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Radiant Systems 10-Q 2010
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 0-22065

 

 

RADIANT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   11-2749765

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3925 Brookside Parkway, Alpharetta, Georgia   30022
(Address of principal executive offices)   (Zip code)

(770) 576-6000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and has posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 2, 2010, there were 38,998,231 shares of the registrant’s no par value common stock outstanding.

 

 

 


Table of Contents

 

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

          PAGE  

PART I

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements      3   
   Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009 (unaudited)      3   
   Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2010 (unaudited) and 2009 (unaudited)      4   
   Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2010 (unaudited)      5   
   Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 (unaudited) and 2009 (unaudited)      6   
   Notes to Condensed Consolidated Financial Statements (unaudited)      8   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      35   

Item 4.

   Controls and Procedures      35   

PART II

   OTHER INFORMATION   

Item 6.

   Exhibits      36   

Signatures

        37   

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

     September 30,
2010
    December 31,
2009
 
ASSETS   

Current assets

    

Cash and cash equivalents

   $ 57,623      $ 15,521   

Accounts receivable, net

     57,499        42,515   

Inventories

     38,175        29,662   

Deferred tax assets

     6,061        5,690   

Other current assets

     3,235        4,587   
                

Total current assets

     162,593        97,975   

Property and equipment, net

     23,953        24,923   

Software development costs, net

     13,046        11,810   

Deferred tax assets, non-current

     2,096        1,323   

Goodwill

     109,575        107,819   

Intangible assets, net

     35,691        42,428   

Other long-term assets

     9,693        2,319   
                

Total assets

   $ 356,647      $ 288,597   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities

    

Current portion of long-term debt

   $ 6,000      $ 6,000   

Accounts payable

     18,963        17,724   

Accrued liabilities

     28,077        23,462   

Customer deposits and unearned revenues

     27,421        21,157   

Current portion of capital lease payments

     527        842   
                

Total current liabilities

     80,988        69,185   

Capital lease payments, net of current portion

     238        576   

Long-term debt, net of current portion

     10,243        56,626   

Deferred tax liabilities, non-current

     4,886        4,265   

Other long-term liabilities

     11,727        4,602   
                

Total liabilities

     108,082        135,254   
                

Shareholders’ equity

    

Preferred stock, no par value; 5,000,000 shares authorized, no shares issued

              

Common stock, no par value; 100,000,000 shares authorized; 38,808,547 and 33,239,198 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively

              

Additional paid-in capital

     242,470        164,769   

Retained earnings (accumulated deficit)

     6,780        (9,081

Accumulated other comprehensive loss

     (685     (2,345
                

Total shareholders’ equity

     248,565        153,343   
                

Total liabilities and shareholders’ equity

   $ 356,647      $ 288,597   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2010     2009     2010     2009  

Revenues:

        

Systems

   $ 42,180      $ 29,619      $ 118,565      $ 86,499   

Maintenance, subscription and transaction services

     36,993        33,501        108,769        96,781   

Professional services

     10,076        7,820        28,490        26,395   
                                

Total revenues

     89,249        70,940        255,824        209,675   

Cost of revenues:

        

Systems

     23,589        16,051        65,955        45,278   

Maintenance, subscription and transaction services

     17,497        16,340        52,023        47,430   

Professional services

     6,903        5,353        20,376        17,401   
                                

Total cost of revenues

     47,989        37,744        138,354        110,109   
                                

Gross profit

     41,260        33,196        117,470        99,566   
                                

Operating expenses:

        

Product development

     6,670        5,911        18,567        16,624   

Sales and marketing

     11,817        10,288        35,374        31,378   

Depreciation of fixed assets

     1,466        1,143        4,416        3,625   

Amortization of intangible assets

     2,157        2,380        6,509        6,969   

General and administrative

     10,087        7,701        29,231        26,142   

Impairment of goodwill (see Note 4)

                   (313       

Other charges and income, net (see Note 8)

                          1,153   
                                

Total operating expenses

     32,197        27,423        93,784        85,891   
                                

Income from operations

     9,063        5,773        23,686        13,675   

Interest income

     (116     (16     (123     (55

Interest expense

     293        542        1,050        1,869   

Other income, net

     (3     (21     (128     (88
                                

Income before taxes

     8,889        5,268        22,887        11,949   

Income tax provision

     1,387        1,847        7,026        4,321   
                                

Net income

   $ 7,502      $ 3,421      $ 15,861      $ 7,628   
                                

Net income per share:

        

Basic income per share

   $ 0.21      $ 0.10      $ 0.46      $ 0.23   

Diluted income per share

   $ 0.20      $ 0.10      $ 0.44      $ 0.23   

Weighted average shares outstanding:

        

Basic

     35,354        33,002        34,290        32,834   

Diluted

     36,916        34,269        35,808        33,500   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(in thousands)

(unaudited)

 

    

 

Common Stock

     Additional
Paid-in
Capital
    (Accumulated
Deficit)

Retained
Earnings
     Accumulated
Other

Comprehensive
Income (Loss)
    Total  
            
     Shares     Amount            

BALANCE, December 31, 2009

     33,239      $      $  164,769      $  (9,081)       $  (2,345)      $  153,343   
                                                  

Components of comprehensive income:

              

Net income

                           15,861                15,861   

Foreign currency translation adjustment

                                   1,660        1,660   
                                                  

Total comprehensive income

                           15,861         1,660        17,521   

Exercise of employee stock options

     1,902                14,315                       14,315   

Stock issued under Employee Stock Purchase Plan

     11                166                       166   

Net tax benefits related to stock-based compensation

                    3,940                       3,940   

Restricted stock awards

     214                1,910                       1,910   

Stock-based compensation

                    2,072                       2,072   

Issuance of common stock

     3,502                56,365                       56,365   

Tax withholdings related to net share settlement of stock options

                    (421                    (421

Retirement of repurchased Company stock

     (60             (646                    (646
                                                  

BALANCE, September 30, 2010

     38,808      $       $ 242,470      $ 6,780       $ (685   $ 248,565   
                                                  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

 

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the nine months ended
September 30,
 
     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 15,861      $ 7,628   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     13,078        11,942   

Provision for deferred income taxes

     (608     1,631   

Impairment of goodwill

     (313       

Stock-based compensation expense

     3,971        3,555   

Other charges and income, net (see Note 8)

            (190

Changes in assets and liabilities, net of the effects of acquisitions:

    

Accounts receivable

     (15,220     3,069   

Inventories

     (8,627     2,418   

Other assets

     2,154        (2,239

Accounts payable

     1,700        (2,331

Accrued liabilities

     4,682        7,867   

Customer deposits and unearned revenue

     2,057        3,802   

Other liabilities

     3,020        (495
                

Net cash provided by operating activities

     21,755        36,657   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (4,379     (4,217

Capitalized software development costs

     (2,913     (3,307

Proceeds from notes receivable

     233          

Purchase of customer list

            (2,000

Proceeds from sale of building

            216   

Purchase price adjustment for Hospitality EPoS

            (97
                

Net cash used in investing activities

     (7,059     (9,405

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net proceeds from issuance of common stock

     56,491          

Proceeds from exercise of employee stock options

     13,669        854   

Proceeds from shares issued under Employee Stock Purchase Plan

     166        169   

Tax benefits related to stock-based compensation

     3,940        114   

Tax withholdings related to net share settlement of stock options

     (421       

Principal payments on capital lease obligations

     (653     (626

Principal payments on term loan under JPM Credit Agreement

     (4,500     (4,500

Proceeds from revolving loan under the JPM Credit Agreement

     16,350        21,200   

Repayments of revolving loan under the JPM Credit Agreement

     (58,350     (47,700

Proceeds from research and development notes payable

     134        239   

Repayments of research and development notes payable

            (81
                

Net cash provided by (used in) financing activities

     26,826        (30,331
                

Effect of exchange rate changes on cash and cash equivalents

     580        1,332   
                

Increase (decrease) in cash and cash equivalents

     42,102        (1,747

Cash and cash equivalents at beginning of period

     15,521        16,450   
                

Cash and cash equivalents at end of period

   $ 57,623      $ 14,703   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the nine months ended
September 30,
 
     2010     2009  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid for interest

   $ 912      $ 1,827   

Cash paid for income taxes

   $ 6,102      $ 1,795   

SCHEDULE OF NON-CASH TRANSACTIONS:

    

Assets acquired under capital leases

   $      $ 155   

Purchases of property and equipment

   $ 28      $ 126   

Amendment to agreement with Century Payments, Inc.

   $ 9,000      $   

Removal of capitalized contract costs

   $ (2,849   $   

Net share settlement of stock options exercised, repurchased and retired

   $ 646      $   

Accrued expenses related to issuance of common stock

   $ (126   $   

Non-cash transactions related to acquisitions:

    

Purchase price adjustment related to Hospitality EPoS

   $      $ (16

Purchase price adjustment related to Jadeon

   $      $ (108

Purchase price adjustment related to Orderman

   $      $ (214

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION AND ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

The information contained in this report is filed by Radiant Systems, Inc. and subsidiaries (“Radiant,” the “Company,” “we,” “us,” or “our”). In the opinion of management, the unaudited interim condensed consolidated financial statements of Radiant, included herein, have been prepared on a basis consistent with the December 31, 2009 audited consolidated financial statements, and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Radiant’s Form 10-K for the year ended December 31, 2009, as updated and superseded by Radiant’s Current Report on Form 8-K dated June 25, 2010 (the “June 25, 2010 8-K”). Radiant’s results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of future operating results.

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial statements of Radiant have been prepared in accordance with generally accepted accounting principles applicable to interim financial statements, the general instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

As described in the June 25, 2010 8-K, effective January 1, 2010, the Company reorganized its business segments to better reflect the Company’s management structure and revenue streams as well as to better identify the operational and geographic scope of its segments. The change resulted in three reportable segments: (1) Hospitality-Americas, (2) Retail & Entertainment-Americas and (3) International. Prior to this change, the Company’s reportable segments were Hospitality and Retail. The June 25, 2010 8-K also provides prior-period segment information which has been recast as a result of these organizational changes.

Repurchased or Reacquired Company Stock

The Company records repurchased or reacquired Company stock at cost and allocates this value to additional paid-in capital.

Net Income Per Share

Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding. In the event of a net loss, dilutive loss per share is the same as basic loss per share. Diluted net income per share includes the dilutive effect of stock options. A reconciliation of the weighted average number of common shares outstanding assuming dilution is as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Weighted average common shares outstanding

     35,354         33,002         34,290         32,834   

Dilutive effect of outstanding stock options

     1,562         1,267         1,518         666   
                                   

Weighted average common shares outstanding assuming dilution

     36,916         34,269         35,808         33,500   
                                   

For the three months ended September 30, 2010 and 2009, options to purchase approximately 0.7 million and 3.2 million shares of common stock, respectively, were excluded from the above reconciliation, as the options were anti-dilutive for the periods then ended. For the nine months ended September 30, 2010 and 2009, options to purchase approximately 1.5 million and 3.9 million shares of common stock, respectively, were excluded from the above reconciliation, as the options were anti-dilutive for the periods then ended.

 

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Table of Contents

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Comprehensive Income (Loss)

The Company follows FASB ASC Topic 220, Comprehensive Income, (“ASC 220”). ASC 220 establishes the rules for the reporting of comprehensive income and its components. The Company’s comprehensive income (loss) includes net income and foreign currency translation adjustments. Total comprehensive income for the three months ended September 30, 2010 and 2009 was approximately $16.4 million and $9.2 million, respectively. Total comprehensive income for the nine months ended September 30, 2010 and 2009 was approximately $17.5 million and $22.4 million, respectively.

Financing Costs Related to Long-Term Debt

Costs associated with obtaining long-term debt are deferred and amortized over the term of the related debt. The Company incurred financing costs equal to $1.2 million related to the JPM Credit Agreement during the first half of 2008. The costs were deferred and are being amortized over the life of the loan, which is five years. Amortization of these financing costs was approximately $0.1 million for each of the three month periods ended September 30, 2010 and 2009. Amortization of these financing costs was approximately $0.2 million and $0.3 million for the nine months ended September 30, 2010 and 2009, respectively.

Fair Value of Financial Instruments

The Company follows the guidance of FASB ASC section 825-10-50 (“ASC 825-10-50”) for disclosures about fair value of its financial instruments. The Company also follows the guidance of FASB ASC section 820-10-35 (“ASC 820-10-35”) to measure the fair value of its financial instruments. ASC 820-10-35 establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America (“U.S. GAAP”) and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10-35 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by ASC 820-10-35 are described below:

 

   

Level 1 – Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

 

   

Level 2 – Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

 

   

Level 3 – Pricing inputs that are generally unobservable inputs and not corroborated by market data.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

   

Cash and equivalents, accounts receivable, notes receivable, and accounts payable – The carrying amount of these items approximates fair value.

 

   

Long-term debt — Term loan – To estimate the fair value of our term loan, which is not quoted on an exchange, the Company used those interest rates that were currently available to it for issuance of debt with similar terms and remaining maturities. At September 30, 2010, the fair value of the $15.5 million principal amount of the term loan under the JPM Credit Agreement was approximately $15.2 million.

 

   

Long-term debt — Revolving credit loan – To estimate the fair value of our revolving credit facility, which is not quoted on an exchange, the Company uses those interest rates currently available to it in conjunction with management’s estimate of the amounts and timing of the repayment of principal amounts and related interest. At September 30, 2010, the Company had no revolving loan facility borrowings. See Note 7 for additional discussion of the Company’s credit facility.

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Accounting Pronouncements

Recently Issued Standards

In October 2009, the FASB issued Accounting Standards Update No. 2009-14 (“ASU 2009-14”), Software (Topic 985): Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force. This ASU establishes that tangible products that contain software that works together with the nonsoftware components of the tangible product to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. These items should be accounted for under other appropriate revenue recognition guidance. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011 and concurrently with ASU 2009-13, which is described below. Full retrospective application is optional and early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the impact of this ASU on our financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force. This ASU amends the criteria for separating consideration in multiple-deliverable arrangements, which will, as a result, separate multiple-deliverable arrangements more often than under existing U.S. GAAP. Additionally, this ASU establishes a selling price hierarchy for determining the selling price of a deliverable. The ASU also eliminates the residual method of revenue allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. This guidance requires that management determine its best estimate of selling price in a manner consistent with that used to determine the price to sell the deliverable on a stand-alone basis. This ASU significantly expands the disclosures required for multiple-deliverable revenue arrangements with the objective of disclosing judgments related to these arrangements and the effect that the use of the relative selling-price method and changes in those judgments have on the timing and amount of revenue recognition. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011 and concurrently with ASU 2009-14, which is described above. Full retrospective application is optional and early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the impact of this ASU on our financial statements.

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

2. STOCK-BASED COMPENSATION

Radiant has adopted equity incentive plans that provide for the grant of incentive and non-qualified stock options and restricted stock awards to directors, officers and other employees pursuant to authorization by the Board of Directors. The exercise price of all options equals the market value on the date of the grant. In addition, Radiant provides employees stock purchase rights under its Employee Stock Purchase Plan (“ESPP”). The ESPP permits employees to purchase Radiant common stock at the end of each quarter at 95% of the market price on the last day of the quarter. Based on these terms, the ESPP will not result in any future stock compensation expense. The Company has authorized approximately 19.6 million shares for awards of stock options and restricted stock, of which approximately 1.7 million shares are available for future grants as of September 30, 2010.

The Company accounts for equity-based compensation in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), which requires the Company to measure the cost of employee services received in exchange for all equity awards granted, including stock options and restricted stock awards, based on the fair market value of the award as of the grant date. The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. The non-cash stock-based compensation expense from stock options and restricted stock awards was included in the condensed consolidated statements of operations as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Cost of revenues - systems

   $ 48      $ 28      $ 131      $ 105   

Cost of revenues - maintenance, subscription and transaction services

     28        19        73        62   

Cost of revenues - professional services

     41        66        107        227   

Product development

     142        56        345        177   

Sales and marketing

     240        154        648        583   

General and administrative

     816        643        2,667        2,402   
                                

Total non-cash stock-based compensation expense

     1,315        966        3,971        3,556   

Estimated income tax benefit

     (497     (354     (1,501     (1,274
                                

Total non-cash stock-based compensation expense, net of tax benefit

   $ 818      $ 612      $ 2,470      $ 2,282   
                                

Impact on net income per share and diluted net income per share

   $ 0.02      $ 0.02      $ 0.07      $ 0.07   
                                

The Company capitalized less than $0.1 million in stock-based compensation expense related to product development in each of the three and nine-month periods ended September 30, 2010 and 2009.

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Stock Options

The exercise price of each stock option equals the market price of Radiant’s common stock on the date of grant. Most options are scheduled to vest equally over a three or four-year period or when certain stock performance requirements are met. These stock performance requirements include a provision that allows for early vesting if certain stock price targets are met. The Company recognizes stock-based compensation expense using the graded vesting attribution method. Outstanding options expire no later than ten years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The weighted average assumptions used in the model for the three and nine-month periods ended September 30, 2010 and 2009 are outlined in the following table:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2010    2009    2010    2009

Expected volatility

   71%    70%    69 -71%    69% -70%

Expected life (in years)

   3-4    3-4    3-4    3-4

Expected dividend yield

   0.0%    0.0%    0.0%    0.0%

Risk-free interest rate

   1.1%    1.9%    1.1 -2.0%    1.6 -2.2%

The computation of the expected volatility assumption used in the Black-Scholes-Merton calculations for new grants is based on a combination of historical and implied volatilities. When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods. The risk-free interest rate is based on the U.S. Treasury yield curve at the grant date, using a remaining term equal to the expected life of the option. The total expense to be recorded in future periods will depend on several variables, including the number of stock-based awards that vest, pre-vesting cancellations and the fair value of those vested awards.

A summary of the changes in stock options outstanding under our stock-based compensation plans during the nine months ended September 30, 2010 is presented below:

 

(in thousands, except per share data)

   Number of
Shares
    Weighted-Average
Exercise Price
     Weighted-Average
Remaining
Contractual Term
(in years)
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2009

     5,875      $ 9.37         3.30       $ 14,656   

Granted

     536      $ 13.47         

Exercised

     (1,902   $ 7.53         

Forfeited or cancelled

     (61   $ 17.96         
                                  

Outstanding at September 30, 2010

     4,448      $ 10.53         3.15       $ 29,319   
                                  

Vested or expected to vest at September 30, 2010

     4,389      $ 10.53         3.11       $ 28,923   

Exercisable at September 30, 2010

     3,191      $ 10.75         2.40       $ 20,342   

Exercisable at December 31, 2009

     4,455      $ 9.51         2.98       $ 10,278   

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

The weighted average grant-date fair value of options granted during the three-month periods ended September 30, 2010 and 2009 was $8.02 and $5.17, respectively. The weighted average grant-date fair value of options granted during the nine-month periods ended September 30, 2010 and 2009 was $7.21 and $1.69, respectively. The total intrinsic value, the difference between the exercise price and the market price on the date of exercise, of options exercised during the three-month periods ended September 30, 2010 and 2009, was $8.7 million and $0.9 million, respectively, and $14.8 million and $1.0 million for the nine-month periods ended September 30, 2010, and 2009, respectively. The total fair value of options that vested during each of the three-month periods ended September 30, 2010 and 2009 was approximately $0.2 million. The total fair value of options that vested during the nine-month periods ended September 30, 2010 and 2009 was approximately $2.9 million and $3.2 million, respectively. There were unvested options outstanding to purchase approximately 1.3 million shares and 1.8 million shares as of September 30, 2010 and 2009, respectively, with a weighted-average grant-date fair value of $4.92 and $3.40, respectively. None of the 1.3 million shares that were unvested at September 30, 2010 had a vesting period based on stock performance requirements. Of the 1.8 million shares that were unvested at September 30, 2009, there were 0.3 million shares that had a vesting period based on stock performance requirements. The unvested shares have a total unrecognized compensation expense as of September 30, 2010 and 2009 equal to approximately $3.1 million and $2.0 million, respectively, net of estimated forfeitures, which will be recognized over the weighted average periods of 1.1 years and 0.9 years, respectively. The Company recognized stock-based compensation expense related to employee and director stock options equal to approximately $0.7 million and $0.6 million for the three months ended September 30, 2010 and 2009, respectively, and approximately $2.0 million and $2.3 million for the nine months ended September 30, 2010 and 2009, respectively. Cash received from stock options exercised was approximately $7.6 million and $0.8 million during the three-month periods ended September 30, 2010 and 2009, respectively, and $13.7 million and $0.9 million for the nine-month periods ended September 30, 2010 and 2009, respectively.

Restricted Stock Awards

The Company awarded less than 0.1 million shares of restricted stock to employees during each of the three-month periods ended September 30, 2010 and 2009. The Company awarded approximately 0.2 million shares and 0.4 million shares of restricted stock to employees during the nine-month periods ended September 30, 2010 and 2009, respectively. These restricted stock awards vest at various times over a three-year period from the date of grant. The weighted average grant-date fair value of restricted stock awards granted during the three-month periods ended September 30, 2010 and 2009 was $14.82 and $10.11 per share, respectively. The weighted average grant-date fair value of restricted stock awards granted during the nine-month periods ended September 30, 2010 and 2009 was $13.55 and $3.35 per share, respectively. The Company recognized stock-based compensation expense related to restricted stock awards equal to approximately $0.6 million and $0.4 million for the three months ended September 30, 2010 and 2009, respectively, and approximately $1.9 million and $1.3 million for the nine months ended September 30, 2010 and 2009, respectively. The total fair value of restricted stock awards that vested during the three-month period ended September 30, 2010 was less than $0.1 million. No restricted stock awards vested during the three-month period ended September 30, 2009. The total fair value of restricted stock awards that vested during the nine-month periods ended September 30, 2010 and 2009 was approximately $0.7 million and $0.4 million, respectively. There were unvested restricted stock awards outstanding at September 30, 2010 and 2009 equal to approximately 0.8 million shares and 0.6 million shares, respectively, with a weighted-average grant-date fair value of $8.62 and $6.90 per share, respectively. The unvested restricted stock awards had a total unrecognized compensation expense as of September 30, 2010 and 2009 equal to approximately $3.5 million and $2.5 million, respectively, which will be recognized over the weighted average periods of 1.5 years and 2.0 years, respectively. The unvested restricted stock awards outstanding are included in the calculation of common shares outstanding as of September 30, 2010.

3. ACQUISITIONS

There were no acquisitions during the periods covered by this report.

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

4. GOODWILL AND INTANGIBLE ASSETS

In accordance with FASB ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”), we classify purchased intangibles into three categories: (1) goodwill; (2) finite-lived intangible assets subject to amortization; and (3) indefinite-lived intangible assets. Goodwill and indefinite-lived intangible assets are not amortized. As required by ASC 350, these assets are tested for impairment on at least an annual basis.

Goodwill

Goodwill is recognized when the consideration paid for a business acquisition exceeds the fair value of the net assets acquired, including tangible and intangible assets. Changes in the carrying amount of goodwill for the nine months ended September 30, 2010 are as follows (in thousands):

 

     Hospitality-
Americas
    Retail &
Entertainment-
Americas
    International     Total  

Gross goodwill

     47,770        58,346        24,883        130,999   

Accumulated impairment losses

     (2,252     (17,008     (3,920     (23,180
                                

BALANCE, December 31, 2009

   $ 45,518      $ 41,338      $ 20,963      $ 107,819   
                                

Impairment charge adjustment for Quest (1)

            313               313   

Currency translation adjustments related to acquisitions

            3,385        57        3,442   

Currency translation adjustments related to impairment losses

            (1,609     (390     (1,999
                                

Gross goodwill

     47,770        61,731        24,940        134,441   

Accumulated impairment losses

     (2,252     (18,304     (4,310     (24,866
                                

BALANCE, September 30, 2010

   $ 45,518      $ 43,427      $ 20,630      $ 109,575   
                                

 

(1) During the year ended December 31, 2009, the Company recognized a provisional non-cash charge of approximately $17.0 million related to the impairment of Quest’s goodwill. A true-up adjustment of approximately $0.3 million related to this impairment charge was recorded in the second quarter of 2010.

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Intangible Assets

Intangible assets recorded in connection with business acquisitions are stated at their fair value, determined as of the date of acquisition, less accumulated amortization, if applicable. These assets consist of finite-lived and indefinite-lived intangibles, including core and developed technology, customer relationships, noncompete agreements, trademarks and tradenames. Amortization of finite-lived intangible assets is recognized on a straight-line basis over their estimated useful lives. A summary of the Company’s intangible assets as of September 30, 2010 and December 31, 2009 is as follows (in thousands):

 

     Weighted
Average
Amortization
Lives
     September 30, 2010     December 31, 2009  
        Gross
Carrying
Value
     Accumulated
Amortization
    Gross
Carrying
Value
     Accumulated
Amortization
 

Hospitality-Americas

             

Core and developed technology

     3.2 years       $ 12,500       $ (12,500   $ 12,500       $ (12,500

Reseller network

     15.0 years         9,200         (4,114     9,200         (3,654

Direct sales channel

     10.0 years         3,600         (2,415     3,600         (2,145

Covenants not to compete

     3.3 years         1,600         (1,599     1,600         (1,569

Trademarks and tradenames

     Indefinite         1,300                1,300           

Trademarks and tradenames

     5.0 years         300         (299     300         (254

Customer list and contracts

     4.2 years         7,195         (4,431     7,195         (3,147
                                     

Total Hospitality-Americas

        35,695         (25,358     35,695         (23,269
                                     

Retail & Entertainment-Americas

             

Core and developed technology

     4.5 years         8,110         (6,145     7,952         (5,540

Reseller network

     10.1 years         9,739         (4,869     9,437         (4,004

Subscription sales

     4.0 years         1,400         (1,400     1,400         (1,400

Covenants not to compete

     10.0 years         150         (97     150         (86

Trademarks and tradenames

     Indefinite         1,303                1,200           

Trademarks and tradenames

     6.0 years         700         (554     700         (467

Customer list and contracts

     9.7 years         4,738         (1,450     4,719         (1,109

Backlog

     2 months         92         (92     92         (92
                                     

Total Retail & Entertainment-Americas

        26,232         (14,607     25,650         (12,698
                                     

International

             

Core and developed technology

     4.3 years         8,717         (3,191     9,148         (1,623

Reseller network

     7.0 years         6,160         (2,004     6,428         (1,361

Trademarks and tradenames

     Indefinite         1,633                1,720           

Customer list and contracts

     10.0 years         1,895         (487     1,910         (350
                                     

Total International

        18,405         (5,682     19,206         (3,334
                                     

Other intangible assets

        2,021         (1,015     2,021         (843
                                     

Total intangible assets

      $ 82,353       $ (46,662   $ 82,572       $ (40,144
                                     

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

The table below summarizes the approximate amortization expense, assuming no future acquisitions, dispositions or impairments of intangible assets, for the following 12-month periods subsequent to September 30, 2010 (in thousands):

 

12-month period ended September 30,

      

2011

   $ 8,177   

2012

     5,653   

2013

     4,555   

2014

     4,072   

2015

     2,742   

Thereafter

     6,256   
        
   $ 31,455   
        

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

5. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

A summary of the Company’s accounts receivable as of September 30, 2010 and December 31, 2009 is as follows (in thousands):

 

     September 30,     December 31,  
     2010     2009  

Trade receivables billed

   $ 57,153      $ 43,220   

Trade receivables unbilled

     3,929        3,127   
                
     61,082        46,347   

Less allowance for doubtful accounts

     (3,583     (3,832
                
   $ 57,499      $ 42,515   
                

The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of customers to make required payments. Estimates are developed by using standard quantitative measures based on customer payment practices and history, inquiries, credit reports from third parties and other financial information. If the financial condition of the Company’s customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. Bad debt expense totaled approximately $0.1 million and less than $0.1 million for the three-month periods ended September 30, 2010 and 2009, respectively, and totaled approximately $0.3 million and $0.5 million for the nine-month periods ended September 30, 2010 and 2009, respectively.

6. INVENTORY

Inventories consist principally of computer hardware and software media and are stated at the lower of cost (first-in, first-out method) or market. A summary of the Company’s inventory as of September 30, 2010 and December 31, 2009 is as follows (in thousands):

 

     September 30,      December 31,  
     2010      2009  

Raw materials

   $ 25,236       $ 14,451   

Work in process

     334         375   

Finished goods

     12,605         14,836   
                 
   $ 38,175       $ 29,662   
                 

 

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Table of Contents

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

7. DEBT

Prior to January 2008, the Company had a senior secured credit facility with Wells Fargo Foothill, Inc. (the “WFF Credit Agreement”). The WFF Credit Agreement provided for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $15 million and a term loan facility in an aggregate principal amount of up to $31 million. The revolving loan amount available to the Company was derived from a monthly borrowing base calculation using the Company’s various accounts receivable balances. The amount derived from this borrowing base calculation was further reduced by the total amount of letters of credit outstanding. Loans under the WFF Credit Agreement bore interest, at the Company’s option, at either the London Interbank Offering Rate (“LIBOR”) plus two and one half percent or at the prime rate of Wells Fargo Bank, N.A.

The WFF Credit Agreement was scheduled to expire on March 31, 2010. However, it was refinanced on January 2, 2008 upon the execution of the credit agreement with JPMorgan Chase Bank, N.A., as arranger and administrative agent, and JPMorgan Chase Bank, N.A, SunTrust Bank, Bank of America, BBVA Compass Bank and Wachovia Bank, N.A., as lenders (the “JPM Credit Agreement”). The JPM Credit Agreement and subsequent amendments thereto provide for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $80 million and a term loan facility in an aggregate principal amount of up to $30 million. The Company has the right to increase the revolving credit commitment by up to $25 million, subject to the terms and conditions set forth in the JPM Credit Agreement. As of September 30, 2010, aggregate borrowings under this facility totaled $15.5 million, comprised of $15.5 million in term loan facility borrowings and no amounts outstanding under the revolving loan facility. As of September 30, 2010, revolving loan borrowings available to the Company were equal to $80.0 million.

The JPM Credit Agreement is guaranteed by the Company and its subsidiaries and is secured by the assets of the Company and its subsidiaries. The maturity date of the JPM Credit Agreement is January 2, 2013. Interest accrues on amounts outstanding under the loan facility, at the Company’s option, at either (1) LIBOR plus a margin ranging between 1.25% and 2.00%, based upon the Company’s consolidated leverage ratio, as defined, or (2) the higher of the administrative agent’s prime rate or one-half of one percent over the federal funds effective rate plus a margin ranging between 0.25% and 1.00%, based on the Company’s consolidated leverage ratio, as defined. The JPM Credit Agreement contains certain customary representations and warranties from the Company. It also contains customary covenants, including: use of proceeds; limitations on liens; limitations on mergers, consolidations and sales of the Company’s assets; and limitations on related party transactions. In addition, the JPM Credit Agreement requires the Company to comply with various financial covenants, including maintaining leverage and fixed charge coverage ratios, as defined. The leverage ratio covenant limits the Company’s consolidated indebtedness to a multiple of three times its consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) as determined on a pro forma basis over the prior four quarters. The fixed charge coverage ratio requires the Company to maintain the ratio of its consolidated EBITDA as determined on a pro forma basis less capital expenses to its fixed charges (which includes regularly scheduled principal payments, consolidated interest expense, taxes paid or payable in accordance with U.S. GAAP, and restricted payments) to at least 1.2 to 1 for periods ending in 2008, 1.3 to 1 for periods ending in 2009, and 1.35 to 1 thereafter. The JPM Credit Agreement also contains certain customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due (subject to specified grace periods), breach of specified covenants, change in control and material inaccuracy of representations and warranties. The Company was in compliance with its financial and non-financial covenants as of September 30, 2010.

In the third quarter of 2008, the Company assumed research and development loans with the Austrian government in the amount of $0.1 million in conjunction with the acquisition of Orderman, bearing interest at approximately 2.50%, which were repaid in the third quarter of 2009. In the fourth quarter of 2008, the Company entered into an additional research and development loan with the Austrian government in the amount of $0.7 million, bearing interest at approximately 2.50%. As of September 30, 2010, approximately $0.7 million was outstanding on this loan. This loan matures on March 31, 2013.

In the second quarter of 2005, the Company entered into an amended and restated promissory note in the amount of $1.5 million with the previous shareholders of Aloha Technologies, Inc., acquired by the Company in January 2004. During the fourth quarter of 2005, the Company modified the amended promissory note by reducing the $1.5 million principal amount to approximately $1.0 million. The decrease was the result of agreed upon purchase price adjustments. The principal on this note was originally agreed to be paid over the course of the third and fourth quarters of 2008 and the first quarter of 2009, but was paid in full during the first quarter of 2008 in conjunction with the execution of the JPM Credit Agreement.

 

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Table of Contents

RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

The following is a summary of long-term debt and the related balances as of September 30, 2010 and December 31, 2009 (in thousands):

 

Description of Debt

   September 30,
2010
     December 31,
2009
 

Revolving credit loan under the JPM Credit Agreement bearing interest at LIBOR plus the applicable margin, as defined, and at the Alternative Base Rate plus the applicable margin, as defined (3.50% as of September 30, 2010), maturing on January 2, 2013

   $       $ 42,000   

Term loan under the JPM Credit Agreement bearing interest at LIBOR plus the applicable margin, as defined (1.56% as of September 30, 2010), maturing on January 2, 2013

     15,500         20,000   

Research and development loan from the Austrian government bearing interest at approximately 2.50%, maturing on March 31, 2013

     743         626   
                 

Total

     16,243         62,626   

Less: Current portion of long-term debt

     6,000         6,000   
                 

Long-term debt, net of current portion

   $ 10,243       $ 56,626   
                 

Approximate annual maturities of notes payable for the following 12-month periods subsequent to September 30, 2010 are listed below (in thousands):

 

12-month period ended September 30,

      

2011

   $ 6,000   

2012

     7,500   

2013

     2,743   
        
   $ 16,243   
        

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

8. OTHER INCOME AND CHARGES

Write-off of Third-Party Software Licenses

During the first quarter of 2009, the Company determined that it would not use certain third-party software licenses and recorded a write-off charge of $0.5 million as a result.

Severance and Restructuring Charge

During the first quarter of 2009, the Company recorded a charge of $0.7 million related to severance costs and restructuring of the organization. This charge resulted from efforts to align the Company’s cost structure with its revenues in light of the severe economic downturn that began in the second half of 2008.

Sale of Building

During the first quarter of 2009, the Company sold a building for cash proceeds of approximately $0.2 million. A net gain of approximately $0.1 million was recognized as a result of this transaction.

Lease Restructuring Charges – Brookside II Building, Alpharetta, Georgia

During the third quarter of 2008, the Company amended a sublease agreement for certain facilities located in Alpharetta, Georgia, in order to reduce future operating costs. In accordance with FASB ASC Topic 420, Exit or Disposal Cost Obligations (“ASC 420”), the Company recorded a lease restructuring charge based on the fair value of the remaining lease payments at the amendment date less the estimated sublease rentals that could reasonably be obtained from the property. The restructuring charges were not attributable to any of the Company’s reportable segments.

This amendment resulted in a restructuring charge of approximately $0.9 million in the third quarter of 2008, which consisted of $0.3 million for construction allowance and $0.6 million of lease restructuring reserves associated with the amendment to the sublease. As of September 30, 2010, approximately $0.3 million related to the lease commitments remained in the restructuring reserve to be paid. The Company anticipates the remaining payments will be made by the first quarter of 2013 (lease expiration). The table below summarizes the activity in the restructuring reserve (in thousands):

 

      Short-Term       Long-Term            Total        

Balance, December 31, 2009

   $ 183      $ 233      $ 416   
                        

Expenses charged against restructuring reserve

     (50     (71     (121
                        

Balance, September 30, 2010

   $ 133      $ 162      $ 295   
                        

Lease Restructuring Charges – Alexander Building, Alpharetta, Georgia

During the third quarter of 2005, the Company decided to consolidate certain facilities located in Alpharetta, Georgia, in order to reduce future operating costs. This resulted in the abandonment of one facility, which formerly housed the Company’s customer support call center. The restructuring charges were not attributable to any of the Company’s reportable segments. In accordance with ASC 420, the Company recorded a lease restructuring charge based on the fair value of the remaining lease payments at the abandonment date less the estimated sublease rentals that could reasonably be obtained from the property.

This consolidation resulted in a restructuring charge of approximately $1.5 million in the third quarter of 2005, which consisted of $1.2 million for facility consolidations and $0.3 million of fixed asset write-offs associated with the facility consolidation. As of September 30, 2010, approximately $0.1 million related to the lease commitments remained in the restructuring reserve to be paid. The Company anticipates the remaining payments will be made by the fourth quarter of 2010 (lease expiration). The table below summarizes the activity in the restructuring reserve (in thousands):

 

      Short-Term       Long-Term             Total        

Balance, December 31, 2009

   $ 180      $       $ 180   
                         

Expenses charged against restructuring reserve

     (123             (123
                         

Balance, September 30, 2010

   $ 57      $       $ 57   
                         

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

9. SEGMENT REPORTING

We currently operate in three segments: (1) Hospitality-Americas, (2) Retail & Entertainment-Americas and (3) International. The Hospitality-Americas segment represents our North and South American restaurants business, which includes fast food, delivery, quick service and table service restaurant operators. Our Retail & Entertainment-Americas segment is comprised of our other North and South American business lines which serve petroleum and convenience retailers, specialty retailers and entertainment venues, including movie theaters, stadiums and arenas. The International segment focuses on our foreign operations outside of the Company’s other two segments, and primarily focuses on restaurant businesses and petroleum and convenience retail businesses. These segments became effective January 1, 2010 and replace the former reportable segments of Hospitality and Retail. All information reported for fiscal year 2009 has been reclassified to present data in accordance with the new segments.

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, electronic payment processing 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, 2009, as filed with the Securities and Exchange Commission. Management evaluates the financial performance of the segments based on direct operating income, which is profit or loss before the allocation of certain corporate costs.

The following table presents revenue for the Company’s reportable segments as well as a reconciliation of segment direct operating income to the Company’s consolidated income before taxes (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Revenues:

        

Hospitality-Americas

   $ 54,630      $ 41,419      $ 154,643      $ 122,752   

Retail & Entertainment-Americas

     23,871        19,923        66,510        57,878   

International

     9,618        8,862        31,469        27,168   

Corporate

     1,130        736        3,202        1,877   
                                

Total revenues

   $ 89,249      $ 70,940      $ 255,824      $ 209,675   
                                

Direct operating income:

        

Hospitality-Americas

   $ 14,323      $ 8,585      $ 38,217      $ 27,490   

Retail & Entertainment-Americas

     7,268        5,515        19,545        16,421   

International

     1,112        699        4,873        2,857   

Corporate

     107        33        555        60   
                                

Total segment direct operating income

     22,810        14,832        63,190        46,828   

Indirect corporate operating costs (a)

     (9,202     (5,093     (26,197     (19,378

Indirect depreciation and amortization expense (b)

     (3,230     (3,000     (9,649     (9,066

Stock-based compensation expense (c)

     (1,315     (966     (3,971     (3,556

Interest and other, net (d)

     (174     (505     (486     (2,879
                                

Total income before taxes

   $ 8,889      $ 5,268      $ 22,887      $ 11,949   
                                

 

(a) Represents unallocated corporate expenses including central marketing, product development and general and administrative costs.

 

(b) Depreciation expense and amortization of intangible assets for each reportable segment are included in a separate schedule within this note.

 

(c) See Note 2 for additional discussion of stock-based compensation expense.

 

(d) Unless otherwise stated, the items in this category are not attributable to any of our reportable segments. This amount for the nine-month period ended September 30, 2010 includes a $0.3 million reduction of the 2009 goodwill impairment charge related to Quest within our Retail & Entertainment-Americas segment (second quarter 2010). This amount for the nine-month period ended September 30, 2009 includes a write-off charge of approximately $0.5 million for certain third-party software licenses that were deemed unusable (first quarter 2009), a charge of approximately $0.7 million related to severance costs and restructuring of the organization (first quarter 2009), and a net gain of approximately $0.1 million on the sale of a building (first quarter 2009).

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Segment assets consist primarily of accounts receivable, goodwill and intangible assets. The following table presents assets for the Company’s reportable segments as of September 30, 2010 and December 31, 2009 (in thousands):

 

         September 30,
2010
     December 31,
2009
 

Assets:

       

Hospitality-Americas

     $ 102,006       $ 98,349   

Retail & Entertainment-Americas

       75,609         72,082   

International

       56,880         59,242   

Corporate

       122,152         58,924   
                   

Total assets

     $ 356,647       $ 288,597   
                   

The following table presents depreciation and amortization expense for the Company’s reportable segments (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Depreciation and amortization:

           

Hospitality-Americas

   $ 1,065       $ 1,087       $ 3,189       $ 3,208   

Retail & Entertainment-Americas

     716         1,051         2,161         3,061   

International

     1,032         748         3,146         2,122   

Corporate

     1,550         1,119         4,582         3,551   
                                   

Total depreciation and amortization

   $ 4,363       $ 4,005       $ 13,078       $ 11,942   
                                   

10. INCOME TAX

The Company follows the guidance issued by the FASB related to accounting for uncertainty in income taxes. This guidance, included in ASC Topic 740, Income Taxes, prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions, for financial statement purposes. The guidance also requires expanded disclosure with respect to the uncertainty in income taxes. During the three-month and nine-month periods ended September 30, 2010, the reserve for uncertainty in income taxes was increased by approximately $0.2 million and $0.4 million, respectively.

Consistent with the Company’s continuing practice, interest and/or penalties related to income tax matters are recorded as part of income tax expense. The Company has accrued less than $0.1 million of interest and penalties associated with uncertain tax positions during the three and nine-month periods ended September 30, 2010.

The Company’s effective tax rates for the three months ended September 30, 2010 and 2009 were equal to 15.6% and 35.1%, respectively, inclusive of discrete events. The Company’s effective tax rates for the nine months ended September 30, 2010 and 2009 were 30.7% and 36.2%, respectively. The quarter-over-quarter and year-over-year decrease is primarily attributable to discrete events including the completion of a multi-year research and development credit and tax planning due to the lapse of IRC Section 954(c)(6). IRC Section 954(c)(6) generally excludes from U.S. federal income tax certain dividends, interest, rents and royalties received or accrued by one controlled foreign corporation (“CFC”) of a U.S. multinational enterprise from a related CFC that would otherwise be taxable pursuant to the subpart F regime. The tax provision permitting the look thru rule lapsed on December 31, 2009; therefore, certain CFC income is included in the annual effective tax rate. Proposed legislation has not been enacted as of September 30, 2010 but tax planning resulted in the reduction of the majority of the 954(c)(6) income inclusion as a discrete event during the quarter ended September 30, 2010.

 

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RADIANT SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

11. RELATED PARTY TRANSACTIONS

None

12. SIGNIFICANT EVENTS

Amended Financial Arrangement – Radiant Payment Services

In 2008, the Company expanded its business services with the launch of Radiant Payment Services (“RPS”), a business aimed at selling and servicing electronic payment processing. At that time, we entered into an agreement with Century Payments, Inc. (“Century”), which obtained and serviced new customers on behalf of RPS.

Effective April 1, 2010, the Company amended its agreement with Century. The amendment restructured the financial arrangement between RPS and Century, gave Century the ability to bundle Radiant products with electronic payment processing services, and requires RPS to provide custom development of certain tools for Century’s use. Due to the transfer of roles, responsibilities and risks from RPS to Century under the new agreement, the Company concluded that it is appropriate to account for the revenues, under this new agreement, on a net basis. RPS received consideration for the amended agreement in the amount of approximately $11.2 million, which is comprised of a $2.2 million one-month promissory note, paid on July 28, 2010, and a $9.0 million 24-month promissory note, due on June 28, 2012, both of which are guaranteed and earn interest at 4.5%.

Approximately $2.8 million of the consideration from Century to RPS relates to repayment of the unamortized balance of capitalized contract costs that RPS had previously paid to Century. The $2.8 million balance was being amortized by the Company over the expected life of the customer contracts but was removed from our balance sheet upon repayment by Century under the amended agreement. The Company deferred the remaining $8.4 million of consideration related to the products and services in the amended agreement and expects to recognize these revenues over the next three to four years as they are earned. Approximately $1.4 million of the deferred revenue was recognized during the first nine months of 2010.

As of September 30, 2010, RPS had approximately $7.0 million in deferred revenue associated with this agreement. Of this amount, $3.4 million is included in the condensed consolidated balance sheets under the caption “Customer deposits and unearned revenue” in current liabilities and $3.6 million is included in the caption “Other long-term liabilities.”

Common Stock Issuance

On September 15, 2010, the Company completed a public offering of 3.5 million shares of its common stock at a price of $17.00 per share. We received net proceeds from the offering of approximately $56.4 million after deducting discounts and commissions paid to the underwriters and other expenses incurred related to the offering. We used a portion of the net proceeds from the offering to pay down the outstanding balance under the revolving portion of our credit facility. The remaining net proceeds will be used to fund working capital requirements and for general corporate purposes, including potential acquisitions.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of Radiant’s business and results of operations. This MD&A should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2009, as updated and superseded by Radiant’s Current Report on Form 8-K dated June 25, 2010, as well as the condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements included elsewhere in this report. MD&A consists of the following sections:

 

   

Overview: A summary of Radiant’s business and opportunities

 

   

Results of Operations: A discussion of operating results

 

   

Liquidity and Capital Resources: An analysis of cash flows, sources and uses of cash, contractual obligations and financial position

 

   

Critical Accounting Policies and Procedures: A discussion of critical accounting policies that require the exercise of judgments and estimates

 

   

Recent Accounting Pronouncements: A summary of recent accounting pronouncements and the effects on the Company

 

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Overview

We are a leading provider of technology solutions for managing site operations in the hospitality and retail industries. With more than 100,000 installations worldwide, our customers include leading brands and venues in the restaurant and food service, sports and entertainment, petroleum and convenience, and specialty retail markets. Our solutions allow our customers to improve customer service and loyalty, improve speed of service, increase revenue per transaction through suggestive selling, loyalty programs and point of purchase promotion displays, and optimize labor and inventory resources. At the core of our solution portfolio is a robust point-of-sale, or POS, solution, consisting of software and hardware that can be deployed as a touch-screen terminal, self-service kiosk or wireless handheld device. We also provide a range of software-as-a-service, or SaaS, offerings to our customers, including online ordering, loyalty promotion, gift card management, theft and fraud prevention, and store and enterprise analytics. The growth of our SaaS offerings, which are sold on a subscription basis, has allowed us to increase the value we provide to our customers and to increase our recurring revenue, which we define as maintenance, subscription and transaction services revenue.

We seek to differentiate our products and services by providing retailers and foodservice operators with technology designed to allow them to provide exceptional service at the critical point of consumer interaction. We do this by developing and selling hardware, software and services that address the unique requirements of the highly specialized store environments in which our customers operate. We support our technology solutions with services such as software and hardware support, installation, training and solutions consulting.

Security has become a driving factor in our industry as our customers try to meet ever escalating governmental requirements directed toward the prevention of identity theft, as well as operating safeguards imposed by the credit and debit card associations. In September 2006, these card associations established the PCI Security Standards Council to oversee and unify industry standards in the areas of credit card data security. We believe we are a leader in providing systems and software solutions that meet the payment application requirements, and we will continue to help the industry define new standards across the payment process, educate businesses on how to reduce theft by meeting the Payment Card Industry Data Security Standard (PCI DSS) requirement process, and build new technologies outside of our point-of-sale software to combat theft.

We operate in three segments: (1) Hospitality-Americas, (2) Retail & Entertainment-Americas and (3) International. The Hospitality-Americas segment represents our North and South American restaurants business, which includes fast food, delivery, quick service and table service restaurant operators. Our Retail & Entertainment-Americas segment is comprised of our other North and South American business lines which serve petroleum and convenience retailers, specialty retailers and entertainment venues, including movie theaters, stadiums and arenas. The International segment focuses on our foreign operations outside of the Company’s other two segments, and primarily focuses on restaurant businesses and petroleum and convenience retail businesses. These segments became effective January 1, 2010 and replace the former reportable segments of Hospitality and Retail. All information reported for fiscal year 2009 has been recast to present data in accordance with the new segments.

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. We believe our customers benefit from a number of competitive advantages gained through our 25-year history of success in our industry segments. These advantages include our globally trusted brand names, large installed base, customizable platforms and our investment in research and development of new products for our industry segments.

The point-of-sale markets in which we operate are intensely competitive and highly dynamic, categorized by advances in technology, product introductions and the ability to respond to security standards. This competitive environment and the expectation in the marketplace that technology will continue to improve while becoming less expensive results in significant pricing pressures. Our ability to compete generally depends on how well we navigate within this environment. To compete successfully we must continue to commercialize our technology, develop new products that meet constantly evolving customer requirements, continually improve our existing products, processes and services faster than our competitors, and price our products competitively while reducing average unit costs.

Our financial results through the first nine months of 2010 reflect significant improvement over the same period a year ago, primarily due to stronger global economic and industry conditions. In the first half of 2009, negative trends in consumer spending and pervasive economic uncertainty led to slowed new site openings and reduced capital spending from existing customers. However, in the second half of 2009, demand began to increase and was recognized through new customer contracts, a growing pipeline of opportunities and the stabilization of our channel partners. This trend has continued in 2010 due to the number of significant new contracts signed in recent months, the visibility of the sales pipeline available to us, our ability to work closely with our channel partners to help end customers realize the benefits of new technology in their sites, and the launching of several new products in hosted solutions, mobile ordering and a new point-of-sale terminal in Europe.

 

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Results of Operations

Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009 and June 30, 2010 and the Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009

Systems – Systems revenues are derived from sales and licensing fees for our point-of-sale hardware and software, site management software solutions and peripherals. Systems sales during the third quarter of 2010 were approximately $42.2 million. This is an increase of $12.6 million, or 42%, as compared to the same period in 2009, and an increase of $0.1 million, or less than 1%, as compared to the second quarter of 2010. Systems sales during the nine-month period ended September 30, 2010 were $118.6 million compared to $86.5 million for the same period in 2009, an increase of 37%. The increases are primarily attributable to improvements seen in the global economy, which in turn has resulted in increased new site openings and capital spending from new and existing customers across all areas of our business. The increases are also attributable to several significant contracts being signed within the past couple of quarters and a significant number of those installations occurring during the second and third quarters of 2010.

Maintenance, subscription and transaction services The Company derives revenues from maintenance, subscription and transaction services, including hardware maintenance, software support and maintenance, software-as-a-service (“SaaS”) solutions and electronic payment processing services. The majority of these revenues are derived from support and maintenance, which is structured on a renewable basis and is directly attributable to the base of installed sites. A majority of all subscription, maintenance and support contracts are renewed annually. Revenues from maintenance, subscription and transaction services during the third quarter of 2010 were approximately $37.0 million. This is an increase of $3.5 million, or 10%, as compared to the same period in 2009, and an increase of $1.2 million, or 3%, as compared to the second quarter of 2010. Revenues from maintenance, subscription and transaction services during the nine-month period ended September 30, 2010 were $108.8 million compared to $96.8 million for the same period in 2009, an increase of 12%. The increases are primarily due to increased demand for SaaS solutions and the additional revenues generated in both hardware and software support and maintenance resulting from increased systems sales, which added to our site base for recurring revenue.

Professional services The Company also derives revenues from professional services such as consulting, training, custom software development and systems installations. Revenues from professional services during the third quarter of 2010 were approximately $10.1 million. This is an increase of $2.3 million, or 29%, as compared to the same period in 2009 and an increase of $0.9 million, or 10%, as compared to the second quarter of 2010. Revenues from professional services during the nine-month period ended September 30, 2010 were $28.5 million compared to $26.4 million for the same period in 2009, an increase of 8%. In recent months we have begun to see a shift in customer spending away from consulting and custom development projects and towards capital purchases of systems. This shift has resulted in a decrease in our one-time consulting and custom development revenues, but has been offset by increases in installations revenues related to increased systems sales.

Systems gross profit – Cost of systems consists primarily of hardware and peripherals for site-based systems and amortization of capitalized labor costs for internally developed software. All costs, other than capitalized software development costs, are expensed as products are shipped, while capitalized software development costs are amortized on a straight-line basis over the estimated useful life of the software. In the third quarter of 2010, systems gross profit increased by $5.0 million, or 37%, as compared to the same period in 2009, and decreased by $0.9 million, or 5%, as compared to the second quarter of 2010. In the third quarter of 2010, the gross profit percentage decreased by two points to 44% from 46% for the same period in 2009 and as compared to the second quarter of 2010. For the nine-month period ended September 30, 2010 compared to the same period in 2009, systems gross profit increased by approximately $11.4 million, or 28%, while the gross profit percentage decreased by four points to 44% from 48% for the same period in 2009. The fluctuations in the gross profit percentage are primarily due to variations in product mix as our hardware products have lower margins than our software products.

Maintenance, subscription and transaction services gross profit – Cost of maintenance, subscription and transaction services consists primarily of personnel and other costs to provide support and maintenance services, SaaS solutions and electronic payment processing services. In the third quarter of 2010, the gross profit on maintenance, subscription and transaction services increased by approximately $2.3 million, or 14%, as compared to the same period in 2009, and increased by $0.6 million, or 3%, as compared to the second quarter of 2010. The gross profit percentage increased by two points to 53% in the third quarter of 2010 from 51% for the same period in 2009, and was flat as compared to the second quarter of 2010. For the nine-month period ended September 30, 2010, the gross profit on maintenance, subscription and transaction services increased by approximately $7.4 million, or 15%, as compared to the same period in 2009, while the gross profit percentage increased by one point to 52%. The slight increases in the gross profit percentages are primarily due to increased revenues from SaaS solutions, which have higher margins than support and maintenance.

 

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Professional services gross profit Cost of professional services consists primarily of personnel costs for consulting, training, custom software development and installation services. The gross profit on professional services revenue for the third quarter of 2010 increased by approximately $0.7 million, or 29%, as compared to the same period in 2009, and increased by $0.7 million, or 28%, as compared to the second quarter of 2010. The gross profit percentage remained constant at 32% in the third quarter of 2010 as compared to the same period in 2009, and increased by four percentage points as compared to the second quarter of 2010. For the nine-month period ended September 30, 2010, the gross profit on professional services decreased by approximately $0.9 million, or 10%, as compared to the same period in 2009, and the gross profit percentage decreased by six percentage points to 28%. The changes in the gross profit percentages are the result of fluctuations in sales mix. These margins decline when more revenues come from lower margin services, such as installations, than from higher margin services, such as consulting and custom development services.

Segment revenues – During the third quarter of 2010, total revenues in the Hospitality-Americas business segment were approximately $54.6 million. This is an increase of $13.2 million, or 32%, as compared to the same period in 2009, and an increase of $3.1 million, or 6%, as compared to the second quarter of 2010. Total revenues in the Hospitality-Americas segment for the nine-month period ended September 30, 2010 were $154.6 million, which is an increase of $31.9 million, or 26%, as compared to the same period in 2009. The increases are primarily the result of improved economic conditions, which has led to increased demand for new systems in both our direct and channel businesses. The increases are also due to several significant contracts being signed within the last couple of quarters and significant installation activity occurring in the second and third quarters of 2010.

In the third quarter of 2010, total revenues in the Retail & Entertainment-Americas business segment were approximately $23.9 million. This is an increase of $3.9 million, or 20%, as compared to the same period in 2009, and an increase of $1.9 million, or 9%, as compared to the second quarter of 2010. Total revenues in the Retail & Entertainment-Americas segment for the nine-month period ended September 30, 2010 were $66.5 million, which is an increase of $8.6 million, or 15%, as compared to the same period in 2009. The increases are primarily attributable to strength in systems sales along with increases in related support and maintenance revenues across each business within the segment, largely due to improved economic and industry conditions.

In the third quarter of 2010, total revenues in the International business segment were approximately $9.6 million. This is an increase of $0.8 million, or 9%, as compared to the same period in 2009, and a decrease of $2.5 million, or 21%, as compared to the second quarter of 2010. Total revenues in the International segment for the nine-month period ended September 30, 2010 were $31.5 million, which is an increase of $4.3 million, or 16%, as compared to the same period in 2009. The increases from the same periods in 2009 are primarily the result of increased systems sales along with hardware and software support and maintenance within our convenience retail business and channel business in Europe. The decrease from the second quarter of 2010 is primarily due to seasonality within our handheld business in Europe where the second quarter is typically the strongest.

Segment direct operating income – The Company evaluates the financial performance of the segments based on direct operating income, which is profit or loss before the allocation of certain corporate costs.

In the third quarter of 2010, direct operating income in the Hospitality-Americas business segment was approximately $14.3 million. This is an increase of $5.7 million, or 67%, as compared to the same period in 2009, and an increase of $1.5 million, or 12%, as compared to the second quarter of 2010. Total direct operating income in the Hospitality-Americas segment for the nine-month period ended September 30, 2010 was $38.2 million, which is an increase of $10.7 million, or 39%, over the same period in 2009. The increases are primarily attributable to increased profits from systems sales, SaaS solutions and hardware and software support and maintenance. These increases were partially offset by an increase in operating expenses, primarily sales commissions, which increased as expected in line with the overall increase in revenues.

In the third quarter of 2010, direct operating income in the Retail & Entertainment-Americas business segment was approximately $7.3 million. This is an increase of $1.8 million, or 32%, as compared to the same period in 2009, and an increase of $0.6 million, or 10%, as compared to the second quarter of 2010. Total direct operating income in the Retail & Entertainment-Americas segment for the nine-month period ended September 30, 2010 was $19.5 million, which is an increase of $3.1 million, or 19%, over the same period in 2009. The increases are primarily the result of additional profits resulting from increased systems sales and related support and maintenance revenues, as previously discussed.

In the third quarter of 2010, direct operating income in the International business segment was approximately $1.1 million. This is an increase of $0.4 million, or 59%, as compared to the same period in 2009, and a decrease of $1.6 million, or 60%, as compared to the second quarter of 2010. Total direct operating income in the International segment for the nine-month period ended September 30, 2010 was $4.9 million, which is an increase of $2.0 million, or 71%, over the same period in 2009. The increases from 2009 are primarily due to additional profits resulting from increased systems sales, including handhelds in the European market, and increased hardware and software support and maintenance revenues. The decrease from the second quarter of 2010 is primarily due to seasonality within our handheld business in Europe as previously explained.

 

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Total operating expenses – The Company’s total operating expenses increased by approximately $4.8 million, or 17%, during the third quarter of 2010 as compared to the same period in 2009, and by approximately $0.9 million, or 3%, as compared to the second quarter of 2010. Total operating expenses for the nine months ended September 30, 2010 increased by approximately $7.9 million, or 9%, as compared to the same period in 2009. Total operating expenses as a percentage of total revenues were 36% in the third quarter of 2010 compared to 39% in the third quarter of 2009 and 36% in the second quarter of 2010. Total operating expenses as a percentage of revenues were 37% for the nine months ended September 30, 2010 as compared to 41% for the same period in 2009. The components of operating expenses are discussed below:

 

   

Product development expenses – Product development expenses consist primarily of wages and materials expended on product development efforts, excluding any development expenses related to associated revenues, which are included in costs of maintenance, subscription and transaction services. Product development expenses increased during the third quarter of 2010 by approximately $0.8 million, or 13%, as compared to the same period in 2009, increased by $0.5 million, or 8%, as compared to the second quarter of 2010, and increased by $1.9 million, or 12%, during the nine months ended September 30, 2010 as compared to the same period in 2009. The increases are due to incremental investments in the development of future products as well as normal fluctuations among maintenance, custom development, capitalized software projects and product development. Product development expenses as a percentage of revenues were 7% for the third quarter of 2010 as compared to 8% for the same period in 2009, 7% for the second quarter of 2010, and 7% for the nine-month period ended September 30, 2010 as compared to 8% for the same period in 2009.

 

   

Sales and marketing expenses – Sales and marketing expenses increased during the third quarter of 2010 by approximately $1.5 million, or 15%, as compared to the same period in 2009, decreased by $0.1 million, or 1%, as compared to the second quarter of 2010, and increased by $4.0 million, or 13%, during the nine months ended September 30, 2010 as compared to the same period in 2009. The increases from 2009 are primarily due to incremental sales commissions expense directly related to the increase in revenues and an increased focus on marketing activities. Sales and marketing expenses as a percentage of revenues were 13% for the third quarter of 2010 as compared to 15% for the same period in 2009, 14% for the second quarter of 2010, and 14% for the nine months ended September 30, 2010 as compared to 15% for the same period in 2009.

 

   

Depreciation and amortization expenses – Depreciation and amortization expenses increased during the third quarter of 2010 by $0.1 million, or 3%, as compared to the same period of 2009, increased by less than $0.1 million, or 1%, compared to the second quarter of 2010, and increased by approximately $0.3 million, or 3%, during the nine months ended September 30, 2010 as compared to the same period in 2009. The slight increases are due to additional depreciation expense resulting from routine capital spending to support our business operations, which was partially offset by a decline in amortization expense for assets that became fully amortized during these periods. Depreciation and amortization expenses as a percentage of revenues were 4% for the third quarter of 2010 as compared to 5% for the same period in 2009, 4% for the second quarter of 2010, and 4% for the nine-month period ended September 30, 2010 as compared to 5% for the same period in 2009.

 

   

General and administrative expenses – General and administrative expenses increased during the third quarter of 2010 by approximately $2.4 million, or 31%, as compared to the same period in 2009, increased by $0.2 million, or 2%, as compared to the second quarter of 2010, and increased by $3.1 million, or 12%, during the nine months ended September 30, 2010 as compared to the same period in 2009. The increases are primarily due to additional bonus expense related to the Company’s performance as compared to its operating budget. General and administrative expenses as a percentage of revenues were 11% for the third quarter of 2010 and 2009, as well as second quarter of 2010, and the nine months ended September 30, 2010. General and administrative expenses as a percentage of revenues for the nine months ended September 30, 2009 were 12%.

 

   

Impairment of goodwill – During the fourth quarter of 2009, the Company recorded a $17.0 million non-cash impairment charge to write off a portion of the goodwill associated with the acquisition of Quest. In the second quarter of 2010, the Company recorded a $0.3 million gain to adjust the initial charge upon completion of the valuation analysis.

 

   

Other income and charges, net The amounts contained under this heading are unlikely to occur again in the normal course of business and, as such, it is not practical to compare amounts between the current period and previous periods. However, a description of the items which comprise these amounts follows:

 

   

During the first quarter of 2009, the Company recorded a charge of $0.7 million related to severance payments and restructuring of the organization and a charge of $0.5 million related to the write-off of third-party software licenses. These charges were partially offset by a gain of $0.1 million on the sale of a building.

 

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Interest expense, net – The Company’s interest expense includes interest expense incurred on its long-term debt, revolving line of credit and capital lease obligations. Interest expense decreased by approximately $0.2 million, or 46%, in the third quarter of 2010 as compared to the same period in 2009, decreased by $0.1 million, or 20%, as compared to the second quarter of 2010, and decreased by $0.8 million, or 44%, during the nine months ended September 30, 2010 as compared to the same period in 2009. These decreases are due to continued paydown of the Company’s outstanding indebtedness and a reduction in interest rates. See Note 7 to the condensed consolidated financial statements for additional discussion of the Company’s credit facility. The Company’s interest income is primarily earned from notes receivable. Interest income increased by approximately $0.1 million in the third quarter of 2010 as compared to the same period in 2009 and the second quarter of 2010, and increased by approximately $0.1 million during the nine months ended September 30, 2010 as compared to the same period in 2009. These increases are primarily the result of the $9.0 million promissory note received from Century at the end of the second quarter of 2010. See Note 12 to the condensed consolidated financial statements for additional discussion of this note receivable.

Income tax provision – The Company’s effective tax rates for the three months ended September 30, 2010 and 2009 were equal to 15.6% and 35.1%, respectively, inclusive of discrete events. The Company’s effective tax rate for the nine-month periods ended September 30, 2010 and 2009 were 30.7% and 36.2%, respectively. The quarter-over-quarter and year-over-year decrease is primarily attributable to discrete events, including the completion of a multi-year research and development credit and tax planning due to the lapse of IRC Section 954(c)(6). IRC Section 954(c)(6) generally excludes from U.S. federal income tax certain dividends, interest, rents and royalties received or accrued by one controlled foreign corporation (“CFC”) of a U.S. multinational enterprise from a related CFC that would otherwise be taxable pursuant to the subpart F regime. The tax provision permitting the look thru rule lapsed on December 31, 2009; therefore, certain CFC income is included in the annual effective tax rate. Proposed legislation has not been enacted as of September 30, 2010 but tax planning resulted in the reduction of the majority of the 954(c)(6) income inclusion as a discrete event during the quarter ended September 30, 2010.

 

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Liquidity and Capital Resources

Prior to January 2008, the Company had a senior secured credit facility with Wells Fargo Foothill, Inc. (the “WFF Credit Agreement”). The WFF Credit Agreement provided for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $15 million and a term loan facility in an aggregate principal amount of up to $31 million. The revolving loan amount available to the Company was derived from a monthly borrowing base calculation using the Company’s various accounts receivable balances. The amount derived from this borrowing base calculation was further reduced by the total amount of letters of credit outstanding. Loans under the WFF Credit Agreement bore interest, at the Company’s option, at either the London Interbank Offering Rate (“LIBOR”) plus two and one half percent or the prime rate of Wells Fargo Bank, N.A.

The WFF Credit Agreement was scheduled to expire on March 31, 2010. However, it was refinanced on January 2, 2008 upon the execution of the credit agreement with JPMorgan Chase Bank, N.A., as arranger and administrative agent, and JPMorgan Chase Bank, N.A., SunTrust Bank, Bank of America, Guaranty Bank and Wachovia Bank, N.A., as lenders (the “JPM Credit Agreement”). The JPM Credit Agreement provides for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $80 million and a term loan facility in an aggregate principal amount of up to $30 million. An amendment to the JPM Credit Agreement was signed in July 2008, whereby the Company has the right to increase its revolving credit commitment by up to $25 million, subject to the terms and conditions set forth in the JPM Credit Agreement. As of September 30, 2010, aggregate borrowings under this facility totaled $15.5 million, comprised of $15.5 million in term loan facility borrowings and no amounts outstanding under the revolving loan facility. As of September 30, 2010, revolving loan borrowings available to the Company were equal to $80.0 million.

The JPM Credit Agreement is guaranteed by the Company and its subsidiaries and is secured by the assets of the Company and its subsidiaries. The maturity date of the JPM Credit Agreement is January 2, 2013. Interest accrues on amounts outstanding under the loan facility, at the Company’s option, at either (1) LIBOR plus a margin ranging between 1.25% and 2.00%, based upon the Company’s consolidated leverage ratio, as defined, or (2) the higher of the administrative agent’s prime rate or one-half of one percent over the federal funds effective rate plus a margin ranging between 0.25% and 1.00%, based on the Company’s consolidated leverage ratio, as defined. The JPM Credit Agreement contains certain customary representations and warranties from the Company. In addition, the JPM Credit Agreement contains certain financial and non-financial covenants, with which the Company was in compliance as of September 30, 2010. Further explanation of this agreement is presented in Note 7 to the condensed consolidated financial statements.

The Company’s working capital increased by approximately $52.8 million, or 183%, to $81.6 million at September 30, 2010 as compared to $28.8 million at December 31, 2009. This increase in working capital during the first nine months of 2010 resulted from an increase in the Company’s current assets, equal to approximately $64.6 million, that was primarily attributable to a substantial increase in cash resulting from the completion of the Company’s public offering of common stock during the quarter-ended September 30, 2010, offset by an increase in current liabilities of approximately $11.8 million, as more fully explained below. The Company has historically funded its business through cash generated by operations.

Cash provided by operating activities during the nine months ended September 30, 2010 was approximately $21.8 million. Cash from operations was mainly generated through income from operations, adjusted to exclude the effect of non-cash charges, including depreciation, amortization, stock-based compensation expense and other charges. Changes in assets and liabilities increased operating cash flows during the first nine months of 2010, principally due to increases in accounts payable, bonus accruals and accrued expenses (which have a positive impact on cash flow) that were attributable to increased sales and an increase in inventory on hand at September 30, 2010, which increased related accruals due to the fact that certain payments due to our vendors that supplied the Company with inventory were not due at quarter-end. These increases were partially offset by increases in accounts receivable and inventory (which have a negative effect on cash flow) that were attributable to increased sales, the timing of certain cash collections and anticipation of hardware shipments in future quarters. In addition, there was also an increase in customer deposits and unearned revenue which resulted from collecting calendar year support and maintenance billings, which have been deferred and are being recognized as revenue over the course of 2010. Lastly, the Company received proceeds from Century of approximately $2.2 million, as more fully explained in Note 12. If near-term demand for the Company’s products weakens, or if significant anticipated sales in any quarter do not close when expected, the availability of funds from operations may be adversely affected.

Cash provided by operating activities during the nine months ended September 30, 2009 was approximately $36.7 million. Cash from operations was mainly generated through income from operations, adjusted to exclude the effect of non-cash charges, including depreciation, amortization, stock-based compensation expense and other charges. Changes in assets and liabilities increased operating cash flows during the first nine months of 2009, principally due to (i) our continued focus on collections which resulted in a reduction in accounts receivable, (ii) a focus on inventory management which resulted in a decrease in inventories, and (iii) an increase in client deposits and unearned revenue which was a result of collecting calendar year support and maintenance billings, which have been deferred and are being recognized as revenue over the course of 2009. The increase in accrued expenses is due to normal quarterly fluctuations.

Cash used in investing activities during the nine months ended September 30, 2010 was approximately $7.1 million. Approximately $4.4 million was used to invest in property and equipment. In addition, the Company continued to increase its investment in future products by investing $2.9 million in internally developed capitalizable software during the first nine months of 2010. The Company also received cash proceeds of $0.2 million from various notes receivable during the first nine months of 2010.

 

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Cash used in investing activities during the nine months ended September 30, 2009 was approximately $9.4 million. Approximately $4.2 million was used to invest in property and equipment and $2.0 million related to the purchase of a customer list related to our RPS business. The Company continued to increase its investment in future products by investing $3.3 million in internally developed capitalizable software during the first nine months of 2009. Lastly, the Company recognized cash proceeds of $0.2 million from the sale of a building located in Australia.

Cash provided by financing activities during the nine months ended September 30, 2010 was approximately $26.8 million. Financing activities included a public stock offering completed during the quarter ended September 30, 2010 of approximately 3.5 million shares of common stock at a price of $17.00 per share, resulting in net cash proceeds equal to approximately $56.5 million, after deducting discounts and commissions paid to the underwriters and other expenses incurred in conjunction with the offering. In addition, the Company received cash proceeds from a research and development note of approximately $0.1 million, the exercise of stock options by employees of approximately $13.7 million, the purchase of shares issued under the Employee Stock Purchase Plan of approximately $0.2 million and the impact of tax benefits related to stock-based compensation expense of approximately $3.9 million. Cash used in financing activities included scheduled payments under the JPM Credit Agreement of approximately $4.5 million, net payments against the revolving loan facility under the JPM Credit Agreement of approximately $42.0 million, scheduled payments against the Company’s capital lease obligations of approximately $0.7 million and tax withholding payments related to the net share settlement of stock options of approximately $0.4 million.

Cash used in financing activities during the nine months ended September 30, 2009 was approximately $30.3 million. Financing activities include scheduled payments under the JPM Credit Agreement, payments against the revolving loan facility, net of proceeds, payments against the research and development notes and scheduled payments against the Company’s capital lease obligations totaling approximately $31.7 million. In addition, the Company received cash proceeds from a research and development note, the exercise of stock options by employees, the purchase of shares issued under the Employee Stock Purchase Plan and the impact of tax benefits related to stock-based compensation expense totaling approximately $1.4 million.

The Company believes that its cash and cash equivalents, funds generated from operations and borrowing capacity will provide adequate liquidity to meet its normal operating requirements, as well as to fund the above obligations, for at least the next twelve months.

The Company believes there are opportunities to grow its business through the acquisition of complementary and synergistic companies, products and technologies. We look for acquisitions that can be readily integrated and accretive to earnings, although we may pursue smaller non-accretive acquisitions that will shorten our time to market with new technologies. The Company expects the general size of cash acquisitions it would currently consider would be less than $50 million. Any material acquisition could result in a decrease in the Company’s working capital, depending on the amount, timing and nature of the consideration to be paid. In addition, any material acquisitions of complementary or synergistic companies, products or technologies could require that we obtain additional debt or equity financing. There can be no assurance that such additional financing will be available to us or that, if available, such financing will be obtained on favorable terms and would not result in additional dilution to our stockholders.

 

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The Company leases office space, equipment and certain vehicles under non-cancelable operating lease agreements expiring on various dates through 2017. Additionally, the Company leases computer equipment under capital lease agreements which expire on various dates through July 2013. Contractual obligations as of September 30, 2010 are as follows (in thousands):

 

     Payments Due by Period  
     Total      Less than 1
Year
     1 - 3
Years
     3 - 5
Years
     More than 5
Years
 

Capital leases

   $ 813       $ 566       $ 247       $       $   

Operating leases (1)

     21,889         5,181         8,571         5,040         3,097   

Other obligations:

              

Revolving credit facility (JPM Credit Agreement)

                                       

Term loan facility (JPM Credit Agreement)

     15,500         6,000         9,500                   

Austrian research & development loan

     743                 743                   

Estimated interest payments on credit facility and term notes (2)

     885         556         329                   

Purchase commitments (3)

     18,383         16,652         1,731                   
                                            

Total contractual obligations

   $ 58,213       $ 28,955       $ 21,121       $ 5,040       $ 3,097   
                                            

 

(1) This schedule includes the future minimum lease payments related to facilities that are being subleased. The total minimum rentals to be received in the future under subleases as of September 30, 2010 are approximately $1.6 million in less than one year and $2.0 million in one to three years.
(2) For purposes of this disclosure, we used the interest rates in effect as of September 30, 2010 to estimate future interest expense. See Note 7 to the condensed consolidated financial statements for further discussion of our debt components and their interest rate terms.
(3) The Company has entered into certain noncancelable purchase orders for manufacturing supplies to be used in its normal operations. The related supplies are to be delivered at various dates through February 2012.

At September 30, 2010, the Company had a $3.2 million reserve for unrecognized tax benefits, which is not reflected in the table above. Substantially all of this tax reserve is classified in other long-term liabilities and deferred income taxes on the accompanying condensed consolidated balance sheet.

 

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Critical Accounting Policies and Procedures

General

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to client programs and incentives, product returns, bad debts, inventories, intangible assets, income taxes, and commitments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as updated and superseded by Radiant’s Current Report on Form 8-K dated June 25, 2010.

Accounting Pronouncements

Recently Issued Standards

In October 2009, the FASB issued Accounting Standards Update No. 2009-14 (“ASU 2009-14”), Software (Topic 985): Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force. This ASU establishes that tangible products that contain software that works together with the nonsoftware components of the tangible product to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. These items should be accounted for under other appropriate revenue recognition guidance. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011 and concurrently with ASU 2009-13, which is described below. Full retrospective application is optional and early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the impact of this ASU on our financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force. This ASU amends the criteria for separating consideration in multiple-deliverable arrangements, which will, as a result, separate multiple-deliverable arrangements more often than under existing U.S. GAAP. Additionally, this ASU establishes a selling price hierarchy for determining the selling price of a deliverable. The ASU also eliminates the residual method of revenue allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. This guidance requires that management determine its best estimate of selling price in a manner consistent with that used to determine the price to sell the deliverable on a stand-alone basis. This ASU significantly expands the disclosures required for multiple-deliverable revenue arrangements with the objective of disclosing judgments related to these arrangements and the effect that the use of the relative selling-price method and changes in those judgments have on the timing and amount of revenue recognition. We are required to adopt this ASU prospectively for new or materially modified agreements as of January 1, 2011 and concurrently with ASU 2009-14, which is described above. Full retrospective application is optional and early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the impact of this ASU on our financial statements.

 

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Forward-Looking Statements

This Quarterly Report on Form 10-Q of Radiant Systems, Inc. and its subsidiaries (“Radiant,” “Company,” “we,” “us,” or “our”) contains forward-looking statements. All statements in this Quarterly Report on Form 10-Q, including those made by the management of Radiant, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Radiant’s future financial results, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), including the section titled “Risk Factors” therein, as updated and superseded by Radiant’s Current Report on Form 8-K dated June 25, 2010. These and many other factors could affect Radiant’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Radiant or on its behalf. Radiant undertakes no obligation to revise or update any forward-looking statements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

The Company’s financial instruments that are subject to market risks are its long-term debt instruments. During the third quarter of 2010, the weighted average interest rate on its long-term debt was approximately 3.4%. A 10% increase in this rate would have impacted interest expense by less than $0.1 million for the three-month period ended September 30, 2010.

Foreign Exchange

The Company’s revenues derived from sources outside of the United States were approximately $12.5 million and $9.8 million for the three months ended September 30, 2010 and 2009, respectively, and approximately $39.0 million and $30.1 million for the nine months ended September 30, 2010 and 2009, respectively. The Company’s business outside the United States is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, the Company’s future results could be materially adversely impacted by changes in these or other factors.

 

ITEM 4. CONTROLS AND PROCEDURES

The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify its financial reports and to other members of senior management and the Company’s board of directors.

Based on their evaluation as of September 30, 2010, 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 (the “Act”) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In the first quarter of 2010, we completed an upgrade of our ERP system. This project is the result of our normal business process to evaluate and upgrade our systems software and related business processes to support our evolving operational needs. As part of the upgrade, we have continued to update our internal controls over financial reporting as necessary to accommodate any modifications to our business processes and accounting procedures. The upgrade was subject to comprehensive testing and review and we believe that appropriate internal controls are in place with the upgraded system.

During the quarter ended September 30, 2010, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 6. EXHIBITS

The following exhibits are filed with or incorporated by reference into this report. The exhibits which are denominated by an asterisk (*) were previously filed as a part of, and are hereby incorporated by reference from (i) a Registration Statement on Form S-1 for the Registrant, Registration No. 333-17723, as amended (“2/97 S-1”), (ii) a Registration Statement on Form S-1 for the Registrant, Registration No. 333-30289 (“6/97 S-1”), (iii) the Registrant’s Form 8-K filed December 17, 2007 (the “December 17, 2007 8-K”), (iv) the Registrant’s Form 8-K filed January 8, 2008 (the “January 8, 2008 8-K”), (v) the Registrant’s Form 8-K filed July 9, 2008 (the “July 9, 2008 8-K”), and (vi) a Registration Statement on Form S-3 for the Registrant, Registration No. 333-162309 (“10/09 S-3”).

 

Exhibit No.

  

Description

*2.1    Share Purchase Agreement, dated December 11, 2007, by and among Radiant Systems, Inc., Quest Retail Technology Pty Ltd, and David Brown (December 17, 2007 8-K).
*2.1.1    First Amendment to Share Purchase Agreement, dated as of January 4, 2008, by and among Radiant Systems, Inc., RADS Australia Holdings Pty Ltd, Quest Retail Technology Pty Ltd, and David Brown (January 8, 2008 8-K).
*2.2    Stock Purchase Agreement dated as of July 3, 2008, by and among Radiant Systems GmbH, Orderman GmbH, Alois Eisl, Franz Blatnik, Gottfried Kaiser, and Ing. Willi Katamay (July 9, 2008 8-K).
10.1    Form of Notice of Grant of Stock Options and Option Agreement.
10.2    Form of Grant Agreements – Restricted Stock Unit and Restricted Stock Award.
10.3    Form of Grant Agreement – Non Qualified Options.
*3.1    Amended and Restated Articles of Incorporation (6/97 S-1).
*3.2    Amended and Restated Bylaws (2/97 S-1).
*3.3    Articles of Amendment to Amended and Restated Articles of Incorporation of Radiant Systems, Inc. (10/09 S-3).
31.1    Certification of John H. Heyman, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Mark E. Haidet, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    RADIANT SYSTEMS, INC

Dated: November 5, 2010

  By:  

/s/    MARK E. HAIDET        

    Mark E. Haidet,
    Chief Financial Officer
    (Duly authorized officer and principal financial officer)

 

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