PAR

PAR Technology Corp. 10-Q Summary: Quarter Ended September 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly and nine-month periods ended September 30, 2002, for PAR Technology Corporation, a Delaware corporation. The company operates two primary reportable segments: Restaurant (integrated hardware/software solutions) and Government (IT outsourcing and defense technology). During the third quarter of 2002, the company discontinued its unprofitable Industrial Software segment (Ausable Solutions, Inc.) to focus on its core businesses.

Key Financial Metrics

Note: Nine-month cash flow figures are provided in the statement of cash flows; quarterly cash flow is not explicitly broken out in the summary tables.

Material Changes vs. Prior Period

• Revenue Growth: Revenues from continuing operations increased 21% in Q3 2002 and 23% for the nine-month period compared to 2001. Product revenues grew 29% (Q3) and 31% (9M), driven by sales to McDonald's, YUM! Brands, and new accounts like Carnival Cruise Lines.
• Profitability: Income from continuing operations rose 56% in Q3 and 83% for the nine months. However, Net Income was significantly impacted by a $831,000 after-tax loss from discontinued operations in Q3.
• Margin Expansion: Product margins improved to 34% in Q3 (from 31% in 2001) due to favorable mix and the discontinuation of a 2001 promotion. Contract margins improved to 9% (from 6%) due to profitability on fixed-price contracts nearing completion.
• Expense Increases: Selling, general, and administrative (SG&A) expenses increased 46% in Q3, primarily due to the reinstatement of executive salaries following a 2001 reduction program and increased marketing spend.
• Discontinued Operations: The company recorded a pre-tax loss of $1.329 million in Q3 related to the closure of the Industrial segment.

Guidance, Outlook, and Risks

Management Commentary: Management expects to maintain margins at acceptable levels to minimize inflation effects. The company believes it has adequate financial resources to meet future liquidity needs, citing strong operating cash flow and a $20 million aggregate line of credit (with $12.8 million outstanding as of Sept 30, 2002).

Risks and Contingencies:

• Customer Concentration: High reliance on key customers. McDonald's (31% of 9M revenue) and YUM! Brands (22%) dominate the Restaurant segment. The Department of Defense accounts for 27% of Government segment revenue.
• Debt Structure: The company has significant short-term debt ($12.8 million) with lines of credit expiring on April 30, 2003. Management notes that increases in short-term interest rates could adversely affect results.
• Inventory Reserves: The company maintains significant reserves for obsolete inventory ($4.4 million as of Sept 30, 2002), requiring judgment regarding product demand and technology changes.
• Government Contract Risks: Contract costs are subject to audit and adjustment by government representatives, which could impact final revenue realization.

Investor Verification Checklist

• Verify the sustainability of revenue growth from key customers (McDonald's, YUM! Brands) given the high concentration risk.
• Confirm the status of the $20 million line of credit renewal prior to the April 30, 2003 expiration date.
• Assess the adequacy of the $4.4 million inventory reserve given the company's exposure to technology changes.
• Monitor the impact of the discontinued Industrial segment on future operating expenses and cash flow.
• Review the timing of government contract settlements to ensure unbilled receivables are realizable.