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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 quarterly period ended September 30, 2009
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-22065
RADIANT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Georgia | 11-2749765 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3925 Brookside Parkway, Alpharetta, Georgia | 30022 | |
(Address of principal executive offices) | (Zip code) |
(770) 576-6000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) 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 ¨
Indicate by check mark whether the registrant has submitted electronically and has posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | 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 ¨ No x
As of November 3, 2009, there were 33,123,737 shares of the registrant’s no par value common stock outstanding.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
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PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
The information contained in this report is furnished by Radiant Systems, Inc. (“Radiant,” “Company,” “we,” “us,” or “our”). In the opinion of management, the information in this report contains all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the results for the interim periods presented. The financial information presented herein should be read in conjunction with the financial statements included in the Company’s Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 30, 2009 | December 31, 2008 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 14,703 | $ | 16,450 | ||||
Accounts receivable, net | 41,656 | 44,024 | ||||||
Inventories, net | 29,869 | 31,838 | ||||||
Deferred tax assets | 8,020 | 7,982 | ||||||
Other current assets | 3,938 | 2,628 | ||||||
Total current assets | 98,186 | 102,922 | ||||||
Property and equipment, net | 23,849 | 23,031 | ||||||
Software development costs, net | 11,520 | 9,278 | ||||||
Goodwill | 124,122 | 115,229 | ||||||
Intangible assets, net | 48,515 | 51,628 | ||||||
Other long-term assets | 2,428 | 1,454 | ||||||
Total assets | $ | 308,620 | $ | 303,542 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Current portion of long-term debt | 6,000 | 6,081 | ||||||
Accounts payable | 15,487 | 17,521 | ||||||
Accrued liabilities | 23,111 | 17,203 | ||||||
Customer deposits and unearned revenues | 24,054 | 19,714 | ||||||
Current portion of capital lease payments | 876 | 825 | ||||||
Total current liabilities | 69,528 | 61,344 | ||||||
Capital lease payments, net of current portion | 764 | 1,287 | ||||||
Long-term debt, net of current portion | 61,637 | 92,385 | ||||||
Deferred tax liabilities, non-current | 4,594 | 3,066 | ||||||
Other long-term liabilities | 4,680 | 5,129 | ||||||
Total liabilities | 141,203 | 163,211 | ||||||
Shareholders’ equity | ||||||||
Preferred stock, no par value; 5,000,000 shares authorized, no shares issued | — | — | ||||||
Common stock, no par value; 100,000,000 shares authorized; 33,106,131 and 32,498,859 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively | — | — | ||||||
Additional paid-in capital | 162,626 | 157,930 | ||||||
Retained earnings | 7,945 | 317 | ||||||
Accumulated other comprehensive loss | (3,154 | ) | (17,916 | ) | ||||
Total shareholders’ equity | 167,417 | 140,331 | ||||||
Total liabilities and shareholders’ equity | $ | 308,620 | $ | 303,542 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||
Revenues: | |||||||||||||||
Systems | $ | 29,619 | $ | 42,629 | $ | 86,499 | $ | 120,304 | |||||||
Maintenance, subscription and transaction services | 33,501 | 29,465 | 96,781 | 78,182 | |||||||||||
Professional services | 7,820 | 10,260 | 26,395 | 27,799 | |||||||||||
Total revenues | 70,940 | 82,354 | 209,675 | 226,285 | |||||||||||
Cost of revenues: | |||||||||||||||
Systems | 16,051 | 22,837 | 45,278 | 63,167 | |||||||||||
Maintenance, subscription and transaction services | 16,340 | 17,294 | 47,430 | 45,236 | |||||||||||
Professional services | 5,353 | 7,286 | 17,401 | 20,206 | |||||||||||
Total cost of revenues | 37,744 | 47,417 | 110,109 | 128,609 | |||||||||||
Gross profit | 33,196 | 34,937 | 99,566 | 97,676 | |||||||||||
Operating expenses: | |||||||||||||||
Product development | 5,911 | 6,482 | 16,624 | 18,231 | |||||||||||
Sales and marketing | 10,288 | 10,322 | 31,378 | 27,102 | |||||||||||
Depreciation of fixed assets | 1,143 | 1,245 | 3,625 | 3,414 | |||||||||||
Amortization of intangible assets | 2,380 | 2,377 | 6,969 | 5,481 | |||||||||||
General and administrative | 7,701 | 8,916 | 26,142 | 24,142 | |||||||||||
Other income and charges, net | — | 2,075 | 1,153 | 1,619 | |||||||||||
Total operating expenses | 27,423 | 31,417 | 85,891 | 79,989 | |||||||||||
Income from operations | 5,773 | 3,520 | 13,675 | 17,687 | |||||||||||
Interest income | (16 | ) | — | (55 | ) | — | |||||||||
Interest expense | 542 | 1,287 | 1,869 | 3,690 | |||||||||||
Other (income) expense, net | (21 | ) | (36 | ) | (88 | ) | 390 | ||||||||
Income from operations before income tax provision | 5,268 | 2,269 | 11,949 | 13,607 | |||||||||||
Income tax provision | 1,847 | 624 | 4,321 | 4,497 | |||||||||||
Net income | $ | 3,421 | $ | 1,645 | $ | 7,628 | $ | 9,110 | |||||||
Net income per share: | |||||||||||||||
Basic income per share | $ | 0.10 | $ | 0.05 | $ | 0.23 | $ | 0.28 | |||||||
Diluted income per share | $ | 0.10 | $ | 0.05 | $ | 0.23 | $ | 0.27 | |||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 33,002 | 32,399 | 32,834 | 32,245 | |||||||||||
Diluted | 34,269 | 33,391 | 33,500 | 33,576 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(in thousands)
(unaudited)
Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Total | ||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | ||||||||||||||
BALANCE, December 31, 2008 | 32,499 | $ | — | $ | 157,930 | $ | 317 | $ | (17,916 | ) | $ | 140,331 | ||||||
Components of comprehensive income: | ||||||||||||||||||
Net income | — | — | — | 7,628 | — | 7,628 | ||||||||||||
Foreign currency translation adjustment | — | — | — | — | 14,762 | 14,762 | ||||||||||||
Total comprehensive income | — | — | — | 7,628 | 14,762 | 22,390 | ||||||||||||
Exercise of employee stock options | 173 | — | 854 | — | — | 854 | ||||||||||||
Stock issued under Employee Stock Purchase Plan | 25 | — | 169 | — | — | 169 | ||||||||||||
Net tax benefits related to stock-based compensation | — | — | 114 | — | — | 114 | ||||||||||||
Restricted stock awards | 409 | — | 1,270 | — | — | 1,270 | ||||||||||||
Stock-based compensation | — | — | 2,289 | — | — | 2,289 | ||||||||||||
BALANCE, September 30, 2009 | 33,106 | $ | — | $ | 162,626 | $ | 7,945 | $ | (3,154 | ) | $ | 167,417 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the nine months ended September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 7,628 | $ | 9,110 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 11,942 | 9,753 | ||||||
Stock-based compensation expense | 3,555 | 3,442 | ||||||
Deferred income taxes | 1,631 | (1,882 | ) | |||||
Other (income) and charges, net (see Note 8) | (190 | ) | 1,619 | |||||
Changes in assets and liabilities, net of the effects of acquisitions: | ||||||||
Accounts receivable | 3,069 | (1,277 | ) | |||||
Inventories | 2,418 | (231 | ) | |||||
Other assets | (2,239 | ) | 2,544 | |||||
Accounts payable | (2,331 | ) | (9,319 | ) | ||||
Accrued liabilities | 7,867 | (7,126 | ) | |||||
Client deposits and unearned revenue | 3,802 | 4,390 | ||||||
Other liabilities | (495 | ) | (289 | ) | ||||
Net cash provided by operating activities | 36,657 | 10,734 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property and equipment | (4,217 | ) | (8,169 | ) | ||||
Capitalized software development costs | (3,307 | ) | (3,025 | ) | ||||
Purchase of customer list | (2,000 | ) | (2,000 | ) | ||||
Proceeds from sale of building | 216 | — | ||||||
Acquisition of Hospitality EPoS Systems Ltd., net of cash acquired (see Note 3) | (97 | ) | (5,953 | ) | ||||
Acquisition of Quest Retail Technology, net of cash acquired (see Note 3) | — | (52,497 | ) | |||||
Acquisition of Jadeon, Inc., net of cash acquired (see Note 3) | — | (6,990 | ) | |||||
Acquisition of Orderman GmbH, net of cash acquired (see Note 3) | — | (30,000 | ) | |||||
Note receivable | — | (250 | ) | |||||
Execution of forward contract | — | 1,664 | ||||||
Net cash used in investing activities | (9,405 | ) | (107,220 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from exercise of employee stock options | 854 | 1,616 | ||||||
Proceeds from shares issued under Employee Stock Purchase Plan | 169 | 119 | ||||||
Tax benefits related to stock-based compensation | 114 | 205 | ||||||
Principal payments on capital lease obligations | (626 | ) | (604 | ) | ||||
Principal payments on JPM Credit Agreement | (4,500 | ) | (3,000 | ) | ||||
Proceeds from borrowings under the JPM Credit Agreement (see Note 7) | 21,200 | 137,700 | ||||||
Repayments of revolving loan under the JPM Credit Agreement | (47,700 | ) | (33,800 | ) | ||||
Proceeds from research and development notes payable | 239 | — | ||||||
Repayments of research and development notes payable | (81 | ) | — | |||||
Payment of financing costs related to the JPM Credit Agreement | — | (664 | ) | |||||
Principal payments on notes payable to shareholders | — | (2,020 | ) | |||||
Principal payments on notes payable to a bank | — | (66 | ) | |||||
Principal payments on WFF Credit Agreement (see Note 7) | — | (18,192 | ) | |||||
Payment of fees to terminate WFF Credit Agreement | — | (341 | ) | |||||
Net cash (used in) provided by financing activities | (30,331 | ) | 80,953 | |||||
Effect of exchange rate changes on cash and cash equivalents | 1,332 | — | ||||||
Decrease in cash and cash equivalents | (1,747 | ) | (15,533 | ) | ||||
Cash and cash equivalents at beginning of period | 16,450 | 29,940 | ||||||
Cash and cash equivalents at end of period | $ | 14,703 | $ | 14,407 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the nine months ended September 30, | |||||||
2009 | 2008 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||
Cash paid for interest | $ | 1,827 | $ | 3,826 | |||
Cash paid for income taxes, net of refunds | $ | 1,795 | $ | 4,480 | |||
SCHEDULE OF NON-CASH TRANSACTIONS: | |||||||
Assets acquired under capital leases | $ | 155 | $ | 1,230 | |||
Purchases of property and equipment | $ | 126 | $ | 121 | |||
Purchase of customer list, final payment completed Q1 2009 | $ | — | $ | 2,000 | |||
Non-cash transactions related to acquisitions (see Note 3): | |||||||
Purchase price adjustment related to Hospitality EPoS Systems Ltd. | $ | (16 | ) | $ | 172 | ||
Purchase price adjustment related to Jadeon, Inc. | $ | (108 | ) | $ | 860 | ||
Purchase price adjustment related to Orderman GmbH | $ | (214 | ) | $ | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION AND ACCOUNTING PRONOUNCEMENTS
Basis of Presentation
In the opinion of management, the unaudited interim condensed consolidated financial statements of Radiant Systems, Inc. (“Radiant” or the “Company”), included herein, have been prepared on a basis consistent with the December 31, 2008 audited consolidated financial statements, and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Radiant’s Form 10-K for the year ended December 31, 2008. Radiant’s results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of future operating results.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements of Radiant have been prepared in accordance with generally accepted accounting principles applicable to interim financial statements, the general instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.
Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
Treasury Stock
The Company records treasury stock purchases at cost and allocates this value to additional paid-in capital.
Net Income Per Share
Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding. In the event of a net loss, dilutive loss per share is the same as basic loss per share. Diluted net income per share includes the dilutive effect of stock options. A reconciliation of the weighted average number of common shares outstanding assuming dilution is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2009 | 2008 | 2009 | 2008 | |||||
Weighted average common shares outstanding | 33,002 | 32,399 | 32,834 | 32,245 | ||||
Dilutive effect of outstanding stock options | 1,267 | 992 | 666 | 1,331 | ||||
Weighted average common shares outstanding assuming dilution | 34,269 | 33,391 | 33,500 | 33,576 | ||||
For the three months ended September 30, 2009 and 2008, options to purchase approximately 3.2 million and 3.4 million shares of common stock, respectively, were excluded from the above reconciliation, as the options were anti-dilutive for the periods then ended. For the nine months ended September 30, 2009 and 2008, options to purchase approximately 3.9 million and 2.7 million shares of common stock, respectively, were excluded from the above reconciliation, as the options were anti-dilutive for the periods then ended.
Comprehensive Income (Loss)
The Company follows FASB ASC Topic 220, Comprehensive Income, (“ASC 220”). ASC 220 establishes the rules for the reporting of comprehensive income and its components. The Company’s comprehensive income (loss) includes net income and foreign currency translation adjustments. Total comprehensive income (loss) for the three months ended September 30, 2009 and 2008 was approximately $9.2 million and ($12.6) million, respectively. Total comprehensive income for the nine months ended September 30, 2009 and 2008 was approximately $22.4 million and $0.7 million, respectively.
Financing Costs Related to Long-Term Debt
Costs associated with obtaining long-term debt are deferred and amortized over the term of the related debt. The Company incurred financing costs equal to $1.2 million related to the JPM Credit Agreement during the first half of 2008. The costs were deferred and are being amortized over the life of the loan, which is five years. Amortization of these financing costs was approximately $0.1 million for the three months ended September 30, 2009 and 2008. Amortization of these financing costs was approximately $0.3 million for the nine months ended September 30, 2009 and 2008.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Accounting Pronouncements
Recently Issued Standards
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-14 (“ASU 2009-14”),Software (Topic 985): Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force. This ASU establishes that tangible products that contain software that works together with the nonsoftware components of the tangible product to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. These items should be accounted for under other appropriate revenue recognition guidance. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011 and concurrently with ASU 2009-13 which is described below. Full retrospective application is optional and early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the impact of this ASU on our financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”),Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force. This ASU amends the criteria for separating consideration in multiple-deliverable arrangements, which will, as a result, separate multiple-deliverable arrangements more often than under existing U.S. GAAP. Additionally, this ASU establishes a selling price hierarchy for determining the selling price of a deliverable. The ASU also eliminates the residual method of revenue allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. This guidance requires that management determine its best estimate of selling price in a manner consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU significantly expands the disclosures required for multiple-deliverable revenue arrangements with the objective of disclosing judgments related to these arrangements and the effect that the use of the relative selling-price method and changes in those judgments have on the timing and amount of revenue recognition. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011 and concurrently with ASU 2009-14 which is described above. Full retrospective application is optional and early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the impact of this ASU on our financial statements.
Recently Adopted Standards
In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”),Fair Value Measurements and Disclosures (Topic 820): Measuring Liabilities at Fair Value. This ASU establishes that in circumstances in which a quoted market price in an active market for an identical liability is not available, an entity is required to measure fair value using the quoted price of an identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or another valuation technique consistent with the principles of Topic 820. We adopted the provisions of ASU 2009-05 as of September 30, 2009, which had no material impact on the Company’s financial position, cash flows or results of operations.
In June 2009, the FASB issued theFASB Accounting Standards CodificationTM (“Codification” or “ASC”) which modifies the GAAP hierarchy by establishing the Codification as the single source of authoritative U.S. GAAP recognized by the FASB applied by nongovernmental entities. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. The Codification became effective July 1, 2009. The Codification is not intended to change or alter existing GAAP and accordingly, it did not impact the Company’s financial position, cash flows or results of operations. However, historical GAAP references in this quarterly report have been adjusted, and references in future filings will be adjusted to reflect authoritative guidance in the Codification.
In May 2009, the FASB issued guidance included in ASC Topic 855,Subsequent Events (“ASC 855”). The provisions of ASC 855 establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 also requires the disclosure of the date through which subsequent events are evaluated and the basis for that date, that is, whether that date represents the date the financial statements are issued or are available to be issued. The provisions of ASC 855 are effective for interim or annual periods ending on or after June 15, 2009. We adopted the provisions of ASC 855 as of April 1, 2009, which had no impact on the Company’s financial position, cash flows or results of operations.
In September 2006, the FASB issued guidance included in ASC Topic 820,Fair Value Measurements and Disclosures(“ASC 820”), and in February 2008, the FASB amended this guidance. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 is applicable to other ASC topics that require or permit fair value measurements, except those relating to lease accounting, and accordingly does not require any new fair value measurements. The provisions of ASC 820 are effective for financial assets and liabilities in fiscal years beginning after November 15, 2007, and for non-financial assets and liabilities in fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Our adoption of the provisions of ASC 820 on January 1, 2008, with respect to financial assets and liabilities measured at fair value, has had no material impact on our fair value measurements or our financial statements. In October 2008, the FASB issued additional guidance included in ASC 820 that clarifies the application of fair value measurements in a market that is not active. These provisions of ASC 820 became effective immediately upon issuance, and their adoption did not have any effect on our financial statements. We determine the fair value of our long-lived assets, in accordance with ASC 820, when testing for impairment. ASC 820 was effective for fair value assessments as of January 1, 2009. In April 2009, the FASB issued further guidance included in ASC 820 that provides for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. These provisions also include guidance on identifying circumstances that indicate a transaction is not orderly. This additional guidance is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The Company concluded that the adoption of these provisions of ASC 820 as of April 1, 2009 had no impact on its financial position, cash flows or results of operations.
In November 2008, the Emerging Issues Task Force reached consensus on guidance about accounting for defensive intangible assets that is included in ASC Topic 350,Intangibles-Goodwill and Other (“ASC 350”). A defensive intangible asset is an acquired intangible asset where the acquirer has no intention of using, or intends to discontinue use of, the intangible asset, but holds it to prevent competitors from obtaining any benefit from it. The acquired defensive asset will be treated as a separate unit of accounting and the useful life assigned will be based on the period during which the asset would diminish in value. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and may impact any intangible assets we acquire in future transactions.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
In June 2008, the FASB issued guidance related to the computation of earnings per share amounts that is included in ASC Topic 260,Earnings Per Share (“ASC 260”). ASC 260 stipulates that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. This guidance is effective for fiscal years beginning after December 31, 2008. The Company concluded that the adoption of these provisions ASC 260 did not have a material impact on its reported basic and diluted earnings per share amounts.
In April 2008, the FASB issued guidance related to determining the useful life of intangible assets that is included in ASC Topic 350,Intangibles-Goodwill and Other (“ASC 350”). This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. More specifically, this guidance removes the requirement to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions and instead, requires an entity to consider its own historical experience in renewing similar arrangements. These provisions also require expanded disclosure related to the determination of intangible asset useful lives. These provisions are effective for financial statements issued for fiscal years beginning after December 15, 2008, and may impact any intangible assets we acquire in future transactions.
In March 2008, the FASB issued guidance included in ASC Topic 815,Derivatives and Hedging (“ASC 815”). This guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments, and disclosures about credit risk-related contingent features in derivative agreements. These provisions are effective for fiscal years beginning after November 15, 2008. As of September 30, 2009, we have not entered into any derivative transactions.
In December 2007, the FASB issued guidance included in ASC Topic 810,Consolidation (“ASC 810”). This guidance requires (1) non-controlling (minority) interests be reported as a component of stockholders’ equity; (2) net income attributable to the parent and to the non-controlling interest be separately identified in the consolidated statement of operations; (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions; (4) any retained non-controlling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and (5) sufficient disclosures be provided that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. These provisions of ASC 810 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of these provisions did not have any impact on the Company’s financial position, cash flows or results of operations as we have no minority interests.
In December 2007, the FASB issued guidance included in ASC Topic 805,Business Combinations (“ASC 805”). This guidance significantly changes the accounting for business combinations. ASC 805 requires an acquiring entity to recognize all assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions. This guidance changes the accounting treatment for certain specific acquisition-related items including: (1) expensing acquisition-related costs as incurred; (2) valuing non-controlling interests at fair value at the acquisition date of a controlling interest; and (3) expensing restructuring costs associated with an acquired business. The guidance also enumerated a substantial number of new disclosure requirements. These provisions of ASC 805 are to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. These provisions will have an impact on our accounting for any future business combinations.
In February 2007, the FASB issued guidance included in ASC Topic 825,Financial Instruments (“ASC 825”). This guidance permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. These provisions of ASC 825 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We adopted these provisions of ASC 825 on January 1, 2008, and have elected not to measure any of our current eligible financial assets or liabilities at fair value.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
2. STOCK-BASED COMPENSATION
Radiant has adopted equity incentive plans that provide for the grant of incentive and non-qualified stock options and restricted stock awards to directors, officers and other employees pursuant to authorization by the Board of Directors. The exercise price of all options equals the market value on the date of the grant. In addition, Radiant provides employees stock purchase rights under its Employee Stock Purchase Plan (“ESPP”). The ESPP permits employees to purchase Radiant common stock at the end of each quarter at 95% of the market price on the last day of the quarter. Based on these terms, the ESPP will not result in any future stock compensation expense. The Company has authorized approximately 18.2 million shares for awards of stock options and restricted stock, of which approximately 1.1 million shares are available for future grants as of September 30, 2009.
The Company accounts for equity-based compensation in accordance with FASB ASC Topic 718,Compensation–Stock Compensation (“ASC 718”), which requires the Company to measure the cost of employee services received in exchange for all equity awards granted, including stock options and restricted stock awards, based on the fair market value of the award as of the grant date. The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. The non-cash stock-based compensation expense from stock options and restricted stock awards was included in the condensed consolidated statements of operations as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Cost of revenues - systems | $ | 28 | $ | 20 | $ | 105 | $ | 65 | ||||||||
Cost of revenues - maintenance, subscription and transaction services | 19 | 20 | 62 | 53 | ||||||||||||
Cost of revenues - professional services | 66 | 70 | 227 | 182 | ||||||||||||
Product development | 56 | 94 | 177 | 270 | ||||||||||||
Sales and marketing | 154 | 186 | 583 | 536 | ||||||||||||
General and administrative | 643 | 833 | 2,402 | 2,337 | ||||||||||||
Total non-cash stock-based compensation expense | $ | 966 | $ | 1,223 | $ | 3,556 | $ | 3,443 | ||||||||
Estimated income tax benefit | (354 | ) | (454 | ) | (1,274 | ) | (1,261 | ) | ||||||||
Total non-cash stock-based compensation expense, net of tax benefit | $ | 612 | $ | 769 | $ | 2,282 | $ | 2,182 | ||||||||
Impact on diluted net income per share | $ | 0.02 | $ | 0.02 | $ | 0.07 | $ | 0.06 | ||||||||
The Company capitalized approximately $8,000 and $16,000 in stock-based compensation cost related to product development for the three-month periods ended September 30, 2009 and 2008, respectively. The Company capitalized approximately $28,000 and $41,000 in stock-based compensation cost related to product development for the nine-month periods ended September 30, 2009 and 2008, respectively.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Stock Options
The exercise price of each stock option equals the market price of Radiant’s common stock on the date of grant. Most options are scheduled to vest equally over a three or four-year period or when certain stock performance requirements are met. These stock performance requirements include a provision that allows for early vesting if certain stock price targets are met. The Company recognizes stock-based compensation expense using the graded vesting attribution method. Outstanding options expire no later than ten years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The weighted average assumptions used in the model for the three and nine-month periods ended September 30, 2009 and 2008 are outlined in the following table:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2009 | 2008 | 2009 | 2008 | |||||
Expected volatility | 70% | 52% | 69% - 70% | 50% - 52% | ||||
Expected life (in years) | 3-4 | 3-4 | 3-4 | 3-4 | ||||
Expected dividend yield | 0.00% | 0.00% | 0.00% | 0.00% | ||||
Risk-free interest rate | 1.9% | 2.6% | 1.6% - 2.2% | 2.1% - 3.3% |
The computation of the expected volatility assumption used in the Black-Scholes-Merton calculations for new grants is based on a combination of historical and implied volatilities. When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods. The risk-free interest rate is based on the U.S. Treasury yield curve at the grant date, using a remaining term equal to the expected life of the option. The total expense to be recorded in future periods will depend on several variables, including the number of stock-based awards that vest, pre-vesting cancellations and the fair value of those vested awards.
A summary of the changes in stock options outstanding under our stock-based compensation plans during the nine months ended September 30, 2009 is presented below:
(in thousands, except per share data) | Number of Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||
Outstanding at December 31, 2008 | 6,359 | $ | 10.66 | 3.25 | $ | — | |||||
Granted | 515 | $ | 3.37 | ||||||||
Exercised | (174 | ) | $ | 5.02 | |||||||
Forfeited or cancelled | (246 | ) | $ | 8.59 | |||||||
Outstanding at September 30, 2009 | 6,454 | $ | 10.31 | 3.28 | $ | 16,303 | |||||
Vested or expected to vest at September 30, 2009 | 6,380 | $ | 10.34 | 3.26 | $ | 15,993 | |||||
Exercisable at September 30, 2009 | 4,677 | $ | 11.19 | 2.80 | $ | 9,405 |
The weighted average grant-date fair value of options granted during the three-month periods ended September 30, 2009 and 2008 were $5.17 and $3.87, respectively. The weighted average grant-date fair value of options granted during the nine-month periods ended September 30, 2009 and 2008 were $1.69 and $5.41, respectively. The total intrinsic value, the difference between the exercise price and the market price on the date of exercise, of options exercised during the three-month periods ended September 30, 2009 and 2008, was $0.9 million and $0.1 million, respectively, and $1.0 million and $1.5 million for the nine-month periods ended September 30, 2009 and 2008, respectively. The total fair value of options that vested during the three-month periods ended September 30, 2009 and 2008, was approximately $0.2 million. The total fair value of options that vested during the nine-month periods ended September 30, 2009 and 2008, was approximately $3.2 million and $2.5 million, respectively. There were unvested options outstanding to purchase approximately 1.8 million shares as of September 30, 2009 and 2008 with a weighted-average grant-date fair value of $3.40 and $4.67, respectively. Of the 1.8 million shares that were unvested at September 30, 2009 and 2008, there were 0.3 million shares and 0.1 million shares, respectively, that had a vesting period based on stock performance requirements. The unvested shares had a total unrecognized compensation expense as of September 30, 2009 and 2008 equal to approximately $2.0 million and $4.0 million, respectively, net of estimated forfeitures, which will be recognized over the weighted average periods of 0.9 years and 1.2 years, respectively. The Company recognized stock-based compensation expense related to employee and director stock options equal to approximately $0.6 million and $0.9 million for the three months ended September 30, 2009 and 2008, respectively, and $2.3 million and $2.7 million for the nine months ended September 30, 2009 and 2008, respectively. Cash received from stock options exercised was approximately $0.8 million and $0.1 million during the three-month periods ending September 30, 2009 and 2008, respectively, and $0.9 million and $1.6 million for the nine-month periods ended September 30, 2009 and 2008, respectively.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Restricted Stock Awards
The Company awarded approximately 0.4 million shares and 0.3 million shares of restricted stock to employees under the Amended and Restated 2005 Long-Term Incentive Plan during the nine months ended September 30, 2009 and 2008, respectively. These restricted stock awards vest at various terms over a three-year period from the date of grant. The weighted average grant-date fair value of restricted stock awards at September 30, 2009 and 2008 was $3.35 and $13.79 per share, respectively. The Company recognized stock-based compensation expense related to restricted stock awards equal to approximately $0.4 million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively and $1.3 million and $0.7 million for the nine months ended September 30, 2009 and 2008, respectively. The unvested restricted stock awards had a total unrecognized compensation expense as of September 30, 2009 and 2008 equal to approximately $2.5 million and $3.0 million, respectively, which will be recognized over the weighted average periods of 2.0 and 2.3 years, respectively.
3. ACQUISITIONS
Each of the acquisitions discussed below was accounted for using the purchase method of accounting as required by FASB ASC Topic 805,Business Combinations(“ASC 805”). Management has concluded that the acquisitions of Orderman, Jadeon and Hospitality EPoS are not considered material acquisitions under the provisions of ASC 805.
Acquisition of Orderman GmbH
On July 1, 2008, the Company acquired Orderman GmbH (“Orderman”), one of the leading manufacturers of wireless handheld ordering and payment devices for the hospitality industry. Headquartered in Salzburg, Austria, Orderman has provided innovative mobile solutions since 1994. Orderman distributes its solutions through a reseller network of partners that have deployed their handheld devices, predominately in Europe. The total purchase price was approximately $33.0 million. The operations of the Orderman business have been included in the Company’s consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
The intangible assets acquired were valued by the Company with the assistance of independent appraisers utilizing customary valuation procedures and techniques. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed from the Orderman acquisition:
(Dollars in Thousands) | |||
Current assets | $ | 7,585 | |
Property, plant and equipment | 1,750 | ||
Identifiable intangible assets | 19,147 | ||
Goodwill | 15,338 | ||
Total assets acquired | 43,820 | ||
Current liabilities | 5,913 | ||
Long-term liabilities | 4,915 | ||
Total liabilities assumed | 10,828 | ||
Purchase price | $ | 32,992 | |
As a result of the Orderman acquisition, goodwill of approximately $15.3 million was recorded and assigned to the Hospitality segment. This includes subsequent changes related to purchase price adjustments in which goodwill increased from the date of acquisition by approximately $1.7 million. The goodwill is deductible for tax purposes over a period of 15 years. The following is a summary of the intangible assets acquired and the weighted-average useful life over which they will be amortized:
(Dollars in Thousands) | Purchased Asset | Weighted- Average Useful Life | |||
Core and developed technology | $ | 10,171 | 4 years | ||
Reseller network | 7,086 | 7 years | |||
Trademark | 1,890 | Indefinite | |||
Total intangible assets acquired | $ | 19,147 | |||
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Acquisition of Jadeon
On May 1, 2008, Radiant acquired substantially all of the assets of Jadeon, Inc. (“Jadeon”), a wholly-owned subsidiary of Innuity, Inc. and one of the Company’s resellers in California. Headquartered in Irvine, just outside Los Angeles, Jadeon had been delivering and supporting Radiant’s hospitality point-of-sale solutions since 2001. The total purchase price was approximately $7.3 million. The operations of the Jadeon business have been included in the Company’s consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
The intangible assets acquired were valued by the Company utilizing customary valuation procedures and techniques. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed from the Jadeon acquisition:
(Dollars in Thousands) | |||
Current assets | $ | 2,018 | |
Property, plant and equipment | 117 | ||
Identifiable intangible assets | 1,795 | ||
Goodwill | 7,766 | ||
Other assets | 185 | ||
Total assets acquired | 11,881 | ||
Total liabilities assumed (all of which were considered current) | 4,617 | ||
Purchase price | $ | 7,264 | |
As a result of the Jadeon acquisition, goodwill of approximately $7.8 million was recorded and assigned to the Hospitality segment. This includes subsequent changes related to purchase price adjustments in which goodwill increased from the date of acquisition by approximately $0.8 million. The goodwill is deductible for tax purposes over a period of 15 years. The following is a summary of the intangible asset acquired and the weighted-average useful life over which it will be amortized:
(Dollars in Thousands) | Purchased Asset | Weighted- Average Useful Life | |||
Customer relationships | $ | 1,795 | 10 years | ||
Total intangible asset acquired | $ | 1,795 | |||
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Acquisition of Hospitality EPoS Systems
On April 4, 2008, the Company acquired Hospitality EPoS Systems Ltd. (“Hospitality EPoS”), a leading technology supplier to the U.K. hospitality market since 1992. Headquartered in Kent, England, just outside London, Hospitality EPoS provided substantial capabilities for sales, implementation and support services and represented Radiant’s suite of hospitality products, including Aloha point-of-sale software, Enterprise.com above-store reporting, gift card and loyalty programs, back office and Radiant hardware. The total purchase price was approximately $6.3 million. The operations of the Hospitality EPoS business have been included in the Company’s consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
The intangible assets acquired were valued by the Company utilizing customary valuation procedures and techniques. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed from the Hospitality EPoS acquisition:
(Dollars in Thousands) | |||
Current assets | $ | 1,532 | |
Property, plant and equipment | 1,672 | ||
Identifiable intangible assets | 2,250 | ||
Goodwill | 3,530 | ||
Total assets acquired | 8,984 | ||
Current liabilities | 2,548 | ||
Long-term liabilities | 178 | ||
Total liabilities assumed | 2,726 | ||
Purchase price | $ | 6,258 | |
As a result of the Hospitality EPoS acquisition, goodwill of approximately $3.5 million was recorded and assigned to the Hospitality segment. This includes subsequent changes related to purchase price adjustments in which goodwill increased from the date of acquisition by approximately $0.3 million. The following is a summary of the intangible asset acquired and the weighted-average useful life over which it will be amortized:
(Dollars in Thousands) | Purchased Asset | Weighted- Average Useful Life | |||
Direct customers | $ | 2,250 | 10 years | ||
Total intangible asset acquired | $ | 2,250 | |||
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Acquisition of Quest Retail Technology
On January 1, 2008, the Company acquired Quest Retail Technology Pty Ltd (“Quest”), a privately held company based in Adelaide, Australia. Quest is a global provider of point-of-sale and back-office solutions to stadiums, arenas, convention centers, race courses, theme parks and various other industries. The total purchase price was approximately $53.4 million. The operations of the Quest business have been included in the Company’s consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
The intangible assets acquired were valued by the Company with the assistance of independent appraisers utilizing customary valuation procedures and techniques. Upon completion of this valuation during the second quarter of 2008, intangible assets were revalued resulting in a decrease of approximately $3.0 million. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed from the Quest acquisition:
(Dollars in Thousands) | |||
Current assets | $ | 2,959 | |
Property, plant and equipment | 448 | ||
Identifiable intangible assets | 18,496 | ||
Goodwill | 32,548 | ||
Other assets | 285 | ||
Total assets acquired | 54,736 | ||
Current liabilities | 1,027 | ||
Long-term liabilities | 318 | ||
Total liabilities assumed | 1,345 | ||
Purchase price | $ | 53,391 | |
As a result of the Quest acquisition, goodwill of approximately $32.5 million was recorded and assigned to the Hospitality segment. The following is a summary of the intangible assets acquired and the weighted-average useful lives over which they will be amortized:
(Dollars in Thousands) | Purchased Assets | Weighted- Average Useful Lives | |||
Core and developed technology | $ | 4,183 | 5 years | ||
Reseller network | 4,379 | 15 years | |||
Trademarks and tradenames | 5,201 | Indefinite | |||
Customer list | 4,641 | 10 years | |||
Backlog | 92 | 2 months | |||
Total intangible assets acquired | $ | 18,496 | |||
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill
In accordance with FASB ASC Topic 350,Intangibles–Goodwill and Other (“ASC 350”), the Company evaluates the carrying value of goodwill as of January 1 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
The Company’s annual evaluations of the carrying value of goodwill, completed on January 1, 2009 and 2008 in accordance with ASC 350, resulted in no impairment losses. Changes in the carrying amount of goodwill for the nine months ended September 30, 2009 are as follows (in thousands):
Hospitality | Retail | Total | |||||||||
BALANCE, December 31, 2008 | $ | 91,522 | $ | 23,707 | $ | 115,229 | |||||
Purchase price adjustments related to Orderman, Hospitality EPoS and Jadeon (see Note 3) | (240 | ) | — | (240 | ) | ||||||
Currency translation adjustments related to acquisitions | 8,220 | 913 | 9,133 | ||||||||
BALANCE, September 30, 2009 | $ | 99,502 | $ | 24,620 | $ | 124,122 | |||||
Intangible Assets
A summary of the Company’s intangible assets as of September 30, 2009 and December 31, 2008 is as follows (in thousands):
Weighted Average Amortization Lives | September 30, 2009 | December 31, 2008 | ||||||||||||||
Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||
Core and developed technology – Hospitality | 3.8 years | $ | 25,869 | $ | (15,368 | ) | $ | 25,021 | $ | (13,691 | ) | |||||
Reseller network – Hospitality | 12.4 years | 19,868 | (5,090 | ) | 18,906 | (3,775 | ) | |||||||||
Direct sales channel – Hospitality | 10 years | 3,600 | (2,055 | ) | 3,600 | (1,785 | ) | |||||||||
Covenants not to compete – Hospitality | 4 years | 1,750 | (1,641 | ) | 1,750 | (1,600 | ) | |||||||||
Trademarks and tradenames – Hospitality | Indefinite | 8,027 | — | 6,928 | — | |||||||||||
Trademarks and tradenames – Hospitality | 5 years | 300 | (239 | ) | 300 | (194 | ) | |||||||||
Customer list and contracts – Hospitality | 7.7 years | 13,737 | (4,014 | ) | 12,782 | (2,274 | ) | |||||||||
Backlog – Hospitality | 2 months | 92 | (92 | ) | 92 | (92 | ) | |||||||||
Core and developed technology – Retail | 4 years | 3,800 | (3,563 | ) | 3,800 | (2,850 | ) | |||||||||
Reseller network – Retail | 6 years | 5,200 | (3,250 | ) | 5,200 | (2,600 | ) | |||||||||
Subscription sales – Retail | 4 years | 1,400 | (1,313 | ) | 1,400 | (1,050 | ) | |||||||||
Trademarks and tradenames – Retail | �� | 6 years | 700 | (438 | ) | 700 | (350 | ) | ||||||||
Other | 7.8 years | 2,020 | (785 | ) | 2,021 | (611 | ) | |||||||||
Total intangible assets | $ | 86,363 | $ | (37,848 | ) | $ | 82,500 | $ | (30,872 | ) | ||||||
Approximate amortization expense, assuming no future acquisitions, dispositions or impairments of intangible assets, for the following 12-month periods subsequent to September 30, 2009 is listed below (in thousands):
12-month period ended September 30, | |||
2010 | $ | 9,294 | |
2011 | 8,247 | ||
2012 | 5,666 | ||
2013 | 4,634 | ||
2014 | 4,173 | ||
Thereafter | 8,474 | ||
$ | 40,488 | ||
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
5. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the Company’s accounts receivable as of September 30, 2009 and December 31, 2008 is as follows (in thousands):
September 30, 2009 | December 31, 2008 | |||||||
Trade receivables billed | $ | 40,714 | $ | 47,047 | ||||
Trade receivables unbilled | 4,920 | 1,347 | ||||||
45,634 | 48,394 | |||||||
Less allowance for doubtful accounts | (3,978 | ) | (4,370 | ) | ||||
$ | 41,656 | $ | 44,024 | |||||
The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of customers to make required payments. Estimates are developed by using standard quantitative measures based on customer payment practices and history, inquiries, credit reports from third parties and other financial information. If the financial condition of the Company’s customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. Bad debt expense totaled less than $0.1 million and approximately $0.9 million for the three-month periods ended September 30, 2009 and 2008, respectively, and totaled approximately $0.5 million and $1.5 million for the nine-month periods ended September 30, 2009 and 2008, respectively.
6. INVENTORY
Inventories consist principally of computer hardware and software media and are stated at the lower of cost (first-in, first-out method) or market. A summary of the Company’s inventory as of September 30, 2009 and December 31, 2008 is as follows (in thousands):
September 30, 2009 | December 31, 2008 | |||||
Raw materials, net of reserves for obsolescence equal to $1.3 million and $1.1 million, respectively | $ | 16,725 | $ | 17,454 | ||
Work in process | 420 | 816 | ||||
Finished goods, net of reserves for obsolescence equal to $4.8 million and $5.9 million, respectively | 12,724 | 13,568 | ||||
$ | 29,869 | $ | 31,838 | |||
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
7. DEBT
Prior to January 2008, the Company had a senior secured credit facility with Wells Fargo Foothill, Inc. (the “WFF Credit Agreement”). The WFF Credit Agreement provided for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $15 million and a term loan facility in an aggregate principal amount of up to $31 million. The revolving loan amount available to the Company was derived from a monthly borrowing base calculation using the Company’s various accounts receivable balances. The amount derived from this borrowing base calculation was further reduced by the total amount of letters of credit outstanding. Loans under the WFF Credit Agreement bore interest, at the Company’s option, at either the London Interbank Offering Rate (“LIBOR”) plus two and one half percent or the prime rate of Wells Fargo Bank, N.A.
The WFF Credit Agreement was scheduled to expire on March 31, 2010. However, it was refinanced on January 2, 2008 upon the execution of the credit agreement with JPMorgan Chase Bank, N.A., as arranger, and JPMorgan Chase Bank, N.A., SunTrust Bank, Bank of America, Guaranty Bank and Wachovia Bank, N.A., as lenders (the “JPM Credit Agreement”). The JPM Credit Agreement and subsequent amendments thereto provide for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $80 million and a term loan facility in an aggregate principal amount of up to $30 million. The Company has the right to increase the revolving credit commitment by up to $25 million, subject to the terms and conditions set forth in the JPM Credit Agreement. As of September 30, 2009, aggregate borrowings under this facility totaled $67.0 million, comprised of $45.5 million in revolving loans and $21.5 million in term loan facility borrowings. As of September 30, 2009, revolving loan borrowings available to the Company were equal to $34.5 million.
The JPM Credit Agreement is guaranteed by the Company and its subsidiaries and is secured by the assets of the Company and its subsidiaries. The maturity date of the JPM Credit Agreement is January 2, 2013. Interest accrues on amounts outstanding under the loan facility, at the Company’s option, at either (1) LIBOR plus a margin ranging between 1.25% and 2.00%, based upon the Company’s consolidated leverage ratio, as defined, or (2) the higher of the administrative agent’s prime rate or one-half of one percent over the federal funds effective rate plus a margin ranging between 0.25% and 1.00%, based on the Company’s consolidated leverage ratio, as defined. The JPM Credit Agreement contains certain customary representations and warranties from the Company. It also contains customary covenants, including: use of proceeds; limitations on liens; limitations on mergers, consolidations and sales of the Company’s assets; and limitations on related party transactions. In addition, the JPM Credit Agreement requires the Company to comply with various financial covenants, including maintaining leverage and fixed charge coverage ratios, as defined. The JPM Credit Agreement also contains certain customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due (subject to specified grace periods), breach of specified covenants, change in control and material inaccuracy of representations and warranties. The Company was in compliance with its financial and non-financial covenants as of September 30, 2009.
In the third quarter of 2008, the Company assumed research and development loans with the Austrian government in the amount of $0.1 million in conjunction with the acquisition of Orderman GmbH, bearing interest at approximately 2.50%, which were repaid in the third quarter of 2009. In the fourth quarter of 2008, the Company entered into an additional research and development loan with the Austrian government in the amount of $0.7 million, bearing interest at approximately 2.50%. As of September 30, 2009, $0.6 million had been drawn on this loan. This loan matures on March 31, 2013.
In the second quarter of 2005, the Company entered into an amended and restated promissory note in the amount of $1.5 million with the previous shareholders of Aloha Technologies, Inc., acquired by the Company in January 2004. During the fourth quarter of 2005, the Company modified the amended promissory note by reducing the $1.5 million principal amount to approximately $1.0 million. The decrease was the result of agreed upon purchase price adjustments. The principal on this note was originally agreed to be paid over the course of the third and fourth quarters of 2008 and the first quarter of 2009, but was paid in full during the first quarter of 2008 in conjunction with the execution of the JPM Credit Agreement.
The following is a summary of long-term debt and the related balances as of September 30, 2009 and December 31, 2008 (in thousands):
Description of Debt | September 30, 2009 | December 31, 2008 | ||||
Revolving credit loan under the JPM Credit Agreement bearing interest at LIBOR/prime rate plus the applicable margin, as defined (2.11% as of September 30, 2009), maturing on January 2, 2013 | $ | 45,500 | $ | 72,000 | ||
Term loan under the JPM Credit Agreement bearing interest at LIBOR plus the applicable margin, as defined (2.06% as of September 30, 2009), maturing on January 2, 2013 | 21,500 | 26,000 | ||||
Research and development loans from the Austrian government bearing interest at approximately 2.50%, maturing on various dates through December 31, 2013 | 637 | 466 | ||||
$ | 67,637 | $ | 98,466 | |||
Approximate maturities of notes payable for the following 12-month periods subsequent to September 30, 2009 are listed below (in thousands):
12-month period ended September 30, | |||
2010 | $ | 6,000 | |
2011 | 6,000 | ||
2012 | 7,500 | ||
2013 | 48,137 | ||
2014 | — | ||
$ | 67,637 | ||
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
8. OTHER INCOME AND CHARGES
Write-off of Third-Party Software Licenses
During the first quarter of 2009, the Company determined that it would not use certain third-party software licenses and recorded a write-off charge of $0.5 million as a result.
Severance and Restructuring Charge
During the first quarter of 2009, the Company recorded a charge of $0.7 million related to severance costs and restructuring of the organization. This charge resulted from efforts to align the Company’s cost structure with its revenues in light of the severe economic downturn that began in the second half of 2008.
Sale of Building
During the first quarter of 2009, the Company sold a building for cash proceeds of approximately $0.2 million. A net gain of approximately $0.1 million was recognized as a result of this transaction.
Lease Restructuring Charges – Brookside II Building, Alpharetta, Georgia
During the third quarter of 2008, the Company amended a sublease agreement for certain facilities located in Alpharetta, Georgia, in order to reduce future operating costs. In accordance with FASB ASC Topic 420,Exit or Disposal Cost Obligations (“ASC 420”), the Company recorded a lease restructuring charge based on the fair value of the remaining lease payments at the amendment date less the estimated sublease rentals that could reasonably be obtained from the property. The restructuring charges were not attributable to any of the Company’s reportable segments.
This amendment resulted in a restructuring charge of approximately $0.9 million in the third quarter of 2008, which consisted of $0.3 million for construction allowance and $0.6 million of lease restructuring reserves associated with the amendment to the sublease. As of September 30, 2009, approximately $0.5 million related to the lease commitments remained in the restructuring reserve to be paid. The Company anticipates the remaining payments will be made by the first quarter of 2013 (lease expiration). The table below summarizes the activity in the restructuring reserve (in thousands):
Short-Term | Long-Term | Total | ||||||||||
Balance, December 31, 2008 | $ | 847 | $ | 401 | $ | 1,248 | ||||||
Construction allowance payments | (625 | ) | — | (625 | ) | |||||||
Payments charged against restructuring reserve | (29 | ) | (129 | ) | (158 | ) | ||||||
Balance, September 30, 2009 | $ | 193 | $ | 272 | $ | 465 | ||||||
Lease Restructuring Charges – Alexander Building, Alpharetta, Georgia
During the third quarter of 2005, the Company decided to consolidate certain facilities located in Alpharetta, Georgia, in order to reduce future operating costs. This resulted in the abandonment of one facility, which formerly housed the Company’s customer support call center. The restructuring charges were not attributable to any of the Company’s reportable segments. In accordance with ASC 420, the Company recorded a lease restructuring charge based on the fair value of the remaining lease payments at the abandonment date less the estimated sublease rentals that could reasonably be obtained from the property.
This consolidation resulted in a restructuring charge of approximately $1.5 million in the third quarter of 2005, which consisted of $1.2 million for facility consolidations and $0.3 million of fixed asset write-offs associated with the facility consolidation. As of September 30, 2009, approximately $0.2 million related to the lease commitments remained in the restructuring reserve to be paid. The Company anticipates the remaining payments will be made by the fourth quarter of 2010 (lease expiration). The table below summarizes the activity in the restructuring reserve (in thousands):
Short-Term | Long-Term | Total | ||||||||||
Balance, December 31, 2008 | $ | 182 | $ | 154 | $ | 336 | ||||||
Payments charged against restructuring reserve | (2 | ) | (115 | ) | (117 | ) | ||||||
Balance, September 30, 2009 | $ | 180 | $ | 39 | $ | 219 | ||||||
Financing Costs Related to Long-Term Debt
Costs associated with obtaining long-term debt are deferred and amortized over the term of the related debt. The Company incurred financing costs in 2005 related to the WFF Credit Agreement and other long-term debt agreements. The costs were deferred and were being amortized over three years. In conjunction with the termination of the WFF Credit Agreement, as described in Note 7, a write-off of the remaining financing costs and early termination penalties resulted in a charge of approximately $0.4 million in the first quarter of 2008.
Forward Exchange Contracts
The Company records derivatives, namely foreign exchange contracts, on the balance sheet at fair value. The gains or losses on foreign currency forward contracts are recorded in the accompanying consolidated statements of operations. The Company does not use derivative financial instruments for speculative or trading purposes, nor does it hold or issue leveraged derivative financial instruments. The Company recognized a gain during the second quarter of 2008 of approximately $0.5 million related to a forward exchange contract in conjunction with the acquisition of Orderman. The Company recognized a gain during the first quarter of 2008 of approximately $0.3 million related to a foreign exchange contract in conjunction with the acquisition of Quest.
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
9. SEGMENT REPORTING
The Company currently operates in two primary segments: (i) Hospitality and (ii) Retail. The reportable segments were identified based on the manner in which management reviews operating results and makes decisions regarding the allocation of the Company’s resources. Each segment focuses on delivering site management systems, including point-of-sale, self-service kiosk, and back-office systems, designed specifically for each of the core vertical markets. The Company’s segments derive revenues from the sale of (i) products, including system software and hardware, and (ii) services, including client support, maintenance, training, custom software development, hosting and implementation services.
The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies included in the Company’s Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission. Management evaluates the performance of the segments based on net income or loss before the allocation of certain central costs.
A summary of the key measures for the Company’s operating segments is as follows (in thousands):
For the three months ended September 30, 2009 | ||||||||||||
Hospitality | Retail | Other | Total | |||||||||
Revenues | $ | 53,474 | $ | 16,730 | $ | 736 | $ | 70,940 | ||||
Amortization of intangible assets | 1,691 | 631 | 58 | 2,380 | ||||||||
Product development | 3,691 | 1,106 | — | 4,797 | ||||||||
Net income before allocation of central costs | 8,234 | 3,766 | — | 12,000 | ||||||||
Goodwill | 99,502 | 24,620 | — | 124,122 | ||||||||
Other identifiable assets | 103,209 | 19,365 | 616 | 123,190 | ||||||||
For the three months ended September 30, 2008 | ||||||||||||
Hospitality | Retail | Other | Total | |||||||||
Revenues | $ | 63,693 | $ | 17,579 | $ | 1,082 | $ | 82,354 | ||||
Amortization of intangible assets | 1,800 | 571 | 6 | 2,377 | ||||||||
Product development | 4,246 | 1,151 | — | 5,397 | ||||||||
Net income before allocation of central costs | 11,210 | 2,027 | — | 13,237 | ||||||||
Goodwill – as of December 31, 2008 | 91,522 | 23,707 | — | 115,229 | ||||||||
Other identifiable assets – as of December 31, 2008 | 105,666 | 23,729 | 1,340 | 130,735 | ||||||||
For the nine months ended September 30, 2009 | ||||||||||||
Hospitality | Retail | Other | Total | |||||||||
Revenues | $ | 159,170 | $ | 48,628 | $ | 1,877 | $ | 209,675 | ||||
Amortization of intangible assets | 4,903 | 1,891 | 175 | 6,969 | ||||||||
Product development | 10,512 | 2,919 | — | 13,431 | ||||||||
Net income before allocation of central costs | 27,742 | 10,938 | 81 | 38,761 | ||||||||
For the nine months ended September 30, 2008 | ||||||||||||
Hospitality | Retail | Other | Total | |||||||||
Revenues | $ | 169,788 | $ | 53,965 | $ | 2,532 | $ | 226,285 | ||||
Amortization of intangible assets | 3,753 | 1,713 | 15 | 5,481 | ||||||||
Product development | 12,128 | 3,448 | — | 15,576 | ||||||||
Net income before allocation of central costs | 32,379 | 6,522 | — | 38,901 |
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
The reconciliation of product development expense from reportable segments to total product development expense for the three and nine-month periods ended September��30, 2009 and 2008 is as follows (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Product development expense for reportable segments | $ | 4,797 | $ | 5,397 | $ | 13,431 | $ | 15,576 | ||||
Indirect product development expense, unallocated | 1,114 | 1,085 | 3,193 | 2,655 | ||||||||
Product development expense | $ | 5,911 | $ | 6,482 | $ | 16,624 | $ | 18,231 | ||||
The reconciliation of net income from reportable segments to total net income for the three and nine-month periods ended September 30, 2009 and 2008 is as follows (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income before allocation of central costs | $ | 12,000 | $ | 13,237 | $ | 38,761 | $ | 38,901 | ||||||||
Central corporate expense, unallocated | (8,579 | ) | (11,592 | ) | (31,133 | ) | (29,791 | ) | ||||||||
Net income | $ | 3,421 | $ | 1,645 | $ | 7,628 | $ | 9,110 | ||||||||
The reconciliation of other identifiable assets to total assets as of September 30, 2009 and December 31, 2008 is as follows (in thousands):
Balance at | ||||||
September 30, 2009 | December 31, 2008 | |||||
Other identifiable assets for reportable segments | $ | 123,190 | $ | 130,735 | ||
Goodwill for reportable segments | 124,122 | 115,229 | ||||
Central corporate assets, unallocated | 61,308 | 57,578 | ||||
Total assets | $ | 308,620 | $ | 303,542 | ||
Revenues and costs not associated with the Company’s Hospitality and Retail segments are associated with hardware sales outside the Company’s segments.
The Company distributes its technology both within the United States of America and internationally. Revenues derived from within the United States of America were approximately $61.1 million and $70.6 million for the three-month periods ended September 30, 2009 and 2008, respectively, and approximately $179.5 million and $196.7 million for the nine-month periods ended September 30, 2009 and 2008, respectively. As of September 30, 2009, the Company had international offices in Australia, Austria, China, Czech Republic, Singapore, Spain and the United Kingdom and representation in Africa, the Americas, Asia, Asia Pacific (including Australia), Europe and the Middle East. Geographic revenue information is based on the location of the selling entity. Revenues derived from international sources were approximately $9.8 million and $11.7 million for the three-month periods ended September 30, 2009 and 2008, respectively, and approximately $30.1 million and $29.6 million for the nine-month periods ended September 30, 2009 and 2008, respectively. At September 30, 2009 and December 31, 2008, the Company had international identifiable assets, including goodwill, of approximately $119.2 million and $107.7 million, respectively, of which approximately $94.9 million and $82.0 million, respectively, are long-lived assets.
The segment reporting data presented above may not reflect actual performance and actual asset balances had each segment been a stand-alone entity. Furthermore, the segment information may not be indicative of future performance.
10. INCOME TAX
The Company adopted guidance issued by the FASB related to accounting for uncertainty in income taxes on January 1, 2007. This guidance, included in ASC Topic 740,Income Taxes, prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions, for financial statement purposes. The guidance also requires expanded disclosure with respect to the uncertainty in income taxes. During the nine months ended September 30, 2009, the reserve for uncertainty in income taxes was decreased by approximately $0.1 million, which resulted in a decrease to income tax expense.
Consistent with the Company’s continuing practice, interest and/or penalties related to income tax matters are recorded as part of income tax expense. The Company has accrued less than $0.1 million of interest and penalties associated with uncertain tax positions for the nine months ended September 30, 2009.
11. RELATED PARTY TRANSACTIONS
None
12. SUBSEQUENT EVENTS
The Company evaluated subsequent events through November 6, 2009, the date our condensed consolidated financial statements were issued. No matters were identified that would materially impact our condensed consolidated financial statements or require disclosure in accordance with ASC 855.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Introduction
Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of Radiant’s business and results of operations. This MD&A should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2008, as well as Radiant’s Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. MD&A consists of the following sections:
• | Overview: A summary of Radiant’s business and opportunities |
• | Results of Operations: A discussion of operating results |
• | Liquidity and Capital Resources: An analysis of cash flows, sources and uses of cash, contractual obligations and financial position |
• | Critical Accounting Policies and Procedures: A discussion of critical accounting policies that require the exercise of judgments and estimates |
• | Recent Accounting Pronouncements: A summary of recent accounting pronouncements and the effects on the Company |
Overview
We are a leading provider of technology focused on the development, installation and delivery of solutions for managing site operations of hospitality and retail businesses. Our point-of-sale and back-office technology is designed to enable businesses to deliver exceptional customer service while improving profitability. We offer a full range of products and services that are tailored to specific hospitality and retail market needs including hardware, software, professional services and electronic payment processing. The Company offers best-of-breed solutions designed for ease of integration in managing site operations, thus enabling operators to improve customer service while reducing costs. We believe our approach to site operations is unique in that our product solutions provide enterprise visibility and control at the site, field, and headquarters levels.
The Company manages its business in two reportable segments: (i) Hospitality (which includes our Entertainment business and the recently acquired businesses of Orderman, Jadeon, Hospitality EPoS and Quest Retail Technology) and (ii) Retail (which is comprised of our Petroleum and Convenience Retail and Specialty Retail businesses). Each segment focuses on delivering site management systems, including point-of-sale, self-service kiosk, and back-office systems, designed specifically for each of the core vertical markets.
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Acquisition of Orderman
On July 1, 2008, the Company acquired Orderman GmbH (“Orderman”), one of the leading manufacturers of wireless handheld ordering and payment devices for the hospitality industry. Headquartered in Salzburg, Austria, Orderman has provided innovative mobile solutions since 1994. Orderman distributes its solutions through a reseller network of more than 600 partners that have deployed approximately 50,000 handheld devices, predominately in Europe. The acquisition enables Radiant to accelerate the adoption of mobile devices in the global hospitality sector. The total purchase price was approximately $33.0 million. The operations of the Orderman business have been included in our consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Jadeon
On May 1, 2008, Radiant acquired substantially all of the assets of Jadeon, Inc. (“Jadeon”), a wholly-owned subsidiary of Innuity, Inc. and one of the Company’s resellers in California. Headquartered in Irvine, just outside Los Angeles, Jadeon had been delivering and supporting Radiant’s hospitality point-of-sale solutions since 2001. The acquisition enables Radiant to strengthen its service capabilities and relationships with key accounts and serves as a platform for Radiant to strengthen its West coast market presence, specifically in the Los Angeles and San Francisco markets, allowing better penetration in the largest market in North America. The total purchase price was approximately $7.3 million. The operations of the Jadeon business have been included in our consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Hospitality EPoS Systems
On April 4, 2008, the Company acquired Hospitality EPoS Systems Ltd. (“Hospitality EPoS”), a leading technology supplier to the U.K. hospitality market since 1992. Headquartered in Kent, England, just outside London, Hospitality EPoS provided substantial capabilities for sales, implementation and support services and represented Radiant’s suite of hospitality products, including Aloha point-of-sale software, Enterprise.com above-store reporting, gift card and loyalty programs, back-office and Radiant hardware. The total purchase price was approximately $6.3 million. The operations of the Hospitality EPoS business have been included in our consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Quest Retail Technology
On January 1, 2008, the Company acquired Quest Retail Technology Pty Ltd (“Quest”), a privately held company based in Adelaide, Australia. Quest is a global provider of point-of-sale and back-office solutions to stadiums, arenas, convention centers, race courses, theme parks and various other industries. The total purchase price was approximately $53.4 million. The operations of the Quest business have been included in our consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Launch of Radiant Payment Services
Radiant expanded its business services in 2008 with the launch of Radiant Payment Services (“RPS”), a business aimed at selling and servicing electronic payment processing. RPS enhances Radiant’s current solutions by providing an integrated, turnkey payment processing solution for a wide variety of payment methods including credit, debit, and gift card payments. The objective of RPS is to raise the level of customer service that is provided to our business owners and operators by providing competitive and transparent pricing, increased accountability from a single vendor, and the highest level of security for customer data and credit card transactions.
To the extent that we believe acquisitions, joint ventures or new businesses can position us to better serve our current segments, we will continue to pursue such opportunities in the future.
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Results of Operations
Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008 and June 30, 2009 and the Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008
Systems –The Company has historically derived the majority of its revenues from sales and licensing fees for its point-of-sale hardware and software, site management software solutions and peripherals. System sales during the third quarter of 2009 were approximately $29.6 million. This is a decrease of $13.0 million, or 31%, from the same period in 2008 and a decrease of $0.2 million, or 1%, from the second quarter of 2009. System sales during the nine-month period ended September 30, 2009 were $86.5 million compared to $120.3 million for the same period in 2008, a decrease of 28%. The decreases from 2008 are primarily attributable to the global economic downturn which has slowed new site openings and reduced capital spending from existing customers. We expect systems revenues to remain lower than 2008 results until economic conditions improve.
Maintenance, subscription and transaction services – The Company derives revenues from maintenance, subscription and transaction services, including hardware maintenance, software support and maintenance, hosting services and credit card transaction services. The majority of these revenues are derived from support and maintenance, which is structured on a renewable basis and is directly attributable to the base of installed sites. A significant majority of all subscription, maintenance and support contracts are renewed annually.
Revenues from maintenance, subscription and transaction services during the third quarter of 2009 were approximately $33.5 million. This is an increase of $4.0 million, or 14%, from the same period in 2008 and an increase of $1.4 million, or 4%, from the second quarter of 2009. Revenues from maintenance, subscription and transaction services during the nine-month period ended September 30, 2009 were $96.8 million compared to $78.2 million for the same period in 2008, an increase of 24%. These increases are primarily due to the additional revenues resulting from our electronic payment processing business but are also attributable to the additional revenues resulting from our acquisitions in 2008, the additional revenues generated in both software and hardware support and maintenance resulting from increased systems sales in 2008 (which added to our site base for recurring revenue) and continued penetration of our hosted solution products. These revenues are recurring in nature and we expect to see continued growth in this revenue stream despite the economic conditions that currently exist.
Professional services – The Company also derives revenues from professional services such as consulting, training, custom software development and system installations. Revenues from professional services during the third quarter of 2009 were approximately $7.8 million. This is a decrease of $2.4 million, or 24%, from the same period in 2008 and a decrease of $1.4 million, or 15%, from the second quarter of 2009. Revenues from professional services during the nine-month period ended September 30, 2009 were $26.4 million compared to $27.8 million for the same period in 2008, a decrease of 5%. The year-over-year decreases are primarily attributable to a decrease in installations revenues, which have declined in direct correlation with the decrease in systems sales previously discussed. The decrease from the second quarter of 2009 is primarily due to one-time consulting arrangements which were not repeated in the third quarter.
Systems gross profit –Cost of systems consists primarily of hardware and peripherals for site-based systems and amortization of capitalized labor costs for internally developed software. All costs, other than capitalized software development costs, are expensed as products are shipped, while capitalized software development costs are amortized on a straight-line basis over the estimated useful life of the software.
In the third quarter of 2009, systems gross profit decreased by $6.2 million, or 31%, as compared to the same period in 2008, and decreased by $1.1 million, or 7%, as compared to the second quarter of 2009. In the third quarter of 2009, the gross profit percentage of 46% was consistent as compared to the same period in 2008 but decreased from the second quarter of 2009 by three percentage points. The decrease in the gross profit percentage from the second quarter is primarily due to hardware product mix. For the nine-month period ended September 30, 2009 as compared to the same period in 2008, systems gross profit decreased by approximately $15.9 million, or 28%, while the gross profit percentage of 48% was consistent as compared to the same period in 2008.
Maintenance, subscription and transaction services gross profit – Cost of maintenance, subscription and transaction services consists primarily of personnel and other costs to provide support and maintenance services, hosting services and credit card transaction services.
In the third quarter of 2009, the gross profit on maintenance, subscription and transaction services increased by approximately $5.0 million, or 41%, as compared to the same period in 2008 and increased by $0.7 million, or 4%, as compared to the second quarter of 2009. The gross profit percentage increased by ten percentage points to 51% in the third quarter of 2009 as compared to the same period in 2008, and was consistent as compared to the second quarter of 2009. For the nine-month period ended September 30, 2009, the gross profit on maintenance, subscription and transaction services increased by approximately $16.4 million, or 50%, as compared to the same period in 2008, while the gross profit percentage increased by nine percentage points to 51%. The year-over-year increases in the gross profit percentage are primarily due to the launch of our payment services business (described earlier) and the removal of capacity in the Company through headcount reductions made in the first quarter of 2009 and the fourth quarter of 2008.
Professional services gross profit – Cost of professional services consists primarily of personnel costs for consulting, training, custom software development and installation services.The gross profit on professional services for the third quarter of 2009 decreased by approximately $0.5 million, or 17%, as compared to the same period in 2008, and by $0.9 million, or 26%, as compared to the second quarter of 2009. The gross profit percentage increased by three percentage points to 32% in the third quarter of 2009 as compared to the same period in 2008, and decreased by five percentage points as compared to the second quarter of 2009. For the nine-month period ended September 30, 2009, the gross profit on professional services increased by approximately $1.4 million, or 18%, as compared to the same period in 2008, while the gross profit percentage increased by seven percentage points to 34%. The year-over-year increases in the gross profit percentage are the result of the removal of capacity in the Company through headcount reductions previously mentioned and a continued focus on improving margins within our professional services through better utilization of personnel, including temporary and contract employees. The decrease in the gross profit percentage from the second quarter of 2009 is primarily due to a reduction in consulting revenues where the associated costs are essentially fixed.
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Segment revenues – During the third quarter of 2009, total revenues in the Hospitality business segment were $53.5 million. This is a decrease of $10.2 million, or 16%, compared to the same period in 2008 and a decrease of $0.8 million, or 2%, as compared to the second quarter of 2009. For the nine months ended September 30, 2009, total revenues in the Hospitality business segment decreased by approximately $10.6 million, or 6%, as compared to the same period in 2008. The year-over-year decreases are primarily due to the economic downturn, which has negatively impacted systems revenues. The nine month year-over-year decrease was partially offset by additional revenues resulting from the acquisitions of Orderman, Hospitality EPoS and Jadeon, which occurred subsequent to the first quarter of 2008. The decrease from the second quarter of 2009 was primarily attributable to a reduction in systems sales due to seasonality within the European market. This decrease was partially offset by increased systems sales within our channel business.
During the third quarter of 2009, total revenues in the Retail business segment were $16.7 million. This is a decrease of $0.9 million, or 5%, as compared to the same period in 2008 and an increase of $0.4 million, or 3%, as compared to the second quarter of 2009. For the nine months ended September 30, 2009, total revenues in the Retail business segment decreased by approximately $5.3 million, or 10%, as compared to the same period in 2008. The year-over-year decreases are primarily attributable to economic factors that have resulted in a decrease in demand by convenience store operators. The increase over the second quarter of 2009 is mainly attributable to an increase in our channel business.
Segment net income before allocation of central costs – The Company measures segment profit based on net income before the allocation of certain central costs. During the third quarter of 2009, total net income before allocation of central costs in the Hospitality business segment decreased by $3.0 million, or 27%, compared to the same period in 2008 and decreased by $2.3 million, or 22%, as compared to the second quarter of 2009. For the nine months ended September 30, 2009, total net income before the allocation of central costs in the Hospitality business segment decreased by approximately $4.6 million, or 14%, as compared to the same period in 2008. The year-over-year decreases are primarily due to the overall decline in revenues due to the economic downturn, which is exacerbated by the additional cost structure assumed from the acquisitions we made in 2008. The decrease from the second quarter of 2009 is primarily due to a reduction in one-time consulting profits within our direct customer business that were not repeated in the third quarter and a decrease in systems profits resulting from reduced systems sales due to seasonality within the European market.
During the third quarter of 2009, total net income before allocation of central costs in the Retail business segment increased by approximately $1.7 million, or 86%, as compared to the same period in 2008 and was flat compared to the second quarter of 2009. For the nine months ended September 30, 2009, total net income before the allocation of central costs in the Retail business segment increased by approximately $4.4 million, or 68%, as compared to the same period in 2008. The year-over-year increases are due primarily to a more efficient cost structure resulting from the headcount reductions which took place in the first quarter of 2009 and the fourth quarter of 2008 and an increase in sales in the second and third quarters through our channel partners.
Total operating expenses – The Company’s total operating expenses decreased by approximately $4.0 million, or 13%, during the third quarter of 2009 as compared to the same period in 2008, decreased by approximately $1.3 million, or 4%, as compared to the second quarter of 2009, and increased by approximately $5.9 million, or 7%, for the nine months ended September 30, 2009 as compared to the same period in 2008, due to the following:
• | Product development expenses – Product development expenses consist primarily of wages and materials expended on product development efforts, excluding any development expenses related to associated revenues, which are included in costs of maintenance, subscription and transaction services. Product development expenses decreased during the third quarter of 2009 by approximately $0.6 million, or 9%, as compared to the same period in 2008, increased by $0.4 million, or 7%, as compared to the second quarter of 2009, and decreased by $1.6 million, or 9%, during the nine months ended September 30, 2009 as compared to the same period in 2008. The year-over-year decreases are primarily the result of headcount reductions which occurred in the first quarter of 2009 and the fourth quarter of 2008 to adjust our cost structure during the economic downturn. The increase from the second quarter is due to normal fluctuations among maintenance, custom development, capitalized software projects and product development. Product development expenses as a percentage of revenues remained constant at 8% for the three and nine-month periods ended September 30, 2009 and 2008 and the second quarter of 2009. |
• | Sales and marketing expenses – Sales and marketing expenses during the third quarter of 2009 were consistent as compared to the same period in 2008, decreased by $0.2 million, or 2%, as compared to the second quarter of 2009, and increased by $4.3 million, or 16%, during the nine months ended September 30, 2009 as compared to the same period in 2008. The nine month year-over-year increase is primarily related to incremental sales and marketing expenses resulting from our acquisitions during 2008. The slight decrease from the second quarter is primarily due to a reduction in trade show expense and advertising costs. Sales and marketing expenses as a percentage of revenues were 15% for the third quarter of 2009 as compared to 13% for the same period in 2008, 15% for the second quarter of 2009, and 15% for the nine months ended September 30, 2009 as compared to 12% for the same period in 2008. |
• | Depreciation and amortization expenses – Depreciation and amortization expenses decreased during the third quarter of 2009 by approximately $0.1 million, or 3%, as compared to the same period of 2008, were flat as compared to the second quarter of 2009, and increased by approximately $1.7 million, or 19%, during the nine months ended September 30, 2009 as compared to the same period in 2008. The three month year-over-year decrease is due to lower depreciation expense resulting from reduced capital spending during the economic downturn. The nine month year-over-year increase is directly related to the amortization of certain intangible assets related to the acquisitions of Orderman, Hospitality EPoS and Jadeon. Depreciation and amortization expenses as a percentage of revenues were 5% for the third quarter of 2009 as compared to 4% for the same period in 2008, 5% for the second quarter of 2009, and 5% for the nine-month period ended September 30, 2009 as compared to 4% for the same period in 2008. |
• | General and administrative expenses – General and administrative expenses decreased during the third quarter of 2009 by approximately $1.2 million, or 14%, as compared to the same period in 2008, decreased by $1.4 million, or 15%, as compared to the second quarter of 2009, and increased by $2.0 million, or 8%, during the nine months ended September 30, 2009 as compared to the same period in 2008. The three month year-over-year decrease is primarily the result of headcount reductions that occurred in the first quarter of 2009 and the fourth quarter of 2008 to adjust our cost structure during the economic downturn. The decrease from the second quarter of 2009 is primarily due to the timing of our bonus expenditures for 2009 and the increase in our health insurance accruals that occurred in the second quarter and were not repeated in the third quarter. The nine month year-over-year increase is primarily due to additional overhead expenses resulting from our acquisitions during 2008. General and administrative expenses as a percentage of revenues were 11% for the third quarter of 2009 and the same period in 2008, 13% for the second quarter of 2009, and 12% for the nine months ended September 30, 2009 compared to 11% for the same period in 2008. |
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• | Other income and charges, net – The amounts contained under this heading are generally non-recurring in nature and, as such, it is not practical to compare amounts between the current period and previous periods. However, a description of the items which comprise these amounts follows: |
During the first quarter of 2009, the Company recorded a charge of $0.7 million related to severance payments and restructuring of the organization and a charge of $0.5 million related to the write-off of third-party software licenses. These charges were partially offset by a gain of $0.1 million on the sale of a building.
During the third quarter of 2008, the Company recorded a restructuring charge of $2.1 million related to amending a sublease agreement on a facility in Alpharetta, Georgia, as discussed in Note 8 to the condensed consolidated financial statements.
During the second quarter of 2008, the Company recorded a gain of approximately $0.5 million as a result of entering into a forward exchange contract in conjunction with the acquisition of Orderman, as discussed in Note 8 to the condensed consolidated financial statements.
During the first quarter of 2008, the Company recorded a gain of approximately $0.3 million as a result of entering into a forward exchange contract in conjunction with the acquisition of Quest. This gain was offset by approximately $0.4 million in debt cost write-offs and penalties associated with the early termination of the WFF Credit Agreement as described in Note 7 to the condensed consolidated financial statements.
Interest expense, net – The Company’s interest expense includes interest expense incurred on its long-term debt, revolving line of credit and capital lease obligations. Interest expense decreased by approximately $0.7 million, or 58%, in the third quarter of 2009 as compared to the same period in 2008, decreased by $0.1 million, or 16%, as compared to the second quarter of 2009, and decreased by $1.8 million, or 49%, during the nine months ended September 30, 2009 as compared to the same period in 2008. These decreases are due to continued paydown of the Company’s outstanding indebtedness and a reduction in interest rates. See Note 7 to the condensed consolidated financial statements for additional discussion of the Company’s credit facility.
Income tax provision – The Company’s effective tax rates for the quarters ended September 30, 2009 and 2008 were equal to 35.1% and 27.5%, respectively, inclusive of discrete events. For the nine-month period ended September 30, 2009 as compared to the same period in 2008, the Company’s effective tax rates were 36.2% and 33.0%, respectively, inclusive of discrete events. The year-over-year increases are primarily attributable to a valuation allowance recorded against state attributes.
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Liquidity and Capital Resources
Prior to January 2008, the Company had a senior secured credit facility with Wells Fargo Foothill, Inc. (the “WFF Credit Agreement”). The WFF Credit Agreement provided for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $15 million and a term loan facility in an aggregate principal amount of up to $31 million. The revolving loan amount available to the Company was derived from a monthly borrowing base calculation using the Company’s various accounts receivable balances. The amount derived from this borrowing base calculation was further reduced by the total amount of letters of credit outstanding. Loans under the WFF Credit Agreement bore interest, at the Company’s option, at either the London Interbank Offering Rate (“LIBOR”) plus two and one half percent or the prime rate of Wells Fargo Bank, N.A.
The WFF Credit Agreement was scheduled to expire on March 31, 2010. However, it was refinanced on January 2, 2008 upon the execution of the credit agreement with JPMorgan Chase Bank, N.A., as arranger, and JPMorgan Chase Bank, N.A., SunTrust Bank, Bank of America, Guaranty Bank and Wachovia Bank, N.A., as lenders (the “JPM Credit Agreement”). The JPM Credit Agreement and subsequent amendments thereto provide for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $80 million and a term loan facility in an aggregate principal amount of up to $30 million. An amendment to the JPM Credit Agreement was signed in July 2008, whereby the Company has the right to increase its revolving credit commitment by up to $25 million, subject to the terms and conditions set forth in the JPM Credit Agreement. As of September 30, 2009, aggregate borrowings under this facility totaled $67.0 million, comprised of $45.5 million in revolving loans and $21.5 million in term loan facility borrowings. As of September 30, 2009, revolving loan borrowings available to the Company were equal to $34.5 million.
The JPM Credit Agreement is guaranteed by the Company and its subsidiaries and is secured by the assets of the Company and its subsidiaries. The maturity date of the JPM Credit Agreement is January 2, 2013. Interest accrues on amounts outstanding under the loan facility, at the Company's option, at either (1) LIBOR plus a margin ranging between 1.25% and 2.00%, based upon the Company's consolidated leverage ratio, as defined, or (2) the higher of the administrative agent’s prime rate or one-half of one percent over the federal funds effective rate plus a margin ranging between 0.25% and 1.00%, based on the Company's consolidated leverage ratio, as defined. The JPM Credit Agreement contains certain customary representations and warranties from the Company. In addition, the JPM Credit Agreement contains certain financial and non-financial covenants, with which the Company was in compliance as of September 30, 2009. Further explanation of this agreement is presented in Note 7 to the condensed consolidated financial statements.
The Company’s working capital decreased by approximately $12.9 million, or 31%, to $28.7 million at September 30, 2009 as compared to $41.6 million at December 31, 2008. This decrease was primarily attributable to the fact that working capital was utilized to reduce the outstanding balance on the Company’s revolving loan facility (which is included in long-term debt) during the first nine months of 2009. The Company has historically funded its business through cash generated by operations.
Cash provided by operating activities during the nine months ended September 30, 2009 was approximately $36.7 million. Cash from operations was mainly generated through income from operations, adjusted to exclude the effect of non-cash charges, including depreciation, amortization, stock-based compensation expense and other charges. Changes in assets and liabilities increased operating cash flows during the first nine months of 2009, principally due to (i) our continued focus on collections which resulted in a reduction in accounts receivable, (ii) a focus on inventory management which resulted in a decrease in inventories, and (iii) an increase in client deposits and unearned revenue which was a result of collecting calendar year support and maintenance billings, which have been deferred and are being recognized as revenue over the course of 2009. The increase in accrued expenses is due to normal quarterly fluctuations. If near-term demand for the Company’s products weakens, or if significant anticipated sales in any quarter do not close when expected, the availability of funds from operations may be adversely affected.
Cash provided by operating activities during the nine months ended September 30, 2008 was approximately $10.7 million. Cash from operations was mainly generated through income from operations, adjusted to exclude the effect of non-cash charges, including depreciation, amortization, stock-based compensation expense and other charges. In addition, the Company received significant amounts of cash for calendar year support and maintenance, which was deferred and was recognized as revenue over the course of 2008. The cash received from support and maintenance was offset by the fact that the Company did not purchase the related receivables of Quest in conjunction with the acquisition completed during the first quarter of 2008 (see Note 3 to the condensed consolidated financial statements). The increase in the Company’s accounts receivable and inventory balances during the first nine months of 2008 was due to normal quarterly fluctuations and the growth of the business as reflected in the year over year revenue increase. The decrease in accounts payable and accrued expenses was due to normal quarterly fluctuations.
Cash used in investing activities during the nine months ended September 30, 2009 was approximately $9.4 million. Approximately $4.2 million was used to invest in property and equipment and $2.0 million related to the purchase of a customer list related to our RPS business. The Company continued to increase its investment in future products by investing $3.3 million in internally developed capitalizable software during the first nine months of 2009. Lastly, the Company recognized cash proceeds of $0.2 million from the sale of a building located in Australia.
Cash used in investing activities during the nine months ended September 30, 2008 was approximately $107.2 million. Approximately $95.4 million was used in the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon, net of cash acquired (see Note 3 to the condensed consolidated financial statements). In addition, the Company recognized cash proceeds of approximately $1.6 million as a result of the execution of forward exchange contracts in conjunction with the Orderman and Quest acquisitions. Approximately $8.2 million was used to invest in property and equipment, including $4.9 million utilized to improve our infrastructure through the implementation of an upgraded enterprise resource planning system. Lastly, the Company continued to increase its investment in future products by investing $3.0 million in internally developed capitalizable software during the first nine months of 2008.
Cash used in financing activities during the nine months ended September 30, 2009 was approximately $30.3 million. Financing activities included scheduled payments under the JPM Credit Agreement and payments against the revolving loan facility and research and development notes, scheduled payments against the Company’s capital lease obligations and the impact of tax benefits related to stock-based compensation expense. In addition, the Company received cash proceeds from a research and development note, the exercise of stock options by employees and the purchase of shares issued under the Employee Stock Purchase Plan.
Cash provided by financing activities during the nine months ended September 30, 2008 was approximately $81.0 million. Financing activities in the first nine months of 2008 included cash received from borrowings under the JPM Credit Agreement equal to $116.9 million, net of scheduled payments, payments against the revolving loan facility and financing costs. These borrowings were used to fund the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon (see Note 3 to the condensed consolidated financial statements), repay the outstanding balance of the term loan under the WFF Credit Agreement, and pay various fees associated with the termination of the WFF Credit Agreement. In addition, the Company received cash proceeds from employees for the exercise of stock options, made scheduled payments under the promissory notes related to the MenuLink acquisition, and repaid the entire balance of the promissory note to the previous shareholders of Aloha Technologies, Inc.
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The Company believes that its cash and cash equivalents, funds generated from operations and borrowing capacity will provide adequate liquidity to meet its normal operating requirements, as well as to fund the above obligations, for at least the next twelve months.
The Company believes there are opportunities to grow its business through the acquisition of complementary and synergistic companies, products and technologies. We look for acquisitions that can be readily integrated and accretive to earnings, although we may pursue smaller non-accretive acquisitions that will shorten our time to market with new technologies. The Company expects the general size of cash acquisitions it would currently consider would be in the $5 million to $50 million range. Any material acquisition could result in a decrease in the Company’s working capital, depending on the amount, timing and nature of the consideration to be paid. In addition, any material acquisitions of complementary or synergistic companies, products or technologies could require that we obtain additional debt or equity financing. There can be no assurance that such additional financing will be available to us or that, if available, such financing will be obtained on favorable terms and would not result in additional dilution to our stockholders.
The Company leases office space, equipment and certain vehicles under non-cancelable operating lease agreements expiring on various dates through 2017. Additionally, the Company leases computer equipment under capital lease agreements which expire on various dates through June 2013. Contractual obligations as of September 30, 2009 are as follows (in thousands):
Payments Due by Period | |||||||||||||||
Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | |||||||||||
Capital leases | $ | 1,789 | $ | 976 | $ | 786 | $ | 27 | $ | — | |||||
Operating leases (1) | 25,310 | 5,300 | 9,071 | 5,275 | 5,664 | ||||||||||
Other obligations: | |||||||||||||||
Revolving credit facility (JPM Credit Agreement) | 45,500 | — | — | 45,500 | — | ||||||||||
Term loan facility (JPM Credit Agreement) | 21,500 | 6,000 | 13,500 | 2,000 | — | ||||||||||
Austrian research & development loan | 637 | — | — | 637 | — | ||||||||||
Estimated interest payments on credit facility and term notes (2) | 7,514 | 2,625 | 4,415 | 474 | — | ||||||||||
Purchase commitments (3) | 8,799 | 8,713 | 86 | — | — | ||||||||||
Total contractual obligations | $ | 111,049 | $ | 23,614 | $ | 27,858 | $ | 53,913 | $ | 5,664 | |||||
(1) | This schedule includes the future minimum lease payments related to facilities that are being subleased. The total minimum rentals to be received in the future under subleases as of September 30, 2009 are approximately $1.9 million in less than one year, $3.1 million in one to three years, and $0.5 million in three to five years. |
(2) | For purposes of this disclosure, we used the interest rates in effect as of September 30, 2009 to estimate future interest expense. See Note 7 to the condensed consolidated financial statements for further discussion of our debt components and their interest rate terms. |
(3) | The Company has entered into certain noncancelable and custom purchase orders for manufacturing supplies to be used in its normal operations. The related supplies are to be delivered at various dates through September 2010. |
At September 30, 2009, the Company had a $2.7 million reserve for unrecognized tax benefits, which is not reflected in the table above. Substantially all of this tax reserve is classified in other long-term liabilities and deferred income taxes on the accompanying condensed consolidated balance sheet.
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Critical Accounting Policies and Procedures
General
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to client programs and incentives, product returns, bad debts, inventories, intangible assets, income taxes, and commitments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
Accounting Pronouncements
Recently Issued Standards
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-14 (“ASU 2009-14”),Software (Topic 985): Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force. This ASU establishes that tangible products that contain software that works together with the nonsoftware components of the tangible product to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. These items should be accounted for under other appropriate revenue recognition guidance. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011 and concurrently with ASU 2009-13 which is described below. Full retrospective application is optional and early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the impact of this ASU on our financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”),Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force. This ASU amends the criteria for separating consideration in multiple-deliverable arrangements, which will, as a result, separate multiple-deliverable arrangements more often than under existing U.S. GAAP. Additionally, this ASU establishes a selling price hierarchy for determining the selling price of a deliverable. The ASU also eliminates the residual method of revenue allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. This guidance requires that management determine its best estimate of selling price in a manner consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU significantly expands the disclosures required for multiple-deliverable revenue arrangements with the objective of disclosing judgments related to these arrangements and the effect that the use of the relative selling-price method and changes in those judgments have on the timing and amount of revenue recognition. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011 and concurrently with ASU 2009-14 which is described above. Full retrospective application is optional and early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the impact of this ASU on our financial statements.
Recently Adopted Standards
In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”),Fair Value Measurements and Disclosures (Topic 820): Measuring Liabilities at Fair Value. This ASU establishes that in circumstances in which a quoted market price in an active market for an identical liability is not available, an entity is required to measure fair value using the quoted price of an identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or another valuation technique consistent with the principles of Topic 820. We adopted the provisions of ASU 2009-05 as of September 30, 2009, which had no material impact on the Company’s financial position, cash flows or results of operations.
In June 2009, the FASB issued theFASB Accounting Standards CodificationTM (“Codification” or “ASC”) which modifies the GAAP hierarchy by establishing the Codification as the single source of authoritative U.S. GAAP recognized by the FASB applied by nongovernmental entities. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. The Codification became effective July 1, 2009. The Codification is not intended to change or alter existing GAAP and accordingly, it did not impact the Company’s financial position, cash flows or results of operations. However, historical GAAP references in this quarterly report have been adjusted, and references in future filings will be adjusted to reflect authoritative guidance in the Codification.
In May 2009, the FASB issued guidance included in ASC Topic 855,Subsequent Events (“ASC 855”). The provisions of ASC 855 establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 also requires the disclosure of the date through which subsequent events are evaluated and the basis for that date, that is, whether that date represents the date the financial statements are issued or are available to be issued. The provisions of ASC 855 are effective for interim or annual periods ending on or after June 15, 2009. We adopted the provisions of ASC 855 as of April 1, 2009, which had no impact on the Company’s financial position, cash flows or results of operations.
In September 2006, the FASB issued guidance included in ASC Topic 820,Fair Value Measurements and Disclosures(“ASC 820”), and in February 2008, the FASB amended this guidance. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 is applicable to other ASC topics that require or permit fair value measurements, except those relating to lease accounting, and accordingly does not require any new fair value measurements. The provisions of ASC 820 are effective for financial assets and liabilities in fiscal years beginning after November 15, 2007, and for non-financial assets and liabilities in fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Our adoption of the provisions of ASC 820 on January 1, 2008, with respect to financial assets and liabilities measured at fair value, has had no material impact on our fair value measurements or our financial statements. In October 2008, the FASB issued additional guidance included in ASC 820 that clarifies the application of fair value measurements in a market that is not active. These provisions of ASC 820 became effective immediately upon issuance, and their adoption did not have any effect on our financial statements. We determine the fair value of our long-lived assets, in accordance with ASC 820, when testing for impairment. ASC 820 was effective for fair value assessments as of January 1, 2009. In April 2009, the FASB issued further guidance included in ASC 820 that provides for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. These provisions also include guidance on identifying circumstances that indicate a transaction is not orderly. This additional guidance is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The Company concluded that the adoption of these provisions of ASC 820 as of April 1, 2009 had no impact on its financial position, cash flows or results of operations.
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In November 2008, the Emerging Issues Task Force reached consensus on guidance about accounting for defensive intangible assets that is included in ASC Topic 350,Intangibles-Goodwill and Other (“ASC 350”). A defensive intangible asset is an acquired intangible asset where the acquirer has no intention of using, or intends to discontinue use of, the intangible asset, but holds it to prevent competitors from obtaining any benefit from it. The acquired defensive asset will be treated as a separate unit of accounting and the useful life assigned will be based on the period during which the asset would diminish in value. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and may impact any intangible assets we acquire in future transactions.
In June 2008, the FASB issued guidance related to the computation of earnings per share amounts that is included in ASC Topic 260,Earnings Per Share (“ASC 260”). ASC 260 stipulates that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. This guidance is effective for fiscal years beginning after December 31, 2008. The Company concluded that the adoption of these provisions ASC 260 did not have a material impact on its reported basic and diluted earnings per share amounts.
In April 2008, the FASB issued guidance related to determining the useful life of intangible assets that is included in ASC Topic 350,Intangibles-Goodwill and Other (“ASC 350”). This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. More specifically, this guidance removes the requirement to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions and instead, requires an entity to consider its own historical experience in renewing similar arrangements. These provisions also require expanded disclosure related to the determination of intangible asset useful lives. These provisions are effective for financial statements issued for fiscal years beginning after December 15, 2008, and may impact any intangible assets we acquire in future transactions.
In March 2008, the FASB issued guidance included in ASC Topic 815,Derivatives and Hedging (“ASC 815”). This guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments, and disclosures about credit risk-related contingent features in derivative agreements. These provisions are effective for fiscal years beginning after November 15, 2008. As of September 30, 2009, we have not entered into any derivative transactions.
In December 2007, the FASB issued guidance included in ASC Topic 810,Consolidation (“ASC 810”). This guidance requires (1) non-controlling (minority) interests be reported as a component of stockholders’ equity; (2) net income attributable to the parent and to the non-controlling interest be separately identified in the consolidated statement of operations; (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions; (4) any retained non-controlling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and (5) sufficient disclosures be provided that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. These provisions of ASC 810 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of these provisions did not have any impact on the Company’s financial position, cash flows or results of operations as we have no minority interests.
In December 2007, the FASB issued guidance included in ASC Topic 805,Business Combinations (“ASC 805”). This guidance significantly changes the accounting for business combinations. ASC 805 requires an acquiring entity to recognize all assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions. This guidance changes the accounting treatment for certain specific acquisition-related items including: (1) expensing acquisition-related costs as incurred; (2) valuing non-controlling interests at fair value at the acquisition date of a controlling interest; and (3) expensing restructuring costs associated with an acquired business. The guidance also enumerated a substantial number of new disclosure requirements. These provisions of ASC 805 are to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. These provisions will have an impact on our accounting for any future business combinations.
In February 2007, the FASB issued guidance included in ASC Topic 825,Financial Instruments (“ASC 825”). This guidance permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. These provisions of ASC 825 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We adopted these provisions of ASC 825 on January 1, 2008, and have elected not to measure any of our current eligible financial assets or liabilities at fair value.
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Forward-Looking Statements
This Quarterly Report on Form 10-Q of Radiant Systems, Inc. and its subsidiaries (“Radiant,” “Company,” “we,” “us,” or “our”) contains forward-looking statements. All statements in this Quarterly Report on Form 10-Q, including those made by the management of Radiant, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Radiant’s future financial results, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), including the section titled “Risk Factors” therein. These and many other factors could affect Radiant’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Radiant or on its behalf. Radiant undertakes no obligation to revise or update any forward-looking statements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rates
The Company’s financial instruments that are subject to market risks are its long-term debt instruments. During the third quarter of 2009, the weighted average interest rate on its long-term debt was approximately 2.9%. A 10% increase in this rate would have impacted interest expense by approximately $54,000 for the three-month period ended September 30, 2009.
Foreign Exchange
As more fully explained in Note 9 to the condensed consolidated financial statements, the Company’s revenues derived from international sources were approximately $9.8 million and $11.7 million for the three-month periods ended September 30, 2009 and 2008, respectively, and approximately $30.1 million and $29.6 million for the nine-month periods ended September 30, 2009 and 2008, respectively. The Company’s international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, the Company’s future results could be materially adversely impacted by changes in these or other factors.
ITEM 4. | CONTROLS AND PROCEDURES |
The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known on a timely basis to the officers who certify its financial reports and to other members of senior management and the Company’s board of directors. Based on their evaluation as of September 30, 2009, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
During the quarter ended September 30, 2009, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. | EXHIBITS |
The following exhibits are filed with or incorporated by reference into this report. The exhibits which are denominated by an asterisk (*) were previously filed as a part of, and are hereby incorporated by reference from (i) a Registration Statement on Form S-1 for the Registrant, Registration No. 333-17723, as amended (“2/97 S-1”), (ii) a Registration Statement on Form S-1 for the Registrant, Registration No. 333-30289 (“6/97 S-1”), (iii) the Registrant’s Form 8-K filed December 17, 2007 (the “December 17, 2007 8-K”), (iv) the Registrant’s Form 8-K filed January 8, 2008 (the “January 8, 2008 8-K”), (v) the Registrant’s Form 8-K filed July 9, 2008 (the “July 9, 2008 8-K”), and (vi) a Registration Statement on Form S-3 for the Registrant, Registration No. 333-162309 (“10/09 S-3”).
Exhibit No. | Description | |
*2.1 | Share Purchase Agreement, dated December 11, 2007, by and among Radiant Systems, Inc., Quest Retail Technology Pty Ltd, and David Brown (December 17, 2007 8-K) | |
*2.1.1 | First Amendment to Share Purchase Agreement, dated as of January 4, 2008, by and among Radiant Systems, Inc., RADS Australia Holdings Pty Ltd, Quest Retail Technology Pty Ltd, and David Brown (January 8, 2008 8-K) | |
*2.2 | Stock Purchase Agreement dated as of July 3, 2008, by and among Radiant Systems GmbH, Orderman GmbH, Alois Eisl, Franz Blatnik, Gottfried Kaiser, and Ing. Willi Katamay (July 9, 2008 8-K) | |
*3.1 | Amended and Restated Articles of Incorporation (6/97 S-1) | |
*3.2 | Amended and Restated Bylaws (2/97 S-1) | |
*3.3 | Articles of Amendment to Amended and Restated Articles of Incorporation of Radiant Systems, Inc. (10/09 S-3) | |
31.1 | Certification of John H. Heyman, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Mark E. Haidet, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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.
RADIANT SYSTEMS, INC | ||||||
Dated: November 6, 2009 | By: | /s/ MARK E. HAIDET | ||||
Mark E. Haidet, | ||||||
Chief Financial Officer | ||||||
(Duly authorized officer and principal financial officer) |
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