PAR TECHNOLOGY CORP - Annual Report: 2015 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

 

FORM 10-K

☒          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2015.

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)

 (315) 738-0600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No S

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes £ No S

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 S No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes S No £

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes £ No S

As of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of voting and non-voting common stock held by non-affiliates of the registrant was approximately $47,035,841 based upon the closing price of the Company’s common stock.

The number of shares outstanding of registrant’s common stock, as of February 29, 2016 ─ 15,644,729 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement in connection with its 2016 annual meeting of stockholders are incorporated by reference into Part III.

 

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PAR TECHNOLOGY CORPORATION

TABLE OF CONTENTS

FORM 10-K

 

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.  Any statements in this document that do not describe historical facts are forward-looking statements.  Forward-looking statements in this document (including forward-looking statements regarding the continued health of segments of the hospitality industry, future information technology outsourcing opportunities, an expected increase or decrease in contract funding by the U.S. Government, the impact of current world events on our results of operations, the effects of inflation on our margins, and the effects of interest rate and foreign currency fluctuations on our results of operations) are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  When we use words such as “intend,” “anticipate,” “believe,” “estimate,” “plan,” “will,” or “expect”, we are making forward-looking statements.  We believe the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to us on the date hereof, but we cannot assure you these assumptions and expectations will prove to have been correct or we will take any action we presently may be planning.  We have disclosed certain important factors that could cause our actual future results to differ materially from our current expectation, including: a decline in the volume of purchases made by one or a group of our major customers; risks in technology development and commercialization; risks of downturns in economic conditions generally, and in the quick-service sector of the hospitality market specifically; risks associated with government contracts; risks associated with competition and competitive pricing pressures; and risks related to foreign operations.  Forward-looking statements made in connection with this report are necessarily qualified by these factors.  We are not undertaking to update or revise publicly any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise.

 

PAR TECHNOLOGY CORPORATION

PART I

Item 1:

Business

PAR Technology Corporation (“PAR” or the “Company”) has operations in two distinct business segments: Hospitality and Government.

PAR’s Hospitality business segment, representing approximately 62% of consolidated revenue from continuing operations, provides technology solutions, including software, hardware and a full range of support services, to businesses and organizations within the global hospitality industry that includes restaurants, grocery stores and specialty retail outlets.  The Company continues to be a leading provider of hospitality management technology solutions to restaurants (the quick service, fast casual and table service categories) with over 75,000 systems installed in over 110 countries.  In addition, the Company is expanding its business into retail, big box retailers, grocery stores, food distribution, and contract food management organizations with PAR’s food safety and task management solution, SureCheck®. These technology solutions are marketed collectively through the Company’s hospitality segment.

PAR’s government segment, representing approximately 38% of consolidated revenue from continuing operations, provides contract services for the U.S. Department of Defense (“DoD”) and federal agencies, specifically in Mission Systems and Intel Solutions.  This segment is dedicated to providing Intelligence, Surveillance and Reconnaissance (“ISR”) technology and services specializing in the development of advanced signal and image processing and management systems with a focus on geospatial intelligence, geographic information systems, and command and control applications. Additionally, this business provides mission critical telecommunications, satellite command and control, and information technology operations and maintenance services worldwide to the U.S. DoD.

During the third quarter of fiscal year 2015, the Company performed a strategic analysis of its current product and business unit offerings and as a result, entered into an asset purchase agreement to sell substantially all of the assets of its hotel/spa technology business within the hospitality segment operated under PAR Springer-Miller Systems, Inc. (“PSMS”) to affiliates of Constellation Software Inc.  This transaction closed on November 4, 2015.  Accordingly, the results of operations of PSMS for fiscal 2015 have been recorded as discontinued operations in accordance with Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements – Discontinued Operations.  All prior period amounts have been reclassified to conform to the current period presentation.  Refer to Note 3 “Discontinued Operations” in the Notes to the Consolidated Financial Statements for further discussion, including the terms of the transaction.

 

Information concerning the Company’s industry segments for the two years ended December 31, 2015 is set forth in Note 12 “Segments and Related Information” in the Notes to the Consolidated Financial Statements.

PAR’s corporate headquarters are located at PAR Technology Park, 8383 Seneca Turnpike, New Hartford, NY 13413-4991, and our telephone number is (315) 738-0600.  We maintain facilities for our Hospitality segment in our New Hartford headquarters, as well as Boca Raton, FL, Boulder, CO, San Diego, CA, Shanghai, People’s Republic of China, Staines, United Kingdom, Paris France, Sydney, Australia, Dubai and Markham, Ontario. We maintain Hospitality sales offices worldwide.  The Company’s Government segment is headquartered in Rome, NY.  Our Government segment has employees worldwide in fulfillment of our contract-based support services.

  The Company’s common stock is traded on the New York Stock Exchange under the symbol “PAR”.  Through PAR’s website (our website address is http://www.partech.com), our Annual Report on Form 10-K, quarterly reports on Form 10-Q, proxy statement, and current reports on Form 8-K and amendments thereto are available to interested parties, free of charge.  Information contained on our website is not part of this Annual Report on Form 10-K.

Unless the context otherwise requires, the term  "PAR" or "Company" as used herein, means PAR Technology Corporation and its wholly-owned subsidiaries.

 

Hospitality Segment

PAR’s solutions for the restaurant industry integrate software applications, hardware platforms, software delivery, installation and lifecycle support services.  PAR’s software offerings for the Restaurant market include front-of-store POS software applications, operations management software applications (known as back office software), and enterprise software applications for content management and business intelligence. PAR’s hardware offerings for the Restaurant market include Point-of-Sale (“POS”) terminals, tablets, kitchen systems utilizing printers and/or video monitors, and a wide range of food safety monitoring and task management hardware and software solutions.

As a leading provider of in-store technology to Restaurants, PAR has developed and nurtured, long-term committed relationships with the industry’s three largest organizations, McDonald’s Corporation, Yum! Brands, Inc., and the SUBWAY^® franchisees of Doctor’s Associates Inc.  McDonald’s^® has 36,525 restaurants in more than 100 countries, and PAR has been an approved provider of restaurant technology systems and support services to their organization since 1980.  Yum! Brands^®, which includes Taco Bell^®, KFC^®, and Pizza Hut^®, has been a PAR customer since 1983.  Yum! Brands has over 41,000 restaurants in more than 125 countries, and PAR continues to be a major supplier of in-store technology systems to concepts within the Yum! Brands portfolio.  The Company continues to expand their installed base of hardware technology and services with SUBWAY, which has more than 43,000 restaurants in over 110 countries.  Other significant hospitality chains for which PAR is the POS vendor of choice include the Baskin-Robbins® unit of Dunkin' Brands Group, Inc.,  the Hardee’s^®  and Carl’s Jr. ^® units of CKE Restaurants, Inc., Five Guys, Jack-in-the-Box and franchisees of these organizations.

In addition PAR has developed an intelligent checklist solution for food safety temperature measurement and task management automation marketed under the name SureCheck®. During the year, the Company continued to add new accounts utilizing its SureCheck solution, in addition to its existing customers, Wegmans Food Markets, Inc., with its 88 store locations, and Wal-Mart Stores Inc.,  (including Sam’s Clubs), and its 5,224 domestic stores.  These customers have selected the PAR SureCheck solution to provide their food safety and task management requirements.

 

The Company markets its software, hardware and services as an integrated solution or unbundled, on an individual basis.  PAR’s Brink POS® (“Brink”) software is a modern, cloud-based, feature-rich POS platform that seamlessly scales for single and multi-unit operators with traditional and mobile platforms.  PAR hardware offerings, particularly its POS terminals, are highly regarded by the hospitality industry for their broad functionality, reliability, durability, and highest quality.  The Company often sells hardware in combination with services, thereby delivering maximum system performance on a cost-effective basis.  PAR emphasizes the operational and economic value of a bundled, integrated solution, combining software, hardware and services that provide customers a comprehensive solution that enhances efficiencies in restaurant operations, while also providing operational and marketing insights.

Software: Restaurant Market

PAR restaurant software offerings are designed for multi-unit and individual restaurant operators, franchise and the enterprise alike in the three dominant restaurant categories: fast casual restaurants (“FC”), quick serve restaurants (“QSR”) and table service restaurants (“TSR”).  Each of these restaurant categories has distinct operating characteristics and service delivery requirements that are managed by PAR’s Brink and PixelPoint software offerings. PAR’s software is designed to allow customers to configure their technology systems that meets their order entry, food preparation, inventory, and workforce management needs, while capturing real-time transaction data at each location and delivering valuable insight throughout the enterprise.

Brink software is a leading cloud based point of sale (“POS”) software for restaurants, especially the rapidly growing fast casual segment.  As a cloud-native POS platform and a more efficient model than on premised POS software, the need for a back-office server in the restaurant is eliminated. Additionally, the cloud native model simplifies software version control and organizational updates, unlike legacy POS systems. Brink POS software is integrated with features that include but are not limited to loyalty at its core, mobile online ordering, kitchen video system, guest surveys, enterprise reporting, mobile dashboard.

PAR’s PixelPoint® software solution is primarily sold to independent table service and quick serve restaurants through our channel partners.  This integrated software solution includes a point of sale software application, a self-service ordering function, an enterprise back-office management function, and an enterprise level loyalty and gift card information sharing application.

 

PixelPoint Head Office Cloud is a web-based enterprise reporting solution that consolidates restaurant data, and is offered as Software-as-a-Service (“SaaS”).  Designed for corporate, field, and site managers, this decision-making tool provides visibility into every restaurant location via a dashboard displaying customer-defined financials, sales analysis, marketing, inventory, and workforce variables.  PAR also offers applications for forecasting, labor scheduling, and inventory management.

Software: Retail Market

The SureCheck software solution provides food safety temperature monitoring and employee task management functionality through the combination of a cloud-based enterprise server application, a PDA-based mobile application and a patented integrated temperature measuring device.  This solution is effective for managing Hazard Analysis & Critical Control Points (“HACCP”) inspection programs for retail and food service organizations, and automates the monitoring of quality risk factors while dramatically lowering the potential for human error.  The SureCheck platform was also designed to help hospitality and retail operators efficiently complete and monitor the compliance of employee tasks while providing insight on abnormal checklist conditions, providing configurable, automated alerts when tasks are behind schedule or out of compliance.  The data captured through this solution is used to manage policy compliance and oversight, loss prevention, safety, merchandising, and other audits unique to the customer.

Hardware

The PAR EverServ^® family of hardware platforms are designed to operate in harsh hospitality environments, be durable and highly functioning, scalable and easily integrated - offering customers competitive performance at a cost-conscious price.  The Company’s hardware platforms, compatible with popular operating systems, support a distributed processing environment and are suitable for a broad range of use and functions within the markets served.  PAR’s open architecture POS platforms are optimized to host the Company’s POS software applications, as well as many third-party POS applications, and are compatible with many peripheral devices.  PAR partners with numerous vendors of complementary in-store peripherals, from cash drawers, card readers and printers to kitchen video systems, allowing the Company to provide a complete solution integrated and delivered by one vendor.

 

PAR currently offers a range of POS hardware platforms, designed to meet and exceed the needs of its customers, regardless of the restaurant concept, the size of the organization or the complexity of its requirements.  PAR’s hardware terminal offerings are primarily comprised of three POS product lines: EverServ 500, EverServ 7000 Series and EverServ 8000 Series.

PAR’s hardware offering, the EverServ 500 platform, is built with the same rugged durability PAR is known for and is a value platform for operators that require fewer features/functions. Its small ergonomic footprint is ideal for installations where space is at a premium. The EverServ 500’s solid state design is quiet, offers low power consumption and minimizes maintenance.

The patented EverServ 7000 series is, designed to offer PAR’s combination of performance, style, ease of service, remote management, flexibility and modularity.  The EverServ 7000 series hardware is built to perform in harsh operating environments, enduring extremely high customer traffic and transaction activities and the difficult restaurant/retail environments that includes grease and liquid spills. The high performance architecture of the 7000 series supports demanding applications and delivers the speed needed to improve customer throughput.

 

As a result of market changes and demand of mobile technologies within restaurants and additional hospitality environments, PAR introduced its series of EverServ tablets designed to withstand the harsh hospitality environment and deliver best performance, durability and highest level of up time. The PAR Tablet 8 and PAR Tablet 10 are the latest in series of mobile devices built for the needs of its Hospitality customers, with a rugged design, extended battery life and a lengthy life cycle, providing the best ROI to customers.  PAR’s mobility family of hardware platforms include options such as differing docking and charging stations, the ability to use magnetic cards and payment systems, hand and shoulder straps and holsters to support the variety of product applications.

 

Lastly, with PAR’s growing presence within the Retail market, PAR developed the SureCheck Advantage, an IoT (Internet of Things) mobile solution designed for food quality and task management. SureCheck software and hardware addresses a costly and cumbersome business challenge for large food retailers. Namely; the recording of employee proper preparation and handling of foods so as to reduce the threat of foodborne illness.   SureCheck enables “HACCP” compliance which is the FDA mandated regulatory process while improving operational efficiencies through the digitization outdated traditionally pen and paper processes.  With the SureCheck, users can perform checklists and easily access unlimited compliance data and reports. The platform provides increased operational efficiencies with its patented integrated temperature probe, bar code scanner and RFID infrared temperature readers.

Maintenance and Service

PAR offers a wide range of maintenance and support services as part of its total solution for the hospitality markets we serve.  In North America, the Company provides comprehensive maintenance and installation services for its software, hardware and systems, as well as those of third parties, utilizing PAR-staffed, round-the-clock, central telephone customer support and diagnostic service center in Boulder, CO.  The Company also has direct service capabilities in Australia and South East Asia and China.

In the U.S., PAR maintains a field service network, consisting of over 100 locations, offering on-site service and repair, as well as depot repair and overnight unit replacements.

PAR’s service organization utilizes a suite of software applications that allows PAR to offer value to its customers through the utilization of its extensive and growing knowledge base to diagnose and resolve customer-service issues.  This also enables PAR to compile the kind of in-depth information it needs to identify trends and opportunities.  If an issue arises with our products, PAR’s customer service management software allows a service technician to diagnose the problem remotely, thereby reducing in many cases the requirement for an on-site service call.  PAR’s service organization is further enabled by a customer relationship management system that allows our call center personnel to maintain a profile on each customer’s background, hardware and software details, client service history, and a problem-resolution database.

 

PAR offers customer support services to its Hospitality customers.  The Company believes its ability to offer comprehensive software delivery services (project management, professional services, sraining), direct installation, maintenance, and support services are one of its key differentiators within the Restaurant industry.  PAR works closely with its customers to identify and address the latest hospitality technology requirements by creating interfaces to the latest innovations in operational equipment, including Europay, MasterCard andVisa, digital, and additional solutions located inside and outside of the customer’s premises.  PAR provides systems integration expertise to interface specialized components, including but not limited to video monitors, wireless networks and video surveillance, to meet requirements of its global customers.

 

Installation and Training

 

PAR offers global software configuration, installation, training, and integration services as a normal part of the software or equipment purchase agreement.  PAR also offers complete application training for a location’s staff as well as technical instruction for customers’ information systems personnel.

 

 

Within the Hospitality Segment, PAR has dedicated sales teams engaging directly with our tier 1 (representing 2,000 sites and above), tier 2 (101-1,999 sites) and tier 3 (2 – 100 sites) customers.  The Company also has dedicated channel partner executives who solely support our Brink and Pixel partners to effectively position and sell PAR’s software and hardware solutions to a wide range of customers.

Our strategic account sales organization concentrates on large chain, corporate customers and their franchisees globally.  In addition, sales efforts are directed toward franchisees of large chains for which the Company is not necessarily the enterprise POS vendor. The Company’s Brink sales team includes a SMB sales team that focuses on Brink sales to multi-unit operators with 25-350 locations as well as major account sales executives to capture the Tier 1 and Tier 2 Brink target market. The Company’s international direct sales force markets to major global tier 1customers as well as regional international chains in restaurant and retail.  With the support from our global partner team, PAR’s channel partners sell and support PAR PixelPoint in the U.S. and around the globe.

The Company’s indirect sales channel sales representatives enlist and support many well-regarded value-added resellers / partners serving the multi-unit operators, independent restaurant sector and non-foodservice markets such as retail, convenience, amusement parks, movie theaters, cruise lines, spas and other ticketing and entertainment venues.

 

The markets in which the Company operates are highly competitive.  Important competitive variables in the hospitality market include functionality, reliability, quality, pricing, service and support.  In the restaurant market, PAR believes its competitive advantages include the focus on an integrated technology solution offering including cloud-based software, ruggedized purpose-built hardware, advanced development capabilities, extensive domain knowledge and expertise, excellent product reliability, a direct sales force organization, world class support and quick service response.  Most of our significant customers have approved several suppliers offering some form of sophisticated hospitality technology system similar to that of the Company.  PAR’s competition is comprised of traditional and emerging companies including: Oracle Corporation, NCR Corporation and Panasonic Corporation.

Due to the nature of the hospitality business, backlog is not significant at any point in time.  The Hospitality segment orders are generally of a short-term nature and are usually booked and shipped in less than 12 months.

The highly technical nature of the Company’s hospitality products requires a significant and continuous research and development effort.  Ongoing product research and quality development efforts are an integral part of all activities within the Company.  Functional and technical enhancements are actively being made to our products to increase customer satisfaction and maintain the high caliber of PAR’s software.  Research and development expenses from continuing operations were approximately $10.2 million in 2015 and $8.9 million in 2014.  The Company capitalizes certain software costs in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 985.  See Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included in Part IV, Item 15 for further discussion.

The Company’s technical staff continuously evaluate new technologies and adopt those that allow PAR to provide significant improvements in customers’ day-to-day systems.  From hand-held wireless devices to advances in internet performance, the Company’s professional services unit is available for consultation on a wide variety of topics including network infrastructures, system functionality, operating system platforms, and hardware expandability.  In addition, the Company has secured strategic partnerships with third-party organizations to offer a variety of credit, debit and gift card payment options.

 

The Company sources and/or assembles most of its products from standard electronic components, fabricated parts such as printed circuit boards, and mechanical components.  Many assemblies and components are manufactured by third parties to the Company’s specifications.  PAR depends on outside suppliers for the continued availability of its assemblies and components.  Although most items are generally available from a number of different suppliers, PAR purchases certain final assemblies and components from single sources.  Items purchased from single sources include certain POS devices, peripherals, custom molded and tooled components, electronic assemblies and components.  If such a supplier should cease to supply an item, PAR believes new sources could be found to provide the components.  However, added cost and manufacturing delays could result and adversely affect the Company’s performance.  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.

The Company owns or has rights to certain patents, copyrights and trademarks.  PAR relies upon non-disclosure agreements, license agreements and applicable domestic and foreign patent, copyright and trademark laws for protection of our intellectual property.  To the extent such protective measures are unsuccessful, or the Company needs to enter into protracted litigation to enforce such rights, the Company’s business could be adversely impacted.  Similarly, there is no assurance that the Company’s products will not become the subject of a third-party claim of infringement or misappropriation.  To the extent such claims result in costly litigation or force the Company to enter into royalty or license agreements, rather than enter into a prolonged dispute, our performance could be adversely impacted.  The Company also licenses certain third-party patents and software with its products.  While PAR maintains strong relationships with its licensors, there is no assurance such relationships will continue or that the licenses will be continued under fees and terms acceptable to the Company.

 

Government Segment

PAR’s Government business provides a range of technical services for the DoD and federal agencies.  This segment is dedicated to serving ISR customers, through specialized development of advanced signal and image processing and management systems with a focus on geospatial intelligence, geographic information systems, and command and control applications. Additionally, this business provides mission critical telecommunications, satellite command and control, and information technology operations and maintenance services worldwide to the U.S. DoD.

The business is organized in two operating sectors that provide comprehensive service offerings across their customer base ISR Solutions and mission systems.

The ISR solutions sector provides systems engineering support and software-based solutions. Expertise ranges from theoretical and experimental studies to development and fielding of operational prototypes. PAR’s employees are: experienced developers and subject-matter experts in DoD Full Motion Video (“FMV”) formats include MPEG-2, H.264, and standard/high definition (“SD/HD”) support; developers of geospatial and imagery data management, visualization, and exploitation solutions; major contributor to radar systems from inception to operational capabilities; developers and integrators of light weight Electro-Optical (“EO”), Infrared (“IR”), multi and hyperspectral sensor and processing systems; light detection and ranging (“LiDAR”) processing systems; developers of certified systems employing multi and hyperspectral imaging to include target detection and cueing algorithms, IR search and track technology, and algorithms for camouflage detection and buried mines; and developers of geospatial information system (“GIS”)-based modeling solutions.  This sector of the Company has an active business in the development of mobility applications that support the needs of mobile teams with real-time situation awareness and distributed communications.  The ISR solutions sector has a strong legacy in the advanced research, development and productization of geospatial information assurance (“GIA”) technology involving steganography, steganalysis, digital watermarking, and image forensics. These enabling technologies have been used to provide increased protection and security of geospatial data.   The ISR Solutions Sector also provides scientific and technical  support to the US Intelligence Community.

 

The mission systems sector includes three distinct lines of business: telecommunications, satellite control, and information technology services. The telecommunication services include satellite and terrestrial communications operations and maintenance services, which operate elements of the US DoD’s global information grid (“GIG”) in support of the national command authority (President & joint chiefs of staff) and Department of Defense. Additionally, PAR operates the U.S. navy’s only satellite operations center providing tracking, telemetry and control of several space-based satellite communication constellations. Finally, the Company’s mission systems sector provides IT services ranging from advanced systems management to help desk support. Approximately 50% of this sector’s global footprint is outside the continental US with contracts in Europe, Africa, Australia, and US Commonwealths and Territories in the Pacific and Caribbean. The Company has strong and enduring relationships with a diverse set of customers throughout the U.S. DoD and federal government. PAR’s track record delivering mission critical services to their government customers spans decades, and includes contracts continuing 15 years or more. The Company works closely with its customers, with the vast majority of the mission systems sector employees co-located at customer sites. PAR’s strong relationships and on-site presence with customers enable the Company to develop deep customer and technical domain knowledge, and translate mission understanding into exemplary program execution and continued demand for its services.

PAR focuses its business in five service areas:

ISR:

Intelligence, Surveillance and Reconnaissance:  The Company provides a variety of geospatial intelligence solutions including full motion video, geospatial information assurance, raster imagery, and LiDAR.  In depth expertise in these domains provides government customers and large systems integrators with key technologies supporting a range of applications from strategic enterprise systems to tactical individual users.  Furthermore, PAR has developed a number of products relative to these advanced technologies and provides integration and training support.

Mission Systems:

Systems Engineering & Evaluation:  The Company integrates and tests EO, IR, Radar, and multi/hyper-spectral sensor systems for a broad range of government and industry surveillance applications.  The Company designs and integrates radar sensor systems including experimentation, demonstration, and test support.  The Company also provides scientific and technical engineering and analysis to intelligence community customers, as well as program management services for the acquisition, development, and deployment of advanced prototypes and quick reaction systems.

 

Satellite & Telecommunications Services:  The Company provides a wide range of technical and support services to sustain mission critical components of the DoD’s global information grid (“GIG”).  These services include continuous 24/7/365 operations, system enhancements and associated maintenance of very low frequency (“VLF”), high frequency (“HF”) and very high frequency (“VHF”) ground-based radio transmitter/receiver facilities. Additionally, the Company operates and maintains several extremely high frequency (“EHF”) and super high frequency (“SHF”) satellite communication earth terminals and teleport facilities.  The DoD communications earth stations operated by the Company is the primary communications infrastructure utilized by the national command authority and military services to exercise command and control of the nation’s air, land and naval forces and provide support to allied coalition forces.

Space & Satellite Control Services:  The Company provides satellite operation, management, and maintenance services in support of satellite control center operations.  Primary services include satellite telemetry monitoring, tracking and command support, and satellite control in order to provide reliable space-based satellite services conducting command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”) operations.  The Company delivers services in support of satellite telemetry, tracking, control and remote terminal operations from 7 locations worldwide.

Information Technology/Systems Services:  The Company provides information technology services to the DoD and federal agencies. These services include helpdesk services, systems administration, network administration, information assurance and systems security, database administration, telephone systems management, testing and testbed management, and ITIL-based service management.

The Company performs work for U.S. Government agencies under firm fixed-price, cost-plus-fixed-fee, and time-and-material contracts.  The majority of these contracts have a period of performance of one to five years.  There are several risks associated with government contracting.  For instance, contracts may be reduced in size, scope and value, as well as modified, delayed and/or cancelled depending upon the government’s requests, budgets, policies and/or changes in regulations.  Contracts can also be terminated for the convenience of the government at 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 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.  In this situation, the Company is performing the work under our own risk and would be responsible for any costs incurred during this time.  Additionally, the defense contract audit agency regularly audits the financial 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 2013 and have not resulted in any material adjustments.

 

Contracts are obtained principally through competitive proposals in response to solicitations from government organizations and prime contractors.  In addition, the Company sometimes obtains contracts by submitting unsolicited proposals.  Although the Company believes it is well positioned in its business areas, competition for government contracts is intense.  Many of the Company’s competitors are major corporations, or subsidiaries thereof, that are significantly larger and have substantially greater financial resources.  The Company also competes with many smaller, economically disadvantaged companies, many of which are designated by the government for preferential “set aside” treatment, that target particular segments of the government contract market.  The principal competitive factors are past performance, the ability to perform the statement of work, price, technological capabilities, management capabilities and service.  Many of the Company’s department of defense customers are now migrating to low-price/technically acceptable procurements while leveraging commercial software standards, applications, and solutions.

The value of existing Government contracts at December 31, 2015, net of amounts relating to work performed to that date was approximately $101.2 million, of which $48.4 million was funded.  The value of existing Government contracts at December 31, 2014, net of amounts relating to work performed to that date was approximately $100.4 million, of which $53.9 million was funded.  Funded amounts represent those amounts committed under contract by Government agencies and prime contractors.  The December 31, 2015 Government contract backlog of $101.2 million represents firm, existing contracts.  Of this backlog amount, approximately $64.8 million is expected to be completed in calendar year 2016, as funding is committed.

 

Employees

As of December 31, 2015, the Company had 1,010 employees, approximately 54% of whom were engaged in the Company’s Hospitality segment, 41% of whom were in the Government segment, and 5% of whom were 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 it has and will be able to continue to fulfill its near-term needs for technical staff.

Approximately 13% of the Company’s employees are covered by collective bargaining agreements.  The Company considers its employee relations to be good.

 

Item 1A

Risk Factors

The Company operates in a dynamic and rapidly changing environment involving numerous risks and uncertainties that are difficult to predict and many of which are outside of the Company's control.  In addition to the other information in this report and the Company’s other filings the following section describes some, but not all, of the risks and uncertainties that could have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock, and could cause our actual results to differ materially from those expressed or implied in our forward-looking statements.

 

Our future operating results, including revenues, gross margins, operating expenses and net income (loss), have fluctuated on a quarterly and annual basis, are difficult to predict, and may be materially affected by a number of factors, many of which are beyond our control, including:

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the dependency on business from major accounts which can, at will, reduce or eliminate on-going business

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the ability to hire, retain and motivate qualified employees to meet the demands of our business;

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the effects of adverse macroeconomic conditions in the United States and international markets, especially in light of the continued challenges in global credit and financial markets;

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the level of demand and purchase orders from our customers, and our ability to adjust to changes in demand and purchase order patterns;

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the timing of our new product announcements or introductions, as well as those by our competitors;

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the ability of our third party suppliers, subcontractors and manufactures to supply us with sufficient quantities of high quality products or components, on a timely basis;

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the effectiveness of our efforts to reduce product costs and manage operating expenses;

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changes in customer demand for our products;

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the ability to timely produce the products our customers seek to satisfy their technology requirements;

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potential significant litigation-related costs;

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intellectual property disputes;

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costs related to compliance with increasing worldwide environmental and other regulations; and

 

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the effects of public health emergencies, natural disasters, security risk, terrorist activities, international conflicts and other events beyond our control.

As a result of these and other factors, there can be no assurance that the Company will not experience significant fluctuations in future operating results on a quarterly or annual basis.  In addition, if our operating results do not meet the expectations of investors, the market price of our common stock may decline.

 

The trading price of our common stock has and may continue to fluctuate significantly.  Such fluctuations may be influenced by many factors, including:

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the concentration of beneficial ownership of our common stock by Dr. John W. Sammon, Director and of PAR’s Board of Directors.

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the liquidity of the market for our common stock;

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the limited availability of earnings estimates and supporting research by investment analysts;

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our performance and prospects;

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the performance and prospects of our major customers;

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investor perception of our company and the industry in which we operate;

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uncertainty regarding domestic and international political conditions, including tax policies; and

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the volatility of the financial markets;

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uncertainty regarding the prospects of domestic and foreign economies;

Public stock markets have recently experienced price and trading volume volatility.  This volatility significantly affected the market prices of securities of many technology companies and the return of such volatility could result in broad market fluctuations that could materially and adversely affect the market price of our common stock for indefinite periods.  In addition, fluctuations in our stock price, volume of shares traded, and changes in our trading multiples may make our stock attractive to certain categories of investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction.

 

A decline in the volume of purchases made by any one of the company’s major customers would materially adversely affect our business.

A small number of related customers have historically accounted for a majority of the Company’s net revenues in any given fiscal period.  For each of the fiscal years ended December 31,

2015 and 2014, aggregate sales to our top two Hospitality segment customers, McDonald’s Corporation and Yum! Brands, Inc., consisting of KFC, Taco Bell and Pizza Hut, amounted to 19% and 10% and 16% and 12% of total revenues from continuing operations, respectively.  Most of the Company’s customers are not obligated to provide us with any minimum level of future purchases or with binding forecasts of product purchases for any future period.  In addition, major customers may elect to delay or otherwise change the timing of orders in a manner that could adversely affect the Company’s quarterly and annual results of operations.  There can be no assurance our current customers will continue to place orders with us, or 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 continual changes and additions to our features and functionality.  Our traditional competitors offer products that have an increasingly wider range of features and capabilities.  A number of new competitors in our restaurant technology business are well funded and are adding features and functionality rapidly. We believe that in order to compete effectively, we must provide systems incorporating new technologies at competitive prices.  There can be no assurance we will be able to continue funding research and development at levels sufficient to enhance our current product offerings, or the Company will be able to develop and introduce on a timely basis, new products that keep pace with technological developments and emerging industry standards and address the evolving needs of customers.  There also can be no assurance 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 our new products and product enhancements will adequately meet the requirements of the marketplace or achieve any significant degree of market acceptance.  Likewise, there can be no assurance as to the acceptance of our products in new markets, nor can there be any assurance as to the success of our penetration of these markets, nor to the revenue or profit margins realized by the Company with respect to these products.  If any of our competitors were to introduce superior software products at competitive prices, or if our software products no longer meet the needs of the marketplace due to technological developments and emerging industry standards, our software products may no longer retain any significant market share.

 

We generate much of our revenue from the hospitality industry and therefore are subject to decreased revenues in the event of a downturn in that industry.

For the fiscal years ended December 31, 2015 and 2014, we derived 62% and 60%, respectively, of our total revenues from continuing operations from the hospitality industry, primarily the QSR market.  Consequently, our hospitality technology product sales are dependent in large part on the health of the hospitality industry, which in turn is dependent on the domestic and international economy, as well as factors such as consumer buying preferences.  Instabilities or downturns in the hospitality market could disproportionately impact our revenues, as clients may exit the industry or delay, cancel or reduce planned expenditures for our products.  Although we believe we can succeed in the quick service restaurant sector of the hospitality industry in a competitive environment, given the cyclical nature of that industry, there can be no assurance our profitability and growth will continue.

we face extensive competition in the markets in which we operate, and our failure to compete effectively could result in price reductions and/or decreased demand for our products and services.

Several competing suppliers offer hospitality management systems similar to ours.  Some of these competitors are larger than PAR and have access to substantially greater financial and other resources and, consequently, may be able to obtain more favorable terms than we can for components and subassemblies incorporated into these hospitality technology products.  The rapid rate of technological change in the hospitality segment makes it likely we will face competition from new products designed by companies not currently competing with us.  These new products may have features not currently available from us.  We believe our competitive ability depends on our total solution offering, our experience in the industry, our product development and systems integration capability, our direct sales force and our customer service organization.  There is no assurance; however, we will be able to compete effectively in the hospitality technology market in the future.

Our government contracting business has been focused on niche offerings, reflecting our expertise, primarily in the areas of intelligence, surveillance and reconnaissance, systems engineering & evaluation, satellite and telecommunications services  and information technology/systems services.  Many of our competitors are larger and have substantially greater financial resources and broader capabilities in information technology.  We also compete with smaller companies, many of which are designated by the government for preferential “set aside” treatment, that target particular segments of the government market and may have superior capabilities in a particular segment.  These companies may be better positioned to obtain contracts through competitive proposals.  Consequently, there are no assurances we will continue to win government contracts as a direct contractor or indirect subcontractor.

 

ineffective internal controls could impact the company’s business and financial results

The Company's internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the Company experiences difficulties in their implementation, the Company's business and financial results could be harmed and the Company could fail to meet its financial reporting obligations. Such as, in connection with management’s evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, management determined that the Company did not maintain effective controls over the pre-hiring diligence procedures which failed to require the completion of satisfactory background investigation, which should have included credit and other public record and media checks for accounting and financial hires to the extent permitted by applicable law.  In addition, our procedures relating to treasury transactions did not require sufficient sign-off documentation and review thereof with respect to approvals required prior to initiating treasury transactions, and as a result, documentation describing the transaction, confirming its execution and evidencing the required approvals did not exist or was significantly deficient, thus impeding prevention or early detection of the improper actions.  While the Company is in the process of improving its internal controls and the material weakness will continue to exist until the remediation actions described in Item 9A, Controls and Procedures, are fully implemented and tested. If the new controls being implemented to address the material weakness and to strengthen the overall internal control over onboarding and treasury transactions are not designed or do not operate effectively, if the Company is unsuccessful in implementing or following these new processes or is otherwise unable to remediate this material weakness, this may result in untimely or inaccurate reporting of the Company’s financial condition or results of operations.

 

We have identified that certain wire transfers were effected during the period between September 25, 2015 and November 6, 2015 involving the unauthorized transfer of Company funds, without documentation, in contravention of the Company’s policies and procedures.  The unauthorized investments occurred during the period between September 25, 2015 and November 6, 2015. The employment of Michael S. Bartusek, the Company’s Vice President and Chief Financial Officer was terminated effective March 14, 2016 for cause in connection with these unauthorized investments made in contravention of the Company’s policies and procedures.  Mr. Bartusek had been hired by the Company into those positions effective July 20, 2015.  These funds collectively total $776,000.  Upon evaluation of the circumstances under which such unauthorized investments were made, the Company determined that internal control weaknesses existed that permitted these wire transfers to be initiated, processed, and completed without obtaining necessary approvals.  This matter was reported by management to the Audit Committee of the Company’s Board of Directors, comprised solely of independent directors.  Under direction of the Audit Committee an investigation was commenced and completed.  The investigation was led by outside counsel, who engaged an independent forensic consultant to assist in the matter.  As directed by the Audit Committee, the Company has reported this matter to federal law enforcement agencies, including the U.S. Securities and Exchange Commission.

 The internal investigation is complete, although the Company continues to pursue recovery of the transferred funds.  We are presently unable to predict whether the SEC or other law enforcement agency will commence their own investigation or determine whether there have been violations of federal laws and regulations.  We have not to date determined whether any of the activities in question violated any applicable laws.  However, if any federal authorities were to ultimately determine that the Company violated any laws or regulations, the Company may be exposed to a broad range of civil and criminal sanctions including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee future compliance by the Company. These investigations and any potential proceedings resulting therefrom could be costly and burdensome to our management, and could adversely impact our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Even if an inquiry or investigation does not result in any adverse determinations, it potentially could create negative publicity and give rise to third-party litigation or other actions.

 

we may not be able to meet the unique operational, legal and financial challenges that relate to our international operations, which may limit the growth of our business.

For the fiscal years ended December 31, 2015, and 2014, our net revenues from sales outside the United States were 14% and 13%, respectively, of the Company’s total revenues from continuing operations.  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 these factors will not have a material adverse effect on our future international sales and, consequently, on our operating results.

Any failure by the Company to execute planned cost reduction measures timely and successfully could result in total costs and expenses that are greater than expected or the failure to meet operational goals as a result of such actions.

In April 2015, the Company announced restructuring actions primarily to reduce cost and expense structure in our hospitality segment and the Company’s corporate organization. The Company expects to realize cost savings now and in the future through these cost and expense actions and may announce future actions to further reduce its worldwide workforce and/or centralize its operations. The risks associated with these actions include potential delays in their implementation, particularly workforce reductions; increased costs associated with such actions; decreases in employee morale and the failure to meet operational targets due to unplanned departures of employees, particularly key employees and sales employees.

we derive a portion of our revenue from u.s. government contracts, which contain provisions unique to public sector customers, including the u.s. government’s right to modify or terminate these contracts at any time.

For the fiscal years ended December 31, 2015 and 2014, we derived 38% and 40%, respectively, of our total revenues from continuing operations from contracts to provide technical expertise to government organizations and prime contractors.  In any year, the majority of our government contracting activity is associated with the U.S. Department of Defense.  Contracts with the U.S. government typically provide that such contracts are terminable, in full or in part, at the convenience of the U.S. government.  If the U.S. government terminated a contract on this basis, we would be entitled to receive payment for our allowable costs and, in general, a proportionate share of our fee or profit for work actually performed.  Most U.S. government contracts are also subject to modification or termination in the event of changes in funding.  As such, we may perform work prior to formal authorization, or the contract prices may be adjusted for changes in scope of work.  Termination or modification of a substantial number of our U.S. government contracts could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, the general uncertainty in U.S. defense total workforce policies (military, civilian and contract), procurement cycles and spending levels for the next several years may impact the performance of this business.  Specifically, the Company could experience reductions in revenue as a result of the U.S. government in-sourcing its current service contracts or the Company could experience a reduction of funding due to U.S. government sequester or other funding reductions.

We perform work for various U.S. government agencies and departments pursuant to fixed-price, cost-plus fixed fee and time-and-material prime contracts and subcontracts.  Approximately 45% of the revenue that we derived from government contracts for the year ended December 31, 2015 came from fixed-price or time-and-material contracts.  The balance of the revenue that we derived from government contracts in 2015 primarily came from cost-plus fixed fee contracts.  Most of our contracts are for one-year to five-year terms.

While fixed-price contracts allow us to benefit from cost savings, they also expose us to the risk of cost overruns.  If the initial estimates we use for calculating the contract price are incorrect, we can incur losses on those contracts.  In addition, some of our governmental contracts have provisions relating to cost controls, and audit rights and if we fail to meet the terms specified in those contracts, then we may not realize their full benefits.  Lower earnings caused by cost overruns would have an adverse effect on our financial results.

Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses.  Under cost-plus fixed fee contracts, we are reimbursed for allowable costs and paid a fixed fee.  However, if our costs under either of these types of contract exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all of our costs.

 

If we are unable to control costs incurred in performing under each type of contract, such inability to control costs could have a material adverse effect on our financial condition and operating results.  Cost over-runs also may adversely affect our ability to sustain existing programs and obtain future contract awards.

 

a portion of our total assets consists of goodwill and identifiable intangible assets, which are subject to a periodic impairment analysis and a significant impairment determination in any future period, could have an adverse effect on our results of operations even without a significant loss of revenue or increase in cash expenses attributable to such period.

 

Item 1B:

Unresolved Staff Comments

None.

 

Item 2:

Properties

The following are the principal facilities (by square footage) of the Company:

 

The Company’s headquarters and principal business facility is located in New Hartford, NY, which is near Utica, in central New York State.  In addition to those noted above, the Company maintains smaller facilities in San Diego, California, Shanghai, People’s Republic of China, Staines, United Kingdom, Dubai and Paris France.

The Company owns its principal facility and adjacent space in New Hartford.  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 the 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:

Mine Safety Disclosures

Not Applicable.

PART II

Item 5:

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock, par value $0.02 per share, trades on the New York Stock Exchange (NYSE symbol - PAR).  At December 31, 2015, there were approximately 424 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, 2015 as reported by New York Stock Exchange:

 

The Company has not paid cash dividends on its common stock, and the Company presently intends to continue to retain earnings for reinvestment in growth opportunities.  Accordingly, it is anticipated no cash dividends will be paid in the foreseeable future.

Item 6:

Selected Financial Data

Not Required.

 

Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.  Any statements in this document that do not describe historical facts are forward-looking statements.  Forward-looking statements in this document (including forward-looking statements regarding the continued health of segments of the hospitality industry, future information technology outsourcing opportunities, an expected increase or decrease in contract funding by the U.S. Government, the impact of current world events on our results of operations, the effects of inflation on our margins, and the effects of interest rate and foreign currency fluctuations on our results of operations) are made pursuant to the safe harbor provisions of the private securities litigation reform act of 1995.  When we use words such as “intend,” “anticipate,” “believe,” “estimate,” “plan,” “will,” or “expect”, we are making forward-looking statements.  We believe the assumptions and expectations reflected in such forward-looking statements are reasonable based on information available to us on the date hereof, but we cannot assure you these assumptions and expectations will prove to have been correct or we will take any action that we presently may be planning.  We have disclosed certain important factors that could cause our actual future results to differ materially from our current expectations, including: a decline in the volume of purchases made by one or a group of our major customers; risks in technology development and commercialization; risks of downturns in economic conditions generally, and in the quick-service sector of the hospitality market specifically; risks associated with government contracts; risks associated with competition and competitive pricing pressures; and risks related to foreign operations.  Forward-looking statements made in connection with this report are necessarily qualified by these factors.  We are not undertaking to update or revise publicly any forward-looking statements if we obtain new information or upon the occurrence of future events or otherwise.

Overview

 

PAR's technology solutions for the hospitality segment feature software, hardware and support services tailored for the needs of restaurants and retailers.  The Company's government segment provides technical expertise in the contract development of advanced systems and software solutions for the U.S. Department of Defense and other federal agencies, as well as information technology and communications support services to the U.S. Department of Defense.

 

The Company's products sold in the hospitality segment are utilized in a wide range of applications by thousands of customers.  The Company faces competition across all of its markets within the hospitality segment, competing on the basis of product design, features and functionality, quality and reliability, price, customer service, and delivery capability.  PAR's continuing strategy is to provide complete integrated technology solutions with industry leading customer service in the markets in which it participates.  The Company conducts its research and development efforts to create innovative technology offerings that meet and exceed customer requirements and also have a high probability for broader market appeal and success.

The Company is focused on expanding its hospitality businesses through its product investments and continued development of its cloud based software applications.  These products include its Brink POS software within the fast casual market, with integrated features that include loyalty, mobile online ordering, kitchen video system, guest surveys, enterprise reporting, mobile dashboard, and much more.  In addition, the Company is investing in the enhancement of existing software applications and the development of the Company's SureCheck® solution for food safety and task management applications.  To support growth of these products, the Company continues to expand its direct sales force and third-party distribution channels.

The Quick Serve Restaurant market, PAR's primary market, continues to perform well for the majority of large, international companies.  PAR primarily sells its hardware platforms to this market, specifically, within our Tier 1 clients.

The focus of the Company’s Government business is to expand its services and solutions business lines. Through outstanding performance of existing service contracts and investing in enhancing its business development capabilities, the Company is able to consistently win renewal of expiring contracts, extend existing contracts, and secure additional new business.  With its intellectual property and investment in new technologies, the Company provides solutions to the U.S. Department of Defense and other federal/state agencies with systems integration, products and highly-specialized services.  The general uncertainty in U.S. defense total workforce policies (military, civilian and contract), procurement cycles and spending levels for the next several years, may impact the performance of this business.

Results of Operations — 2015 Compared to 2014

During the year ending December 31, 2015, the Company performed a strategic analysis of its current product and business unit offerings and as a result, entered into an asset purchase agreement to sell substantially all of the assets of its hotel/spa technology business operated under PAR Springer-Miller Systems, Inc. (“PSMS”) to affiliates of Constellation Software Inc.  This transaction closed on November 4, 2015.  Accordingly, the results of operations of PSMS have been classified as discontinued operations in the Consolidated Statements of Operation and Cash Flows in accordance with Accounting Standards Codification (“ASC”) ASC 205-20, Presentation of Financial Statements – Discontinued Operations.  Additionally, the assets and associated liabilities have been classified as discontinued operations in the Consolidated Balance Sheets.  All prior period amounts have been reclassified to conform to the current period presentation.  Refer to Note 3 “Discontinued Operations” in the notes to the Consolidated Financial Statements for further discussion, including the terms of the transaction.

 

The Company reported revenues of $229.0 million for the year ended December 31, 2015, an increase of 5.1% from the $217.9 million reported for the year ended December 31, 2014.  PAR’s revenue from its hospitality segment of $141.2 million for the year ended December 31, 2015, an increase of 8.4% compared to the $130.2 million reported for the year ended December 31, 2014.  PAR’s government segment reported revenues of $87.9 million for the year ended December 31, 2015, a slight increase from the $87.7 million reported for the year ended December 31, 2014. PAR reported net income from continuing operations of $4.0 million or $0.26 per diluted share for the year ended December 31, 2015 versus $71,000 or $0.00 per diluted share for the same period in 2014.  For fiscal year 2015 and 2014, the Company reported a net loss from discontinued operations of $4.9 million or $0.32 loss per share versus a loss of $3.7 million or $0.24 loss per share, respectively.

Product revenues were $94.4 million for the year ended December 31, 2015, an increase of 11.7% from the $84.5 million recorded in 2014.  This increase was primarily driven by higher revenues generated from the Company’s global tier 1 accounts. In addition, growth within the Company’s domestic tier one accounts and new accounts established through the acquisition of Brink contributed to the revenue increase as compared to prior year.

Service revenues were $46.8 million for the year ended December 31, 2015, an increase of 2.3% from the $45.7 million reported for the same period in 2014.  The increase is the result of the Company diversifying its revenue with a higher recurring revenue base through its software contracts, specifically software sold as a service and other revenue streams generated through post contract support offerings.

 

Contract revenues were $87.9 million for the year ended December 31, 2015, compared to $87.7 million reported for the same period in 2014, an increase of 0.2%.  This increase is driven by increased activity within the Company’s intelligence, surveillance and reconnaissance contracts slightly offset by a reduction in revenue generated from mission systems contracts.

 

Product margins for the year ended December 31, 2015 were 27.8%, a decrease from 30.3% for the same period in 2014.  During the year negatively impacting the overall product margins were a high volume of lower margin peripheral devices sold to our largest hospitality customers and a larger deployment of higher margin software for a specific rollout in 2014 that did not recur in 2015.

Service margins were 29.8% for the year ended December 31, 2015, an increase from the 23.4% recorded for the same period in 2014.  The increase is a result of favorable service revenue mix during the year.  The primary driver is the continued growth of revenue streams within the Company’s software platforms sold as a service.  In addition, the Company experienced a high volume of its time and material revenue within PAR’s repair center.

 

Selling, general and administrative expenses were $28.3 million for the year ending December 31, 2015, compared to $29.0 million for the year ended December 31, 2014.  The decrease is primarily attributable to lower equity based compensation expense and the Company’s execution of cost reduction initiatives within its hospitality segment operations.  The Company continues to monitor its cost structure, including strategic initiatives to reduce its fixed costs.  Partially offsetting the decrease was severance related expense.

 

Research and development expenses were $10.2 million for the year ended December 31, 2015, compared to $8.9 million recorded for the same period in 2014.  This increase was primarily related to increased software development costs for products within the hospitality segment, primarily R&D associated with the Company’s Brink POS software application.

 

During the year ended December 31, 2015, the Company recorded $987,000 of amortization expense associated with acquired identifiable intangible assets from the acquisition of Brink that was acquired on September 18, 2014.  The Company recorded $279,000 of amortization expense associated with acquired identifiable intangible assets for the year ended December 31, 2014.

 

Other expense, net was $800,000 for the year ended December 31, 2015 compared to other income, net of $485,000 for the same period in 2014.  Other income/expense primarily includes fair market value fluctuations of the Company's deferred compensation plan, rental income, net, foreign currency fair value adjustments, and other non-operating income/expense.  The decrease primarily relates to a write off of $776,000 for investments, and lower rental income received during the year.   The investment write-off of $776,000 in fiscal year 2015 represents the write-off of unauthorized investments that were made in contravention of the Company’s policies and procedures involving the Company’s funds. The unauthorized investments occurred during the period between September 25, 2015 and November 6, 2015.   As of December 31, 2015, the Company is uncertain of the collectability relating to these investments and as a result, reduced its fair value to zero.  The write-off of the investment resulted in the Company identifying a material weakness over financial reporting as described in Item 9A and also described in footnote 1.

Interest expense represents interest charged on the Company's short-term borrowings and from long-term debt.  Interest expense was $308,000 for the year ended December 31, 2015 as compared to $136,000 for the same period in 2014.  This increase is associated with higher outstanding borrowing in 2015 as compared to the same period in 2014.

For the year ended December 31, 2015, the Company’s effective income tax rate was an expense of 27.2%, compared to expense of 98.1% in 2014.   The variances from the federal statutory rate for 2015 were due to the mix of taxable income from the Company's domestic and foreign jurisdictions.  In 2014, the Company repatriated earnings through the payment of a $5.0 million dividend by its Chinese subsidiary to its domestic parent company, resulting in income tax expense of $2.2 million on those earnings.  The Company considers this a one-time repatriation which helped finance the Brink acquisition and further earnings are considered permanently re-invested.

Liquidity and Capital Resources

The Company’s primary sources of liquidity have been cash flow from operations and a line of credit with its bank.  Cash generated from operating activities of continuing operations was $2.2 million for the year ended December 31, 2015 compared to cash provided of $9.6 million for the same period in 2014.

 

In 2015, cash was generated from the Company’s operating results plus the add-back of non-cash expenses and a reduction of inventory.  Offsetting significant operating cash flow components include a decrease accounts payable primarily due to the timing of vendor payments and a decrease in customer deposits associated with the Company’s hospitality segment.  In 2014, cash generated from operations was mostly due to the add back of non-cash charges and changes in working capital.  Significant operating cash flow components include cash used to procure inventory required for planned deployments in 2015, as well as cash used through an increase in receivables resulting from significant sales volume recorded late in fiscal year 2014.  Operating cash flow was generated by an increase in accounts payable and accrued expenses mainly due to the timing of vendor payments associated with the aforementioned growth in inventory and other amounts owed to vendors.  Cash was also generated through the increase in customer deposits associated with the Company’s hospitality segment.

Cash generated from investing activities from continuing operations was $7.5 million for the year ended December 31, 2015 versus cash used of $8.2 million for the same period in 2014.  In 2015, the Company received cash proceeds of $12.1 million related to the sale of its hotel/spa technology business.  This was offset by the Company wrote-off $776,000 of unauthorized investments that were made in contravention of the Company’s policies and procedures involving the Company’s funds.  Capital expenditures of $1.7 million were primarily for capital improvements made to the Company’s leased properties as well as purchases of computer equipment associated with the Company’s software support service offerings.  Capitalized software was $2.1 million and was used for investments in many of the Company’s hospitality software platforms.  In 2014, the first installment payment associated with the purchase of Brink Software Inc. which accounted for use of approximately $5.0 million of the investing capital.  Capital expenditures of $1.5 million were primarily for capital improvements made to the Company’s leased properties as well as purchases of computer equipment associated with the Company’s software support service offerings.  Capitalized software was $1.7 million and was used for investments in many of the Company’s hospitality software platforms.

Cash used in financing activities from continuing operations was $7.7 million for the year ended December 31, 2015 versus cash generated of $4.8 million for the same period in 2014.  In 2015, the Company decreased borrowings on its credit facility by $5.0 million, net and its long-term debt by $0.2 million and benefited $0.5 million from the exercise of employee stock options.  Additionally, the second installment payment associated with the purchase of Brink Software Inc. accounted for approximately $3.0 million was made.  In 2014, the Company borrowed $5.0 million, net on its credit facility in connection with the purchase of Brink Software Inc., and decreased its long term borrowings by $0.2 million.

 

Through June 4, 2014, the Company maintained a credit facility with J.P. Morgan Chase, N.A. and NBT Bank, N.A. (on behalf of itself and as successor by merger to Alliance Bank, N.A.) consisting of $20.0 million in working capital lines of credit (with the option to increase to $30.0 million), which expired in June 2014.  This agreement allowed the Company, at its option, to borrow funds at the LIBOR rate plus the applicable interest rate spread or at the bank's prime lending rate.  This credit facility was secured by certain assets of the Company.

On June 5, 2014, the Company executed an amendment to its then existing credit facility to provide for the renewal of the facility through June 2017, with terms generally consistent to those of its prior facility.  This facility provided the Company with capital of up to $20.0 million (with the option to increase to $30.0 million) in the form of a revolving line of credit.  This agreement allowed the Company, at its option, to borrow funds at the LIBOR rate plus the applicable interest rate spread or at the bank's prime lending rate.

On September 9, 2014, the Company terminated its existing credit facilities with J.P. Morgan Chase, N.A. and NBT Bank, N.A. (on behalf of itself and as successor by merger to Alliance Bank, N.A.) consisting of $20.0 million in working capital lines of credit, and the Company and its domestic subsidiaries entered into a new three-year credit facility with J.P. Morgan Chase, N.A (the Credit Facility). The terms of the Credit Facility provide for up to $25 million of a line of credit, with borrowing availability based on a percentage of value of various assets of the Company and its subsidiaries. The new agreement bears interest at the applicable bank rate (3.25% at December 31, 2015) or, at the Company's option, at the LIBOR rate plus the applicable interest rate spread (range of 1.5% – 2.0%).  At December 31, 2015, the Company did not have any outstanding balance on this line of credit.  The weighted average interest rate paid by the Company was approximately 3.50% during fiscal year 2015.   The new agreement contains traditional asset based loan covenants and includes covenants regarding earnings before interest, tax, depreciation & amortization (“EBITDA”) and a fixed charge coverage ratio, and provides for acceleration upon the occurrence of customary events of defaults.

On March 19, 2015, the Company amended  the Credit Facility to reduce the EBITDA requirement and extend the fixed charge coverage ratio.  The amendment provides the Company flexibility to continue investing in the Company’s future product offerings while maintaining certain covenant thresholds as defined in the amendment.  On March 16, 2016, the Company received a notice of defaults under its current Credit Facility due to unauthorized investments made during 2015 by the company’s former Chief Financial Officer, which were not permitted investments as defined in the lending agreement.  See Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for further discussion on these unauthorized investments.  These unauthorized investments involved cash transfers totaling $776,000, which amounts have been written off by the Company as of December 31, 2015 (the “Unauthorized Transactions”).  On March 24, 2016 the lender provided waivers of the defaults, subject to certain terms and conditions contained in the waiver, including entry by the Company into a fourth amendment to the Company’s Credit Agreement.

 

On March 24, 2016, based on the waiver received, the Company executed the fourth amendment to its existing Credit Agreement.  Under the terms and conditions of this amendment, the Company has undertaken to engage, and has engaged,  an independent consultant to review its  internal controls relating to financial reporting and authorization procedures for financial transactions (including, without limitation, investments) initiated by the Company’s officers (the “Internal Control Review”).  The company has agreed to deliver to the lender a report prepared by Company’s consultant that sets forth, in reasonable detail, the results of the Internal Control Review, together with a summary of any recommended changes to the Company’s internal control procedures (the “ICR Report”).  To the extent the ICR Report sets forth recommended changes to Borrowers’ internal control procedures (“IC Recommendations”), The Company has agreed to promptly take steps to implement the IC Recommendations in all material respects.  The Company has agreed to provide periodic updates to the lender relating to the Internal Control Review, implementation of IC Recommendations and any ongoing investigations related to the Unauthorized Transactions

In addition to the credit facility described above, the Company has a mortgage loan, collateralized by certain real estate, with a balance of $746,000 and $919,000 at December 31, 2015 and 2014, respectively.  This mortgage matures on November 1, 2019.  The Company's fixed interest rate was 4.05% through October 1, 2014.  Beginning on October 1, 2014, the fixed rate was converted to a new rate equal to the then-current five year fixed advanced rate charged by the New York Federal Home Loan bank, plus 225 basis points.  Effective November 1, 2014, the Company entered into an agreement that fixed the interest rate at 4.00% through the maturity date of the loan.  The annual mortgage payment including interest through November 1, 2019 totals $206,000.

In connection with the acquisition of Brink Software Inc. on September 18, 2014, the Company recorded indebtedness to the former owners of Brink Software Inc. under the stock purchase agreement.  At December 31, 2015 and 2014, the principal balance of the note payable was $2.0 million and $5.0 million and it had a carrying value of $1.9 million and $4.8 million, respectively.  The carrying value was based on the note’s estimated fair value at the time of acquisition.  The note does not bear interest and repayment terms are $3.0 million, which was paid on the first anniversary of close, September 18, 2015, and $2.0 million payable on the second anniversary of close, September 18, 2016.

 

During fiscal year 2016, the Company anticipates that its capital requirements will not exceed approximately $3.0 million to $5.0 million.  The Company does not routinely enter into long term contracts with its major hospitality segment customers.  The Company commits to purchasing inventory from its suppliers based on a combination of internal forecasts and actual orders from customers.  This process, along with good relations with suppliers, supports the working capital investment required by the Company.  Although the Company lists two major customers, McDonald’s and Yum! Brands, it sells to hundreds of individual franchisees of these corporations, each of which is individually responsible for its own debts.  These broadly made sales substantially reduce the impact on the Company’s liquidity if one individual franchisee reduces the volume of its purchases from the Company in a given year.  The Company, based on internal forecasts, believes its existing cash, line of credit facilities and its anticipated operating cash flow will be sufficient to meet its cash requirements through 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, potential growth through strategic acquisition, 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 additional equity or debt financing will be available on acceptable terms or at all.  The Company’s sources of liquidity beyond twelve months, in management’s opinion, will be its cash balances on hand at that time, funds provided by operations, funds available through its lines of credit and the long-term credit facilities that it can arrange.

The Company’s future principal payments under its stock purchase agreement with Brink, mortgage and operating leases are as follows (in thousands):

 

 

Financial Statements:

	Report of Independent Registered Public Accounting Firm	53
	Consolidated Balance Sheets at December 31, 2015 and 2014	54
	Consolidated Statements of Operations for the years ended December 31, 2015 and 2014	55
	Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015 and 2014	56
	Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015 and 2014	57
	Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014	58
	Notes to Consolidated Financial Statements	59

		December 31,
Assets		2015				2014
Current assets:
Cash and cash equivalents		$	8,024			$	9,867
Accounts receivable-net			29,530				29,674
Inventories-net			21,499				25,928
Deferred income taxes			6,741				4,512
Other current assets			3,808				4,018
Assets of discontinued operations			-				22,119
Total current assets			69,602				96,118
Property, plant and equipment - net			5,716				5,148
Note receivable			3,320				-
Deferred income taxes			11,038				11,357
Goodwill			11,051				11,051
Intangible assets - net			10,898				10,580
Other assets			3,687				3,043
Total Assets		$	115,312			$	137,297
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt		$	2,103			$	3,173
Borrowings under line of credit			-				5,000
Accounts payable			11,729				19,258
Accrued salaries and benefits			5,727				5,726
Accrued expenses			6,705				6,492
Customer deposits			180				1,242
Deferred service revenue			10,639				10,388
Income taxes payable			279				475
Liabilities of discontinued operations			441				4,617
Total current liabilities			37,803				56,371
Long-term debt			566				2,566
Other long-term liabilities			8,883				8,847
Total liabilities			47,252				67,784
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, $.02 par value, 1,000,000 shares authorized			-				-
Common stock, $.02 par value, 29,000,000 shares authorized; 17,352,198 and 17,274,708 shares issued, 15,644,729 and 15,566,599 outstanding at December 31, 2015 and 2014, respectively			347				346
Capital in excess of par value			45,753				44,854
Retained earnings			30,574				31,465
Accumulated other comprehensive loss			(2,778	)			(1,316	)
Treasury stock, at cost, 1,708,109 shares			(5,836	)			(5,836	)
Total shareholders’ equity			68,060				69,513
Total Liabilities and Shareholders’ Equity		$	115,312			$	137,297

		Year ended December 31,
		2015				2014
Net revenues:
Product		$	94,397			$	84,484
Service			46,754				45,690
Contract			87,852				87,689
			229,003				217,863
Costs of sales:
Product			68,192				58,889
Service			32,824				35,011
Contract			81,848				82,347
			182,864				176,247
Gross margin			46,139				41,616
Operating expenses:
Selling, general and administrative			28,276				28,974
Research and development			10,247				8,947
Amortization of identifiable intangible assets			987				279
			39,510				38,200
Operating income from continuing operations			6,629				3,416
Other (expense) income, net			(800	)			485
Interest expense			(308	)			(136	)
Income from continuing operations before provision for income taxes			5,521				3,765
Provision for income taxes			(1,500	)			(3,694	)
Income from continuing operations			4,021				71
Discontinued operations
Loss on discontinued operations (net of tax)			(4,912	)			(3,722	)
Net loss		$	(891	)		$	(3,651	)
Basic Earnings per Share:
Income from continuing operations			0.26				0.00
Loss from discontinued operations			(0.32	)			(0.24	)
Net Loss		$	(0.06	)		$	(0.24	)
Diluted Earnings per Share:
Income from continuing operations			0.26				0.00
Loss from discontinued operations			(0.32	)			(0.24	)
Net loss		$	(0.06	)		$	(0.24	)
Weighted average shares outstanding
Basic			15,562				15,501
Diluted			15,666				15,582

		Year ended December 31,
		2015				2014
Net loss		$	(891	)		$	(3,651	)
Other comprehensive loss net of applicable tax:
Foreign currency translation adjustments			(1,462	)			(777	)
Comprehensive loss		$	(2,353	)		$	(4,428	)

		Year ended December 31,
		2015				2014
Cash flows from operating activities:
Net loss		$	(891	)		$	(3,651	)
Loss from discontinued operations			4,912				3,722
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Loss on investment			776				-
Depreciation, amortization and accretion			3,070				2,007
Provision for bad debts			772				340
Provision for obsolete inventory			1,293				2,232
Equity based compensation			487				1,185
Change in fair value of contingent consideration			90				-
Deferred income tax			(1,910	)			516
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(628	)			(700	)
Inventories			3,136				(3,826	)
Income tax receivable/(payable)			(196	)			290
Other current assets			210				(1,129	)
Other assets			(644	)			(368	)
Accounts payable			(7,529	)			3,022
Accrued salaries and benefits			1				(425	)
Accrued expenses			213				4,572
Customer deposits			(1,062	)			1,060
Deferred service revenue			251				645
Other long-term liabilities			(54	)			93
Deferred tax equity based compensation			(60	)			-
Net cash provided by operating activities-continuing operations			2,237				9,585
Net cash used in operating activities-discontinued operations			(1,643	)			(3,324	)
Net cash provided by operating activities			594				6,261
Cash flows from investing activities:
Capital expenditures			(1,705	)			(1,536	)
Capitalization of software costs			(2,148	)			(1,650	)
Investment expenditure			(776	)			-
Payments for acquisition, net of cash acquired			-				(5,000	)
Proceeds from sale of business			12,100				-
Net cash provided by (used in) investing activities-continuing operations			7,471				(8,186	)
Net cash used in investing activities-discontinued operations			(1,046	)			(1,816	)
Net cash provided by (used in) investing activities			6,425				(10,002	)
Cash flows from financing activities:
Payments of long-term debt			(173	)			(165	)
Payments of other borrowings			(222,156	)			(39,771	)
Proceeds from other borrowings			217,156				44,771
Payments for deferred acquisition obligations			(3,000	)			-
Proceeds from stock awards			473				2
Net cash (used in) provided by financing activities			(7,700	)			4,837
Effect of exchange rate changes on cash and cash equivalents			(1,462	)			(944	)
Net (decrease) increase in cash and cash equivalents			(2,143	)			152
Cash and cash equivalents at beginning of period			10,167				10,015
Cash and cash equivalents at end of period			8,024				10,167
Less cash and cash equivalents of discontinued operations at end of period			-				300
Cash and cash equivalents of continuing operations at end of period		$	8,024			$	9,867
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	206			$	129
Income taxes, net of refunds		$	310			$	722
Supplemental disclosures of non-cash information:
Acquisition through notes payable		$	-			$	4,820
Contingent consideration payable in connection with acquisition		$	-			$	5,040
Sale of business through note receivable		$	3,320			$	-

		Year ended December 31 (in thousands)
		2015				2014
Foreign currency loss		$	(193	)		$	(115	)
Rental income-net			264				359
Investment write-off			(776	)			-
Other			(95	)			241
		$	(800	)		$	485

		December 31, (in thousands)
		2015				2014				Estimated Useful Life
Acquired and internally developed software costs		$	12,725			$	10,577			3 - 7 years
Customer relationships			160				160			7 years
Non-competition agreements			30				30			1 year
			12,915				10,767
Less accumulated amortization			(2,417	)			(587	)
		$	10,498			$	10,180
Trademarks, trade names (non-amortizable)			400				400			N/A
		$	10,898			$	10,580

2016		$	2,012
2017			1,911
2018			1,747
2019			1,350
2020			1,174
Thereafter			2,304
Total		$	10,498

		December 31,
		2015				2014
Income from continuing operations		$	4,021			$	71
Basic:
Shares outstanding at beginning of year			15,592				15,473
Weighted average shares (cancelled) issued during the year, net			(30	)			28
Weighted average common shares, basic			15,562				15,501
Income from continuing operations per common share, basic		$	0.26			$	0.00
Diluted:
Weighted average common shares, basic			15,562				15,501
Dilutive impact of stock options and restricted stock awards			104				81
Weighted average common shares, diluted			15,666				15,582
Income from continuing operations per common share, diluted		$	0.26			$	0.00

		Restaurants				Hotel/Resort/ Spa				Government				Total
Net Balances at December 31, 2013		$	-			$	6,116			$	736			$	6,852
Goodwill			12,433				13,946				736				27,115
Accumulated Impairment charge			(12,433				(7,830	)			-				(20,263	)
Acquisition			10,315				-				-				10,315
Reclassified to Discontinued Operations			-				(6,116	)			-				(6,116	)
Net balance at December 31, 2014			10,315				-				736				11,051
Goodwill			22,748				13,946				736				37,430
Accumulated Impairment charge			(12,433				(10,238	)			-				(22,671	)
Divestiture			-				(3,708	)			-				(3,708	)
Net balance at December 31, 2015		$	10,315			$	-			$	736			$	11,051