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Radiant Systems 10-Q 2007 Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2007
For the transition period from to Commission File Number: 0-22065
RADIANT SYSTEMS, INC. (Exact name of registrant as specified in its charter)
(770) 576-6000 (Registrant’s telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 a large accelerated filer, an accelerated filer or a non-accelerated filer. (see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act) Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x As of April 30, 2007, there were 31,104,195 shares of the registrant’s no par value common stock outstanding.
Table of ContentsRADIANT SYSTEMS, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS
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Table of ContentsPART I. FINANCIAL INFORMATION
The information contained in this report is furnished by 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 Registrant’s Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission.
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Table of ContentsRADIANT SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited)
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Table of ContentsRADIANT SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of ContentsRADIANT SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED March 31, 2007 (in thousands) (unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of ContentsRADIANT SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of ContentsRADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION AND ACCOUNTING PRONOUNCEMENTS Basis of Presentation In the opinion of management, the unaudited interim condensed consolidated financial statements of Radiant Systems, Inc. (“Radiant” or the “Company”), included herein, have been prepared on a basis consistent with the December 31, 2006 audited consolidated financial statements, except for the adoption as of January 1, 2007 of FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes, and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Radiant’s Form 10-K for the year ended December 31, 2006. Radiant’s results of operations for the three months ended March 31, 2007 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. Treasury Stock The Company records treasury stock purchases at cost and allocates this value to additional paid-in capital. Net Income Per Share Basic net income per share is computed based on the weighted-average number of shares of our common stock outstanding. Diluted net income per share is computed based on the weighted-average number of shares of our common stock outstanding and dilutive stock options. The following is a reconciliation of the denominators used in the basic and diluted net income per share computations (in thousands):
For the three months ended March 31, 2007 and 2006, options to purchase approximately 2.4 million and 1.4 million shares of common stock were excluded from the above reconciliation, as the options were antidilutive for the periods then ended. Comprehensive Income The Company’s comprehensive income includes net income and foreign currency translation adjustments. Total comprehensive income for the three months ended March 31, 2007 and 2006 was approximately $2.2 million and $0.5 million, respectively. Accounting Pronouncements In February 2007, the FASB released Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”. Under SFAS 159 companies may elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. This election, called the “fair value option”, will enable some companies to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The company is currently assessing the potential impact, if any, of this statement on its financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. SFAS 157 is effective for fiscal years beginning after November 15, 2007; however, earlier adoption is encouraged. The Company is currently assessing the potential impact, if any, of this statement on its financial statements.
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Table of Contents2. STOCK-BASED COMPENSATION Radiant has adopted stock plans that provide for the grant of incentive and non-qualified stock options to directors, officers, and other employees pursuant to authorization by the Board of Directors. The exercise price of all options equals the market value on the date of the grant. In addition, Radiant provides employees stock purchase rights under its Employee Stock Purchase Plan (“ESPP”). The ESPP was suspended on December 31, 2005 in an effort to reduce future stock compensation expense. The Company reinstated the ESPP program during the third quarter of 2006 on terms that permit employees to purchase Radiant common stock at the end of each quarter at 95% of the market price on the last day of the quarter. Based on these terms, the reinstated ESPP will not result in any future stock compensation expense. The Company has authorized approximately 16.2 million shares for awards of options, of which approximately 1.1 million shares are available for future grants as of March 31, 2007. On January 1, 2006, Radiant implemented the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payments” (SFAS 123(R)), using the modified prospective transition method. SFAS 123(R) requires companies to recognize the cost for employee services received in exchange for awards of equity instruments based upon the grant-date fair value of those awards. Using the modified prospective transition method of adopting SFAS 123(R), Radiant began recognizing compensation expense for equity-based awards granted after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R), plus unvested awards granted prior to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Under this method of implementation, no restatement of prior periods was required. Equity-based compensation expense recognized under SFAS 123(R) in the condensed consolidated statements of operations for the three months ended March 31, 2007 and 2006 was approximately $0.8 million. The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. Equity based compensation expense reduced basic earnings per share by $0.03 for the three months ended March 31, 2007 and 2006 and reduced diluted earnings per share by $0.03 and $0.02, respectively, for the three months ended March 31, 2007 and 2006 The non-cash stock-based compensation expense was included in the condensed consolidated statements of operations as follows (in thousands):
For the three-month periods ended March 31, 2007 and 2006, the total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation, recorded in accordance with SFAS No. 123(R), was approximately $0.2 million and $0, respectively. The Company capitalized approximately $25,000 and $0 in compensation cost related to product development for the three month periods ended March 31, 2007 and 2006, respectively. Stock Options The exercise price of each stock option equals the market price of Radiant’s stock on the date of grant. Most options are scheduled to vest equally over a three or four-year period or when certain stock performance requirements are met. These stock performance requirements include a provision that allows for early vesting if certain stock price targets are met. The Company recognizes stock-based compensation expense using the graded vesting attribution method. Outstanding options expire no later than ten years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions used in the model for the three-month periods ended March 31, 2007 and 2006 are outlined in the following table:
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Table of ContentsThe computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on a combination of historical and implied volatilities. When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods. The risk free interest rate is based on the U.S. Treasury yield curve at the grant date, using a remaining term equal to the expected life of the option. The total expenses to be recorded in future periods will depend on several variables, including the number of share-based awards that vest, pre-vesting cancellations and the fair value of those vested awards. A summary of the changes in stock options outstanding under Radiant’s equity-based compensation plans during the three months ended March 31, 2007 is presented below:
The weighted average grant-date fair value of options granted during the three month periods ended March 31, 2007 and 2006 were $5.70 and $5.37, respectively. The total intrinsic value, the difference between the exercise price and the market price on the date of exercise, of options exercised during the three month periods ended March 31, 2007 and 2006, was approximately $0.9 million and $3.2 million, respectively. The total fair value of options that vested during the three month periods ended March 31, 2007 and 2006 was approximately $0.1 million and $0.2 million, respectively. At March 31, 2007, Radiant had approximately 2.4 million unvested options outstanding with a weighted-average grant-date fair value of $2.99. Of the 2.4 million options that were unvested at March 31, 2007, there were 0.4 million options that had a vesting period based on stock performance requirements. The unvested options have a total unrecognized compensation expense of approximately $6.5 million, net of estimated forfeitures, which will be recognized over the weighted average period of 1.62 years. Cash received from stock option exercises was approximately $1.0 million and $2.1 million during the three month periods ending March 31, 2007 and 2006, respectively.
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Table of Contents3. ACQUISITIONS AND DIVESTITURES Each of the acquisitions discussed below was accounted for using the purchase method of accounting as prescribed by Statement of Financial Accounting Standards No. 141, “Business Combinations”. Acquisition of Synchronics, Inc. On January 3, 2006, the Company acquired substantially all of the assets of Synchronics, Inc. (“Synchronics”), a supplier of business management and point-of-sale software for the retail industry. Total consideration was approximately $26.8 million and consisted of approximately $19.5 million in cash (subject to a post-closing adjustment) and 605,135 shares of restricted common stock with a value of $12.05 per share in accordance with EITF 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination.” The cash portion of the purchase price was paid on the date of closing. The operations of the Synchronics business have been included in the Company’s condensed consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Retail segment. The intangible assets acquired were valued by the Company with the assistance of independent appraisers utilizing customary valuation procedures and techniques. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed as of the date of the Synchronics acquisition:
As a result of the Synchronics acquisition, goodwill of approximately $17.0 million was recorded and assigned to the Retail segment. The goodwill is deductible for tax purposes over a period of 15 years. The following is a summary of the intangible assets acquired and the weighted-average useful lives over which they will be amortized:
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Table of Contents4. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill In accordance with SFAS No. 142, the Company evaluates the carrying value of goodwill as of January 1 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company’s annual evaluations of the carrying value of goodwill, completed on January 1, 2007 and 2006 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, 2007 are as follows (in thousands):
Intangible Assets A summary of the Company’s intangible assets as of March 31, 2007 and December 31, 2006 is as follows (in thousands):
Approximate amortization expense, assuming no future acquisitions, dispositions or impairments of intangible assets, for the following 12-month periods subsequent to March 31, 2007 are listed below (in thousands):
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Table of Contents5. INVENTORY Inventories consist principally of computer hardware and software media and are stated at the lower of cost (first-in, first-out method) or market. A summary of the Company’s inventory as of March 31, 2007 and December 31, 2006 is as follows (in thousands):
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Table of Contents6. DEBT 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. The Credit Agreement, which was amended on January 3, 2006, 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 $31 million. The expiration date of the Credit Agreement is March 31, 2010. The revolving loan amount available to the Company is derived from a monthly borrowing base calculation using the Company’s various receivables balances. The amount derived from this borrowing base calculation is further reduced by the total amount of letters of credit outstanding. Loans under the Credit Agreement will bear interest, at Radiant’s 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 Radiant’s 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, 2007, 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. The Credit Agreement is secured by the assets of the Company. As of March 31, 2007, the Company had approximately $0.6 million in letters of credit against its available borrowing base of approximately $12.1 million, and $6.5 million was outstanding against the revolving loan facility, which is included in current liabilities. In the second quarter of 2005, the Company entered into an amended and restated promissory note in the amount of $1.5 million with the previous shareholders of Aloha Technologies, Inc., acquired by the Company in January 2004. During the fourth quarter of 2005, the Company modified the amended promissory note by reducing the $1.5 million principal amount to $1.0 million. The decrease was the result of agreed upon purchase price adjustments. The principal on this note will be paid over the course of the third and fourth quarters of 2008 and the first quarter of 2009. In the fourth quarter of 2005, the Company issued approximately $4.1 million in notes payable related to the acquisition of MenuLink. The interest on the notes is calculated based on the prime rate and payments for both principal and interest are being made in equal installments over a 36-month period. The notes are scheduled to be paid off by the fourth quarter of 2008. The following is a summary of long-term debt and the related balances as of March 31, 2007 and December 31, 2006 (in thousands):
Approximate maturities of notes payable for the following 12-month periods subsequent to March 31, 2007 are listed below (in thousands):
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Table of Contents7. RESTRUCTURING CHARGES Lease Restructuring Charges – Bedford, Texas During the second quarter of 2006, Radiant relocated its offices in Bedford, Texas to a facility in Fort Worth, Texas. The Company is contractually liable for the lease payments on the abandoned Bedford facility through September 2007 (lease expiration). In accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), the Company recorded a lease restructuring charge based on the fair value of the remaining lease payments and estimated maintenance costs at the abandonment date. The restructuring charges were attributable to the Company’s Hospitality business segment. The abandonment of the Bedford facility resulted in a restructuring charge of approximately $1.4 million in the second quarter of 2006, which consisted of the fair value of the remaining lease liability and ongoing maintenance costs. During the first quarter of 2007, the Company updated its restructuring reserve analysis and reduced the reserve by $0.1 million in restructuring charges as the initial assumption regarding ongoing maintenance costs had changed. As of March 31, 2007, approximately $0.5 million related to the lease commitments remained in the restructuring reserve to be paid. The Company anticipates the remaining payments will be made by the end of the third quarter of 2007 (lease expiration). The table below summarizes the activity in the restructuring reserve (in thousands):
Lease Restructuring Charges – Alpharetta, Georgia During the third quarter of 2005, Radiant decided to consolidate certain facilities located in Alpharetta, Georgia, in order to reduce future operating costs. This resulted in the abandonment of one facility, which formerly housed the Company’s customer support call center. The restructuring charges were not attributable to any of the Company’s reportable segments. In accordance with SFAS 146, the Company recorded a lease restructuring charge based on the fair value of the remaining lease payments at the abandonment date less the estimated sublease rentals that could reasonably be obtained from the property. This consolidation resulted in a restructuring charge of approximately $1.5 million in the third quarter of 2005, which consisted of $1.2 million for facility consolidations and $0.3 million of fixed asset write-offs associated with the facility consolidation. During the first quarter of 2007, the Company updated its restructuring reserve analysis and reduced the reserve by $0.2 million in restructuring charges as the initial assumption regarding the ability to sublease the facility had changed. As of March 31, 2007, approximately $0.6 million related to the lease commitments remained in the restructuring reserve to be paid. The Company anticipates the remaining payments will be made by the fourth quarter of 2010 (lease expiration). The table below summarizes the activity in the restructuring reserve (in thousands):
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Table of Contents8. SEGMENT REPORTING The Company currently operates in two primary segments: (i) Hospitality and (ii) Retail. The reportable segments were identified based on the manner in which management reviews operating results and makes decisions regarding the allocation of the Company’s resources. Each segment focuses on delivering site management systems, including point-of-sale, self-service kiosk, and back-office systems, designed specifically for each of the core vertical markets. The Company’s segments derive revenues from the sale of (i) products including system software and hardware, and (ii) services, including client support, maintenance, training, custom software development, hosting and implementation services. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies included in the Company’s Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission. Management evaluates the performance of the segments based on net income or loss before the allocation of certain central costs. A summary of the key measures for the Company’s operating segments is as follows (in thousands):
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Table of ContentsThe reconciliation of product development expense from reportable segments to total product development expense for the three month periods ended March 31, 2007 and 2006 is as follows (in thousands):
The reconciliation of net income from reportable segments to total net income for the three month periods ended March 31, 2007 and 2006 is as follows (in thousands):
The reconciliation of other identifiable assets to total assets as of March 31, 2007 and 2006 is as follows (in thousands):
Revenues not associated with the Company’s Hospitality and Retail segments are comprised of revenues from hardware sales outside the Company’s segments. The Company distributes its technology both within the United States of America and internationally. The Company currently has international offices in Australia, the Czech Republic, the United Kingdom and Singapore. Revenues derived from international sources were approximately $6.7 million and $6.2 million for the three months ended March 31, 2007 and 2006, respectively. At March 31, 2007 and 2006, the Company had international identifiable assets, including goodwill, of approximately $14.4 million and $12.8 million, respectively, of which approximately $4.3 million and $4.1 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.
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Table of Contents9. COMMITMENTS AND CONTINGENCIES FROM DIVESTITURE OF ENTERPRISE SOFTWARE SYSTEMS BUSINESS On July 21, 2006, RedPrarie Corporation acquired BlueCube Software, formerly owned by Erez Goren, the brother of Alon Goren, our Chairman and Chief Technology Officer. As a result of this purchase, all transactions occurring between the Company and BlueCube will no longer be considered related party transactions.
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Table of Contents10. RELATED PARTY TRANSACTIONS As a result of the Synchronics acquisition which occurred in the first quarter of 2006, the Company entered into a 5-year lease agreement for property located in Memphis, Tennessee, which was the headquarters of Synchronics with Jeff Goldstein Investment Partnership. Mr. Goldstein was the previous owner of Synchronics and was employed by the company as of March 31, 2007. On April 30, 2007, the Company terminated Mr. Goldstein’s employment. This termination of employment was on a mutual basis. As a result, all future transactions occurring between the Company and Mr. Goldstein will no longer be considered related party transactions.
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Table of Contents11. INCOME TAX Radiant adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), at the beginning of fiscal year 2007. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes. As a result of the implementation the Company recognized a $1.6 million increase to reserves for uncertain tax positions. This increase was accounted for as an adjustment to the beginning balance of accumulated deficit on the Balance Sheet. Including the cumulative effect increase, at the beginning of 2007, Radiant had approximately $2.4 million of total gross unrecognized tax benefits. Of this total, $1.7M (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months. Radiant and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. For U.S. federal and most state jurisdictions, tax years after 1996 are open for examination primarily due to net operating losses and other tax attribute carryforwards. For Australia, Czech Republic and the UK, tax years after 2000, 2002 and 2004, respectively, are open for examination. The Company is not currently under examination by any taxing jurisdiction. Radiant’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company has accrued $0.1 million in penalties associated with uncertain tax positions for the period ended January 1, 2007. Interest expense associated with uncertain tax positions as of January 1, 2007 was insignificant.
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Table of Contents
Introduction Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of Radiant’s business and results of operations. This MD&A should be read in conjunction with the MD&A included in our Form 10-K for the year ended December 31, 2006 as well as Radiant’s Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. MD&A consists of the following sections:
Overview We are a leading provider of retail technology focused on the development, installation and delivery of solutions for managing site operations of hospitality and retail businesses. Our point-of-sale and back-office technology is designed to enable businesses to deliver exceptional client service while improving profitability. We offer a full range of products that are tailored to specific hospitality and retail market needs, including hardware, software and professional services. The Company offers best-of-breed solutions designed for ease of integration in managing site operations, thus enabling operators to improve customer service while reducing costs. We believe our approach to site operations is unique in that our product solutions provide enterprise visibility and control at the site, field and headquarters levels. We operate in two primary segments: (i) Hospitality, and (ii) Retail. Each segment focuses on delivering site management systems, including point-of-sale, self-service kiosk and back-office systems, designed specifically for each of the core vertical markets. Acquisition of Synchronics, Inc. On January 3, 2006, we acquired substantially all of the assets of Synchronics, Inc. (“Synchronics”), a supplier of business management and point-of-sale software for the specialty retail industry. Total consideration was approximately $26.8 million and consisted of approximately $19.5 million in cash (subject to a post-closing adjustment) and 605,135 shares of restricted common stock with a value of $12.05 per share in accordance with EITF 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination.” The cash portion of the purchase price was paid on the date of closing. The operations of the Synchronics business have been included in our condensed consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Retail segment. To the extent that we believe acquisitions or joint ventures can position the Company to better to serve its current segments, we will continue to pursue such opportunities in the future.
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Table of ContentsResults of Operations Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006 and December 31, 2006 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 2007 were approximately $32.0 million. This is an increase of $5.6 million, or 21%, from the same period in 2006, and a decrease of $5.1 million, or 14%, from the fourth quarter of 2006. The year over year quarterly increase is primarily due to the continued growth and the integration of the acquisitions that took place in late 2005 and early 2006 of MenuLink and Synchronics, the continued expansion within the Hospitality segment, both through our direct sales force and through the reseller channel, and the continued success of selling the Company’s hardware products into its hospitality markets. The decrease from the fourth quarter of 2006 was primarily due to the cyclical nature of capital expenditures throughout the retail marketplace. 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. Revenues from client support, maintenance and other services during the first quarter of 2007 were approximately $25.4 million. This is an increase of 13% from the same period in 2006 and an increase of 7% from the fourth quarter of 2006. These increases are primarily due to the additional revenues generated in both software and hardware support and maintenance resulting from increased software and hardware sales in 2006 and the first quarter of 2007, the increase in revenues generated from the Company’s Hospitality subscription products due to continued marketing efforts around this product line, and the additional revenues generated through the growth of 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 costs for internally developed software 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 2007 increased by $2.7 million, or 22% as compared to the same period in 2006, while the gross profit percentage remained constant at 47%. Systems sales gross profit for the first quarter of 2007 decreased by approximately $3.0 million, or 16%, compared to the fourth quarter of 2006, while the gross profit percentage decreased by 2 points. This decrease was primarily due to a lower volume of hardware sales during the first quarter of 2007 as compared to the fourth quarter of 2006. The cyclical nature of this decline in revenues has resulted in a decrease in our hardware margins due to an increase in our fixed overhead rate. 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 Company’s services operations. The gross profit on service sales was $9.8 million in both the first quarter of 2007 and 2006, while the gross profit percentage decreased by 5 points to 39%. The gross profit percentage on service sales increased in the first quarter of 2007 over the fourth quarter of 2006 by 2%. The decrease in the gross profit percentage on service sales from 2006 to 2007 is primarily due to normal fluctuations between product development projects and maintenance projects that occur throughout the year. The increase in the margin percentage from the fourth quarter of 2006 is a result of continued focus on improving margins within our consulting, custom development and maintenance businesses. Segment revenues – During the first quarter of 2007, total revenues in the Hospitality business segment increased by approximately $7.0 million, or 22%, compared to the same period in 2006, and increased by approximately $2.2 million, or 6%, compared to the fourth quarter of 2006. These increases are primarily due to the successful integration of MenuLink into our business model, the continued volume growth within the reseller channel, and improved demand throughout the industry. During the first quarter of 2007, total revenues in the Retail business segment increased by approximately $1.4 million, or 8%, compared to the same period in 2006, and decreased by approximately $5.2 million, or 23%, compared to the fourth quarter of 2006. The majority of the increase from the first quarter of 2006 is a result of the successful integration of Synchronics into our business model. The decrease from the fourth quarter of 2006 is primarily due to the cyclical nature of capital expenditures throughout the Retail industry.
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Table of ContentsSegment net income before allocation of central costs – The Company measures segment profit based on net income before the allocation of certain central costs. During the first quarter of 2007, total net income before allocation of central costs in the Hospitality business segment increased by approximately $3.0 million, or 73%, as compared to the same period in 2006. These increases were primarily due to additional revenues resulting from the successful integration of MenuLink into our business model, the continued growth within the reseller channel, and improved demand throughout the industry. During the first quarter of 2007, total net income before allocation of central costs in the Retail business segment increased by approximately $1.0 million, or 41%, as compared to the same period in 2006. These increases are primarily due to the successful integration of Synchronics into our business model and improved demand throughout the retail industry, specifically in the petroleum and convenience store market. Total operating expenses – The Company’s total operating expenses increased by approximately $0.5 million, or 2%, during the first quarter of 2007 as compared to the same period in 2006, and decreased by approximately $1.1 million, or 5%, from the fourth quarter of 2006 due to the following:
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Table of ContentsInterest income and expense – The Company’s interest income is derived from the investment of the Company’s cash and cash equivalents and has remained flat in the three month period ended March 31, 2007 as compared to the same period in 2006. The Company’s interest expense includes interest expense incurred on its long-term debt and capital lease obligations. Interest expense increased by approximately $0.1 million, or 10%, in the first quarter of 2007 compared to the same period in 2006, and decreased by $0.1 million, or 16%, from the fourth quarter of 2006. The increase from the first quarter of 2006 is attributable to the, additional short-term borrowings to finance stock repurchases and short-term capital needs, and an increase in the prime rate of interest. The decrease from the fourth quarter of 2006 is a result of approximately $1.8 million of principal payments and a decrease in the need for short-term borrowings during the quarter.
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Table of ContentsLiquidity 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. The Credit Agreement, which was amended on January 3, 2006, 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 $31 million. The expiration date of the Credit Agreement is March 31, 2010. The revolving loan amount available to the Company is derived from a monthly borrowing base calculation using the Company’s various accounts receivable balances. The amount derived from this borrowing base calculation is further reduced by the total amount of letters of credit outstanding. Loans under the Credit Agreement will bear interest, at Radiant’s 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, with which the Company was in compliance as of March 31, 2007. As of March 31, 2007, the Company had approximately $0.6 million in letters of credit against its available borrowing base of approximately $12.1 million, and $6.5 million was outstanding against the revolving loan facility. The Company’s working capital increased by approximately $3.7 million, or 13%, to $33.4 million at March 31, 2007 as compared to $29.7 million at December 31, 2006. The Company has historically funded its business through cash generated by operations. Cash used in operations during the three months ended March 31, 2007 was approximately $0.7 million. Cash from operations was mainly generated through income from operations, adjusted to exclude the effect of non-cash charges including depreciation, amortization, lease restructuring, and stock-based compensation. In addition, the Company received significant amounts of cash for calendar year support and maintenance which has been deferred and will be recognized as revenue over the course of 2007. These increases in cash were offset by an increase in our accounts receivable and inventory balances. The increase in receivables is due to normal quarterly fluctuations and the growth of the business, as reflected in the year over year revenue increase. The increase in inventory is also due to normal quarterly fluctuations and anticipation of increases in hardware shipments in future quarters. The decrease in accrued expenses is a result of year-end bonuses being paid out during the first quarter of 2007. If near-term demand for the Company’s products weakens or if significant anticipated sales in any quarter do not close when expected, the availability of funds from operations may be adversely affected. Cash provided by operating activities during the three months ended March 31, 2006 was approximately $1.3 million. Cash from operations 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. Cash used in investing activities during the three months ended March 31, 2007 was approximately $1.3 million. Approximately $0.5 million of the cash was invested in property and equipment. The Company continued to increase its investment in future products by investing $0.9 million in internally developed capitalizable software during the first quarter of 2007. Cash used in investing activities during the three months ended March 31, 2006 was approximately $21.9 million. Approximately $19.5 million of the cash was used in the acquisition of Synchronics. Approximately $2.0 million of cash was invested in property and equipment, most of which was a result of renovations in the Company’s manufacturing facility and the build-out of our new satellite office location in Fort Worth, Texas. Approximately $0.4 million was invested in internally developed capitalizable software during the three months ended March 31, 2006. Cash used in financing activities during the three months ended March 31, 2007 was approximately $0.4 million. Financing activities in the first quarter of 2007 included cash proceeds from employees for the exercise of stock options, and repayment of promissory notes related to the MenuLink acquisition and scheduled payments under the Credit Agreement. Cash used in financing activities during the three months ended March 31, 2006 was approximately $16.8 million. Financing activities in the first quarter of 2006 included cash received under borrowings from the Credit Agreement, as amended (see Note 6 to the condensed consolidated financial statements), cash proceeds received from employees for the exercise of stock options and repayment of promissory notes related to the MenuLink acquisition, repurchase of common stock, and scheduled payments under the Credit Agreement. 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 most common transactions in the market could require cash of $10 million to $50 million. The company would consider more substantial strategic opportunities as they arise that may require considerably more capital. Any material acquisition could result in a decrease in the Company’s working capital, depending on the amount, timing and nature of the consideration to be paid. In addition, any material acquisitions of complementary and synergistic companies, products or technologies could require that the Company 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.
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Table of ContentsThe Company leases office space, equipment and certain vehicles under non-cancelable operating lease agreements expiring on various dates through 2013. Additionally, the Company leases computer equipment under capital lease agreements which expire on various dates through August 2010. Contractual obligations as of March 31, 2007 are as follows (in thousands):
As of March 31, 2007, the noncurrent portion of our income tax liability, including accrued interest and penalties related to unrecognized tax benefits, is $2.4 million. At this time, the settlement period for the noncurrent portion of our income tax liability cannot be determined; however, it is not expected to be due within the next twelve months. The Company will include its income tax liabilities in the “Aggregate Contractual Obligations” table in its Annual Report on Form 10-K for the year ended December 31, 2007.
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Table of ContentsCritical Accounting Policies and Procedures General The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to client programs and incentives, product returns, bad debts, inventories, intangible assets, income taxes, and commitments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 10-K for the fiscal year ended December 31, 2006, except as follows: In July 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which became effective for Radiant beginning in 2007. FIN 48 addressed the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The adoption of FIN 48 has resulted in a transition adjustment reducing beginning accumulated deficit by $0.9 million. If recognized, the tax portion of the adjustment would affect the effective tax rate. For additional information regarding the adoption of FIN 48, see Note 11, Income Taxes. For further discussion of the Company’s critical accounting estimates related to income taxes, see the 2006 Annual Report on Form 10-K. Accounting Pronouncements In February 2007, the FASB released Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”. Under SFAS 159 companies may elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. This election, called the “fair value option”, will enable some companies to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The company is currently assessing the potential impact, if any, of this statement on its financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. SFAS 157 is effective for fiscal years beginning after November 15, 2007; however, earlier adoption is encouraged. The Company is currently assessing the potential impact, if any, of this statement on its financial statements.
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Table of ContentsForward-Looking Statements This Quarterly Report on Form 10-Q of Radiant Systems, Inc. and its subsidiaries (“Radiant,” “Company,” “we,” “us,” or “our”) contains forward-looking statements. All statements in this Quarterly Report on Form 10-Q, including those made by the management of Radiant, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Radiant’s future financial results, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the Company’s 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 Radiant’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Radiant or on its behalf. Radiant undertakes no obligation to revise or update any forward-looking statements.
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The Company’s financial instruments that are subject to market risks are its long-term debt. During the first quarter of 2007, the weighted average interest rate on its long-term debt was approximately 8.5%. A 10.0% increase in this rate would have impacted interest expense by approximately $72,000 for the three month period ended March 31, 2007. As more fully explained in Note 9 to the condensed consolidated financial statements, the Company’s revenues derived from international sources were approximately $6.7 million and $6.2 million for the three months ended March 31, 2007 and 2006, respectively. The Company’s international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, the Company’s future results could be materially adversely impacted by changes in these or other factors. The effects of foreign exchange rate fluctuations on the Company’s results of operations and financial position during the three month periods ended March 31, 2007 and 2006 were not material.
The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known on a timely basis to the officers who certify its financial reports and to other members of senior management and the Company’s board of directors. Based on their evaluation as of March 31, 2007, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. During the quarter ended March 31, 2007, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Not applicable.
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Table of ContentsPART II. OTHER INFORMATION
The following exhibits are filed with or incorporated by reference into this report. The exhibits which are denominated by an asterisk (*) were previously filed as a part of, and are hereby incorporated by reference from (i) a Registration Statement on Form S-1 for the Registrant, Registration No. 333-17723, as amended (“2/97 S-1”), (ii) a Registration Statement on Form S-1 for the Registrant, Registration No. 333-30289 (“6/97 S-1”), (iii) the Registrant’s Form 8-K filed January 9, 2006 (the “January 9, 2006 8-K”), and (iv) the Registrant’s Form 10-Q for the quarter ended June 30, 2006 (“6/30/06 10-Q”).
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Table of ContentsSIGNATURES 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.
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