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:
September 30, 1998 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
incorporation or organization) Identification No.)
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
1000 Alderman Drive, Alpharetta, Georgia 30005
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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 November 10, 1998
was 16,066,111.
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
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PART I: FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures About Market Risks
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 13
Signature 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 29,010 $ 47,567
Accounts receivable, net of allowance for doubtful accounts of
$500 and $350............................................................... 21,381 17,557
Inventories.................................................................. 12,777 8,706
Other short-term assets...................................................... 4,046 1,867
-------- --------
Total current assets..................................................... 67,214 75,697
Property and equipment, net................................................... 7,847 4,844
Software development costs, net............................................... 3,175 1,773
Intangibles, net.............................................................. 6,981 10,332
Other long-term assets........................................................ 5,280 869
-------- --------
$ 90,497 $ 93,515
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................. $ 7,574 $ 7,234
Accrued liabilities.......................................................... 6,326 5,887
Client deposits and unearned revenue......................................... 2,387 4,645
Current portion of long-term debt............................................ 187 672
-------- --------
Total current liabilities................................................. 16,474 18,438
Long-term debt, less current portion.......................................... 4,078 4,056
-------- --------
Total liabilities......................................................... 20,552 22,494
-------- --------
Shareholders' equity
Common stock, no par value; 30,000,000 shares authorized;
16,063,944 and 15,423,587 shares issued and outstanding..................... - -
Additional paid-in capital................................................... 92,048 90,708
Deferred compensation........................................................ (399) (536)
Accumulated deficit.......................................................... (21,704) (19,151)
-------- --------
69,945 71,021
-------- --------
Commitments...................................................................
-------- --------
$ 90,497 $ 93,515
======== ========
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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- --------
REVENUES:
System sales.............................................. $13,706 $17,532 $44,146 $ 42,740
Client support, maintenance and other services............. 6,072 3,258 16,701 7,770
------- ------- ------- --------
Total revenues........................................... 19,778 20,790 60,847 50,510
COST OF REVENUES:
System sales............................................... 6,284 8,071 21,430 22,291
Client support, maintenance and other services............. 5,293 2,795 14,509 6,938
------- ------- ------- --------
Total cost of revenues................................... 11,577 10,866 35,939 29,229
------- ------- ------- --------
GROSS PROFIT................................................ 8,201 9,924 24,908 21,281
OPERATING EXPENSES:
Product development........................................ 2,748 1,984 8,561 4,603
Sales and marketing expenses............................... 3,105 1,447 9,001 3,563
Depreciation and amortization.............................. 1,214 666 3,389 1,566
Non-recurring charges...................................... 455 - 455 20,348
General and administrative................................. 3,072 2,424 9,176 6,024
------- ------- ------- --------
(LOSS) INCOME FROM OPERATIONS............................... (2,393) 3,403 (5,674) (14,823)
Interest income, net....................................... (407) (576) (1,418) (410)
------- ------- ------- --------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) PROVISION......... (1,986) 3,979 (4,256) (14,413)
Income tax (benefit) provision............................ (795) 1,532 (1,703) 1,320
------- ------- ------- --------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM..................... (1,191) 2,447 (2,553) (15,733)
EXTRAORDINARY ITEM:
Loss from early extinguishment of debt, net of income
tax of $82................................................ - - - 131
------- ------- ------- --------
NET (LOSS) INCOME........................................... $(1,191) $ 2,447 $(2,553) $(15,864)
======= ======= ======= ========
BASIC (LOSS) INCOME PER SHARE:
(Loss) before extraordinary item........................... (0.07) 0.17 (0.16) (1.29)
Extraordinary loss on early extinguishment of debt......... $ - $ - $ - $ (0.01)
------- ------- ------- --------
BASIC (LOSS) INCOME PER SHARE............................... $ (0.07) $ 0.17 $ (0.16) $ (1.30)
======= ======= ======= ========
DILUTED (LOSS) INCOME PER SHARE:
Income (loss) before extraordinary item.................... (0.07) 0.14 (0.16) (1.29)
Extraordinary loss on early extinguishment of debt......... $ - $ - $ - $ (1.01)
------- ------- ------- --------
DILUTED (LOSS) INCOME PER SHARE............................. $ (0.07) $ 0.14 $ (0.16) $ (1.30)
======= ======= ======= ========
SHARES USED TO COMPUTE BASIC
(LOSS) INCOME PER SHARE.................................... 16,062 14,646 15,989 12,237
======= ======= ======= ========
SHARES USED TO COMPUTE
DILUTED (LOSS) INCOME PER SHARE............................ 16,062 17,844 15,989 12,237
======= ======= ======= ========
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 NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................... $ (2,553) $(15,864)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation...................................................... 137 -
Depreciation and amortization.............................................................. 3,389 1,566
Income tax benefit......................................................................... - (212)
Purchased research and development costs................................................... - 19,134
Stock compensation expense................................................................. - 1,214
Deferred income tax benefit................................................................ (1,703) (397)
Discounts earned on software license sales................................................. - 113
Amortization and write off of loan discount and loan origination fees...................... - 332
Imputed interest on shareholder note....................................................... 171 -
Changes in assets and liabilities:
Accounts receivable...................................................................... (3,824) (11,031)
Inventories.............................................................................. (4,070) (2,522)
Other assets............................................................................. (1,016) (711)
Accounts payable......................................................................... 340 3,018
Accrued liabilities...................................................................... 452 -
Client deposits and deferred revenues.................................................... (2,257) (4,063)
-------- --------
Net cash used in operating activities.................................................. (10,934) (9,423)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................................ (4,985) (2,404)
Capitalized software development costs..................................................... (1,842) (872)
Increase in goodwill attributed to acquisitions............................................ - (4,336)
-------- --------
Net cash used in investing activities.................................................. (6,827) (7,612)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock warrants............................................ - 960
Proceeds from the issuance of common stock, net of issuance costs.......................... - 82,553
Exercise of employee stock options......................................................... 1,339 285
Repurchase of common stock from shareholders............................................... - (2,122)
Shareholder loans.......................................................................... (1,500) (330)
Principal payments under capital lease obligations......................................... (178) (288)
Repayments of shareholder loans............................................................ - (7,344)
Principal payments under long-term debt.................................................... (457) (4,576)
Other...................................................................................... - 98
-------- --------
Net cash (used in) provided by financing activities.................................... (796) 69,236
-------- --------
(Decrease) increase in cash and cash equivalents........................................... (18,557) 52,201
Cash and cash equivalents at beginning of year............................................. 47,567 2,342
-------- --------
Cash and cash equivalents at end of period................................................. $ 29,010 $ 54,543
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................................................. $ 36 $ 211
======== ========
Income taxes............................................................................. $ 359 $ -
======== ========
Noncash investing and financing activities:
Equipment purchases financed by borrowings under capital lease obligations................. $ - $ 43
======== ========
Reclassification of S Corporation retained earnings to additional paid-in capital............. $ - $ 8,203
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. 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 nine months ended
September 30, 1998 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, 1997.
2. ACQUISITIONS
In May 1997, the Company completed the acquisitions of ReMACS, based in
Pleasanton, California, and RSI Merger Corporation (d.b.a. Twenty/20 Visual
Systems) ("Twenty/20"), based in Dallas, Texas. ReMACS is a leading provider of
back office management system for clients in the restaurant industry with over
8,000 installed or licensed sites. Twenty/20 is a provider of point of sale and
table management system for full-service restaurants.
In October 1997, the Company acquired RapidFire Software, Inc. ("RapidFire
Software") and EquiLease Financial Services, Inc. ("EquiLease") (collectively
"RapidFire") based in Hillsboro, Oregon. RapidFire Software is a leading
provider of point of sale system to the pizza industry and other delivery
restaurants, with installations in over 2,000 restaurant sites nationwide.
EquiLease provides lease financing to certain clients of RapidFire.
In November 1997, the Company completed its acquisition of Logic Shop, Inc.
("Logic Shop"), based in Atlanta, Georgia. Logic Shop is a leading provider of
management software to the convenient automotive service center market, with
over 1,500 sites installed.
3. NON-RECURRING AND ACQUISITION RELATED CHARGES
During the third quarter ended September 30, 1998, the Company further
integrated its acquisitions of ReMACS and RapidFire by consolidating their
support and product development functions to its Alpharetta, Georgia location.
As a result, the Company recorded approximately $455,000 of non-recurring exit
charges related to severance arrangements. During the nine months ended
September 30, 1997, the Company incurred $20.3 million in non-recurring charges.
These non-recurring charges were comprised of $19.1 million in purchased
research and development costs and $1.2 million in stock compensation expense.
The purchased research and development costs, representing the estimated fair
value of acquired research and development projects as determined by independent
appraisal, was incurred in connection with the Company's acquisitions of ReMACS
and Twenty/20 during the period. The stock compensation expense, representing
the excess of the fair market value of the Company's common stock on the date of
the grant of the stock options over the aggregate exercise price of such
options, was the result of certain stock options granted in connection with the
acquisition of Twenty/20 during the period.
4. INCOME TAX (BENEFIT) PROVISION
Income tax benefit for interim periods is based on estimated effective annual
income tax rates. As a result of its election to be treated as an S Corporation
for income tax purposes, the Company, prior to the completion of its initial
public offering in February 1997, was not subject to federal or state income
taxes. The Company's S Corporation status was terminated upon completion of its
initial public offering in February 1997. Upon the termination of its S
Corporation election, the Company recorded certain deferred tax assets in the
amount of $592,000. Simultaneously, with the recording of these deferred tax
assets, the Company recorded a tax benefit of $305,000 and a valuation allowance
of $287,000 due to uncertainty surrounding the future utilization of such
deferred tax assets. For the period prior to the Company's initial public
offering, the tax benefit has been presented on a pro forma basis as if the
Company had been liable for federal and state income taxes. The pro forma tax
benefit for the period from January 1, 1997 through February 19, 1997, the date
the Company terminated its S Corporation status, was a benefit of $212,000.
Based on its loss from operations for the nine months ended September 30, 1998,
the Company has recorded a tax benefit of $1.7 million using an effective tax
rate of 40.0%.
In connection with the filing of the Company's 1997 income tax returns, the
Company revised the tax basis of the intangible assets acquired in connection
with its fourth quarter 1997 acquisitions of RapidFire and Logic Shop resulting
in the reduction of intangible assets of $2.3 million.
6
5. NET (LOSS) INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective for
fiscal years ending after December 15, 1997. The Company adopted the new
guidelines for the calculation and presentation of earnings per share, and
restated all prior periods. Basic loss per share is based on the weighted
average number of shares outstanding. Diluted loss per share is based on the
weighted average number of shares outstanding and the dilutive effect of common
stock equivalent shares ("CSEs") issuable upon the exercise of stock options and
warrants (using the treasury stock method).
The following table represents a reconciliation of basic and dilutive weighted
average shares and earnings per share using the guidelines of SFAS 128.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
000S OMITTED EXCEPT PER SHARE DATE 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding...... 16,062 14,646 15,989 12,237
Shares of common stock assumed issued upon
exercise of common stock equivalents using
the "treasury stock" method as it applies
to the computation of diluted earnings
per share.................................... - 3,198 - -
------- ------- ------- --------
Diluted weighted average shares outstanding.... 16,062 17,844 15,958 12,237
======= ======= ======= ========
Net (loss) income used in the computation of
basic and diluted loss per share............ $(1,191) $ 2,447 $(2,553) $(15,864)
======= ======= ======= ========
(Loss) income per share:
Basic........................................ $ (0.07) $ 0.17 $ (0.16) $ (1.30)
======= ======= ======= ========
Diluted...................................... $ (0.07) $ 0.14 $ (0.16) $ (1.30)
======= ======= ======= ========
6. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No.130"). SFAS No. 130 establishes
standards for the disclosure of all components of comprehensive income.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. Other comprehensive income refers to
revenues, expenses, gains, and losses that under generally accepted accounting
principles are included in comprehensive income but bypass net income.
Currently, the Company has no other comprehensive income items. Accordingly,
the adoption of SFAS No. 130 in the first quarter 1998 had no impact on the
Company's financial statements.
7
In 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in its interim financial
reports to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated by the chief decision maker
in deciding how to allocate resources and in assessing performance. SFAS No.
131 also allows the aggregation of segments, which meet certain criteria.
Although SFAS No. 131 is not required to be applied to interim statements in the
initial year of application, management believes its current disclosures
contained within the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of its interim reports on SEC Form
10Q and annual report on SEC Form 10K comply with the Statement's requirements.
As a result, the application of SFAS No. 131 will not significantly affect its
financial statement disclosures.
8
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 provides enterprise-wide technology solutions to the retail
industry. The Company offers fully integrated retail automation solutions
including point of sale systems, consumer-activated ordering systems, back
office management systems and headquarters-based management systems. The
Company's products enable retailers to interact electronically with their
clients, capture detailed data at the point of sale, manage labor and inventory
at their sites and communicate electronically with their sites, vendors and
credit networks. In addition, the Company offers system planning, design and
implementation services to tailor its solutions to each retailer's
specifications.
The Company derives its revenues primarily from the sale of integrated systems,
which include software, hardware and related support and consulting services.
The Company plans to increase licensing of certain of its software products on a
stand-alone basis. In addition, the Company offers implementation and
integration services which are 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 a client has. Accordingly, while the typical
sale is the result of a long, complex process, the Company's client usually
continues installing additional sites over an extended period of time. Revenues
from software and system 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.
Since November 1995, a number of events resulted in strong revenue growth for
the Company. The Company developed new products, established relationships with
new clients and increased sales to existing clients. The Company expanded its
presence into the retail industry in November 1995 by entering into a joint
venture (PrysmTech) to market enterprise-wide technology solutions to cinema
operators. On December 31, 1996, the Company purchased the remaining interest in
PrysmTech. Accordingly, the operations of PrysmTech are reflected in the 1996
financial statements of the Company with a deduction for the minority interest
in the earnings of PrysmTech. Continuing its growth in the retail industry, in
May 1996 the Company purchased Liberty Systems International, Inc. ("LSI"), a
technology solution provider to the quick service restaurant ("QSR") operators.
To broaden its presence in the restaurant market, the Company acquired ReMACS
and Twenty/20, in May 1997 and RapidFire in October 1997. In November 1997, the
Company acquired Logic Shop to serve the convenient automotive service centers.
During this period, the Company also expanded its sales force and continued to
add management, consulting and product development personnel.
In early 1998, a number of factors impacted the Company's revenue growth and
operating results. Most notable was the fact that a number of the Company's
larger clients were involved in mergers and acquisitions which, for a variety of
reasons, interrupted or delayed roll outs of the Company's products. In
addition, sales cycles with new clients piloting the Company's products were
lengthier than the Company's management anticipated. The above, coupled with
investments by the Company in product development and other areas of the
business negatively impacted operating results and contributed to losses during
1998.
As a result of its election to be treated as an S Corporation for income tax
purposes, prior to the completion of its initial public offering in February
1997, the Company was not subject to federal or state income taxes. Pro forma
net loss amounts discussed herein include additional income tax benefits
determined by applying the Company's anticipated statutory tax rate to pretax
loss, adjusted for permanent tax differences. The Company's S Corporation
status terminated upon completion of its initial public offering in February
1997.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997
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 21.8% to $13.7 million for the three
months ended September 30, 1998 (the "third quarter 1998"), compared to $17.5
million for the three months ended September 30, 1997 (the "third quarter
1997"). The decrease for the third quarter 1998 resulted from interruptions and
delays in client rollouts of the Company's solutions. System sales increased
3.3% to $44.1 million for the nine months ended September 30, 1998 (the "fiscal
year 1998"),
9
compared to $42.7 for the nine months ended September 30, 1997 (the "fiscal year
1997"). The increase for the fiscal year 1998 related to increased sales and
license fees from new and existing clients.
Client Support, Maintenance and Other Services. The Company also derives
revenues from client support, maintenance and other services, which increased
86.4% to $6.1 million for the third quarter 1998, compared to $3.3 million for
the third quarter 1997 and increased 114.9% to $16.7 million for the fiscal year
1998, compared to $7.8 million for the fiscal year 1997. The increases were due
to increased support, maintenance and services revenues resulting from an
increased install base and from the Company's 1997 acquisitions. Additionally,
increased client demand of professional services such as training, custom
software development, project management and implementation services contributed
to these increases.
Cost of System Sales. Cost of system sales consists primarily of hardware and
peripherals for site-based system and labor. These costs are expensed as
products are shipped. Cost of system sales decreased 22.1% to $6.3 million for
the third quarter 1998, compared to $8.1 million for the third quarter 1997.
The decrease was directly attributable to the decrease in system sales during
the third quarter of 1998. Cost of system sales decreased 3.9% to $21.4 million
for the fiscal year 1998 from $22.3 million for the fiscal year 1997. The
decrease was directly attributable to decreased material costs and a higher mix
of software license revenues, which have lower costs than the company's site-
based system for fiscal year 1998. Cost of system sales as a percentage of
system sales decreased to 45.8% from 46.0% for the third quarter 1998 and 1997,
respectively, and to 48.5% from 52.2% for the fiscal year 1998 and 1997,
respectively. The decreases were due primarily to increased efficiencies
associated with the manufacturing of site-based system, as well as increased
sales of software licenses which typically have higher gross margins than the
site-based system sold by the Company.
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 increased 89.4% to $5.3 million for the third
quarter 1998 from $2.8 million for the third quarter 1997 and increased 109.1%
to $14.5 million for fiscal year 1998 from $6.9 million for fiscal year 1997.
The increases were due primarily to increased wages associated with the effort
of supporting higher revenues in this area. Cost of client support, maintenance
and other services as a percentage of client support, maintenance and other
services revenues increased to 87.2% from 85.8% for the third quarter 1998 and
1997, respectively, as a result of less profitable mix of services. Cost of
client support, maintenance and other services as a percentage of client
support, maintenance and other services revenues decreased 86.9% from 89.3% for
fiscal year 1998 and 1997, respectively, due to increased efficiencies and staff
utilization.
Product Development Expenses. Product development expenses consist primarily of
wages and materials expended on product development efforts. Product development
expenses increased 38.5% to $2.7 million for the third quarter 1998, compared to
$2.0 million for the third quarter 1997 and increased 86.0% to $8.6 million for
fiscal year 1998, compared to $4.6 million for fiscal year 1997. The increases
were due to higher development costs associated with new product development and
additional development costs associated with the Company's 1997 acquisitions.
Product development expenses as a percentage of total revenues increased to
13.9% from 9.5% for the third quarter 1998 and 1997, respectively, and to 14.1%
from 9.1% for fiscal year 1998 and 1997, respectively, as product development
expenses increased at a faster pace than total revenues. The Company capitalizes
a portion of its software development costs. In the third quarter 1998 and 1997,
the Company capitalized software development costs of $744,000, or 21.3% of its
total product development costs, and $412,000, or 17.2% of its total product
development costs, respectively. For fiscal year 1998 and 1997, the Company
capitalized software development costs of $1.8 million, or 17.7% of its total
product development costs, and $872,000, or 15.9% of its total product
development costs, respectively.
Sales and Marketing Expenses. Sales and marketing expenses increased 114.6% to
$3.1 million during the third quarter 1998, compared to $1.4 million in the
third quarter 1997, and increased 152.6% to $9.0 million during fiscal year
1998, compared to $3.6 million for fiscal year 1997. The increase was
associated with the Company's 1997 acquisitions, continued expansion of its
sales activities and increased commission expense. Sales and marketing expenses,
as a percentage of total revenues, were 15.7% and 7.0% for the third quarter
1998 and 1997, respectively, and 14.8% and 7.1% for fiscal year 1998 and 1997,
respectively.
10
Depreciation and Amortization. Depreciation and amortization expenses increased
82.3% to $1.2 million for the third quarter 1998, compared to approximately
$666,000 for the third quarter 1997 and increased 116.4% to $3.4 million for
fiscal year 1998, compared to $1.6 million for fiscal year 1997. The increase
resulted from an increase in computer equipment and other assets required to
support an increased number of employees and locations, as well as increased
goodwill amortization resulting from acquisitions. Depreciation and amortization
as a percentage of total revenues was 6.1% and 3.2% for the third quarter 1998
and 1997, respectively, and 5.6% and 3.1% for fiscal year 1998 and 1997,
respectively. These increases were primarily due to associated personnel
support costs, which increased at a pace higher than associated revenues.
Amortization of capitalized software development costs was approximately
$217,000 and $58,000 for the third quarter 1998 and 1997, respectively, and
approximately $440,000 and $232,000 for fiscal year 1998 and 1997, respectively.
Non-Recurring Charges. During the third quarter 1998 the Company recorded
approximately $455,000 of non-recurring exit charges related to severance
arrangements associated with the consolidation of certain support and product
development functions to its Alpharetta, Georgia location. No such charges were
incurred during the third quarter 1997. During fiscal year 1997, the Company
incurred $20.3 million in non-recurring charges. These non-recurring charges
were comprised of $19.1 million in purchased research and development costs and
$1.2 million in stock compensation expense. The purchased research and
development costs, representing the estimated fair value of acquired research
and development projects as determined by independent appraisal, was incurred in
connection with the Company's acquisitions of ReMACS and Twenty/20 during the
period. The stock compensation expense, representing the excess of the fair
market value of the Company's common stock on the date of the grant of the stock
options over the aggregate exercise price of such options, was the result of
certain stock options granted in connection with the acquisition of Twenty/20
during the period.
General and Administrative Expenses. General and administrative expenses
increased 26.7% to $3.1 million for the third quarter 1998, compared to $2.4
million for the third quarter 1997, and increased 52.3% to $9.2 million for
fiscal year 1998, compared to $6.0 million for fiscal year 1997. The increase
was due primarily to personnel increases and related costs associated with the
Company's 1997 acquisitions. General and administrative expenses as a
percentage of total revenues were 15.5% and 11.7% for the third quarter 1998 and
1997, respectively, and 15.1% and 11.9% for fiscal year 1998 and 1997,
respectively, as personnel and related expenses grew at a faster rate than
revenues.
Interest Income. Interest income decreased 29.3% to $407,000 for the third
quarter 1998, compared to $576,000 for the third quarter 1997. For fiscal year
1998, interest income increased 245.9% to $1.4 million compared to $410,000 for
fiscal year 1997. The increase resulted primarily from interest income earned
on the proceeds of the sale of 5.4 million shares of the Company's common stock
during the first and third quarters of 1997.
Income Tax (Benefit) Provision. As a result of its election to be treated as an
S Corporation for income tax purposes, the Company, prior to the completion of
its initial public offering in February 1997, was not subject to federal or
state income taxes. The Company's S Corporation status was terminated upon
completion of its initial public offering in February 1997 and upon termination
of its S Corporation status, the Company recorded deferred tax assets in the
amount of $592,000. Simultaneously, with the recording of these deferred tax
assets, the Company recorded a tax benefit of $305,000 and a valuation allowance
of $287,000. The valuation allowance was recorded due to the uncertainty
surrounding the future utilization of such deferred tax assets. For all periods
presented, the accompanying financial statements reflect provisions for income
taxes computed in accordance with the provisions of Statement of Accounting
Standards No. 109, "Accounting for Income Taxes". For the period prior to the
Company's initial public offering, the tax benefit has been presented on a pro
forma basis as if the Company had been liable for federal and state income
taxes. The pro forma tax benefit for the period from January 1, 1997 through
February 19, 1997, the date the Company terminated its S Corporation status, was
a benefit of $212,000. As substantially all of the purchased research and
development expenses associated with the ReMACS and Twenty/20 acquisitions were
not deductible for income tax purposes, no income tax (benefit) provision was
recognized during the third quarter 1997 compared to a benefit of 40.0% for the
third quarter 1998.
Extraordinary Item. During fiscal year 1997, a loss from early extinguishment
of debt of $213,000, net of taxes of $82,000, was recognized due to the write
off of certain unamortized loan origination costs and unamortized debt discounts
associated with the repayment of outstanding indebtedness to Sirrom Capital
Corporation of $4.5 million. There was no such charge during fiscal year 1998.
Net Loss/Income. For the reason discussed above, net loss for the third quarter
ended September 30, 1998, before non-recurring charges, was $919,000, or $0.06
per share, a decrease of $3.4 million, or $0.20 per
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share over net income of $2.4 million, or $0.14 per share for the same period in
1997. Net loss for the nine months ended September 30, 1998, before non-
recurring charges, was $2.3 million or $0.14 per share, a decrease of
approximately $6.3 million or $0.40 per share over net income of $4.0 million or
$0.26 per share for the same period last year, before extraordinary items and
acquisition related charges. Including the non-recurring charges of
approximately $455,000, discussed above, the net loss for the three and nine
month periods ending September 30, 1998 was approximately $1.2 million and $2.5
million, respectively, or $0.07 and $0.16 per share. Net loss for the nine month
period of 1997 was approximately $15.9 million or $1.30 per share, including
acquisition related charges of approximately $19.7 million, net of tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company completed a public offering of 2.6 million shares of
common stock and received net proceeds of approximately $58.4 million after
deducting estimated underwriting discounts and offering expenses. A portion of
the offering proceeds was used to repay $3.3 million of debt incurred in
connection with the acquisition of ReMACS. The remaining proceeds will be used
for general corporate purposes, including research and development, sales and
marketing, possible strategic acquisitions and the increased working capital
requirements of the Company generated by its growth. As of September 30, 1998,
the Company had $29.0 million in cash and cash equivalents.
The Company used cash from operating activities in fiscal year 1998 and fiscal
year 1997 of $10.9 million and $9.4 million, respectively. In fiscal year 1998,
the Company's uses of cash were the primary result of the net loss for the
period then ended; increased accounts receivables and inventories due to
increased sales; decreased accounts payable and accrued liabilities due to
timing of certain vendor payments; and client deposits and unearned revenues as
the Company delivered products and/or services previously paid by clients.
During fiscal year 1997, the Company's use of operating cash was primarily the
result of increased accounts receivable and inventories, and decreased client
deposits and unearned revenues as the Company delivered products and/or services
previously paid by clients.
Cash used in investing activities in fiscal year 1998 and fiscal year 1997 was
$6.8 million and $7.6 million, respectively. The uses of cash in investing
activities for fiscal year 1998 consisted primarily of the purchases of property
and equipment for approximately $5.0 million and capitalized software costs of
$1.8 million. During fiscal year 1998, the Company moved into two new leased
facilities in Alpharetta, Georgia with approximately 161,000 combined square
feet. As a result, the Company purchased equipment and furniture to accommodate
the moves. The uses of cash in investing activities for fiscal year 1997
consisted primarily of the purchases of property and equipment of approximately
$2.4 million and the payment for purchases of acquisitions, net of cash
acquired, of $4.3 million.
Cash of $796,000 was used in financing activities during fiscal year 1998 due
primarily to an advance made by the Company to the former sole shareholder of
RapidFire under its agreement to loan up to $1.5 million, which debt matures
October 31, 2005 and bears interest at 5.0% per annum. Cash of $69.2 million was
provided by financing activities during the fiscal year 1997 due to the issuance
of common stock in the initial public offering and follow-on offering offset by
the repayment of the Company's outstanding indebtedness noted above.
YEAR 2000 COMPUTER MATTER
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, invoices sent, or
engage in similar normal business activities.
The Company is in the process of conducting a business risk assessment of its
information technology systems. The Company will develop remediation plans for
such information technology systems if its business risk assessment indicates
such is warranted. All costs associated with analyzing the Year 2000 Issue or
making conversions to existing systems are being expensed as incurred.
Management presently believes that the costs to modify its information
technology infrastructure to be Year 2000 compliant will not have a material
adverse impact to its financial condition or results of operations during any
quarterly or annual reporting period.
The Company is planning formal communications with all of its significant
suppliers of goods and services to determine the extent to which the Company's
operations and systems are vulnerable to those third parties' failure to
remediate their own Year 2000 Issue. There can be no guarantee that the systems
of other companies on which the Company's operations and systems rely will be
timely converted and would not have an adverse effect on the Company's systems
or results of operations.
The Company will utilize predominantly internal resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project by June 30, 1999, which is prior to
any anticipated impact on its operating systems.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
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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 the future business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors, which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition and other
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- --------------------------------------------------------------------
Not applicable
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits.
The following exhibits are filed with this Report:
27.1 Financial Data Schedule
(b) Reports to be filed on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998
RADIANT SYSTEMS, INC
Dated: November 13, 1998 By: /s/ John H. Heyman
--------------------- -------------------
John H. Heyman, Executive
Vice President and Chief
Financial Officer
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EXHIBIT INDEX
Exhibit Number Description of Exhibit
_____________ ------------------------
27.1 Financial Data Schedule
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