Radiant Systems 10-Q 2005
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 2005
Commission File Number: 0-22065
RADIANT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Issuers telephone number, including area code: (770) 576-6000
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of the registrants common stock outstanding as of April 22, 2005 was 29,175,110.
TABLE OF CONTENTS
Item 1. Financial Statements
The information contained in this report is furnished for the Registrant, Radiant Systems, Inc. (Radiant or the Company). In the opinion of management, the information in this report contains all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the results for the interim periods presented. The financial information presented herein should be read in conjunction with the financial statements included in the Registrants Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005
The accompanying notes are an integral part of these consolidated statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Stock-Based Compensation
Basis of Presentation
In the opinion of management, the unaudited interim condensed consolidated financial statements of Radiant Systems, Inc. (Radiant or the Company), included herein, have been prepared on a basis consistent with the December 31, 2004 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Radiants Form 10-K for the year ended December 31, 2004. Radiants results of operations for the three months ended March 31, 2005 are not necessarily indicative of future operating results.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements of Radiant have been prepared in accordance with generally accepted accounting principles applicable to interim financial statements, the general instructions 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.
As a result of Radiants disposal of its Enterprise segment and operations in the first quarter of 2004, the Companys condensed consolidated statement of operations present the discontinued Enterprise segment and operations separate from continuing operations (Note 2). The net tax effect of discontinued operations during 2004 was not material to the financial statements.
The Company records treasury stock purchases at cost. The excess of cost over par value is allocated to additional paid in capital based on the per share amount of capital in excess of par value for all shares. During the three months ended March 31, 2005, the Company repurchased, and subsequently retired, approximately 238,000 shares at $4.21 at a cost of approximately $1.0 million. These shares were repurchased from the former shareholders of Breeze Software Proprietary Limited (Breeze) and were issued in the third quarter of 2004 in connection with the additional consideration given for obtaining certain earnings milestones, pursuant to the Breeze acquisition agreement (Note 2). At the Companys option, cash equaling the value of the shares issued was exchanged for the shares during the first quarter of 2005. During the three months ended March 31, 2004, the Company repurchased approximately 2.0 million shares at a weighted average share price of $8.15 at a cost of $16.3 million. These shares were repurchased in connection with the divesture of the Enterprise segment and were subsequently retired (Note 2).
Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of shares outstanding. In the event of a net loss, basic loss per share is the same as dilutive loss per share. For the three months ended March 31, 2005, basic weighted average shares outstanding were approximately 29,247,000 and dilutive weighted average shares outstanding were approximately 30,302,000. For the three months ended March 31, 2004, Radiant reported a net loss from continuing operations, and the basic and dilutive weighted average shares outstanding for that period were approximately 28.9 million.
For the three months ended March 31, 2005 and 2004, options to purchase approximately 2.8 million and 6.5 million shares of common stock were excluded from the above reconciliation, as the options were antidilutive for the periods then ended.
The Companys comprehensive income includes net income and foreign currency translation adjustments. Total comprehensive income for the three months ended March 31, 2005 and 2004 was approximately $1.3 million and $1.8 million, respectively.
Accounting for Stock-Based Compensation
Radiant measures compensation expense for its stock-based employee compensation plans using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, until required otherwise by Statement of Financial Accounting Standards No. 123 (R), as discussed further in Note 1. Under the intrinsic value method, as the exercise of all options granted under these plans was equal to the fair market price of the underlying common stock on the grant date, no stock-based employee compensation cost is recognized in the condensed consolidated statements of operations.
In accordance with Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of the Financial Accounting Standards Board (FASB) Statement No. 123 and Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, Radiants pro forma option expense is computed using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Radiants employee stock options have characteristics significantly different from those of traded options.
To comply with SFAS 148, Radiant presents the following table to illustrate the effect on the net income (loss) and earnings (loss) per share if it had applied the fair value recognition provisions of SFAS 123, as amended, to options granted under its stock-based employee compensation plans. For purposes of this pro forma disclosure, the estimated value of the options is amortized ratably to expense over the options vesting period.
On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law. The AJCA includes items such as the phase out of the Extraterritorial Income Exclusion Act of 2000 over a three year period, the introduction of a qualified manufacturing deduction and a one-time election to repatriate foreign earnings. The Company has started an evaluation of the effects of the repatriation provision; however, the Company does not expect to be able to complete this evaluation until after Congress or the Treasury Department provide additional clarifying language on key elements of the provision.
In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs - An amendment of ARB No. 43, Chapter 4 (SFAS No. 151), which is effective for fiscal periods beginning after June 15, 2005 and must be applied prospectively. SFAS No. 151 requires that abnormal amounts of idle capacity, freight, handling costs and spoilage should be excluded from the cost of inventory and expensed as incurred. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.
In December 2004, the FASB issued FASB Statement No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29 (SFAS No. 153). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is to be applied prospectively for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Companys adoption of SFAS No. 153 is not expected to have a material impact on its financial position or results of operations.
In December 2004, the FASB issued FASB Statement No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R) which is effective for the Company beginning on January 1, 2006. SFAS No. 123R replaces SFAS No. 123, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS No. 123R requires that the compensation cost relating to share-based awards to employees be recognized in financial statements and be measured based on the grant-date fair value of the stock options or other equity-based compensation. The Company currently provides the comparative pro forma disclosures required by SFAS No. 148 but continues to account for stock compensation in accordance with APB 25. The Company is evaluating the alternatives allowed under the standard, which the Company is required to adopt in the first quarter of fiscal year 2006.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations - An Interpretation of FASB Statement No. 143 (FIN 47), which is effective for fiscal periods ending after December 15, 2005. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.
2. Acquisitions and Divestitures
Acquisition of Breeze Software Proprietary Limited
On May 9, 2001, the Company acquired all of the outstanding common stock of Breeze Software Proprietary Limited (Breeze), a leading provider of software applications for retailers in the Australian marketplaces. The purchase price consisted of $1.7 million in cash and assumption of net liabilities of $700,000. Total consideration, including approximately $400,000 in transaction costs, was $2.8 million. Goodwill of approximately $2.8 million was recorded at the time of the acquisition. The Company was obligated to pay additional consideration of cash and/or stock in the event certain earnings milestones were achieved, through the fourth quarter of 2004. During the third quarter of 2004 and the fourth quarter of 2003, the specified earnings milestones were achieved and the Company paid additional consideration of approximately 238,000 shares and 141,000 shares, respectively, of common stock for a total consideration of approximately $1.0 million and $1.2 million, respectively, based upon the quoted price of the Companys stock, which was allocated to goodwill. In addition, during the fourth quarter 2004, a final earnings milestone was obtained and the Company elected to pay the additional consideration of approximately $1.3 million in cash. This payment was accrued in the fourth quarter of 2004 and paid during the first quarter of 2005.
Acquisition of Aloha Technologies, Inc.
On January 13, 2004, the Company acquired substantially all of the assets of Aloha Technologies and certain affiliated entities (collectively, Aloha). Aloha is a leading provider of point of sale systems for the hospitality industry. Aloha was acquired to further develop the Companys hospitality division. The results of Aloha have been included in the consolidated financial statements from the date of the acquisition.
Total consideration and transaction costs of approximately $49.4 million consisted of an $11.0 million cash payment, a five-year note in the principal amount of $19.7 million at an interest rate of prime plus one percent, a one-year note in the principal amount of $1.7 million at an interest rate of prime plus one percent, the issuance of 2.4 million shares of restricted common stock with a fair value of $6.50 per share on the date of announcement (December 15, 2003), and $900,000 of direct expenses Radiant incurred related to the acquisition and the assumption of certain liabilities. The transaction was accounted for using the purchase method of accounting as required by FASB Statement No. 141, Business Combinations, and Radiant has accordingly allocated the purchase price of Aloha based upon the fair values of the net assets acquired and liabilities assumed.
The intangible assets acquired were valued by the Company with the assistance of independent appraisers utilizing customary valuation procedures and techniques. Goodwill recorded in the acquisition will be tested periodically for impairment as required by FASB Statement No. 142, Goodwill and Other Intangible Assets. During the year ended December 31, 2004 and in accordance with Emerging Issues Task Force (EITF) Issue 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, accrued liabilities and goodwill of approximately $1.1 million were recorded to account for the execution of the integration plan developed at the time of acquisition, including severance packages to Aloha employees.
Goodwill of $24.7 million has been assigned to the hospitality segment and is expected to be deductible for tax purposes over the next 15 years. The following is a summary of the intangible assets acquired and the weighted-average useful lives over which they will be amortized:
The following unaudited pro forma financial information for the period ended March 31, 2004, presents results as if the acquisition had occurred at the beginning of the period and is presented for comparison purposes with the actual results for the three months ended March 31, 2005.
These pro forma results have been prepared for comparative purposes only and include certain adjustments such as additional amortization expense as a result of identifiable intangible assets arising from the acquisition and from increased interest expense on acquisition debt. The pro forma results are not necessarily indicative either of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the period or of future results.
Acquisition of E Needs, Inc.
On April 14, 2004, the Company acquired substantially all of the assets of E Needs, Inc., a company engaged in the business of developing, marketing, licensing and selling software and services in the movie-theatre circuit and related financial management marketplaces. The operating results of E Needs are included in the condensed consolidated financial statements from the date of acquisition. Pro forma information has not been presented as it is not material to the Companys financial statements.
The transaction included the purchase of certain software technology source code and customer lists. Total consideration was approximately $700,000 and consisted of $300,000 in cash, the issuance of 46,133 shares of common stock with a fair value of $6.50 per share based on the average close price for the 10 days prior to the date of announcement (March 17, 2004) and approximately $100,000 of assumed liabilities and direct expenses. The purchase agreement also provides for additional cash payments if certain future operating targets are achieved. The additional payments may aggregate to approximately $1.6 million and will be accounted for as part of the purchase price. As of March 31, 2005, none of these future operating targets had been achieved. Intangible assets of approximately $600,000 were recorded and will be amortized over the assets estimated useful lives, which range from three to ten years. The remaining $100,000 purchase price was recorded as goodwill and assigned to the entertainment segment. The goodwill is expected to be deductible for tax purposes over the next 15 years.
Divestiture of Enterprise Software Systems Business
On January 31, 2004, the Company completed a tax free split-off of the Companys Enterprise Software Systems (Enterprise) business now known as BlueCube Software, to Erez Goren, the Companys former Co-Chairman and Co-Chief Executive Officer. Pursuant to the terms of the Share Exchange Agreement under which the split-off was effected, Radiant contributed specified assets and liabilities of the Enterprise business, together with $4.0 million in cash, to the newly formed subsidiary, and then transferred all of the shares of the new company to Erez Goren in exchange for the redemption of 2.0 million shares of common stock of the Company, valued at $16.3 million based upon the quoted price of the Companys stock on January 31, 2004. The shares redeemed represented approximately 7.0% of the Companys outstanding shares. The consideration for the transaction was determined based on negotiations between the special committee of the Companys independent directors and Mr. Goren. At the completion of this transaction, Mr. Goren resigned as Co-Chairman and Co-Chief Executive Officer of Radiant and as a member of the Companys Board of Directors.
During the quarter ended March 31, 2005, the Company recorded no additional expenses related to the divestiture of Enterprise business.
For the one month ended January 31, 2004, Enterprise generated revenues and a net loss of approximately $1.8 million and $913,000, respectively. The Enterprise results are included in discontinued operations in the Companys condensed consolidated statement of operations. The following is a summary of asset and liabilities of the Enterprise business that were contributed to BlueCube Software, the proceeds received, and the resulting gain on disposal:
Commitments and Contingencies from Divestiture
Radiant has a contractual obligation for performance under certain existing customer contracts that have not been assigned to BlueCube at Radiants choice or because they require the consent of the customer (Legacy Contracts). Under a Reseller and Services Agreement, BlueCube is obligated to fulfill the terms of these Legacy Contracts, including providing hosting, support, maintenance and professional services. BlueCube will act as Radiants subcontractor, and indemnify Radiant for any losses associated with its performance or non-performance of the Legacy Contract obligations. Radiant will continue to invoice these Legacy customers on behalf of BlueCube. Radiant will pass through the payments received in these transactions as they are received from the customers. As of March 31, 2005, Radiant had received approximately $300,000 from Legacy customers that had not yet been passed to BlueCube. This amount has been included in accrued contractual obligations and payables due to BlueCube in the accompanying condensed consolidated balance sheet as of March 31, 2005.
Under this Reseller and Services Agreement with BlueCube, Radiant became a preferred reseller of selected BlueCube computer products. The fixed price charged to customers for BlueCube products is remitted to BlueCube based on a fixed percentage of this price, as stated in the agreement. During the three months ended March 31, 2005 and 2004, the Company recognized approximately $100,000 of revenues under this agreement. As of March 31, 2005 and December 31, 2004, Radiant has a payable due to BlueCube related to the fixed percentage passed through to BlueCube of approximately $1.1 million and $1.3 million, respectively. This amount has been included in accrued contractual obligations and payables due to BlueCube in the accompanying condensed consolidated balance sheets as of March 31, 2005 and December 31, 2004. In addition, during the three months ended March 31, 2005 and 2004, the Company recognized approximately $100,000 and $500,000 of revenues generated from the sale of Radiant products to BlueCube. As of March 31, 2005 and December 31, 2004, Radiant has a receivable due from BlueCube of approximately $500,000 and $300,000, respectively.
Radiant also maintains rights to access product source code and information needed to fulfill Legacy Contract obligations if BlueCube fails to perform. For a limited number of existing customer contracts, Radiant and BlueCube have shared liability, which includes penalties, for a period of 18 months after January 31, 2004, based upon the revenue received by each party under the contract. For one of these contracts, milestones defined in the original contract were amended. Failure to meet these amended milestones could result in penalties and/or losses, the amount of which cannot be estimated. In managements opinion, it is not probable that Radiant will incur penalties/losses under this contract. In addition to the initial cash included in the transaction, it was agreed that approximately $5.3 million of unearned revenue will be transferred to BlueCube upon BlueCubes completion of the related contractual commitments. Approximately $200,000 and $4.2 million were paid during the three months ended March 31, 2005 and from inception through March 31, 2005, respectively. Management expects the majority of the remaining cash to be transferred to BlueCube over the next nine months. The remaining liability of approximately $1.1 million is included in accrued contractual obligations and payables due to BlueCube in the accompanying condensed consolidated balance sheet as of March 31, 2005.
Radiant has also agreed to sublease a portion of its property, currently under an operating lease, to BlueCube. This sublease will expire concurrently with Radiants operating lease on the property in January 2013. Operating lease rentals received are recorded against operating lease expense in the consolidated statements of operations. BlueCube has the right to early termination beginning on January 31, 2007, and must provide Radiant with an 18 month notice that early termination will occur. Payments received from BlueCube under this sublease equated to approximately $300,000 during the three months ended March 31, 2005. Aggregate future minimum lease payments under this sublease agreement for the twelve months ended March 31st, are approximately: $1.3 million in 2006, $1.4 million per year for years 2007 through 2011, and a total of $3.9 million over the remaining 22 months of the lease. In conjunction with this sublease agreement, Radiant and BlueCube entered into a right of refusal and option agreement pertaining to real property currently owned by Radiant and adjacent to the property being subleased by BlueCube. Under this agreement, BlueCube has an option to purchase the real property at a stated value, which management believes is the fair value at the time of the split-off. BlueCube has the right of refusal if Radiant obtains an offer to sell the real property to another party. The exercise of this right will result in BlueCube purchasing the real property at a price based on a formula and the third-party offer obtained by Radiant. This agreement is subordinate to a pre-existing right of first refusal with a third-party.
During 2003, management approved a plan to sell the acquired HotelTools software. The software is available for immediate sale and management is actively pursuing interested parties to sell the software in its present condition. The Company believes that the value of the software is stated at its net realizable value and continues to actively negotiate to sell the software at this price. However, if it is determined that limited interest exists for this product, additional write downs may be necessary in the future.
3. Goodwill and Other Intangibles, Net
In accordance with SFAS No. 142 the Company evaluates the carrying value of goodwill as of January 1st of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting units goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Companys annual evaluations of the carrying value of goodwill completed on January 1, 2005 and 2004 in accordance with SFAS No. 142 resulted in no impairment losses.
Changes in the carrying amount of goodwill for the three months ended March 31, 2005 are as follows (in thousands):
A summary of the Companys intangible assets as of March 31, 2005 and December 31, 2004 is as follows (in thousands):
Over the next five years ending on March 31st, amortization expense will be approximately $5.1 million in 2006 and 2007, $4.2 million in 2008, and $1 million in 2009 and 2010.
A summary of the Companys inventory as of March 31, 2005 and December 31, 2004 is as follows (in thousands):
Notes PayableAloha Acquisition
The following is a summary of the promissory notes entered into with the previous shareholders of Aloha in connection with the Companys purchase of Aloha (Note 2) on January 13, 2004 and outstanding as of March 31, 2005 and December 31, 2004:
Interest expense on these notes was $255,000 and $223,000 for the three months ended March 31, 2005 and 2004, respectively.
Approximate maturities of notes payable are as follows for the following 12-month periods subsequent to March 31, 2005:
On March 31, 2005, the Company entered into a senior secured credit facility (the Credit Agreement) with Wells Fargo Foothill, Inc., as the arranger, administrative agent and initial lender. Other lenders may participate in the Credit Agreement from time to time. Unless extended, the Credit Agreement expires on March 31, 2008. The Credit Agreement provides for extensions of credit, upon satisfaction of certain conditions in the form of revolving loans in an aggregate principal amount of up to $15 million and a term loan facility in an aggregate principal amount of up to $15 million. The revolving loan amount available to the Company is derived from a monthly borrowing base calculation using the Companys various receivables balances. Loans under the Credit Agreement will bear interest, at Radiants option, at either the London Interbank Offering Rate plus two and one half percent or at the rate that Wells Fargo Bank, N.A. announces as its prime rate then in effect. Fees associated with the Credit Agreement are typical for transactions of this type. The Credit Agreement contains certain customary representations and warranties from Radiant. It also contains customary covenants, including use of proceeds; limitations on liens; limitations on mergers, consolidations and sales of Radiants assets; and limitations on transactions with related parties. In addition, the Credit Agreement contains various financial covenants, including: minimum EBITDA levels, minimum tangible Net Worth, and maximum capital expenditures. As of March 31, 2005, the Company was in compliance with all financial covenants. The Credit Agreement also contains customary events of default, including nonpayment of principal, interest, fees or charges when due; breach of covenants; material inaccuracy of representations and warranties when made; and insolvency. If any events of default occur and are not cured within the applicable grace periods or waived, the administrative agent shall at the election of the required lenders terminate the commitments and declare the loans then outstanding to be due and payable in whole or in part together with accrued interest and any unpaid accrued fees and all other liabilities of Radiant thereunder. As of March 31, 2005, the Company had no outstanding balance related to its Credit Agreement.
8. Segment Reporting Data
The Company currently operates in three primary segments: (i) Petroleum and Convenience Retail, (ii) Hospitality and Food Service, and (iii) Entertainment. Each segment focuses on delivering site management systems, including point-of-sale (POS), self-service kiosk, and back-office systems, designed specifically for each of the core vertical markets.
The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies. The Companys 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.
The summary of the Companys operating segments is as follows (in thousands):
The reconciliation of contribution margin to net income for the three months ended March 31, 2005 and 2004 is as follows:
The reconciliation of other identifiable assets to total assets as of March 31, 2005 and 2004 is as follows:
Revenues not associated with the Companys Petroleum/Convenience Retail, Hospitality/Food Service or Entertainment segments are comprised of revenues from sales to BlueCube (Note 2) and hardware sales outside the Companys segments.
The Company distributes its technology both within the United States of America and internationally. The Company currently has international offices in Australia, Spain, Czech Republic, and Singapore. Revenues derived from international sources were approximately $6.9 million and $3.8 million for the three months ended March 31, 2005 and 2004, respectively. At March 31, 2005 and 2004, the Company had international identifiable assets, including goodwill, of approximately $13.7 million and $7.6 million, respectively, of which approximately $5.0 million and $2.5 million, respectively, are considered long-lived assets.
The segment reporting data presented above may not reflect actual performance and actual asset balances had each segment been a stand-alone entity. Furthermore, the segment information may not be indicative of future performance.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis (MD&A) is intended to facilitate an understanding of Radiants business and results of operations. This MD&A should be read in conjunction with Radiants Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. MD&A consists of the following sections:
Radiant is a leading provider of retail technology focused on the development, installation and delivery of solutions for managing site operations of retail and food service businesses.
The Company focuses on delivering site management systems, including point-of-sale (POS), self-service kiosk, and back-office systems, designed specifically for its three reportable segments of Hospitality, Petroleum and Convenience Retail, and Entertainment. Radiants site management solutions include software products, site hardware, professional services and support services. Each product can be purchased independently or as a suite of integrated products to address the customers specific business needs. These products enable operators to drive top-line growth and improve bottom-line performance.
Radiant offers best-of-breed solutions designed for ease of integration with operators existing infrastructures. The Companys site management technology enables retail and food service operators to improve customer service while reducing costs. The Company believes its approach to site management is unique in that its product solutions provide visibility and control at the site, field, and headquarters levels. Additionally, Radiant focuses on addressing the unique requirements of the highly specialized environments in which its customers operate. These environments require a high degree of reliability, specialized functionality, and peripheral compatibility. Using its point-of-sale, customer self-service and back-office technology, businesses are able to improve customer service and loyalty, improve speed of service, increase revenue per transaction, and reduce fraud and shrink. The Companys full line of open, standards-based site management hardware allows operators to leverage advanced technology built specifically for the environment in which they operate.
Radiant believes its current generation of point-of-sale and customer self-service products represents an innovative platform based on an open, modular software and hardware architecture that offers increased functionality and stability compared to other systems in the marketplace, at a lower total cost of ownership.
The Companys point-of-sale and back office technology is designed to enable businesses to deliver exceptional client service while improving profitability. The Company offers a full range of products that are tailored to specific retail and food service market needs including hardware, software and professional services. The Company offers best-of-breed solutions designed for ease of integration in managing site operations enabling operators to improve customer service while reducing costs. The Company believes its approach to site operations is unique in that its product solutions provide enterprise visibility and control at the site, field, and the headquarters levels.
The Company operates primarily through three reportable segments: (i) Petroleum and Convenience Retail, (ii) Hospitality, and (iii) Entertainment. The current business segments were implemented subsequent to the disposition of the Enterprise Software Systems segment, through a renewed focus on the Companys vertical market strategy.
Disposition of the Enterprise Software Systems Segment
In January 2004, Radiant completed the split-off of its enterprise software business, now known as BlueCube Software, to Erez Goren, the Companys former Co-Chairman of the Board and Co-Chief Executive Officer (see Note 2 of the condensed consolidated financial statements for further information). Radiant retained the right to sell and market the Enterprise Productivity Suite, including functionality such as workforce and supply chain management, through a reseller agreement with BlueCube Software. Under certain customer agreements, the Company has retained the obligation to perform contract obligations that have been subcontracted to BlueCube. As further described in Note 2 to the condensed consolidated financial statements, the separation agreement provides for a shared liability for contract claims of specified contracts over the initial 18 month term of the separation. Radiant does not believe that liabilities under these agreements are likely but they do represent a potential risk for the Company. The disposition of the Enterprise segment has allowed the Company to focus its efforts on better serving its core markets and increase market penetration. This disposition has significantly improved the Companys profits and cash position.
During the first quarter of 2004, Radiant reported a gain on the disposition of the Enterprise Software Systems segment of $3.8 million as further described in Note 2. The operating revenues and expenses through January 31, 2004 for the Enterprise Software Systems segment are reported as a net loss of $913,000 in discontinued operations on the consolidated income statement as further described in Note 2.
Acquisition of Aloha Technologies, Ltd. and ENeeds, Inc.
In the first quarter of 2004, Radiant completed the acquisition of Aloha Technologies, a leading provider of point-of-sale systems for the hospitality/food service industry. In the second quarter of 2004, the Company completed the acquisition of ENeeds, the leading provider of Film Management software and services in the North American exhibition industry. These were strategic acquisitions to assist in developing the Companys Hospitality and Entertainment segments. Further financial information concerning these acquisitions is contained in Note 2 of the condensed consolidated financial statements.
To the extent that Radiant believes acquisitions or joint ventures can better position it to serve its current segments, it will continue to pursue such opportunities in the future.
Results of Operations
Three months ended March 31, 2005 compared to the three months ended March 31, 2004
System sales. The Company derives the majority of its revenues from sales and licensing fees for its point-of-sale hardware, software and site management software solutions. System sales during the first quarter of 2005 were $20.4 million. This is an increase of $8.5 million, or 72%, from the same period in 2004, and a decrease of $3.6 million, or 15%, from the fourth quarter of 2004.
The year over year quarterly increase is primarily due to additional software license sales associated with having a full quarter of results related to the Aloha acquisition which took place in mid-January 2004, the increased use of the hospitality re-seller channel for additional sales, the success of selling the Companys new hardware products into its hospitality reseller markets (which began in the later part of the second quarter 2004), increased presence in the international community which has resulted in a $3.1 million or 82% increase in its international revenues and improved product demand throughout the hospitality and petroleum and convenience retail industries. The decrease from the fourth quarter of 2004 was primarily due to the cyclical nature of capital expenditures throughout the hospitality, petroleum and convenience retail and entertainment industries.
Client support, maintenance and other services. The Company also derives revenues from client support, maintenance and other services including training, custom software development, subscription and hosting, and implementation services (professional services). The majority of these revenues is from support and maintenance and is structured on a recurring revenue basis associated with installed sites in the field, while additional professional services are associated with projects related to new sales or implementation of products.
Client support, maintenance and other services during the first quarter of 2005 increased 13% from the same period in 2004 and increased 7% from the fourth quarter of 2004. These increases are primarily due to the additional revenues generated in both software and hardware support and maintenance due to the increased sales in 2004, the increase in revenues generated from the Companys Hospitality subscription products due to continued marketing efforts around this product line, and the additional revenues generated through custom development and consulting projects.
System sales gross profit. Cost of system sales consists primarily of hardware and peripherals for site-based systems, amortization of software costs and labor. All costs, other than amortization, are expensed as products are shipped, while software amortization is expensed at the greater of straight line amortization or proportion to sales volume.
System sales gross profit in the first quarter of 2005 as compared to the first quarter of 2004 increased by approximately $3.2 million, or 49%, while the gross profit percentage decreased by 7% to 48%. The decrease in the gross profit percentage is primarily due to the change in mix between the Companys hardware and software product lines resulting from additional hardware sales within its reseller channel. Systems sales gross profit for the first quarter of 2005 decreased approximately $1.1 million compared to the fourth quarter of 2004, while the gross profit percentage increased by 2%. This increase was primarily due to improved hardware sales gross profit.
Client support, maintenance and other services gross profit. Cost of client support, maintenance and other services consists primarily of personnel and other costs associated with the Companys services operations.
The gross profit on service sales in the first quarter of 2005 as compared to the first quarter of 2004 decreased by approximately $0.6 million, or 10%, and the gross profit percentage decreased by 9% to 34%. The gross profit percentage remained relatively flat during the first quarter of 2005 and the fourth quarter of 2004.
The decrease in the gross profit percentage from the first quarter of 2004 is due to normal fluctuations between product development projects and maintenance projects that occur throughout the year and due to a major software project being released in the beginning of the third quarter of 2004. Personnel expenses associated with this project were capitalized during the first quarter of 2004. Personnel assigned to this project were reassigned to software maintenance projects after the completion of this project in the third quarter of 2004 and continued to be assigned to maintenance projects throughout the first quarter of 2005. As such, costs were expensed as incurred.
Segment Revenues: Total revenues in the Hospitality and Food Service business segment during the first quarter of 2005 increased by approximately $10.2 million to $20.0 million from $9.8 million compared to the same period in 2004 primarily due to a full quarter of results from the purchase of Aloha in mid-January, use of the re-seller channel for additional sales into the hospitality market (specifically hardware sales which began being sold through the reseller market in the later part of the second quarter 2004) and improved demand throughout the industry. Total revenues in the Petroleum and Convenience Retail business segment increased by approximately $2.1 million, or 18%, to $13.3 million primarily due to improved international presence and demand throughout the petroleum and convenience retail industry. The Companys Entertainment business segment revenues decreased by approximately $1.0 million, or 20%, to $3.9 million primarily due to market conditions throughout the entertainment industry.
Total operating expenses. The Companys total operating expenses increased by 2% during the first quarter of 2005 compared to the same period in 2004 due to the following:
Product development expenses decreased during the first quarter of 2005 by approximately $0.5 million, or 14%, compared to the same period in 2004. This decrease is primarily due to a full quarter of product expenditures associated with the purchase of Aloha in mid-January and the normal fluctuations between product development projects and maintenance projects that occur throughout the year (as mentioned above). Product development expense as a percentage of revenue decreased from 13% to 8% for the first quarter of 2005 compared to the same period in 2004. Product development expenses remained relatively flat as compared to the fourth quarter of 2004.
Interest and other expense (income) net. The Companys net interest expense includes interest expense incurred on its long-term debt, less interest income derived from the investment of its cash and cash equivalents. Net interest expense increased by approximately $42,000 to approximately $244,000 during the first quarter of 2005 compared to the same period in 2004. The increase in net interest expense resulted from a significant increase in the prime rate over the course of the past 12 months, which resulted in a higher interest rate on the interest bearing notes payable associated with the acquisition of Aloha Technologies.
Liquidity and Capital Resources
On March 31, 2005, the Company entered into a senior secured credit facility (the Credit Agreement) with Wells Fargo Foothill, Inc., as the arranger, administrative agent and initial lender. Other lenders may participate in the Credit Agreement from time to time. Unless extended, the Credit Agreement expires on March 31, 2008. The Credit Agreement provides for extensions of credit in the form of revolving loans in an aggregate principal amount of up to $15 million and a term loan facility in an aggregate principal amount of up to $15 million. Loans under the Credit Agreement will bear interest, at Radiants option, at either the London Interbank Offering Rate plus two and one half percent or at the rate that Wells Fargo Bank, N.A. announces as its prime rate then in effect. Fees associated with the Credit Agreement are typical for transactions of this type.
The Credit Agreement contains certain customary representations and warranties from Radiant. In addition the Credit Agreement contains certain financial and non-financial covenants, which the Company was in compliance with as of March 31, 2005. As of March 31, 2005, the Company has no outstanding balance related to its Credit Agreement.
The Companys working capital has increased approximately $0.9 million to $20.1 million at March 31, 2005 as compared to $19.2 million at December 31, 2004. The Company has historically funded its business through cash generated by operations. Cash provided by operating activities from continuing operations during the first quarter of 2005 was $6.0 million as compared to $7.2 million during the same period in 2004. Cash from operations, in 2005, was mainly generated from income from operations, the adding back of non-cash items such as depreciation and amortization and through the collection of calendar year support and maintenance invoices that are deferred and recognized over the course of the year. This was partially offset by normal fluctuations in receivables and payables and by the payment of accrued 2004 year end bonuses. If near-term demand for the Companys products weakens or if significant anticipated sales in any quarter do not close when expected, the availability of funds from operations may be adversely affected. Cash used in investing activities during the first quarter of 2005 was $2.3 million as compared to $21.6 million during the same period in 2004. In 2005, investing activities mainly consisted of additional consideration related to the Breeze acquisition (see Note 2 in the condensed consolidated financial statement footnotes), the purchase of equipment and the continued payout of accrued contract obligations related to the BlueCube disposition. Cash used in financing activities during the first quarter of 2005 was $3.7 million as compared to cash provided by financing activities of $0.2 million during the same period in 2004. In 2005, financing activities mainly consisted of the pay off and pay down of notes payable related to the Aloha acquisition and payments made in connection with loan fees to enter into the Credit Agreement previously mentioned.
The Company leases office space, equipment and certain vehicles under non-cancelable operating lease agreements expiring on various dates through 2013. Additionally, the Company leases various equipment and furniture under four-year capital lease agreements. The capital leases run until November 2007 and June, 2005, respectively. Aggregate future minimum lease payments under the capital lease and non-cancelable operating leases as of March 31, 2005, and contractual obligations including the purchase of Aloha Technologies are as follows (in thousands):
The Company believes there are opportunities to grow the business through the acquisition of complementary and synergistic companies, products, and technologies. The Company looks for acquisitions that can be readily integrated and accretive to earnings, although it may pursue smaller non-accretive acquisitions that will shorten its time to market with new technologies. Management believes the general size of cash acquisitions the Company would currently consider would be in the $1 million to $15 million range. Any material acquisition could result in a decrease to the Companys working capital depending on the amount, timing and nature of the consideration to be paid. In addition, any material acquisitions of complementary or synergistic companies, products or technologies could require that it obtain additional debt or equity financing. There can be no assurance that such additional financing will be available or that, if available, such financing will be obtained on terms favorable to the Company and would not result in additional dilution to its stockholders.
The Company believes that its cash and cash equivalents and funds generated from operations will provide adequate liquidity to meet its normal operating requirements, as well as fund the above obligations for the foreseeable future.
Critical Accounting Policies and Procedures
The Companys 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 Companys 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 consolidated financial statements.
The Companys revenue is generated primarily through software and system sales, support and maintenance, and other services. The Company recognizes revenue using the guidance from 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, SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), Accounting Research Bulletin (ARB) No. 45, Long-Term Construction-Type Contracts (ARB 45), SEC Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues Task Force No. 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware. 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 or determinable; (4) collectibility is reasonably assured; and (5) remaining obligations under the agreement are insignificant. Under multiple element arrangements, where each element is separately stated, sold and priced, the Company allocates revenues to the various elements based on vendor-specific objective evidence (VSOE) of fair value. The Companys VSOE of fair value is determined based on the price charged when the same element is sold separately. If evidence of fair value does not exist for all elements in a multiple element arrangement, the Company recognizes revenue using the residual method. Under the residual method, a delivered element without VSOE of fair value is recognized as revenue if all undelivered elements have VSOE of fair value.
The Company generally sells its products, which include both software licenses and hardware, directly to end-users. Revenue from software licenses and system sales is generally recognized as products are shipped, provided that no significant vendor obligations remain and that the collection of the related receivable is probable. For those agreements that provide for significant services or custom development that are essential to the softwares functionality, the software license and contracted services are recognized under the percentage of completion method as prescribed by the provisions of ARB 45 and SOP 81-1.
The Company offers its clients post contract support in the form of maintenance, telephone support and unspecified software enhancements. Revenue from support and maintenance is recognized ratably over the term of the agreement.
The Companys services revenue consists of professional fees generated from consulting, custom development, installation 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. Under contracts where revenue is recognized using the percentage of completion method under the provisions of SOP 81-1, the Company measures its progress-to-completion by using input measures, primarily labor hours. The Company continually updates and revises estimates of its input measures. If those estimates indicate a loss will be incurred, the entire loss is recognized in that period.
In addition, the Company offers its customers subscription pricing and hosting services for some of its products. Under these subscription based contracts, revenue is recognized ratably over the contract period commencing, generally, when the product has been installed and training has been completed.
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 customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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.
The Company evaluates the recoverability of long-lived assets and finite-lived identifiable intangibles not held for sale whenever events or changes in circumstances indicate that an assets carrying amount may not be recoverable. Such circumstances could include, but are not limited to, (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used or in its physical condition, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds the fair value of the asset. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows.
Goodwill and Intangible Assets
The Company has significant intangible assets related to goodwill and other acquired intangibles as well as capitalized software costs. In assessing the recoverability of goodwill and other intangible assets, the Company must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges against these assets in the reporting period in which the impairment is determined. For intangible assets, this evaluation includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over their estimated useful lives, the Company will record an impairment charge in the amount by which the carrying value of the assets exceeds their fair value. For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit which houses goodwill to that reporting units fair value. The fair value of the reporting units is based upon the net present value of future cash flows, including a terminal value calculation. If the reporting units estimated fair value exceeds the reporting units carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed its carrying value, then further analysis would be required to determine the amount of the impairment, if any. If the Company determines that there is an impairment in either an intangible asset, or goodwill, the Company may be required to record an impairment charge in the reporting period in which the impairment is determined, which may have a negative impact on earnings.
In accordance with Statement of Financial Accounting Standards No. 86, the Companys 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. Capitalization of such costs begins when a detail program or a working model has been produced as evidenced by the completion of design, planning, coding and testing, such that the product meets its design specifications and has thereby established technological feasibility. Capitalization of such costs ends when the resulting product is available for general release to the public. Amortization of capitalized software development costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which the Company has determined is not more than five years. Management is required to use its judgment in determining whether development costs meet the criteria for immediate expense or capitalization. Additionally, management is required to use its judgment in the valuation of the unamortized capitalized software costs in determining whether the recorded value is recoverable based on future product sales.
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. Valuation allowances related to tax accruals and assets could be impacted by changes to tax codes, changes in statutory tax rates and the Companys future taxable income levels.
This Quarterly Report on Form 10-Q of Radiant Systems, Inc. and its subsidiaries (Radiant, Company, we, us, or our) contains forward-looking statements. All statements in this Quarterly Report on Form 10-Q, including those made by the management of Radiant, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Radiants future financial results, operating results, business strategies, projected costs, products, competitive positions, managements plans and objectives for future operations, and industry trends. These forward-looking statements are based on managements estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as may, will, should, could, would, expect, plan, anticipate, believe, estimate, predict, potential, and continue, the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the Companys Form 10-K filed with the Securities and Exchange Commission (SEC), including the section titled Risk Factors therein. These and many other factors could affect Radiants future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Radiant or on its behalf. Radiant undertakes no obligation to revise or update any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Companys financial instruments that are subject to market risks are its cash and cash equivalents and long-term debt. During the first quarter of 2005, the weighted average interest rate on its cash balances was approximately 2.15 %. A 10.0% decrease in this rate would have impacted interest income by approximately $1,700 during the first quarter of 2005. During the first quarter of 2005, the weighted average interest rate on its long-term debt was approximately 6.1%. A 10.0% increase in this rate would have impacted interest expense by approximately $26,000 during the first quarter of 2005.
As more fully explained in Note 8 of the condensed consolidated financial statements, the Companys revenues derived from international sources were approximately $6.9 million and $3.8 million during the three months ended March 31, 2005 and 2004, respectively. The Companys 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 Companys future results could be materially adversely impacted by changes in these or other factors. The effects of foreign exchange rate fluctuations on the Companys results of operations and financial position during the first quarter 2005 and 2004 were not material.
Item 4. Disclosure Controls and Procedures
The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify its financial reports and to other members of senior management and the Companys board of directors. Based on their evaluation as of March 31, 2005, the principal executive officer and principal financial officer of the Company have concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
During the quarter ended March 31, 2005, there were no changes in the Companys internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding the Companys repurchases of shares of its common stock during the three months ended March 31, 2005.
Item 6. Exhibits
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.