,000 increase in applied technology contracts including those involving
the development of software to assist Air Force command level personnel in air
battle planning. Also contributing to this growth was a $400,000 increase in
information technology outsourcing revenue from contracts for facility
operations at critical U.S. Department of Defense telecommunication sites across
the globe. These outsourcing operations provided by the Company directly support
U.S. Navy, Air Force and Army operations as they seek to convert their military
information technology communications facilities into contractor-run operations
and to meet new requirements with contractor support.
Product margins for the quarter ended March 31, 2006 were 44.4%, an
increase of 570 basis points from the 38.7% for the quarter ended March 31,
2005. This increase in margins was primarily attributable to higher software
revenue. This software revenue was generated from the Company's resort, spa and
restaurant customers including license sales of the Company's newly acquired
PixelPoint software.
Customer Service margins were 22.1% for the quarter ended March 31, 2006
compared to 22% for the same period in 2005. While margins increased in several
service areas, they were offset by a decline in installation margins for
restaurant customers due to the drop in installation revenue for the period.
Contract margins were 7% for the quarter ended March 31, 2006 versus 5.5%
for the same period in 2005. The margin increase resulted from a favorable cost
share adjustment on our Logistics Management program and higher margins on
certain fixed price contracts. The most significant components of contract costs
in 2006 and 2005 were labor and fringe benefits. For the quarter ended March 31,
2006, labor and fringe benefits were $11.7 million or 80% of contract costs
compared to $9.8 million or 72% of contract costs for the same period in 2005.
Selling, general and administrative expenses are virtually all related to
the Company's Hospitality segment. Selling, general and administrative expenses
for the quarter ended March 31, 2006 were $8.1 million, an increase of 9% from
the $7.4 million expense for the same period in 2005. The increase was primarily
attributable to a rise in selling and marketing expenses related to sales of the
Company's traditional hardware and software products. Also contributing to the
increase was an investment in the Company's restaurant sales force, the cost of
compliance with the Sarbanes-Oxley regulations, and the Company's 2005
acquisition of PixelPoint Technologies, Inc.
Research and development expenses relate primarily to the Company's
Hospitality segment. Research and development expenses were $2.9 million for the
quarter ended March 31, 2006, an increase of 27% from the $2.3 million recorded
in 2005. The increase was primarily attributable to the Company's research and
development in its recently acquired PixelPoint subsidiary. The Company also
continues to conduct research and development related to its hardware and
software products for its restaurant, resort and spa customers.
Amortization of identifiable intangible assets was $307,000 for the first
quarter of 2006 compared to $246,000 for 2005. The increase is primarily due to
amortization relating to the acquisition of PixelPoint Technologies, Inc. on
October 4, 2005.
Other income, net, was $157,000 for the quarter ended March 31, 2006
compared to $233,000 for the same period in 2005. Other income primarily
includes rental income and foreign currency gains and losses. The decrease in
2006 resulted primarily from a decline in foreign currency gains when compared
to 2005.
Interest expense represents interest charged on the Company's short-term
borrowing requirements from banks and from long-term debt. Interest expense was
$85,000 for the quarter ended March 31, 2006 as compared to $78,000 in 2005. The
Company experienced a higher borrowing interest rate in 2006 which was offset by
a lower average borrowings outstanding in 2006 when compared to 2005.
For the quarter ended March 31, 2006, the Company's effective income tax
rate was 36.2%, compared to 38% in 2005. The variance from the federal statutory
rate in 2006 and 2005 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 used in operations was
$6 million for the quarter ended March 31, 2006 compared to cash provided by
operations of $3 million for 2005. In 2006, cash was negatively impacted by the
timing of customer receipts and the payment of employee bonuses. In 2005, cash
flow was generated primarily from operating profits, the tax benefit generated
from the exercise of stock options and the timing of vendor payments for
material purchases.
Cash used in investing activities was $508,000 for the quarter ended March
31, 2006 versus $535,000 for the same period in 2005. In 2006, capital
expenditures were $448,000 and were principally for manufacturing equipment and
information technology equipment and software for internal use. Capitalized
software costs relating to software development of Hospitality segment products
were $60,000 in 2006. In 2005, capital expenditures were $312,000 and were
primarily for manufacturing and research and development equipment. Capitalized
software costs relating to software development of Hospitality segment products
were $223,000 in 2005.
Cash provided by financing activities was $3.7 million for the quarter
ended March 31, 2006 versus cash used by financing activities of $7.5 million in
2005. During 2006, the Company increased its short-term bank borrowings by $3.6
million and received $96,000 from the exercise of employee stock options. In
2005, the Company reduced its short-term bank borrowings by $7.7 million and
received $214,000 from the exercise of employee stock options.
The Company has an aggregate availability of $20,000,000 in bank lines of
credit secured by eligible receivables and inventory. One line totaling
$12,500,000 bears interest at the bank borrowing rate (6.9% at March 31, 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 (7.1% at March 31, 2006).
At March 31, 2006, there was $7,123,000 outstanding under these lines and
$12,877,000 available under these lines. In April 2006, these lines were renewed
for three years and now expire in April 2009. Under the new agreements, the
Company can borrow funds at the LIBOR rate plus the applicable interest rate
spread. The new facilities contain certain loan covenants including a leverage
ratio of greater than 5 to 1 and a fixed charge coverage ratio of not greater
than 4 to 1. These new lines are unsecured.
During fiscal year 2006, the Company anticipates that its capital
requirements will be approximately $2 million. The Company does not usually
enter into long term contracts with its major Hospitality segment customers. The
Company commits to purchasing inventory from its suppliers based on a
combination of internal forecasts and the actual orders from customers. This
process, along with good relations with suppliers, minimizes the working capital
investment required by the Company. Although the Company lists two major
customers, McDonald's and Yum! Brands, it sells to hundreds of individual
franchisees of these corporations, each of which is individually responsible for
its own debts. These broadly made sales substantially reduce the impact on the
Company's liquidity if one individual franchisee reduces the volume of its
purchases from the Company in a given year. The Company, based on internal
forecasts, believes its existing cash, line of credit facilities and its
anticipated operating cash flow will be sufficient to meet its cash requirements
through at least the next twelve months. However, the Company may be required,
or could elect, to seek additional funding prior to that time. The Company's
future capital requirements will depend on many factors including its rate of
revenue growth, the timing and extent of spending to support product development
efforts, expansion of sales and marketing, the timing of introductions of new
products and enhancements to existing products, and market acceptance of its
products. The Company cannot assure that additional equity or debt financing
will be available on acceptable terms or at all. The Company's sources of
liquidity beyond twelve months, in management's opinion, will be its cash
balances on hand at that time, funds provided by operations, funds available
through its lines of credit and the long-term credit facilities that it can
arrange.
Critical Accounting Policies
The Company's consolidated financial statements are based on the
application of U.S. generally accepted accounting principles (GAAP). GAAP
requires the use of estimates, assumptions, judgments and subjective
interpretations of accounting principles that have an impact on the assets,
liabilities, revenue and expense amounts reported. The Company believes its use
of estimates and underlying accounting assumptions adhere to GAAP and are
consistently applied. Valuations based on estimates are reviewed for
reasonableness and adequacy on a consistent basis throughout the Company.
Primary areas where financial information of the Company is subject to the use
of estimates, assumptions and the application of judgment include revenue
recognition, accounts receivable, inventories, intangible assets 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 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, with
cost determined using the first-in, first-out (FIFO) method. The Company uses
certain estimates and judgments and considers several factors including product
demand and changes in technology to provide for excess and obsolescence reserves
to properly value inventory.
Capitalized Software Development Costs
The Company capitalizes certain costs related to the development of
computer software used in its Hospitality segment under the requirements of
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. Software
development costs incurred prior to establishing technological feasibility are
charged to operations and included in research and development costs. Software
development costs incurred after establishing feasibility are capitalized and
amortized over the estimated economic life when the product is available for
general release to customers.
Goodwill
Following Financial Accounting Standards Board issuance of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
(SFAS 142), the Company tests all goodwill for impairment annually, or more
frequently if circumstances indicate potential impairment. The Company has
elected to annually test for impairment in the fourth quarter of its fiscal
year.
Taxes
The Company has significant amounts of deferred tax assets that are
reviewed for recoverability and valued accordingly. These assets are evaluated
by using estimates of future taxable income and the impact of tax planning
strategies. Valuations related to tax accruals and assets can be impacted by
changes to tax codes, changes in statutory tax rates and the Company's estimates
of its future taxable income levels.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Inflation
Inflation had little effect on revenues and related costs during the first
quarter of 2006. Management anticipates that margins will be maintained at
acceptable levels to minimize the affects of inflation, if any.
Interest rates
As of March 31, 2006, the Company has $2 million in variable long-term debt
and $7.1 million in variable short-term debt. The Company believes that an
adverse change in interest rates of 100 basis points would not have a material
impact on our business, financial condition, results of operations or cash
flows.
Foreign currency
The Company's primary exposures relate to certain non-dollar denominated
sales and operating expenses in Europe and Asia. These primary currencies are
the Euro, the Australian dollar and the Singapore dollar. Management believes
that foreign currency fluctuations should not have a significant impact on our
business, financial conditions, results of operations or cash flows due to the
low volume of business affected by foreign currencies.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this report, the Company, 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,
carried out an evaluation of the effectiveness of the "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) of the Company. These officers have
concluded that our disclosure controls and procedures are effective. As such,
the Company believes that all material information relating to the Company and
its consolidated subsidiaries required to be disclosed in periodic filings with
the Securities and Exchange Commission (i) is recorded, processed, summarized
and reported within the required time period, and (ii) is accumulated and
communicated to the Company's management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
(b) Changes in Internal Controls.
There was no change in the Company's internal controls over financial
reporting, as defined in Rule 13a-15(f) of the Exchange Act during the quarter
ended March 31, 2006 that has materially affected, or is reasonably likely to
materially affect, such internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1A. Risk Factors
We operate in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following section describes some, but not
all, of the risks and uncertainties that could have a material adverse effect on
our business, financial condition, results of operations and the market price of
our common stock, and could cause our actual results to differ materially from
those expressed or implied in our forward-looking statements.
A decline in the volume of purchases made by any one of the company's major
customers would materially adversely affect our business.
A small number of related customers have historically accounted for a
majority of the Company's net revenues in any given fiscal period. For the
fiscal years ended December 31, 2005, 2004 and 2003, aggregate sales to our top
two Hospitality segment customers, McDonald's and Yum! Brands, amounted to 41%,
51% and 50%, respectively, of total revenues. For the three months ended March
31, 2006 and 2005, sales to those customers were 35% and 40%, respectively of
total revenues. Most of the Company's customers are not obligated to provide us
with any minimum level of future purchases or with binding forecasts of product
purchases for any future period. In addition, major customers may elect to delay
or otherwise change the timing of orders in a manner that could adversely affect
the Company's quarterly and annual results of operations. There can be no
assurance that our current customers will continue to place orders with us, or
that we will be able to obtain orders from new customers.
An inability to produce new products that keep pace with technological
developments and changing market conditions could result in a loss of market
share.
The products we sell are subject to rapid and continual changes in
technology. Our competitors offer products that have an increasingly wider range
of features and capabilities. We believe that in order to compete effectively we
must provide systems incorporating new technologies at competitive prices. There
can be no assurance that we will be able to continue funding research and
development at levels sufficient to enhance our current product offerings, or
that the Company will be able to develop and introduce on a timely basis new
products that keep pace with technological developments and emerging industry
standards and address the evolving needs of customers. There also can be no
assurance that we will not experience difficulties that will result in delaying
or preventing the successful development, introduction and marketing of new
products in our existing markets, or that our new products and product
enhancements will adequately meet the requirements of the marketplace or achieve
any significant degree of market acceptance. Likewise, there can be no assurance
as to the acceptance of our products in new markets, nor can there be any
assurance as to the success of our penetration of these markets, nor to the
revenue or profit margins realized by the Company with respect to these
products. If any of our competitors were to introduce superior software products
at competitive prices, or if our software products no longer met the needs of
the marketplace due to technological developments and emerging industry
standards, our software products may no longer retain any significant market
share. If this were to occur, we could be required to record a charge against
capitalized software costs, which amount to $3.4 million as of March 31, 2006.
We generate much of our revenue from the hospitality industry and therefore are
subject to decreased revenues in the event of a downturn either in that industry
or in the economy as a whole.
For the fiscal years ended December 31, 2005, 2004 and 2003, we derived
73%, 71% and 70%, respectively, of our total revenues from the Hospitality
industry, primarily the quick service restaurant marketplace. For the three
months ended March 31, 2006 and 2005, revenues from the Hospitality industry
were 70% and 71%, respectively, of total revenues. Consequently, our Hospitality
technology product sales are dependent in large part on the health of the
Hospitality industry, which in turn is dependent on the domestic and
international economy, as well as factors such as consumer buying preferences
and weather conditions. Instabilities or downturns in the Hospitality market
could disproportionately impact our revenues, as clients may either exit the
industry or delay, cancel or reduce planned expenditures for our products.
Although we believe we can assist the quick service restaurant sector of the
Hospitality industry in a competitive environment, given the cyclical nature of
that industry, there can be no assurance that our profitability and growth will
continue.
We derive a portion of our revenue from government contracts, which contain
provisions unique to public sector customers, including the government's right
to modify or terminate these contracts at any time.
For the fiscal years ended December 31, 2005, 2004 and 2003, we derived
27%, 29% and 30%, respectively, of our total revenues from contracts to provide
technical services to U.S. Government agencies and defense contractors. For the
three months ended March 31, 2006 and 2005, revenues from such contracts were
30% and 29%, respectively, of total revenues. Contracts with U.S. Government
agencies typically provide that such contracts are terminable at the convenience
of the U.S. Government. If the U.S. Government terminated a contract on this
basis, we would be entitled to receive payment for our allowable costs and, in
general, a proportionate share of our fee or profit for work actually performed.
Most U.S. Government contracts are also subject to modification or termination
in the event of changes in funding. As such, we may perform work prior to formal
authorization, or the contract prices may be adjusted for changes in scope of
work. Termination or modification of a substantial number of our U.S. Government
contracts could have a material adverse effect on our business, financial
condition and results of operations.
We perform work for various U.S. Government agencies and departments
pursuant to fixed-price, cost-plus fixed fee and time-and-material, prime
contracts and subcontracts. Approximately 64% of the revenue that we derived
from Government contracts for the year ended December 31, 2005 came from
fixed-price or time-and-material contracts. The balance of the revenue that we
derived from Government contracts in 2005 primarily came from cost-plus fixed
fee contracts. Most of our contracts are for one-year to five-year terms.
While fixed-price contracts allow us to benefit from cost savings, they
also expose us to the risk of cost overruns. If the initial estimates we use for
calculating the contract price are incorrect, we can incur losses on those
contracts. In addition, some of our governmental contracts have provisions
relating to cost controls and audit rights and, if we fail to meet the terms
specified in those contracts, then we may not realize their full benefits. Lower
earnings caused by cost overruns would have an adverse effect on our financial
results.
Under time-and-materials contracts, we are paid for labor at negotiated
hourly billing rates and for certain expenses. Under cost-plus fixed fee
contracts, we are reimbursed for allowable costs and paid a fixed fee. However,
if our costs under either of these types of contract exceed the contract ceiling
or are not allowable under the provisions of the contract or applicable
regulations, we may not be able to obtain reimbursement for all of our costs.
If we are unable to control costs incurred in performing under each type of
contract, such inability to control costs could have a material adverse effect
on our financial condition and operating results. Cost over-runs also may
adversely affect our ability to sustain existing programs and obtain future
contract awards.
We face extensive competition in the markets in which we operate, and our
failure to compete effectively could result in price reductions and/or decreased
demand for our products and services.
There are several suppliers who offer Hospitality management systems
similar to ours. Some of these competitors are larger than PAR and have access
to substantially greater financial and other resources and, consequently, may be
able to obtain more favorable terms than we can for components and subassemblies
incorporated into these Hospitality technology products. The rapid rate of
technological change in the Hospitality industry makes it likely that we will
face competition from new products designed by companies not currently competing
with us. These new products may have features not currently available on our
Hospitality products. We believe that our competitive ability depends on our
total solution offering, our product development and systems integration
capability, our direct sales force and our customer service organization. There
is no assurance, however, that we will be able to compete effectively in the
hospitality technology market in the future.
Our Government contracting business has been focused on niche offerings,
primarily signal and image processing, information technology outsourcing and
engineering services. Many of our competitors are, or are subsidiaries of,
companies such as Lockheed-Martin, Raytheon, Northrop-Grumman, BAE, Harris and
SAIC. These companies are larger and have substantially greater financial
resources than we do. We also compete with smaller companies that target
particular segments of the Government market. These companies may be better
positioned to obtain contracts through competitive proposals. Consequently,
there are no assurances that we will continue to win Government contracts as a
prime contractor or subcontractor.
We may not be able to meet the unique operational, legal and financial
challenges that relate to our international operations, which may limit the
growth of our business.
For the fiscal years ended December 31, 2005, 2004 and 2003, our net
revenues from sales outside the United States were 11%, 9% and 11%,
respectively, of the Company's total revenues. For the three months ended March
31, 2006 and 2005, sales outside the United States were 10% and 9%,
respectively, of the total revenues. We anticipate that international sales will
continue to account for a significant portion of sales. We intend to continue to
expand our operations outside the United States and to enter additional
international markets, which will require significant management attention and
financial resources. Our operating results are subject to the risks inherent in
international sales, including, but not limited to, regulatory requirements,
political and economic changes and disruptions, geopolitical disputes and war,
transportation delays, difficulties in staffing and managing foreign sales
operations, and potentially adverse tax consequences. In addition, fluctuations
in exchange rates may render our products less competitive relative to local
product offerings, or could result in foreign exchange losses, depending upon
the currency in which we sell our products. There can be no assurance that these
factors will not have a material adverse affect on our future international
sales and, consequently, on our operating results.
Our business depends on a large number of highly qualified professional
employees and, if we are not able to recruit and retain a sufficient number of
these employees, we would not be able to provide high quality services to our
current and future customers, which would have an adverse effect on our revenues
and operating results.
We actively compete for qualified professional staff. The availability or
lack thereof of qualified professional staff may affect our ability to develop
new products and to provide services and meet the needs of our customers in the
future. An inability to fulfill customer requirements due to a lack of available
qualified staff at agreed upon salary rates may adversely impact our operating
results in the future.
a significant portion of our total assets consists of goodwill and identifiable
intangible assets, which are subject to a periodic impairment analysis and a
significant impairment determination in any future period could have an adverse
effect on our results of operations even without a significant loss of revenue
or increase in cash expenses attributable to such period.
We have goodwill and identifiable intangible assets totaling approximately
$20.6 million and $9.5 million at March 31, 2006, respectively, resulting
primarily from several business acquisitions. At least annually, we evaluate
goodwill and identifiable intangible assets for impairment based on the fair
value of the operating business unit to which these assets relate. This
estimated fair value could change if we are unable to achieve operating results
at the levels that have been forecasted, the market valuation of such companies
decreases based on transactions involving similar companies, or there is a
permanent, negative change in the market demand for the services offered by the
business unit. These changes could result in an impairment of the existing
goodwill and identifiable intangible asset balances that could require a
material non-cash charge to our results of operations.
Item 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 February 6, 2006, PAR Technology Corporation furnished a report on Form
8-K pursuant to Item 8.01 (Other Events) of that Form relating to the name of
the director chosen to preside at the regularly scheduled executive sessions of
the non-management directors of PAR Technology Corporation is Director Sangwoo
Ahn.
On February 14, 2006, PAR Technology Corporation furnished a report on Form
8-K pursuant to Item 2.02 (Results of Operations and Financial Condition) of
that Form relating to its financial information for the quarter ended December
31, 2005, as presented in a press release of February 14, 2006 and furnished
thereto as an exhibit.
On March 28, 2006, PAR Technology Corporation furnished a report on Form
8-K pursuant to Item 5.02 (Departure of Directors or Principal Officers;
Election of Directors; Appointment of Principal Officers) of that Form relating
to the received notice from Mr. J. Whitney Haney of his decision not to stand
for re-election to the Company's Board of Directors.
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: May 10, 2006
RONALD J. CASCIANO
---------------------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer
and Treasurer
Exhibit Index
Sequential
Page
Exhibit Number
------- ------
31.1 Certification of Chairman of the Board E-1
and Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Vice President, Chief E-2
Financial Officer and Treasurer Pursuant
to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Chairman of the Board E-3
and Chief Executive Officer and
Vice President, Chief Financial Officer
and Treasurer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.1
PAR TECHNOLOGY CORPORATION
STATEMENT OF EXECUTIVE OFFICER
I, John W. Sammon, Jr., certify that:
1. I have reviewed this report on Form 10-Q of PAR Technology Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)), for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter and that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 10, 2006
John W. Sammon, Jr.
-------------------------------------------------
John W. Sammon, Jr.
Chairman of the Board and Chief Executive Officer
E-1
Exhibit 31.2
PAR TECHNOLOGY CORPORATION
STATEMENT OF EXECUTIVE OFFICER
I, Ronald J. Casciano, certify that:
1. I have reviewed this report on Form 10-Q of PAR Technology Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)), for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter and that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 10, 2006
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 March 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, John
W. Sammon, Jr. and Ronald J. Casciano, Chairman of the Board & Chief Executive
Officer and Vice President, Chief Financial Officer & Treasurer of the Company,
certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirement of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
John W. Sammon, Jr.
- -----------------------------------------------
John W. Sammon, Jr.
Chairman of the Board & Chief Executive Officer
May 10, 2006
Ronald J. Casciano
- -----------------------------------------------
Ronald J. Casciano
Vice President, Chief Financial Officer & Treasurer
May 10, 2006
E-3