PAR Technology (PAR) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 2011.  Commission File Number 1-9720

OR

[    ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From __________ to __________

Commission File Number __________

PAR TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	16-1434688
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
PAR Technology Park
8383 Seneca Turnpike
New Hartford, New York	13413-4991
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:  (315) 738-0600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x  No o

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

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

Large Accelerated Filer o Accelerated Filer o Non Accelerated Filer o Smaller Reporting Company x

 (Do not check if a smaller reporting company)

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

The number of shares outstanding of registrant’s common stock, as of October 27, 2011 – 15,156,584 shares.

PAR TECHNOLOGY CORPORATION

TABLE OF CONTENTS

FORM 10-Q

PART I

FINANCIAL INFORMATION

Item Number		Page
Item 1.	Financial Statements (unaudited)
	Consolidated Statements of Operations for the three and nine months	1
	ended September 30, 2011 and 2010
	Consolidated Statements of Comprehensive Income (Loss)	2
	for the three and nine months ended September 30, 2011 and 2010
	Consolidated Balance Sheets at September 30, 2011 and	3
	December 31, 2010
	Consolidated Statements of Cash Flows for the nine months ended	4
	September 30, 2011 and 2010
	Notes to Unaudited Interim Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30
	PART II
	OTHER INFORMATION
Item 1A.	Risk Factors	31
Item 4.	RESERVED	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
Signatures		33
Exhibit Index		34

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
Net revenues:	2011			2010			2011			2010
Product	$	24,856		$	27,850		$	71,730		$	72,185
Service		19,152			17,268			53,330			53,369
Contract		15,756			16,053			48,836			49,950
		59,764			61,171			173,896			175,504
Costs of sales:
Product		16,196			17,865			45,298			47,256
Service		13,650			12,192			45,383			36,141
Contract		14,667			15,041			45,812			46,854
		44,513			45,098			136,493			130,251
Gross margin		15,251			16,073			37,403			45,253
Operating expenses:
Selling, general and administrative		9,239			9,995			29,304			29,316
Research and development		3,730			4,826			11,590			12,592
Impairment of goodwill and intangible assets	─			─				20,843		─
Amortization of identifiable intangible assets		257			234			667			703
		13,226			15,055			62,404			42,611
Operating income (loss)		2,025			1,018			(25,001	)		2,642
Other income (expense), net		23			97			(106	)		516
Interest expense		(48	)		(157	)		(163	)		(299	)
Income (loss) before provision for income taxes		2,000			958			(25,270	)		2,859
(Provision) benefit for income taxes		(798	)		(420	)		9,028			(890	)
Net income (loss)	$	1,202		$	538		$	(16,242	)	$	1,969
Earnings (loss) per share
Basic	$	.08		$	.04		$	(1.08	)	$	.13
Diluted	$	.08		$	.04		$	(1.08	)	$	.13
Weighted average shares outstanding
Basic		15,031			14,879			14,984			14,794
Diluted		15,118			15,048			14,984			15,009

See notes to unaudited interim consolidated financial statements

1

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
	2011			2010			2011			2010
Net income (loss)	$	1,202		$	538		$	(16,242	)	$	1,969
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(444	)		(5	)		493			(219	)
Comprehensive income (loss)	$	758		$	533		$	(15,749	)	$	1,750

See notes to unaudited interim consolidated financial statements

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PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 (in thousands, except share amounts)

(unaudited)

	September 30,			December 31,
	2011			2010
Assets Current assets:
Cash and cash equivalents	$	3,351		$	6,781
Accounts receivable-net		36,781			43,517
Inventories-net		29,769			38,707
Income tax refunds		37			152
Deferred income taxes		9,925			5,719
Other current assets		3,095			3,067
Total current assets		82,958			97,943
Property, plant and equipment - net		5,500			5,796
Deferred income taxes		5,902			1,079
Goodwill		6,852			26,954
Intangible assets - net		15,794			10,389
Other assets		2,074			2,124
Total Assets	$	119,080		$	144,285
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	1,977		$	1,711
Borrowings under lines of credit		1,500			−
Accounts payable		14,211			19,902
Accrued salaries and benefits		7,676			9,055
Accrued expenses		2,746			2,843
Customer deposits		1,247			2,286
Deferred service revenue		14,209			16,260
Total current liabilities		43,566			52,057
Long-term debt		1,252			2,744
Other long-term liabilities		2,686			2,725
Shareholders’ Equity:
Preferred stock, $.02 par value,
1,000,000 shares authorized	─			─
Common stock, $.02 par value,
29,000,000 shares authorized;
16,863,868 and 16,746,618 shares issued;
15,156,584 and 15,039,334 outstanding		337			335
Capital in excess of par value		42,828			42,264
Retained earnings		34,363			50,605
Accumulated other comprehensive loss		(120	)		(613	)
Treasury stock, at cost, 1,707,284 shares		(5,832	)		(5,832	)
Total shareholders’ equity		71,576			86,759
Total Liabilities and Shareholders’ Equity	$	119,080		$	144,285

See notes to unaudited interim consolidated financial statements

3

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	For the nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	(16,242	)	$	1,969
Adjustments to reconcile net income (loss) to net cashprovided by operating activities:
Impairment of goodwill and intangible assets		20,843		─
Depreciation and amortization		2,072			2,496
Provision for bad debts		358			966
Provision for obsolete inventory		9,908			1,057
Equity based compensation		434			212
Deferred income tax		(8,988	)		1,140
Changes in operating assets and liabilities:
Accounts receivable		6,378			2,165
Inventories		(970	)		(9,202	)
Income tax refunds		115			(815	)
Other current assets		(28	)		(393	)
Other assets		50			(220	)
Accounts payable		(5,437	)		10,719
Accrued salaries and benefits		(1,379	)		978
Accrued expenses		(97	)		(691	)
Customer deposits		(1,039	)		(876	)
Deferred service revenue		(2,051	)		(2,915	)
Other long-term liabilities		(39	)		339
Net cash provided by operating activities		3,888			6,929
Cash flows from investing activities:
Capital expenditures		(720	)		(3,519	)
Capitalization of software costs		(7,048	)		(669	)
Contingent purchase price paid on prior acquisitions	─				(33	)
Net cash used in investing activities		(7,768	)		(4,221	)
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements		1,500			(1,500	)
Payments of long-term debt		(1,226	)		(996	)
Proceeds from the exercise of stock options		132			546
Purchase of treasury stock	─				(323	)
Net cash provided by (used in) financing activities		406			(2,273	)
Effect of exchange rate changes on cash and cash equivalents		44			(254	)
Net (decrease) increase in cash and cash equivalents		(3,430	)		181
Cash and cash equivalents at beginning of period		6,781			3,907
Cash and cash equivalents at end of period	$	3,351		$	4,088
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	176		$	387
Income taxes, net of refunds		92			714
See notes to unaudited interim consolidated financial statements

4

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. The accompanying unaudited interim consolidated financial statements have been prepared by PAR Technology Corporation (the “Company” or “PAR”) in accordance with U.S. generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements.  Accordingly, these interim financial statements do not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of the Company, such unaudited statements include all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation of the results for such periods.  The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results of operations to be expected for any future period.  The consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2010  included in the Company’s December 31, 2010 Annual Report to the Securities and Exchange Commission on Form 10-K.

The preparation of consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period.  Significant items subject to such estimates and assumptions include:  the carrying amount of property, plant and equipment, identifiable intangible assets and goodwill, equity based compensation, and valuation allowances for receivables, inventories and deferred income taxes.  Actual results could differ from those estimates.

The current economic conditions and the continued volatility in the financial markets, both in the U.S and in many other countries where the Company operates, have contributed and may continue to contribute to higher unemployment levels, decreased consumer spending, reduced credit availability and/or declining business and consumer confidence. Such conditions could have an impact on consumer purchases and/or retail customer purchases, which in turn could impact the buying conditions of the Company’s customers resulting in a reduction of sales, operating income and cash flows. This could have a material adverse effect on the Company’s business, financial condition and/or results of operations, which could have a material adverse impact on the Company’s significant estimates, specifically the fair value of its reporting units used in support of its annual goodwill impairment test.  Additionally, disruptions in the credit and other financial markets and economic conditions could, among other things, impair the financial condition of one or more of the Company’s customers or suppliers, thereby increasing the risk of customer bad debts or non-performance by suppliers.

Certain amounts for prior periods have been reclassified to conform to the current period classification.

5

2. The Company’s net accounts receivable consist of:

	(in thousands)
	September 30,			December 31,
	2011			2010
Government segment:
Billed	$	11,075		$	10,622
Advanced billings		(2,013	)		(385	)
		9,062			10,237
Hospitality segment:
Accounts receivable - net		26,791			32,083
Logistics Management segment:
Accounts  receivable - net		928			1,197
	$	36,781		$	43,517

At September 30, 2011 and December 31, 2010, the Company had recorded allowances for doubtful accounts of $1,309,000 and $1,619,000, respectively, primarily against Hospitality accounts receivable.

3. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment.  The Company operates in three business segments, Hospitality, Government and Logistics Management, although no goodwill resides within the financial statements of the Logistics Management segment.  Goodwill impairment testing is performed at the sub-segment level (referred to as a reporting unit).  The three reporting units utilized by the Company for its impairment testing are: Restaurant, Hotel/Resort/Spa, and Government. Goodwill is assigned to a specific reporting unit at the date the goodwill is initially recorded. Once goodwill has been assigned to a specific reporting unit, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

Goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment, at which time a second step would be performed to measure the amount of impairment.  The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment.

As part of its quarterly financial close process for the period ended June 30, 2011, the Company determined that as a result of the significant decline in the stock price that occurred during the second quarter, a goodwill impairment triggering event had occurred because the Company could no longer reconcile the aggregate fair value of its reporting units to its market capitalization after consideration of a reasonable control premium.  Although there was no significant adverse change to the long term financial outlook of any of its reporting units, the Company concluded that a triggering event had occurred, and as a result, performed additional analyses over the valuation of its reporting units in accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other.  The goodwill impairment identified by the Company was within the Restaurant and Hotel/Resort/Spa reporting units of its Hospitality segment.  The fair value of the Government reporting unit was substantially in excess of its carrying value; therefore, no goodwill impairment was noted.

6

The Company utilizes three methodologies in performing its goodwill impairment test for each reporting unit.  These methodologies include both an income approach, namely a discounted cash flow method, and two market approaches, namely the guideline public company method and quoted price method.  The discounted cash flow method was weighted 80% in the fair value calculation, while the public company method and quoted price method were weighted each at 10% of the fair value calculation.  The valuation methodologies and weightings used in the current year are generally consistent with those used in the Company’s annual impairment test.

The discounted cash flow method derives a value by determining the present value of a projected level of income stream, including a terminal value.  This method involves the present value of a series of estimated future cash flows at the valuation date by the application of a discount rate, one which a prudent investor would require before making an investment in the equity of the Company.  The Company considers this method to be most reflective of a market participant’s view of fair value given the current market conditions, as it is based on the Company’s forecasted results and, therefore, established its weighting at 80% of the fair value calculation.

Key assumptions within the Company’s discounted cash flow model included projected financial operating results, a long term growth rate ranging from 4% to 5% (beyond 5 years) and discount rates ranging from 17% to 27%, depending on the reporting unit.  As stated above, as the discounted cash flow method derives value from the present value of a projected level of income stream, a modification to the Company’s projected operating results including changes to the long term growth rate, could impact the fair value.  The present value of the cash flows is determined using a discount rate that was based on the capital structure and capital costs of comparable public companies as well as company-specific risk premium, as identified by the Company.  A change to the discount rate could impact the fair value determination.

The financial projections used within the discounted cash flow models were generally consistent with those used as part of the Company’s fiscal year 2010 goodwill impairment test performed within the fourth quarter of 2010.  Furthermore, the long term growth rates remained constant, reflective of the Company’s belief that there was no adverse change to the long term financial outlook of its reporting units.  However, given the signficant decline in the Company’s stock price experienced during the second quarter, the Company determined it prudent to utilize higher discount rates in its valuation, which the Company believes is reflective of the perceived market risk that is reducing the fair value of the Company’s stock.  The Company believes that the assumptions used within its discounted cash flow estimates were appropriate in the circumstances.

The market approach is a general way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold.  There are two methodologies considered under the market approach: the public company method and the quoted price method.

The public company method and quoted price method of appraisal are based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing closely held companies.  The mechanics of the method require the use of the stock price in conjunction with other factors to create a pricing multiple that can be used, with certain adjustments, to apply against the subject’s similar factor to determine an estimate of value for the subject company.  The Company considered these methods appropriate as they provide an indication of fair value as supported by current market conditions.  The Company established its weighting at 10% of the fair value calculation for each method.

7

The most critical assumption underlying the market approaches utilized by the Company are the comparable companies utilized.  Each market approach described above estimates revenue and earnings multiples for the Company based on its comparable companies.  As such, a change to the comparable companies could have an impact on the fair value determination.

After recording the goodwill impairment charge during the second quarter of 2011, the Company had reconciled the aggregate estimated fair value of the reporting units to the market capitalization of the consolidated Company including a control premium that was consistent with the premium observed in prior annual impairment tests.

As part of the financial close process for the quarter ended September 30, 2011, the Company reevaluated the assumptions utilized in the impairment test performed during the quarter ended June 30, 2011 and concluded they remained appropriate based on the Company’s actual financial results to date, combined with its assessment of the long term financial outlook of its businesses.  Although the Company experienced a reduction in its stock price through September 30, 2011, it was able to reconcile the estimated fair value of the reporting units (both individually and in the aggregate) to the market capitalization of the consolidated Company, including a control premium consistent with the control premium observed during the second quarter.  As such, the Company concluded that a triggering event relative to its goodwill and intangible assets did not exist as of September 30, 2011.

The following table reflects the changes in goodwill during the nine month period ended September 30, 2011 (in thousands):

	(in thousands)
	September 30,				December 31,
	2011				2010
Balance at beginning of the period		$	26,954			$	26,635
Impairment of goodwill			(20,263	)		─
Change in foreign exchange rates during the period			161				319
Balance at end of period		$	6,852			$	26,954

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4. Inventories are primarily used in the manufacture and service of Hospitality products.  The components of inventory consist of the following:

	(in thousands)
	September 30,			December 31,
	2011			2010
Finished Goods		$	12,080		$	13,913
Work in process			1,021			959
Component parts			7,281			7,228
Service parts			9,387			16,607
		$	29,769		$	38,707

During the nine months ended September 30, 2011, the Company recorded a charge of $7.7 million (all recorded during the quarter ended June 30, 2011) associated with the write down of service parts inventory related to discontinued products.  This charge was recorded as the result of an acceleration of technology upgrade programs by two of the Company’s major customers and an overall change in customer requirements as a result of these upgrades.  As part of these programs, the Company’s customers were required to upgrade their existing hardware in support of new software utilized at their respective restaurants.

5. The Company capitalizes certain costs related to the development of computer software sold by its Hospitality segment. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs.  Software development costs incurred after establishing feasibility (as defined within ASC 985-20) are capitalized and amortized on a product-by-product basis when the product is available for general release to customers.  Capitalized software for the three and nine months ended September 30, 2011 was $2 million and $7 million respectively.  Capitalized software for the three and nine months ended September 30, 2010 was $1.2 million and $3.4 million respectively.

Annual amortization, charged to cost of sales when the product is available for general release to customers, is computed using the greater of (a) the straight-line method over the remaining estimated economic life of the product, generally three to five years or (b) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product. Amortization of capitalized software costs for the three and nine months ended September 30, 2011 was $112,000 and $395,000, respectively.  Amortization for the three and nine months ended September 30, 2010 was $171,000 and $598,000, respectively.

The Company acquired identifiable intangible assets in connection with its acquisitions in prior years.  Amortization of identifiable intangible assets for the three and nine months ended September 30, 2011 was $257,000 and $667,000 respectively.  Amortization for the three and nine months ended September 30, 2010 was $234,000 and $703,000, respectively.

9

The components of identifiable intangible assets are:

	(in thousands)
	September 30,			December 31,
	2011			2010
Software costs	$	19,208		$	12,161
Customer relationships		4,519			4,519
Trademarks (non-amortizable)		2,170			2,750
Other		620			620
		26,517			20,050
Less accumulated amortization		(10,723	)		(9,661	)
	$	15,794		$	10,389

The future amortization of these intangible assets assuming straight-line amortization of capitalized software costs is as follows (in thousands):

2011	$	253
2012		1,962
2013		1,451
2014		1,446
2015		1,446
Thereafter		7,066
	$	13,624

In conjunction with its quarterly financial close process for the second quarter of 2011, the Company reevaluated its indefinite lived intangibles and determined that two of its trade names within its Hospitality segment should no longer be considered to have indefinite lives.  This determination was made after consideration of the Company’s planned use of these trade names in future periods.  As such, the Company utilized the royalty method to estimate the fair values of the two specific trade names in question as of June 30, 2011.  As a result of this estimate, the Company recorded an impairment charge of $580,000 during the quarter ended June 30, 2011.  The residual value of the aforementioned trade names will be amortized over their remaining useful lives.

6. The Company applies the fair value recognition provisions of ASC Topic 718 Stock-Based Compensation.  Total stock-based compensation expense included within operating expenses for the three and nine months ended September 30, 2011 was $203,000 and $434,000, respectively.  These amounts were recorded net of benefit of $61,000 (all recorded during the quarter ended March 31, 2011) for the nine months ended September 30, 2011, as the result of forfeitures of unvested stock options prior to the completion of the requisite service period.  Total stock-based compensation expense included within operating expenses for the three and nine months ended September 30, 2010 was $199,000 and $212,000, respectively.  These amounts were recorded net of benefits of $211,000 for the nine months ended September 30, 2010, as the result of forfeitures of unvested stock options prior to the completion of the requisite service period.  At September 30, 2011, the unrecognized compensation expense related to non-vested equity awards was $845,000 (net of estimated forfeitures), which is expected to be recognized as compensation expense in fiscal years 2011 through 2015.

7. Earnings per share are calculated in accordance with ASC Topic 260, which specifies the computation, presentation and disclosure requirements for earnings per share (EPS).  It requires the presentation of basic and diluted EPS.  Basic EPS excludes all dilution and is based upon the weighted average number of common shares outstanding during the period.  Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.  For the three and nine months ended September 30, 2011,  ­­728,000 ­ and  602,000, respectively, of incremental shares from the assumed exercise of stock options were not included in the computation of diluted earnings per share because of the anti-dilutive effect on earnings per share.

10

The following is a reconciliation of the weighted average shares outstanding for the basic and diluted EPS computations (in thousands, except per share data):

	For the three months ended September 30,
	2011		2010
Net income	$	1,202	$	538
Basic:
Shares outstanding at beginning of period		15,009		14,838
Weighted average shares issued during the period, net		22		41
Weighted average common shares, basic		15,031		14,879
Earnings per common share, basic	$	.08	$	.04
Diluted:
Weighted average common shares, basic		15,031		14,879
Dilutive impact of stock options and restricted stock awards		87		169
Weighted average common shares, diluted		15,118		15,048
Earnings per common share, diluted	$	.08	$	.04

	For the nine months ended September 30,
	2011			2010
Net income (loss)	$	(16,242	)	$	1,969
Basic:
Shares outstanding at beginning of period		14,909			14,677
Weighted average shares issued during the period, net		75			117
Weighted average common shares, basic		14,984			14,794
Earnings (loss) per common share, basic	$	(1.08	)	$	.13
Diluted:
Weighted average common shares, basic		14,984			14,794
Dilutive impact of stock options and restricted stock awards	─				215
Weighted average common shares, diluted		14,984			15,009
Earnings (loss) per common share, diluted	$	(1.08	)	$	.13

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8. The Company utilizes the fair value provisions of ASC Topic 820 Fair Value Measurements and Disclosures.  ASC Topic 820 describes a fair value hierarchy based upon three levels of input, which are:

Level 1 − quoted prices in active markets for identical assets or liabilities (observable)

Level 2 − inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable market data for essentially the full term of the asset or liability (observable)

Level 3 − unobservable inputs that are supported by little or no market activity, but are significant to determining the fair value of the asset or liability (unobservable)

The Company’s interest rate swap agreement is valued at the amount the Company would have expected to pay to terminate the agreement.  The fair value determination is based upon the present value of expected future cash flows using the LIBOR rate, plus an applicable interest rate spread, a technique classified within Level 2 of the valuation hierarchy described above.  At September 30, 2011, the fair value of the Company’s interest rate swap included an unrealized loss of $45,000, and is included as a component of accrued expenses within the Consolidated Balance Sheet.  The associated fair value adjustments for the three and nine months ended September 30, 2011 and 2010 were $25,000 and $82,000, respectively, and $27,000 and $78,000, respectively, and were recorded as decreases to interest expense.

9. The Company’s reportable segments are strategic business units that have separate management teams and infrastructures that offer different products and services.

The Company has three reportable segments, Hospitality, Government and Logistics Management.  The Hospitality segment offers integrated solutions to the hospitality industry.  These offerings include industry leading hardware and software applications for restaurants, hotels, resorts and spas.  This segment also offers customer support including field service, installation, twenty-four hour telephone support and depot repair.  The Government segment performs complex technical studies, analysis, and experiments, develops innovative solutions, and provides on-site engineering in support of advanced defense, security, and aerospace systems.  This segment also provides expert on-site services for operating and maintaining U.S. Government-owned communication assets.  The Logistics Management segment provides tracking technologies to help the transportation industry better hone business practices through decreased consumption of energy and smarter management of assets while improving security and customer satisfaction.  Intersegment sales and transfers are not significant.

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Information as to the Company’s segments is set forth below:

	(in thousands)
	For the three months						For the nine months
	ended September 30,						ended September 30,
	2011			2010			2011			2010
Net revenues:
Hospitality	$	42,934		$	44,174		$	120,471		$	122,115
Government		15,756			16,053			48,836			49,950
Logistics Management		1,074			944			4,589			3,439
Total	$	59,764		$	61,171		$	173,896		$	175,504
Operating income (loss):
Hospitality	$	1,940		$	1,335		$	(25,563	)	$	2,223
Government		937			894			2,760			2,716
Logistics Management		(695	)		(1,012	)		(1,764	)		(2,085	)
Other		(157	)		(199	)		(434	)		(212	)
		2,025			1,018			(25,001	)		2,642
Other income, net		23			97			(106	)		516
Interest expense		(48	)		(157	)		(163	)		(299	)
Income (loss) before provision
for income taxes	$	2,000		$	958		$	(25,270	)	$	2,859
Depreciation and amortization:
Hospitality	$	558		$	652		$	1,715		$	2,108
Government		18			20			58			61
Logistics Management		8			6			22			18
Other		86			122			277			309
Total	$	670		$	800		$	2,072		$	2,496
Capital expenditures including software costs:
Hospitality	$	2,063		$	1,524		$	7,610		$	3,999
Government	─			─				20			44
Logistics Management		43		─				69			13
Other		6			38			69			132
Total	$	2,112		$	1,562		$	7,768		$	4,188
Revenues by geographic area:
United States	$	52,136		$	54,403		$	152,676		$	157,380
Other Countries		7,628			6,768			21,220			18,124
Total	$	59,764		$	61,171		$	173,896		$	175,504

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The following table represents identifiable assets by business segment:

	(in thousands)
	September 30,		December 31,
	2011		2010
Identifiable assets:
Hospitality	$	88,115	$	119,237
Government		10,268		11,627
Logistics Management		2,907		3,398
Other		17,790		10,023
Total	$	119,080	$	144,285

The following table represents identifiable assets by geographic area based on the location of the assets:

	(in thousands)
	September 30,			December 31,
	2011			2010
United States		$	107,111		$	133,385
Other Countries			11,969			10,900
Total		$	119,080		$	144,285

The following table represents Goodwill by business segment:

	(in thousands)
	September 30,			December 31,
	2011			2010
Hospitality		$	6,116		$	26,218
Government			736			736
Total		$	6,852		$	26,954

Customers comprising 10% or more of the Company’s total revenues are summarized as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
Hospitality segment:
McDonald’s Corporation		30	%		38	%		29	%		34	%
Yum! Brands, Inc.		15	%		10	%		13	%		10	%
Government segment:
U.S. Department of Defense		26	%		26	%		28	%		28	%
All Others		29	%		26	%		30	%		28	%
		100	%		100	%		100	%		100	%

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Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statement

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

Overview

PAR’s technology solutions for the Hospitality segment feature software, hardware and professional/lifecycle support services tailored for the needs of restaurants, luxury hotels, resorts and spas, casinos, cruise lines, movie theatres, theme parks and specialty retailers.  The Company’s Government segment provides technical expertise in the contract development of advanced systems and software solutions for the U.S. Department of Defense and other federal, state, and local governmental organizations as well as information technology and communications support services to the U.S. Department of Defense, delivering comprehensive and sophisticated support for communication and network operations worldwide.  Lastly, PAR’s Logistics Management segment provides innovative asset monitoring and tracking systems for customers in the road, rail, and transit markets by providing advanced integrated solutions for all types of refrigerated and dry assets.

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The Company’s products sold in the Hospitality segment are utilized in a range of applications by thousands of customers.  The Company faces competition across all of its markets within the Hospitality segment, competing primarily on the basis of product design, features and functionality, quality and reliability, price, customer service, and delivery capability.  PAR’s global infrastructure and reach as a technology solutions provider to hospitality customers is an important competitive advantage, as it allows the Company to provide innovative systems, with significant global deployment capability, to its multinational customers such as McDonald’s, Yum! Brands, Subway, Baskin-Robbins, CKE Restaurants and the Mandarin Oriental Hotel Group.  PAR’s continuing strategy is to provide complete integrated technology solutions and services with excellent customer service in the markets in which it participates.  The Company conducts its research and development efforts to create innovative technology offerings that meet and exceed customer requirements and also have a high probability for broader market appeal and success.

The Company is focused on expanding three distinct parts of its Hospitality businesses.  First, it is making significant investments in developing next generation software for its luxury hotel and restaurant markets.  Second, the Company continues to work on building a more robust and extensive distribution channel.  Lastly, as the Company’s customers continue to expand in international markets, PAR has created an international infrastructure focused on that expansion.

In regards to the current economic conditions, the Quick Service Restaurant (QSR) market continues to perform well for the large international companies; however, the Company has seen an impact on the regional QSR organizations whose business is slowing because of higher unemployment and lack of consumer confidence in specific domestic regions.  These conditions have had and could continue to have an impact on the markets in which the Company's customers operate, which could result in a reduction of sales, operating income and cash flows.  The Company is currently assisting one of its large international customers as they execute an aggressive upgrade schedule to their in-store technology.  In addition, the Company sees an improvement in the pipeline of business with its second tier customers.

Approximately 28% of the Company’s revenues are generated by its government business. The operational performance of PAR’s Government segment translates into consistently winning new contracts, extended contracts, and renewed contracts.  PAR provides its clients the technical expertise necessary to operate and maintain complex technology systems utilized by government organizations.  The Company experienced lower than expected revenues during the first nine months of 2011 as a result of delays in new contract starts due to the Congressional impasse on the Government Fiscal Year 2011 budget and lower systems integration revenues.  The general uncertainty in U.S. defense spending for the balance of the calendar year may impact the growth of this business segment on a year-over-year basis.

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PAR’s Logistics Management business continues to add new accounts.  Although the Company is experiencing the difficulties of an extended adoption phase of its technology by the transport industry, it continues to expand its customer base in the refrigerated and dry van markets.  As the market recognizes the value proposition associated with the real time use of location and environmental information in both asset management and cargo quality assurance, the Company believes it is well positioned in this emerging market.

As part of its quarterly financial close process for the period ended June 30, 2011, the Company determined that as a result of the significant decline in the stock price that occurred during the second quarter, a goodwill impairment triggering event had occurred because the Company could no longer reconcile the aggregate fair value of its reporting units to its market capitalization after consideration of a reasonable control premium.  Although there was no significant adverse change to the long term financial outlook of any of its businesses, the Company concluded that a triggering event had occurred and as a result, performed additional analyses over the valuation of its reporting units in accordance with the relevant accounting rules, recording a non-cash impairment charge of $20.2 million to its goodwill.  In addition, as part of this goodwill triggering event assessment, the Company recorded an impairment charge of $580,000 associated with its indefinite lived intangible assets.

The Company utilizes three methodologies in performing its goodwill impairment test for each reporting unit.  These methodologies include both an income approach, namely a discounted cash flow method, and two market approaches, namely the guideline public company method and quoted price method.  The discounted cash flow method was weighted 80% in the fair value calculation, while the public company method and quoted price method were weighted each at 10% of the fair value calculation.  The valuation methodologies and weightings used in the current year are generally consistent with those used in the Company’s annual impairment test.

The discounted cash flow method derives a value by determining the present value of a projected level of income stream, including a terminal value.  This method involves the present value of a series of estimated future benefits at the valuation date by the application of a discount rate, one which a prudent investor would require before making an investment in the equity of the company.  The Company considers this method to be most reflective of a market participant’s view of fair value given the current market conditions, as it is based on the Company’s forecasted results and, therefore, established its weighting at 80% of the fair value calculation.

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Key assumptions within the Company’s discounted cash flow model included projected financial operating results, a long term growth rate ranging from 4% to 5% (beyond 5 years) and discount rates ranging from 17% to 27%, depending on the reporting unit.  As stated above, as the discounted cash flow method derives value from the present value of a projected level of income stream, a modification to the Company’s projected operating results including changes to the long term growth rate, could impact the fair value.  The present value of the cash flows is determined using a discount rate that was based on the capital structure and capital costs of comparable public companies as well as company-specific risk premium, as identified by the Company.  A change to the discount rate could impact the fair value determination.

The financial projections used within the discounted cash flow models were generally consistent with those used as part of the Company’s fiscal year 2010 goodwill impairment test performed within the fourth quarter of 2010.  Furthermore, the long term growth rates remained constant, reflective of the Company’s belief that there was no adverse change to the long term financial outlook of its reporting units.  However, given the significant decline in the Company’s stock price experienced during the second quarter, the Company determined it prudent to utilize higher discount rates in its valuation, which the Company believes is reflective of the perceived market risk that is reducing the fair value of the Company’s stock.  The Company believes that the assumptions used within its discounted cash flow estimates were appropriate in the circumstances.

The market approach is a general way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold.  There are two methodologies considered under the market approach: the public company method and the quoted price method.

The public company method and quoted price method of appraisal are based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing closely held companies.  The mechanics of the method require the use of the stock price in conjunction with other factors to create a pricing multiple that can be used, with certain adjustments, to apply against the subject’s similar factor to determine an estimate of value for the subject company.  The Company considered these methods appropriate as they provide an indication of fair value as supported by current market conditions.  The Company established its weighting at 10% of the fair value calculation for each method.

The most critical assumption underlying the market approaches utilized by the Company are the comparable companies utilized.  Each market approach described above estimates revenue and earnings multiples for the Company based on its comparable companies.  As such, a change to the comparable companies could have an impact on the fair value determination.

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After recording the goodwill impairment charge during the second quarter of 2011, the Company had reconciled the aggregate estimated fair value of the reporting units to the market capitalization of the consolidated Company including a control premium that was consistent with the premium observed in prior annual impairment tests.

As part of the financial close process for the quarter ended September 30, 2011, the Company reevaluated the assumptions utilized in the impairment test performed during the quarter ended June 30, 2011 and concluded they remained appropriate based on the Company’s actual financial results to date, combined with its assessment of the long term financial outlook of its businesses.  Although the Company experienced a reduction in its stock price through September 30, 2011, it was able to reconcile the estimated fair value of the reporting units (both individually and in the aggregate) to the market capitalization of the consolidated Company, including a control premium consistent with the control premium observed during the second quarter.  As such, the Company concluded that a triggering event relative to its goodwill and intangible assets did not exist as of September 30, 2011.

Results of Operations —

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

The Company reported revenues of $59.8 million for the quarter ended September 30, 2011, a decrease of 2% from the $61.2 million reported for the quarter ended September 30, 2010.  The Company’s net income for the quarter ended September 30, 2011 was $1.2 million, or $0.08 earnings per diluted share, compared to $538,000 or $0.04 earnings per diluted share for the same period in 2010.

Product revenues were $24.9 million for the quarter ended September 30, 2011, a decrease of 11% from the $27.9 million recorded in 2010.  This decrease was the result of a decline in domestic sales to McDonald’s as their significant upgrade program is nearing completion.  Partially offsetting this decrease was an increase in product sales to Yum! Brands, commensurate with new store rollouts, as well as increases in channel sales.  In addition, international product sales grew 15% primarily to McDonald’s and Yum! Brands in Europe and Asia.

Customer service revenue primarily includes installation, software maintenance, training, twenty-four hour help desk support and various depot and on-site service options.  Customer service revenues were $19.2 million for the quarter ended September 30, 2011, an increase of 11% from the $17.3 million reported for the same period in 2010.  This increase is driven by higher installation and contract revenues associated with new restaurant upgrades, partially offset by a decline in depot service revenue as a consequence of the aforementioned upgrades.

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Contract revenues were $15.8 million for the quarter ended September 30, 2011, compared to $16.1 million reported for the same period in 2010.  This reduction reflects the slow pace at which funding has been authorized for new and renewal contracts.

Product margins for the quarter ended September 30, 2011 were 34.8%, a decrease from 35.9% for the same period in 2010.  This reduction was the result of an unfavorable mix in product sales to McDonald’s resulting from a decrease in the amount of terminals sold relative to lower margin peripheral devices.  This decrease was partially offset by various cost reduction and efficiency improvement efforts implemented across the Company’s Hospitality businesses.

Customer service margins were 28.7 % for the quarter ended September 30, 2011, compared to 29.4% for the same period in 2010.  This decrease was primarily due to a reduction in higher margin depot service revenue as a result of the various customer upgrade programs currently being executed upon and the related reduction of time and material revenue generated by the Company’s depot service business.  This decline was partially offset by an improvement in installation margin resulting from improved utilization of installation personnel.

Contract margins were 6.9% for the quarter ended September 30, 2011, compared to 6.3% for the same period in 2010. ��This increase was due to more favorable contract mix as compared to the previous period.  The most significant components of contract costs in 2011 and 2010 were labor and fringe benefits.  For the third quarter of 2011, labor and fringe benefits were $11.2 million or 76% of contract costs compared to $11.7 million or 78% of contract costs for the same period in 2010.

Selling, general and administrative expenses for the quarter ended September 30, 2011 were $9.2 million, a decrease from $10 million for the same period in 2010.  This decrease was due to the Company’s execution of various cost reduction strategies primarily within sales and marketing support within its Hospitality businesses.

Research and development expenses were $3.7 million for the quarter ended September 30, 2011, a decrease from the $4.8 million for the same period in 2010.  This decrease was associated with the Company capitalizing the development costs associated with its next generation Hospitality software platforms.

Amortization of identifiable intangible assets was $257,000 for the quarter ended September 30, 2011, compared to $234,000 for the same period in 2010.  This increase was due to the amortization of certain intangible assets that were previously considered to have indefinite lives.

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Other income, net was $23,000 for the quarter ended September 30, 2011 compared to $97,000 for the same period in 2010.  Other income primarily includes rental income, income from the sale of certain assets, finance charges and foreign currency gains and losses.  The decrease is associated with a decrease in foreign currency gains during the period.

Interest expense primarily represents interest charged on the Company’s short-term borrowing requirements from banks and from long-term debt.  Interest expense was $48,000 for the quarter ended September 30, 2011 as compared to $157,000 for the same period in 2010.  Interest expense for 2010 included a non-recurring charge relative to past due taxes for a specific jurisdiction.

For the quarter ended September 30, 2011, the Company’s expected effective income tax rate was 40.0%, compared to 43.8% for the same period in 2010.  The variance from the federal statutory rate in 2011 was primarily due to the establishment of a valuation allowance related to certain deferred tax assets, partially offset by research credits generated.  The valuation allowance was established as the Company determined that certain state net operating loss carryforwards and current foreign tax credits generated may not be fully realized.   The variance from the federal statutory rate in 2010 was due to state income taxes and various nondeductible expenses.

Results of Operations —

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

The Company reported revenues of $173.9 million for the nine months ended September 30, 2011, a decrease of 1% from the $175.5 million reported for the same period in 2010.  The Company’s net loss for the nine months ended September 30, 2011 was $16.2 million, or $1.08 loss per diluted share, compared to a net income of $2 million or $0.13 earnings per diluted share for the same period in 2010.  The results of 2011 include pre-tax charges of $29.4 million.  Of this amount, $20.8 million was a non-cash charge related to the impairment of the Company’s goodwill and intangible assets.  The remaining $8.6 million in charges was related to the write-down of certain inventory associated with discontinued products, as well severance and office closure costs.

Product revenues were $71.7 million for the nine months ended September 30, 2011, a decrease of 1% from the $72.2 million recorded in 2010.  This decrease was the result of a decline in domestic sales to McDonald’s as their significant upgrade program is nearing completion.  Partially offsetting this decline was an increase in domestic sales to Baskin-Robbins, Subway, YUM! Brands and sales made through the Company’s dealer channel, as well as a 22% increase in international product revenue.

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Customer service revenue primarily includes installation, software maintenance, training, twenty-four hour help desk support and various depot and on-site service options.  Customer service revenues were $53.3 million for the nine months ended September 30, 2011, flat from the $53.4 million reported for the same period in 2010.  While the Company experienced an increase in installation and field contract service revenue as a result of new product deployments, this increase was offset by a decrease in depot service revenue, commensurate with new store upgrades.  Lastly, service revenue associated with the Company’s Logistics Management business increased 35% year over year.

Contract revenues were $48.8 million for the nine months ended, September 30, 2011, a decrease of 2% when compared to the $50 million for the same period in 2010.  This decrease reflects the slow pace at which funding has been authorized for new and renewal contracts.

Product margins for the nine months ended September 30, 2011 were 36.8%, an increase from 34.5% for the same period in 2010.  This improvement was primarily the result of an improved product mix resulting from an increase in the volume of terminals sold relative to related peripherals as well as various cost reduction and efficiency improvement efforts implemented across the Company’s Hospitality businesses.

Customer service margins were 14.9% for the nine months ended September 30, 2011, compared to 32.3% for the same period in 2010.  This decrease was primarily the result of a charge of $7.7 million recorded in the second quarter of 2011 associated with the write down of service parts inventory related to discontinued products.  This charge was recorded as the result of an acceleration of technology upgrade programs by two of the Company’s major customers and an overall change in customer requirements as a result of these upgrades.  As part of these programs, the Company’s customers were required to upgrade their existing hardware in support of new software utilized at their respective restaurants.  In addition, this decrease was also the result of a reduction in higher margin depot service revenue as a result of the various customer upgrade programs currently being executed upon.  Partially offsetting this decreased was an improvement in installation margin resulting from improved utilization of installation personnel.

Contract margins were 6.2% for the nine months ended September 30, 2011, flat versus the same period in 2010.  The most significant components of contract costs in 2011 and 2010 were labor and fringe benefits.  For 2011, labor and fringe benefits were $35.4 million or 77% of contract costs compared to $36.7 million or 78% of contract costs for the same period in 2010.

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Selling, general and administrative expenses for the nine months ended September 30, 2011 were $29.3 million, flat as compared to the same period in 2010.  Total expense for 2011 included non-recurring charges of $600,000 recorded in the second quarter of 2011 related to severance and office closure as the Company restructures its operations.  Exclusive of the aforementioned charges, selling, general and administrative expenses decreased year over year as a result of the execution of various cost reduction strategies primarily within its Hospitality businesses.

Research and development expenses were $11.6 million for the nine months ended September 30, 2011, a decrease from $12.6 million for the same period in 2010.  This decrease was associated with the Company capitalizing the development costs associated with its next generation Hospitality software platforms.  This decrease was partially offset by the Company’s continued investment in its Logistics Management business.

The Company recorded a non-cash impairment charge of $20.2 million to its goodwill, which was the result of the significant reduction in PAR’s stock price through the second quarter.  As a result of this reduction, the Company determined an impairment of goodwill had occurred and in accordance with the relevant accounting rules, recorded the aforementioned charge.  This Company does not believe there has been an adverse change to the long term outlook of its businesses.  In addition to the aforementioned goodwill impairment charge, as part of this analysis, the Company recorded an impairment charge of $580,000 associated with its indefinite lived intangible assets.

Amortization of identifiable intangible assets was $667,000 for the nine months ended September 30, 2011, compared to $703,000 for the same period in 2010.  This decrease was due to certain intangible assets becoming fully amortized in 2010.

Other expense, net, was $106,000 for the nine months ended September 30, 2011 compared to other income, net of $516,000 for the same period in 2010.  Other income primarily includes rental income, income from the sale of certain assets, finance charges and foreign currency gains and losses.  The decrease is primarily attributable to foreign currency losses incurred on the closure of certain international offices during the period.

Interest expense primarily represents interest charged on the Company’s short-term borrowing requirements from banks and from long-term debt.  Interest expense was $163,000 for the nine months ended September 30, 2011 as compared to $299,000 for the same period in 2010.  Interest expense for 2010 included a non-recurring charge relative to past due taxes for a specific jurisdiction.

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For the nine months ended September 30, 2011, the Company’s expected effective income tax benefit based on projected pre-tax loss was 35.7%.  This compares to an expected income tax rate of 31.1% for the same period in 2010.  The variance from the federal statutory rate in 2011 was primarily due to the establishment of a valuation allowance related to certain deferred tax assets, partially offset by research credits.  The valuation allowance was established as the Company determined that certain state net operating loss carryforwards and current foreign tax credits generated may not be fully realized.  The variance from the federal statutory rate in 2010 was primarily due to the reversal of a valuation allowance of $230,000 on certain deferred tax assets as the result of the Company’s tax planning strategies and research credits generated.

Liquidity and Capital Resources

The Company’s primary sources of liquidity have been cash flow from operations and its bank line of credit.  Cash provided by operations was $3.9 million for the nine months ended September 30, 2011 compared to $6.9 million for the same period in 2010.  In 2011, cash was generated by the Company’s net loss plus the add back of non-cash charges, offset by reductions to changes in operating assets and liabilities.  The most significant changes to the Company’s operating assets and liabilities were the decrease in accounts receivable due to the timing of collections of advanced service and maintenance contract billings.  This was partially offset by cash used  towards payments of accounts payable and accrued salaries and benefits based on the timing of payments.  Cash was also used to support the execution of existing service support contracts with customers.    In 2010, cash was generated primarily the Company’s net income and add back of non-cash charges, as well as through the change in operating assets and liabilities. The most significant change to the Company’s operating assets and liabilities were an increase in accounts payable based on the timing of vendor payments, offset by an increase in inventory commensurate with forecast requirements for the period.

Cash used in investing activities was $7.8 million for the nine months ended September 30, 2011 versus $4.2 million for the same period in 2010.  In 2011, capital expenditures were $720,000 and were primarily for office and computer equipment.  Capitalized software was $7.0 million and was associated with the Company’s next generation Hospitality software platforms.  In 2010, capital expenditures were $3.6 million and were primarily related to the Company’s acquisition of certain technology components to compliment its next generation enterprise solution for its Restaurant business.  Capitalized software costs relating to software development of Hospitality segment products were $669,000 in 2010.

Cash provided by financing activities was $406,000 for the nine months ended September 30, 2011 versus cash used of $2.3 million in 2010.  In 2011, the Company increased its short-term borrowings by $1.5 million in support of its operating cash needs, and decreased its long-term debt by $1.2 million.  The Company also benefited $132,000 from the exercise of employee stock options.  In 2010, the Company decreased its short-term borrowings by $1.5 million, decreased its long-term debt by $996,000 and benefited $546,000 from the exercise of employee stock options.  Lastly, the Company repurchased shares of its common stock for $323,000 in 2010.

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On June 6, 2011, the Company executed a new credit agreement with its lenders of its credit facility.  This credit facility provides the Company borrowing availability up to $20 million (with the option to increase to $30 million) in the form of a line of credit.  This agreement allows the Company, at its option, to borrow funds at the LIBOR rate plus the applicable interest rate spread (1.5% at September 30, 2011) or at the bank’s prime lending rate (3.25% at September 30, 2011).  This agreement expires in June 2014.  At September 30, 2011, the Company had $1.5 million outstanding under this agreement.  The weighted average interest rate paid by the Company was 2.4% during the third quarter of 2011.  This agreement contains certain loan covenants including leverage and fixed charge coverage ratios.  In July 2011, this agreement was amended to exclude specific non-recurring charges recorded by the Company in the second quarter of 2011 from all debt covenant calculations in 2011 and through June 30, 2012.  The Company is in compliance with these amended covenants at September 30, 2011.  This credit facility is secured by certain assets of the Company.

The Company borrowed $6 million under an unsecured term loan agreement, in connection with a prior business acquisition.  This loan is part of its existing credit facility and provides for interest only payments in the first year and escalating principal payments through 2012. The loan bears interest at the LIBOR rate plus the applicable interest rate spread (1.5% at September 30, 2011) or at the bank’s prime lending rate (3.25% at September 30, 2011). The terms and conditions of the line of credit agreement described in the preceding paragraph also apply to the term loan.

The Company entered into an interest rate swap agreement associated with the above $6 million loan, with principal and interest payments due through August 2012.  At September 30, 2011, the notional principal amount totaled $1.8 million.  This instrument was utilized by the Company to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility.  The Company did not adopt hedge accounting, but rather records the fair market value adjustments through the consolidated statements of operations each period.  The associated fair value adjustment for the three and nine months ended September 30, 2011 were $25,000 and $82,000, respectively, and were recorded as decreases to interest expense.

The Company has a $1.5 million mortgage, collateralized by certain real estate.  The annual mortgage payment including interest totals $222,000.  The mortgage bears interest at a fixed rate of 5.75% and matures in 2019.

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During fiscal year 2011, the Company anticipates that its capital requirements will be approximately $8 to $9 million.  The Company does not enter into long term contracts with its major Hospitality segment customers. The Company commits to purchasing inventory from its suppliers based on a combination of internal forecasts and the actual orders from customers.  This process, along with good relations with suppliers, minimizes the working capital investment required by the Company.  Although the Company lists two major customers, McDonald’s and Yum! Brands, it sells to hundreds of individual franchisees of these corporations, each of which is individually responsible for its own debts.  These broadly made sales substantially reduce the impact on the Company’s liquidity if one individual franchisee reduces the volume of its purchases from the Company in a given year.  The Company, based on internal forecasts, believes its existing cash and line of credit facilities and its anticipated operating cash flow will be sufficient to meet its cash requirements through at least the next twelve months.  However, the Company may be required, or could elect, to seek additional funding prior to that time.  The Company’s future capital requirements will depend on many factors including its rate of revenue growth, the timing and extent of spending to support product development efforts, expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of its products.  The Company cannot assure that additional equity or debt financing will be available on acceptable terms or at all.  The Company’s sources of liquidity beyond twelve months, in management’s opinion, will be its cash balances on hand at that time, funds provided by operations, funds available through its lines of credit and the long-term credit facilities that it can arrange.

Recent Accounting Pronouncements

In December 2010, FASB issued ASU 2010-28 “Intangibles—Goodwill and Other (Topic 350)” (ASU 2010-28). Topic 350 is amended to clarify the requirement to test for impairment of goodwill.  Topic 350 has required that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value.  Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative, goodwill of that reporting unit shall be tested for impairment on an annual or interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists.  The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. The adoption of this standard did not impact the consolidated financial statements.

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In December 2010, the FASB issued ASU 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations” (ASU 2010-29). This standard update clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The adoption of this standard did not have a material impact on the consolidated financial statements as there were no business combinations in the current period.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.”  ASU No. 2009-14 amends guidance included within ASC Topic 985-605 to exclude tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. Entities that sell joint hardware and software products that meet this scope exception will be required to follow the guidance of ASU No. 2009-13. ASU No. 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this standard did not have a material impact on the consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.”  ASU No. 2009-13 amends guidance included within ASC Topic 605-25 to require an entity to use an estimated selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. ASU No. 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this standard did not have a material impact on the consolidated financial statements.

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Recently Issued Accounting Pronouncements Not Yet Adopted

In September 2011, the FASB issued an update to Topic 350 – Intangibles – Goodwill and Other of the Accounting Standards Codification. The objective of this update is to simplify how entities, both public and nonpublic test goodwill for impairment. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income.” This ASU intends to enhance comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as part of the statement of changes in shareowners’ equity. The provisions of this ASU will be applied retrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted.  The Company is currently evaluating the impact of adopting this ASU.

Critical Accounting Policies

In our Annual Report on Form 10-K for the year ended December 31, 2010, we disclose accounting policies, referred to as critical accounting policies, that require management to use significant judgment or that require significant estimates.  Management regularly reviews the selection and application of our critical accounting policies.  There have been no updates to the critical accounting policies contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

inflation

Inflation had little effect on revenues and related costs during the nine months ended September 30, 2011.  Management anticipates that margins will be maintained at acceptable levels to minimize the affects of inflation, if any.

interest rates

As of September 30, 2011, the Company has $3.3 million in variable debt.  The Company believes that an adverse change in interest rates of 100 basis points would not have a material impact on our business, financial condition, results of operations or cash flows.

foreign currency

The Company’s primary exposures relate to certain non-dollar denominated sales and operating expenses in Europe and Asia. These primary currencies are the Euro, the Australian dollar and the Singapore dollar.  Management believes that foreign currency fluctuations should not have a significant impact on our business, financial conditions, and results of operations or cash flows due to the current volume of business affected by foreign currencies.

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Item 4. Controls and Procedures

(a)         Evaluation of Disclosure Controls and Procedures.

Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2011, the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), conducted under the supervision of and with the participation of the Company’s chief executive officer and chief financial officer, such officers have concluded that the Company’s disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is accumulated and communicated to management including the chief executive and financial officers, as appropriate, to allow timely decisions regarding required disclosures, are effective as of the Evaluation Date.

(b)         Changes in Internal Control over Financial Reporting.

There was no change in the Company’s internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting.

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PART II - OTHER INFORMATION

Item 1A.  Risk Factors

The Company is exposed to certain risk factors that may affect operations and/or financial results.  The significant factors known to the Company are described in the Company’s most recently filed Annual Report on Form 10-K.  There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K.

Item 4.  Reserved

Item 5.  Other Information

On August 10, 2011, PAR Technology Corporation furnished a report on Form 8-K pursuant to Item 2.02 (Results of Operations and Financial Condition) of that Form relating to its financial information for the quarter ended June 30, 2011, as presented in the press release of August 10, 2011 and furnished thereto as an exhibit.

On July 15, 2011, PAR Technology Corporation furnished a report on Form 8-K pursuant to Item 5.02(b) (Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers) announcing the retirement of Charles A. Constantino as a Director of the Company effective as of July 12, 2011.

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Item 6.  Exhibits

List of Exhibits

Exhibit No.	Description of Instrument
31.1	Certification of Chairman of the Board and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Vice President, Chief Financial Officer, Treasurer, and Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chairman of the Board and Chief Executive Officer and Vice President, Chief Financial Officer, Treasurer, and Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PAR TECHNOLOGY CORPORATION
	(Registrant)
Date:  November 10, 2011
	/s/RONALD J. CASCIANO
	Ronald J. Casciano
	Vice President, Chief Financial Officer, Treasurer, and Chief Accounting Officer

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Exhibit Index

Exhibit No.	Description of Instrument	Sequential Page Number
31.1	Certification of Chairman of the Board and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	E-1
31.2	Certification of Vice President, Chief Financial Officer, Treasurer, and Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	E-2
32.1	Certification of Chairman of the Board and Chief Executive Officer and Vice President, Chief Financial Officer, Treasurer, and Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	E-3

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