-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WxRi33YG2Z4fq0HvrQKXdh/O/TEORjFSWlIAJa1VcDk2s8VXjFWeuoQK6X7W9TLn Uhh/YjI/djPLRIAqubVZgA== 0000708821-04-000004.txt : 20040330 0000708821-04-000004.hdr.sgml : 20040330 20040330152433 ACCESSION NUMBER: 0000708821-04-000004 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAR TECHNOLOGY CORP CENTRAL INDEX KEY: 0000708821 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 161434688 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09720 FILM NUMBER: 04700613 BUSINESS ADDRESS: STREET 1: PAR TECHNOLOGY PARK STREET 2: 8383 SENECA TURNPIKE CITY: NEW HARTFORD STATE: NY ZIP: 13413 BUSINESS PHONE: 3157380600 10-K/A 1 ye10ka123103.txt FORM 10-K/A FOR DECEMBER 31, 2003 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2003. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From __________ to __________ Commission File Number 1-9720 PAR TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 16-1434688 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) PAR Technology Park 8383 Seneca Turnpike New Hartford, New York 13413-4991 (Address of principal executive offices) (Zip Code) (315) 738-0600 (Registrant's Telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common Stock, $.02 par value New York Stock Exchange Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the average price as of March 15, 2004 - $39,678,591. The number of shares outstanding of registrant's common stock, as of March 15, 2004 - 8,593,150 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement in connection with its 2003 annual meeting of stockholders are incorporated by reference into Part III. PAR TECHNOLOGY CORPORATION TABLE OF CONTENTS FORM 10-K Item Number ----------- PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions Item 14. Statements of Fees Paid to Independent Auditors PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Signatures "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 Information provided by the Company, including information contained in this Annual Report, or by its spokespersons from time to time may 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. Actual future results may vary materially from those projected, anticipated, or indicated in any forward-looking statements as a result of certain risk factors. Readers should pay particular attention to the considerations described in the sections of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk." PAR TECHNOLOGY CORPORATION PART I Item 1: Business PAR Technology Corporation ("PAR" or the "Company") is the parent company of wholly-owned subsidiary businesses. PAR's largest subsidiary, ParTech, Inc. is a provider of management technology solutions, including hardware, software and professional services to businesses in the restaurant, hospitality, and retail industries. The Company is a leading supplier of hospitality technology systems with over 35,000 systems installed in 95 countries. PAR's hospitality management software technology assists in the operation of hospitality and restaurant businesses by managing data from end-to-end and improving profitability through more efficient operations. Our professional services mission is to assist businesses in achieving the full potential of their hospitality technology systems. PAR is a provider of professional services and enterprise business intelligence applications, with long-term relationships with the restaurant industry's two largest corporations - McDonald's Corporation and Yum! Brands Inc. McDonald's has over 30,000 restaurants in 119 countries and PAR has been a selected provider of restaurant management technology systems and lifecycle support services to McDonald's since 1980. Yum! Brands (which includes Taco Bell, KFC and Pizza Hut) has been a PAR customer since 1983. Yum has nearly 33,000 units globally and PAR is the sole approved supplier of restaurant management technology systems to Taco Bell as well as the Point-of-Sale vendor of choice to KFC. Other significant chains where PAR is the POS vendor of choice are: Boston Market, Chic-fil-A, CKE Restaurants (including Hardees, Carl Jr.'s.), Carnival Cruise Lines, Loews Cineplex and large franchisees of each of the foregoing brands. PAR is the parent of PAR Government Systems Corporation and Rome Research Corporation, both who are Government contractors. As a long-standing Government contractor, PAR develops advanced technology systems for the Department of Defense and other 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. With more than 35 years in this business, PAR's Government engineering service business provides management and engineering services that include facilities operation and management. In addition, through Government-sponsored research and development, PAR has developed technologies with relevant commercial uses. A prime example of this "technology transfer" is the Company's Point-of-Sale technology, which was derived from research and development involving microchip processing technology sponsored by the Department of Defense. Information concerning the Company's industry segments for the three years ended December 31, 2003 is set forth in Note 11 to the Consolidated Financial Statements included elsewhere herein. The Company's common stock is traded on the New York Stock Exchange under the symbol "PTC." Our corporate headquarters offices are located at PAR Technology Park, 8383 Seneca Turnpike, New Hartford, New York 13413-4991; telephone number (315) 738-0600. Our website address is http://www.partech.com. Information contained on our website is not part of this prospectus. Unless the context otherwise requires, the term "PAR" or "Company" as used herein, means PAR Technology Corporation and its wholly-owned subsidiaries. Restaurant Segment PAR's wholly-owned subsidiary, ParTech, Inc., is a provider of integrated enterprise solutions to the hospitality industry. The Company's Point-of-Sale (POS) restaurant management technology integrates both cutting-edge software applications and the Company's Pentium(R)-based hardware platform. This restaurant management system can host fixed as well as wireless order-entry terminals, may include kitchen printers or video monitors and/or third-party supplied peripherals networked via an Ethernet LAN, and is accessible to enterprise-wide network configurations. PAR also provides extensive systems integration and professional service capabilities to design, tailor and implement solutions that enable its customers to manage all aspects of data collection and processing for single or multiple site enterprises from a central location. Products The technology requirements of the major restaurant organizations include rugged, reliable management systems capable of receiving, transmitting and coordinating large numbers of foodservice orders for quick and accurate delivery. The Company's integrated restaurant software applications permit its hospitality customers to configure their restaurant technology systems to meet their order entry, menu, food preparation and delivery coordination needs while recording all pertinent data concerning the transactions at the restaurant. PAR's restaurant systems are the result of more than 25 years of experience and knowledge combined with an in-depth understanding of the restaurant market. This knowledge and expertise is reflected in the product design, implementation capability and systems integration skills. Software. PAR's latest generation of restaurant software, the InFusion Suite, is comprised of InTouch(TM) POS, InForm(TM) Back Office, InSynch(TM) Enterprise Configuration and InQuire(TM) Enterprise Reporting. InTouch is a multi-brand, multi-concept application, containing rich features and functions such as real-time mirror imaging of critical data, on-line graphical help and interactive diagnostics, all presented with intuitive graphical user interfaces. In addition, PAR's back office management software, InForm, allows restaurant owners to control critical food and labor costs using intuitive tools for forecasting, labor scheduling and inventory management. The InSynch Enterprise Configuration manager provides business-wide management of diverse concept menus, security settings and system parameters all from one central location. InQuire Enterprise Reporting offers a web-based hosted reporting service leveraging the latest technology from Microsoft's .Net platform. InQuire's Executive Dashboard provides operational decisionware for the entire organization, as well as automated management reporting and process integration. In addition, the Company offers a streamlined POS software, GT/Exalt(TM), which is the predominant software in the QSR industry. GT/Exalt provides restaurant owners with increased cash security, improved customer service and highly flexible kitchen and drive-thru functionality. Hardware. The Company's hardware platform system, POS4XPO, is a Pentium(R)-designed system, developed to host the most powerful point-of-sale software applications of the restaurant industry. POS4XPO's design utilizes open architecture with industry standard components, is compatible with the most popular operating systems, and was the first POS hardware system to be certified by Microsoft(R) as Windows(R) NT Compliant(R). POS4XPO supports a distributed processing environment and incorporates an advanced restaurant technology system, utilizing Intel microprocessors, standard PC expansion slots, Ethernet LAN, standard Centronics printer ports as well as USB ports. The hardware system supplies its industry-standard components with features for restaurant applications such as multiple video ports. The POS system utilizes distributed processing architecture to integrate a broad range of PAR and third-party peripherals and is designed to withstand the harsh restaurant environment. The hardware platform has a favorable price-to-performance ratio over the life of the system as a result of its PC compatibility, ease of expansion and high reliability design. The PAR Customer Interactive Terminal (CID) offers an intuitive touchscreen interface which integrates the customer into each transaction. The highly-configurable CID design enables presentation of promotional advertisements as well as information capture such as customer feedback and signatures. It also accepts electronic payments from credit and debit cards as well as RF-ID tags. The CID is user-friendly and built using the same rugged design, proven technology and software compatibility as PAR's POS4XPO. Systems Integration and Professional Services. PAR's ability to offer the full spectrum of integration, implementation, installation, maintenance, and support services is one of the Company's key differentiators. PAR continues to work in unison with its customers to identify and address the latest restaurant technology requirements by creating interfaces to equipment, including innovations such as automated cooking and drink-dispensing devices, customer-activated terminals and order display units located inside and outside of the restaurant. The Company provides its systems integration expertise to interface specialized components, such as video monitors, coin dispensers and non-volatile memory for journalizing transaction data, as is required in some international applications. In addition, the Company has secured strategic partnerships with third-party organizations to offer a variety of credit, debit and gift card payment options that allow quick service restaurants, convenience stores, gasoline stations and drugstores to process cashless payments quickly and efficiently. Installation and Training In the U.S., Canada, Europe, South Africa, Middle East, Australia and Asia, PAR personnel provide installation, training and integration services on a fixed-fee basis as a normal part of the equipment purchase agreement. In certain areas of North and South America, Europe and Asia, the Company provides these integration services through third parties. Maintenance and Service The Company offers a wide range of maintenance and support services as part of its total solution for its targeted restaurant markets. In the North American restaurant technology market, the Company provides comprehensive maintenance and integration services for the Company's equipment and systems as well as those of third parties through a 24-hour central telephone customer support and diagnostic service in Boulder, Colorado. The Company also maintains a field service network consisting of nearly 100 locations offering on-site service and repair, as well as depot repair, overnight unit replacements and spare unit rentals. At the time a restaurant technology system is installed, PAR employees train the restaurant employees and managers to ensure efficient and effective use of the system. If a problem occurs within the Company's manufactured point-of-sale system (hardware and software), PAR's current service management software products allow a service technician to diagnose the problem by telephone or by remotely dialing-in to the POS system, thus greatly reducing the need for on-site service calls. The Company's service organization utilizes a suite of software applications from Clarify, Inc. (Clarify) as its Customer Resource Management tool. Clarify allows PAR to demonstrate compelling value and differentiation to its customers through the utilization of its extensive and ever-growing knowledge base to efficiently diagnose and resolve customer-service issues. Clarify also enables PAR to compile the kind of in-depth information it needs to spot trends and identify opportunities. The Company also maintains service centers in Europe, South Africa, the Middle East, Australia and Asia. The Company believes that its ability to address all support and maintenance requirements for a customer's restaurant technology network provides it with a clear competitive advantage. Sales & Marketing Sales in the restaurant technology market are often generated by first obtaining the acceptance of the corporate restaurant chain as an approved vendor. Upon approval, marketing efforts are then directed to franchisees of the chain. Sales efforts are also directed toward franchisees of chains for which the Company is not an approved corporate vendor. The Company employs direct sales personnel in several sales groups. The Major Accounts Group works with large restaurant chain corporate customers typically owning more than 50 restaurants. The Domestic Sales Group targets franchisees of the major restaurant chain customers, as well as smaller chains within the U.S. The International Sales Group seeks sales to major customers with restaurants overseas and to international chains that do not have a presence in the United States. The Company's OEM Sales Group works exclusively with third-party resellers and value-added resellers throughout the country. This group is primarily responsible for sales to customers outside the restaurant industry. Competition The competitive landscape in the hospitality market is driven primarily by functionality, reliability, quality, pricing, service and support. The Company believes that its principal competitive advantages include its focus on a total restaurant solution offering, advanced development capabilities, in-depth industry knowledge and expertise, excellent product reliability, a direct sales force organization, and the quality of its support and quick service response. The markets in which the Company transacts business are highly competitive. Most of our major customers have approved several suppliers who offer some form of sophisticated restaurant technology system similar to the Company's. Major competitors include Panasonic, IBM Corporation, Radiant Systems, NCR, and Micros Systems. Backlog At December 31, 2003, the Company's backlog of unfilled orders for the Restaurant segment was approximately $9,800,000 compared to $5,500,000 a year ago. All of the present orders are expected to be delivered in 2004. The Restaurant segment orders are generally of a short-term nature and are usually booked and shipped in the same fiscal year. Research and Development The highly technical nature of the Company's restaurant products requires a significant and continuous research and development effort. Research and development expenses were approximately $4,779,000 in 2003, $5,400,000 in 2002 and $5,495,000 in 2001. The Company capitalizes certain software costs in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. See Note 1 to the Consolidated Financial Statements included in Item 15 for further discussion. Manufacturing and Suppliers The Company assembles its products from standard components such as integrated circuits and fabricated parts such as printed circuit boards, metal parts and castings, most of which are manufactured by others to the Company's specifications. The Company depends on outside suppliers for the continued availability of its components and parts. Although most items are generally available from a number of different suppliers, the Company purchases certain components from only one supplier. Items purchased from only one supplier include certain printers, base castings and electronic components. If such a supplier should cease to supply an item, the Company believes that new sources could be found to provide the components. However, added cost and manufacturing delays could result and adversely affect the business of the Company. The Company has not experienced significant delays of this nature in the past, but there can be no assurance that delays in delivery due to supply shortages will not occur in the future. Intellectual Property The Company owns or has rights to certain patents and trademarks, though none of these intellectual property rights provides a significant competitive advantage. The Company also utilizes commercially-available software with its products. The Company does not derive any substantial economic value from these intellectual property rights. Government Segment PAR operates two wholly-owned subsidiaries in the Government business segment, PAR Government Systems Corporation and Rome Research Corporation. These companies provide the U.S. Department of Defense (DoD) and other federal and state Government organizations with a wide range of technical services and products. Some of the more significant areas in which the Company is involved include: design, development, and integration of state-of-the-art imagery intelligence systems for information archive, retrieval, and processing; advanced research and development for imaging sensors; development and operations of logistic management systems; engineering and support services for Government information technology and communications facilities. Information Systems and Technology The Information Systems and Technology (IS&T) business sector develops integrated systems for imaging information archiving, processing, exploitation, and visualization. IS&T is the system integrator for the Multi-Sensor Integration facility at the Air Force Research Laboratory-Rome Research Site and is a key developer of the National Geospatial-Intelligence Agency (NGA) Image Product Library (IPL). The IPL provides access to a virtual network of archives in support of the operational users of imagery. The Company was recently awarded a substantial systems integration contract to support interoperability of new and emerging commercial imagery exploitation and data management systems for U.S. Air Force (USAF) operations. Since 1986, the Company has been a key contributor to the full-scale engineering development for the Joint Surveillance Target Attack Radar System (Joint STARS) and more recently, for the Affordable Moving Surface Target Engagement (AMSTE) program. The Company provides systems engineering for radar technologies that detect, track and target ground vehicles. Signal & Image Processing The Signal and Image Processing (SIP) business sector supports the development and implementation of complex sensor systems including the collection and analysis of sensor data. The SIP group has developed sensor concepts, algorithms, and real-time systems to address the difficult problems of locating low-contrast targets against clutter background (e.g., cruise missiles, fighter aircraft, and personnel against heavy terrain backgrounds), detecting man-made objects in dense foliage, and performing humanitarian efforts in support of the removal of land mines with ground penetrating radar. The Company also supports numerous technology demonstrations for the DoD, including a multi-national NATO exercise of wireless communications interoperability. As part of this demonstration, the Company designed and built the Software Radio Development System ("SoRDS") for test and evaluation of communications waveforms. The Company has extended this technology into public safety and law enforcement via the Software Adaptive Advanced Communications (SAACTM) system, a multi-channel communications gateway intended to solve the problem of wireless communications interoperability. The Company also supports Navy airborne infrared surveillance systems through the development of advanced optical sensors. Geospatial Software and Modeling The Geospatial Software and Modeling (GS&M) business sector performs water resources modeling, Geographic Information Systems (GIS) based data management, and geospatial information technology development. In particular, the Company's Flood*WareTM software tool and methodology is being employed by New York State in support of Federal Emergency Management Agency's Map Modernization Program. Similar technologies are used in support of water quality modeling and assessment applications for the NYC Watershed Protection Program. Logistic Management Systems The Logistic Management Systems (LMS) business sector focuses on the design, development, deployment and commercialization of the Cargo*Mate(R) Logistic Information Management System. Cargo*Mate(R) is a comprehensive, end-to-end solution for the monitoring and management of transport assets and cargo throughout the intermodal (i.e., port, highway, rail, and ocean) transportation lifecycle. The Cargo*Mate(R) system was being implemented under a multi-year Cooperative Agreement with the U.S. Department of Transportation/Federal Highway Administration (DOT/FHWA) with funds specifically authorized by Congress for Cargo*Mate(R) under the Transportation Equity Act for the 21st Century (TEA-21) in 1998. The Company has recently secured funding for this program for 2004. Cargo*Mate(R) uses state-of-the-art technology to acquire Global Positioning System (GPS) location and equipment status data, wireless communication networks to transmit the data to the LMS Operations Center, and a powerful geospatial database to customize the data to meet the needs of each customer and provide it to the customer over the Internet or via direct linkage to existing ("back-office") information systems. Information Technology and Communications Support Services The Company provides a wide range of technical and support services to sustain mission critical components of the Department of Defense Global Information Grid. These services include continuous operations, system enhancements and maintenance of very low frequency (VLF), high frequency (HF) and very high frequency (VHF) radio transmitter/receiver facilities, and extremely high frequency (EHF) and super high frequency (SHF) satellite communication heavy earth terminal facilities. The Company supports these DoD communications facilities, as well as other telecommunications equipment and information systems, at customer locations in and outside of the continental United States. The various facilities, operating 24 hours a day, are integral to the command and control of the nation's air, land and naval forces, and those of United States coalition allies. Test Laboratory and Range Operations The Company provides management, engineering, and technical services under several contracts with the U.S. Air Force, the U.S. Navy and the U.S. Army. These services include the planning, execution, and evaluation of tests at Government ranges and laboratories operated and maintained by the Company. Test activities include unique components, specialized equipment, advanced systems for radar, communications, electronic counter-measures, and integrated weapon systems. The Company also develops complex measurement systems in several defense-related areas of technology. Government Contracts The Company performs work for U.S. Government agencies under firm fixed-price, cost-plus-fixed-fee, time-and-material, and incentive-type prime contracts and subcontracts. Most of its contracts are for one-year to five-year terms. The Company also has been awarded Task Order/Support contracts. There are several risks associated with Government contracts. For example, contracts may be terminated for the convenience of the Government any time the Government believes that such termination would be in its best interests. In this circumstance, the Company is entitled to receive payments for its allowable costs and, in general, a proportionate share of its fee or profit for the work actually performed. The Company's business with the U.S. Government is also subject to other risks unique to the defense industry, such as reduction, modification, or delays of contracts or subcontracts if the Government's requirements, budgets, or policies or regulations change. The Company may also perform work prior to formal authorization or prior to adjustment of the contract price for increased work scope, change orders and other funding adjustments. Additionally, the Defense Contract Audit Agency on a regular basis audits the books and records of the Company. Such audits can result in adjustments to contract costs and fees. Audits have been completed through the Company's fiscal year 2001 and have not resulted in any material adjustments. Marketing and Competition Marketing begins with collecting information from a variety of sources concerning the present and future requirements of the Government and other potential customers for the types of technical expertise provided by the Company. Although the Company believes it is positioned well in its chosen areas of image and signal processing, information technology/communications and engineering services, competition for Government contracts is intense. Many of the Company's competitors are major corporations, or their subsidiaries, such as Lockheed-Martin, Raytheon, Northrop-Grumman, BAE, Harris, Boeing and SAIC that are significantly larger and have substantially greater financial resources than the Company. The Company also competes with many smaller companies that target particular segments of the Government market. Contracts are obtained principally through competitive proposals in response to solicitations from Government agencies and prime contractors. The principal competitive factors are past performance, the ability to perform, price, technological capabilities, management capabilities and service. In addition, the Company sometimes obtains contracts by submitting unsolicited proposals. Many of the Company's DoD customers are now migrating to commercial software standards, applications, and solutions. In that light, the Company is utilizing its Internal Research and Development funds to migrate existing solutions into software product lines that will support the DoD geospatial community (i.e., NGA, USAF, etc.). Backlog The dollar value of existing Government contracts at December 31, 2003, net of amounts relating to work performed to that date, was approximately $116,694,000, of which $31,894,000 was funded. At December 31, 2002, the comparable amount was approximately $112,934,000, of which $24,100,000 was funded. Funded amounts represent those amounts committed under contract by Government agencies and prime contractors. The December 31, 2003 Government contract backlog of $116,694,000 represents firm, existing contracts. Approximately $35,900,000 of this amount is expected to be completed in calendar year 2004, as funding is committed. Employees As of December 31, 2003, the Company had 1,140 employees, approximately 52% of whom are engaged in the Company's Restaurant segment, 44% of whom are in the Government segment, and the remainder are corporate employees. Due to the highly technical nature of the Company's business, the Company's future can be significantly influenced by its ability to attract and retain its technical staff. The Company believes that it will be able to fulfill its near-term needs for technical staff. Approximately 24% of the Company's employees are covered by collective bargaining agreements. The Company considers its employee relations to be good. Item 2: Properties The following are the principal facilities (by square footage) of the Company: Industry Floor Area Number of Location Segment Principal Operations Sq. Ft. -------- ------- -------------------- ---------- New Hartford, NY Restaurant Principal executive offices, 138,500 Government manufacturing, research and development laboratories, computing facilities Rome, NY Government Research and Development 23,400 Boulder, CO Restaurant Service 20,500 Sydney, Australia Restaurant Sales and Service 9,100 Boca Raton, FL Restaurant Research and Development 8,700 La Jolla, CA Government Research and Development 3,800 The Company's headquarters and principal business facility is located in New Hartford, New York, which is near Utica, located in Central New York State. The Company owns its principal facility and adjacent space in New Hartford, N.Y. All of the other facilities are leased for varying terms. Substantially all of the Company's facilities are fully utilized, well maintained, and suitable for use. The Company believes its present and planned facilities and equipment are adequate to service its current and immediately foreseeable business needs. Item 3: Legal Proceedings The Company is subject to legal proceedings which arise in ordinary course of business. In the opinion of management, the ultimate liability, if any, with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company. Item 4: Submission of Matters to a Vote of Security Holders None PART II Item 5: Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's Common Stock, par value $.02 per share, trades on the New York Stock Exchange (NYSE symbol - PTC). At December 31, 2003, there were approximately 631 owners of record of the Company's Common Stock, plus those owners whose stock certificates are held by brokers. The following table shows the high and low stock prices for the two years ended December 31, 2003 as reported by New York Stock Exchange: 2003 2002 ---------------------- ------------------------ Period Low High Low High - --------------- -------- -------- -------- -------- First Quarter $4.42 $7.07 $2.55 $4.15 Second Quarter $4.70 $6.23 $3.93 $5.88 Third Quarter $5.87 $7.15 $4.56 $6.25 Fourth Quarter $6.30 $8.39 $4.25 $8.13 The Company has not paid cash dividends on its Common Stock, and its Board of Directors presently intends to continue to retain earnings for reinvestment in growth opportunities. Accordingly, it is anticipated that no cash dividends will be paid in the foreseeable future. On December 3, 2002, PAR sold an aggregate of 383,019 shares of its Common Stock at a price of $5.30 per share to E*Capital Corporation and certain individuals associated with Eliot Rose Asset Management, LLC for an aggregate offering price of $2,030,000. Following the payment in the amount of $87,500 to the placement agent engaged by the Company and certain other expenses, the remaining net proceeds to the Company of approximately $1.9 million were used to pay down short-term debt. Such sales were made in reliance upon Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Item 6: Selected Financial Data SELECTED CONSOLIDATED STATEMENT OF INCOME DATA (In thousands, except per share amounts) The following selected historical consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. The following table has been restated to reflect all the activity of the Company's Industrial segment as "discontinued operations."
Year ended December 31, ------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------- Net revenues from continuing operations ......... $ 139,770 $ 133,681 $ 114,354 $ 101,463 $ 132,839 Cost of sales ................... $ 110,777 $ 105,225 $ 89,001 $ 86,647 $ 103,392 Gross margin .................... $ 28,993 $ 28,456 $ 25,353 $ 14,816 $ 29,447 Selling, general & administrative $ 19,340 $ 19,540 $ 16,774 $ 23,937 $ 20,982 (Provision) benefit for income taxes .................. $ (1,593) $ (884) $ (621) $ 6,800 $ 800 Income (loss) from continuing operations ......... $ 2,792 $ 2,623 $ 2,080 $ (10,961) $ 374 Basic earnings (loss) per share from continuing operations .... $ .33 $ .33 $ .27 $ (1.40) $ .04 Diluted earnings (loss) per share from continuing operations ...... $ .32 $ .32 $ .27 $ (1.40) $ .04
SELECTED CONSOLIDATED BALANCE SHEET DATA (In thousands) December 31, ----------------------------------------------- 2003 2002 2001 2000 1999 ----------------------------------------------- Current assets ..... $74,215 $69,070 $67,795 $64,009 $72,170 Current liabilities $29,836 $31,743 $39,118 $36,434 $25,505 Total assets ....... $87,167 $85,122 $88,915 $85,771 $86,798 Long-term debt ..... $ 2,092 $ 2,181 $ 2,268 $ 2,323 $ -- Shareholders' equity $55,239 $51,198 $47,529 $47,012 $61,410 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statement The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This document contains forward-looking statements. Any statements in this document that do not describe historical facts are forward-looking statements. Forward-looking statements in this Annual Report (including forward-looking statements regarding future sales to McDonald's restaurants, 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. 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 associated with Government contracts; risks of downturns in economic conditions generally, and in the quick service sector of the restaurant market specifically; risks associated with foreign sales and high customer concentration; risks associated with competition and competitive pricing pressures; and other risks detailed in the Company's filings with the Securities and Exchange Commission. The Company's actual results could differ materially from the results contemplated by these and any other forward-looking statements. Factors that could contribute to such differences include those discussed below as well as those cautionary statements and other factors set forth in "Quantitative and Qualitative Disclosures about Market Risk" and elsewhere herein. The cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements whenever they appear in this Annual Report on Form 10-K. Any forward-looking statements should be considered in light of all of these factors. Overview PAR Technology Corporation ("PAR" or the "Company") is the parent company of wholly-owned subsidiary businesses. PAR's largest subsidiary, ParTech, Inc. is a provider of management technology solutions, including hardware, software and professional services to businesses in the restaurant, hospitality, and retail industries. The Company is a leading supplier of hospitality technology systems with over 35,000 systems installed in 95 countries. PAR's hospitality management software technology assists in the operation of hospitality and restaurant businesses by managing data from end-to-end and improving profitability through more efficient operations. The Company's professional services mission is to assist businesses in achieving the full potential of their hospitality technology systems. PAR is a provider of professional services and enterprise business intelligence applications, with long-term relationships with the restaurant industry's two largest corporations - McDonald's Corporation and Yum! Brands Inc. McDonald's has over 30,000 restaurants in 119 countries and PAR has been a selected provider of restaurant management technology systems and lifecycle support services to McDonald's since 1980. Yum! Brands (which includes Taco Bell, KFC and Pizza Hut) has been a PAR customer since 1983. Yum has nearly 33,000 units globally and PAR is the sole approved supplier of restaurant management technology systems to Taco Bell as well as the Point-of-Sale vendor of choice to KFC. Other significant chains where PAR is the POS vendor of choice are: Boston Market, Chic-fil-A, CKE Restaurants (including Hardees, Carl Jr.'s.), Carnival Cruise Lines, Loews Cineplex and large franchisees of each of the foregoing brands. PAR is also the parent of PAR Government Systems Corporation and Rome Research Corporation, both of whom are Government contractors. As a long-standing Government contractor, PAR develops advanced technology systems for the Department of Defense and other 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 addition, through Government-sponsored research and development, PAR has developed technologies with relevant commercial uses. A prime example of this "technology transfer" is the Company's Point-of-Sale technology, which was derived from research and development involving microchip processing technology sponsored by the Department of Defense. During 2003, the Quick-Service Restaurant market continued to strengthen as evidenced by reported improved results from the Company's major customers including McDonald's and Yum! Brands. Additionally, the Company was named the primary supplier to KFC for their corporate stores. The Company also recorded significant new business from Chick-fil-A, CKE and Bojangles and released its new integrated software suite, iNfusion. The Company's Government business continued to win contracts in 2003 related to I/T outsourcing and secured its first contract with the U.S. Army. The Company now performs outsourcing for the three main branches of the military. In 2004, the Company anticipates the continued health of the QSR market and additional I/T outsourcing opportunities. Over the years, PAR has maintained its leadership in its two businesses through the utilization of several Company strengths including market leadership, technological innovation, customer focus, global reach and employee initiative. By focusing on these strengths, PAR is able to help shape the marketplace, increase the Company's customer base and continue to allow the Company to expand, worldwide. The following table sets for the Company's revenues by reportable segment for the period ending December 31: (in thousands) 2003 2002 2001 --------- ---------- --------- Revenues Restaurant $ 98,088 $ 95,706 $ 83,844 Government 41,682 37,975 30,510 --------- ---------- --------- Total Consolidated revenue $ 139,770 $ 133,681 $ 114,354 ========= ========== ========= The following discussion and analysis highlights items having a significant effect on operations during the three-year period ended December 31, 2003. 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. Results of Operations -- 2003 Compared to 2002 The Company reported revenues of $139.8 million for the year ended December 31, 2003, an increase of 5% from the $133.7 million reported for the year ended December 31, 2002. Income from continuing operations for the year ended December 31, 2003 was $2.8 million, a 6% increase from the $2.6 million earned in 2002. The Company reported diluted net income per share from continuing operations for the year ended December 31, 2003 of $.32, unchanged from the year ended December 31, 2002. Basic net income per share from continuing operations for the year ended December 31, 2003 was $.33 also unchanged as compared to the corresponding period in 2002. The Company's net income for the year ended December 31, 2003 was $2.4 million, or $.27 diluted net income per share, compared to net income of $741,000 and $.09 per diluted share for 2002. Product revenues from the Company's Restaurant segment were $60.2 million for the year ended December 31, 2003, an increase of 2% from the $59.2 million recorded in 2002. The primary reason for this increase was a 23% or $3.6 million growth in sales to YUM! Brands, as a result of the Company being recently selected as this customer's primary supplier of Restaurant systems to KFC Corporate stores. YUM! Brands includes five major restaurant chains. Sales to other major accounts including Chick-fil-A, CKE and Loew's Cineplex increased 10% or $2 million reflecting an improving hospitality market. Partially offsetting these increases was an 18% or $4.5 million decline in sales to McDonald's due to delays in buying decisions experienced in the first half of 2003 as McDonald's transitioned to a new strategy under its new management team. The Company anticipates growth in this account in 2004. Customer Service revenues are also generated by the Company's Restaurant segment. The Company's service offerings include installation, training, twenty-four hour help desk support and various field and on-site service options. Customer service revenues were $37.9 million for the year ended December 31, 2003, an increase of 4% from $36.6 million in 2002. This increase was primarily due to a 9% or $514,000 increase in call center revenue as the number of contracts increased relating to the growth in customer base. All other service areas increased 3% or $798,000, due to general business growth. Contract revenues from the Company's Government segment were $41.7 million for the year ended December 31, 2003, an increase of 10% when compared to the $38 million recorded in the same period in 2002. This increase primarily resulted from a $4.7 million or 26% increase in information technology outsourcing revenue for contracts for facility operations at strategic U.S. Department of Defense Telecommunication sites across the globe. These outsourcing operations provided by the Company directly support U.S. Navy, Army and Air Force operations as they seek to convert their military information technology communications facilities into contractor-run operations. Also contributing to this growth was a $1.3 million or 39% increase in revenue from research contracts involving Imagery Information Technology. This was partially offset by a $2.1 million or a 64% decline in the Company's Logistic Management Program, due to reduced funding from the Government. This program involves the tracking of mobile chassis under the Company's Cargo*Mate(TM) contracts. The Company anticipates new funding for this project from the Government in 2004. Product margins for the year ended December 31, 2003 were 35.2%, an increase from 32.9% for the year ended December 31, 2002. In 2003, margins benefited from higher software content in product sales when compared to 2002. Software sales of the Company's InFusion and Exalt products both contributed to this increase. This was offset by lower absorption of fixed manufacturing costs due to reduced production volume experienced in the first half of 2003. Customer service margins were 15.1% for the year ended December 31, 2003 compared to 17.7% for the same period in 2002. The decline is primarily the result of increased employee benefit costs and an increase in the provision for excess and obsolete service inventory in 2003 when compared to 2002. The increase in benefit costs relates primarily to the Company's contribution to the defined profit sharing retirement plan and higher performance bonuses based on improved overall Company results. The increased inventory provision was necessary due to a voluntary termination of an unprofitable service contract. This action is expected to improve service margins in the future. Contract margins were 5% for the year ended December 31, 2003 versus 6.5% for 2002. In 2002, the Company recognized additional profit on certain fixed price contracts that were completed in the period. The Company's fixed price contracts generally span multiple years, sometimes extending for as long as four to five years. The Company sometimes recognizes an additional profit on these fixed price contracts as the contracts near completion, when the Company determines that its contract expenditures will be less than it had previously estimated. In 2002, the primary reason for cost under runs was lower than anticipated overhead rates. In this instance, during 2002, the Company won several new contracts that resulted in an increase in the base of direct labor and a corresponding decline in the Company's overhead rates. The significant components of contract costs in 2003 were 77% for labor and fringe benefits, 7% for materials and supplies, and 2% for subcontract costs. For the same period in 2002, these costs were 73%, 7%, and 5%, respectively of contract costs. The balance of contract costs for 2003 and 2002 included consulting, facilities, communications and corporate overhead costs. Margins on the Company's Government contract business historically run between 5% and 6%. Selling, general and administrative expenses are virtually all related to the Company's Restaurant segment. Selling, general and administrative expenses for the year ended December 31, 2003 were $19.3 million, a decline of 1% from the $19.5 million expended in 2002. The decline was due to a reduction in selling expenses as a result of improved efficiencies and a reduced provision for doubtful accounts. This was partially offset by increases in benefit costs and legal and accounting fees. Research and development expenses relate primarily to the Company's Restaurant segment. However in 2003, approximately 10% of these expenses related to the Company's Logistic Management Program (Cargo*Mate(TM)). Research and development expenses were $5.3 million for the year ended December 31, 2003, a decline of 2% from the $5.4 million recorded in 2002. This decline was primarily due to a small reduction in the development staff as a result of certain efficiency improvements. This was partially offset by the Company's investment in its Cargo*Mate(TM) Program. The Company is investing in this technology during a temporary funding hiatus from the U.S. Government. Other income, net, was $582,000 in 2003 compared to $815,000 in 2002. Other income primarily includes rental income and foreign currency gains and losses. In 2002, the Company sold a patent that it obtained relating to former research done by the Company involving the cornea of the eye. Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense declined 34% to $540,000 for the year ended December 31, 2003 as compared to $824,000 in 2002 due to a reduced interest rate and lower average amounts outstanding in 2003 as compared to 2002. For the year ended December 31, 2003, the Company's effective tax rate was 36.3%, compared to 25.2% in 2002. The variance from the federal statutory rate in 2003 was due to state income taxes partially offset by a decrease in the valuation allowance for certain tax credits. The variance from the federal statutory rate in 2002 was due to the extraterritorial income exclusion and the favorable resolution of certain tax matters with taxing authorities. These items were offset by a $329,000 valuation allowance recorded in 2002 against certain foreign tax credits, due to the fact that the Company anticipated that these foreign tax credits would expire prior to utilization. For the year ended December 31, 2003, the Company recorded an after tax loss of $363,000 compared to $1.9 million in 2002 from the discontinued operation of its Industrial segment. In 2003 the Company determined that they would not be able to sub-lease the Industrial business real estate operating leases and accordingly recorded a provision of $570,000. In 2002, the Company decided to close down its unprofitable Industrial business unit, Ausable Solutions, Inc., due to substantial continuing losses, an inability to penetrate the market and a long sales cycle. The overall downturn in the global economy and specifically in the manufacturing and warehousing industries, coupled with the diminishing capital expenditures of the Company's industrial customers, prevented the Company from being profitable in this particular business segment. As a result, the Company concluded that it would be prudent to take decisive action and return the Company's focus to its core businesses of hospitality technology and Government services and research and development. The Company believes that the decision to exit the Industrial segment will not have a negative impact on the Company's continuing operations. The Company notes that its Industrial business did not have common customers with its Restaurant or Government Contract businesses. Results of Operations -- 2002 Compared to 2001 The Company reported revenues from continuing operations of $133.7 million for the year ended December 31, 2002, an increase of 17% from the $114.4 million reported in 2001. Income from continuing operations was $2.6 million in 2002, a 26% increase over the $2.1 million earned in 2001. The Company reported diluted net income per share from continuing operations of $.32 for 2002, a 19% increase over the $.27 reported a year earlier. Basic net income per share from continuing operations was $.33 in 2002 compared to $.27 in 2001. The Company's net income for the year ended December 31, 2002 was $741,000 or $.09 diluted net income per share, compared to net income of $282,000 and $.04 per diluted share in 2001. Product revenues from the Company's Restaurant segment were $59.2 million in 2002, an increase of 18% from the $50.3 million recorded in 2001. The principal factor was increased sales to certain of the Company's traditional customers including YUM! Brands, Inc. and McDonald's. Sales to YUM! Brands increased 47% or $5.1 million while McDonald's sales increased 19% or $3.9 million. Also contributing to the revenue growth was an increase of 32% or $4.1 million in sales to several other new and existing accounts. These accounts include Carnival Cruise Lines, Rare Hospitality, CKE Restaurants and The Pantry, Inc. These increased sales were due to several factors including the market demand for the Company's newest product, the POS4XP(TM), and customers' requirements to replace or upgrade older systems at existing restaurants. This increase was partially offset by a 68% or $4.2 million decline in sales to Boston Market. The Company acquired this account and completed the delivery of the customer's initial requirements in 2001. Customer Service revenues are also generated by the Company's Restaurant segment. The Company's service offerings include installation, training, twenty-four hour help desk support and various field and on-site service options. Customer service revenues were $36.6 million in 2002, an increase of 9% from the $33.6 million in 2001. The growth was due to a 49% or $2.6 million increase in installation revenue in 2002. This was the result of increased product sales during the year. All other service areas accounted for the remaining increase. Contract revenues from the Company's Government segment were $38 million in 2002, an increase of 24% when compared to the $30.5 million recorded in 2001. The Company received over $100 million in new awards in 2002. More specifically, this increase resulted from a 52% or $6.2 million growth in the Company's I/T outsourcing contracts for facility operations at strategic U.S. Department of Defense Telecommunication sites across the globe. These outsourcing operations provided by the Company directly support the U.S. Navy and Air Force operations. The Company has become a recognized leader in the conversion of military I/T communications facilities to contractor operations. Also contributing to the growth was a 31% or $670,000 increase in a floodplain-mapping contract with the New York State Department of Environment Conservation. Additionally, contract revenues under the Company's Cargo*Mate(TM) contract grew 37% or $884,000 in 2002 compared to 2001. Product margins were 32.9% for 2002 compared to 33.4% in 2001. The product mix change as a result of the revenue growth discussed above had a small positive impact on margins. However, this was offset by an increase in the provision for excess and obsolete inventory in 2002 when compared to 2001. This was primarily a result of a decline in the forecasted usage of certain inventory components as the Company recently introduced newer products. Customer service margins were 17.7% in 2002 compared to 19.1% in 2001. This margin decline was the result of an investment by the Company to increase the number of field service personnel in the first half of the year in order to support the installation and field service requirements of the Boston Market account which was acquired by the Company in 2001. Contract margins were 6.5% in 2002 versus 7.1% in 2001. This decline was due to slightly lower profit margins on certain fixed-price contracts in 2002 when compared to 2001. Margins in 2002 and 2001 were higher than anticipated due to additional profit recognized upon completion of certain contracts. The Company's fixed price contracts generally span multiple years, sometimes extending for as long as four to five years. The Company sometimes recognizes an additional profit on these fixed price contracts as the Company nears completion of the contract when the Company determines that its contract expenditures will be less than it had previously estimated. In 2002 and 2001, the primary reason for cost underruns was lower than anticipated overhead rates. Margins on the Company's Government contract business historically run between 5% and 6%. For the year ended December 31, 2002, the significant components of contract costs were 73% for labor and fringe benefits, 7% for supplies, and 5% for subcontract. For 2001, these costs were 73%, 9% and 3%, respectively of contract costs. The balance of contract costs for 2002 and 2001 included consulting, facilities, communications and corporate overhead costs. Selling, general and administrative expenses are virtually all related to the Company's Restaurant segment. Selling, general and administrative expenses were $19.5 million in 2002 versus $16.8 million in 2001, an increase of 16%. This occurred primarily in sales and marketing expenses and is directly related to the growth in product revenue. The Company increased its worldwide sales force, increased related travel expenses and incurred general inflationary increases in wages and benefits. Research and development expenses are primarily from the Company's Restaurant segment. Research and development expenses were $5.4 million in 2002, a decrease of 3% from the $5.6 million recorded for the same period in 2001. This minor decrease was due to the completion of certain development projects in 2002. Research and development costs attributable to Government contracts are included in cost of contract revenues. Other income, net, was $815,000 in 2002 and includes rental income and foreign currency gains and losses. There were no significant variations in 2002 compared to 2001. Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense declined 29% to $824,000 in 2002 primarily due to lower interest rates in 2002 compared to 2001. In 2002, the Company's effective tax rate was 25.2%, compared to 23.0% in 2001. The variance from the federal statutory rate was due to the extraterritorial income exclusion and the favorable resolution of certain tax matters with taxing authorities. These items were partially offset by a $329,000 valuation allowance against certain foreign tax credits, due to the fact that the Company anticipates these foreign tax credits would expire prior to utilization. During 2002, the Company recorded an after tax loss of $1.9 million or $.23 loss per diluted share resulting from the discontinuance of its Industrial segment. The Company's decision to close down its unprofitable Industrial business unit, Ausable Solutions, Inc., followed a trend of continuous losses over the past three years, 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. Liquidity and Capital Resources The Company's primary source of liquidity has been cash flow from operations and lines of credit with various banks. Cash provided by continuing operations was $3.3 million in 2003 compared to $4.1 million in 2002. In 2003, cash flow was generated primarily by operating profits. This was partially offset by an increase in accounts receivable due to the revenue growth experienced in the fourth quarter of 2003. In 2002, cash flow benefited from the operating profits for the period and a reduction in accounts receivable. The Company was able to improve its ability to collect trade receivables by adding staff and by implementing more stringent collection procedures. This was partially offset by an increase in Customer Service inventory requirements to support the Company's current product line and expanded customer base. In addition, there was an increase in finished goods inventory in anticipation of certain customer orders that were not delivered until the first quarter of 2003. Cash used in investing activities was $1.2 million for 2003 versus $1.7 million for 2002. In 2003, capital expenditures were $415,000 and were primarily for internal use software and upgrades to the Company's Customer Service facility. Capitalized software costs relating to software development of restaurant products were $809,000 in 2003. For 2002, capital expenditures were $916,000 and were primarily for the Restaurant segment, including internal use software and a phone system upgrade and for improvements to the Company's headquarters facility. Capitalized software costs were $790,000 in 2002. Cash used in financing activities was $1.8 million in 2003 and $2.8 million in 2002. During 2003, the Company reduced its short-term bank borrowings by $2.6 million and received $839,000 from the exercise of employee stock options. In 2002, the Company reduced its short-term bank borrowings by $5.1 million, and received $381,000 from the exercise of employee stock options. The Company also raised $1.9 million on the sale of treasury stock in 2002. The Company evaluates market conditions on an ongoing basis and may elect to repurchase shares of its common stock at times when the prevailing market conditions provide an opportunity for the Company to buy back its stock at a discounted rate as compared to book value. The Company has an aggregate of $20,000,000 in bank lines of credit. One line totaling $12,500,000 bears interest at the prime rate (4% at December 31, 2003) and is subject to loan covenants. These covenants include a debt to tangible net worth ratio of 1 to 1; working capital of at least $25 million; and a debt coverage ratio of 4 to 1. The availability of this facility is determined based on the amount of certain receivables and inventory. Specifically, the total amount of credit available under this facility at a given time is based on (a) 80% of the Company's accounts receivable under 91 days outstanding attributable to the Company's Restaurant segment and (2) 40% of the Company's inventory, excluding work in progress. This line expires on April 30, 2005. The remaining line of $7,500,000 allows the Company, at its option, to borrow funds at the LIBOR rate plus the applicable interest rate spread (3.9% at December 31, 2003) or at the bank's prime lending rate. This facility contains certain loan covenants including a leverage ratio of not greater than 4 to 1 and a fixed charge coverage ratio of not less than 4 to 1. This line expires on October 30, 2005. Both lines are collateralized by certain accounts receivable and inventory. The Company was in compliance with all loan covenants as of December 31, 2003. At December 31, 2003, an aggregate of $6,989,000 was outstanding and an aggregate of $13,011,000 was available under these lines. The Company's has a $2.2 million mortgage loan on certain real estate. The Company's future principal payments under this mortgage are as follows (in 000's): 2004 $ 89 2005 94 2006 98 2007 103 2008 108 Thereafter 1,689 -------- $ 2,181 ======== The Company's future minimum obligations under non-cancelable operating leases are as follows (in 000's): 2004 $ 1,082 2005 915 2006 641 2007 348 2008 323 Thereafter 445 -------- $ 3,754 ======== Over the next twelve months, the Company anticipates that its capital requirements will be less than $2 million. The Company does not usually enter into long term contracts with its major restaurant 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. While 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 and whatever long-term credit facilities it can arrange. Critical Accounting Policies The Company's consolidated financial statements are based on the application of accounting principles generally accepted in the United States of America (GAAP). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness and adequacy on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, accounts receivable, inventories, intangible assets and taxes. Revenue Recognition Policy The Company recognizes revenue generated by the Restaurant segment using the guidance from SEC Staff Accounting Bulletin No. 104, "Revenue Recognition" and the AICPA Statement of Position (SOP) 97-2, "Software Revenue Recognition," and other applicable revenue recognition guidance and interpretations. Product revenue in the Restaurant segment is generated from sales of the Company's standard Point-of-Sale systems. When the Company installs its restaurant systems (which primarily includes hardware or hardware and software) on behalf of its customers, the Company recognizes revenue from the sale of its restaurant systems upon delivery to the customer's site. 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 in the Restaurant segment, consisting of support, field and depot repair, are provided to customers either on a time and materials basis or under its maintenance contracts. Services provided on a time and materials basis are recognized as the services are performed. Service revenues from maintenance contracts are deferred when billed and recognized ratably over the related contract period. The Company recognizes revenue in its Government segment using the guidance from SEC Staff Accounting Bulletin No. 104, "Revenue Recognition". The Company's contract revenues generated by the Government segment result primarily from contract services performed for the United States Government under a variety of costs-plus fee, time-and-material and fixed-price contracts. Revenue on cost-plus fixed fee contracts is recognized based on allowable costs for labor hours delivered, as well as other allowable costs plus the applicable fee. Revenue on time and material contracts is recognized by multiplying the number of direct labor-hours delivered in the performance of the contract by the contract billing rates and adding other direct costs as incurred. Revenue for fixed price contracts is recognized primarily on a straight-line basis over the life of the fixed-price contract. The Company's obligation under these contracts is simply to provide labor hours to conduct research or to staff facilities with no other deliverables or performance obligations. Anticipated losses on all contracts are recorded in full when identified. Unbilled accounts receivable are stated in the Company's financial statements at their estimated realizable value. Contract costs, including indirect expenses, are subject to audit and adjustment through negotiations between the Company and 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. Inventories The Company's inventories are valued at the lower of cost or market. The Company uses certain estimates and judgments and considers several factors including product demand and changes in technology to provide for excess and obsolescence reserves to properly value inventory. Capitalized software development costs The Company capitalizes certain costs related to the development of computer software used in its Restaurant products 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 on a product-by-product basis when the product is available for general release to customers. Goodwill In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets", (SFAS 142). The Company adopted SFAS 142 effective January 1, 2002. Under this standard, amortization of goodwill and certain intangible assets, including certain intangible assets recorded as a result of past business combinations, was discontinued upon the adoption of SFAS 142. Instead, all goodwill is tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. The Company has elected to annually test for impairment at December 31. There was no impairment of goodwill in 2003 or 2002. Taxes The Company has significant amounts of deferred tax assets that are reviewed for recoverability and valued accordingly. These assets are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Valuations related to tax accruals and assets can be impacted by changes to tax codes, changes in statutory tax rates and the Company's estimates of its future taxable income levels. Item 7A: Quantitative and Qualitative Disclosures about Market Risk 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 customers has historically accounted for a majority of our net revenues in any given fiscal period. For the fiscal years ended December 31, 2003, 2002 and 2001, aggregate sales to our top two Restaurant segment customers, McDonald's and Yum!Brands, amounted to 50%, 51% and 51%, respectively, of total revenues. Most customers are not obligated to make any minimum level of future purchases from us or to provide us 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 quarterly and annual results of operations. There can be no assurance that our current customers will continue to place orders with us, or that we will be able to obtain orders from new customers. AN INABILITY TO PRODUCE NEW PRODUCTS THAT KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS AND CHANGING MARKET CONDITIONS COULD RESULT IN A LOSS OF MARKET SHARE. The products we sell are subject to rapid and continual technological change. The products that are available from our competitors have increasingly offered a wider range of features and capabilities. We believe that in order to compete effectively we must provide compatible systems incorporating new technologies at competitive prices. There can be no assurance that we will be able to continue funding research and development at levels sufficient to enhance our current product offerings, or that the Company will be able to develop and introduce on a timely basis new products that keep pace with technological developments and emerging industry standards and address the evolving needs of customers. There can also 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, or to the revenue or profit margins with respect to these products. If any of our competitors were to introduce superior software products at competitive prices, or if our software products no longer met the needs of the marketplace due to technological developments and emerging industry standards, our software products may no longer retain any significant market share. If this were to occur, we could be required to record a charge against capitalized software costs, which amount to $1.8 million as of December 31, 2003. WE GENERATE MUCH OF OUR REVENUE FROM THE QUICK SERVICE RESTAURANT INDUSTRY AND THEREFORE ARE SUBJECT TO DECREASED REVENUES IN THE EVENT OF A DOWNTURN EITHER IN THAT INDUSTRY OR IN THE ECONOMY AS A WHOLE. For the years ended December 31, 2003, 2002 and 2001, we derived 70%, 72% and 73%, respectively, of our net revenues from the restaurant industry, primarily the Quick Service Restaurant (QSR) industry. Consequently, our restaurant technology product sales are dependent in large part on the health of the QSR industry, which in turn is dependent on the domestic and international economy, as well as factors such as consumer buying preferences and weather conditions. Instabilities or downturns in the restaurant market could disproportionately impact our revenues, as clients may either exit the industry or delay, cancel or reduce planned expenditures for our products. Although we believe we can assist the QSR sector of the restaurant industry in a competitive environment, given the cyclical nature of that industry, there can be no assurance that our profitability and growth will continue. WE DERIVE A PORTION OF OUR REVENUE FROM GOVERNMENT CONTRACTS, WHICH CONTAIN PROVISIONS UNIQUE TO PUBLIC SECTOR CUSTOMERS, INCLUDING THE GOVERNMENT'S RIGHT TO MODIFY OR TERMINATE THESE CONTRACTS AT ANY TIME. For the fiscal years ended December 31, 2003, 2002 and 2001, we derived 30%, 28% and 27%, respectively, of our net revenues from contracts to provide technical products and services to United States Government agencies and defense contractors. Contracts with United States Government agencies typically provide that such contracts are terminable at the convenience of the Government. If the 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 increased work scope or change orders. 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 the United States Government pursuant to firm fixed-price, cost-plus fixed fee and time-and-material, prime contracts and subcontracts. The majority of our Government contracts are either firm fixed-price/time-and-material, or cost-plus fixed fee contracts. Approximately 72% of the revenue that we derived from Government contracts for the year ended December 31, 2003 came from firm fixed-price or time-and-material contracts. The balance of the revenue that we derived from Government contracts in 2003 primarily came from cost-plus fixed fee contracts. Most of our contracts are for one-year to five-year terms. While firm fixed-price contracts allow us to benefit from cost savings, they also expose us to the risk of cost overruns. If the initial estimates we use for calculating the contract price are incorrect, we can incur losses on those contracts. In addition, some of our Governmental contracts have provisions relating to cost controls and audit rights and, if we fail to meet the terms specified in those contracts, then we may not realize their full benefits. Lower earnings caused by cost overruns would have an adverse effect on our financial results. Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Under cost-plus fixed fee contracts, we are reimbursed for allowable costs and paid a fixed fee. However, if our costs under either type 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. Under each type of contract, if we are unable to control costs we incur in performing under the contract, our financial condition and operating results could be materially adversely affected. Cost over-runs also may adversely affect our ability to sustain existing programs and obtain future contract awards. WE FACE EXTENSIVE COMPETITION IN THE MARKETS IN WHICH WE OPERATE, AND OUR FAILURE TO COMPETE EFFECTIVELY COULD RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES. There are currently five major suppliers who offer restaurant management systems similar to ours. Some of these competitors are larger than PAR and have access to substantially greater financial and other resources and, consequently, may be able to obtain more favorable terms than we can for components and subassemblies incorporated into their restaurant technology products. The rapid rate of technological change in the restaurant market makes it likely that we will face competition from new products designed by companies not currently competing with us. Such products may have features not currently available on our restaurant products. We believe that our competitive ability depends on our total solution offering, our product development and systems integration capability, our direct sales force and our Customer Service organization. There is no assurance, however, that we will be able to compete effectively in the restaurant technology market in the future. Our Government contracting business has been focused on niche offerings, primarily signal and image processing, I/T outsourcing and engineering services. Many of our competitors are, or are subsidiaries of, companies such as Lockheed-Martin, Raytheon, Northrop-Grumman, BAE, Harris, Boeing and SAIC. These companies are larger and have substantially greater financial resources than we do. We also compete with smaller companies that target particular segments of the Government market. These companies may be better positioned to obtain contracts through competitive proposals. Consequently, there are no assurances that we will continue to win Government contracts as a prime contractor or subcontractor. WE MAY NOT BE ABLE TO MEET THE UNIQUE OPERATIONAL, LEGAL AND FINANCIAL CHALLENGES THAT RELATE TO OUR INTERNATIONAL OPERATIONS, WHICH MAY LIMIT THE GROWTH OF OUR BUSINESS. For the years ended December 31, 2003, 2002 and 2001, our net revenues from sales outside the United States were 11%, 11% and 14%, respectively, of the Company's net revenues. We anticipate that international sales will continue to account for a significant portion of sales. We intend to continue to expand our operations outside the United States and to enter additional international markets, which will require significant management attention and financial resources. Our operating results are subject to the risks inherent in international sales, including, but not limited to, regulatory requirements, political and economic changes and disruptions, geopolitical disputes and war, transportation delays, difficulties in staffing and managing foreign sales operations, and potentially adverse tax consequences. In addition, fluctuations in exchange rates may render our products less competitive relative to local product offerings, or could result in foreign exchange losses, depending upon the currency in which we sell our products. There can be no assurance that these factors will not have a material adverse effect on our future international sales and, consequently, on our operating results. INFLATION Inflation had little effect on revenues and related costs during 2003. Management anticipates that margins will be maintained at acceptable levels to minimize the effects of inflation, if any. INTEREST RATES As of December 31, 2003, the Company has $2.2 million in variable long-term debt and $7.0 million in variable short-term debt. The Company believes that adverse change in interest rates of 100 basis points would not have a material impact on our business, financial conditions, results of operations or cash flows. FOREIGN CURRENCY The Company's primary exposures relate to certain non-dollar denominated sales and operating expenses in Europe and Asia. These primary currencies are the Euro, the Australian dollar and the Singapore dollar. Management believes that foreign currency fluctuations should not have a significant impact on our business, financial conditions, results of operations or cash flows due to the low volume of business affected by foreign currencies. Item 8: Financial Statements and Supplementary Data The Company's 2003 Consolidated financial statements, together with the report thereon of KPMG LLP dated February 20, 2004, and the report of PricewaterhouseCoopers LLP dated March 28, 2003 are included elsewhere herein. See Item 15 for a list of Financial Statements and Financial Statement Schedule. Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On July 23, 2003, the Audit Committee of our Board of Directors authorized management of PAR Technology Corporation to seek proposals from accounting firms interested in replacing PricewaterhouseCoopers LLP as our independent accountants. On August 21, 2003 PricewaterhouseCoopers LLP resigned. The Company engaged KPMG LLP as its independent public accountants as of October 9, 2003. During the two recent fiscal years and prior to and through October 9, 2003 the Company had not consulted with KPMG LLP regarding any of the matters or events set forth in Item 304 (a) (2) (i) and (ii) of Regulation S-K. The reports of PricewaterhouseCoopers LLP as of December 31, 2002 and for each of the fiscal years ended December 31, 2001 and 2002, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In July 2003, PricewaterhouseCoopers LLP delivered it management letter to, and discussed it with, Management and the Audit Committee. The management letter is the formal means by which PricewaterhouseCoopers LLP reports to us its findings, developed as a result of its annual audit, with regard to accounting policies, procedures and controls. In this management letter PricewaterhouseCoopers LLP stated its belief that material weaknesses existed at this time of the audit with respect to the Company's revenue recognition practices that ultimately resulted in the previously reported restatement. In the management letter, PricewaterhouseCoopers LLP also made recommendations regarding systems and procedures relating to revenue recognition. While the Company did not agree with PricewaterhouseCoopers LLP's determination that the business practices in place led to the restatement or constituted a material weakness in the policies, procedures and controls, the Company has implemented all of the recommendations made by PricewaterhouseCoopers LLP in their management letter. Item 9A: Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. As of December 31, 2003, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 15d-14(c). Based upon the evaluation, the Company's President and Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure and procedures are effective in enabling the Company to identify, process, record and report information required to be included in the Company's periodic SEC filings within the required time period. (b) Changes in Internal Controls. There was no significant change in the Company's internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting. PART III Item 10: Directors and Executive Officers of the Registrant The directors and executive officers of the Company and their respective ages and positions are:
Name Age Position - ------------------------------ --- --------------------------------------------------- Dr. John W. Sammon, Jr. 64 Chairman, President and Chief Executive Officer, PAR Technology Corporation Charles A. Constantino 64 Executive Vice President and Director, PAR Technology Corporation Sangwoo Ahn 65 Director, PAR Technology Corporation J. Whitney Haney 69 Director, PAR Technology Corporation James A. Simms 44 Director, PAR Technology Corporation Gregory T. Cortese 54 Chief Executive Officer & President ParTech, Inc., General Counsel and Secretary, PAR Technology Corporation Albert Lane, Jr. 62 President, PAR Government Systems Corporation and Rome Research Corporation Ronald J. Casciano 50 Vice President, Chief Financial Officer and Treasurer, PAR Technology Corporation Other senior officers and significant employees of the Company and their respective ages and positions are: Name Age Position - ------------------------------ --- --------------------------------------------------- Raymond E. Barnes 56 Vice President, POS Systems Development, ParTech, Inc. Edward Bohling 44 Vice President, Information Systems and Technology, PAR Government Systems Corporation Linda D. Brewer 47 Vice President, Pacific/West Coast Operations Rome Research Corporation Louis Brown 53 Vice President, World Wide Sales, ParTech, Inc.
Name Age Position - ------------------------------ --- --------------------------------------------------- William P. Gaines 47 Senior Director, Finance/Controller PAR Government Systems Corporation Kenneth M. Giffune 55 Vice President, Human Resources PAR Technology Corporation Sam Y. Hua 42 Vice President and Chief Technical Officer ParTech, Inc. Thomas A. Lindsay 52 Vice President, New Business, Rome Research Corporation Fred A. Matrulli 58 Vice President, Operations/ Logistic Management Systems, PAR Government Systems Corporation Roger P. McReynolds 58 Vice President, Chief Quality Officer, ParTech, Inc. Hector Melendez 54 Vice President, Plans, Rome Research Corporation Victor Melnikow 46 Vice President, & General Manager, Rome Research Corporation E. John Mohler 60 Vice President, Business Development, Logistic Management Systems, PAR Government Systems Corporation Viola A. Murdock 47 Senior Corporate Counsel, PAR Technology Corporation John W. Sammon III 33 Vice President and General Manger, Logistic Management Systems, PAR Government Systems Corporation Samuel S. Talaba 47 Controller, ParTech, Inc. Jerry F. Weimar 47 Vice President, Special Projects, ParTech, Inc. William J. Williams 42 Vice President, Operations, ParTech, Inc. Stanley A. Zysk, Jr. 57 Vice President, Quality Software Assurance, ParTech, Inc.
The Company's directors are elected in classes with staggered three-year terms with one class being elected at each annual meeting of shareholders. The directors serve until the next election of their class and until their successors are duly elected and qualified. The Company's officers are appointed by the Board of Directors and hold office at the will of the Board of Directors. The principal occupations for the last five years of the directors, executive officers, and other significant employees of the Company are as follows: Dr. John W. Sammon, Jr. is the founder of the Company and has been the Chairman, President and Chief Executive Officer since its incorporation in 1968. Mr. Charles A. Constantino has been a director of the Company since 1971 and Executive Vice President since 1974. Mr. Sangwoo Ahn was appointed a director of the Company in March, 1986. Mr. Ahn is the Chairman of the Board, Quaker Fabric Corp. since 1993 and previously was the partner of Morgan, Lewis, Githens & Ahn. Mr. J. Whitney Haney has been a director of the Company since 1988. Mr. James A. Simms was appointed a director of the Company in October, 2001. Mr. Simms is currently a senior investment banker with Adams, Harkness & Hill, Inc. and has held this position since 1997. Mr. Gregory T. Cortese was named President, ParTech, Inc. in June 2000 in addition to General Counsel and Secretary of PAR Technology Corporation. Previously, Mr. Cortese was the Vice President, Law and Strategic Development since 1998. Mr. Albert Lane, Jr. was appointed to President, Rome Research Corporation in 1988. Mr. Lane was additionally appointed President of PAR Government Systems Corporation in 1997. Mr. Ronald J. Casciano, CPA, was promoted to Vice President, Chief Financial Officer, Treasurer of PAR Technology Corporation in June, 1995. Mr. Raymond E. Barnes was promoted to Vice President, POS Systems Development of ParTech, Inc. in 1998. Mr. Edward Bohling was promoted to Vice President, Information Systems and Technology of PAR Government Systems Corporation in 1998. Ms. Linda D. Brewer was promoted to Vice President of Pacific/West Coast Operations of Rome Research Corporation in January 2002. Prior to this position, Ms. Brewer was Director of Pacific/West Coast Operations for Rome Research Corporation. Mr. Louis Brown was promoted to Vice President, World Wide Sales for ParTech, Inc. in December 2001. Previously, Mr. Brown was the Director, New Business Development of ParTech, Inc. Mr. William Gaines was promoted to Senior Director, Finance/Controller of PAR Government Systems Corporation in 2002. Previously, Mr. Gaines was Director of Accounting of PAR Government Systems Corporation. Dr. Kenneth M. Giffune, Ed.D was appointed Vice President of Human Resources for PAR Technology Corporation in July 1995. Mr. Sam Y. Hua was promoted to Vice President and Chief Technical Officer of ParTech, Inc. in 1998. Mr. Thomas A. Lindsay was promoted to Vice President, New Business in September 2003 for Rome Research Corporation. Previously, Mr. Lindsay was Director of Marketing for Rome Research Corporation. Mr. Fred A. Matrulli was named Vice President, Operations/Logistic Management Systems of PAR Government Systems Corporation, in 1998. Mr. Roger P. McReynolds was appointed Vice President, Chief Quality Officer of ParTech, Inc. in February 2002. Previously, Mr. McReynolds was Vice President of Operations for ParTech, Inc. Mr. Hector Melendez was appointed to Vice President, Plans in February, 2002. Mr. Melendez joined Rome Research Corporation in April 2001 as Vice President. Previously, he was a Director of Communication Infrastructure in the United States Marine Corps. Mr. Victor Melnikow was promoted to Vice President & General Manager for Rome Research Corporation in September 2003. Previously, Mr. Melnikow held the position of Vice President, Finance of Rome Research Corporation. Mr. E. John Mohler was promoted to Vice President, Business Development, Logistic Management Systems of PAR Government Systems in 2002. Previously Mr. Mohler held the position of Vice President, Logistic Management Systems of PAR Government Systems Corporation. Ms. Viola A. Murdock was promoted to Senior Corporate Counsel for PAR Technology Corporation in 1996. Mr. John Sammon III was named Vice President and General Manager, Logistic Management Systems of PAR Government Systems in 2003. Prior to this position he was Director, Logistic Management Systems of PAR Government Systems Corporation. Mr. Samuel Talaba was named Controller of ParTech, Inc. in 1997. Mr. Jerry F. Weimar was promoted to Vice President, Special Project of ParTech, Inc.in 2002. Prior to that, he held the position of VP, Professional Services of ParTech, Inc. Mr. William J. Williams was promoted to Vice President, Operations of ParTech, Inc. in 2002. Prior to this position, Mr. Williams was the Vice President, Manufacturing of ParTech, Inc. Mr. Stanley A. Zysk, Jr. was named Vice President, Quality Software Assurance of ParTech, Inc.in May 2003. Previously, Mr. Zysk previously held the position of Vice President of Product Management for ParTech, Inc. Item 11: Executive Compensation The information required by this item will appear under the caption "Executive Compensation" in our 2003 definitive proxy statement for the annual meeting of stockholders on May 27, 2004 and is incorporated herein by reference. Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item will appear under the caption "Security Ownership Of Management And Certain Beneficial Owners" in our 2003 definitive proxy statement for the annual meeting of stockholders on May 27, 2004 and is incorporated herein by reference. Item 13: Certain Relationships and Related Transactions The information required by this item will appear under the caption "Executive Compensation" in our 2003 definitive proxy statement for the annual meeting of stockholders on May 27, 2004 and is incorporated herein by reference. Item 14: Statement of Fees Paid to Independent Auditors The response to this item will appear under the caption "Statement of Fees Paid to Independent Auditors" in our 2003 definitive proxy statement for the annual meeting of stockholders to be held on May 27, 2004 and is incorporated herein by reference. PART IV Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as a part of the Form 10-K (1) Financial Statements: Reports of Independent Accountants Consolidated Balance Sheets at December 31, 2003 and 2002 Consolidated Statements of Income for the three years ended December 31, 2003 Consolidated Statements of Comprehensive Income for the three years ended December 31, 2003 Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2003 Consolidated Statements of Cash Flows for the three years ended December 31, 2003 Notes to Consolidated Financial Statements (2) Financial Statement Schedule: Valuation and Qualifying Accounts and Reserves Reports on Form 8-K On October 14, 2003, PAR Technology Corporation filed a report on Form 8-K pursuant to Item 4 (Changes in Registrant's Certifying Accountant) of that Form relating to the engagement of KPMG LLP as the Company's independent accounts. On October 30, 2003, PAR Technology Corporation furnished a report on Form 8-K pursuant to Item 9 (Regulation FD Disclosure) of that Form relating to its financial information for the quarter ended September 30, 2003, as presented in a press release October 30, 2003 and furnished thereto as an exhibit. (c) Exhibits See list of exhibits on page 73. (d) Financial statement schedules See (a)(2) above. Independent Auditors' Report The Board of Directors and Shareholders PAR Technology Corporation: We have audited the consolidated financial statements of PAR Technology Corporation and subsidiaries as of and for the year ended December 31, 2003, as listed in the accompanying index. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule as of and for the year ended December 31, 2003, as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2003 consolidated financial statements referred to above present fairly, in all material respects, the financial position of PAR Technology Corporation and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule as of and for the year ended December 31, 2003, when considered in relation to the basic 2003 consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Syracuse, New York February 20, 2004 Report of Independent Auditors The Board of Directors and Shareholders PAR Technology Corporation: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of PAR Technology Corporation and its Subsidiaries at December 31, 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Syracuse, New York March 28, 2003 CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts) December 31, -------------------- 2003 2002 -------- --------- Assets Current assets: Cash ............................................... $ 1,467 $ 490 Accounts receivable-net (Note 3) ................... 31,876 25,843 Inventories-net (Note 4) ........................... 31,894 34,274 Deferred income taxes (Note 8) ..................... 6,486 5,766 Other current assets ............................... 2,472 2,638 Total assets of discontinued operation (Note 2) .... 20 59 -------- -------- Total current assets ........................... 74,215 69,070 Property, plant and equipment - net (Note 5) ............ 7,240 8,455 Deferred income taxes (Note 8) .......................... 2,857 4,386 Other assets ............................................ 2,855 3,211 -------- -------- $ 87,167 $ 85,122 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt .................. $ 89 $ 85 Borrowings under lines of credit ................... 6,989 9,549 Accounts payable ................................... 8,301 8,371 Accrued salaries and benefits ...................... 5,461 4,615 Accrued expenses ................................... 2,471 2,077 Deferred service revenue ........................... 5,947 6,704 Total liabilities of discontinued operation (Note 2) 578 342 -------- -------- Total current liabilities ...................... 29,836 31,743 -------- -------- Long-term debt (Note 6) ................................. 2,092 2,181 -------- -------- Commitments and contingent liabilities (Notes 5 and 10) Shareholders' Equity (Note 7): Preferred stock, $.02 par value, 1,000,000 shares authorized ...................... -- -- Common stock, $.02 par value, 19,000,000 shares authorized; 9,966,062 and 9,770,262 shares issued; 8,555,375 and 8,359,575 outstanding .............. 199 195 Capital in excess of par value ..................... 29,761 28,926 Retained earnings .................................. 32,375 29,946 Accumulated other comprehensive loss ............... (43) (816) Treasury stock, at cost, 1,410,687 shares ............................... (7,053) (7,053) -------- -------- Total shareholders' equity ..................... 55,239 51,198 -------- -------- $ 87,167 $ 85,122 ======== ======== See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Amounts) Year ended December 31, ---------------------------------- 2003 2002 2001 --------- --------- --------- Net revenues: Product ................................ $ 60,223 $ 59,153 $ 50,272 Service ................................ 37,865 36,553 33,572 Contract ............................... 41,682 37,975 30,510 --------- --------- --------- 139,770 133,681 114,354 --------- --------- --------- Costs of sales: Product ................................ 39,024 39,643 33,506 Service ................................ 32,140 30,081 27,163 Contract ............................... 39,613 35,501 28,332 --------- --------- --------- 110,777 105,225 89,001 --------- --------- --------- Gross margin ..................... 28,993 28,456 25,353 --------- --------- --------- Operating expenses: Selling, general and administrative .... 19,340 19,540 16,774 Research and development ............... 5,310 5,400 5,565 --------- --------- --------- 24,650 24,940 22,339 --------- --------- --------- Operating income from continuing operations . 4,343 3,516 3,014 Other income, net ........................... 582 815 848 Interest expense ............................ (540) (824) (1,161) --------- --------- --------- Income from continuing operations before provision for income taxes ......... 4,385 3,507 2,701 Provision for income taxes (Note 8) ......... (1,593) (884) (621) --------- --------- --------- Income from continuing operations ........... 2,792 2,623 2,080 --------- --------- --------- Discontinued operations: Loss from operations of discontinued component (including loss on disposal of $830,000 in 2002) (570) (2,516) (2,335) Income tax benefit ..................... 207 634 537 --------- --------- --------- Loss from discontinued operations ...... (363) (1,882) (1,798) --------- --------- --------- Net income .................................. $ 2,429 $ 741 $ 282 ========= ========= =========
Continued CONSOLIDATED STATEMENTS OF INCOME (Continued) (In Thousands Except Per Share Amounts) Year ended December 31, ---------------------------------- 2003 2002 2001 --------- --------- -------- Earnings per share: Basic: Income from continuing operations $ .33 $ .33 $ .27 Loss from discontinued operations $ (.04) $ (.24) $ (.23) Net income ................ $ .29 $ .09 $ .04 Diluted: Income from continuing operations $ .32 $ .32 $ .27 Loss from discontinued operations $ (.04) $ (.23) $ (.23) Net income ................ $ .27 $ .09 $ .04 Weighted average shares outstanding Basic ........................... 8,438 7,934 7,726 ========= ========= ======== Diluted ......................... 8,861 8,315 7,799 ========= ========= ======== See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Year ended December 31, ------------------------- 2003 2002 2001 -------- ------ ------ Net income ................................... $2,429 $ 741 $ 282 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 773 625 (238) ------ ------ ------ Comprehensive income ......................... $3,202 $1,366 $ 44 ====== ====== ====== See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Total Common Stock Capital in Other Treasury Stock Shareholders' ------------ excess of Retained Comprehensive --------------- ------------ (In Thousands) Shares Amount Par Value Earnings Income (Loss) Shares Amount Equity ------ ------ --------- -------- ------------ ------ ------ ------ Balance at December 31, 2000, 9,517 $ 190 $ 28,071 $ 28,923 $ (1,203) (1,794) $ (8,969) $ 47,012 Net income 282 282 Issuance of common stock upon the exercise of stock options (Note 7) 157 3 470 473 Translation adjustments (238) (238) -------- ------- --------- --------- ----------- --------- -------- --------- Balance at December 31, 2001, 9,674 193 28,541 29,205 (1,441) (1,794) (8,969) 47,529 Net income 741 741 Sale of treasury stock, net 6 383 1,916 1,922 Issuance of common stock upon the exercise of stock options (Note 7) 96 2 379 381 Translation adjustments 625 625 -------- ------- --------- --------- ----------- --------- -------- --------- Balance at December 31, 2002 9,770 195 28,926 29,946 (816) (1,411) (7,053) 51,198 Net income 2,429 2,429 Issuance of common stock upon the exercise of stock options (Note 7) 196 4 835 839 Translation adjustments 773 773 -------- ------- --------- --------- ----------- --------- -------- --------- Balance at December 31, 2003 9,966 $ 199 $ 29,761 $ 32,375 $ (43) (1,411) $ (7,053) $ 55,239 ======== ======== ========= ========= =========== ========= ======== =========
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Year ended December 31, --------------------------------- 2003 2002 2001 --------- --------- --------- Cash flows from operating activities: Net income .................................... $ 2,429 $ 741 $ 282 Adjustments to reconcile net income to net cash provided by operating activities: Net loss from discontinued operations ...... 363 1,882 1,798 Depreciation and amortization .............. 2,815 2,894 3,156 Provision for bad debts .................... 968 1,491 1,299 Provision for obsolete inventory ........... 2,957 2,321 590 Deferred income tax ........................ 809 544 (240) Changes in operating assets and liabilities: Accounts receivable ...................... (7,001) 6,045 (5,982) Inventories .............................. (577) (10,454) (103) Income tax refund claims ................. -- 95 638 Other current assets ..................... 166 596 (1,352) Other assets ............................. (20) (24) (22) Accounts payable ......................... (70) (2,611) 2,226 Accrued salaries and benefits ............ 846 292 477 Accrued expenses ......................... 394 (197) (491) Deferred service revenue ................. (757) 493 (518) -------- -------- -------- Net cash provided by continuing operating activities ................... 3,322 4,108 1,758 Net cash used in discontinued operations (88) (580) (1,829) -------- -------- -------- Net cash provided (used) by operating activities ................... 3,234 3,528 (71) -------- -------- -------- Cash flows from investing activities: Capital expenditures .......................... (415) (916) (517) Capitalization of software costs .............. (809) (790) (742) -------- -------- -------- Net cash used in investing activities ... (1,224) (1,706) (1,259) -------- -------- -------- Cash flows from financing activities: Net borrowings (payments) under line-of-credit agreements ................... (2,560) (5,082) 830 Payments of long-term debt .................... (85) (57) (55) Net proceeds from the sale of treasury stock .. -- 1,922 -- Proceeds from the exercise of stock options ... 839 381 473 -------- -------- -------- Net cash provided (used) by financing activities ................... (1,806) (2,836) 1,248 -------- -------- --------
Continued CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In Thousands) Year ended December 31, ---------------------------- 2003 2002 2001 -------- -------- ------- Effect of exchange rate changes on cash and cash equivalents ........................ 773 625 (238) ------- ------- ------- Net increase (decrease) in cash and cash equivalents .................... 977 (389) (320) Cash and cash equivalents at beginning of year ....................... 490 879 1,199 ------- ------- ------- Cash and cash equivalents at end of year ............................. $ 1,467 $ 490 $ 879 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 553 $ 848 $1,095 Income taxes, net of refunds 291 101 (543) See accompanying notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 -- Summary of Significant Accounting Policies Basis of consolidation The consolidated financial statements include the accounts of PAR Technology Corporation and its wholly owned subsidiaries (ParTech, Inc., Ausable Solutions, Inc., PAR Government Systems Corporation and Rome Research Corporation), collectively referred to as the "Company." All significant intercompany transactions have been eliminated in consolidation. Revenue recognition The Company recognizes revenue generated by the Restaurant segment using the guidance from SEC Staff Accounting Bulletin No. 104, "Revenue Recognition" and the AICPA Statement of Position (SOP) 97-2, "Software Revenue Recognition," and other applicable revenue recognition guidance and interpretations. Product revenue consists of sales of the Company's standard Point-of-Sale systems of the Restaurant 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. For restaurant systems that are self-installed by the customer or an unrelated third party and for component sales or supplies, the Company recognizes revenue at the time of shipment. In addition to product sales, the Company may provide installation and training services, and also offers maintenance contracts to its customers. Installation and training service revenues are recognized as the services are performed. The Company's other service revenues, consisting of support, field and depot repair, are provided to customers either on a time and materials basis or under its maintenance contracts. Services provided on a time and materials basis are recognized as the services are performed. Service revenues from maintenance contracts are deferred when billed and recognized ratably over the related contract period. The Company recognizes revenue in its Government segment using the guidance from SEC Staff Accounting Bulletin No. 104, "Revenue Recognition." The Company's contract revenues generated by the Government segment result primarily from contract services performed for the United States Government under a variety of costs-plus fee, time-and-material and fixed-price contracts. Revenue on cost-plus fixed fee contracts is recognized based on allowable costs for labor hours delivered, as well as other allowable costs plus the applicable fee. Revenue on time and material contracts is recognized by multiplying the number of direct labor-hours delivered in the performance of the contract by the contract billing rates and adding other direct costs as incurred. Revenue for fixed price contracts is recognized primarily on a straight-line basis over the life of the fixed-price contract. The Company's obligation under these contracts is simply to provide labor hours to conduct research or to staff facilities with no other deliverables or performance obligations. Anticipated losses on all contracts are recorded in full when identified. Unbilled accounts receivable are stated in the Company's financial statements at their estimated realizable value. Contract costs, including indirect expenses, are subject to audit and adjustment through negotiations between the Company and Government representatives. Statement of cash flows For purposes of reporting cash flows, the Company considers all highly liquid investments, purchased with a remaining maturity of three months or less, to be cash equivalents. The effect of changes in foreign-exchange rates on cash balances is not significant. Accounts receivable - Allowance for doubtful accounts Allowances for doubtful accounts are based on estimates of probable losses related to accounts receivable balances. The establishment of allowances requires the use of judgment and assumptions regarding probable losses on receivable balances. Inventories The Company's inventories are valued at the lower of cost or market. The Company uses certain estimates and judgments and considers several factors including product demand and changes in technology to provide for excess and obsolescence reserves to properly value inventory. Property, plant and equipment Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to twenty-five years. Expenditures for maintenance and repairs are expensed as incurred. Warranties The Company's products are sold with a standard warranty for defects in material and workmanship. The standard warranty offered by the Company is for one year, although certain sales have shorter warranty periods. The Company establishes an accrual for estimated warranty costs at the time revenue is recognized on the sale. This estimate is based on projected product reliability using historical performance data. The changes in the product warranty liability for the years ended December 31, are summarized as follows (in thousands): 2003 2002 -------- -------- Balance at beginning of year ........................ $ (560) $ (388) Provision for warranties issued during the year ..... (1,009) (1,540) Settlements made (in cash or in kind) during the year 1,075 1,368 ------- ------- Balance at end of year .............................. $ (494) $ (560) ======= ======= Income taxes The provision for income taxes is based upon pretax earnings with deferred income taxes provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The Company records a valuation allowance when necessary to reduce deferred tax assets to their net realizable amounts. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign currency The assets and liabilities for the Company's international operations are translated into U.S. dollars using year-end exchange rates. Income statement items are translated at average exchange rates prevailing during the year. The resulting translation adjustments are recorded as a separate component of shareholders' equity under the heading Accumulated Other Comprehensive Loss. Exchange gains and losses on intercompany balances of a long-term investment nature are also recorded as a translation adjustment and are included in Accumulated Other Comprehensive Income (Loss). Foreign currency transaction gains and losses, which historically have not been significant, are included in net income. Capitalized software development costs The Company capitalizes certain costs related to the development of computer software used in its Restaurant products 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 on a product-by-product basis when the product is available for general release to customers. The unamortized computer software costs included in other assets amounted to $1,772,000 and $2,148,000 at December 31, 2003 and 2002, respectively. Annual amortization, charged to cost of sales, is computed using the straight-line method over the remaining estimated economic life of the product, generally three years. Amortization of capitalized software costs amounted to $1,185,000, $1,098,000 and $1,376,000 in 2003, 2002, and 2001, respectively. Stock-based compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), encourages, but does not require companies to record compensation cost for stock-based compensation plans at fair value. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Had compensation cost for the Company's stock-based compensation plans and other transactions been determined based on the fair values at the fiscal year 2003, 2002 and 2001 grant dates for those awards, consistent with the requirements of SFAS 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been adjusted to the proforma amounts indicated below (in thousands, except per share data): 2003 2002 2001 -------- ------- ------- Net income ................... $ 2,429 $ 741 $ 282 Compensation benefit (expense) (118) 117 (278) ------- ------- ------- Proforma net income .......... $ 2,311 $ 858 $ 4 ======= ======= ======= Earnings per share: As reported -- Basic ....... $ .29 $ .09 $ .04 -- Diluted ..... $ .27 $ .09 $ .04 Proforma -- Basic ....... $ .27 $ .11 $ -- -- Diluted ..... $ .26 $ .10 $ -- The estimated weighted average fair value of options granted is $1.52, $1.10 and $.62 for 2003, 2002 and 2001, respectively. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2003, 2002 and 2001: 2003 2002 2001 ---- ---- ---- Risk-free interest rate 2.0% 4.2% 3.8% Dividend yield N/A N/A N/A Volatility factor 44% 44% 42% Expected option life 5 Years 6 Years 7.5 Years In management's opinion the existing models do not necessarily provide a reliable measure of the fair value of its stock options because the Company's stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed, and because of changes in the subjective assumptions can materially affect fair value estimate. Earnings per share 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 Share and Per Share Data): 2003 2002 2001 ------ ------ ------ Net income ................................. $2,429 $ 741 $ 282 ====== ====== ====== Basic: Shares outstanding at beginning of year 8,360 7,881 7,723 Weighted shares issued during the year 78 53 3 ------ ------ ------ Weighted average common shares, basic . 8,438 7,934 7,726 ====== ====== ====== Earnings per common share, basic ...... $ .29 $ .09 $ .04 ====== ====== ====== Diluted: Weighted average common shares, basic . 8,438 7,934 7,726 Dilutive impact of stock options ...... 423 381 73 ------ ------ ------ Weighted average common shares, diluted 8,861 8,315 7,799 ====== ====== ====== Earnings per common share, diluted .... $ .27 $ .09 $ .04 ====== ====== ====== Use of Estimates 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, intangible assets and goodwill, valuation allowances for receivables, inventories and deferred income tax assets. Actual results could differ from those estimates. Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets", (SFAS 142). The Company adopted SFAS 142 effective January 1, 2002. Under this standard, amortization of goodwill and certain intangible assets, including certain intangible assets recorded as a result of past business combinations, was discontinued upon the adoption of SFAS 142. Instead, all goodwill is tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. The Company has elected to annually test for impairment at December 31. There was no impairment of goodwill in 2003 or 2002. The carrying value of goodwill was $598,000 at December 31, 2003 and is included in other assets on the consolidated balance sheets. The following is a reconciliation assuming goodwill had been accounted for in accordance with SFAS 142 in the year ended December 31, 2001: 2001 Income from continuing operations - as reported ...... $ 2,080 Add back: Goodwill amortization (net of income taxes) 114 --------- Adjusted income from continuing operations ........... $ 2,194 ========= Basic EPS Income from continuing operations - as reported ...... $ .27 Add back: Goodwill amortization (net of income taxes) .01 --------- Adjusted income from continuing operations ........... $ .28 ========= Diluted EPS Income from continuing operations - as reported ...... $ .27 --------- Add back: Goodwill amortization (net of income taxes) .01 --------- Adjusted income from continuing operations ........... $ .28 ========= Accounting for Impairment or Disposal of Long-Lived Assets Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," (SFAS 144) was issued in August 2001. SFAS 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 144 supersedes Standard Financial Accounting Standards No. 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 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 3, the Company decided to dispose of its Industrial segment in August 2002 and has adopted the provisions of SFAS 144 regarding the measurement, recognition and disclosure of this discontinued operation. Reclassifications Amounts in prior years' consolidated financial statements are reclassified whenever necessary to conform with the current year's presentation. New Accounting Pronouncements In December 2002, the Emerging Issues Task Force (EITF) issued EITF 00-21, Revenue Arrangements with Multiple Deliveries (EITF 00-21). EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. It also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in an arrangement. EITF 00-21 does not apply to deliverables in arrangements to the extent the accounting for such deliverables is within the scope of other existing higher-level authoritative accounting literature. EITF 00-21 is effective for revenue arrangements entered into beginning after July 1, 2003. The adoption of EITF 00-21 did not have an impact on the 2003 consolidated financial statements and the Company does not anticipate that the adoption of EITF 00-21 will have any impact on the consolidated financial statements prospectively. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 provides guidance for identifying a controlling interest in a Variable Interest Entity (VIE) established by means other than voting interests. FIN 46 also requires consolidation of a VIE by an enterprise that holds such controlling interest. The Company is required to adopt the provisions of FIN 46 for any variable interest entity created prior to February 1, 2003, by the end of the current fiscal year. The Company does not have any interest qualifying as VIE's and does not anticipate that the provisions of FIN 46 will have a significant impact on the consolidated financial statements, prospectively. In December 2002, FASB Statement No. 148 Accounting for Stock Based Compensation - Transaction and Disclosure, an amendment of FASB Statement No. 123, was issued. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements. Disclosures required by this standard are included in the notes to these consolidated financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement of Financial Accounting Standards No. 133. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have an impact on the Company's consolidated financial statements. The Company does not expect the adoption of SFAS 149 to have a significant impact on the Company's consolidated financial statements, prospectively. In May, 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective beginning in the third quarter of 2003. The adoption of SFAS 150 did not have an impact on the consolidated financial statements and the Company does not anticipate SFAS 150 will have a significant impact on the consolidated financial statements, prospectively. Note 2 -- Business Operations During the third quarter of 2002, the Company decided to close down its unprofitable Industrial business unit, Ausable Solutions, Inc., following a trend of continuous losses. The overall downturn in the global economy and specifically the manufacturing and warehousing industries, coupled with the diminishing capital expenditures of the Company's industrial customers, prevented the Company from being profitable in this particular business segment. The decision to shut down this unit has allowed the Company to focus on its two core businesses, Restaurant and Government. The Company believes that the decision to exit the Industrial segment will not have a negative impact on the Company's continuing operations. The Company's Industrial business did not have common customers with its Restaurant and Government contract businesses. A summary of net revenues, net loss from operations of discontinued component and total assets and liabilities of discontinued operations are detailed below (in thousands): Year ended December 31, ----------------------------- 2003 2002 2001 -------- ------- ------- Net revenues .............. $ -- $ 1,454 $ 2,749 Net loss from operations of discontinued component . $ (363) $(1,882) $(1,798) December 31, -------------- 2003 2002 ------ ----- Discontinued assets-other ....... $ 20 $ 59 ==== ==== Discontinued liabilities-other .. $578 $342 ==== ==== Note 3 -- Accounts Receivable The Company's net accounts receivable consist of: December 31, (In Thousands) ---------------------- 2003 2002 -------- --------- Government segment: Billed ............. $ 8,961 $ 4,789 Advanced billings (1,214) (532) -------- -------- 7,747 4,257 -------- -------- Restaurant segment: Trade accounts receivable 24,129 21,586 -------- -------- $ 31,876 $ 25,843 ======== ======== At December 31, 2003 and 2002, the Company had recorded allowances for doubtful accounts of $2,389,000 and $3,153,000, respectively, against trade accounts receivable. Trade accounts receivable are primarily with major fast-food corporations or their franchisees. At December 31, 2003 and 2002, the Company had also recorded reserves of $7,000 and $15,000, respectively, against Government accounts receivable. Note 4 -- Inventories Inventories are used primarily in the manufacture, maintenance, and service of restaurant systems. Inventories are net of related reserves. The components of inventory are: December 31, (In Thousands) ---------------------------- 2003 2002 -------- -------- Finished goods ....................... $ 7,430 $10,892 Work in process ...................... 1,623 1,700 Component parts ...................... 5,585 4,923 Service parts ........................ 17,256 16,759 ------- ------- $31,894 $34,274 ======= ======= The Company records reserves for shrinkage, excess and obsolete inventory. At December 31, 2003 and 2002, these amounts were $4,361,000 and $4,094,000, respectively. Note 5 -- Property, Plant and Equipment The components of property, plant and equipment are: December 31, (In Thousands) ------------------ 2003 2002 ------- -------- Land ........................ $ 253 $ 253 Buildings and improvements .. 7,108 7,026 Rental property ............. 3,490 3,582 Furniture and equipment ..... 25,719 25,992 ------- ------- 36,570 36,853 Less accumulated depreciation and amortization ............ 29,330 28,398 ------- ------- $ 7,240 $ 8,455 ======= ======= The useful lives of buildings and improvements and rental property are twenty to twenty-five years. The useful lives of furniture and equipment ranges from three to eight years. Depreciation expense recorded was $1,630,000, $1,802,000 and $1,967,000 for 2003, 2002 and 2001, respectively. The Company subleases a portion of its headquarters facility to various tenants. Rent received from these leases totaled $1,114,000, $1,027,000 and $1,051,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Future minimum rent payments due to the Company under these leases is as follows (in thousands): 2004 $ 942 2005 942 2006 882 2007 133 -------- $ 2,899 ======== The Company leases office space under various operating leases. Rental expense on these operating leases was approximately $1,200,000, $1,228,000 and $1,143,000 for the years ended December 31, 2003, 2002, and 2001, respectively. Future minimum lease payments under all noncancelable operating leases are (in thousands): 2004 $ 1,082 2005 915 2006 641 2007 348 2008 323 Thereafter 445 -------- $ 3,754 ======== In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we evaluate the accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS 144 requires recognition of impairment of long-lived assets if the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset for assets to be held and used, or the amount by which the carrying value exceeds the fair market value less cost to dispose for assets to be disposed. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. No impairment was identified during 2003, 2002 or 2001. Note 6 -- Debt The Company has an aggregate of $20,000,000 in bank lines of credit. One line with a maximum availability totaling $12,500,000, bears interest at the prime rate (4% at December 31, 2003) and is subject to loan covenants. These covenants include a debt to tangible net worth ratio of 1 to 1; working capital of at least $25 million; and a debt coverage ratio of 4 to 1. The availability of this facility is determined based on the amount of certain accounts receivable and inventory. At December 31, 2003, the amount of available under this line was $12,500,000 based on (a) 80% of the Company's accounts receivable under 91 days outstanding attributable to the Company's Restaurant segment and (2) 40% of the Company's inventory, excluding work in progress. This line expires on April 30, 2005. The remaining line of $7,500,000 allows the Company, at its option, to borrow funds at the LIBOR rate plus the applicable interest rate spread (3.9% at December 31, 2003) or at the bank's prime lending rate. This facility contains certain loan covenants including a leverage ratio of not greater than 4 to 1 and a fixed charge coverage ratio of not less than 4 to 1. This line expires on October 30, 2005. Both lines are collateralized by certain accounts receivable and inventory. The Company was in compliance with all loan covenants as of December 31, 2003. At December 31, 2003, an aggregate of $6,989,000 was outstanding and an aggregate of $13,011,000 was available under these lines. The Company has a $2.2 million mortgage collateralized by certain real estate. The annual mortgage payment including interest totals $192,500. The mortgage bears interest at a variable rate based on the lending bank's Corporate Base Lending Rate plus 1/2%. At December 31, 2003, the interest rate was 4 3/4%. The remaining balance is due on May 1, 2010. The Company's future principal payments under this mortgage are as follows (in 000's): 2004 $ 89 2005 94 2006 98 2007 103 2008 108 Thereafter 1,689 --------- $ 2,181 ========= Note 7 -- Stock based compensation The Company has reserved 2,055,260 shares under its stock option plan. Options under this Plan may be incentive stock options or nonqualified options. 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. A summary of the stock options follows: No. of Shares Weighted Average (In Thousands) Exercise Price -------------- -------------- Outstanding at December 31, 2000 ... 1,515 $ 4.21 Granted ....................... 404 2.29 Exercised ..................... (157) 3.00 Forfeited ..................... (289) 4.01 ------ -------- Outstanding at December 31, 2001 ... 1,473 3.81 Granted ....................... 109 2.77 Exercised ..................... (96) 3.22 Forfeited ..................... (188) 5.69 ------ -------- Outstanding at December 31, 2002 ... 1,298 3.67 Granted ....................... 79 4.98 Exercised ..................... (196) 3.46 Forfeited ..................... (137) 4.05 ------ -------- Outstanding at December 31, 2003 ... 1,044 $ 3.48 ====== ======== Shares remaining available for grant 688 ====== Total shares vested and exercisable as of December 31, 2003 ....... 716 $ 3.53 ====== ======== Stock options outstanding at December 31, 2003 are summarized as follows: Range of Number Weighted Average Weighted Average Exercise Prices Outstanding Remaining Life Exercise Price --------------- ----------- -------------- -------------- $1.88 - $4.00 681 7.1 Years $2.67 $4.01 - $6.50 363 6.4 Years $4.97 -------------- ------ --------- ----- $1.88 - $6.50 1,044 6.8 Years $3.48 ============== ===== ========= ===== Note 8-- Income Taxes The provision (benefit) for income taxes consists of: Year ended December 31, (In Thousands) ---------------------------------------- 2003 2002 2001 --------- --------- -------- Current income tax: Federal ............. $ 177 $ (465) $ 13 State ............... 112 55 28 Foreign ............. 288 131 98 ------- ------- ------- 577 (279) 139 ------- ------- ------- Deferred income tax: Federal ............. 605 370 (57) State ............... 251 121 (64) Foreign ............. (47) 38 66 ------- ------- ------- 809 529 (55) ------- ------- ------- Provision for income taxes $ 1,386 $ 250 $ 84 ======= ======= ======= Deferred tax liabilities (assets) are comprised of the following at: December 31, (In Thousands) ---------------------- 2003 2002 --------- --------- Software development expense .............. $ 656 $ 266 Depreciation .............................. 209 426 -------- -------- Gross deferred tax liabilities ............ 865 692 -------- -------- Allowances for bad debts, inventory and warranty .................. (3,503) (3,511) Capitalized inventory costs ............... (60) (67) Benefit accruals .......................... (296) (324) Federal net operating loss carryforward ... (4,647) (5,113) State net operating loss carryforward ..... (634) (865) Foreign net operating loss carryforward ... (530) (483) Tax credit carryforward ................... (538) (772) Valuation allowance for foreign tax credits -- 329 Other ..................................... -- (38) -------- -------- Gross deferred tax assets ................. (10,208) (10,844) -------- -------- Net deferred tax asset .................... $ (9,343) $(10,152) ======== ======== The Company has a Federal net operating loss carryforward of $13.7 million, which expires in 2020 and 2021. The Company has tax credit carryforwards of $538,000, which expires in various tax years from 2005 - 2023. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the historical level of taxable income and projections for future taxable income, management believes it is more likely than not the Company will realize the benefit of the deferred tax assets. Accordingly, no deferred tax valuation allowance was recorded at December 31, 2003. As of December 31, 2002, the Company recorded a $329,000 valuation allowance against certain foreign tax credits. The foreign tax credits either expired or were converted to net operating loss carryforwards in 2003. Therefore, a valuation allowance is no longer required at December 31, 2003. The provision for income taxes differed from the provision computed by applying the Federal statutory rate to income before taxes due to the following: Year ended December 31, --------------------------------- 2003 2002 2001 ------ ------- ------- Federal statutory tax rate ...... 34.0% 34.0% 34.0% State taxes ..................... 8.5 15.8 (12.6) Extraterritorial income exclusion (2.0) (20.6) (19.7) Valuation allowance ............. (8.6) 33.2 -- Changes in estimate of prior year's accrual ................ -- (54.1) (3.0) Non deductible expenses ......... 3.2 8.3 19.5 Tax credits ..................... (1.3) (4.0) (13.7) Foreign income taxes ............ 2.1 12.6 18.0 Other ........................... .4 -- .5 ---- ---- ---- 36.3% 25.2% 23.0% ==== ==== ==== Note 9 -- Employee Benefit Plans The Company has a deferred profit-sharing retirement plan that covers substantially all employees. The Company's annual contribution to the plan is discretionary. The Company contributed $819,000 and $200,000 to the Plan in 2003 and 2002, respectively. There was no contribution to the plan in 2001. The plan also contains a 401(k) provision that allows employees to contribute a percentage of their salary. These contributions are matched at the rate of 10% by the Company. The Company contributions under the 401(k)component were $205,000, $208,000, and $208,000 in 2003, 2002, and 2001, respectively. The Company also maintains an incentive-compensation plan. Participants in the plan are key employees as determined by the Board of Directors and executive management. Compensation under the plan is based on the achievement of predetermined financial performance goals of the Company and its subsidiaries. Awards under the plan are payable in cash. Awards under the plan totaled $559,000, $261,000 and $416,000 in 2003, 2002 and 2001, respectively. Note 10 -- Contingencies The Company is subject to legal proceedings, which arise in the ordinary course of business. Additionally, U.S. Government contract costs are subject to periodic audit and adjustment. In the opinion of management, the ultimate liability, if any, with respect to these actions will not materially affect the financial position, results of operations, or cash flows of the Company. Note 11 -- Segment and Related Information 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, Restaurant and Government. The Restaurant segment offers integrated solutions to the hospitality 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 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. As discussed in Note 3, the Company discontinued its Industrial segment in the third quarter of 2002. Accordingly, the results of this segment have been reported as discontinued operations. Intersegment sales and transfers are not significant. Information as to the Company's segments is set forth below: Year ended December 31, (In Thousands) ------------------------------------ 2003 2002 2001 ---------- ---------- ---------- Revenues: Restaurant ......................... $ 98,088 $ 95,706 $ 83,844 Government ......................... 41,682 37,975 30,510 --------- --------- --------- Total ........................ $ 139,770 $ 133,681 $ 114,354 ========= ========= ========= Income (loss) from continuing operations: Restaurant ......................... $ 2,977 $ 1,278 $ 1,226 Government ......................... 1,928 2,266 1,954 Other .............................. (562) (28) (166) --------- --------- --------- 4,343 3,516 3,014 Other income, net ....................... 582 815 848 Interest expense ........................ (540) (824) (1,161) --------- --------- --------- Income before provision for income taxes ................... $ 4,385 $ 3,507 $ 2,701 ========= ========= ========= Identifiable assets: Restaurant ......................... $ 70,550 $ 71,725 $ 75,200 Government ......................... 10,475 6,568 7,700 Industrial ......................... 20 59 2,777 Other .............................. 6,122 6,770 3,238 --------- --------- --------- Total ........................ $ 87,167 $ 85,122 $ 88,915 ========= ========= ========= Depreciation and amortization: Restaurant ......................... $ 2,212 $ 2,315 $ 2,557 Government ......................... 201 117 104 Other .............................. 402 462 495 --------- --------- --------- Total ........................ $ 2,815 $ 2,894 $ 3,156 ========= ========= ========= Capital expenditures: Restaurant ......................... $ 236 $ 549 $ 307 Government ......................... 50 112 83 Other .............................. 129 255 127 --------- --------- --------- Total ........................ $ 415 $ 916 $ 517 ========= ========= ========= The following table presents revenues by country based on the location of the use of the product or services. 2003 2002 2001 ---------- ---------- ---------- United States ........................... $ 124,556 $ 118,375 $ 97,937 Other Countries ......................... 15,214 15,306 16,417 --------- --------- --------- Total ............................... $ 139,770 $ 133,681 $ 114,354 ========= ========= ========= The following table presents property by country based on the location of the asset. 2003 2002 2001 ------- ------- ------- United States ......... $79,831 $75,640 $80,122 Other Countries........ 7,336 9,482 8,793 ------- ------- ------- Total ............. $87,167 $85,122 $88,915 ======= ======= ======= Customers comprising 10% or more of the Company's total revenues are summarized as follows: 2003 2002 2001 --------- --------- --------- Restaurant segment: McDonald's Corporation....... 25% 30% 30% Yum! Brands, Inc. ........... 25% 21% 21% Government segment: Department of Defense ....... 30% 28% 27% All Others .................... 20% 21% 22% --- --- --- 100% 100% 100% === === === Note 12 -- Fair Value of Financial Instruments Estimated fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term nature of the instruments. Such current assets and liabilities include cash and cash equivalents, accounts receivable, borrowings under lines of credit, current portion of long-term debt and accounts payable. The estimated fair value of the Company's long-term debt is based on interest rates at December 31, 2003 and 2002 for new issues with similar remaining maturities and approximates carrying value at December 31, 2003 and 2002. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Note 13 -- Related Party Transactions The Company leases its corporate wellness facility to related parties at a current rate of $9,775 per month. The Company provides membership to this facility to all employees. During 2003, 2002, and 2001 the Company received rental income amounting to $117,300, $117,300, and $108,600, respectively. All lease payments are current at December 31, 2003. At December 31, 2003 the Company has outstanding interest bearing loans totaling $595,430 to two executive officers. These loans were originated prior to June, 2002. The interest rates are variable and were 4% at December 31, 2003. The amount outstanding and interest rate at December 31, 2002 were $720,000 and 4.25%, respectively. During 2003, 2002 and 2001 interest income recorded by the Company related to these loans was $26,100, $27,500, and $35,300, respectively. These loans are payable on demand. These loans are current as to interest payments at December 31, 2003. Note 14 -- Selected Quarterly Financial Data (Unaudited) Quarter ended (In Thousands Except Per Share Amounts) 2003 March 31 June 30 September 30 December 31 ---- -------- ------- ------------ ----------- Net revenues ..................... $30,542 $32,011 $36,006 $41,211 Gross margin ..................... 6,041 6,344 7,520 9,088 Income from continuing operations .......... 256 351 858 1,327 Basic earnings per share from continuing operations ..... .03 .04 .10 .16 Diluted earnings per share from continuing operations ..... .03 .04 .10 .15 Quarter ended (In Thousands Except Per Share Amounts) 2002 March 31 June 30 September 30 December 31 ---- -------- ------- ------------ ----------- Net revenues ..................... $33,715 $33,918 $31,785 $34,263 Gross margin ..................... 6,818 7,038 7,226 7,374 Income from continuing operations .......... 832 702 726 363 Basic earnings per share from continuing operations ..... .10 .09 .09 .05 Diluted earnings per share from continuing operations ..... .10 .09 .09 .04
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In Thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------------------------------------ Additions --------- Balance at beginning of Charged to Costs Charged to Balance at end Description period and Expenses Other Accounts Deductions of period - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for Doubtful Accounts - deducted from Accounts Receivable in the Consolidated Balance Sheet 2003 $3,168 968 (1,740) $2,396 2002 $4,504 1,491 (2,827) $3,168 2001 $4,444 1,299 (1,239) $4,504 (a) Uncollectible accounts written off. - ------------------------------------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------------------------------------ Additions --------- Balance at beginning of Charged to Costs Charged to Balance at end Description period and Expenses Other Accounts Deductions of period - ------------------------------------------------------------------------------------------------------------------------------------ Inventory Reserves for shrinkage, excess and obsolete inventory - - deducted from inventory in the Consolidated Balance Sheet 2003 $ 4,094 2,957 (2,690) $ 4,361 2002 $ 3,253 2,321 (1,480) $ 4,094 2001 $ 4,171 590 (1,508) $ 3,253
SIGNATURES Pursuant to the requirements of Section 13 of 15(d) 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 March 30, 2004 /s/John W. Sammon, Jr. ------------------------------- John W. Sammon, Jr. Chairman of Board and President ------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /s/John W. Sammon, Jr. - ---------------------- Chairman of Board and March 30, 2004 John W. Sammon, Jr. President (Principal Executive Officer) and Director /s/Charles A. Constantino - ------------------------- Executive Vice President March 30, 2004 Charles A. Constantino and Director /s/Sangwoo Ahn - ------------------------- Director March 30, 2004 Sangwoo Ahn /s/J. Whitney Haney - ------------------------- Director March 30, 2004 J. Whitney Haney /s/James A. Simms - ------------------------- Director March 30, 2004 James A. Simms /s/Ronald J. Casciano - ------------------------- Vice President, Chief Financial March 30, 2004 Ronald J. Casciano Officer and Treasurer List of Exhibits Exhibit No. Description of Instrument - -------------------------------------------------------------------------------- 3.1 Certificate of Incorporation, Filed as Exhibit 3.1 to Registration as amended Statement on Form S-2 (Registration No. 333-04077)of PAR Technology Corporation incorporated herein by reference. 3.2 Certificate of Amendment to the Filed as Exhibit 3.1 to Registration Certificate of Incorporation Statement on Form S-2 (Registration No. 333-04077)of PAR Technology Corporation incorporated herein by reference. 3.3 By-laws, as amended.Filed as Statement on Form S-2 (Registration Exhibit 3.1 to Registration No. 333-04077) of PAR Technology Corporation incorporated herein by reference. 4 Specimen Certificate representing Filed as Exhibit 3.1 to Registration the Common Stock. Statement on Form S-2 (Registration No. 333-04077)of PAR Technology Corporation incorporated herein by reference. 10.1 Letter of Agreement with Sanmina Filed as Exhibit 10.1 to Form S-3/A - SCI Corporation (Registration No. 333-102197) of PAR Technology Corporation incor- porated herein by reference. 10.2 NBT, N.A. Line of Credit Agreement 10.3 JPMorgan Chase Agreement 22 Subsidiaries of the registrant 23 Consents of Independent Accountants 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. EXHIBIT 22 Subsidiaries of PAR Technology Corporation - -------------------------------------------------------------------------------- Name State of Incorporation - -------------------------------------------------------------------------------- ParTech, Inc. New York PAR Government Systems Corporation New York Rome Research Corporation New York PAR Vision Systems Corporation New York Ausable Solutions, Inc. Delaware EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Shareholders PAR Technology Corporation We consent to the incorporation by reference in the registration statements (No. 33-04968, 33-39784, 33-58110, and 33-63095) on Form S-8 and the registration statement (No. 333-102197) on Form S-3 of PAR Technology Corporation of our report dated February 20, 2004, with respect to the consolidated balance sheet of PAR Technology Corporation as of December 31, 2003 and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the year ended December 31, 2003, and the financial statement schedule "Valuation and Qualifying Accounts and Reserves" as of and for the year ended December 31, 2003, which report appears in the December 31, 2003 annual report on Form 10-K of PAR Technology Corporation. KPMG LLP Syracuse, New York March 29, 2004 Consent of Independent Auditors We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (33-04968, 33-39784, 33-58110, and 33-63095) and the Registration Statement on Form S-3 (333-102197) of PAR Technology Corporation of our report dated March 28, 2003 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Syracuse, New York March 29, 2004 Exhibit 31.1 PAR TECHNOLOGY CORPORATION STATEMENT OF EXECUTIVE OFFICER I, John W. Sammon, Jr., certify that: 1. I have reviewed this year end report on Form 10-K of PAR Technology Corporation; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants fourth, fiscal quarter in the case of an annual report) and that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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: d. 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 e. 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: March 30, 2004 /s/John W. Sammon, Jr. ------------------------- John W. Sammon, Jr. Chairman of the Board and Chief Executive Officer Exhibit 31.2 PAR TECHNOLOGY CORPORATION STATEMENT OF EXECUTIVE OFFICER I, Ronald J. Casciano, certify that: 1. I have reviewed this year end report on Form 10-K of PAR Technology Corporation; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants fourth, fiscal quarter in the case of an annual report) and that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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: d. 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 e. 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: March 30, 2004 /s/Ronald J. Casciano ------------------------- Ronald J. Casciano Vice President, Chief Financial Officer & Treasurer 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 Annual Report of PAR Technology Corporation (the "Company") on Form 10-K for the year ending December 31, 2003 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. /s/John W. Sammon, Jr. - ------------------------------- John W. Sammon, Jr. Chairman of the Board & Chief Executive Officer March 30, 2004 /s/Ronald J. Casciano - ------------------------------- Ronald J. Casciano Vice President, Chief Financial Officer & Treasurer March 30, 2004 EX-10.2 4 loanagreenbtbank.txt NBT, N.A. LINE OF CREDIT AGREEMENT EXHIBIT 10.2 BUSINESS LOAN AGREEMENT Borrower: PAR Technology Corporation Lender: NBT Bank, National Association 8383 Seneca Turnpike Route 5 555 French Rd. New Hartford, NY 13413 New Hartford, NY 13413 Federal ID:16-1434688 Guarantors: Partech, Inc. Ausable Solutions, Inc. PAR Government Systems Corporation Rome Research Corporation Federal ID: - -------------------------------------------------------------------------------- THIS BUSINESS LOAN AGREEMENT dated as of September 21 2001, between PAR Technology Corporation, a Delaware corporation having its primary corporate offices at 8383 Seneca Turnpike, New Hartford, NY, 13413, ("Borrower") and NBT Bank, National Association, a national banking association having a place of business at 555 French Rd., New Hartford, NY 13413 ("Lender") is made and executed on the following terms and conditions. Borrower has applied to Lender for the Loan(s) (below defined), which are to be used to finance the working capital needs of the Borrower during the term of the Loan(s). Lender is willing to extend the Loan to Borrower solely under the terms and conditions specified in this Agreement, a certain promissory note made by Borrower to Lender of even date hereof (the "Note") and in the Related Documents (as below defined), and upon condition that each of Partech Inc., Ausable Solutions, Inc., PAR Government Systems Corporation, and Rome Research Corporation, each jointly and severally give to the Lender their unconditional and unlimited guaranties of payment of the Loan(s) and upon further condition that Borrower and Partech, Inc., give and grant to Lender security interests in property of each as is required by Lender, to all of which Borrower agrees. Borrower understands and agrees that: (a) in granting, renewing, or extending the Loan, or making Advances (as below defined), Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement, and each of all Guarantors' representations, warranties agreements as set forth in this Agreement, as and where applicable; (b) the granting, renewing or extending of the Loan(s), or the making of Advances, by Lender at all times shall be subject to Lender's reasonable judgment and discretion; and (c) the Loan shall be and remain subject to the terms and conditions of this Agreement. TERM. This Agreement shall be effective as of September 21, 2001, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full, all other obligations of Borrower hereunder are discharged in full, and the parties herein terminate this Agreement in writing. DEFINITIONS. Acceptable Inventory. The words "Acceptable Inventory" shall mean and include that Inventory of Borrower and Partech, Inc., (as specifically defined and limited in the paragraph below titled "Inventory") which is reported monthly in the summary Inventory, subject to periodic audit and verification; excluding the following: A. Inventory which is not free and clear of all security interests, liens, encumbrances, and claims of third parties, except for Permitted Liens. B. Inventory which is obsolete, unsalable, damaged, defective, or unfit for further processing. C. Work in process. D Inventory which is stored, housed, or located outside the fifty (50) states of the United States of America. Acceptable Receivables. The words "Acceptable Receivables" shall mean and include those Accounts and Accounts Receivable of Borrower and Partech, Inc., (as specifically defined and limited in the paragraph below titled Accounts, Accounts Receivable, etc), which are reported monthly by accounts receivable and accounts payable aging/summary reports, aged at not in excess of those numbers of days as set forth in the Borrowing Base Certificate (below defined and set out as Exhibit 1 herein), respective to those categories of Accounts Receivable set forth in the Borrowing Base Certificate, and subject to periodic audit and verification. The words "Acceptable Receivables" shall also exclude: (A) Accounts with respect to which the Account Debtor is an officer, director, or employee of Borrower or a Guarantor. (B) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (C) Accounts with respect to which the Account Debtor is not a resident or resident corporation, or other business entity, of and within the United States, except to the extent such Accounts are supported by insurance, bonds, or other assurances satisfactory to Lender. 2 (D) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (E) Accounts which are subject to dispute, counterclaim or setoff. (F) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (G) Accounts with respect to which Lender, in its sole reasonable discretion deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (H) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (I) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (J) Intercompany, foreign, and work-in-process receivables. Accounts, Accounts Receivable, etc. The words "Accounts", "Accounts Receivable" "Chattel Paper", "Documents", and "Instruments", have the same respective meanings as are given to those terms in the Uniform Commercial Code in effect from time to time in the State of New York. Account Debtor. The words "Account Debtor" mean the person or entity obligated upon an Account. Advance. The word "Advance" shall mean and include any sums advanced by Lender or credited by Lender under the Loan(s) to the account or accounts of Borrower, or for the account of Borrower to third parties, including without limitation, advances (i) of principal (ii) to pay interest or fees or (iii) the incurring of expenses by Lender reimbursable by Borrower pursuant to the Note, the Related Documents, or this Agreement. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Agreement from time to time (if any). Borrower. The word "Borrower" means PAR Technology Corporation. Borrowing Base: The "Borrowing Base" is a formula by which Lender shall determine the eligibility of Borrower to receive an Advance or Advances under the Loan. The words "Borrowing Base" shall mean the lesser of (a) $12,500,000.00 or (b) the sum of (i) 80% of the aggregate amount of Acceptable Receivables plus (ii) 25% of the aggregate amount of Qualified Receivables (as hereinafter defined) plus (iii) 40% of the Acceptable Inventory, less the outstanding balance of existing loans and indebtedness owed by Borrower to Lender and by Borrower to Chase. Business Day. The words "Business Day" mean a day on which the commercial banks are open for business in the State of New York. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Closing Date. The words "Closing Date" shall mean the date upon which the Note is executed by Borrower and delivered to Lender. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for the Loan(s), whether real or personal property, whether tangible or intangible, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise; including, inter alia, without limitation the Accounts, Accounts Receivable, and Inventory of Borrower and Partech, Inc., as those terms are more specifically defined in the definitions Accounts, Accounts Receivable, etc., above, and Inventory, below, and further including but not limited to all property and assets of Borrower and Partech, Inc., set forth on the attached Schedule 2, which are pledged as security for the Loan(s) in Security Agreements executed by Borrower and Lender and Partech, Inc., and Lender, dated of even date hereof. The Security Interests granted in the Collateral by Borrower and Partech, Inc., to Lender, shall be first-lien priority Security Interests in the Collateral, subject only to a similar Security Interest in the Collateral made and given by Borrower and Partech, Inc., to the Chase Manhattan Bank ("Chase") by a security agreement dated as of May 1, 2001, the priority and competing nature of the Security Interest of each of Lender and Chase being governed by a certain Intercreditor Agreement made by and between Lender and Chase, dated as of May 1, 2001, and all modifications thereof, all amendments thereto, all substitutions therefor or replacements thereof, from time to time. Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. Environmental Laws. The words "Environmental Laws" mean and include any action which subjects the 3 Collateral and Operation Sites to CERCLA, SARA, the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing; or any other applicable environmental law, statute, act, rule, or ordinance enacted by any municipal, county, state, or federal governmental agency, including without limitation the New York State Department of Environmental Conservation and the Federal Environmental Protection Agency (individually, Environmental Law or collectively, Environmental Laws.) ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Expiration Date. The words "Expiration Date" means April 30, 2003, the date of termination of Lender's commitment or obligation to lend or advance proceeds of the Loan or the Note under the Note and/or this Agreement; and on which date all sums outstanding under the Loan, the Note, or this Agreement are due and payable in full without further demand or notice. Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation Borrower and Partech, Inc.. Guarantors. The words "Guarantors" mean and include, jointly and severally, Partech, Inc., Ausable Solutions, Inc., PAR Government Systems Corporation, and Rome Research Corporation, each an unconditional and unlimited guarantor of the Loan(s) and Indebtedness of Borrower. Guaranties. The word "Guaranties" mean and include the unconditional unlimited guaranties of payment of the Loan(s) and Indebtedness executed by the Guarantors. Indebtedness. The word "Indebtedness" means and includes the Loan(s), including any consolidations, extensions, modifications, and renewals thereof, together with all other obligations and liabilities of Borrower to Lender arising out of or in conjunction with the Loan(s), as well as all claims by Lender against Borrower arising out of or in conjunction with the Loan(s); whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Inventory. The word "Inventory" means all of Borrower's and Partech, Inc.'s, raw materials, work in process, finished goods, merchandise, parts and supplies, of every kind and description, and goods held for sale or lease or furnished under contracts of service in which Borrower and/or Partech, Inc., now has or hereafter acquires any right, whether held by Borrower and/or Partech, Inc., or others, and all documents of title, warehouse receipts, bills of lading, and all other documents of every type covering all or any part of the foregoing. Inventory includes inventory temporarily out of Borrower's and/or Partech, Inc.'s custody or possession and all returns on Accounts. Inventory Location Site. The words "Inventory Location Site" mean and include those business locations, whether owned or leased, or subleased, by Borrower and/or Partech, Inc., or any of their Subsidiaries and/or affiliates, where Borrower and/or Partech, Inc., stores (temporarily or permanently prior to sale), maintains, sells and/or holds for sale Borrower's and/or Partech, Inc.'s, Inventory. Lender. The word "Lender" means NBT Bank, National Association, its successors and assigns. Line(s) of Credit. The words "Line of Credit" or "Lines of Credit" mean the credit facilities described in the Section below titled "LINE OF CREDIT", being the Loan. Loan. The word "Loan" or "Loans" means and includes those certain loans made by Lender to Borrower, as evidenced by the Note(s). Note. The word "Note" or "Notes" means and includes without limitation those written, executed instruments evidencing indebtedness owed by Borrower to Lender, specifically including but not limited to that certain note given by Borrower to Lender in the face amount of $12,500,000.00, dated September 21, 2001. Permitted Liens. The words "Permitted Liens" mean and include (a) liens and Security Interests securing the Indebtedness, or other liens and Security Interests of Lender; (b) liens for taxes, assessments, payments in lieu of taxes, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens incurred subsequent to the Closing Date, arising in the ordinary course of business and securing Debt of Borrower which is not yet delinquent; (d) purchase money Security Interests which are created before or after the Closing Date, if approved by Lender; (e) purchase money liens or purchase money Security Interests upon or in any Collateral acquired or held by Borrower in the ordinary course of business, or otherwise approved by Lender in writing; (f) liens resulting in deposits to secure the payment of workman's compensation or other social security, or to secure the performance of bids or contracts in the ordinary course of business; (g) lien and Security Interests given by Borrower and Partech, Inc., to Chase under Security Agreements dated as of May 1, 2001, and all renewals, replacements, and extensions thereof provide the same are at all times governed by the Intercreditor Agreement made by and between Chase and Lender, dated as of May 1, 2001, and last amended by Amendment dated as of September 18, 2001. 4 Qualified Receivables. The words "Qualified Receivables" shall mean and include all those receivables which but for their age being in excess of ninety (90) days, but not in excess of one hundred twenty (120) days, would be Acceptable Receivables. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The acronym "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subsidiary. The word "Subsidiary" means (a) any corporation, the outstanding shares of which having sufficient voting power (not depending on the happening of a contingency) to elect at least a majority of the members of its Board of Directors, which are at the time owned by the Borrower (b) any corporation to which Borrower shall appoint a majority of the members of its Board of Directors or (c) an entity of which Borrower is the sole member. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. LINES OF CREDIT. Lender agrees to make Advances to Borrower from time to time, from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time or under any contingency does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows: CONDITIONS PRECEDENT TO ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: Payment of Fees and Expenses. Borrower shall have paid to Lender all expenses specified in this Agreement or any Related Document as are then due and payable, including without limitation any Loan commitment fees, recording and/or filing fees, fees for purposes of inspections, audits, reviews, UCC/judgment and lien search fees, annual agency fees, if any, and servicing fees, if any, (as more particularly set forth in section AFFIRMATIVE COVENANTS, below) and those applicable expenses which are set forth in paragraph below titled "Miscellaneous Provisions", subparagraph titled "Expenses of Lender - Indemnification." Further, all costs incident to closing of the Loan shall have been paid including the reimbursement to Lender and Lender's legal counsel of all reasonable attorneys' fees, charges, disbursements, and expenses incurred in completing all of the matters contemplated by this Agreement; and Borrower shall, upon demand by Lender or its agents, advance to Lender and Lender's legal counsel, as set forth and provided by any of them, monies necessary to secure payment of any of the foregoing, to make payment of the same. No Event of Default. There shall not exist on the Closing Date or at the time of any requested Advance a condition which would constitute an Event of Default under this Agreement, the Note, or the Related Documents. Lender's Satisfaction with Financial, etc., issues. Lender shall be satisfied with all financial, tax, environmental, and regulatory issues relating to the Borrower, the Guarantors, the Collateral, the Inventory Location Sites, and the transactions contemplated by this Agreement. No Other Debt. On the Effective Date and unless otherwise permitted under this Agreement, Borrower shall have no Debt (other than Borrower's trade debt incurred in the ordinary course of Borrower's business) outstanding other than the Loan or other indebtedness to Lender or other indebtedness as evidenced in writing to Lender or disclosed on Borrower's and Guarantors' Financial Statements delivered previously to Lender and approved by Lender. Representations and Warranties. On the Effective Date and on the date of any requested Advance, all Representations and Warranties set forth in this Agreement shall be true and correct. Pre-Closing Audit. Prior to the Closing Date, Lender shall have reviewed and approved a pre-closing audit of Borrower's and Partech, Inc.'s, businesses, including in said audit but not limited to, a review and report on Borrower's and Partech, Inc.'s, Accounts, Accounts Receivable, Accounts Payable , and Inventory; said audit being performed by an independent auditor, paid for by Borrower but retained by Lender. Depository Account. Borrower shall have opened and shall be maintaining, one or more depository accounts at a branch or branches of Lender, which depository accounts shall be maintained by Borrower with Lender for the 5 term of this Agreement, and any extensions and/or renewals of the same, maintaining therein average daily aggregate balances of not less than $250,000.00. Advance Accounts. Borrower shall have opened and shall be maintaining at a branch of Lender a checking account, which checking account shall be designated by Borrower and Lender as the account to be funded by Lender with all Advances requested by Borrower and approved by Lender. Participation in the Line of Credit. Lender, prior to the Closing Date, shall have entered into a participation agreement(s) with other lending institution(s) for a minimum of $5,000,000.00 of the Line of Credit, in which participation Lender shall be and shall remain the lead bank in such participation(s). Landlord's/ Mortgagee's Waivers. If Inventory is at any time to be stored in any Inventory Location Site not owned by Borrower or Partech, Inc., and if such Inventory Location Site is owned by Borrower or Partech, Inc., and such building facility or location is mortgaged by Borrower or Partech, Inc., or, if owned by other than Borrower or Partech, Inc., and mortgaged by such owner, then and in that event, the Borrower and/or Partech, Inc., as applicable, shall cause such other owner of the building facility or location and any prior existing mortgagee of such building facility to provide Lender with, prior to the Closing Date, landlord's waiver(s), in form and content satisfactory to Lender and Lender's counsel, authorizing Lender, at any time, access to the building or property where the Inventory is maintained to review and/or audit such Inventory and in addition, the right to Lender, upon a continuing uncured Event of Default, to remove all such Inventory at any time without notice, (unless a requirement of written notice is specifically set forth within this Agreement or the Related Documents) to Borrower, Partech, Inc., or such mortgagee or owner, provided Lender shall not cause damage beyond normal wear and tear to the building or property during any removal of the Inventory. Delivery of Documents. Borrower and, as applicable, Guarantors, shall deliver or cause to be delivered to Lender, on the Closing Date or prior thereto, the following, in form and substance satisfactory to Lender and otherwise subject to the terms of this Agreement, as follows: (a) the Note; (b) Security Agreements and UCC-1 Financing Statements of Borrower and Partech, Inc., creating and perfecting Lender's Security Interests in the Collateral; (c) the Guaranties of the Guarantors; (d) any and all releases, satisfactions, assignments, subordinations, termination statements, necessary to cause Security Interests granted by Borrower and Partech, Inc., in the Collateral to be first-priority Security Interests in the Collateral, subject only to the competing Security Interests of Chase in the Collateral, provided such competing Security Interests of Chase are governed by the Intercreditor Agreement made by and between Lender and Chase, effective as to the Loan, Note and Security Interests. (e) evidence of business interruption insurance, inventory loss, damage and theft insurance, with regard to the Loan, in amounts, at terms, and from insurers reasonably acceptable to the Lender. Borrower and Partech, Inc., cause their insurers to name as an additional insured on such evidence of insurance the Lender as follows: "NBT Bank, National Association, its successors and/or assigns, 52 South Broad Street, Norwich, New York 13815". Borrower and Partech, Inc., shall also execute and deliver Agreements to Provide Insurance, which such Agreements shall be in form and content as prepared by and approved by Lender's Counsel and Lender, respectively. (f) any required governmental and third-party approvals, documentation, records, reports, tests, studies, approvals, or permits, in connection with the Loan transaction or in connection with the granting of the Security Interests in any of the Collateral, (if any) have been obtained and remain in effect, and all applicable waiting periods, if any, shall have expired without any action being taken by any competent authority which restrains, prevents, or imposes conditions upon the consummation of the Loan transaction or granting of Security Interests in any of the Collateral. There shall not exist any judgment, order, injunction or other restraint prohibiting or imposing any materially adverse conditions upon the Collateral, or the transactions contemplated by this Agreement, the Note, and the Related Documents; (g) Borrower and Guarantors shall submit, in a form acceptable to Lender's counsel, (i) evidence of authority of Borrower and each and every Guarantor to enter into the Loan, pledge their applicable interests in the Collateral to the Lender as security for the Loan, and Guarantors to guaranty the Loan, all of the foregoing in the form of corporate resolutions which shall set forth the names of the corporate officers and/or other person(s) having the power to execute the Note, Guaranties, and all other instruments and documents required by Lender of Borrower and/or Guarantors, as applicable, evidencing and securing the Loan, including all the Related Documents; (ii) evidence in the form of currently dated (less than 60 days from the Closing Date) Certificates of Good Standing from the State of Delaware and New York, as applicable, and/or all other States in which Borrower and/or Guarantors are organized and subsisting, as either domestic or foreign corporations, that the Borrower and/or Guarantors are corporations duly organized, in good standing and qualified to do business in their jurisdiction(s) of formation, the jurisdictions in which the Guarantors operate their businesses, including their principal place(s) of business, and the jurisdictions in which the Collateral is located (Certificates of Good Standing); (iii) copies of Borrower's and Guarantors' respective Articles of Incorporation (or their equivalent)together with proof of due filing, and copies of each of their respective most current By-laws, and any amendments to any of the foregoing. All of the foregoing documentation relating to the corporate, capital or legal structure of Borrower and Guarantors shall be satisfactory to Lender and Lender's counsel; 6 (h) Lender shall be provided with a legal opinion from Borrower's and Guarantors' counsel(s) in form and substance acceptable to Lender's counsel (the "Opinion"). The Opinion will include the opinion that Borrower and Guarantors are properly organized and in good standing in their respective jurisdiction(s) of organization and the jurisdiction(s) set forth in the immediately preceding paragraph Section (g), and that the Loan and Guaranties, when closed and executed, will (i) provide Lender with valid Security Interests in the Collateral, (ii) will not violate the laws of the United States of American or any jurisdiction in which Borrower or Guarantors are organized, located, doing business, or in which the Collateral is located, (iii) the Loan and Guaranties are not in contravention of any contract, agreement, or court order to which the Borrower or any Guarantor is a party, and (iv) are enforceable against Borrower and Guarantors (except as enforceability may be limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditors' rights) and any other opinions which the Lender's counsel may reasonably request. In addition, the Opinions must opine as to the Borrower's and Guarantors' authority to enter into the Loan, pledge their respective Collateral, encumber their respective assets, undertake the liabilities contained in the Note, this Agreement, the Guaranties and the Related Documents (applicable as respective to Borrower and Guarantors), and as to the Borrower's and Guarantors' respective good standings and capacities to transact business. (i) Borrower and Partech, Inc., shall provide to the Lender and/or its counsel, at least five (5) days prior to the Closing Date, current State and County Uniform Commercial Code (UCC) searches with respect to the Borrower and Partech, Inc. The closing of the Loan shall be conditioned upon satisfactory review and approval of the UCC searches, by the Lender and its counsel. (j) Borrower and all Guarantors shall furnish to Lender's counsel or authorize Lender's counsel to obtain a current judgment and lien searches, and bankruptcy searches, against each of Borrower and Guarantors; the results of such searches shall be subject to the approval of Lender and Lender's counsel. (k) Borrower and Guarantors herein and hereby authorize Lender and Lender's counsel, at Borrower's cost and expense, to obtain in conjunction with each Advance, and prior to the making of each Advance, updates and/or renewals of each or all of items as immediately above preceding, in letters (e) (i) and (j). Requests for and Making Loan Advances. Advances under the Line of Credit may not be requested orally. Each Advance shall be made in writing by Borrower's submission to Lender of an executed Request for Advance. All requests for Advances are to be directed to Lender's office shown above. Advances under the Line of Credit may be made by Lender at any time during the 30 days following the last Borrowing Base Certificate and Compliance Certificate filed with Lender by the Borrower (the "Advance Period"). Advances during any Advance Period shall be made by Lender to Borrower's business checking account, maintained by Borrower at Lender (the "Advance Account"). Advances are to be made by Lender to the Advance Account on an as-needed basis, such that the Advance Account shall maintain a positive balance at all times. Notwithstanding the foregoing, there shall not be at any time or under any contingency, more Loan proceeds outstanding than the lesser of (i) the sum of the amounts shown at lines 14 and 16 of the last Borrowing Base Certificate filed with Lender, which is not more than 30 days aged, plus the principal face value of the Note, or (ii) the principal face value of the Note. The following parties or persons are authorized to request Advances and complete and submit the Borrowing Base Certificate, Requests for Advances, and Compliance Certificates (each of which are below referenced) under the Line of Credit, until Lender receives from Borrower, at Lender's address shown above, written notice of the revocation of such person(s) or entity's authority: Dr. John W. Sammon Jr., Chairman of the Board/President Charles A. Constantine, Executive Vice President Ronald J. Casciano, Vice President/Treasurer/ChiefFinancial Officer Each and every Advance made at any time by Lender to Borrower, under the Line of Credit, shall be conclusively deemed to have been made at the request of, and for the benefit of, Borrower (a) when credited to any account of Borrower maintained with Lender, including but not limited to the Advance Account; or (b) when advanced in accordance with the instructions of an authorized representative(s) above set forth. Lender, at its option, may set a cutoff time, after which all requests for an Advance under the Line of Credit, will be treated as having been requested on the next succeeding Business Day. Borrower, prior to each Advance Period under the Line of Credit, shall provide Lender with (i) a completed and executed Borrowing Base Certificate and (ii) a completed and executed Compliance Certificate, copies of which are attached as Exhibits 1 and 2, respectively. The Borrowing Base Certificate, Request for Advance and Compliance Certificate, shall be executed by any of the duly authorized representatives of Borrower as set forth above. No Advance shall be made under the Line of Credit, inter alia, if more than thirty (30) days has lapsed since Borrower has 7 last filed with Lender its current Borrowing Base Certificate, and Compliance Certificate. No Advance shall be made under the Line of Credit, inter alia, if Borrower has failed, prior to any Advance being made, to have filed with Lender its current Request for Advance. Lender, at Lender's discretion, may withhold or refrain from making any Advance, if Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents. Loan Accounts. Lender shall maintain on its books, records of accounts of Borrower, in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the Loan. Lender shall provide Borrower with periodic statements of Borrower's Loan account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary in writing within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. REPRESENTATIONS AND WARRANTIES. Borrower and Guarantors, where and as applicable, represent and warrant to Lender, as of the date of this Agreement, as of the date of each request for an Advance, as of the date of any renewal, substitution, replacement, extension or modification of the Loan, Note or Related Documents, and at all times any Indebtedness exists: Accounts. All Account information as delivered to Lender in writing and/or as otherwise provided to or made available to Lender's chosen auditor of Borrower's and Partech, Inc.'s, business, is true and correct subject to non-material variance. Inventory. (a) All Inventory information as delivered to Lender in writing and/or as otherwise provided to or made available to Lender's chosen auditor of Borrower's and Partech, Inc.'s business, is true and correct, subject to non-material variance; (b) the value of the Inventory is, and will be at all times, determined on a consistent accounting basis; (c) except as agreed to the contrary by Lender in writing or otherwise disclosed by Borrower and/or Partech, Inc., to Lender in any list of Inventory Location Sites, and/or in the ordinary course of business in dealing with such Inventory, all Inventory now and at all times hereafter, will be in Borrower's physical possession, and shall not be held by others on consignment, sale on approval, or sale or term; (d) all Inventory is now and at all times hereafter is to be of good and merchantable quality, free from defects; and (e) except in the ordinary course of business, and except as described in the paragraph Permitted Liens above, Inventory is not now and will not at any time hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent and in such event, Borrower will concurrently at the time of bailment cause any such bailee, warehouseman, or similar party, to issue and deliver to Lender, in a form acceptable to Lender, warehouse receipts in Lender's name, evidencing the storage of Inventory, and landlord, bailee, warehouseman, or similar party's consent to waive possessory liens in favor of Lender and grant access to Lender. Organization; Authorization. Borrower and Guarantors are corporations which are duly organized, validly existing, and in good standing under the laws of each of their respective subsistence, and are validly existing and in good standing in all states in which Borrower and Guarantors are doing business. Borrower and Guarantors have the full power and authority to own their properties, including the Collateral, and to transact the businesses in which they are presently engaged or presently propose to engage. The Loan and the giving and granting of each Guarantor's Guaranty and the pledge of applicable Collateral by Partech, Inc., and Borrower, and the execution and delivery and performance by Guarantors as applicable of the Note, Guarantors' Guaranties, this Agreement, the Related Documents, and any other agreements, documents, or instruments contemplated in connection with the Loan, have been duly authorized by all necessary action of Borrower and Guarantors, and are not and will not be in contravention of any law, rule, or regulation or in contravention of the terms of Borrower's, and, as applicable, Guarantors', Articles of Incorporation or Bylaws, or any agreement, instrument, or Court order to which Borrower or any Guarantor, as applicable, is a party or by which it or he may be bound. Financial Information. Each financial statement of Borrower and Guarantors (separately or combined) herewith or heretofore delivered to Lender, was prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of previous such statements, and truly discloses Borrower's and Guarantors' financial conditions (including all of Borrower's contingent liabilities) as of the date of such statement, and the results of their operations for the period covered thereby, and there has been no material adverse change in Borrower's and/or Guarantors' financial condition and operation, subsequent to the date of the most recent financial statements of Borrower and Guarantors delivered to Lender. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower and Guarantors, when delivered, will constitute, legal, valid and binding obligations of Borrower and, as applicable, Guarantors, enforceable against Borrower and Guarantors in accordance with their respective terms; except to the extent that enforceability (but not validity) may be limited by the laws of bankruptcy, insolvency, or other laws generally affecting creditors' rights. Collateral. Except as previously disclosed in Borrower's or Partech, Inc.'s, financial statements or in writing to Lender and as accepted by Lender, Borrower and Partech, Inc., own and have good title in each of their respective names to all of their respective Collateral, free and clear of all Security Interests except for Permitted Liens, and Borrower and Partech, Inc., have not executed any Security Agreements or financing statements relating to such Collateral, other than to Lender and/or except for any other Permitted Liens. Borrower and Partech, Inc., have not filed a financing statement under any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste", "hazardous substance", "disposal", "release", and "threatened release", as used in this Agreement, shall have the same meanings as set forth in the Environmental Laws. In addition to any protection afforded to Lender as a named insured on any pollution/environmental liability insurance policy (if any) obtained and maintained by Borrower and/or Partech, Inc., as a requirement under this Agreement, Borrower and Partech, Inc., represent and warrant that (a) Neither Borrower nor Partech, Inc., has unlawfully used, generated, manufactured, stored, treated, disposed of, or released any hazardous waste or substance on, under, about or from any Inventory Location Site or any part thereof; (b) neither Borrower nor 8 Partech, Inc., has knowledge of, or reason to believe that there has been any actual or threatened litigation or claims of any kind by any person, entity or municipality, relating to such matters; (c) neither Borrower nor Partech, Inc., nor any tenant, contractor, employee, or agent of Borrower or Corporate Guarantor shall unlawfully use, generate, manufacture, store, treat, dispose of, or release of any hazardous waste or substance on, under, about or from any Inventory Location Site or any portion thereof; and any activity of such a nature has been, and shall continue to be, conducted in compliance with all applicable Environmental Laws. Borrower and Partech, Inc., authorize Lender and its agents, in accordance with the terms of any Landlord's Waivers and/or mortgagee's waivers, to enter upon Inventory Location Sites to make such inspections and tests as Lender may deem appropriate to determine compliance of the Fuel Inventory with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's or Partech, Inc.'s, expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower, Partech, Inc., or to any other person or entity. Borrower and Partech, Inc., hereby (a) releases and waives any future claims against Lender, its employees, officers and directors, for indemnity or contribution in the event Borrower or Partech, Inc., becomes liable for cleanup or other costs under any Environmental Laws; and (b) agrees to indemnify and hold harmless Lender, its employees, officers and directors, against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's or Partech, Inc.'s, ownership of the Inventory, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in, or subsequent transfer to a third party of, the Inventory or any portion thereof, whether by foreclosure or otherwise. Litigation and Claims. No litigation or governmental proceeding is pending, or, to the knowledge of Borrower's and Guarantors' directors or officers, threatened against or affecting Borrower or Guarantors, which may result, in the reasonable opinion of the Borrower and/or Guarantors, as applicable, and their counsel on such litigation or proceeding, in a monetary award or judgment against the Borrower or Guarantors, which is uninsured and which is in excess of $100,000.00, against Borrower or Guarantors or their respective business, properties, or operations. Leases. Neither Borrower or Guarantors are lessees of any real property or personal property except as has been disclosed to Lender in writing and/or in Borrower and Corporate Guarantor's financial statements delivered to the Lender. Liens/Taxes. Neither Borrower's nor Guarantors' assets are subject to any lien, mortgage, Security Interest, encumbrance, or other adverse claims of any nature, except as has been disclosed in writing to Lender in Borrower's and Guarantors' financial statements or other Borrower-executed or Guarantor-executed writing delivered to Lender. To the best of Borrower's and Guarantors' knowledge, all tax returns and reports of Borrower and Guarantors that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower or Guarantors in good faith in the ordinary course of business and for which adequate reserves have been provided. Commercial Purposes. Borrower intends to use the Loan proceeds solely for its periodic working capital needs. Certificates Delivered. No certificate or statement heretofore delivered by Borrower or any Guarantor to Lender in connection with the Loan contains any untrue statement of a material fact or fails to state any material fact which could adversely affect the properties, business, operations, prospects or condition (financial or otherwise) of Borrower or Guarantors or could adversely affect the Collateral. Employee Benefit Plans. Each employee benefit plan as to which Borrower or any Guarantor may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's and Guarantors' Offices and Records. Borrower's and all Guarantors' place of business, and Borrower's and all Guarantors' chief executive offices, if Borrower or any Guarantor has more than one place of business, is located at 8383 Seneca Turnpike, New York State Route 5, New Hartford, NY 13413. Unless Borrower or Guarantors have designated otherwise in writing in Borrower's and/or Guarantors' annual listing of owned and/or leased operating locations, (as provided for under paragraph below titled AFFIRMATIVE COVENANTS, subparagraph Lists of Locations ) this location is also the office or offices where Borrower and all Guarantors keep their records, including those concerning the Collateral. Survival of Representations and Warranties. Borrower and each Guarantor understands and agrees that Lender, without independent investigation, is relying upon the above Representations and Warranties in extending the Loan and each Advance to Borrower. Borrower and, where applicable, Guarantors, further agree that the foregoing Representations and Warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full and all other obligations of Borrower under the Related Documents, Note and this Agreement have been discharged, or until this Agreement shall be terminated by all parties, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower and Guarantors, as applicable, covenant and agree with Lender that, while this Agreement is in effect, Borrower and, where applicable, Guarantors will: Litigation. Promptly inform Lender of any litigation or any claim or controversy which might become the subject of litigation against Borrower and/or Guarantor, or affecting any of the Borrower's or any Guarantor's property, if such litigation or potential litigation might, in the event of an unfavorable 9 outcome, in the opinion of the Borrower or any Guarantor, as applicable, and its counsel on such litigation, result in a monetary award or judgment against the Borrower or any Guarantor, which is uninsured and which is in excess of $100,000.00; Borrower's Annual Financial Statements. Annually, the Borrower and Guarantors shall deliver to the Lender their combined financial statements prepared by an acceptable outside accounting firm in accordance with generally accepted accounting principals (GAAP) on an audited basis. Such financial statements shall be provided no later than 120 days after the end of each of the Borrower's fiscal years. Failure to furnish such financial statements shall be considered a default under the terms of the Loan. Annual 10-K Reports. Annually, within 120 days of the end of Borrower's fiscal year, the Borrower shall deliver to Lender a copy of its filed Securities and Exchange Commission (SEC) 10-K, with all schedules and notes attached, certified to by the Borrower's President or Chief Financial Officer as being a true and exact copy of the original, as filed. Semiannual Accounts Receivable and Accounts Payable. Borrower shall deliver to Lender semiannually during the term of the Loan, and within ten (10) days of each June 30th and each December 31st, commencing with the end of the next semiannual period of Borrower following the Closing Date, and continuing thereafter semiannually during the terms of the Loan, Borrower's complete schedule of its Accounts receivable and its Accounts payable, certified to as true and accurate by Borrower's Chief Financial Officer. Quarter-Annual 10-Q Reports. Borrower shall deliver to Lender, quarter-annually during the term of the Loan, and commencing with the end of the first quarter-annual period of Borrower's fiscal year following the Closing Date and continuing thereafter quarter-annually for the term of the Loan, a copy of Borrower's filed SEC 10-Q reports. The quarter-annual SEC 10-Q reports shall be delivered to Lender within sixty (60) days of the end of each quarter-annual period. Monthly Reports. Borrower and Partech, Inc., shall deliver to Lender monthly, within ten (10) days of each month's end during the term of the Loan, commencing with the end of the first month following the Closing Date, and continuing monthly thereafter, for Lender's review, (i) summary aging reports of Borrower's and Partech, Inc.'s, Accounts receivable and Accounts payable, which shall be submitted by computer disc or e-mail; (ii) a summary of Borrower's and Partech, Inc.'s, Inventory showing quantities used, purchased, and in storage; and (iii) a full and complete Borrowing Base Certificate, certified to as true and accurate by Borrower's President or Chief Financial Officer. All financial statements required to be provided under this Agreement shall be prepared in accordance with Generally Accepted Accounting Principals applied on a consistent basis, and certified by the respective Borrower and/or Guarantor's Chief Financial Officer as being true and correct. Financial Covenants and Ratios. Borrower shall maintain the following financial covenants and ratios: A. Minimum Debt Service Coverage Ratio. Borrower shall maintain a minimum Debt Service Coverage Ratio of not less than 1.50 to 1.00 (1.50:1.00) measured annually based upon Borrower's annual filed SEC 10-K report. The Debt Service Coverage Ratio applicable to the above financial covenant requirement shall be determined based upon the following formula: Net Profit+ Depreciation + Amortization --------------------------------------- Current Maturity Long-term Debt B. Debt to Tangible Net Worth Ratio. Borrower shall maintain a maximum Debt to Tangible Net Worth Ratio, measured quarter-annually, based upon Borrower's quarterly filed SEC 10-Q reports, of not more than 1.00 to 1.00 (1.00:1.00). C. Tangible Net Worth. Borrower shall maintain a minimum level of Tangible Net Worth measured quarter-annually based upon Borrower's quarterly-filed SEC 10-Q reports, less goodwill and capitalized software, plus accumulated comprehensive income of not more than Three Million Dollars ($3,000,000.00) as follows: C.1. Borrower's quarter-annual term ending September 30, 2001: U.S. $44,800,000.00 C.2. Borrower's quarter-annual term ending December 31, 2001, and continuing each consecutive quarter-annual term through and including September 30, 2002: U.S. $45,000,000.00 C.3. Borrower's quarter annual term ending December 31, 2002, through Loan maturity: U.S. $48,000,000.00 D. Working Capital. Borrower shall maintain a level of working capital measured quarter-annually by Borrower's filed SEC 10-Q Reports, of not less than U.S. $25,000,000.00. E. Current Ratio. Borrower shall maintain a Current Ratio, measured quarter-annually by Borrower's filed SEC 10-Q Reports, of not less than 1.75 to 1.00 (1.75:1.00). 10 F. Coverage Ratio. Borrower shall maintain a Coverage Ratio, measured quarter-annually commencing with the quarter term ending December 31, 2001, on a rolling four- quarters basis, based upon Borrower's filed SEC 10Q Reports, of not less than 5.0 to 1.0 (5.0:1.0). The Coverage Ratio applicable to the above financial covenant requirement shall be determined based upon the following formula: A fraction, (a) the numerator of which is: Earnings measured before deductions therefrom of Interest, Taxes, Depreciation, and Amortization; and (b) the denominator of which is: Interest Expense plus current maturities of long-term debt. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower's Chief Financial Officer as being true and correct. Audits. Borrower shall permit Lender or those independent contracted auditors retained by Lender, at Borrower's expense, to conduct annually during all times the Loan term, one (1) annual field audits of Borrower and Partech, Inc.'s Accounts receivable and inventory. The field audit shall be without notice to Borrower or Partech, Inc.. Borrower and Partech, Inc., agree to provide such auditors with access to Borrower's and Partech, Inc.'s, property and business records necessary to conduct and complete such audits. The audits shall be conducted at Borrower's places of business during the hours of 8:00 AM and 6:00 PM on any Business Day or Days. Insurance. Maintain, with financially sound and reputable insurance companies or associations, workman's compensation insurance, liability insurance, and extended coverage and any other insurance of the kinds usually carried by companies engaged in businesses similar to that of Borrower, in an amount of not less than full replacement cost on their present and future Collateral, and their present and future properties, assets, and business, against such casualties, risks and contingencies, and in such types and amounts as are reasonably acceptable to Lender; and at Lender's request, deliver to Lender evidence of the maintenance of such insurance. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon reasonable request of Lender and upon reasonable notice (however not more often than annually) Borrower and Partech, Inc., will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. Landlord's/Mortgagee's Waivers. Maintain such landlord's and mortgagee's waivers obtained in accordance with the terms as set forth in paragraph above titled Conditions Precedent to Each Advance, above. Depository Account. Borrower shall, during the term of this Agreement, maintain at a branch or branches of Lender depository accounts with average daily balances of not less than U.S. $250,000.00. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Taxes, Charges and Liens. Promptly pay when due any and all taxes, lawful claims (whether for labor, materials, or otherwise), assessments, and government charges upon Borrower and/or Partech, Inc., or against any of Borrower's and/or Partech, Inc.'s, property, unless the same is being contested in good faith by appropriate proceedings and reserves deemed reasonably adequate by Lender have been established therefor. Performance. Promptly perform all acts and execute all such documents as Lender may reasonably require in order to enable Lender to report, file, and record every instrument that Lender may deem necessary in order to perfect and maintain Lender's Security Interests and liens in the Collateral and otherwise to preserve and protect the rights of Lender. Operations. Conduct their business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses, operations, and/or the Collateral including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's and Guarantors' employee benefit plans. Maintain Records/Inspection. Borrower and all Guarantors shall keep adequate books and records in accordance with good accounting practices, of all their transactions, so that at any time, and from time to time, their true and complete financial condition may be readily determined; and at Lender's request, make such records available for Lender's inspection and permit Lender to make and take away copies thereof. Environmental Compliance and Reports. Borrower and all Guarantors shall comply in all respects with all federal, state and local laws, statutes, regulations and ordinances governing environmental 11 protection as are applicable to Borrower and Guarantors; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned, leased, and/or occupied by Borrower or any Guarantor, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's or any Guarantor's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Rights and Licences. Preserve and maintain all rights, licenses, privileges, franchises, certificates, and the like necessary for the operation of Borrower's and Guarantors' businesses, and the maintenance of their existence, and promptly and properly comply with all laws, statutes, ordinances, and governmental regulations applicable to each or any of them, or to any of their property, business operations, and transactions. Maintain Property. Borrower and all Guarantors shall maintain all of their tangible properties in good condition and repair and make all necessary replacements thereof, and operate the same properly and efficiently. Inform Lender. Keep the Lender fully informed as to all matters as may materially affect Lender's interest in the Loan and the Collateral. For purposes of this clause, "materially" shall mean any event, set of facts, results or action by or against the Borrower or any Guarantor which shall have an adverse impact on the Borrower or any Guarantor in excess of a monetary value of $100,000.00. Lists of Locations. Annually, Borrower and Partech, Inc., accompanying their delivery of financial statements, shall deliver to Lender a complete written listing of each of its owned and/or leased operating locations, including the identification of the location, whether owned or leased, and if leased the material terms of such lease, where any Inventory is housed, stored or located. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loan and to perfect all Security Interests, if any. Establishment of Lock-Box or Blocked Accounts. Upon Lender's demand, at any time during the term of this Agreement, Borrower shall establish a lock-box or blocked accounts (collectively, the "Blocked Accounts") in Borrower's and/or Partech, Inc.'s, name(s), with Lender, or with such banks as are acceptable to Lender (the "Collecting Banks"), subject to irrevocable instructions in a form specified by Lender, to which the Account Debtors of all Accounts shall directly remit all payments on Accounts and in which Borrower and Partech, Inc., will immediately deposit all cash payments for Inventory or other cash payments constituting proceeds of Collateral in the identical form in which such payment was made, whether by cash or check. In addition, Lender may establish one or more depository accounts at each Collecting Bank or at a centrally located bank (collectively, the "Depository Account"). From and after receipt by any Collecting Bank of written notice from Lender to such Collecting Bank that an Event of Default has occurred and is continuing, all amounts held or deposited in the Blocked Accounts held by such Collecting Bank shall be transferred to the Depository Account. Subject to the foregoing, Borrower and Partech, Inc., hereby agree that all payments received by Lender, whether by cash, check, wire transfer or any other instrument, made to such blocked Accounts or otherwise received by Lender, and whether on the Accounts or as proceeds of other Collateral or otherwise, will be the sole and exclusive property of Lender. Borrower and Partech, Inc., shall, acting as trustee for Lender, receive, as the sole and exclusive property of Lender any moneys, checks, notes, drafts, or other payments relating to and/or constituting proceeds of Accounts or other Collateral which come into the possession or under the control of Borrower and/or Partech, Inc., and immediately upon receipt thereof, Borrower and/or Partech, Inc., or such persons, shall deposit the same or cause the same to be deposited in kind, in a Blocked Account. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rules, regulation or guideline or the interpretation or application thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. Federal, State of local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the Loan, (b) reduce the amounts payable to Lender under this Agreement, the Note, or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the Loan, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower and all Guarantors covenant and agree with Lender that while this Agreement is in effect, Borrower and all Guarantors shall not, without the prior written consent of Lender, which consent shall not be unreasonably withheld, delayed or conditioned: Continuity of Operations. 12 (a) Permit any material change in the management or control of Borrower or any Guarantor, and Borrower and any Guarantor shall at all times retain management and supervisory personnel adequate for management, supervision and conduct of Borrower's and any Guarantor's respective properties, businesses and operations; (b) Cause or permit their dissolution, loss of their franchise or charter; (c) become a party to any merger or consolidation; (d) cause, permit, or allow a change in control of the Borrower or any Guarantor, whether by contract, change in the ownership of the majority of the holders of the Borrower's or any Guarantor's shares of voting stock or otherwise; (e) sell, transfer, or otherwise dispose of (or attempt to do any of the foregoing) a substantial portion of other assets or make or attempt to make a "bulk transfer" as such term is defined in Article 6 of the Uniform Commercial Code. Loans, Acquisitions and Guaranties. (a) Make any loans or advances or sell any of their Accounts Receivable, with or without recourse; notwithstanding the foregoing, Borrower or any Guarantor may make loans to others without Lender's prior written permission, provided the value of such loans does not in the aggregate exceed $100,000.00; (b) endorse, guaranty, or otherwise become surety for or contingently liable upon, the obligations of any person, firm or entity (provided, however, that the foregoing shall not apply to endorsements of negotiable instruments by Borrower or any Guarantor in the ordinary course of their businesses); or permit any of its Subsidiaries to create, incur, assume, or suffer to exist, any debt upon which the Borrower or any Guarantor shall be contingently liable. Notwithstanding the foregoing, Borrower or any Guarantor may provide its endorsement, guaranty or act as surety, or become contingently liable, for or upon the obligations of another, provided the same are treated as indebtedness of the Borrower for purposes of interpreting the Financial Covenants of this Agreement and the inclusion of the same does not violate the Financial Covenants of this Agreement. Grant Security Interests. Mortgage, assign, hypothecate, grant a security interest in, or encumber any of the Collateral, except for Permitted Liens, liens existing on the date hereof and disclosed to Lender in writing, and permitted in writing by Lender (provided, however, the foregoing shall not apply to liens of taxes which are not delinquent or which are being contested in good faith and liens resulting from deposits to secure the payments of workman's compensation or other social security, or to secure the performance of bids or contracts in the ordinary course of business). Assign Duties. Assign or transfer, or attempt to do so, any of their respective rights, powers, duties, or obligations arising pursuant to the Loan. CESSATION OF ADVANCES. If Lender has made any commitment to make any loan, including the Loan, to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Advances or to disburse loan proceeds if Borrower or any Guarantor is in default under the terms of this Agreement, the Note, any Guaranty, or the Related Documents. RIGHT OF SETOFF. In addition to Lender's right of setoff arising by operation of law, Borrower grants to Lender a contractual possessory Security Interest in, and right of setoff against, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account and whether evidenced by a certificate of deposit), including without limitation all accounts held jointly with someone else or some other entity, and all accounts Borrower may open in the future, excluding however all trust accounts for which the grant of a Security Interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. The following if occurring and continuing shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loan and Note and such failure continues more than fifteen (15) days. Default on Other Indebtedness. Failure of Borrower to pay any other note in accordance with its terms which at any time evidences indebtedness (whether now existing or at any time hereafter arising) of Borrower to Lender, or Lender at any time deems itself insecure and reasonably believes that the prospect of payment or performance of any Related Document, or this Agreement, to be impaired. Other Defaults. Failure of Borrower after notice of default by Lender to Borrower and opportunity to cure of thirty (30) days, to perform any covenant or agreement of Borrower contained in this Agreement, the Note or the Related Documents (whether existing at the time or arising at any time thereafter) of Borrower to Lender. Default in Favor of Third Parties. The acceleration or call by any other lender of Borrower's Debt prior to its stated maturity, excluding acceleration of such Debt by Borrower which acceleration has no material adverse effect upon Borrower and does not cause a violation of Borrower's other covenants made with Lender under this Agreement, the Note, or the Related Documents. 13 False Statements. Any statement, representation or warranty of Borrower or any Guarantor contained in the Note, this Agreement or Related Documents (as applicable to Borrower or such Guarantor) or in any other writing furnished at any time by Borrower or any Guarantor, to Lender, shall prove to have been untrue, misleading or inaccurate in any material respect and Borrower or such Guarantor is unable to cure the same within thirty days after notice from Lender to Borrower or such Guarantor. Defective Collateralization/ Loan Contestation. Delivery or enforceability of this Agreement, the Note, or the Related Documents to which Borrower and/or any Guarantor is a party, shall be contested in any judicial forum by Borrower or any Guarantor, or Borrower or such Guarantor shall deny that Borrower or such Guarantor has any further liability or obligation hereunder or thereunder. Insolvency. The insolvency of Borrower or any Guarantor, or the failure of Borrower or any Guarantor to generally pay their debts as they become due or on demand. Creditor or Forfeiture Proceedings. The filing of any attachment, sequestration or similar proceeding against any of Borrower's or any Guarantor's respective property, which property has a fair market value of $100,000.00 or more, and which attachment remains undischarged, unbonded by Borrower or such Guarantor, as applicable, or undismissed for a period of ten (10) days after the commencement thereof. Events Affecting Guarantor. Termination or attempted termination of any Guaranty by any Guarantor, and after notice by Lender to Borrower and thirty days' opportunity to cure, (i) Borrower has not caused such Guarantor to withdraw its termination or revocation of the guaranty, or (ii) Borrower has not otherwise caused the remaining Guarantors, subject to Lender's reasonable approval, to replace such terminated or revoked guaranty with the guaranty of another (including existing Guarantors). Receiver Appointed. The appointment of a custodian, receiver or trustee of Borrower or any Guarantor, of all or any substantial part of their respective assets. Bankruptcy. The adjudication of Borrower or any Guarantor as a bankrupt or the involuntary bankruptcy of Borrower and/or any Guarantor, or the commencement of a proceeding by or against Borrower or any Guarantor under the U.S. Bankruptcy Code or any other bankruptcy or insolvency law. Judgments. The failure of Borrower or any Guarantor to pay any money judgment against it or him before such judgment becomes final and no longer appealable; or a judgment in excess of $100,000.00 is rendered against Borrower or any Guarantor. Assignment for Benefit of Creditors. The execution by Borrower or any Guarantor of an assignment for the benefit of its or his creditors. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur and not be cured by any applicable grace or cure period provided, all commitments and obligations of Lender under the Note, this Agreement or the Related Documents immediately will terminate (including any obligation to make Advances), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower or any Guarantor, except as otherwise provided herein or in the Related Documents (except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional). If Borrower shall be in default of any one or more of its Financial Covenants as set forth hereunder in paragraph titled AFFIRMATIVE COVENANTS, subparagraph Financial Covenants, the Borrower's Note with Lender evidencing the Loan shall automatically, without further requirement of notice, become a demand instrument. Upon the occurrence of any continuing uncured Event of Default and at any time thereafter, Lender may, at its option, but without any obligation to do so, and in addition to any other right Lender may have, do any one or more of the following without notice to Borrower or to any Guarantor: (a) cancel this Agreement; (b) institute appropriate proceedings to enforce the performance of this Agreement; (c) withhold Advances; (d) expend funds necessary to remedy the Default; (e) take possession of the Collateral; (f) accelerate maturity of the Note and/or Indebtedness and demand payment of all sums due under the Note and/or Indebtedness; (g) bring an action on the Note and/or Indebtedness; (h) foreclose the Security Agreements in any manner available under law; and (i) exercise any other right or remedy which it has under the Note or Related Documents, or which is otherwise available at law or in equity or by statute. In addition, Lender shall have all other rights and remedies provided in the Related Documents and available at law, in equity, or otherwise. Except as prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercise singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or any Guarantor shall not affect Lender's right to declare a Default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with the Note, the Guaranties, and any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. 14 Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of New York. If there is a lawsuit, Borrower and all Guarantors agrees upon Lender's request to submit to the jurisdiction of the courts of Oneida County, the State of New York. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender, Borrower or any Guarantor against the other. This Agreement shall be governed by and construed In accordance with the laws of the State of New York, exclusive of law rules and public policies. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower and Guarantors agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan, to one or more purchasers, whether related or unrelated to Lender, provided Lender continues as the lead lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or Guarantors, or about any other matter relating to the Loan, and Borrower and Guarantors hereby waive any rights to privacy it may have with respect to such matters. Borrower and Guarantors additionally waive any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower and Guarantors also agree that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower and Guarantors further waive all rights of offset or counterclaim that it may later against Lender or against any purchaser of such a participation interest and unconditionally agrees that only Lender may enforce Borrower's or Guarantors' obligation under the Loan, Note, Guaranties or Related Documents, unless Lender is insolvent, in which case the holder of any interest in the Loan may enforce them. Borrower and Guarantors further agree that the purchaser of any such participation interest may, due to any insolvency of Lender, enforce its interests, irrespective of any personal claims or defenses that Borrower or Guarantors may have against Lender. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier and said courier has confirmed delivery; or deposited in the United States mail, first class, certified mail return receipt requested, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above, and receipt has been acknowledged or return evidencing refusal has been received by sender. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Power of Attorney. Upon and during the continuance of an Event of Default beyond any applicable grace or cure period, and so long as any Indebtedness remains outstanding, Borrower and Partech, Inc., Guarantor irrevocably (this power being coupled with an interest) appoint, constitute, and name Lender or any of its attorneys or agents, the true and lawful attorney for Borrower or Partech, Inc., with full power or substitution to do any or all of the following at any time (but this grant of authority shall not negate any other grant of authority under this Agreement which may authorize other actions, or similar actions under other circumstances, and the Borrower and Partech, Inc. shall not take any actions to contest or reverse, or negate, Lender's actions hereunder): (A) To receive, endorse, sign and deliver, in the name of Borrower or Partech, Inc., or in Lender's, name, all checks, drafts, money orders, and other instruments, for the payment of monies which is payable to the Borrower or Partech, Inc.; (B) To sign the name of Borrower or Partech, Inc., and to receipt for the Borrower or Partech, Inc., on any schedules, assignments, instruments, documents, and UCC financing, continuation or amendment statements, which Borrower or Partech, Inc., are obligated to give Lender hereunder or any Security Interest, or notices to Borrower or Partech, Inc., or certificates or other documents to be delivered or presented in connection with the Loan; (C) To take or bring at Borrower or Partech, Inc.'s expense, in the name of Borrower, Partech, Inc.,, or Lender, all steps, actions, and suits that Lender considers reasonably necessary or desirable to effect collections of Accounts, to enforce payment of any Account, to settle, compromise, sell, assign, discharge or release, in whole or in part, any amounts owing on Accounts, to extend the time for payment of any and all Accounts, and to make allowances and adjustments with regard to Accounts; and (D) to do such other and further acts and deeds in the name of Borrower or Partech, Inc., that Lender may deem reasonably necessary or desirable to enforce the rights of Partech, Inc., or Borrower against third parties with respect to the Collateral. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower or Guarantors and shall bind their respective successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower and Corporate Guarantor shall not, however, have the right to assign their rights under this Agreement or any interest therein, without the prior written consent of Lender. 15 Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, it the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty, covenant, or Financial Covenant (unless otherwise excluded by the terms of this Agreement) the word "Borrower" as used herein shall include all Subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Advance of the Loan to, or at the request of, any Subsidiary or affiliate of Borrower, or to make any other loan or financial accommodation to any Subsidiary or affiliate of Borrower. Survival. All warranties, representations, and covenants made by Borrower and, as applicable, Guarantors, in this Agreement or in any certificate or other instrument delivered by Borrower or any Guarantor to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of this Agreement, the Note, the Guaranties, and the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time Is of the Essence. Time is of the essence in the performance of this Agreement. Expenses of Lender; Indemnification. (A) Borrower and/or Guarantors shall pay the reasonable out-of-pocket costs and expenses of Lender including the reasonable fees and reasonable disbursements of Lender's counsel, incurred by Lender in connection with (i) the negotiation and preparation of, and amendments to, this Agreement, the Note, the Guaranties, any participation agreements, the Intercreditor Agreement, or the Related Documents, and any amendment or modification thereof (whether or not the transactions contemplated by this Agreement are consummated), and the closing of the transactions contemplated hereby and thereby; (ii) the perfection of the liens granted pursuant hereto and pursuant to the Related Documents; (iii) the making of the Loan hereunder; (iv) the negotiation, preparation or enforcement of any other document in connection with this Agreement, the Note, the Related Documents, or the Loan; (v) any proceeding brought or formal action taken by Lender to enforce any provision of this Agreement, the Note, any Guaranty, or the Related Documents or to enforce or exercise any right, power or remedy hereunder or thereunder, or (vi) any action which may be taken or instituted by any person, entity, or governmental authority against Lender as a result of any of the foregoing. The fees and expenses of Lender's counsel through the Closing Date shall be payable not later than the Closing Date. (B) Borrower and Guarantors, jointly and severally, each indemnifies and holds harmless Lender and its directors, officers, employees, agents, counsel, subsidiaries, and affiliates (the "Indemnified Persons") from and against any and all losses, liabilities, obligations, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever including, without limitation, reasonable attorneys fees, which may be imposed on, incurred by, or asserted against any Indemnified Person in any way relating to or arising out of this Agreement, the Note, or the Related Documents, or any of them, or the Loan, or the use of the proceeds of the Loan or any of the transactions contemplated herein or thereby or the ownership or operation of any of the assets of Borrower or any Guarantor, or the breach by Borrower or any Guarantor of any of the representations, warranties, covenants, and agreements, contained herein or in the Note, the Guaranties, or in the Related Documents; provided, however, that Borrower and Guarantors shall not be liable to any Indemnified Person, if there is a final judicial determination that such losses, liabilities, obligations, damages, penalties, actions, judgment, suits, costs, expenses or disbursements resulted solely from the gross negligence or willful misconduct of such Indemnified Person. (C) As used herein, the term "attorneys' fees" shall include the amount of any and all reasonable fees and reasonable disbursements of the Lender's counsel and of any experts and agents (including fees of law clerks, paralegals, investigators and others not admitted to the bar but performing services under the supervision of an attorney) which Lender may incur in connection with (i) the custody, preservation, use, or operation, or the sale of, collection from, or other realization upon, any Collateral; (ii) the exercise or enforcement of any rights of Lender hereunder; (iii) the failure by Borrower or any Guarantor to perform or observe any of the provisions hereof, or of the Note, of any Guaranty, or of the Related Documents, or (iv) the interpretation of any of the provisions hereof. As used herein, the term "attorneys' fees" includes such fees incurred in the exercise of any remedy (with or without litigation) in any proceeding for the collection of the Indebtedness, in any foreclosure against any of the Collateral, in protecting or sustaining the lien or priority of any Security Interest, or in any litigation, or controversy arising out of or connected with the Indebtedness, including any bankruptcy (including, without limitation, filing of an involuntary bankruptcy petition; seeking dismissal, abstention or conversion of a bankruptcy proceeding; challenging venue of the bankruptcy proceeding, filing and defending a proof of claim; opposing or conditioning the debtor's right to operate its business; serving on the creditors' committee; seeking appointment of a trustee, examiner or disbursing agent; proposing or seeking modification of a plan of reorganization; seeking relief from stay and/or adequate protection; opposing debtor's use of cash collateral or obtaining credit; and opposing discharge) arbitration, mediation, receivership, injunction, or other proceeding of any nature, or any appeal from or petition of review or rehearing of any of the foregoing. Waiver and Release by Borrower. To the maximum extent permitted by applicable law, and except as expressly provided herein, Borrower and Guarantors (a) waive demand, protest, presentment, and notice of dishonor of all commercial paper at any time held by Lender on which Borrower or any Guarantor is in any way liable (b) releases Lender and its officers, attorneys, agents, and employees 16 from all claims for loss or damage caused by any act or omission on the part of any of them except gross negligence or willful misconduct; (c) waive any application of any statute of limitations as a bar or defense interposed by Borrower or any Guarantor against any suit instituted by Lender for recovery upon the Indebtedness; and (d) waives any defense against Lender's suit for recovery upon the Indebtedness which has as its basis the Loan, Note, the Guaranties, this Agreement, or any Related Document, being unenforceable. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Guarantor or Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Guarantor or Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND AGREES TO ITS TERMS. GUARANTORS ACKNOWLEDGE THEY HAVE EACH READ ALL THE PROVISIONS OF THIS AGREEMENT AND ENTERS INTO AND EXECUTES THIS AGREEMENT FOR PURPOSES OF MAKING THOSE REPRESENTATIONS, WARRANTIES, AND COVENANTS TO LENDER AS THEY APPLY TO EACH GUARANTOR. THIS AGREEMENT IS DATED AS OF September 21, 2001. BORROWER: PAR TECHNOLOGY CORPORATION - ------------------------------------- By: Ronald Casciano, Vice President/Treasurer/ CFO Authorized Representative PARTECH, INC. by:Ronald Casciano/Treasurer Authorized Representative AUSABLE SOLUTIONS, INC. - ------------------------------------------------------ by: Ronald Casciano/Treasurer Authorized Representative PAR GOVERNMENT SYSTEMS CORPORATION - ------------------------------------------------------ by: Ronald Casciano/Treasurer Authorized Representative ROME RESEARCH CORPORATION - ------------------------------------------------------ by: Ronald Casciano/Treasurer Authorized Representative LENDER: NBT Bank, National Association - ----------------------------------- BY: Rex W. Cary Vice President 17 EXHIBIT 1 - BORROWING BASE CERTIFICATE BORROWER: PAR TECHNOLOGY CORPORATION MAXIMUM LINE AMOUNT: $12,500,000.00 NBT BANK/ALLIANCE MAXIMUM LINE AMOUNT $7,500,000.00 CHASE MANHATTAN BANK Acceptable Accounts Receivables (A/A/R) As of: ------------------------------- 1. A/A/R: 3-30 Days ________________________________ 2. A/A/R:31-60 Days ________________________________ 3. A/A/R: 61-90 Days ________________________________ 4. A/A/R: 91-120 Days ________________________________ 5. A/A/R: 121 Days & over ________________________________ 6. Total Acceptable Accounts Receivable: ________________________________ 7. Less: A/A/R 91 Days & Over (________________________________) 8. Subtotal of A/A/R: _________________________________ 9. 80% of A/A/R 0-90 Days X 80% ________________ 10. 25% Eligible A/A/R: 91-120 Days X 25 %________________ 11. Acceptable Inventory _________________________________ 12. 40% of Acceptable Inventory X 40% ________________ 13. Total Acceptable Accounts Receivable and Acceptable Inventory _________________________________ 14. Present Line Balance - NBT __________________________________ 15. Present Line Balance - Chase __________________________________ 16. Excess/(Deficiency)(Line 13 minus Lines 14 & 15)___________________________ The undersigned hereby represent and warrant that this is a correct statement regarding the status of Acceptable Accounts Receivable and Acceptable Inventory (as such terms are defined in that certain business loan agreement dated as of September 21, 2001, between PAR Technology Corporation, Partech, Inc., et al., and NBT Bank, National Association), assigned to NBT Bank, and that the figures set forth herein are completely accurate. The undersigned further warrant and represent that the Borrower is in complete compliance with all terms and conditions in the agreements between us. The undersigned further understand that the loans to the Borrower will be based upon NBT's reliance on the information contained herein. By:____________________________________________ (Title) Date: _______________________________ 18 EXHIBIT 2 - REQUEST FOR ADVANCE NBT Bank, National Association $12,500,000.00 LINE OF CREDIT LOAN PAR TECHNOLOGY CORPORATION DATE: ___/___/___ REQUEST FOR ADVANCE THE UNDERSIGNED, being an Authorized Representative of PAR Technology Corporation ("Borrower") as set forth in loan documents made and given by Borrower to NBT Bank, National Association ("Lender") dated as of September 21, 2001, with respect to a certain secured line of credit loan (the "Loan") (the "Loan Documents") herein and hereby requests an Advance of Loan proceeds under the Loan Documents pursuant to and in conformance with the Loan Documents. This request for Advance is made of Lender for an Advance of Loan proceeds from the Loan and in the amount as below set forth. This request for advance is supported by Borrower's submission herewith of Borrower's current complete and executed Borrowing Base Certificate and Compliance Certificate for the Loan. $12,500,000.00 Line of Credit Loan - ---------------------------------- NBT Loan Amount Outstanding as of _____________ (Date of Advance) Chase Loan Amount Outstanding as of _____________ (Date of Advance) LOAN ADVANCE REQUEST: $_____________ (Must Not Exceed Line 16 of the Borrowing Base Certificate) Total Amount Outstanding as of advance: $_____________ (May not exceed $20,000,000.00) Requested Date of Loan Ad- vance funding to Borrower's Account: ___________ (Date) Copy of Borrower's Current Borrowing Base and Compliance Certificate attached? Borrowing Base Certificate: [_] [_] Yes No Compliance Certificate: [_] [_] Yes No Request Submitted by PAR Technology Corporation - ------------------------------------------ By: (Name): (Title): REQUEST APPROVED: [_] 19 REQUEST DENIED: [_] By: ______________________________________ Officer, NBT Bank, National Association 20 EXHIBIT 3 -COMPLIANCE CERTIFICATE The undersigned warrant(s) and represent(s) that Borrower is in complete compliance with all terms and conditions in the agreements between Borrower and NBT Bank, National Association, including but not limited to all agreements, instruments and documents evidencing and securing a certain secured line of credit loan in the maximum principal amount of $12,500,000.00 (the "Loan") and any and all further documentation executed by Borrower in connection with the Loan; and that to the best knowledge of the undersigned authorized representative of Borrower, Partech, Inc., and Guarantors (as such term is defined in a certain business loan agreement dated September 21, 2001, made by and among Borrower, Partech, Inc., Ausable Solutions, Inc., PAR Government Systems Corporation, and Rome Research Corporation (the "Loan Agreement"), neither Borrower, Partech, Inc., nor Guarantors are in Default under the terms of any of the foregoing agreements, instruments and documents, and any of the Related Documents and none of the Guarantors have revoked and/or limited their respective Guaranties (as defined in the Loan Agreement). The undersigned further understands that NBT Bank, National Association, in making advances to Borrower under the Loan, shall be relying upon the truth and accuracy of the above warranties and representations. PAR TECHNOLOGY CORPORATION -------------------------------------- By:(Name) (Title): PARTECH, INC. -------------------------------------- by: (Name): (Title): AUSABLE SOLUTIONS, INC. -------------------------------------- by: (Name): (Title): PAR GOVERNMENT SYSTEMS CORPORATION -------------------------------------- by: (Name): (Title): ROME RESEARCH CORPORATION -------------------------------------- by: (Name): (Title): *Authorized Representatives are any one of the following persons: John Sammons Charles Constantino Ronald Casciano EX-10.2 5 chintermsnbt.txt NBT, N.A. CHANGES IN TERMS TO LOC AGREEMENT EXHIBIT 10.2 CHANGE IN TERMS AGREEMENT THIS CHANGE IN TERMS AGREEMENT (herein "Agreement") is made as of July 18, 2003, by PAR Technology Corporation, a Delaware business corporation, having a principal office at 8383 Seneca Turnpike, New Hartford, NY 13413 (herein "Borrower"), and NBT BANK, NATIONAL ASSOCIATION, having a business address at 555 French Road, New Hartford, NY 13413 (herein "Lender"). WHEREAS, Borrower has heretofore originally obtained a certain replenishing line of credit loan from Lender in the maximum principal amount not to exceed under any contingency at any time the sum of Twelve Million Five Hundred Thousand and 00/100ths Dollars (U.S. $12,500,000.00) (the "Loan") the Loan originally being evidenced by a certain promissory note dated September 21, 2001, in the maximum principal amount of the Loan (the "Original Note"), and further evidenced, secured, and documented by a business loan agreement dated September 21, 2001, made by and between Borrower and Lender (the "Business Loan Agreement"), certain other instruments, agreements, indemnities, documents, and other writings dated as of even date as the Note and dated as of May 1, 2001 (hereafter, the Note, Business Loan Agreement, and such other instruments, agreements, indemnities, documents, and writings are collectively referred to as the "Original Loan Documents"); and WHEREAS, the Loan was, pursuant to the Original Note, to be due and payable in full as of April 30, 2003 (the " Original Maturity Date"), unless the Original Maturity Date was otherwise extended in writing by Lender with Borrower; and WHEREAS, the Original Note was renewed and replaced by a certain (Renewal) Promissory Note dated as of May 1, 2003 (the "Renewal Note"), executed and delivered by Borrower to Lender, which Renewal Note extended and modified certain terms of the Note and Business Loan Agreement by (a) extension of the Original Maturity Date to a date of July 31, 2003 (the "First Extended Maturity Date"); and, as a term and condition of Lender's extending the Original Maturity Date, by (b) modification of that certain subparagraph set forth in the Business Loan Agreement titled Financial Covenants, subsection F., titled "Coverage Ratio"; and WHEREAS, hereinafter the Original Note as modified by the Renewal Note shall be termed the "Note"; and hereinafter the term "Business Loan Agreement" as used herein shall be deemed to encompass the modifications thereto as set forth in and implemented under the Renewal Note; and WHEREAS, at Borrower's request, Lender has agreed to extend the First Extended Maturity Date and to modify certain other terms of the Business Loan Agreement in accordance with the terms as hereinafter set forth; and NOW THEREFORE, in consideration of the aforestated premises, and other good and valuable consideration, the receipt and sufficiency of which is mutually acknowledged, the 1 parties hereto agree as follows: 1. BORROWER'S ACKNOWLEDGMENT AND CONFIRMATION OF ITS OBLIGATIONS UNDER THE NOTE, BUSINESS LOAN AGREEMENT, AND THE OTHER ORIGINAL LOAN DOCUMENTS. Borrower herein confirms, represents, and acknowledges all obligations, liabilities, representations, warranties, indemnities, and promises contained in the Note, the Business Loan Agreement, and the other Original Loan Documents, including but not limited to the payment of the Loan and all indebtedness arising therefrom pursuant to the Note, including all principal, interest, claims, costs, obligations, liabilities, debts, and amounts arising out of the Loan, Note, the Business Loan Agreement, and all other Original Loan Documents. Borrower hereby confirms, acknowledges, and represents that the Note evidences the Loan and is, and continues, as a valid binding obligation of Borrower to Lender; and Borrower confirms, acknowledges, and represents that the Related Documents (as defined in the Original Loan Documents), which Related Documents include but are not limited to the Business Loan Agreement, and that General Security Agreement made and given by Borrower and Partech, Inc., to Lender, dated May 1, 2001 (the "Security Agreement") granting security interests to Lender in that property of Borrower and Partech, Inc., as set forth in the Security Agreement, and that the security interests, liens, and encumbrances upon the property of Borrower and of Partech, Inc., granted under the Security Agreement continue to be and are valid first-priority liens against such property of Borrower and Partech, Inc., subject only to the rights of The Chase Manhattan Bank in the same property, as such rights are governed by that certain Intercreditor Agreement made by and between Lender and Chase Manhattan Bank dated May 1, 2001 (the "Intercreditor Agreement") and any modifications to the Intercreditor Agreement. 2. AGREEMENT TO CHANGE TERMS OF NOTE. Borrower and Lender agree that the terms of the Note are to be modified as follows: a Maturity Date. The Maturity Date is extended from July 31, 2003, to April ------------- 30, 2005. - -----Hereafter, the Note as modified by the terms as above set forth in this paragraph a, titled Maturity Date, is referred to as the "Modified Note"). 3. AGREEMENT TO CHANGE TERMS OF THE BUSINESS LOAN AGREEMENT. Borrower and Lender agree that the terms of the Business Loan Agreement are to be modified as follows: (a) Section titled AFFIRMATIVE COVENANTS, subsection titled Semiannual Accounts Receivable and Accounts Payable, set forth on Page 9 of 19 of the Business Loan Agreement, is hereby deleted and replaced with the following: 2 Semiannual Accounts Receivable, Accounts Payable, and Inventory Summary. Borrower shall deliver to Lender, semiannually during the term of the Loan, and within ten (10) days of each June 30th and each December 31st, commencing with the end of the next semiannual period of Borrower following the Closing Date, and continuing thereafter semiannually during the term of the Loan, Borrower's complete schedule of its Accounts receivable and its Accounts payable, and Borrower's Inventory accounting showing beginning and ending totals, quantities used, purchased, and in storage, certified to as true and accurate by Borrower's Chief Financial Officer. All remaining terms and conditions of the Loan, Note, Business Loan Agreement, Security Agreement, and other Original Loan Documents, except as modified by this Change in Terms Agreement, shall continue, in all respects, unmodified, unchanged and in the same force and effect, as if said terms and conditions had been fully set forth in this Agreement. Hereafter, the Note, Security Agreement, Business Loan Agreement, and other Original Loan Documents, and the Modification Documents, are termed the "Loan Documents" when collectively referred to. 4. CONFLICTS. In the event that any term or condition as contained in this Agreement is in conflict with any term or condition contained in any other Loan Document prior made and executed in connection with the Loan, then the terms and conditions of this Agreement shall control. 5. BORROWER'S COVENANTS. Borrower covenants that (a) Borrower is, and continues to be, lawfully and exclusively seized of the fee interest in the property encumbered by the Security Agreement; (b) Borrower has the right, authority, and capacity to undertake the obligations and liabilities as set forth in this Agreement and in the Loan Documents, to modify and change the terms of the Note and the Business Loan Agreement as set forth in this Agreement; and to execute and deliver to Lender this Agreement; (c) Borrower will defend generally the title to its property, including but not limited to the property pledged in the Security Agreement, against all claims and demands made by any person, entity, agency, municipal body or any other party; and (d) that there are no offsets, counterclaims or defenses against the Loan and indebtedness arising therefrom unpaid, or against the Note, the Business Loan Agreement, this Agreement, or against any other Loan Document. 6. TERMINATION; CHANGES; AMENDMENTS. This Agreement may not be terminated, changed or amended except by a written agreement signed by the parties hereto. 3 IN WITNESS WHEREOF, Borrower and Lender, have executed this Agreement or caused the same to be executed by their representatives thereunto duly authorized. NBT BANK, NATIONAL ASSOCIATION PAR TECHNOLOGY CORPORATION By:____________________________ ________________________ Rex W. Cary, by: Ronald J. Casciano, Vice President Treasurer STATE OF NEW YORK): COUNTY OF ONEIDA): ss.: On this July ____, 2003, before me the undersigned, a notary public in and for said State, personally appeared Rex W. Cary, to me known or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument; and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon whose behalf said individual acted, executed the instrument. ------------------------------ NOTARY PUBLIC - State of N.Y. Appointed in My commission expires: STATE OF NY) COUNTY OF ONEIDA):ss.: On this July _____, 2003, before me the undersigned, a notary public in and for said State, personally appeared Ronald J. Casciano, to me known or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument; and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon whose behalf said individual acted, executed the instrument. ------------------------------ NOTARY PUBLIC - State of NY Appointed in_________ County My commission expires: 4 EX-10.3 6 ptccredagreechase.txt JPMORGAN CHASE LINE OF CREDIT AGREEMENT EXHIBIT 10.3 ================================================================================ [GRAPHIC OMITTED] $7,500,000 CREDIT AGREEMENT dated as of October 31, 2003 between PAR TECHNOLOGY CORPORATION and JPMORGAN CHASE BANK ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE I Definitions ----------- SECTION 1.01. Defined Terms CORRECT PAGE NUMBERS.......................... 1 SECTION 1.02. Terms Generally............................................. 9 SECTION 1.03. Accounting Terms; GAAP...................................... 9 ARTICLE II The Credits ----------- SECTION 2.01. Commitment.................................................. 10 SECTION 2.02. Loans....................................................... 10 SECTION 2.03. Requests for Loans.......................................... 10 SECTION 2.04. Funding of Loans............................................ 11 SECTION 2.05. Interest Elections.......................................... 11 SECTION 2.06. Termination and Reduction of Commitment..................... 11 SECTION 2.07. Repayment of Loans; Evidence of Debt........................ 12 SECTION 2.08. Prepayment of Loans......................................... 12 SECTION 2.09. Fees........................................................ 13 SECTION 2.10. Interest.................................................... 13 SECTION 2.11. Alternate Rate of Interest.................................. 13 SECTION 2.12. Increased Costs............................................. 14 SECTION 2.13. Break Funding Payments...................................... 15 SECTION 2.14. Taxes....................................................... 15 ARTICLE III Representations and Warranties ------------------------------ SECTION 3.01. Organization; Powers........................................ 16 SECTION 3.02. Authorization; Enforceability............................... 16 SECTION 3.03. Governmental Approvals; No Conflicts........................ 16 SECTION 3.04. Financial Condition; No Material Adverse Change............. 16 SECTION 3.05. Properties.................................................. 16 SECTION 3.06. Litigation and Environmental Matters........................ 17 SECTION 3.07. Compliance with Laws and Agreements......................... 17 SECTION 3.08. Investment and Holding Company Status....................... 17 1 SECTION 3.09. Taxes....................................................... 17 SECTION 3.10. ERISA....................................................... 17 SECTION 3.11. Disclosure.................................................. 18 ARTICLE IV Conditions ---------- SECTION 4.01. Effective Date.............................................. 18 SECTION 4.02. Each Loan................................................... 19 ARTICLE V Affirmative Covenants --------------------- SECTION 5.01. Financial Statements and Other Information.................. 19 SECTION 5.02. Notices of Material Events.................................. 20 SECTION 5.03. Existence; Conduct of Business.............................. 20 SECTION 5.04 Payment of Obligations...................................... 20 SECTION 5.05. Maintenance of Properties; Insurance........................ 21 SECTION 5.06. Books and Records; Inspection Rights........................ 21 SECTION 5.07. Compliance with Laws........................................ 21 SECTION 5.08. Use of Proceeds and Letters of Credit....................... 21 ARTICLE VI Negative Covenants ------------------ SECTION 6.01. Indebtedness................................................ 21 SECTION 6.02. Liens....................................................... 22 SECTION 6.03. Fundamental Changes......................................... 22 SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions... 23 SECTION 6.05. Hedging Agreements.......................................... 23 SECTION 6.06. Restricted Payments......................................... 23 SECTION 6.07. Transactions with Affiliates................................ 23 SECTION 6.08. Restrictive Agreements...................................... 24 SECTION 6.09. Leverage Ratio 24 SECTION 6.10. Fixed Charge Coverage Ratio 24 SECTION 6.11. Minimum Tangible Net Worth 24 ARTICLE VII Events of Default..................................... 24 ----------------- 2 ARTICLE VIII Miscellaneous ------------- SECTION 8.01. Notices..................................................... 26 SECTION 8.02. Waivers; Amendments......................................... 27 SECTION 8.03. Expenses; Indemnity; Damage Waiver.......................... 27 SECTION 8.04. Successors and Assigns...................................... 28 SECTION 8.05. Survival.................................................... 29 SECTION 8.06. Counterparts; Integration; Effectiveness................... 29 SECTION 8.07. Severability................................................ 29 SECTION 8.08. Right of Setoff............................................. 29 SECTION 8.09. Governing Law; Jurisdiction; Consent to Service of Process.. 29 SECTION 8.10. WAIVER OF JURY TRIAL........................................ 30 SECTION 8.11. Headings.................................................... 30 SECTION 8.12. Confidentiality............................................. 30 SECTION 8.13. Interest Rate Limitation.................................... 31 SCHEDULES: - ---------- Schedule 3.06 -- Disclosed Matters Schedule 6.01 -- Existing Indebtedness Schedule 6.02 -- Existing Liens Schedule 6.08 -- Existing Restrictions EXHIBITS: - --------- Exhibit A -- Form of Certificate of [Assistant] Secretary Exhibit B -- Form of Borrowing Request Exhibit C -- Form of Interest Election Request Exhibit D -- Form of Financial Officer's Certificate Exhibit E -- Form of Opinion of Borrower's Counsel 3 CREDIT AGREEMENT dated as of October 31, 2003, between PAR TECHNOLOGY CORPORATION and JPMORGAN CHASE BANK. The parties hereto agree as follows: ARTICLE I Definitions ----------- SECTION 1.01. Defined Terms. As used in this Agreement, the following terms ------------- have the meanings specified below: "ABR", when used in reference to any Loan, refers to whether such Loan is --- bearing interest at a rate determined by reference to the Alternate Base Rate. "Adjusted LIBO Rate" means, with respect to any Eurodollar Loan for any -------- Interest Period, an interest rate per annum equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Affiliate" means, with respect to a specified Person, another Person that --------- directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Alternate Base Rate" means, for any day, a rate per annum equal to the ------------------- Prime Rate in effect on such day. Any change in the Alternate Base Rate due to a change in the Prime Rate shall be effective from and including the effective date of such change in the Prime Rate. "Applicable Rate" means, for any day, with respect to any ABR Loan or --------------- Eurodollar Loan, or with respect to the commitment fee payable hereunder, as the case may be, the applicable rate per annum set forth below: LEVEL I LEVEL II LEVEL III LEVEL IV Eurodollar Rate 2.25% 2.625% 3.00% 3.375% Alternate Base Rate 0% 0% 0% .375% APPLICABLE FEE RATE LEVEL I LEVEL II LEVEL III LEVEL IV Commitment Fee .25% .375% .50% .625% "Level I" status exists at any date if, as of the last day of the Fiscal Quarter of the Borrower referred to in the most recent financial statements of Borrower delivered to the Bank, the Leverage Ratio is less than or equal to 2.00 to 1.00. "Level II" status exists at any date if, as of the last day of the Fiscal Quarter of the Borrower referred to in the most recent financial statements of Borrower delivered to the Bank, (i) the Borrower has not qualified for Level I status and (ii) the Leverage Ratio is less than or equal to 2.75 to 1.00. "Level III" status exists at any date if, as of the last day of the Fiscal Quarter of the Borrower referred to in the most recent financial statements of Borrower delivered to the Bank, (i) the Borrower has not qualified for Level I or II status and (ii) the Leverage Ratio is less than or equal to 3.5 to 1.00. "Level IV" status exists at any date if, as of the last day of the Fiscal Quarter of the Borrower referred to in the most recent financial statements of Borrower delivered to the Bank, (i) the Borrower has not qualified for Level I, II or III status and (ii) the Leverage Ratio is greater than 3.5 to 1.00. "Assessment Rate" means, for any day, the annual assessment rate in effect --------------- on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in dollars at the offices of such member in the United States. "Availability Period" means the period from and including the Effective ------------------- Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitment. "Bank" means JPMorgan Chase Bank. ---- "Board" means the Board of Governors of the Federal Reserve System of the ----- United States of America. "Borrower" means PAR Technology Corporation, a Delaware corporation. "Borrowing Request" means a request by the Borrower for a Loan in ----------------- accordance with Section 2.03. "Business Day" means any day that is not a Saturday, Sunday or other day on ------------ which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any Person means the obligations of such ------------------------- Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Change in Control" means (a) the acquisition of ownership, directly or ----------------- indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of shares representing more than 10% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower, in addition to those shares owned by such Person or group on the date hereof; (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated; or (c) the acquisition of direct or indirect Control of the Borrower by any Person or group other than the executive management of the Borrower. "Change in Law" means (a) the adoption of any law, rule or regulation after ------------- the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by 2 any Governmental Authority after the date of this Agreement or (c) compliance by the Bank with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to ---- time. "Commitment" means, the commitment of the Bank to make Loans, as such ---------- commitment may be reduced from time to time pursuant to Section 2.06. The initial amount of the Bank's Commitment is $7,500,000. "Control" means the possession, directly or indirectly, of the power to ------- direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Default" means any event or condition which constitutes an Event of ------- Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Matters" means the actions, suits and proceedings and the ----------------- environmental matters disclosed in Schedule 3.06. "dollars" or "$" refers to lawful money of the United States of America. ------- "Effective Date" means the date on which the conditions specified in -------------- Section 4.01 are satisfied (or waived in accordance with Section 8.02). "Environmental Laws" means all laws, rules, regulations, codes, ordinances, ------------------ orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters. "Environmental Liability" means any liability, contingent or otherwise ----------------------- (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) --------------- that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 ----------- of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing 3 pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurodollar", when used in reference to any Loan, refers to whether such ---------- Loan is bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "Event of Default" has the meaning assigned to such term in Article VII. ---------------- "Excluded Taxes" means, with respect to the Bank, (a) income or franchise -------------- taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located. "Financial Officer" means the chief financial officer, principal accounting ----------------- officer, treasurer or controller of the Borrower. "Fixed Charge Coverage Ratio" means, as to a Person and in respect of the --------------------------- period for which the computation is being made, and which period shall in each case consist of a twelve month period ending on the last day of a Fiscal Quarter, the ratio of (i) Earnings Before Interest, Taxes, Depreciation and Amortization to (ii) the current maturities of long term Indebtedness plus interest expense. The category of "Earnings Before Interest, Taxes, Depreciation and Amortization" in the Fixed Charge Coverage Ratio shall be measured for such Person over the preceding four Fiscal Quarters. In the case of the Borrower, its Fixed Charge Coverage Ratio shall be measured on a consolidated basis with its Subsidiaries. "GAAP" means generally accepted accounting principles in the United States ---- of America. "Governmental Authority" means the government of the United States of ---------------------- America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, --------- --------- contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and --------------- including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of 4 credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Indemnified Taxes" means Taxes other than Excluded Taxes. ----------------- "Index Debt" means senior, unsecured, long-term indebtedness for borrowed ---------- money of the Borrower that is not guaranteed by any other Person or subject to any other credit enhancement. "Interest Election Request" means a request by the Borrower to convert or ------------------------- continue a Loan in accordance with Section 2.05. "Interest Payment Date" means (a) with respect to any ABR Loan, the first --------------------- day of each month, and (b) with respect to any Eurodollar Loan, the last day of the Interest Period therefor and, in the case of a Eurodollar Loan with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period. "Interest Period" means with respect to any Eurodollar Loan, the period --------------- commencing on the date of such Loan and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided, that (i) if any Interest Period would end on a -------- day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Loan only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar Loan that commences on the last 5 Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Loan initially shall be the date on which such Loan is made and, thereafter shall be the effective date of the most recent conversion or continuation of such Loan. "Leverage Ratio" means, as to a Person and in respect of the period for -------------- which the computation is being made, and which period shall in each case consist of a twelve month period ending on the last day of a Fiscal Quarter, the ratio of (i) Indebtedness to (ii) Earnings Before Interest, Taxes, Depreciation and Amortization. The category of "Earnings Before Interest, Taxes, Depreciation and Amortization" in the Leverage Ratio shall be measured for such Person over the preceding four Fiscal Quarters. In the case of the Borrower, its Leverage Ratio shall be measured on a consolidated basis with its Subsidiaries. "LIBO Rate" means, with respect to any Eurodollar Loan for any Interest --------- Period, the rate at which dollar deposits in an amount and for a maturity comparable to such Interest Period are offered by the principal London office of the Bank in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, ----- lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loans" means the loans made by the Bank to the Borrower pursuant to this ----- Agreement. "Material Adverse Effect" means a material adverse effect on (a) the ----------------------- business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries taken as a whole, (b) the ability of the Borrower to perform any of its obligations under this Agreement or other loan documents or (c) the rights of or benefits available to the Bank under this Agreement or available to other lenders under other loan documents. "Material Indebtedness" means Indebtedness (other than the Loans), or --------------------- obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower and its Subsidiaries in an aggregate principal amount exceeding $250,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "Maturity Date" means two years from the date of this Agreement. ------------- "Moody's" means Moody's Investors Service, Inc. -------- "Multiemployer Plan" means a multiemployer plan as defined in Section ------------------ 4001(a)(3) of ERISA. "Other Taxes" means any and all present or future stamp or documentary ----------- taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. 6 "PBGC" means the Pension Benefit Guaranty Corporation referred to and ---- defined in ERISA and any successor entity performing similar functions. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.04; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; and (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; provided that the term "Permitted Encumbrances" shall not include any Lien - -------- securing Indebtedness. "Permitted Investments" means: --------------------- (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000; and (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above. "Person" means any natural person, corporation, limited liability company, ------ trust, joint venture, association, company, partnership, Governmental Authority or other entity. 7 "Plan" means any employee pension benefit plan (other than a Multiemployer ---- Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Prime Rate" means the rate of interest per annum publicly announced from ---------- time to time by the Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Related Parties" means, with respect to any specified Person, such --------------- Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Restricted Payment" means any dividend or other distribution (whether in ------------------ cash, securities or other property) with respect to any shares of any class of capital stock of the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such shares of capital stock of the Borrower or any option, warrant or other right to acquire any such shares of capital stock of the Borrower. "S&P" means Standard & Poor's. --- "Statutory Reserve Rate" means a fraction (expressed as a decimal), the ---------------------- numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Bank is subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "subsidiary" means, with respect to any Person (the "parent") at any date, ---------- any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" means any subsidiary of the Borrower. ---------- "Tangible Net Worth" means the total of shareholders' or partnership equity ------------------ of a Person as it appears on the balance sheet of such Person, minus the net carrying value of intangible assets properly classified as such in accordance with GAAP (including, but not limited to, goodwill, organizational expenses, trademarks, tradenames, licenses, patents, capitalized research and development costs), minus minority interests in its Subsidiaries, and without regard to unrealized gains or losses due to foreign 8 currency fluctuations. In the case of the Borrower, its Tangible Net Worth shall be measured on a consolidated basis with its Subsidiaries. "Taxes" means any and all present or future taxes, levies, imposts, duties, ----- deductions, charges or withholdings imposed by any Governmental Authority. "Transactions" means the execution, delivery and performance by the ------------ Borrower of this Agreement, the borrowing of Loans and the use of the proceeds thereof. "Type", when used in reference to any Loan, refers to whether the rate of ----- interest on such Loan is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "Withdrawal Liability" means liability to a Multiemployer Plan as a result --------------------- of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Terms Generally. The definitions of terms herein shall apply --------------- equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.03. Accounting Terms; GAAP. Except as otherwise expressly ---------------------- provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided -------- that, if the Borrower notifies the Bank that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Bank notifies the Borrower that the Bank request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. 9 ARTICLE II The Credit ---------- SECTION 2.01. Commitment. Subject to the terms and conditions set forth ---------- herein, the Bank agrees to make Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in outstanding Loans exceeding the Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Loans. SECTION 2.02. Loans. ------ (a) At the commencement of each Interest Period for any Eurodollar Loan, such Loan shall be in an amount that is an integral multiple of $100,000 and not less than $500,000. At the time that each ABR Loan is made, such Loan shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $100,000; provided that an ABR Loan may be in an aggregate amount that is -------- equal to the entire unused balance of the total Commitment. Loans of more than one Type and Class may be outstanding at the same time; provided that there -------- shall not at any time be more than a total of fourteen Eurodollar Loans outstanding. (b) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Loan if the Interest Period requested with respect thereto would end after the Maturity Date. SECTION 2.03. Requests for Loans. To request a Loan, the Borrower shall ------------------ notify the Bank of such request by telephone (a) in the case of a Eurodollar Loan, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Loan or (b) in the case of an ABR Loan, not later than2:00 p.m., New York City time, one Business Day before the date of the proposed Loan. Each such telephonic Borrowing Request shall be irrevocable and, as to a Eurodollar Loan, shall be confirmed promptly by hand delivery or telecopy to the Bank of a written Borrowing Request in a form approved by the Bank and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the amount of the requested Loan; (ii) the date of such Loan, which shall be a Business Day; (iii) whether such Loan is to be an ABR Loan or a Eurodollar Loan; (iv) in the case of a Eurodollar Loan, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.04. If no election as to the Type of Loan is specified, then the requested Loan shall be an ABR Loan. If no Interest Period is specified with respect to any requested Eurodollar Loan, then the Borrower shall be deemed to have selected an Interest Period of one month's duration, in the case of a Eurodollar Loan. 10 SECTION 2.04. Funding of Loans. The Bank shall make each Loan available to ---------------- the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Bank in New York City and designated by the Borrower in the applicable Borrowing Request. SECTION 2.05. Interest Elections. (a) Each Loan initially shall be of the ------------------ Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Loan, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Loan to a different Type or to continue such Loan and, in the case of a Eurodollar Loan, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Loan and each such portion shall be considered a separate Loan. (b) To make an election pursuant to this Section, the Borrower shall notify the Bank of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Loan of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and, as to a Eurodollar Loan, shall be confirmed promptly by hand delivery or telecopy to the Bank of a written Interest Election Request in a form approved by the Bank and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Loan to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Loan (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Loan); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Loan is to be an ABR Loan or a Eurodollar Loan; and (iv) if the resulting Loan is a Eurodollar Loan, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Loan but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration, in the case of a Eurodollar Loan. (d) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Loan prior to the end of the Interest Period applicable thereto, then, unless such Loan is repaid as provided herein, at the end of such Interest Period such Loan shall be converted to an ABR Loan. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Bank so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Loan may be converted to or continued as a Eurodollar Loan and (ii) unless repaid, each Eurodollar Loan shall be converted to an ABR Loan at the end of the Interest Period applicable thereto. SECTION 2.06. Termination and Reduction of Commitment. (a) Unless --------------------------------------- previously terminated, the Commitment shall terminate on the Maturity Date. 11 (b) The Borrower may at any time terminate, or from time to time reduce, the Commitment; provided that (i) each reduction of the Commitment shall be in -------- an amount that is an integral multiple of $500,000 and not less than $500,000 and (ii) the Borrower shall not terminate or reduce the Commitment if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.08, the aggregate amount of Loans outstanding exceeds the Commitment. (c) The Borrower shall notify the Bank of any election to terminate or reduce the Commitment under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitment delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Bank on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitment shall be permanent. SECTION 2.07. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby ------------------------------------ unconditionally promises to pay to the Bank the then unpaid principal amount of each Loan on the Maturity Date. (b) The Bank shall maintain in accordance with its usual practice an account or accounts evidencing (i) the indebtedness of the Borrower to the Bank resulting from each Loan made by the Bank, including the amounts of principal and interest payable and paid to the Bank from time to time hereunder, (ii) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, and (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to the Bank hereunder. (c) The entries made in the accounts maintained pursuant to paragraph (b) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of the Bank to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (d) The Bank may request that Loans be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to the Bank a promissory note payable to the order of the Bank (or, if requested by the Bank, to the Bank and its registered assigns). Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 8.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.08. Prepayment of Loans. (a) The Borrower shall have the right at ------------------- any time and from time to time to prepay any Loan in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section. (b) The Borrower shall notify the Bank by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Loan, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, (ii) in the case of prepayment of an ABR Loan, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Loan or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitment as contemplated by Section 2.06, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.06. 12 Each partial prepayment of any Loan shall be in an amount that would be permitted in the case of an advance of a Loan of the same Type as provided in Section 2.02. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.10. SECTION 2.09. Fees. (a) The Borrower agrees to pay to the Bank a commitment ---- fee, which shall accrue at the Applicable Rate on the daily unused amount of the Commitment during the period from and including the date hereof to but excluding the date on which the Commitment terminates. Accrued commitment fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitment terminates, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) All fees payable hereunder shall be paid on the dates due, in immediately available funds. Fees paid shall not be refundable under any circumstances. SECTION 2.10. Interest. (a) The ABR Loans shall bear interest at the -------- Alternate Base Rate plus the Applicable Rate. (b) The Eurodollar Loans shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Loan plus the Applicable Rate. (c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section. (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and upon termination of the Commitment; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Bank, and such determination shall be conclusive absent manifest error. SECTION 2.11. Alternate Rate of Interest. If prior to the commencement of -------------------------- any Interest Period for a Eurodollar Loan: (a) the Bank determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or 13 (b) the Bank determines (which determination shall be conclusive absent manifest error) that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to the Bank of making or maintaining the Loan for such Interest Period; then the Bank shall give notice thereof to the Borrower by telephone or telecopy as promptly as practicable thereafter and, until the Bank notifies the Borrower that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Loan to, or continuation of any Loan as, a Eurodollar Loan shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Loan, such Loan shall be made as an ABR Loan; provided that if the circumstances giving rise to such notice affect only one Type of Loan, then the other Type of Loans shall be permitted. SECTION 2.12. Increased Costs. (a) If any Change in Law shall: ---------------- (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Bank (except any such reserve requirement reflected in the Adjusted LIBO Rate); or (ii) impose on the Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by the Bank; and the result of any of the foregoing shall be to increase the cost to the Bank of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by the Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to the Bank, as to Eurodollar Loans made by the Bank after notification of such Change in Law, such additional amount or amounts as will compensate the Bank for such additional costs incurred or reduction suffered. (b) If the Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on the Bank's capital or on the capital of the Bank's holding company, if any, as a consequence of this Agreement or the Loans made by the Bank to a level below that which the Bank or the Bank's holding company could have achieved but for such Change in Law (taking into consideration the Bank's policies and the policies of the Bank's holding company with respect to capital adequacy), then from time to time the Borrower will pay to the Bank, as to Eurodollar Loans made by the Bank after notification of such Change in Law, such additional amount or amounts as will compensate the Bank or the Bank's holding company for any such reduction suffered. (c) A certificate of the Bank setting forth the amount or amounts necessary to compensate the Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay the Bank the amount shown as due on any such certificate, as to Eurodollar Loans made by the Bank after notification of such Change in Law. (d) Failure or delay on the part of the Bank to demand compensation pursuant to this Section shall not constitute a waiver of the Bank's right to demand such compensation; provided that the Borrower shall not be required to compensate the Bank, as to Eurodollar Loans made by the Bank after notification of such Change in Law, pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that the Bank notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of the Bank's intention to claim compensation therefor; provided -------- further that, if the Change in Law giving rise to such increased costs or - ------- reductions is 14 retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof. SECTION 2.13. Break Funding Payments. In the event of (a) the payment of ---------------------- any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11(b) and is revoked in accordance therewith), then, in any such event, the Borrower shall compensate the Bank for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to the Bank shall be deemed to include an amount determined by the Bank to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate (in the case of a Eurodollar Loan) that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which the Bank would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of the Bank setting forth any amount or amounts that the Bank is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay the Bank the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.14. Taxes. (a) Any and all payments by or on account of any ----- obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the -------- Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Bank within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Bank on or with respect to any payment by or on account of any obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by the Bank on its own behalf or on behalf of the Bank shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Bank the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Bank. 15 ARTICLE III Representations and Warranties ------------------------------ The Borrower represents and warrants to the Bank that: SECTION 3.01. Organization; Powers. Each of the Borrower and its ------------ Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. SECTION 3.02. Authorization; Enforceability. The Transactions are within ----------------------------- the Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do ------------------------------------ not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 3.04. Financial Condition; No Material Adverse Change. (a) The ----------------------------------------------- Borrower has heretofore furnished to the Bank its consolidated balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the Fiscal Year ended December 31, 2002, reported on by PriceWaterhouseCoopers LLP, independent public accountants, and (ii) as of and for the Fiscal Quarter and the portion of the Fiscal Year ended March 31, 2003, certified by its chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. (b) Since December 31, 2002, there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole. SECTION 3.05. Properties. (a) Each of the Borrower and its Subsidiaries has ---------- good title to, or valid leasehold interests in, all its real and personal property material to its business, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. 16 (b) Each of the Borrower and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.06. Litigation and Environmental Matters. (a) There are no ------------------------------------ actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. (c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. SECTION 3.07. Compliance with Laws and Agreements. Each of the Borrower and ----------------------------------- its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. SECTION 3.08. Investment and Holding Company Status. Neither the Borrower ------------------------------------- nor any of its Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.09. Taxes. Each of the Borrower and its Subsidiaries has timely ----- filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected ----- to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $1,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as 17 of the date of the most recent financial statements reflecting such amounts, exceed by more than $1,000,000 the fair market value of the assets of all such underfunded Plans. SECTION 3.11. Disclosure. The Borrower has disclosed to the Bank all ---------- agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Bank in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. ARTICLE IV Conditions ---------- SECTION 4.01. Effective Date. The obligation of the Bank to make Loans -------------- hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 8.02): (a) The Bank (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Bank (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Bank shall have received a favorable written opinion (addressed to the Bank and dated the Effective Date) of Hancock & Estabrook, LLP, counsel for the Borrower, substantially in the form of Exhibit A, and covering such other matters relating to the Borrower, this Agreement or the Transactions as the Bank shall reasonably request. The Borrower hereby requests such counsel to deliver such opinion. (c) The Bank shall have received such documents and certificates as the Bank or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Bank and its counsel. (d) The Bank shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02. (e) The Bank shall have received all fees and other amounts due and payable on or prior to the Effective Date, including a Facility Fee of $27, 500 and, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder. The Bank shall notify the Borrower of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligation of the Bank to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) 18 at or prior to 3:00 p.m., New York City time, on November 15, 2003 (and, in the event such conditions are not so satisfied or waived, the Commitment shall terminate at such time). SECTION 4.02. Each Loan. The obligation of the Bank to make any Loan --------- (including the intial Loan) is subject to the satisfaction of the following conditions: (a) The representations and warranties of the Borrower set forth in this Agreement shall be true and correct on and as of the date of such Loan. (b) At the time of and immediately after giving effect to such Loan no Default shall have occurred and be continuing. The borrowing of each Loan shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V Affirmative Covenants --------------------- Until the Commitment has expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrower covenants and agrees with the Bank that: SECTION 5.01. Financial Statements and Other Information. The Borrower will ------------------------------------------ furnish to the Bank: (a) within 120 days after the end of each Fiscal Year of the Borrower, its audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all reported on by KPMG LLP or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; (b) within 60 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, its consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such Fiscal Quarter and the then elapsed portion of the Fiscal Year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous Fiscal Year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.09, 6.10 and 6.11 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such 19 change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) concurrently with any delivery of financial statements under clause (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the ordinary course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (e) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, as the case may be; and (f) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of this Agreement, as the Bank may reasonably request. SECTION 5.02. Notices of Material Events. The Borrower will furnish to the -------------------------- Bank prompt written notice of the following: (a) the occurrence of any Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $1,000,000; and (d) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03. Existence; Conduct of Business. The Borrower will, and will ------------------------------ cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; provided that the foregoing shall not prohibit any merger, -------- consolidation, liquidation or dissolution permitted under Section 6.03. SECTION 5.04. Payment of Obligations. The Borrower will, and will cause ---------------------- each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. 20 SECTION 5.05. Maintenance of Properties; Insurance. The Borrower will, and -------------------------- will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. SECTION 5.06. Books and Records; Inspection Rights. (a) The Borrower will, ----------------- and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Bank, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. (b) In the event that the Borrower's Leverage Ratio is at any time greater than 3.5 to 1.0 for two consecutive quarters (unless an Event of Default has occurred and is continuing, in which case such limitation shall not apply), the Borrower will permit the Bank (or any agents or representatives thereof) to conduct, and cooperate with the Bank in connection therewith, a field examination of the Accounts of the Borrower and its Subsidiaries, and all books and records and other information relating thereto, financial or otherwise, the fees and expenses of which shall be for the account of the Borrower, all at such reasonable times and as often as reasonably requested. SECTION 5.07. Compliance with Laws. The Borrower will, and will cause each -------------------- of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.08. Use of Proceeds. The proceeds of the Loans will be used only --------------- for working capital. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations G, U and X. ARTICLE VI Negative Covenants ------------------ Until the Commitment has expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full, the Borrower covenants and agrees with the Bank that: SECTION 6.01. Indebtedness. The Borrower will not, and will not permit any ------------ Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except: (a) Indebtedness created hereunder; (b) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and extensions, renewals and replacements of any such Indebtedness that do not increase the maximum amount of borrowing permitted thereunder by such lender as set forth on such Schedule; 21 (c) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary; (d) Guarantees by the Borrower of Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of the Borrower or any other Subsidiary; (e) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; provided that (i) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by this clause (e) shall not exceed $1,000,000 at any time outstanding; and (f) Indebtedness of the Borrower or any Subsidiary as an account party in respect of trade letters of credit. SECTION 6.02. Liens. The Borrower will not, and will not permit any ----- Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Permitted Encumbrances; (b) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.02; provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (c) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary , as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower or any Subsidiary and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; and (d) Liens on fixed or capital assets acquired, constructed or improved by the Borrower or any Subsidiary; provided that (i) such security interests secure Indebtedness permitted by clause (e) of Section 6.01, (ii) such security interests and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, (iii) the Indebtedness secured thereby does not exceed 100% of the cost of acquiring, constructing or improving such fixed or capital assets and (iv) such security interests shall not apply to any other property or assets of the Borrower or any Subsidiary. SECTION 6.03. Fundamental Changes. (a) The Borrower will not, and will not ------------------- permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of 22 transactions) all or substantially all or any substantial part of its assets, or all or substantially all of the stock of any of its Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Subsidiary or Person may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (ii) any Subsidiary or Person may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary, (iii) any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another Subsidiary and (iv) any Subsidiary may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders; provided that any such merger involving a Person that is not a wholly -------- owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.04. (b) The Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto. SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. --------------------------------------------------------- The Borrower will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any capital stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (a) Permitted Investments; (b) investments by the Borrower existing on the date hereof in the capital stock of its Subsidiaries; (c) loans or advances made by the Borrower to any Subsidiary and made by any Subsidiary to the Borrower or any other Subsidiary; and (d) Guarantees constituting Indebtedness permitted by Section 6.01. SECTION 6.05. Hedging Agreements. The Borrower will not, and will not ------------------ permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities. SECTION 6.06. Restricted Payments. The Borrower will not, and will not ------------------- permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except (a) the Borrower may declare and pay dividends with respect to its capital stock payable solely in additional shares of its common stock, (b) Subsidiaries may declare and pay dividends ratably with respect to their capital stock and (c) the Borrower may make Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees of the Borrower and its Subsidiaries. SECTION 6.07. Transactions with Affiliates. The Borrower will not, and will ---------------------------- not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of 23 its Affiliates, except (a) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (b) transactions between or among the Borrower and its [wholly owned] Subsidiaries not involving any other Affiliate and (c) any Restricted Payment permitted by Section 6.06. SECTION 6.08. Restrictive Agreements. The Borrower will not, and will not ---------------------- permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; provided that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by this Agreement, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.08 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof. Section 6.09. Leverage Ratio. Borrower will not suffer or permit its -------------- Leverage Ratio, as measured at the end of each Fiscal Quarter, to be greater than 4.0 to 1.0. Section 6.10. Fixed Charge Coverage Ratio. Borrower will not suffer or --------------------------- permit its Fixed Charge Coverage Ratio, as measured at the end of each Fiscal Quarter, to be less than 4.0 to 1.0. Section 6.11 Minimum Tangible Net Worth. Borrower will not suffer or permit -------------------------- its Tangible Net Worth to be at any time less than (a) $49,000,000 plus (b) 50% of its Consolidated Net Income earned in each Fiscal Quarter commencing with the Net Income earned in the Fiscal Quarter ended September 30, 2003. ARTICLE VII Events of Default If any of the following events ("Events of Default") shall occur: ----------------- (a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three Business Days; (c) any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with this Agreement or any amendment or modification hereof or waiver 24 hereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification hereof or waiver hereunder, shall prove to have been incorrect when made or deemed made; (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.03 (with respect to the Borrower's existence) or 5.08 or in Article VI; (e) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Bank to the Borrower; (f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) the Borrower or any Subsidiary shall become unable, admit in writing or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $1,000,000 shall be rendered against the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment; 25 (l) an ERISA Event shall have occurred that, in the opinion of the Bank, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect in any year; or (m) a Change in Control shall occur; then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Bank may, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitment, and thereupon the Commitment shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitment shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. ARTICLE VIII Miscellaneous ------------- SECTION 8.01. Notices. Except in the case of notices and other ------- communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Borrower, to it at: PAR Technology Corporation 8383 Seneca Turnpike New Hartford, New York 13413-4991 Attention of Ronald J. Casciano, Vice President, CFO and Treasurer Telecopy No. (315) 738-0411 (b) if to Bank, to it at: JPMorgan Chase Bank Bridgewater Place 500 Plum Street, Floor 7 Syracuse, NY 13204 Attention of William J. McPhail, Vice President Telecopy No. (315) 424-1898 Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. 26 SECTION 8.02. Waivers; Amendments. (a) No failure or delay by the Bank in ------------------- exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Bank hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Bank may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Bank. SECTION 8.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall ---------------------------------- pay (i) all reasonable out-of-pocket expenses incurred by the Bank and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Bank and costs allocated by its internal legal department, in connection with the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Bank, including the fees, charges and disbursements of any counsel for the Bank, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans. (b) The Borrower shall indemnify the Bank, and each Related Party of the Bank (each such Person being called an "Indemnitee") against, and hold each ---------- Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or the proceeds therefrom, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to -------- any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof. (d) All amounts due under this Section shall be payable not later than 15 days after written demand therefor. 27 SECTION 8.04. Successors and Assigns. (a) The provisions of this ---------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Bank (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Bank) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) The Bank may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that, except in the -------- case of an assignment to an Affiliate of the Bank, the Borrower must give its prior written consent to such assignment (which consent shall not be unreasonably withheld); and provided further that any consent of the Borrower --------------------- otherwise required under this paragraph shall not be required if an Event of Default under clause (h) or (i) of Article VII has occurred and is continuing. Subject to notification of an assignment, the assignee shall be a party hereto and, to the extent of the interest assigned, have the rights and obligations of the Bank under this Agreement, and the Bank shall, to the extent of the interest assigned, be released from its obligations under this Agreement (and, in the case of an assignment covering all of the Bank's rights and obligations under this Agreement, the Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 8.03). Any assignment or transfer by the Bank of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by the Bank of a participation in such rights and obligations in accordance with paragraph (c) of this Section. (c) The Bank may, without the consent of the Borrower, sell participations to one or more banks or other entities (a "Participant") in all or a portion of ----------- the Bank's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) the -------- Bank's obligations under this Agreement shall remain unchanged, (ii) the Bank shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower shall continue to deal solely and directly with the Bank in connection with the Bank's rights and obligations under this Agreement. Any agreement or instrument pursuant to which the Bank sells such a participation shall provide that the Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or -------- instrument may provide that the Bank will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 8.02(b) that affects such Participant. Subject to paragraph (d) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.12, 2.13 and 2.14 to the same extent as if it were the Bank and had acquired its interest by assignment pursuant to paragraph (b) of this Section. (d) A Participant shall not be entitled to receive any greater payment under Section 2.12 or 2.14 than the Bank would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. (e) The Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of the Bank, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security -------- interest shall release the Bank from any of its obligations hereunder or substitute any such pledgee or assignee for the Bank as a party hereto. 28 SECTION 8.05. Survival. All covenants, agreements, representations and -------- warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Bank and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by the Bank or on its behalf and notwithstanding that the Bank may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitment has not expired or terminated. The provisions of Sections 2.12, 2.13, 2.14 and 8.03 and Article VII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitment or the termination of this Agreement or any provision hereof. SECTION 8.06. Counterparts; Integration; Effectiveness. This Agreement may ---------------------------------------- be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Bank constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Bank and when the Bank shall have received counterparts hereof which, when taken together, bear the signature of the Borrower, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 8.07. Severability. Any provision of this Agreement held to be ------------ invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 8.08. Right of Setoff. If an Event of Default shall have occurred --------------- and be continuing, the Bank and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by the Bank and such Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by the Bank, irrespective of whether or not the Bank shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of the Bank under this Section are in addition to other rights and remedies (including other rights of setoff) which the Bank may have. SECTION 8.09. Governing Law; Jurisdiction; Consent to Service of Process. ----------------------------------------------------------- (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and 29 determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Bank may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 8.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 8.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE -------------------- FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 8.11. Headings. Article and Section headings and the Table of -------- Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 8.12. Confidentiality. The Bank agrees to maintain the --------------- confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Bank on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, "Information" means all information received from the Borrower ----------- relating to the Borrower or its business, other than any such information that is available to the Bank on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower -------- after the date hereof, such information is clearly identified at the 30 time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. SECTION 8.13. Interest Rate Limitation. Notwithstanding anything herein to ------------------------ the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, ------------ received or reserved by the Bank in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to the Bank in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by the Bank. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. PAR TECHNOLOGY CORPORATION By _______________________ Name: Title: JPMORGAN CHASE BANK By ______________________ Name: Title: 31 Schedule 3.06 Disclosed Matters None. Schedule 6.01 Existing Indebtedness $12,500,000 Working Capital Line of Credit, pursuant to a Business Loan Agreement dated September 21, 2001 between the Borrower and NBT Bank, National Association, as modified and extended pursuant to a (Renewal) Promissory Note dated May 1, 2003, and further modified and extended pursuant to a Change In Terms Agreement dated July 18, 2003. Commercial Mortgage, dated ____________, executed and delivered by the Borrower to NBT Bank, National Association, in the original principal amount of $____________and having an approximate present principal balance of $2,114,000. Schedule 6.02 Existing Liens General Security Agreement dated May 1, 2001, executed by the Borrower and ParTech, Inc. in favor of NBT Bank, National Association, covering all personal property of the Borrower and ParTech, Inc., as further described in the General Security Agreement. A mortgage lien covering real property owned by the Borrower, pursuant to the Commercial Mortgage loan described in Schedule 6.01. Schedule 6.08 Existing Restrictions None. EXHIBIT A FORM OF CERTIFICATE OF [ASSISTANT] SECRETARY Reference is made to the Credit Agreement dated as of October 31, 2003 (the "Credit Agreement"), among PAR Technology Corporation and JPMorgan Chase Bank. Terms defined in the Credit Agreement are used herein with the same meanings. This certificate is being delivered pursuant to Section 4.01 of the Credit Agreement. I, [ ], [Assistant] Secretary of the Borrower, DO HEREBY CERTIFY that: (a) there have been no amendments or supplements to, or restatements of, the [charter] of the Borrower since [ ]; (b) no proceedings have been instituted or are pending or contemplated with respect to the dissolution, liquidation or sale of all or substantially all the assets of the Borrower or threatening its existence or the forfeiture of any of its corporate rights; (c) annexed hereto as Exhibit A is a true and correct copy of the By-laws of the Borrower as in effect on [Date] 1/ and at all times thereafter through the date hereof; (d) annexed hereto as Exhibit B is a true and correct copy of certain resolutions duly adopted by the Board of Directors of the Borrower at [a meeting/meetings] of said Board of Directors duly called and held on [Date(s)], which resolutions are the only resolutions adopted by the shareholders or Board of Directors of the Borrower or any committee thereof relating to the Credit Agreement or the Transactions and have not been revoked, amended, supplemented or modified and are in full force and effect on the date hereof; and 3 (e) each of the persons named below is and has been at all times since [Date] a duly elected and qualified officer of the Borrower holding the respective office set forth opposite his or her name and the signature set forth opposite the name of each such person is his or her genuine signature: Name Title Specimen Signature ---- ----- ------------------ [Include all officers who are signing the Credit Agreement or any closing documents.] IN WITNESS WHEREOF, I have hereunto signed my name this [ ] day of [ ]. 2/ ---------------------------- [Assistant] Secretary I, [ ], [ ] of the Borrower, do hereby certify that [ ] has been duly elected, is duly qualified and is the [Assistant] Secretary of the Borrower, that the signature set forth above is [his/her] genuine signature and that [he/she] has held such office at all times since [ ]. IN WITNESS WHEREOF, I have hereunto signed my name this [ ] day of [ ]. 3/ - _____________________________________ 1/ Title: ___________________ 2/ To be the Effective Date. - - 3/This certification should be included as part of the secretary's certificate - - and signed by one of the officers whose incumbancy is certified pursuant to clauuse (e) above. EXHIBIT B FORM OF EURODOLLAR LOAN BORROWING REQUEST JPMorgan Chase Bank Bridgewater Place 500 Plum Street, Floor 7 Syracuse, NY 13204 Attention: William J. McPhail, Vice President [Date] Greetings: Reference is made to the Credit Agreement dated as of October 31, 2003 (the "Credit Agreement"), among PAR Technology Corporation and JPMorgan Chase Bank. Terms defined in the Credit Agreement are used herein with the same meanings. This notice constitutes a Borrowing Request and the Borrower hereby requests a Loan under the Credit Agreement, and in that connection the Borrower specifies the following information with respect to the Loan requested hereby: (A) Principal amount of requested Loan:____________________ (B) Date of such Loan (which is a Business Day):___________________ (C) Whether such Loan is to be an ABR Loan or a Eurodollar Loan: _____________________ (D) In the case of a Eurodollar Loan, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period": ___________________ (E) Location and number of Borrower's account at Bank to which proceeds of Loan are to be disbursed:______________________ The Borrower hereby represents and warrants that the conditions specified in paragraphs (a) and (b) of Section 4.02 of the Credit Agreement are satisfied. Very truly yours, PAR Technology Corporation By: -------------------------------------- Name: Title: EXHIBIT C FORM OF INTEREST ELECTION REQUEST JPMorgan Chase Bank Bridgewater Place 500 Plum Street, Floor 7 Syracuse, NY 13204 Attention: William J. McPhail, Vice President [Date] Greetings: Reference is made to the Credit Agreement dated as of October 31, 2003 (the "Credit Agreement"), among PAR Technology Corporation and JPMorgan Chase Bank. Terms defined in the Credit Agreement are used herein with the same meanings. This notice constitutes an Interest Election Request and the Borrower hereby requests the conversion or continuation of a Loan under the Credit Agreement, and in that connection the Borrower specifies the following information with respect to the Loan to be converted or continued as requested hereby: (A) Loan to which this request applies: _______________________ (B) principal amount of Loan to be converted/continued:_______________ (C) Effective date of election (which is a Business Day):___________________ (D) Whether such Loan is to be an ABR Loan or a Eurodollar Loan: _____________________ (E) In the case of a Eurodollar Loan, the Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period": ------------------- Very truly yours, PAR Technology Corporation By: ------------------------ Name: Title: EXHIBIT D FORM OF FINANCIAL OFFICER'S CERTIFICATE Reference is made to the Credit Agreement dated as of October 31, 2003 (the "Credit Agreement"), between PAR Technology Corporation and JPMorgan Chase Bank. Terms defined in the Credit Agreement are used herein with the same meanings. This certificate is being delivered pursuant to Section 5.01(c) of the Credit Agreement. I, [ ], [ ] of the Borrower, DO HEREBY CERTIFY that: (a) the representations and warranties of the Borrower set forth in the Credit Agreement are true and correct on and as of the date hereof; (b) no Default has occurred and is continuing at the date hereof; (c) Fixed Charge Coverage Ratio. Borrower's Fixed Charge Coverage Ratio, as --------------------------- measured in respect of the period for which the computation is being made, and which period shall in each case consist of a twelve month period ending on the last day of a Fiscal Quarter, is calculated as follows: (i) Earnings Before Interest, Taxes, Depreciation and Amortization equals: ___________ (ii) the current maturities of long term Indebtedness equals: ______________________ plus: interest expense equals: __________________ Total of (ii) equals: ___________________ Ratio of (i) to (ii): ___________ Required Ratio: _____________ (d) Leverage Ratio. Borrower's Leverage Ratio, as measured in respect of -------------- the period for which the computation is being made, and which period shall in each case consist of a twelve month period ending on the last day of a Fiscal Quarter, is calculated as follows: (i) Indebtedness equals: _________ (ii) Earnings Before Interest, Taxes, Depreciation and Amortization equals: ___________ Ratio of (i) to (ii): ___________ Required Ratio: _____________ (e) Minimum Tangible Net Worth. Borrower's Minimum Tangible Net Worth, as measured in respect of the period for which the computation is being made, and which period shall in each case be the period ending on the last day of a Fiscal Quarter, is calculated as follows: (i) $49,000,000 plus (ii) 50% of its Consolidated Net Income earned in each Fiscal Quarter, commencing with the Net Income earned in the Fiscal Quarter ended September 30, 2003 equals: ___________ and (iii) 100% of the aggregate net cash proceeds from any issuance of capital stock or other ownership interests received by the Borrower or any of its Subsidiaries equals: ______________ Total of (i), (ii) and (iii) equals: $ _________ IN WITNESS WHEREOF, I have hereunto signed my name this [ ] day of [ ]. 4/ - - ------------------------------------------ Name: Title: -------------------------- 4/To be dated the Effective Date. - - EXHIBIT E OPINION OF COUNSEL FOR THE BORROWER [Effective Date] JPMorgan Chase Bank 270 Park Avenue New York, New York 10017 Dear Sirs: [I/We] have acted as counsel for PAR Technology Corporation, a Delaware corporation (the "Borrower"), in connection with the Credit Agreement dated as of October 31, 2003 (the "Credit Agreement"), between the Borrower and JPMorgan Chase Bank. Terms defined in the Credit Agreement are used herein with the same meanings. [I, or individuals under my direction,/We] have examined originals or copies, certified or otherwise identified to [my/our] satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as [I/we] have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, [I am/we are] of the opinion that: 1. The Borrower (a) is a corporation duly organized, validly existing and in good standing under the laws of Delaware and New York, (b) has all requisite power and authority to carry on its business as now conducted and (c) except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. 2. The Transactions are within the Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. The Credit Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. 3. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. 4. There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to [my/our] knowledge, threatened against or affecting the Borrower or any of its Subsidiaries (a) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect (other than the Disclosed Matters) or (b) that involve the Credit Agreement or the Transactions. 5. Neither the Borrower nor any of its Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. [I am a member/we are members] of the bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the General Corporation Law of the State of Delaware and the Federal laws of the United States of America. [[I/We] note that the Credit Agreement is governed by the laws of the State of New York. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person (other than your successors and assigns as Lenders and Persons that acquire participations in your Loans) without our prior written consent. Very truly yours, Hancock & Estabrook, LLP -----END PRIVACY-ENHANCED MESSAGE-----