10-Q 1 thirdqtr10q02.txt THIRD QUARTER 10Q 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2002. 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 [ ] The number of shares outstanding of registrant's common stock, as of October 31, 2002 - 7,932,360 shares. PAR TECHNOLOGY CORPORATION TABLE OF CONTENTS FORM 10-Q PART 1 FINANCIAL INFORMATION Item Number ----------- Item 1. Financial Statements - Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2002 and 2001 - Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September 30, 2002 and 2001 - Consolidated Balance Sheet at September 30, 2002 and December 31, 2001 - Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 - Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II OTHER INFORMATION Item 4. Controls and Procedures Item 6. Exhibits and Reports on Form 8-K Signatures Certifications Exhibit Index Item 1. Financial Statements PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In Thousands Except Per Share Amounts) (Unaudited)
For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Net revenues: Product ................................ $ 14,694 $ 11,371 $ 46,217 $ 35,264 Service ................................ 9,222 8,522 27,666 25,071 Contract ............................... 9,403 7,681 28,019 22,535 --------- --------- --------- --------- 33,319 27,574 101,902 82,870 --------- --------- --------- --------- Costs of sales: Product ................................ 9,703 7,848 31,341 23,974 Service ................................ 7,296 7,070 22,669 20,011 Contract ............................... 8,599 7,255 26,029 21,247 --------- --------- --------- --------- 25,598 22,173 80,039 65,232 --------- --------- --------- --------- Gross margin ..................... 7,721 5,401 21,863 17,638 --------- --------- --------- --------- Operating expenses: Selling, general and administrative .... 5,082 3,483 13,823 11,122 Research and development ............... 1,226 1,059 3,992 4,104 --------- --------- --------- --------- 6,308 4,542 17,815 15,226 --------- --------- --------- --------- Income from operations ...................... 1,413 859 4,048 2,412 Other income, net ........................... 255 210 565 760 Interest expense ............................ (235) (214) (660) (894) --------- --------- --------- --------- Income before provision for income taxes ........................... 1,433 855 3,953 2,278 Provision for income taxes .................. (537) (280) (1,312) (834) --------- --------- --------- --------- Income from continuing operations ........... 896 575 2,641 1,444 --------- --------- --------- --------- Discontinued operations: Loss from operations of discontinued segment (including loss on disposal of $830,000 in 2002) (1,329) (737) (2,448) (1,716) Income tax benefit ..................... 498 242 812 628 --------- --------- --------- --------- Loss on discontinued operations ........ (831) (495) (1,636) (1,088) --------- --------- --------- --------- Net income .................................. $ 65 $ 80 $ 1,005 $ 356 ========= ========= ========= =========
Item 1. Financial Statements PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In Thousands Except Per Share Amounts) (Unaudited)
For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Earnings per share: Basic: Income from continuing operations ...... $ .11 $ .07 $ .33 $ .19 Loss from discontinued operations ...... $ (.11) $ (.06) $ (.21) $ (.14) Net income .......................... $ .01 $ .01 $ .13 $ .05 Diluted: Income from continuing operations ...... $ .11 $ .07 $ .32 $ .19 Loss from discontinued operations ...... $ (.10) $ (.06) $ (.20) $ (.14) Net income .......................... $ .01 $ .01 $ .12 $ .05 Weighted average shares outstanding Diluted ................................ 8,328 7,846 8,216 7,789 ========= ========= ========= ========= Basic .................................. 7,901 7,723 7,891 7,723 ========= ========= ========= =========
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)
For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Net income .................................. $ 65 $ 80 $1,005 $ 356 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 22 72 435 (296) ------ ------ ------ ------ Comprehensive income ........................ $ 87 $ 152 $1,440 $ 60 ====== ====== ====== ======
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands Except Share Amounts) September 30, 2002 December 31, Assets (Unaudited) 2001 -------- -------- Current Assets: Cash ...................................... $ 992 $ 879 Accounts receivable-net ................... 29,198 36,934 Inventories ............................... 29,131 24,469 Income tax refund claims .................. -- 95 Deferred income taxes ..................... 3,262 2,883 Other current assets ...................... 3,233 3,315 Total assets of discontinued operation .... 430 -- -------- -------- Total current assets .................. 66,246 68,575 Property, plant and equipment - net ............ 8,953 9,471 Deferred income taxes .......................... 7,057 7,774 Other assets ................................... 2,791 3,204 -------- -------- $ 85,047 $ 89,024 ======== ======== Liabilities and Shareholders' Equity Current Liabilities: Notes payable ............................. $ 12,828 $ 14,686 Accounts payable .......................... 6,693 11,290 Accrued salaries and benefits ............. 4,511 4,580 Accrued expenses .......................... 2,833 2,274 Deferred service revenue .................. 6,226 6,339 Total liabilities of discontinued operation 656 -- -------- -------- Total current liabilities ............. 33,747 39,169 -------- -------- Long-term debt ................................. 2,224 2,268 -------- -------- Shareholders' Equity: Preferred stock, $.02 par value, 1,000,000 shares authorized ............. -- -- Common stock, $.02 par value, 19,000,000 shares authorized; 9,694,466 and 9,674,466 shares issued 7,900,760 and 7,880,760 outstanding ..... 194 193 Capital in excess of par value ............ 28,589 28,541 Retained earnings ......................... 30,268 29,263 Accumulated comprehensive loss ............ (1,006) (1,441) Treasury stock, at cost, 1,793,706 shares . (8,969) (8,969) -------- -------- Total shareholders' equity ............ 49,076 47,587 -------- -------- $ 85,047 $ 89,024 ======== ======== PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) (Unaudited) For the nine months ended September 30, -------------------- 2002 2001 ------- ------- Cash flows from operating activities: Net income ....................................... $ 1,005 $ 356 Adjustments to reconcile net income to net cash provided by operating activities: Net loss from discontinued operations ......... 1,636 1,088 Depreciation and amortization .................. 2,176 2,270 Provision for bad debts ........................ 1,041 360 Provision for obsolete inventory ............... 1,728 838 Deferred income taxes .......................... 338 137 Increase (decrease) from changes in: Accounts receivable .......................... 6,695 (149) Inventories .................................. (6,390) 1,940 Income tax refund claims ..................... 95 656 Other current assets ......................... 82 (1,037) Other assets ................................. (200) -- Accounts payable ............................. (4,597) (1,731) Accrued salaries and benefits ................ (69) (185) Accrued expenses ............................. 559 (871) Income taxes payable ......................... -- (79) Deferred service revenue ..................... (113) 425 ------- ------- Net cash provided by continuing operating activities ...................... 3,986 4,018 Net cash used in discontinued operations .... (932) (1,156) ------- ------- Net cash provided by operating activities ... 3,054 2,862 ------- ------- Cash flows from investing activities: Capital expenditures ........................... (977) (430) Capitalization of software costs ............... (546) (590) ------- ------- Net cash used in investing activities ....... (1,523) (1,020) ------- ------- Cash flows from financing activities: Net payments under line-of-credit agreements ... (1,858) (1,342) Payments on long-term debt obligations ......... (44) (41) Proceeds from the exercise of stock options .... 49 -- ------- ------- Net cash used in financing activities ...... (1,853) (1,383) ------- ------- Effect of exchange rate changes on cash and cash equivalents .......................... 435 (296) ------- ------- Net increase in cash and cash equivalents ....... 113 163 Cash and cash equivalents at beginning of year .. 879 1,199 ------- ------- Cash and cash equivalents at end of period ...... $ 992 $ 1,362 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ....................................... $ 656 $ 833 Income taxes, net of refunds ................... 66 (488) PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The statements for the three and nine months ended September 30, 2002 and 2001 are unaudited; 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 consolidated financial statements for the year ending December 31, 2002 are subject to adjustment at the end of the year when they will be audited by independent accountants. The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2002. The consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes for the years ended in December 31, 2001 and 2000 included in the Company's December 31, 2001 Annual Report to the Securities and Exchange Commission on Form 10-K. 2. During the third quarter of 2002, the Company recorded an after tax loss of $831,000 or $.10 per diluted share resulting from the discontinuance of its Industrial segment. The Company's decision to close down its unprofitable Industrial Software business unit, Ausable Solutions, Inc., followed a trend of continuous losses over the past 18 months, which resulted from an economic downturn in the IT software market with corresponding delays of anticipated contracts. This decision will allow the Company to focus on its two core businesses, Restaurant and Government. A summary of net revenues and pre-tax operating results and total assets and liabilities of discontinued operations are detailed below (in thousands): For the three months For the nine months ended September 30, ended September 30, ------------------- ------------------ 2002 2001 2002 2001 -------- -------- -------- -------- Net revenues ............. $ 239 $ 617 $ 1,366 $ 1,982 Pre-tax loss from discontinued operations $(1,329) $ (737) $(2,448) $(1,716) September 30, 2002 (Unaudited) ----------- Discontinued Assets: Cash ................................................ $ 87 Accounts receivable-net ............................. 288 Other current assets ................................ 55 ---- Total assets of discontinued operations .... $430 ==== Discontinued Liabilities: Accounts payable .................................... $ 68 Accrued salaries and benefits ....................... 327 Other current liabilities ........................... 261 ---- Total liabilities of discontinued operations $656 ==== PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Inventories are primarily used in the manufacture and service of Restaurant products. The components of inventory, net of related reserves, consist of the following: (In Thousands) September 30, December 31, 2002 2001 -------- -------- Finished goods ............... $ 6,091 $ 5,414 Work in process .............. 1,714 1,868 Component parts .............. 4,962 3,602 Service parts ................ 16,364 13,585 ------- ------- $29,131 $24,469 ======= ======= At September 30, 2002 and December 31, 2001, the Company had recorded reserves for obsolete inventory of $4,428,000 and $3,253,000, respectively. 4. In June 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets", ("SFAS 142"). The Company adopted SFAS 142 effective January 1, 2002. Under this standard, amortization of goodwill and certain intangible assets, including certain intangibles recorded as a result of past business combinations, is to be discontinued upon adoption of SFAS 142. Instead, all goodwill with indefinite lives will be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. The net book value of goodwill of continuing operations was $598,000 at September 30, 2002. SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," was issued in August 2001. SFAS No. 144 provides new guidance on the recognition of impairment and losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of discontinued operations are to be measured and presented. SFAS No. 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," and a portion of Accounting Principle Board (APB) No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of Segment of a Business," while retaining many of the requirements of these two statements. Under SFAS No. 144, discontinued operations are no longer measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. As further described in Note 2, the Company has announced the discontinuation of its Industrial Segment and has adopted the provisions of SFAS 144 regarding the measurement, recognition and disclosure of this discontinued operation. 5. The Company's reportable segments are strategic business units that have separate management teams and infrastructures that offer different products and services. PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company has two reportable segments, Restaurant and Government. The Restaurant Segment offers integrated solutions to the restaurant industry. These offerings include industry leading hardware and software applications utilized at the point-of-sale, back of store and corporate office. This segment also offers customer support including field service, installation, twenty-four hour telephone support and depot repair. The Government segment designs and implements advanced technology computer software systems primarily for military and intelligence agency applications. 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. As discussed in Note 2, the Company discontinued its Industrial segment in the third quarter of 2002. Inter-segment sales and transfers are not material. Information as to the Company's operations in its segments is set forth below (in thousands): For the three months For the nine months ended September 30, ended September 30, --------------------- --------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Revenues: Restaurant .............. $ 23,916 $ 19,893 $ 73,883 $ 60,335 Government .............. 9,403 7,681 28,019 22,535 --------- --------- --------- --------- Total ............. $ 33,319 $ 27,574 $ 101,902 $ 82,870 ========= ========= ========= ========= Income (loss) from continuing operations: Restaurant .............. $ 681 $ 492 $ 2,191 $ 1,308 Government .............. 732 410 1,882 1,161 Other ................... -- (43) (25) (57) --------- --------- --------- --------- 1,413 859 4,048 2,412 Other income, net ............ 255 210 565 760 Interest expense ............. (235) (214) (660) (894) --------- --------- --------- --------- Income before provision for income taxes ........ $ 1,433 $ 855 $ 3,953 $ 2,278 ========= ========= ========= ========= Depreciation and amortization: Restaurant .............. $ 538 $ 625 $ 1,701 $ 1,773 Government .............. 22 26 76 76 Other ................... 163 162 399 421 --------- --------- --------- --------- Total ............. $ 723 $ 813 $ 2,176 $ 2,270 ========= ========= ========= ========= Capital expenditures: Restaurant .............. $ 356 $ 57 $ 784 $ 235 Government .............. -- 41 35 83 Other ................... 43 32 158 112 --------- --------- --------- --------- Total ............. $ 399 $ 130 $ 977 $ 430 ========= ========= ========= ========= The following table presents revenues by geographic area based on the location of the use of the product or services. For the three months For the nine months ended September 30, ended September 30, --------------------- --------------------- 2002 2001 2002 2001 --------- --------- --------- --------- United States ................ $ 29,713 $ 24,116 $ 91,442 $ 71,207 Other Countries .............. 3,606 3,458 10,460 11,663 -------- -------- -------- --------- Total .................. $ 33,319 $ 27,574 $101,902 $ 82,870 ======== ======== ======== ========= Customers comprising 10% or more of the Company's total revenues are summarized as follows: For the three months For the nine months ended September 30, ended September 30, ---------------- ---------------- 2002 2001 2002 2001 ------ ------ ------ ----- Restaurant Segment: McDonald's Corporation ....... 33% 30% 31% 31% YUM! Brands Inc. ............. 23% 18% 22% 23% Government Segment: Department of Defense ........ 28% 28% 27% 27% All Others ........................ 16% 24% 20% 19% --- --- --- --- 100% 100% 100% 100% === === === === September 30, December 31, 2002 2001 ------------ ----------- Identifiable assets: Restaurant .............. $71,912 $75,309 Government .............. 6,651 7,700 Industrial .............. 430 2,777 Other ................... 6,054 3,238 ------- ------- Total ............. $85,047 $89,024 ======= ======= The following table presents property by geographic area based on the location of the asset. September 30, December 31, 2002 2001 ---------- ---------- United States ........... $78,329 $80,231 Other Countries ......... 6,718 8,793 ------- ------- Total ............ $85,047 $89,024 ======= ======= Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2002 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2001 Information provided by the Company, including information contained in this report or by its spokespersons from time to time might contain forward-looking statements. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including without limitation, further delays in new product introduction, risks in technology development and commercialization, risks in product development and market acceptance of and demand for the Company's products, risks of downturns in economic conditions generally, and in the quick service sector of the restaurant market specifically, risks of intellectual property rights associated with competition and competitive pricing pressures, risks associated with foreign sales and high customer concentration, and other risks detailed in the Company's filings with the Securities and Exchange Commission. The following discussion and analysis highlights items having a significant effect on operations during the quarter ended September 30, 2002. It may not be indicative of future operations or earnings. It should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial and statistical information appearing elsewhere in this report. For the third quarter ended September 30, 2002, PAR Technology Corporation reported revenues from continuing operations of $33.3 million compared to $27.6 million in the third quarter 2001, an increase of 21%. Income from continuing operations was $896,000, a 56% increase over the $575,000 earned in the third quarter one year ago. The Company reported diluted net income per share from continuing operations of $0.11 for this quarter, a 57% increase over the $0.07 reported for the same period a year earlier. The Company's net income for the third quarter of 2002 was $65,000, or $0.01 diluted net income per share, compared to net income of $80,000 and $0.01 per diluted share for the same period in 2001. Product revenues were $14.7 million in 2002, an increase of 29% from the $11.4 million recorded in 2001. The Company's restaurant products are being favorably received in the market place. In particular, sales increased to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2002 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2001 certain of the Company's traditional customers including McDonald's and YUM! Brands, Inc. YUM! Brands, Inc. includes KFC, Taco Bell and Pizza Hut. Also contributing to the revenue growth were sales to several new accounts. Customer service revenues were $9.2 million in 2002, an increase of 8% from the $8.5 million in 2001. Higher installation, call center and field service revenues in support of an expanded installed base were responsible for the increase. The Company's service offerings include installation, twenty-four hour help desk support and various field and on-site service options. Contract revenues were $9.4 million in 2002, an increase of 22% when compared to the $7.7 million recorded in the same period in 2001. This increase resulted from the expanded scope of our I/T outsourcing contracts for facility operations at strategic U.S. Navy Telecommunication sites across the globe. These outsourcing operations provided by the Company directly support the Navy's fleet operations. The Company has become a recognized leader in the conversion of military I/T communications facilities to contractor operations. Additionally, contract revenues grew as a result of our emerging logistics management business, which involves the tracking of mobile chassis under the Company's Cargo*Mate(TM) contracts. Product margins were 34% for 2002 compared to 31% for the same period in 2001. Margins improved due to favorable product mix. In addition, during the third quarter of 2001, the Company offered a special promotion to certain customers that was discontinued in 2002. Customer service margins were 21% in 2002 compared to 17% for the same period in 2001. This increase resulted from a more favorable mix on certain service offerings. Contract margins were 9% in 2002 versus 6% for the same period in 2001. Margins improved due to higher than expected profitability on certain fixed-price contracts that are close to completion. Margins on the Company's government contract business historically run between 5% and 6%. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2002 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2001 Selling, general and administrative expenses were $5.1 million in 2002 versus $3.5 million for the same period in 2001, an increase of 46%. This increase is primarily the result of some executive salary adjustments. Last year, as part of the Company's plan to return to profitability following losses incurred in 2000, a salary reduction program was initiated. This program was terminated in the fourth quarter of 2001 and normal pay was reinstated reflecting the return to profitability of the business. Additionally, sales and marketing expenses of the Restaurant business increased which is directly related to the growth in product revenue. Research and development expenses were $1.2 million in 2002, an increase of 16% from the $1.1 million recorded for the same period in 2001. This increase is due to continuing development of the Company's restaurant products. Research and development costs attributable to government contracts are included in cost of contract revenues. Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. The 10% increase to $235,000 in 2002 was primarily due to a higher average balance outstanding in 2002 partially offset by a lower interest rate in 2002 than in 2001. During the third quarter of 2002, the Company recorded an after tax loss of $831,000 or $.10 per diluted share resulting from the discontinuance of its Industrial segment. The Company's decision to close down its unprofitable Industrial Software business unit, Ausable Solutions, Inc., followed a trend of continuous losses over the past 18 months, which resulted from an economic downturn in the IT software market with corresponding delays of anticipated contracts. This decision will allow the Company to focus on its two core businesses, Restaurant and Government, which are both growing and profitable. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 For the nine months ended September 30, 2002, PAR Technology Corporation reported revenues from continuing operations of $101.9 million, a 23% increase from the $82.9 million reported one year ago. The Company also reported income from continuing operations of $2.6 million for the first nine months of 2002 versus $1.4 million for the same period in 2001, an increase of 83%. Diluted net income per share from continuing operations was $0.32 for the first nine months of 2002, an increase of 68% when compared to diluted net income per share of $0.19 for the same period in 2001. The Company's net income for the nine months of 2002 was $1 million or $0.12 diluted net income per share, compared to net income of $356,000 and $0.05 per diluted share for the same period in 2001. Product revenues were $46.2 million in 2002, an increase of 31% from the $35.3 million recorded in 2001. This is attributable to increased sales to the Company's traditional customers including McDonald's and YUM! Brands, Inc. Sales to several new customers, including Carnival Cruise Lines, also contributed to this increase. Customer service revenues were $27.7 million in 2002, an increase of 10% from the $25.1 million in 2001. This increase was attributable to revenue derived from the installation of equipment as product sales rose. An increase in the number of service contracts also contributed to this revenue growth. Contract revenues were $28 million in 2002, an increase of 24% when compared to the $22.5 million recorded for the same period in 2001. This increase is primarily due to the increase in scope of the Company's I/T outsourcing contracts for strategic U.S. Navy Telecommunication sites. The increase in revenue is also attributable to a floodplain-mapping contract with the New York State Department of Environment Conservation. Additionally, contract revenues grew as a result of the Company's Cargo*Mate(TM) contracts. Product margins were 32% for 2002 consistent with the same period in 2001. This was due to more favorable pricing in 2002 offset by a change in product mix in 2002 compared to 2001. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 Customer service margins were 18% in 2002 compared to 20% for the same period in 2001. This margin decrease resulted from field service startup expenses related to the support of the Company's Boston Market account and increased use of third parties for certain installation activities. Contract margins were 7% in 2002 compared to 6% in 2001. Margins improved due to higher than expected profitability on certain fixed-price contracts that are close to completion. Margins on the Company's government contract business historically run between 5% and 6%. Selling, general and administrative expenses were $13.8 million in 2002 versus $11.1 million for the same period in 2001, an increase of 24%. This increase is primarily the result of the executive salary adjustments. There were also increases in sales and marketing expenses related to the higher sales volume. Research and development expenses were $4 million in 2002, a decrease of 3% from the $4.1 million recorded for the same period in 2001. This minor decrease occurred in the first half of the year due to the timing of certain restaurant development projects. Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense declined 26% to $660,000 in 2002 primarily due to a lower interest rate in 2002 than in 2001. Liquidity and Capital Resources The Company's primary source of liquidity has been from operations and lines of credit with various banks. The Company generated cash flow from continuing operating activities of $4 million in 2002 and in 2001. The primary factors contributing to the 2002 positive cash flow were to operating profits for the period and a reduction in accounts receivable. This was partially offset by an increase in inventory to meet current demand. A reduction in inventory and cost cutting measures taken by the Company in the fourth quarter of 2000 all contributed to the positive cash flow in 2001. Cash used in investing activities was $1.5 million in 2002 versus $1 million in 2001. In 2002, capital expenditures were primarily for improvements to the Company's headquarter facility and for normal operational needs in the restaurant segment. In addition, the Company capitalized $546,000 of MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 software costs. In 2001, capital expenditures were primarily for manufacturing equipment and for improvements to the Company's customer service facility in Boulder, Colorado. The Company also capitalized $590,000 of software costs. Cash used in financing activities was $1.9 million in 2002 compared to $1.4 million in 2001. The Company reduced its line-of-credit borrowings by $1.9 million in 2002 and by $1.3 million in 2001. The Company currently has two line-of-credit agreements, which aggregate $20 million with certain banks. At September 30, 2002, $12.8 million was outstanding under these agreements. The Company continues to review its existing debt structure and credit availability. Both lines expire on April 30, 2003. The Company believes that it has adequate financial resources to meet its future liquidity and capital requirements in 2002. Critical Accounting Policies The Company's consolidated financial statements are based on the application of 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 revenues, receivables, inventories, intangible assets and taxes. Revenues from product sales are recorded as the products are shipped, provided that no significant vendor or post-contract support obligations remain and the collection of the related receivable is probable. The Company's service revenues are recognized ratably over the related contract period or as the services are performed. Billings in advance of the Company's performance of such work are reflected as deferred service revenue in the accompanying consolidated balance sheet. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 The Company's contract revenues result primarily from contract services performed for the United States Government under a variety of cost-reimbursement, time-and-material and fixed-price contracts. Contract revenues, including fees and profits, are recorded as services are performed using the percentage-of-completion method of accounting, primarily based on contract costs incurred to date compared with estimated costs at completion. Anticipated losses on all contracts and programs in process are recorded in full when identified. Unbilled accounts receivable are stated at estimated realizable value. Contract costs, including indirect expenses, are subject to audit and adjustment through negotiations between the Company and government representatives. Contract revenues have been recorded in amounts that are expected to be realized on final settlement. The Company follows accepted industry practice and records contract amounts retained by the government as a current asset. Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. 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. The Company has intangible assets on its balance sheet that includes computer software costs and goodwill related to acquisitions. The valuation of these assets and the assignment of useful amortization lives involve significant judgments and the use of estimates. The testing of these intangibles for impairment under established accounting guidelines also requires significant use of judgment and assumptions. Changes in business conditions could potentially require future adjustments to these assets. 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 future taxable income levels. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 Quantitative and Qualitative Disclosures about Market Risk Inflation had little effect on revenues and related costs during the first nine months of 2002. Management anticipates that margins will be maintained at acceptable levels to minimize the effects of inflation, if any. The Company has total interest bearing short-term debt of approximately $12.8 million at September 30, 2002. Management believes that increases in short-term rates could have an adverse effect on the Company's future results. Management believes that foreign currency fluctuations should not have a significant impact on gross margins due to the low volume of business affected by foreign currencies. Item 4. Controls and Procedures During the 90-day period prior to the filing date of this report, management, including the Corporation's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Corporation files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Corporation's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Corporation carried out its evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and, therefore, no corrective actions were taken. Item 6. Exhibits and Reports on Form 8-K List of Exhibits Exhibit No. Description of Instrument ------- ------------------------- 11 Statement re computation of per-share earnings 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Reports on Form 8-K None during the third quarter of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAR TECHNOLOGY CORPORATION -------------------------- (Registrant) Date: November 14, 2002 /s/RONALD J. CASCIANO ------------------------------ Ronald J. Casciano Vice President, Chief Financial Officer and Treasurer PAR TECHNOLOGY CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John W. Sammon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PAR Technology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures 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 quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/John W. Sammon ----------------- John W. Sammon Chairman of the Board and Chief Executive Officer Date: November 14, 2002 PAR TECHNOLOGY CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ronald J. Casciano, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PAR Technology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures 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 quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/Ronald J. Casciano --------------------- Ronald J. Casciano VP, C.F.O. & Treasurer Date: November 14, 2002 Exhibit Index Exhibit ------- 11 - Statement re computation of per-share earnings 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 11 COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK (In Thousands) For the three months ended September 30, -------------------- 2002 2001 -------- -------- Diluted Earnings Per Share: Weighted average shares of Common stock outstanding: Balance outstanding - beginning of period .............. 7,901 7,723 Incremental shares of common stock outstanding giving effect to stock options ............. 427 123 ----- ----- Weighted balance - end of period ....................... 8,328 7,846 ===== ===== For the three months ended September 30, -------------------- 2002 2001 -------- -------- Basic Earnings Per Share: Weighted average shares of Common stock outstanding: Balance outstanding - beginning of period .............. 7,901 7,723 ----- ----- Weighted balance - end of period ....................... 7,901 7,723 ===== ===== Exhibit 11 COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK (In Thousands) For the nine months ended September 30, ------------------- 2002 2001 -------- -------- Diluted Earnings Per Share: Weighted average shares of Common stock outstanding: Balance outstanding - beginning of period .............. 7,881 7,723 Weighted average shares issued ......................... 10 -- Incremental shares of common stock outstanding giving effect to stock options ............. 325 66 ----- ----- Weighted balance - end of period ....................... 8,216 7,789 ===== ===== For the nine months ended September 30, ------------------- 2002 2001 -------- -------- Basic Earnings Per Share: Weighted average shares of Common stock outstanding: Balance outstanding - beginning of period .............. 7,881 7,723 Weighted average shares issued ......................... 10 -- ----- ----- Weighted balance - end of period ....................... 7,891 7,723 ===== ===== Exhibit 99.1 PAR TECHNOLOGY CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of PAR Technology Corporation (the Company) on Form 10-Q for the period ending Septmber 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John W. Sammon, Chairman of the Board and Chief Executive Officer 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: (1) The Report fully complies with the requirement of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John W. Sammon ------------------ John W. Sammon Chairman of the Board and Chief Executive Officer November 14, 2002 Exhibit 99.2 PAR TECHNOLOGY CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of PAR Technology Corporation (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Ronald J. Casciano, VP, C.F.O. & 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: (1) The Report fully complies with the requirement of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Ronald J. Casciano ---------------------- Ronald J. Casciano VP, C.F.O. & Treasurer November 14, 2002