PAR

PAR Technology Corp. 10-Q Summary: Quarter Ended September 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2004, and the nine-month period ended on that date. PAR Technology Corporation operates two primary segments: Hospitality (providing management technology solutions to the restaurant and retail industries) and Government (providing IT services and advanced technology systems to U.S. government agencies). The company recently completed the acquisition of Springer-Miller Systems, Inc. on October 1, 2004, to expand its hospitality software portfolio.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 18% in Q3 and 25% for the nine months ended September 30, 2004, compared to the prior year.
• Segment Performance:
  • Hospitality: Product revenue surged 19% in Q3 (32% for 9M), driven by a 62% increase in sales to McDonald's and growth from CKE Restaurants. Service revenue grew 15% in Q3.
  • Government: Contract revenue increased 21% in Q3, fueled by a 21% rise in IT outsourcing revenue for Department of Defense facilities and a 28% increase in imagery research contracts.
• Profitability: Net income more than doubled in Q3 (112% increase) and nearly tripled for the nine-month period (177% increase). Operating income rose 89% in Q3.
• Liquidity: Cash provided by operating activities improved dramatically to $12.8 million for the nine months ended September 30, 2004, compared to $0.98 million in the prior year, aided by a reduction in accounts receivable and strong operating profits.
• Debt Reduction: The company reduced short-term borrowings under lines of credit by approximately $7 million during the nine-month period. Total debt outstanding at period end was minimal ($2.1 million).

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued health in the Hospitality segment and additional IT outsourcing opportunities in the Government segment. Capital requirements for the remainder of fiscal 2004 are projected to be under $2 million.
• Acquisition: The company acquired Springer-Miller Systems on October 1, 2004, for approximately $19.3 million (including cash acquired), financed by a combination of cash and stock. This acquisition was supported by an increase in bank lines of credit from $20 million to $30 million.
• Risks and Contingencies:
  • Customer Concentration: The top two Hospitality customers (McDonald's and Yum! Brands) accounted for 51% of total revenues for the nine months ended September 30, 2004. A decline in purchases by these customers would materially affect the business.
  • Government Contract Risks: Government contracts are subject to termination at the convenience of the U.S. government and funding changes. Approximately 30% of revenue is derived from government contracts.
  • Margin Pressure: Service margins declined in Q3 (13.5% vs 17.1% in 2003) due to increased use of third-party contractors for a major integration project. Product margins for the nine months declined slightly (32.8% vs 34.5%) due to lower-margin peripheral hardware sales.

Investor Verification Checklist

• Customer Concentration: Verify the stability of relationships with McDonald's and Yum! Brands, which represent over half of total revenue.
• Acquisition Integration: Monitor the financial impact and integration progress of the Springer-Miller Systems acquisition completed in October 2004.
• Government Funding: Track the status of Department of Defense contracts, specifically the Logistics Management Program which saw reduced funding in 2003 but received new funding in Q3 2004.
• Margin Trends: Watch for continued pressure on service margins due to third-party labor costs and product margins due to hardware mix changes.
• Liquidity Position: Confirm the utilization of the expanded $30 million credit facility and the company's ability to meet working capital requirements without additional financing.