PAR’s hardware offering, the EverServ 500 platform,The restaurant market is built with the same rugged durability PAR is known for but in a compact design that delivers the performancefragmented, we support major corporations and reliabilitytheir franchisees, and businesses of their legacy offerings. Its small ergonomic footprint is ideal for installations where space is at a premium. The design offers a spill resistant, high-impact enclosure that is built to withstand harsh restaurant and retail conditions with continuous operation. The EverServ 500’s solid state design is quiet, offers low power consumption and minimizes maintenance.
The patented EverServ 7000 series is PAR’s flagship POS platform, designed to offer PAR’s ultimate combination of performance, style, ease of service, remote management, flexibility and modularity. The EverServ 7000 series hardwareis built to perform in harsh environments enduring severe treatment and liquid spills. The high performance next-gen architecture of the series supports demanding applications and delivers the speed needed to improve customer throughput.
The patented EverServ 6000 platform has been PAR’s high performance, rugged and reliable POS terminal for the past several years and been deployed globally with the world’s largest restaurant chains. By design, the Everserv 6000 is simple to service, reducing down times and minimizing business interruption. The EverServ 6000 POS terminal leverages a common computing platform across multiple configurations to simplify IT operations, deployment and support, resulting in lower costs. In addition, its energy-saving features and rugged design contribute to a low total cost of ownership and a long product lifespan.
As a result of market changes and demand of mobile technologies within restaurants and additional hospitality environments, PAR introduced its series of 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 its temperature measurement device to provide a complete technology solution supporting food safety compliance and task management automation. The device can operate as a stand-alone hardware platform or as integrated solution with the Company’s Everserv SureCheck® offering.
Software: Restaurant Market
PAR’s restaurant software offerings were designed to exceed the requirements of large and small operators, franchise and enterprise alike in the three dominant restaurant categories: Quick Serve Restaurants (“QSR”), Fast Casual Restaurants (“FC”), and Table Service Restaurants (“TSR”). Each of these restaurant categories has distinct operating characteristics and service delivery requirements and each of PAR’s EverServ software offerings, were designed to allow customers to configure their technology systems to meet their order entry, food preparation, inventory, and workforce management needs, while capturing pertinent POS and BOH transaction data at each location and delivering valuable insight throughout the enterprise.
PAR’s EverServ PixelPoint™ software solution is primarily sold to independent restaurants through channel partners. This integrated software solution includes a point-of-sale software application, a wireless ordering capability, an on-line ordering feature, a self-service ordering function, an enterprise backoffice management function, and an enterprise level loyalty and gift card information sharing application.
On September 19, 2014, PAR acquired Brink Software, Inc., a fast emerging provider of cloud based point of sale (POS) software for restaurants. The Brink POS software productis distinguished by its cloud based designed, with integrated features that include loyalty at its core, mobile online ordering, kitchen video system, guest surveys, enterprise reporting, mobile dashboard, and much more.
In addition to POS software, PAR offers a number of complementary restaurant applications for the enterprise customer. EverServ Operations Reporting is a web-based enterprise reporting solution that consolidates data from all restaurant locations, and is offered either as an on-premises installation or through 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. EverServ Operations reporting was also designed to be capable of integrating with customers’ business applications such as financials, payroll, and supply-chain systems. PAR also offers applications for forecasting, labor scheduling, and inventory management.
Software: Retail Market
The EverServ SureCheck software platform provides food safety monitoring and employee task management functionality through the combination of a cloud-based enterprise server application, a PDA-based mobile application and an 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.
Software: Hotel (including Resorts and Spas) Market
For the Hotel/Resort/Spa market, the Company’s guest-centric property management software provides a series of fully integrated modules that manage all aspects of the guest experience, as well as consolidating guest information and history across the operation into asizes, including single database. PAR develops, sells and supports the SMS|Host® Hospitality Management System, a leading solution in the market for the luxury and resort market of the global hospitality industry. PAR’s SMS|Host platform remains a market leader because of its robust guest-centric functionality, allowing hotel staff to coordinate, cross-sell, and deliver personalized guest services across all various services of large, complex resort operations. The flexibility of the SMS|Host platform, with numerous seamlessly integrated, guest-centric modules, provides the tools the Company’s hotel customers need to personalize service, anticipate guest needs, and consistently exceed guest expectations.
The ATRIO® suite is a highly flexible, highly scalable cloud based software solution that significantly increases PAR’s addressable market to accelerate future revenue growth. The ATRIO® platform of solutions, including property management, spa management and point of sale, was designed as a significant redefinition of the functionality and delivery of hospitality management software.
For the Spa market, PAR provides its SpaSoft® product, the industry’s leading Spa Management Application. Nearly 75% of Forbes five-star spas in the world use SpaSoft to support their operations. The Company designed SpaSoft to satisfy the unique needs of resort spas, day spas, and medi-spas. SpaSoft’s unique booking engine, advanced resource inventory, yield management module, scheduling, management and reporting tools assist in the total management of sophisticated hotel/resort spas and day spas. SpaSoft specifically addresses the needs of the spa industry, enabling spa staff to provide the individualized, impeccable guest service that their most important clients desire and expect.
Services
PAR offers customer support services to its Hospitality customers. The Company believes itsstore operators. We believe our ability to offer directcomprehensive services including installation, maintenance, and technical support services are oneto a diverse set of its key differentiators withincustomers differentiates us from our competitors.
Continuous product research, innovation, and product development are an integral part of our business. We continuously evaluate customer needs, and new and relevant technologies, to enable us to develop innovative new products and adopt those that allow PARenhancements to provide significant improvements in customers’ day-to-day systems. Fromour existing products to improve and/or add to their functionality, performance, operation, and integration capabilities; from hand-held wireless devices to advances in internet performance, the Company’s technical staffour 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.
Installation and Training
Globally, PAR offers 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 site’s staff as well as technical instruction for customers’ information systems personnel.
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 centers in Boulder, CO, and Las Vegas, NV. The Company also has direct service capabilities in Australia and Asia.
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 sophisticated 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.
Sales and Marketing
Within the Hospitality Segment, PAR has dedicated sales teams engaging directly with customers while also utilizing various types of partners through indirect selling channels targeting a variety of differing markets and customer segments.
With regard to the Restaurant market of its Hospitality segment, the Company employs a direct sales force concentrating 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 corporate POS vendor. The Company’s international direct sales force markets to major customers with global locations as well as international chains without a presence in the United States.
The Company’s indirect sales channel enlists sales representatives, and value-added resellers serving the independent restaurant sector and non-foodservice markets such as retail, convenience, amusement parks, movie theaters, cruise lines, spas and other ticketing and entertainment venues.
Sales in the Hotel market of the Hospitality segment are coordinated by multiple sales groups. The Domestic Sales Group targets independent, business class and luxury hotels, resorts and spas in North America and the Caribbean, while the International Sales Group targets independent hotels and resorts outside of the North America. Additionally, the Major Accounts Sales Group works with high profile corporate and chain clients. Lastly, the Company’s Installed Accounts Sales Group works solely with clients who have already installed the SMS|Host product suite.
Competition
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 hardware, advanced development capabilities, extensive domain knowledge and expertise, excellent product reliability, a direct sales force organization, world class support and quick service response. In the Hotel market, PAR believes its competitive advantages include the extensive domain knowledge, long-standing industry leadership, cloud-based and guest-centric orientation of the software, and our high level of customer support. Most of our significant customers have approved several suppliers offering some form of sophisticated hospitality technology system similar to that of the Company. Major competitors include Oracle Corporation, NCR Corporation and Panasonic Corporation.
Backlog
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.
Research and Development
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 were approximately $16.0$11.6 million in 20142016 and $15.6$10.1 million in 2013. The Company capitalizes2015. We capitalize certain software costs in accordance with Financial Accounting Standards Board (“FASB”)(FASB), Accounting Standards Codification (“ASC”) Topic No. 985. See Note 1 “Summary– Summary of Significant Accounting Policies” - of the Notes to the Consolidated Financial Statements included in Part(Part IV, Item 15 of this Annual Report) for further discussion.
Manufacturing and Suppliers
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, and 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.
Intellectual Property
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 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.
Manufacturing and Suppliers
We assemble our ES 8000 series of hardware internally as well as source hardware products and hardware related components from third parties. Although we purchase most of the materials, supplies, product sub-assemblies and full assemblies for our internal assembling of products from several suppliers, we do rely on sole sources for certain of our assembly components and hardware products. As a result, we periodically review and evaluate potential risks of disruption to our supply chain operations in the event one or more supplier should fail to perform.
Government SegmentSegment:
PAR’s Government businesssegment provides a range of technicalsolutions and services for the U.S. Department of Defense (“DoD”) and federal agencies. This segmentIt is dedicated to serving focused on two principal offerings – Solutions and Services; and Mission Support.
Solutions and Services
Intelligence, Surveillance, and Reconnaissance (“ISR”) needs specializing. We provide a variety of geospatial intelligence and situational awareness solutions for mobile and data center offerings. Our substantive, in depth expertise in these domains enable us to provide our government customers and large systems integrators with key technologies to support a variety of applications ranging from strategic enterprise systems to tactical in the developmentfield dismounted users. Additionally, we have developed a number of solutions relative to these advanced signaltechnologies and image processingwe provide integration and management systemstraining support 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 worldwiderespect to the U.S. DoD.these solutions.
The business is organized in two operating sectors that provide comprehensive service offerings across their customer base – Technical Services and ISR Solutions.
The Technical Services 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 the 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 spaced-based satellite communication constellations. Finally, the Company’s Technical Services Sector provides IT services ranging from advanced systems to basic help desk support. Moreover, approximately 50% of this Sector’s global footprint includes an international presence with major contracts in Africa, Greece, Italy, Sicily, Puerto Rico, the Northern Marianas Islands, and Australia. 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 that have continued 15 years or more. The Company works closely with its customers, with the vast majority of the Technical Services 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.
The ISR Solutions Sector provides systems-engineeringengineering support and software-based solutions. Expertisesolutions to DoD research and development laboratories as well as operational commands. Our internal expertise ranges from theoretical and experimental studies to development and fielding of operational prototypes. PAR’scapabilities. Our employees are:
| · | experienced developers and subject-matter experts in DoD Full Motion Video (“FMV”); |
| · | developers of geospatial and imagery data management, visualization, and exploitation solutions; |
| · | major contributors to radar systems from inception to operational capabilities; |
| · | developers of mobile computing applications for Android, iOS, and Windows; and |
| · | developers of geospatial information system (“GIS”) solutions. |
We are actively engaged in the development of mobility applications that support the needs of mobile teams with real-time situation awareness 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 systems, and LiDAR; 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.distributed communications. ISR Solutions Sector has a strong legacy in the advanced research, development and productization of geospatial information assurance (“GIA”) technology involving steganography, steganalysis,steg analysis, digital watermarking, and image forensics. These enabling technologies have been used to provide increased protection and security of geospatial data.
PAR focuses its business in five service areas:
Intelligence, Surveillance, and Reconnaissance (“ISR”): The Companyalso provides a variety of geospatial intelligence solutions including full motion video, geospatial information assurance, raster imagery,scientific and light detection and ranging (“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 systemstechnical support to tactical individual users. Furthermore, PAR has developed a number of products relative to these advanced technologies and provides integration and training support.the U.S. Intelligence Community.
Systems Engineering & Evaluation:Evaluation The Company integrates. We integrate and tests Electro-Optical (“EO”), Infrared (“IR”), Radar, and multi/hyper-spectral sensor systems fortest a broad range of government and industry surveillance applications. PAR developed the Multi-mission Advanced Sensor System (“MASS”), which assists with counter-terrorism, first responder, environmental,research and drug enforcement applications. In addition, thedevelopment solutions. The Company designs and integrates radar sensor systems including experimentation, demonstration, and test support. We also provide 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.
Mission Support
Satellite & Telecommunications ServicesSupport.: The Company provides We provide a wide range of technical and support services to sustain mission critical components of the DoD’s GlobalDepartment of Defense Information Grid (GIG)Network (DoDIN). These services include continuous 24/7/365 operations, system enhancements and associated maintenance of very low frequency (“VLF”)(VLF), high frequency (“HF”)(HF) and very high frequency (“VHF”)(VHF) ground-based radio transmitter/receiver facilities. Additionally, the Company operates and maintains several extremely high frequency (“EHF”)(EHF) and super high frequency (“SHF”)(SHF) satellite communication earth terminals and teleport facilities. The DoD communications earth stations operated by the CompanyPAR is the primary communications infrastructure utilized by the National Command Authoritynational 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:Support The Company provides. We provide satellite operation, management, and maintenance services into support of Satellite Control Center Operations.satellite control center operations. Primary services include Satellite Telemetry Monitoring, Trackingsatellite telemetry monitoring, tracking and Command Support,command support, and Satellite Control in ordersatellite control to provide reliable space-based satellite services conducting Command, Control, Communications, Computers, Intelligence, Surveillancecommand, control, communications, computers, intelligence, surveillance, and Reconnaissancereconnaissance (C4ISR) Operations. The Companyoperations. PAR delivers services in support of satellite Telemetry, Tracking, Controltelemetry, tracking, control, and Remote Terminal Operationsremote terminal operations from 7 locations worldwide.
Information Technology/Management technology/Systems Services: SupportThe Companyprovides Information Technology. We provide management technology services to the DoD and Federal Agencies.federal agencies. These services include Helpdesk Services, Systems Administration, Network Administration, Information Assurancehelpdesk services, systems administration, network administration, information assurance and Systems Security, Database Administration, Telephone Systems Management, Testingsystems security, database administration, telephone systems management, testing and Testbed Management, ITIL-Based Service Management,testbed management, and Tier 0 through Tier III support.ITIL-based service management.
Government ContractsTelecommunication services include satellite and terrestrial communications operations and maintenance services, which operate elements of the DoDIN to support the National Command Authority (President & Joint Chiefs of Staff), DoD and other government agencies. The Company provides IT support services ranging from advanced systems management to help desk support—with more than 50% of its global footprint outside the continental U.S. with contracts in Europe, Africa, Australia, and U.S. commonwealths and territories in the Pacific and Caribbean.
The Company performsPAR has strong and enduring relationships with a diverse set of customers throughout the U.S. DoD and federal government, and our track record of delivering mission critical services to our government customers spans decades, and includes contracts continuing 15 years or more. We work for U.S. Government agencies under firm fixed-price, cost-plus-fixed-fee, and time-and-material contracts. Theclosely with our customers, with the vast majority of these contracts have a period of performance of oneour mission system employees co-located at customer sites. Our strong relationships and on-site presence with our customers enable PAR to five years. There are several risks associated with Government contracting. For instance, contracts may be reduced in size, scopedevelop substantive customer 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 terminatedtechnical domain knowledge, and translate mission understanding into exemplary program execution and continued demand 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 2011 and have not resulted in any material adjustments.PAR’s services.
Marketing and Competition
Contracts are obtained principallyWe obtain contracts primarily through competitive proposals in response to solicitations from government organizations and prime contractors. In addition, the CompanyPAR sometimes obtains contracts by submitting unsolicited proposals. Although the Company believes it iswe believe we are well positioned in itsour business areas, competition for Governmentgovernment contracts is intense. Many of the Company’sour competitors are major corporations, or subsidiaries thereof, that are significantly larger and have substantially greater financial resources. The CompanyWe also competescompete with many smaller, economically disadvantaged companies, many of which are designated by the Governmentgovernment 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 Departmentour department of Defensedefense customers are now migrating to low-price/technically acceptable procurements while leveraging commercial software standards, applications, and solutions.
Backlog
The value of existing Government contracts at December 31, 2014,2016, net of amounts relating to work performed to that date, was approximately $100.4$126.0 million, of which $53.9$36.4 million was funded. The value of existing Government contracts at December 31, 2013,2015, net of amounts relating to work performed to that date, was approximately $95.6$101.2 million, of which $40.9$48.4 million was funded. Funded amounts represent those amounts committed under contract by Government agencies and prime contractors. The December 31, 20142016 Government contract backlog of $100.4$126.0 million represents firm, existing contracts. Of this backlog amount, approximately $67.5$55.4 million is expected to be completed in calendar year 2015,2017, as funding is committed.
EmployeesIntellectual Property and Other Rights
We develop a substantial amount of our products internally as original developments, discoveries and know-how or based on existing copyrighted works and/or patents issued or pending of PAR or third party licensors. We have a number of U.S. and foreign patents and patents pending and trademarks, as well as copyrights that relate to internally developed software, various distinctive characteristics of our products, including certain attributes, functionality, and brand association and goodwill. In addition to our publicly available intellectual property, we possess competitive confidential information and trade secrets. We protect our intellectual property and other proprietary information by actively pursuing U.S. and foreign patent and trademark protection of our proprietary product developments, discoveries and know-how and our brands and logos, and by entering into license agreements and non-disclosure and confidentiality agreements.
Employees
As of December 31, 2014, the Company had 1,2212016, we employed approximately 1,002 full-time employees, including approximately 63% of whom were engaged56% in the Company’s Hospitalityour Restaurant/Retail segment, 32% of whom were38% in theour Government segment and 5%(27% 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 10% of the Company’s employeeswhich are covered by collective bargaining agreements. The Company considers its employee relationsagreements), and 6% who are corporate employees. We consider our relationship with our employees to be good.
17Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website at www.partech.com “About Us - Investors, SEC Filings”, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). The information posted on or accessible through our website is not incorporated into this Annual Report on Form 10-K.
The Company operates in a dynamic and rapidly changing environment involving numerousOur business is subject to certain risks and uncertainties, that are difficult to predict and manyeach of which are outside of the Company's control. In addition to the other information in this reportcould materially 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 onadversely affect our business, financial condition, results of operations, cash flows and the markettrading price of our common stock.
Our yearly results of operations may fluctuate significantly due to the timing of our revenue recognition and our ability to accurately forecast sales, including subscription software sales and renewals.
Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future as our business model continues to evolve from hardware and related services to a management technology solutions provider, including offering and delivering our software as a service – SaaS. As revenues from our cloud offerings increase, we may experience volatility in our reported revenues and operating results due to the differences in timing of revenue recognition between our SaaS offerings and our traditional on-premises software and hardware sales. The SaaS delivery model is subscription based; accordingly, SaaS revenues are generally recognized ratably over the life of the subscription. In contrast, revenue from our on-premises software and hardware sales is generally recognized in full at the time of delivery. Accordingly, the SaaS business model creates certain risks related to the timing of revenue recognition not associated with our traditional on-premises delivery model. A portion of our quarterly SaaS based revenue results from the recognition of deferred revenue relating to subscription agreements entered into during previous quarters. A decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that period, but may result in a decline in our revenue in future quarters. If any of our assumptions about revenue from our SaaS business model prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.
If our technical and maintenance support services are not satisfactory to our customers, they may not renew their services agreements or buy future products, which could adversely affect our future results of operations, financial condition, and cash flows.
Our business relies on our customers’ satisfaction with the technical and maintenance support services we provide to support our products. If we fail to provide technical and maintenance support services that are responsive, satisfy our customers’ expectations and resolve issues that they encounter with our products, then they may not purchase additional products or services from us in the future.
If we are unable to recruit and retain qualified employees, our business may be harmed.
Much of our future success depends on hiring qualified employees and the continued service of our senior management. Experienced personnel in the management technology industry are in high demand and competition for their talents is intense in the skill-set we require. Moreover, we believe that a critical contributor to our success is our corporate culture and values. We must not only successfully attract and retain qualified business, technical, product development and other employees that contribute to our business, we must attract and retain qualified employees who embrace and reflect our culture and values. Our failure to do so, could adversely affect our ability to innovate, to rapidly and effectively change and introduce new products, and to provide timely and effective installation, technical and maintenance support services, and our financial condition and results of operations may suffer.
The price of our common stock and could causemay be negatively impacted by factors that are unrelated to our actual results to differ materially from those expressed or implied in our forward-looking statements.operating performance.
Our future operating results are difficult to predict and are subject to fluctuations.
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 mayThe trading price of our common stock could be materially affectedimpacted by a number of factors, many of which are beyondoutside our control, including:control. Although our stock has been listed on NYSE for many years, trading in our stock does not generally occur in high volumes and the market for our stock cannot always be characterized as active. Thin trading in our stock may exaggerate fluctuations in the stock’s value, leading to price volatility in excess of that which would occur in a more active trading market. In addition, the stock market in general is subject to fluctuations that affect the share prices and trading volumes of many companies, and these broad market fluctuations could adversely affect the market price of our common stock. Factors that could affect our common stock price in the future include but are not necessarily limited to the following:
| · | the effects of adverse macroeconomic conditionsactual or anticipated fluctuations in the United States and international markets, especially in light of the continued challenges in global creditour operating results and financial markets; |
| · | changes in customer demand for our products; |
| · | the timing of our new product announcements or introductions, as well as those by our competitors; |
| · | the ability to timely produce the products our customers seek to satisfy their technology requirements; |
| · | the level of demand and purchase orders from our customers, and our ability to adjust to changes in demand and purchase order patterns; |
| · | 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; |
| · | the effectiveness of our efforts to reduce product costs and manage operating expenses; |
| · | the ability to hire, retain and motivate qualified employees to meet the demands of our business; |
| · | intellectual property disputes; |
| · | potential significant litigation-related costs; |
| · | costs related to compliance with increasing worldwide environmental and other regulations; and |
| · | the effects of public health emergencies, natural disasters, security risk, terrorist activities, international conflicts and other events beyond our control. |
| · | the dependency on business from major accounts which can, at will, reduce or eliminate on-going business |
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.
Our stock price has been volatile and may fluctuate in the future.
The trading price of our common stock has and may continue to fluctuate significantly. Such fluctuations may be influenced by many factors, including:
| · | the volatility of the financial markets; |
| · | uncertainty regarding the prospects of domestic and foreign economies; |
| · | uncertainty regarding domestic and international political conditions, including tax policies; |
| · | our performance and prospects;condition; |
| · | the performance and prospects of our major customers; |
| · | fluctuations in the trading volume of our common stock; |
| · | the concentrated beneficial ownership of our common stock by our founder, Dr. John W. Sammon; |
| · | actual or anticipated regulatory action against us; |
| · | the lack of earnings guidance and securities analysts following us; |
| · | investor perception of our companyus and the industryindustries in which we operate; |
| · | the limited availability of earnings estimatesuncertainty regarding domestic and supporting research by investment analysts; |
| · | the liquidity of the market for our common stock;international political conditions, including tax policies; and |
| · | uncertainty regarding the concentrationprospects of beneficial ownership of our common stock by Dr. John W. Sammon, Directordomestic and Chairman Emeritus of PAR’s Board of Directors.foreign economies. |
Public stock markets have recently experienced priceTwo customers account for a significant portion of our revenues. The loss of one of these customers, or a significant reduction, delay, or cancellation of purchases by one of these customers would materially adversely affect our business, financial condition, and trading volume volatility. This volatility significantly affectedresults of operations.
Revenues from our Restaurant/Retail segment constituted 65% and 62% of our total consolidated revenues for 2016 and 2015, respectively; and, aggregate sales to our two largest customers, which include sales to these two customers’ respective franchisees - McDonald’s Corporation and Yum! Brands, Inc., which consists of the market pricesKentucky Fried Chicken, Taco Bell and Pizza Hut brands – constituted 25% (McDonald’s) and 11% (Yum!) and 19% (McDonald’s) and 10% (Yum!) of securitiestotal consolidated revenues for 2016 and 2015, respectively. There were no other customers that comprised greater than 10% of many technology companiesour total consolidated revenues during these years. A loss of McDonald’s or Yum! Brands as a customer, or a significant reduction, delay, or cancellation of orders by one of these customers would reduce our revenue and the return of such volatility could result in broad market fluctuations that couldoperating income and would 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,business, operating results 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.financial condition.
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, 2014 and 2013, aggregate sales to our top two Hospitality segment customers, McDonald’s Corporation and Yum! Brands, Inc. amounted to 28% and 32% of total revenues, 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 rapid and continual changes in technology. Our competitors offer products that have an increasingly wider range of features and capabilities. 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, 2014 and 2013, we derived 62% and 63%, respectively, of our total revenues 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 and weather conditions. 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 theour 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.products.
Several competing suppliersThe markets for our POS software and hardware products are characterized by rapid technological advances, intense competition among existing and emerging competitors, evolving industry standards, emerging business, distribution and support models, disruptive technology developments, and frequent new product introductions.
While we think our POS software and hardware products offer hospitality management systems similar to ours. Somecompetitive, innovative features and functionality, any one of these competitorsfactors could create downward pressure on pricing and gross margins and could adversely affect sales to our existing customers, as well as our ability to attract and sell to new customers. Our future success will depend on our ability to anticipate and identify changes in customer needs and/or relevant technologies and to rapidly and effectively change and improve our products in response, including changes in operating systems, application software and computer and communications hardware, with which our products interoperate or their performance and functionality are larger than PARotherwise affected. If we fail to anticipate and/or identify changes in customer needs and/or emerging relevant technological trends, our business, results of operations 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 changeconditions could suffer. Additionally, any delay in the Hospitality segment makes it likely we will face competition fromdevelopment, marketing, or launch of new products designed by companies not currently competing with us. Theseor enhancements to our existing products could result in customer attrition or impede our ability to attract new products may have features not currently available from us. We believecustomers, causing a decline in our revenue, earnings or stock price and weakening 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.position.
Our Governmentgovernment contracting business has been focused on niche offerings, reflecting our expertise, primarily in the areas of Communications Systems Support, Intelligence, Surveillance and Reconnaissance, (ISR), Systems Engineeringsystems engineering & Evaluationevaluation, satellite and Information Systemstelecommunications services and management technology/systems services. Many of our competitors in the Government segment are larger and have substantially greater financial resources and broader capabilities in informationmanagement technology. We also compete with smaller companies, many of which are designated by the Governmentgovernment 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 Governmentgovernment contracts as a directprime contractor or indirect subcontractor.
we may not be ablesubcontractor, and our failure to meet the unique operational, legaldo so, would reduce our revenue and operating income and could adversely affect our business, operating results and financial challenges that relate to our international operations, which may limit the growthcondition.
The consequence of our business.
For the fiscal years ended December 31, 2014, and 2013, our net revenues from sales outside the United States were 13% and 16%, respectively, of the Company’s total revenues. We anticipate international sales will continue to account for a significant portion of sales. We intend to continue to expand our operations outside the United States and to enter additional international markets, which will require significant management attention and financial resources. Our operating results are subject to the risks inherent in international sales, including, but not limited to, regulatory requirements, political and economic changes and disruptions, geopolitical disputes and war, transportation delays, difficulties in staffing and managing foreign sales operations, and potentially adverse tax consequences. In addition, fluctuations in exchange rates may render our products less competitive relative to local product offerings, orinternal investigations 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 business and could subject us to regulatory scrutiny.
Under the oversight of our Audit Committee, in the first quarter of 2016, we conducted an internal investigation of our former chief financial officer’s unauthorized investment activities and, we are currently conducting an internal investigation to determine whether certain import/export and sales documentation activities at our China and Singapore offices were improper and in possible violation of the U.S. Foreign Corrupt Practices Act, or FCPA, and other applicable laws, and certain of our policies, including our Code of Business Conduct and Ethics.
We voluntarily notified the SEC of our investigation (and our findings and conclusions) of our former chief financial officer; and, we have voluntarily notified the SEC and the U.S. Department of Justice, or DOJ, of our investigation of the activities concerning China and Singapore, and we are fully cooperating with these agencies. If the SEC, DOJ, or other governmental agencies (including foreign governmental agencies) were to determine that violations of certain laws or regulations occurred, then we could be exposed to a broad range of civil and criminal sanctions, including injunctive relief, disgorgement, fines, penalties, modifications to our business practices, including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee our future international sales and, consequently,compliance. While we are currently unable to predict what actions the SEC, DOJ, or other governmental agencies (including foreign governmental agencies) might take, or what the likely outcome of any such actions might be, or estimate the range of reasonably possible fines or penalties, such actions, fines and/or penalties could be material, resulting in a material adverse effect on our operating results.business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Even if an inquiry or investigation does not result in an adverse determination, our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows could still be adversely impacted.
If we fail to correct the identified material weaknesses, and maintain appropriate internal controls, our business, results of operations and financial condition could be adversely affected.
As described in “Item 9A - Controls and Procedures” of this Annual Report during the third quarter of 2016, we identified material weaknesses in our internal control over financial reporting. We previously disclosed identified material weaknesses in our hiring and treasury procedures, which have been remedied. If we fail to correct our current material weaknesses; or, if we are unable to maintain appropriate internal controls in the future, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC could be adversely affected, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC. Any such consequence or other negative effect could adversely affect our business, results of operations and financial condition.
We are subject to risks associated with compliance with international laws and regulations which may harm our business
Although only 8% for 2016 and 14% for 2015 of our total consolidated revenues were derived from sales outside of the U.S., we have operations across the globe, and our international operations subject us to a variety of risks and challenges, including:
| · | compliance with foreign laws and regulations, including the FCPA, the U.K. Bribery Act of 2010, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our software and hardware in certain foreign markets, and the risks and costs of non-compliance with such laws and regulations, including fines, penalties, criminal sanctions against us, our officers or employees, prohibitions on the conduct of our business and damage to our reputation; |
| · | increased risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and irregularities in financial statements; |
| · | reduced protection of our intellectual property rights in certain countries and practical difficulties and costs of enforcing rights abroad; |
| · | compliance with the laws of numerous foreign taxing jurisdictions and overlapping of different tax regimes; |
| · | uncertainty around a potential reverse or renegotiation of international trade agreements and partnerships under President Donald J. Trump’s administration; |
| · | sales and customer service challenges associated with operating in different countries; |
| · | difficulties in receiving payments from different geographies, including difficulties associated with currency fluctuations, payment cycles, transfer of funds or collecting accounts receivable, especially in emerging markets; |
| · | variations in economic or political conditions between each country or region; |
| · | economic uncertainty around the world and adverse effects arising from economic interdependencies across countries and regions; |
| · | uncertainty around how the United Kingdom’s recent decision to exit the European Union (“Brexit”) will impact its access to the European Union Single Market, the related regulatory environment, the global economy, and the resulting impact on our business; and |
| · | increased infrastructure and legal compliance costs. |
A portion of ourGovernment segment revenue is derived from u.s.U.S. government contracts, which contain provisions unique to public sector customers, including the u.s.U.S. government’s right to modify or terminate these contracts at any time.
For the fiscal years ended December 31, 2014In 2016 and 2013,2015 we derived 38%35% and 37%38%, respectively, of our total consolidated revenues from contracts to provide technical expertise to Governmentgovernment organizations and prime contractors. In any given year, the majority of our Governmentgovernment contracting activity is associated with the U.S. Department of Defense. Contracts with the U.S. Governmentgovernment typically provide that such contracts are terminable, in fullwhole or in part, at the convenience of the U.S. Government.government. If the U.S. Government terminatedgovernment terminates 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. Governmentgovernment 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. Governmentgovernment 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. Governmentgovernment agencies and departments pursuant to fixed-price, cost-plus fixed fee and time-and-material prime contracts and subcontracts. Approximately 53%55% of the revenue that werevenues derived from government contracts for the year ended December 31, 2014 came from2016, was based on fixed-price or time-and-material contracts. Thetime-and- material contracts, and the balance (approximately 45% of the revenue that we derived from Government contracts in 2014 primarily came fromtotal government revenues) was based on 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 theirthe full benefits.benefit of the contracts. 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, ifIf our costs under either of these types of contractcontracts were to exceed the contract ceiling, or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursementreimbursed for all100% of our associated costs.
If we are unable to control costs incurred in performing under each type of contract, such Our inability to control our costs under either a time-and-materials contract or a cost-plus fixed fee contract 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 significantA portion of our total assets consists of goodwill and identifiable and 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 our revenue or increase in cash expenses attributable to such period.
We haveOur goodwill and identifiable intangible assetswas approximately $11.1 million at December 31, 2014 totaling approximately $17.22016 and December 31, 2015, and our intangibles were $11.0 million at December 31, 2016 and $23.0$10.9 million respectively; resultingat December 31, 2015. Identifiable intangible assets were, primarily froma result of business acquisitions and internally developed capitalized software. The Company testsWe test our goodwill and identifiable intangible assets for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We describe the impairment testing process and results of this testing more thoroughly herein in Item7 under the heading “Management’s“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.” If we determine an impairment has occurred at any point in time, we will be required to reduce goodwill or identifiable intangible assets on our balance sheet.
| Unresolved Staff Comments |
None. Additional information about our impairment testing is contained in Note 1 – Summary of Significant Accounting Policies - of the Notes to Consolidated Financial Statements (Part IV, Item 15 of this Annual Report).
14
The following are the principal facilities (by square footage) of the Company:
Location
| Industry Segment
| Floor Area Principal Operations
| Number of Sq. Ft.
|
New Hartford, NY | Hospitality
Government
| Principal executive offices,
manufacturing, research and
development laboratories,
computing facilities
| 174,450
|
Rome, NY | Government | Research and development | 30,800 |
Stowe, VT | Hospitality | Sales, service and research and development | 21,300 |
Sydney, Australia | Hospitality | Sales and service | 14,400 |
Las Vegas, NV | Hospitality | Service | 12,000 |
Boca Raton, FL | Hospitality | Research and development | 11,470 |
Markham, Ontario | Hospitality | Research and development | 11,100 |
Boulder, CO | Hospitality | Service | 10,700 |
The Company’s headquarters and principal business facility is located in New Hartford, NY, which is near Utica, in central New York State.
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 1B. | Item 3: Unresolved Staff Comments. | Legal Proceedings |
We do not have any unresolved comments from the SEC staff.
Our corporate headquarters is located at PAR Technology Park, 8383 Seneca Turnpike, New Hartford, New York. We own our corporate headquarters – both the building and land. We lease all our other properties for varying terms. We believe our existing properties, both owned and leased, are in good condition and are suitable for the conduct of our business for the foreseeable future.
The Company is subjectfollowing table sets forth the location, the operating segment (if applicable) that uses and the use of each of our principal properties and each properties’ approximate square footage:
Location | | Operating Segment | | Use | | Approximate Square Footage |
New Hartford, NY | | Corporate/ Restaurant / Retail | | Corporate headquarters, assembly, research and development laboratories, sales, service, wellness, and computing facilities | | 216,800 |
Rome, NY | | Government | | Research, product development, sales | | 30,800 |
Sydney, Australia | | Restaurant / Retail | | Sales and service | | 14,400 |
Boca Raton, FL | | Restaurant / Retail | | Research and product development | | 11,470 |
Markham, Ontario | | Restaurant / Retail | | Research and product development | | 11,100 |
Boulder, CO | | Restaurant / Retail | | Service | | 10,700 |
In addition to the properties identified above, we have leasehold interests in small office spaces located in San Diego, California (use: research, product development, sales and administration) and Shanghai, China; Singapore; Staines, United Kingdom; Dubai, United Arab Emirates; and Paris, France (use: sales and administration).
We are not currently a party to any material litigation.
See Note 10 – Contingencies - of the Notes to Consolidated Financial Statements (Part IV, Item 15 of this Annual Report) for information regarding legal proceedings which arisearising in the ordinary course of business. Inour business, and a discussion about our current internal investigation into import/export and sales documentation activities at our China and Singapore offices, and the opinion of management,civil and criminal sanctions available to 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.SEC, DOJ, and other governmental agencies (including foreign governmental agencies).
Item 4: | | Mine Safety Disclosures |
Not Applicable.
PART II
5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The Company’s Common Stock, par value $.02 per share, tradesOur common stock is listed on the New York Stock Exchange (NYSEunder the symbol - PAR)“PAR”. At December 31, 2014,On March 28, 2017, there were approximately 375 owners411 holders of record of the Company’s Common Stock, plus those owners whose stock certificates are held by brokers.
our common stock. The following table showssets forth, for the periods indicated, the high and low stocksales prices for the two years ended December 31, 2014our common stock as reported by the New York Stock Exchange:
| | 2014 | | | 2013 | | | 2016 | | | 2015 | |
Period | | Low | | | High | | | Low | | | High | | |
| | | | | | | | | | | | | | High | | | Low | | | High | | | Low | |
First Quarter | | $ | 4.65 | | | $ | 5.50 | | | $ | 4.11 | | | $ | 5.10 | | | $6.63 | | | $5.04 | | | $6.04 | | | $4.03 | |
Second Quarter | | $ | 4.12 | | | $ | 4.99 | | | $ | 3.85 | | | $ | 4.89 | | | 6.86 | | | 4.35 | | | 4.98 | | | 3.80 | |
Third Quarter | | $ | 3.78 | | | $ | 5.24 | | | $ | 4.01 | | | $ | 5.27 | | | 5.52 | | | 4.83 | | | 5.29 | | | 4.11 | |
Fourth Quarter | | $ | 4.28 | | | $ | 6.18 | | | $ | 4.83 | | | $ | 5.92 | | | 5.58 | | | 4.71 | | | 7.39 | | | 5.12 | |
The Company has notWe have never declared or paid cash dividends on its Common Stock, and its Board of Directors presently intends to continueour common stock. We currently intend to retain any future earnings for reinvestmentuse in growth opportunities. Accordingly, it is anticipated nothe operation of our business and do not intend to declare or pay any cash dividends will be paid in the foreseeable future. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant.
Under our equity incentive plans, in consideration for grants of performance vesting restricted stock, recipients must pay PAR par value for each share granted; if the performance vesting requirements are not satisfied, PAR repurchases the forfeited shares at par value. In addition, employees may elect to have us withhold shares to satisfy minimum statutory federal, state and local tax withholding obligations arising from the vesting of restricted stock. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of shares by us on the date of withholding.
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 meaningThe following discussion and analysis of Section 27A of the Securities Act of 1933, as amended,our financial condition 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 onshould be read in conjunction with our margins,Consolidated Financial Statements and the effectsNotes thereto included under Part IV, Item 15 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 reflectedthis Annual Report. See also, “Forward-Looking Statements” 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.Annual Report.
Overview
PAR'sPAR’s management technology solutions for the HospitalityRestaurant/Retail segment featurefeatures cloud and on-premise software applications, hardware platforms, and related installation, technical, and maintenance support services tailored for the needs of restaurants hotels, resorts and spas, casinos, cruise lines, movie theatres, theme parks and retailers. The Company'sOur 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 informationmanagement technology and communications support services to the U.S. Department of Defense.
The Company'sOur products sold in the HospitalityRestaurant/Retail segment are utilized in a wide range of applications by thousands of customers. The Company facescustomers worldwide. We face competition across all of its markets withincategories in the HospitalityRestaurant/Retail segment competingin which we compete based on the basis of product design, innovative features and functionality, quality and reliability, price, customer service, and delivery capability. PAR's continuingOur strategy is to provide complete integrated management technology solutions, withsupported by industry leading customer service in the markets in which it participates. The Company conducts itsservice. Our research and development efforts are focused on timely identifying changes in customer needs and/or relevant technologies, to createrapidly and effectively develop innovative technology offeringsnew products and enhancements to our existing products that meet and exceed customer requirementsrequirements.
Our strategy is to expand our Restaurant/Retail business by continuing to invest in our existing products - Brink 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 continuedSureCheck - including the development of itsenhancements to our existing software applications and hardware platforms and the development of new and innovative cloud based software applications. These products include its Brink POS software, with integrated features that include loyalty at its core, mobile online ordering, kitchen video system, guest surveys, enterprise reporting, mobile dashboard, and much more. PAR’s strategy is also focused on the continued feature expansion and deployment of ATRIO®, its cloud-based software for the Hotel/Resort/Spa markets. 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 the growth of theseour products, the Company continueswe continue to expand itsour direct sales force and third-party distribution channels.channel partners.
Currently, PAR’s primary market is the quick serve restaurant category and hardware sales to tier 1 customers in that category. Our strategy continues to focus on growth of our software offerings, including our cloud software as a service (SaaS) and related hardware and support services, consistent with our strategy to expand our product offerings beyond restaurant and retail markets. As we implement our strategies, we continuously monitor the trends in the markets we currently operate and the markets we intend to operate in the future. We know POS hardware is becoming a commodity, as more POS devices (tablets, kiosks and bring your own device) are introduced, competition will increase, driven by pricing, scalability, functionality, and economies of scale, resulting in smaller margins. Our strategy acknowledges this trend, and we intend to grow our recurring revenues from software contracts, specifically SaaS, reducing the impact of this eventual commoditization of POS hardware.
The Quick Serve Restaurant (“QSR”) market, PAR's primary market, continues to perform wellstrategy for the majority of large, international companies. However, the Company has seen certain market conditions impact smaller specific QSR organizations, whose business is slowing due to the continued lack of consumer confidence in those regions. These conditions could have a material adverse impact on the Company's estimates, specifically the fair value of its assets related to its legacy products. The Company continues to assess the alignment of its product and service offerings to support improved operational efficiency and profitability going forward.
The focus of the Company’sour PAR Government businesssegment is to expand its services and solutions business lines. Throughbuild on our sustained outstanding performance of existing service contracts, and investingcoupled with investments in enhancing itsenhanced business development capabilities, the Company is ablecapabilities. We believe we are well positioned to consistently win renewalrealize continued renewals of expiring contracts extendand extensions of existing contracts, and secure additional new business. With itsservice and solution contracts in expanded areas within the U.S. Department of Defense and other federal agencies. We believe our highly relevant technical competencies, intellectual property, and investmentinvestments in new technologies the Company providesprovide opportunities to offer systems integration, products, and highly-specialized service solutions to the U.S. Department of Defense and other federal/state agencies with systems integration, products and highly-specialized services.federal agencies. 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 impactare factors we monitor as we develop and implement our business strategy for the performance of this business.PAR Government segment.
Results of Operations — 20142016 Compared to 20132015
The CompanyDuring the year ended December 31, 2015, we sold substantially all of the assets of our hotel/spa technology business operated under PAR Springer-Miller Systems, Inc. (“PSMS”). See Note 2 – Divestiture and Discontinued Operations - of the Notes to Consolidated Financial Statements for further discussion, including the terms of the transaction.
We reported revenues of $233.6$229.7 million for the year ended December 31, 2014, a decrease of 3.2%2016, flat from the $241.4$229.0 million reported for the year ended December 31, 2013. The Company’s net loss2015. Revenues from continuing operationsour Restaurant/Retail segment of $149.3 million for the year ended December 31,2016, increased 5.8%, compared to $141.2 million reported for the year ended December 31, 2014 was $3,651,000 or $0.24 loss per share, compared to2015. PAR’s Government segment reported revenues of $80.3 million for the year ended December 31, 2016, a decrease of 8.6% from $87.9 million reported for the year ended December 31, 2015. We reported net income from continuing operations of $569,000,$2.5 million or $0.04$0.16 per diluted share for the year ended December 31, 2016 versus $4.0 million or $0.26 per diluted share for the same period in 2013. During 2013, the Company2015. For 2016 and 2015, we reported a net loss from discontinued operations of $211,000,$0.7 million or $0.01$0.05 loss per share associated with its former Logistics Management business. During 2014, PAR did not record any incomeversus a loss of $4.9 million or $0.32 loss from discontinued operations. The Company’s net income for the year ended December 31, 2013 was $358,000, or $0.02 per diluted share.share, respectively.
Product revenues for the year ended December 31, 2014 were $87.2 million, a decrease from the $90.8 million recorded for the same period in 2013. This decrease was primarily the result of decreased sales to certain major customers as large rollouts were completed in fiscal 2013. Partially offsetting this decrease was an increase in sales made through the Company’s worldwide dealer network as well as an increase in software sales, which have improved 23% year over year.
Service revenue primarily includes installation, software maintenance, training, 24 hour help desk support and various depot and on-site service options. Customer service revenues were $58.7$100.3 million for the year ended December 31, 2014,2016, an increase of 6.2% from $94.4 million recorded in 2015. This increase was primarily driven by higher revenues generated from hardware attachments associated with Brink deployments and hardware sold to global tier 1 accounts. Offsetting the increase was a 4.6% decrease in revenues driven by our global channel partners.
Service revenues were $49.1 million for the year ended December 31, 2016, an increase of 5.0% from $61.5$46.8 million reported for the same period in 2013. 2015. The decreaseincrease is mostlyattributable to the resultdiversification of a decline in field serviceour revenue as certain customers transitioned to alternative service support delivery models as wellbase, with higher recurring revenue from our software contracts; specifically, software sold as a decline in installationservice, SaaS, and other revenue consummate with lower product revenue. This decline is partially offset by an increase associated with the Company's depot repair operation, resultingstreams generated from new contracts.post contract support (“PCS”) offerings.
Government contractContract revenues were $87.7$80.3 million for the year ended December 31, 2014,2016, compared to $87.9 million reported for the same period in 2015, a decrease of 1.5% when compared to the $89.0 million recorded in 2013. This decrease is attributable to the completion of certain fixed price technical services contracts that were completed in 2013 and early 2014. 8.6%. This decrease was partiallydriven by lower volume within our PMO services contracts, offset by an increase in value-added revenue from the Company’son our Intelligence, Surveillance, and Reconnaissance (“ISR”) systems integration contract.(ISR), contracts.
Product margins for the year ended December 31, 20142016, were 31.8%26.2%, an increasea decrease from 31.4% in27.7% for the same period in 2013. This increase was driven by a favorable2015. Overall, product margin decreased primarily due to unfavorable product mix, resultingas a result of higher than anticipated project work from increasedtier 1 customers, and lower sales of higher margin perpetual software license revenue.licenses.
Customer serviceService margins were 31.1%27.4% for the year ended December 31, 2014, compared to 29%2016, a decrease from 27.5% recorded for the same period in 2013. This2015. The decrease was primarily due to an increase is associatedin costs to support our hardware support contracts, and $0.5 million was due to accelerated amortization related to discontinued development of a software module. Offsetting these increases was a favorable product mix with a favorable mix in service offerings compared to 2013.higher content of software sold as SaaS and other software related revenues.
Government contractContract margins were 6.1%8.1% for the year ended December 31, 2014, a decrease from the 7.2%2016, compared to 6.8% for the same period in 2013. The most significant components of2015. This increase was due to a more profitable contract costs in 2014 and 2013 were labor and fringe benefits. For 2014, labor and fringe benefits were $37.4 million, or 45% of contract costs, compared to $40.2 million or 51% of contract costs for the same period in 2013. This decrease in percentage is mostly attributable to the higher amount of material and subcontract revenues in 2014mix, associated with the Company's ISR systems integration contract with the U.S. Army. higher margin on value-added revenues.
Selling, general and administrative expenses were $31.4 million for the year ending December 31, 2016, compared to $27.3 million for the year ended December 31, 20142015. The increase is primarily attributable to $1.5 million of expenses related to the investigation of our former chief financial officer’s unauthorized transfers of funds, $1.3 million of expenses related to our internal investigation of conduct at our China and Singapore offices, a write-off of $0.8 million relating to our human capital management system, and $0.6 million of expenses related to the implementation of the initial phase of our new enterprise resource system.
Research and development expenses were $37.3$11.6 million a decrease of 1.6% fromfor the $37.9year ended December 31, 2016, compared to $10.1 million recorded for the same period in 2013. The decrease is attributable to the Company’s execution of cost reduction initiatives within its Hospitality operations.Partially offsetting the decrease were increases in expenses associated with the acquisition of Brink Software, equity based compensation expense and severance related expenses.
Research and development expenses were $16.0 million for the year ended December 31, 2014, an increase of 2.6% from the $15.6 million recorded in 2013.2015. This increase was primarily related to an increase in hardware development expenses associated with new product developments, as well as an increase inincreased software development expensescosts for products within the Restaurant/Retail segment, primarily R&D associated with the acquisition ofCompany’s Brink Software.and SureCheck software applications.
During 2014, the Companyyear ended December 31, 2016, we recorded $279,000$1.0 million of amortization expense associated with acquired identifiable intangible assets from thein connection with our acquisition of Brink, Software. The Company did not record anywhich closed on September 18, 2014. We recorded $1.0 million of amortization expense associated with acquired identifiable intangiblethese assets in 2013.
Other income, net, was $304,000 for the year ended December 31, 20142015.
Other income, net, was $1.3 million for the year ended December 31, 2016 compared to $506,000other expense, net of $0.8 million for the same period in 2013. 2015. Other income/expense primarily includes fair value adjustments on contingent consideration, rental income, net of applicable expenses, foreign currency fair value adjustments, fair market value fluctuations of the Company'sour deferred compensation plan rentaland other non-operating income/expense. The primary drivers of the increase in other income, strategic product development partnerships, and foreign currency fair value adjustments. The income in 2014 is primarily duenet, relates to rental income. The income in 2013 was primarily due to incomea $1.1 million decrease of contingent consideration liability related to strategic product development partnerships withinour acquisition of Brink in the Company’s Hospitality businessthird quarter 2014 and lower market volatility within the Company’s deferred compensation plan.an insurance recovery of $0.8 million relating to our former chief financial officer’s unauthorized transfers of funds.
Interest expenseincome (expense), net, represents accreted increased from the note receivable related to the sale of PSMS and interest charged on the Company’sour short-term borrowings from banks and from long-term debt. Interest expenseincome was $136,000$0.1 million for the year ended December 31, 2014,2016, as compared to $60,000an interest expense of $0.3 million for the same period in 2013. 2015. This increase is associated with higherthe accreted interest income of $0.2 million related to the note receivable in connection with the sale of PSMS and lower interest expense as compared to 2015, which is due to lower outstanding borrowings in 2014 versus 2013.on the line of credit.
For the year ended December 31, 2014, the Company’s2016, our effective income tax rate was an expense of 78.0%31.4%, compared to a benefitan expense of 370%27.2% in 2013.2015. The variances from the federal statutory rate for 20142016 were due to the mix of taxable income from the Company'sCompany’s domestic and foreign jurisdictions, and providing for income taxes on the repatriation of foreign earnings. 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 to help finance the Brink acquisition and further earnings are considered permanently reinvested. The variance from the federal statutory rate in 2013 was due to a benefit of $410,000 received in connectionwhich is consistent with the American Taxpayer Relief Act of 2012 that was signed into lawvariance in January 2013. The credit related to retroactive tax relief for certain tax law provisions that expired in 2012. As the legislation was signed into law after the end of PAR's 2012 fiscal year, the retroactive effect of the bill is reflected in fiscal year 2013 tax provision. Excluding the retroactive application of this credit, the Company's effective federal rate is 175%. The remaining variance from the federal statutory rate was due to the mix of taxable income generated by the Company's domestic and foreign operations as well as other tax credits and non-deductible expenses.2015.
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 offrom continuing operations was $6.3$11.4 million for the year ended December 31, 20142016, compared to cash usedgenerated of $2.8$2.6 million for the same period in 2013.2015.
In 2014,For the year ended December 31, 2016, cash generated fromprovided by continuing operations was mostly$11.4 million, due to our operating results, plus the add backadd-back of non-cash charges and changes in working capital. SignificantNet changes in operating assets and liabilities was $3.0 million primarily as a result of customer deposits, offset by an increase in inventory. In 2015, cash provided by continuing operations was $2.6 million, cash was generated from our operating results plus the add-back of non-cash expenses and a reduction of inventory. Offsetting 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 increasea decrease in accounts payable and accrued expenses mainlyprimarily 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 increasea decrease in customer deposits associated with the Company’s Hospitalityour Restaurant/Retail segment. In 2013, cash was used in operations mostly due to the Company's change in working capital requirements, primarily associated with decreases in accrued expenses and accounts payable due to the timing of payments made to vendors, specifically for inventory purchases and payments associated with the Company's ISR contract with the U.S. Government. This was partially offset by the add back of non-cash charges.
Cash used in investing activities from continuing operations was $10.0$7.1 million for the year ended December 31, 20142016 versus $5.8$7.5 million provided by investing activities for the same period in 2013.year ended December 31, 2015. In 2014, the first installment payment associated with the purchase of Brink Software Inc. accounted for approximately $5.0 million of the investing capital. Additionally,2016, capital expenditures of $2.1$3.4 million were primarily for PAR’s new ERP system and capital improvements made to our owned and leased properties. Capitalized software was $2.7 million and was associated with investments in Restaurant/Retail software platforms. In 2015, we received cash proceeds of $12.1 million related to the sale of the PSMS business. This was offset by a $0.8 million write-off related to our former chief financial officer’s unauthorized transfers of Company’s funds. Capital expenditures of $1.7 million were primarily related to capital improvements to leased properties as well as purchases of computer equipment associated with the Company’sour software support service offerings. Capitalized software was $2.9$2.1 million and was used for investments in many of the Company’s Hospitality software platforms. In 2013, capital expenditures of $1.1 million were primarily for purchases of computer equipment associated with the Company’s software support service offerings. Capitalized software was $4.7 million and was associated with investments for the Company’s Hospitalityour Restaurant/Retail software platforms.
Cash generated fromused in financing activities from continuing operations was $4.8$2.2 million for the year ended December 31, 20142016 versus cash used of $107,000$7.7 million for the same periodyear ended December 31, 2015. In 2016, we paid the third installment associated with our purchase of Brink of $2.0 million, in 2013.addition to payments on long-term debt of $0.2 million, and proceeds from stock activity of $27,000. In 2014,2015, the Company borrowed $5.0 milliondecreased borrowings on its credit facility in connection with the purchase of Brink Software Inc.,by $5.0 million, net and decreased its long term borrowings by $165,000. In 2013, the Company decreasedon its long-term borrowingsdebt by $159,000$0.2 million, and benefited $52,000$0.5 million from the exercise of employee stock options. Additionally, the second installment payment associated with our acquisition of Brink accounted for approximately $3.0 million of the cash used in financing activities during 2015.
DuringOn November 29, 2016, the Company, together with certain of its U.S. subsidiaries, as “Loan Guarantors” (together with the Company, the “Loan Parties”) entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as the “Lender”. The Credit Agreement provides for revolving loans in an aggregate principal amount of up to $15.0 million to be made available to the Company; availability at any time being equal to the lesser of (i) $15.0 million and (ii) a borrowing base (equal to the sum of 80% eligible accounts, 50% eligible raw materials inventory and 35% eligible finished goods inventory, with no more than 50% of total eligible inventory included in the borrowing base), less the aggregate principal amount outstanding (the “Credit Facility”). Interest accrues on outstanding principal balances at an applicable rate per annum determined, as of the end of each fiscal year 2013 and through June 4,quarter, by reference to the CBFR Spread or the Eurodollar Spread based on the Company’s consolidated indebtedness ratio as at the determination date. The Credit Facility replaces the Company’s asset-based credit agreement dated September 9, 2014 the Company maintained a credit facility with J.P. MorganJPMorgan Chase, N.A. (the “2014 ABL Credit Agreement”) 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 portion of the Company.proceeds of the Credit Facility were used to pay-off all indebtedness outstanding under the 2014 ABL Credit Agreement.