SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
March 31, 2002 0-22065
RADIANT SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Georgia 11-2749765
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3925 Brookside Parkway, Alpharetta, Georgia 30022
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (770) 576-6000
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
----- -----
The number of the registrant's shares outstanding as of May 9, 2002
was 27,593,899.
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001 3
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2002 (unaudited) and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 (unaudited) and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-10
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations 11-18
Item 3: Quantitative and Qualitative Disclosures About Market Risks 18
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 19
Signatures: 19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 28,739 $ 33,924
Accounts receivable, net 25,453 20,988
Inventories 16,079 17,290
Other short-term assets 3,227 3,401
-------- --------
Total current assets 73,498 75,603
Property and equipment, net 13,662 14,590
Software development costs, net 16,443 15,229
Other long-term assets 24,650 19,740
-------- --------
$128,253 $125,162
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 11,849 $ 10,176
Client deposits and unearned revenue 9,713 9,762
Current portion of long-term debt 467 460
-------- --------
Total current liabilities 22,029 20,398
Long-term debt, less current portion 1,031 1,150
-------- --------
Total liabilities 23,060 21,548
Shareholders' equity
Common stock, $0.00001 par value; 100,000,000 shares authorized;
27,552,338 and 27,647,830 shares issued and outstanding 0 0
Additional paid-in capital 112,997 113,016
Deferred compensation and employee loans (718) (818)
Accumulated deficit (7,086) (8,584)
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Total shareholders' equity 105,193 103,614
-------- --------
$128,253 $125,162
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the three months ended
March 31, 2002 March 31, 2001
-------------- --------------
Revenues:
System sales $17,128 $20,499
Client support, maintenance and other
services 14,160 13,498
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Total revenues 31,288 33,997
Cost of revenues:
System sales 7,727 10,496
Client support, maintenance and other
services 8,529 8,983
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Total cost of revenues 16,256 19,479
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Gross profit 15,032 14,518
Operating Expenses:
Product development 3,462 2,454
Sales and marketing 4,807 4,715
Depreciation and amortization 1,439 2,324
Non-recurring charges -- 1,023
General and administrative 2,912 3,998
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Income from operations 2,412 4
Interest income, net 206 573
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Income before income tax provision 2,618 577
Income tax provision 1,120 202
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Net income $ 1,498 $ 375
======= =======
Basic and diluted income per share:
Basic income per share $ 0.05 $ 0.01
======= =======
Diluted income per share $ 0.05 $ 0.01
======= =======
Weighted average shares outstanding:
Basic 27,560 27,674
======= =======
Diluted 29,006 29,442
======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the three months ended
March 31,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,498 $ 375
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred compensation -- 17
Depreciation and amortization 2,243 3,183
Changes in assets and liabilities:
Accounts receivable (4,465) (635)
Inventories 1,211 665
Other assets 402 399
Accounts payable and accrued liabilities 1,673 (3,863)
Client deposits and deferred revenue (49) 2,183
-------- --------
Net cash provided by operating activities 2,513 2,324
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (504) (1,869)
Purchase of software asset and capitalized professional
services costs (5,250) --
Capitalized software development costs (1,913) (2,067)
-------- --------
Net cash used in investing activities (7,667) (3,936)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of employee stock options 177 428
Repurchase of common stock (196) (2,044)
Principal payments under capital lease obligations (112) --
Proceeds from repayments of shareholder loans 100 --
-------- --------
Net cash used in financing activities (31) (1,616)
-------- --------
Decrease in cash and cash equivalents (5,185) (3,228)
Cash and cash equivalents at beginning of year 33,924 49,560
-------- --------
Cash and cash equivalents at end of period $ 28,739 $ 46,332
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 25 $ --
-------- --------
Income taxes $ 452 $ 80
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements, the general instructions of 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. In the opinion of Radiant Systems, Inc. (the
"Company") management, these condensed consolidated financial statements contain
all adjustments (which comprise only normal and recurring accruals) necessary
for fair presentation of the consolidated financial condition and results of
operations for these periods. The interim results for the three months ended
March 31, 2002 are not necessarily indicative of the results to be expected for
the full year. These statements should be read in conjunction with the Company's
consolidated financial statements as filed in its Annual Report on Form 10-K for
the year ended December 31, 2001.
2. Net Income Per Share
Basic net income per common share is computed by dividing net income by the
weighted-average number of shares outstanding. 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):
For the three months ended
March 31,
--------------------------
2002 2001
-------------- -----------
Average common shares outstanding 27,560 27,674
Dilutive effect of outstanding stock options 1,446 1,768
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Average common shares outstanding assuming dilution 29,006 29,442
======= ======
For the quarters ended March 31, 2002 and 2001, options to purchase
approximately 2.1 million and 648,000 shares of common stock, respectively, were
excluded from the above reconciliation, as the options were antidilutive.
3. Segment Reporting Data
The Company provides enterprise technology solutions to businesses that serve
the consumer. To date, the Company's product applications have been focused on
the convenience store, food service, entertainment and convenient automotive
service center markets, as these markets require many of the same product
features and functionality.
6
The Company's management evaluates the performance of the segments based on an
internal measure of contribution margin, or income and loss from operations,
before certain allocated costs of development and corporate overhead. The
Company accounts for intersegment sales and transfers as if the sales or
transfers were to first parties, that is, at current market prices.
The other nonreportable segment includes miscellaneous businesses, certain
unallocated corporate operating expenses and the elimination of intersegment
sales.
The summary of the Company's operating segments is as follows (in thousands):
For the three months ended March 31, 2002
----------------------------------------------------------------------------
Petroleum/ Hospitality
Convenience and Food
Store Service Entertainment Other Consolidation
----------- ---------- ------------- ------ -------------
Revenues $20,196 $4,976 $5,087 $ 1,029 $31,288
Contribution margin 8,959 (109) 1,865 (1,618) 9,097
Operating income (loss) 4,047 (905) 983 (1,713) 2,412
For the three months ended March 31, 2001
----------------------------------------------------------------------------
Petroleum/ Hospitality
Convenience and Food
Store Service Entertainment Other Consolidation
----------- ----------- ------------- ----- -------------
Revenues $16,910 $ 8,762 $6,324 $2,001 $33,997
Contribution margin 5,743 (943) 3,236 (689) 7,347
Operating income (loss) 2,539 (3,010) 1,382 (907) 4
The Company distributes its technology both within the United States and
internationally. Revenues derived from international sources were approximately
$3.8 million and $1.9 million for the three months ended March 31, 2002 and
2001, respectively.
Certain reclassifications have been made to prior quarter segment reporting data
to conform to current quarter presentation.
4. Acquisitions
In July 2001, the Company purchased certain assets from HotelTools, Inc.
("HotelTools"), an emerging provider of enterprise software solutions for the
hospitality industry including solutions to centralize all aspects of
multi-property hotel operations, including hotel management, rate management,
reservations and procurement. The transaction included the purchase of certain
intellectual property rights, fixed assets and pending patents. The purchase
price consisted of $1.8 million in cash and assumption of net liabilities of
approximately $1.0 million. Total consideration, including approximately
$100,000 in transaction costs, was $2.9 million. Intangibles of approximately
$2.4 million were recorded, which are being amortized over two to five years
(See Note 6). In addition, the Company hired approximately 30 former employees
of HotelTools.
In May 2001, the Company acquired all the common stock of Breeze Software
Proprietary Limited ("Breeze"), a leading provider of software applications for
retailers in the Australian and Asia-Pacific marketplaces. The purchase price
consisted of $1.7 million in cash and assumption of net liabilities of
approximately $700,000. Total consideration, including approximately $400,000 in
transaction costs, was $2.8 million. Intangibles of approximately $2.8 million
were recorded, which are being amortized over four to ten years (See Note 6).
The Company may pay additional consideration of cash and stock if certain
earnings milestones are obtained. In connection with the acquisition, the
Company entered into employment agreements with three employees for terms
expiring no later than December 31, 2003.
7
5. Significant Events
On June 30, 2001 the Company and Tricon Restaurant Services Group, Inc.
("Tricon") signed a contract evidencing a multi-year arrangement to implement
the Company's Enterprise Productivity Software exclusively in Tricon's
company-owned restaurants around the world. Tricon's franchisees will also be
able to subscribe to the software under the same terms as the company-owned
restaurants. As part of this agreement, the Company agreed to purchase from
Tricon its source code and object code for certain back office software
previously developed by Tricon for $20.0 million, $16.5 million of which is
payable in specified annual installments through December 31, 2003. The
remaining $3.5 million is payable on a pro rata basis based upon Tricon's
acceptance and rollout of the Enterprise Productivity Software and fulfillment
of its total target client store commitment beginning in 2002 and ending in
2004. To date, the Company has paid Tricon $8.0 million as its first two
payments for the purchase of the Tricon back office software, and capitalized
approximately $772,000 in personnel costs associated with professional services
for which associated revenues of approximately $1.8 million have been deferred.
The remaining specified annual installment payments due are as follows (in
thousands):
December 31,
---------------------------------
2002 4,500
2003 4,026
------
Total $8,526
======
In January 2002, the Company paid Tricon $5.3 million as its second installment
became due on December 31, 2001. Tricon waived all penalties and additional
interest expense. The annual installment payments are partially secured by an
irrevocable letter of credit secured by the Company's accounts receivable.
Costs associated with the purchase of this asset, costs of professional services
work performed, as well as cash received by the Company, will be deferred and
recognized over the five-year subscription term of the contract beginning upon
installation of the Enterprise Productivity Software at each site.
On March 3, 2000, the Company entered into an agreement with America Online,
Inc. and its subsidiary Moviefone, Inc. (collectively "AOL"), whereby AOL
agreed, among other items, to invest $25.0 million in a to-be-formed subsidiary
of the Company to engage in consumer interactive businesses other than in the
entertainment industry (e.g., interactive fuel and dispenser business and
interactive restaurant self-ordering business), with any amount not invested by
AOL to be callable by the Company into common shares of the Company. On March
19, 2001, the Company and AOL amended this strategic relationship. Based on the
new agreement, the Company's theater exhibition point-of-sale and management
systems solution became AOL Moviefone's preferred offering in the cinema and
entertainment industry and the Company supports AOL Moviefone clients operating
the MARS point of sale product. Additionally, both companies have agreed not to
pursue forming a subsidiary to address potential business-to-consumer
applications over the Internet. As part of the amended agreement, AOL is funding
current MARS clients to upgrade to the Company's systems and the Company's
performance of certain professional services for AOL and certain MARS' clients.
On January 23 and 26, 2001, respectively, the Company announced the permanent
closure of its facilities in Hillsboro, Oregon and Pleasanton, California. The
decision was made to reduce costs and consolidate operations at the Company's
headquarters in Alpharetta, Georgia. The Hillsboro office had served primarily
as a sales office for the Company's small business food products, while the
Pleasanton office had served primarily as a sales office for hospitality and
food service products. The office closure costs related to these two offices are
comprised primarily of severance benefits and lease reserves. As part of
8
the closings, the Company terminated 25 of the 34 employees. As a result, the
Company recorded a non-recurring charge of approximately $1.0 million associated
with this action during its first quarter of 2001. At March 31, 2002, the
Company had approximately $49,000 remaining in accrued liabilities related to
the remaining exit costs, which the Company expects to pay by the end of the
second quarter of 2002. No such charge was recorded during the first quarter of
2002.
6. Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board ("FASB") issued a
Staff Announcement Topic D-103 ("Topic D-103"), "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred". Topic D-103 establishes that reimbursements received for
out-of-pocket expenses should be reported as revenue in the income statement.
Historically, the Company has classified reimbursed out-of-pocket expenses as a
reduction in the cost of consulting services. The Company was required to adopt
the guidance of Topic D-103 in first quarter of 2002. During the quarter ended
March 31, 2002, the adoption of Topic D-103 resulted in an increase in reported
consulting service revenues and cost of consulting services of approximately
$400,000. The impact of this adoption did not and will not affect the Company's
net income or loss in any past or future periods.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supersedes
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business", and
"Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
("Opinion 30") for the disposal of a segment of a business (as previously
defined in Opinion 30). The Financial Accounting Standards Board issued SFAS No.
144 to establish a single accounting model, based on the framework established
in SFAS No. 121, for long-lived assets to be disposed of by sale.
SFAS No. 144 broadens the presentation of discontinued operations in the income
statement to include a component of an entity (rather than a segment of a
business). A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity. SFAS No. 144 also requires that discontinued
operations be measured at the lower of the carrying amount for fair value less
cost to sell. The Company adopted SFAS 144 effective January 1, 2002. The
adoption did not have a material impact on the Company's results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity capitalizes
the cost by incurring the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for the
amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Management is evaluating the effect of this
statement on the Company's results of operations and financial position.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141, "Business Combinations" ("SFAS No.141"),
and Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 supercedes APB No. 16, and
SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises".
9
SFAS No. 141 prescribes the accounting principles for business combinations and
requires that all business combinations be accounted for using the purchase
method of accounting. SFAS No. 141 is effective for all business combinations
after June 30, 2001.
SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142
prescribes the accounting practices for acquired goodwill and other intangible
assets. Under SFAS No. 142, goodwill will no longer be amortized to earnings,
but instead will be reviewed periodically (at least annually) for impairment.
The Company adopted SFAS No. 142 on January 1, 2002. Goodwill and certain other
intangible assets, determined by management to have an indefinite life and
relating to acquisitions subsequent to June 30, 2001, will not be amortized. As
of December 31, 2001 the Company had approximately $10.5 million of recorded net
goodwill and $2.2 million in intangible assets, which were subject to the
provisions of SFAS No. 142. The Company is amortizing its intangible assets
resulting from its acquisition of certain assets from HotelTools over a period
of no greater than five years. During the quarter ended March 31, 2002, the
Company recorded approximately $100,000 of amortization expense associated with
such identifiable definite-lived intangible assets.
Under SFAS No. 142, the Company is required to review goodwill for potential
impairment by June 30, 2002 and measure the amount of impairment, if any, by
December 31, 2002. Management expects to complete its evaluation of the impact
of this statement by June 30, 2002.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Overview
The Company derives its revenues primarily from the sale of integrated systems,
including software, hardware and related support and professional services. In
addition, the Company offers implementation and integration services which are
typically billed on a per diem basis. The Company's revenues from its various
technology solutions are, for the most part, dependent on the number of
installed sites for a client. Accordingly, while the typical sale is the result
of a long, complex process, the Company's clients usually continue installing
additional sites over an extended period of time. Revenues from software and
systems sales are recognized as products are shipped, provided that collection
is probable and no significant post shipment vendor obligations remain. Revenues
from client support, maintenance and other services are generally recognized as
the service is performed.
In 1999, the Company began developing its new generation of management systems
products--Enterprise Productivity Software, formerly WAVE(TM). This product
architecture is designed to combine and expand the functionality of its Site
Management Systems and Headquarters-Based Management Systems. The Company's
architecture and platforms for these products are entirely web-based, which the
Company believes will enable it to increase the functionality while decreasing
the costs of implementing and maintaining technology solutions for retailers.
Management believes that these products will strengthen its offerings by
providing integrated, end-to-end solutions that span from the consumer to the
supply chain.
The Enterprise Productivity Software was generally released during the first
quarter of 2002. The Company intends to offer its Enterprise Productivity
Software both through the application service provider, or "ASP," delivery model
as well as through installations directly in client locations as "client-hosted"
systems. In instances where clients select the ASP delivery model, the Company
will remotely host applications from an off-site central server that users can
access over dedicated lines, virtual private networks or the Internet. The
Company is continuing to establish strategic relationships to facilitate the
release of the Enterprise Productivity Software.
In connection with its strategy to develop ASP-delivered products, in April 2000
the Company began offering certain new and existing products on a
subscription-based pricing model. Under this subscription-pricing model, clients
pay a fixed, monthly fee for use of the Enterprise Productivity Software and the
necessary hosting services to utilize those applications and solutions. This
offering represents a change in the Company's historical pricing model in which
clients were charged an initial licensing fee for use of the Company's products
and continuing maintenance and support during the license period. To date, the
Company continues to derive a majority of its revenue from these legacy products
under its traditional sales model of one-time software license fees, hardware
sales and software maintenance and support fees. Based on this historical trend,
the Company anticipates that clients purchasing the Company's legacy products
will continue to favor the one-time software license and hardware purchases over
the subscription-based pricing model for the foreseeable future.
Although the Company's subscription-based revenues to date have been immaterial
to total revenues, the Company expects that the general release of the
Enterprise Productivity Software will lead to an increase in the percentage of
recurring revenues coming from subscription-based offerings. As a result of
offering clients a subscription-pricing model and the decline of revenues from
legacy site management and headquarters solutions, the Company expects to see a
decline in the one-time revenues from legacy software license fees, replaced
over time by monthly subscription fees. In addition, the Company expects revenue
from maintenance and support from existing clients to decline and to be replaced
by subscription fees should existing clients convert to the subscription-pricing
model.
11
This change in the Company's product strategy to develop and offer ASP-delivered
and Internet solutions and the transition to a subscription-pricing model
involve certain risks and assumptions. There can be no assurance that the
Company will successfully implement these changes in its organization, product
strategy or pricing model or that the changes will not have a material adverse
effect on the Company's business, financial condition or results of operations.
To date, the Company's primary source of revenues has been large client rollouts
of the Company's products, which are typically characterized by the use of
fewer, larger contracts. These contracts typically involve longer negotiating
cycles, require the dedication of substantial amounts of working capital and
other resources, and in general require costs that may substantially precede
recognition of associated revenues. During the third quarter ended September 30,
2001, the Company began to experience a decline in revenues and negative
operating results. The Company attributes this decline primarily to the current
global economic environment and the product transition the Company was
undertaking in advance of the general release of the Enterprise Productivity
Software. In response to these circumstances, during the latter part of the
third quarter and throughout the fourth quarter of 2001, the Company, in
addition to other measures, downsized its personnel by 7.3% in order to contain
its operating costs. If the Company's product transition or industry acceptance
of the Enterprise Software Product progresses slower than currently anticipated
or if the economic downturn continues or worsens the Company believes it could
continue to experience a decline in revenues and negative operating results.
On April 1, 2000 the Company effected a 3-for-2 stock split. All historical
share data and weighted average shares have been restated to account for this
split.
Results of Operations
Three ended March 31, 2002 compared to three months ended March 31, 2001
System Sales. The Company derives the majority of its revenues from sales and
licensing fees of its headquarters-based, back office management, and point of
sale solutions. System sales decreased 16.4% to $17.1 million for the quarter
ended March 31, 2002 (the "first quarter 2002"), compared to $20.5 million for
the quarter ended March 31, 2001 (the "first quarter 2001"). This decrease was
primarily the result of the weakening global economy, the Company's strategy to
begin converting certain new and existing products and clients to the
subscription-pricing model, as well as declining sales of the Company's legacy
back-office and headquarters products in advance of the Company's general
release of its Radiant Enterprise Management software which occurred late in the
first quarter 2002.
Client Support, Maintenance and Other Services. The Company also derives
revenues from client support, maintenance and other services. Client support,
maintenance and other services increased 4.9% to $14.2 million for the first
quarter 2002, compared to $13.5 million for the first quarter 2001. This
increase was due to increased client demand for professional services such as
training, custom software development, project management and implementation
services and from increased support and maintenance revenues as a result of a
larger installed base within new and existing markets.
Cost of System Sales. Cost of system sales consists primarily of hardware and
peripherals for site-based systems and labor. These costs are expensed as
products are shipped. Cost of system sales decreased 26.4% to $7.7 million for
the first quarter 2002, compared to $10.5 million for the first quarter 2001.
Cost of system sales as a percentage of system sales decreased to 45.1% for the
first quarter 2002 from 51.2% for the first quarter 2001. This decrease was due
primarily to higher hardware margins and changes in product sales mix in the
first quarter 2002. Additionally, amortization of capitalized software
development costs was approximately $698,000 and $531,000 for the first quarter
2002 and 2001, respectively.
12
Cost of Client Support, Maintenance and Other Services. Cost of client support,
maintenance and other services consists primarily of personnel and other costs
associated with the Company's services operations. Cost of client support,
maintenance and other services decreased 5.1% to $8.5 million for the first
quarter 2002 from $9.0 million for the first quarter 2001. Additionally, cost of
client support, maintenance and other services as a percentage of client
support, maintenance and other services revenues decreased to 60.2% for the
first quarter 2002 from 66.6% for the first quarter 2001. These decreases were
due primarily to increased efficiencies and staff utilization, as well as
personnel reductions the Company undertook in the third and fourth quarter 2001.
Product Development Expenses. Product development expenses consist primarily of
wages and materials expended on product development efforts. Product development
expenses increased 41.1% to $3.5 million for the first quarter 2002, compared to
$2.5 million for the first quarter 2001. This increase was due primarily to
increased development costs resulting from the acquisitions of HotelTools and
Breeze during 2001, as well as the reduction in capitalized software development
costs during the first quarter 2002. During the first quarter 2002, the Company
capitalized software development costs of $1.9 million, or 35.6% of its total
product development costs, compared to $2.1 million or 45.7% during the first
quarter 2001. Product development expenses as a percentage of total revenues
increased to 11.1% from 7.2%, as product development expenses increased at a
faster pace than total revenues.
Sales and Marketing Expenses. Sales and marketing expenses increased 2.0% to
$4.8 million during the first quarter 2002, compared to $4.7 million in the
first quarter 2001. This increase was associated primarily to the Company's
continued expansion of its sales activities, including new hires and increased
bonus and commission expense. Sales and marketing expenses as a percentage of
total revenues were 15.4% and 13.9% for the first quarter 2002 and 2001,
respectively as sales and marketing expenses increased during the 2002 period at
a pace higher than revenues.
Depreciation and Amortization. Depreciation and amortization expenses decreased
38.1% to $1.4 million for the first quarter 2002, compared to $2.3 million for
the first quarter 2001. This decrease resulted primarily from a decrease in
goodwill amortization of approximately $600,000 attributed to the adoption of
SFAS No. 142 (See Note 6 to the condensed consolidated financial statements). As
a result of the adoption of SFAS No. 142, the Company ceased amortization of
goodwill on all its acquisitions made prior to June 30, 2001. Depreciation and
amortization as a percentage of total revenues was 4.6% and 6.8% for the first
quarter 2002 and 2001, respectively.
Non-recurring charges. On January 23 and 26, 2001, respectively, the Company
announced the permanent closure of its facilities in Hillsboro, Oregon and
Pleasanton, California. The decision was made to reduce costs and consolidate
operations at the Company's headquarters in Alpharetta, Georgia. The Hillsboro
office had served primarily as a sales office for the Company's small business
food products, while the Pleasanton office had served primarily as a sales
office for hospitality and food service products. The office closure costs
related to these two offices are comprised primarily of severance benefits and
lease reserves. As part of the closings, the Company terminated 25 of the 34
employees at these facilities. As a result, the Company recorded a non-recurring
charge of approximately $1.0 million associated with this action during the
first quarter 2001. At March 31, 2002, the Company had approximately $49,000
remaining in accrued liabilities related to the remaining exit costs, which the
Company expects to pay by the end of the second quarter of 2002. No such charge
was recorded during the first quarter 2002.
General and Administrative Expenses. General and administrative expenses
decreased 27.2% to $2.9 million, or 9.3% of revenues, for the first quarter
2002, compared to $4.0 million, or 11.8% of revenues, for the first quarter
2001. The decrease was due primarily to increased efficiencies, reduction of
certain support personnel and other cost cutting measures.
13
Interest Income, Net. Net interest income decreased 64.0% to $206,000 for the
first quarter 2002, compared to $573,000 for the first quarter 2001. The
Company's net interest income is derived from the investment of its cash and
cash equivalents, less interest expense incurred on its long-term debt. The
decreases in net interest income resulted primarily from a decrease in cash and
cash equivalents from an average cash balance of $47.9 million during the first
quarter 2001 to an average cash balance of $31.3 million during the first
quarter 2002. Additionally, the Company's weighted average interest rate it
receives on cash balances declined in 2002 over 2001. See "--Liquidity and
Capital Resources" and "--Item 3. Quantitative and Qualitative Disclosures About
Market Risks."
Income Tax Provision. The Company recorded a tax provision of 42.8% in the first
quarter 2002 compared to a tax provision of 35.0% in the first quarter 2001.
This tax rate increase during the first quarter 2002 was primarily due to an
increase in the Company's effective tax rate from 35.0% to 40.0% due to tax
planning strategies utilized in the prior year, which were not available during
the first quarter 2002, as well as approximately $75,000 in foreign taxes the
Company was required to record during the first quarter 2002.
Net Income. Net income for the first quarter 2002 was $1.5 million, or $0.05 per
diluted share, an increase of $1.1 million, or $0.04 per diluted share, compared
to net income of $375,000, or $0.01 per diluted share, for the first quarter
2001.
Liquidity and Capital Resources
As of March 31, 2002, the Company had $28.7 million in cash and cash equivalents
and working capital of $51.5 million.
Cash provided by operating activities was $2.7 million and $2.3 million in first
quarters 2002 and 2001, respectively. In first quarter 2002, cash provided by
operating activities consisted primarily of net income of $1.5 million during
the period, depreciation and amortization of $2.2 million as well as decreased
inventories of $1.2 million and an increase in accounts payable and accrued
liabilities of $1.7 million. These amounts were partially offset by a decrease
in accounts receivable of $4.5 million. In first quarter 2001, cash provided by
operating activities was primarily due to depreciation and amortization expense
of $3.2 million as well as a $2.2 million increase in client deposits and
unearned revenues during the first quarter 2001 as the Company delivered
products and/or services previously paid by clients. These amounts were
partially offset by increases in accounts receivables of approximately $635,000
as well as decreased accounts payable and accrued liabilities due to timing of
certain vendor payments of $3.9 million.
Cash used in investing activities during first quarters 2002 and 2001 was $7.9
million and $3.9 million, respectively. The uses of cash in investing activities
during first quarter 2002 consisted primarily of the purchase of a software
asset and capitalized professional services costs for a total of $5.5 million,
as more fully described in Note 5 of the condensed consolidated financial
statements, as well as purchases of property and equipment of $504,000 and
capitalized software costs of $1.9 million. As more fully described in Note 5 of
the condensed consolidated financial statements, the Company paid Tricon $5.3
million as the second installment for the source code and object code for
certain back office software previously developed by Tricon and capitalized
approximately $232,000 in professional services costs. The uses of cash in
investing activities for first quarter 2001 was due to the purchases of property
and equipment of $1.9 million and capitalized software development costs of $2.1
million.
Cash of $31,000 was used in financing activities during first quarter 2002 due
primarily to the Company's purchase of common stock pursuant to its stock
repurchase program for approximately $196,000 and principal payments under
capital lease obligations of approximately $112,000, offset by cash received
14
from the repayment of shareholder loans and $177,000 of proceeds from the
exercise of stock options. Cash of $1.6 million was used in financing activities
during first quarter 2001 due primarily to the Company's repurchase of common
stock from shareholders for approximately $2.0 million partially offset by cash
received from the exercise of employee stock options of approximately $428,000.
In May 2000, the Board of Directors of the Company authorized a stock repurchase
program pursuant to which the Company was authorized to repurchase up to 1.0
million shares of common stock of the Company over the next twelve months.
During 2000, the Company repurchased and subsequently retired approximately
90,000 shares at prices ranging from $18.25 to $19.94 per share, for total
consideration of approximately $1.8 million. In May 2001, the Board of Directors
of the Company renewed this stock repurchase program whereby the Company is
authorized to repurchase up to 1.0 million shares of common stock of the Company
through May 2002. During 2001, the Company repurchased and subsequently retired
approximately 725,000 shares at prices ranging from $5.27 to $18.67 per share,
for total consideration of approximately $6.0 million. During the first quarter
2002, the Company repurchased and subsequently retired approximately 25,000
shares at prices ranging from $7.71 to $8.00 per share, for total consideration
of approximately $196,000. As of March 31, 2002, the Company has repurchased and
subsequently retired approximately 840,000 shares of its common stock, for total
consideration of approximately $8.0 million under this repurchase program.
The Company leases office space, equipment and certain vehicles under
noncancellable operating lease agreements expiring on various dates through
2013. Additionally, the Company leases various equipment and furniture under a
four-year capital lease agreement. The capital lease runs until March 31, 2005.
Aggregate future minimum lease payments under the capital lease and
noncancellable operating leases as of March 31, 2002 are as follows (in
thousands):
Payments Due by Period
--------------------------------------------------------------------
Contractual Obligations: Less than
Total 1 Year 1-3 Years 4-5 Years After 5 Years
------- ---------- --------- --------- -------------
Capital Lease Obligations: $ 1,653 $ 551 $ 1,102 -- --
Operating Leases 45,192 5,992 9,833 $7,808 $21,559
Other Long-Term Obligations (1) 8,526 4,500 4,026 -- --
------- ------- ------- ------ -------
Total Contractual Cash Obligations $55,371 $11,043 $14,961 $7,808 $21,559
======= ======= ======= ====== =======
(1) As more fully described in Note 5 of the consolidated financial statements,
on June 30, 2001 the Company and Tricon signed a contract evidencing a
multi-year arrangement to implement Radiant Enterprise Productivity
Software exclusively in Tricon's company-owned restaurants around the
world. Tricon's franchisees will also be able to subscribe to the
Enterprise Productivity Software under the same terms as the company-owned
restaurants. As part of this agreement, the Company agreed to purchase from
Tricon its source code and object code for certain back office software
previously developed by Tricon for $20.0 million, $16.5 million of which is
payable in specified annual installments through December 31, 2003. The
remaining $3.5 million is payable on a pro rata basis based upon Tricon's
acceptance and rollout of the Enterprise Productivity Software and
fulfillment of its total target client store commitment beginning in 2002
and ending in 2004. Costs associated with the purchase of this asset, costs
of professional services work performed, as well as cash received by the
Company, will be deferred and recognized over the five-year subscription
term of the contract beginning upon installation of the Enterprise
Productivity Software at each site. During the first quarter 2002, the
Company paid Tricon $5.3 million as its second installment payment for the
purchase of the Tricon back
15
office software, and deferred approximately $232,000 in personnel costs
associated with professional services for which associated revenues of
approximately $300,000 were deferred.
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 on-going 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.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its condensed
consolidated financial statements.
Revenue Recognition
The Company recognizes revenue using the guidance from SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" and the AICPA
Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect
to Certain Transactions." Under these guidelines, the Company recognizes revenue
when the following criteria are met: (1) persuasive evidence of an agreement
exists; (2) delivery of the product has occurred; (3) the fee is fixed and
determinable; (4) collectibility is probable; and (5) remaining obligations
under the agreement are insignificant. For those agreements that contain
significant future obligations, revenue is recognized under the percentage of
completion method. The Company's services revenue consists of fees generated
from consulting, custom development, installation, support, maintenance and
training. Revenue related to professional services performed by the Company is
generally recognized on a time and materials basis as the services are
performed. The Company also offers fixed fee services arrangements that are
recognized under the percentage of completion method. Revenue from support and
maintenance is generally recognized as the service is performed.
In addition, the Company estimates what future warranty claims may occur based
upon historical rates and defers revenues based on these estimated claims. If
the historical data used to calculate these estimates does not properly reflect
future claims, these estimates could be revised.
Allowance for doubtful accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of clients to make required payments. Estimates are
developed by using standard quantitative measures based on historical losses,
adjusting for current economic conditions and, in some cases, evaluating
specific client accounts for risk of loss. The establishment of reserves
requires the use of judgment and assumptions regarding the potential for losses
on receivable balances. Though the Company considers these balances adequate and
proper, if the financial condition of its clients or channel partners were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
16
Inventories
Inventories are stated at the lower of cost or market value. Cost is principally
determined by the first-in, first-out method. The Company records adjustments to
the value of inventory based upon its forecasted plans to sell its inventories.
The physical condition (e.g., age and quality) of the inventories is also
considered in establishing its valuation. These adjustments are estimates, which
could vary significantly, either favorably or unfavorably, from actual
requirements if future economic conditions, client inventory levels or
competitive conditions differ from expectations.
Intangible Assets
The Company has significant intangible assets related to goodwill and other
acquired intangibles as well as capitalized software costs. The determination of
related estimated useful lives and whether or not these assets are impaired
involves significant judgments. Changes in strategy and/or market conditions
could significantly impact these judgments and require adjustments to recorded
asset balances.
The Company's policy on capitalized software costs determines the timing of
recognition of certain development costs. In addition, this policy determines
whether the cost is classified as development expense or cost of license fees.
Management is required to use its judgment in determining whether development
costs meet the criteria for immediate expense or capitalization.
Income Taxes
The Company has significant amounts of deferred tax assets that are reviewed for
recoverability and valued accordingly. These assets are evaluated by using
estimates of future taxable income streams and the impact of tax planning
strategies. Valuations related to tax accruals and assets can be impacted by
changes to tax codes, changes in statutory tax rates and the Company's future
taxable income levels.
Contingencies
The Company is subject to legal proceedings and other claims related to product,
labor and other matters. The Company is required to assess the likelihood of any
adverse judgments or outcomes to these matters as well as potential ranges of
probable losses. A determination of the amount of reserves required, if any, for
these contingencies are made after careful analysis of each individual issue.
The required reserves may change in the future due to new developments in each
matter or changes in approach such as a change in settlement strategy in dealing
with these matters.
Forward-Looking Statements
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results and plans for future business
development activities, and are thus prospective. These statements appear in a
number of places in this Report and include all statements that are not
statements of historical fact regarding intent, belief or current expectations
of the Company, its directors or its officers with respect to, among other
things: (i) the Company's financing plans; (ii) trends affecting the Company's
financial condition or results of operations; (iii) the Company's growth
strategy and operating strategy (including the development of its products and
services); and (iv) the declaration and payment of dividends. The words "may,"
"would," "could," "will," "expect," "estimate," "anticipate," "believe,"
"intend," "plans," and similar expressions and variations thereof are intended
to identify forward-looking statements. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, many of which are beyond the Company's ability to
control. Actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. Among the key risks,
assumptions and factors that may affect operating results, performance and
financial condition are the Company's reliance on a small number of customers
for a larger portion of its
17
revenues, fluctuations in its quarterly results, ability to continue and manage
its growth, liquidity and other capital resources issues, competition and the
other factors discussed in detail in the Company's Form 10-K filed with the
Securities and Exchange Commission, including the "Risk Factors" therein.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
- -------------------------------------------------------------------
The Company's financial instruments that are subject to market risks are its
cash and cash equivalents. During the first quarter 2002, the weighted average
interest rate on its cash balances was approximately 2.01%. A 10.0% decrease in
this rate would have impacted interest income by approximately $18,546 during
the first quarter 2002.
As more fully explained in Note 3 of the condensed consolidated financial
statements, the Company's revenues derived from international sources were
approximately $3.8 million and $1.9 million during first quarter 2002 and 2001,
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. The effects of foreign exchange rate fluctuations on
the Company results of operations and financial position during the first
quarter 2002 and 2001 were not material.
18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits.
None
(b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter ended March 31, 2002,
date of report February 7, 2002 regarding the release of financial results
for the three months and year ended December 31, 2001.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RADIANT SYSTEMS, INC.
Dated: May 13, 2002 By: /s/ John H. Heyman
-------------------------
John H. Heyman, Executive
Co-Chief Executive
Officer and Chief
Financial Officer
(Duly authorized
officer and principal
financial officer)
19