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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
_____________________
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
______________________________
Commission File No. 0-22065
RADIANT SYSTEMS, INC.
A Georgia Corporation
(IRS Employer Identification No. 11-2749765)
3925 Brookside Parkway
Alpharetta, Georgia 30022
(770) 576-6000
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has 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 [CHECK MARK] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the common stock of the registrant held
by nonaffiliates of the registrant (9,091,768 shares) on March 17,
1999 was approximately $85,803,561 based on the closing price of the
registrant's common stock as reported on The Nasdaq Stock Market on
that date. For the purposes of this response, officers, directors and
holders of 10% or more of the registrant's common stock are considered
to be affiliates of the registrant at that date.
The number of shares outstanding of the registrant's Common Stock, as
of March 15, 1999: 16,131,150 shares of no par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be
delivered to the shareholders in connection with the Annual Meeting of
the Shareholders to be held on May 14, 1999 are incorporated by
reference in response to Part III of this Report.
PART I
Item 1. Business.
General
Radiant Systems, Inc. (the "Company" or "Radiant") provides
enterprise-wide technology solutions to the retail industry.
The Company offers fully integrated retail automation solutions
including point of sale systems, consumer-activated ordering systems,
back office management systems and headquarters-based management
systems. The Company's products enable retailers to interact
electronically with consumers, capture data at the point of sale,
manage site operations and logistics and communicate electronically
with their sites, vendors and credit networks. In addition, the
Company offers system planning and design services that tailor the
automation solution to each retailer's specifications, as well as
implementation services to facilitate installation of the Company's
products.
Certain retail markets require many of the same product features and
functionality. As a result, the Company believes it can continue to
leverage its existing technology across various retail markets with
limited incremental product development efforts.
The Company operates through two primary reportable segments (i)
Global Solutions and (ii) Regional Solutions. Although both groups
provide enterprise-wide technology solutions to the retail industry,
the distinguishing factor between them is primarily size of the
clients served and the nature of the services performed. Global
Solutions' clients tend to be clients with greater than fifty owned
and operated sites, while Regional Solutions' clients typically have
less than fifty owned and operated sites. Additionally, the
purchasing behavior of the Global Solutions' clients is typically
characterized by the use of fewer, larger contracts. These contracts
typically involve longer negotiating cycles, and often require the
dedication of substantial amounts of working capital and other
resources. See Note 12 to the Company's consolidated financial
statements for certain financial information relating to these two
segments.
In May 1997, the Company completed the acquisitions of Restaurant
Management and Control Systems, Inc. ("ReMACS"), based in Pleasanton,
California, and RSI Merger Corporation (d.b.a.Twenty/20 Visual
Systems) ("Twenty/20"), based in Dallas, Texas. ReMACS is a leading
provider of back office management systems for clients in the food
service industry with over 8,000 installed or licensed sites.
Twenty/20 is a provider of point of sale and table management systems
for full-service restaurants.
In October 1997, the Company acquired RapidFire Software, Inc.
("RapidFire Software") and EquiLease Financial Services, Inc.
("EquiLease") (collectively "RapidFire") based in Hillsboro, Oregon.
RapidFire Software is a leading provider of point of sale systems to
the pizza industry and other delivery restaurants, with installations
in over 2,000 food service sites nationwide. EquiLease provides lease
financing to certain clients of RapidFire.
In November 1997, the Company completed its acquisition of Logic Shop,
Inc. ("Logic Shop"), based in Atlanta, Georgia. Logic Shop is a
leading provider of management software to the convenient automotive
service center market, with over 1,500 sites installed.
The Company originally was incorporated under the laws of the state of
New York on August 1, 1985 and was subsequently reincorporated under
the laws of the state of Georgia on October 27, 1995. The name of the
Company was changed to Radiant Systems, Inc. from Softsense Computer
Products, Inc. on November 13, 1996.
Industry Background
Successful retailers increasingly require information systems that
capture a detailed picture of consumer activity at the point of sale
and store that data in an accessible fashion. Early technology
innovators in the retail industry deployed robust, integrated
information systems at the point of sale and used the information to
react rapidly to changing consumer preferences, ultimately gaining
market share in the process. In addition, these integrated
information systems helped retailers achieve operational efficiencies.
Many large national retailers have followed suit by investing in
proprietary information systems.
For many types of retailers, however, this type of automation did not
make economic or business sense. In particular, merchants with a
large number of relatively small sites, such as convenience stores,
petroleum retailers, convenient automotive service centers, food
service and entertainment venues, generally have not been able to
cost-effectively develop and deploy sophisticated, enterprise-wide
information systems. Economic and standardization problems for these
markets are exacerbated by the fact that many sites operate as
franchises, dealerships or other decentralized ownership and control
structures. Without an investment in technology, these retailers
continue to depend on labor and paper to process transactions.
Management believes that high labor costs, lack of centralized
management control of remote sites and inadequate informational
reporting, together with emerging technology trends, have caused many
of these retailers to reexamine how technology solutions can benefit
their operations.
A large number of retail sites face these challenges. At the end of
1998, there were more than 95,700 convenience stores nationwide, while
the cinema industry had approximately 29,500 screens at 5,100 sites
nationwide. As of June 1998, the food service industry had over
487,000 domestic units, of which approximately 210,000 were classified
as quick service restaurants ("QSR"). Typically, the existing systems
in these industries consist of stand-alone devices such as cash
registers or other point of sale systems with little or no integration
with either the back office of the site or an enterprise-wide
information system. Implementation of systems providing this
functionality typically involves multiple vendors and an independent
systems integration firm. The resulting proprietary solutions are
often difficult to support and have inherently high risks associated
with implementation. Management believes that technology solutions
that are highly functional and scalable, relatively inexpensive and
easy to deploy are critical for successful implementation in these
retail markets.
In the absence of an integrated solution, retailers in these markets
typically rely on manual reporting to capture data on site activity
and disseminate it to different levels of management at the regional
and national headquarters. Basic information on consumers (i.e., who
they are, when they visit and what they buy) is not captured in
sufficient detail, at the right time or in a manner that can be
communicated easily to others in the organization. Similarly,
information such as price changes does not flow from headquarters to
individual sites in a timely manner. In addition, communications with
vendors often remain manual, involving paperwork, delays and related
problems.
Recent trends in the retailing industry have accelerated the need for
enterprise-wide information and have heightened demand for integrated
retailing systems. Based in part upon industry association reports
and other studies, as well as the Company's experience in marketing
its products, the Company believes consumer preferences have shifted
away from retailer loyalty toward value and convenience, creating a
greater need for timely data concerning consumer buying patterns and
preferences. Management also believes that convenient
consumer-activated ordering and payment systems, such as ATMs, voice
response units and "pay at the pump" systems, have become important to
retailers who wish to retain and build a client base. Additionally,
retailers can improve operational and logistical efficiencies through
better management of inventory, purchasing, merchandising, pricing,
promotions and shrinkage control. Management believes that the
constant flow of information among the point of sale, the back office,
headquarters and the supply chain has become a key competitive
advantage in the retail industry, causing retailers to demand more
sophisticated, integrated solutions from their systems vendors.
In a parallel development, technological advances have improved the
capability of systems available to retailers. With
the price of computing power declining, technology investments have
become economically feasible for many retailers. Further, computing
power has become increasingly flexible and distributable, facilitating
data capture and processing by applications located at the point of
sale. Also, new front-end graphical user interfaces are making
systems easier to use, which reduces training time and transaction
costs and facilitates more types of consumer-activated applications.
To meet increasing systems demands from retailers, providers of
hardware and software point of sale solutions are attempting to
integrate existing products. This process often requires independent
systems integrators to provide enterprise-wide data communications.
These systems often are based on proprietary, closed protocols and
technology platforms from several different vendors. As a result, the
effort required to implement and maintain these systems can be
difficult, time consuming and expensive.
The Radiant Solution
The Company offers fully integrated technology solutions that enable
retailers to improve site operations, serve consumers better and route
information throughout their organization and supply chains. The
Company believes its core technology and solutions are applicable to a
variety of retail markets. The Company's suite of products links
store level point of sale information with centralized merchandising
and financial functions that ultimately drive replenishment
communications with suppliers and vendors. The Company believes that
its site solutions are easy to implement, typically requiring less
than a week to install and a few hours to train individual users. The
following summarizes the solutions provided by the Company:
A five segment diagram presenting in brief form the principal features
and functions of the Company's primary technology solutions and
services. The diagram includes the text:
CONSUMER-ACTIVATED
Touch Screen Interactive
Video, Graphics, Audio
Credit/Cash Payment
Compact, Enclosed Terminals
Suggestive Selling
HEADQUARTERS
Executive Information
Electronic Price Book
Vendor EDI
Centralized Menu Management
Decision Support Systems
POINT OF SALE
Touch Screen Interactive
Transaction Auditing
Credit Processing
Data Capture
Peripheral Integration
Cash Reconciliation
Table Management
BACK OFFICE
Inventory Control
Vendor Management
Purchasing/Receiving
Employee Management
Recipe Management
Menu Management
SERVICES
Consulting
Training
Maintenance
Technical Support
Integration
Installation
The Company's technology solutions enable retailers to: allow
consumers to place their own orders for items such as food, movie
tickets and concessions through graphical touch screen interfaces;
capture transaction information and communicate with credit card
networks; manage and analyze in-store inventory movement, including
electronic ordering; schedule and manage staffing; and connect
headquarters to each of the retailer's local sites and vendors,
enabling management to quickly change pricing and review operating
performance in a timely and efficient manner. The Company's
products have been deployed successfully in retail operations ranging
in size from one to more than 800 sites.
Retailers derive the following benefits from Radiant's solutions:
Integrated information flows. The Company's technology solutions
provide retailers with tools for monitoring and analyzing sales
data, stock status, vendor relationships, merchandising and other
important activities, both at their sites and headquarters.
These products further enable retailers to communicate
electronically with their suppliers in order to exchange purchase
orders, invoices and payments.
Centralized management of highly decentralized operations.
Information provided by the Company's solutions enables
headquarters management to monitor site performance in a
consistent manner on a near-real time basis, implement price
changes simultaneously throughout the enterprise and rapidly
initiate targeted marketing programs.
Tighter on-site control over operations. The Company's back
office systems enable site managers to closely manage inventory,
reconcile accounts and control issues such as shift scheduling
and hourly wage calculations. The Company's solutions
incorporate sophisticated inventory management techniques to help
a retailer optimize its merchandising strategy.
Improved labor productivity. The Company incorporates user
friendly graphics within its solutions, reducing employee
training and order processing times which are important benefits
in retail environments due to high employee turnover. The
Company's back office solutions can alleviate extensive paperwork
required of site managers, allowing them more time to focus on
operations.
Improved client service. The Company's consumer-activated
ordering systems permit clients to place their own orders, answer
surveys and electronically communicate with the retailer. These
systems can improve client service, reduce site labor costs and,
through automating suggestive selling concepts, help the retailer
implement revenue enhancement opportunities.
Company Strategy
The Company's objective is to be the leading worldwide provider of
enterprise-wide technology solutions to the retail markets it serves.
The Company is pursuing the following strategies to achieve this
objective:
Expand existing position in selected markets. The Company
believes that it is in a strong position to expand its current
market share in the convenience store, food service,
entertainment and convenient automotive service center markets
due to its highly functional solutions and its practical
experience in deploying and implementing retail solutions. The
Company has experience integrating all aspects of its solutions
into existing retail technology infrastructures. In particular,
the Company has developed interfaces with a number of the widely
used electronic information and payment networks, including
networks of certain major petroleum retailers. The Company
continues to develop interfaces to credit networks of additional
major petroleum retailers, which if certified, will allow the
Company access to a large number of potential sites.
Introduce new products to current markets. The Company has
introduced a variety of new products and services since the
beginning of 1996, including consumer-activated systems, a
headquarters-based, enterprise-wide management system, Decision
Support System ("DSS"), a Windows NT version of its local
site-based products, consulting services and its multimedia
networking platform. During 1998, the Company began developing
Lighthouse, its next generation software technology. Management
believes its Lighthouse generation of software products, which
leverages both Microsoft Windows CE and NT operating systems,
represents an innovative platform based on open, modular software
and hardware architecture and offers increased functionality and
stability compared to other open systems in the marketplace at a
lower total costs of ownership. Additionally, the Company
continues to review products and solutions utilizing the
Internet.
Continue to develop sales and services infrastructure. To meet
the anticipated requirements of growth in its business, the
Company intends to continue expanding its direct sales force and
its professional services organization.
Expand markets for the Company's solutions. The Company believes
that its core technology and solutions are applicable to a
variety of retail markets. The Company has made five
acquisitions in the food service and entertainment markets, which
combined with its existing systems and technology, will enable it
to broaden its presence in these markets.
Attract and retain outstanding personnel. The Company believes
its strongest asset is its people. To attract and retain top
talent, the Company intends to maintain its entrepreneurial
culture and to continue offering competitive benefit programs.
The Company has granted stock options to a majority of its
employees and will strive to continue to align employee interests
with those of the Company's shareholders.
Make strategic acquisitions. The Company has accelerated its
entry into new vertical markets through acquisitions and joint
venture arrangements. Although the Company had no acquisitions
in 1998, to the extent the Company believes acquisitions can
better position it to serve its markets or penetrate others, it
will pursue such opportunities.
Retail Markets
To date, the Company's product applications have been focused toward
the convenience store, food service, entertainment and convenient
automotive service center markets, as these markets require many of
the same product features and functionality. The Company believes it
can continue to leverage its existing technology across these and
other retail markets with limited incremental product development
efforts.
Convenience Store Market
In the United States, there currently are approximately 95,700
convenience store sites, which derive a significant portion of
revenues from selling products other than gasoline. Additionally, the
Company believes that the international convenience store market
represents a substantial opportunity for its solutions. Management
believes that the industry is currently under-invested in technology.
Only 28.0% of the industry's retail sites use scanning equipment,
compared to grocery stores, which have implemented scanning at
approximately 90.0% of their locations.
The Company thus believes that the demand for the Company's solutions
in the convenience store market for the foreseeable future will remain
strong. This demand is fueled in part by the fact that many
convenience store operators are finding that their consumers prefer
"pay at the pump" systems, and many operators are upgrading their POS
systems to interface with these consumer-activated systems.
Approximately 37.0% of convenience stores currently utilize pay at the
pump technology. Implementing this technology requires a site to
upgrade its system for controlling and managing fuel sales.
Management believes that installation of pay at the pump systems will
remain strong for the foreseeable future, encouraging additional
investment in store automation. Management also believes that based
on technology in recent years, and the positive return on investment
associated with the Company's solutions, demand for new technology
will remain from both new and existing clients.
Food Service Market
The domestic food service market includes approximately 487,000 sites
as of June 1998. Restaurants increasingly require sophisticated
systems which integrate with evolving headquarters information systems
and enable more timely and accurate management of site operations. At
the site, managers seek real time information access and management
systems that permit employees to increase the speed and accuracy with
which they take an order, prepare the food, and fill the order, often
accommodating numerous concurrent consumer orders at multiple
table-top, counter-top and drive-through locations. Managers at all
levels are seeking solutions to better manage menu and pricing
functions, optimizing profitability and inventory management. The
market for automated information and transaction systems for
restaurants is typically more advanced than in the convenience store,
convenient automotive service center and entertainment markets but is
highly fragmented and includes a large number of proprietary, closed
systems.
Entertainment Market
The domestic cinema industry is concentrated, with the top six chains
operating approximately 44.0% of the cinema screens. In addition to
increasing screens per site, "megaplexes" have evolved, which combine
restaurants, movies and other forms of entertainment in one facility.
There are approximately 29,500 cinema screens in the United States.
These screens are operated at approximately 5,000 sites, with recent
trends emphasizing more screens per site. While cinema sites
typically are operated in a decentralized manner, the Company believes
cinema operators are focused on implementing cost controls from
headquarters.
Convenient Automotive Service Center Market
The convenient automotive service center market includes quick oil
change centers, full service car washes and various repair centers.
In the United States, there currently are approximately 15,000 quick
oil change centers and approximately 7,000 full service car washes.
The Company believes that the international automotive service center
market also represents a substantial opportunity for its solutions, as
well as various repair centers such as transmission and clutch
specialty shops and tire stores.
Retail Products
While the Company believes that its core technology may be adapted to
provide solutions to a variety of markets, it has concentrated its
efforts to date in the convenience store, food service, entertainment
and convenient automotive service center markets. The Company's
principal products, sales and marketing efforts, clients and
competitors are discussed below for these markets. The Company markets
a variety of products and services as part of its strategy to serve as
an integrated solutions provider. From consumer-activated ordering
solutions to feature-rich, highly functional point of sale and back
office systems tied into headquarters through advanced client/server
software, the Company's enterprise-wide solutions interact with the
consumer, site employees and management and the senior management of a
retailer's operations. To help retailers optimize the impact these
systems have on their operations, the Company also offers a wide array
of consulting, training and support services provided by experienced
professionals. The Company further provides "ruggedized" hardware
systems designed to cope with harsh retailing environments.
Consumer-Activated Ordering Systems
Within each of the markets the Company serves, the trend towards more
focused client service and less favorable labor demographics has
created a demand for consumer-activated ordering systems. In
response, the Company has developed an easy to use, consumer-activated
system which allows a consumer to preview movies and purchase tickets
or place a food order, pay with a plastic card and make inquiries and
view promotions through the use of a touch screen application. The
software development environment and authoring tools allow various
media, such as video clips, logos, pictures and recordings, to be
quickly integrated into a consumer-friendly application.
Management believes consumer-activated technology allows a retailer to
increase labor productivity, increase revenues through suggestive
selling, increase consumer ordering speed and accuracy, capture
consumer information at the point of sale and respond quickly to
changing consumer preferences. The Company's initial
consumer-activated ordering system was commercially released in the
second quarter of 1996, and, to date, the Company has sold systems or
licensed software to a number of retailers.
Point of Sale Systems
The Company offers a variety of point of sale products which can be
licensed as modules or as a complete system. These point of sales
products are comprehensive solutions that allow retailers to process
transactions and capture data, as well as manage other front office
operations. The products feature a touch screen interface,
user-friendly applications and flexibility in set-up and configuration
to accommodate operational variables at each sites. They are based on
an open architecture and run on either the Windows NT or Windows CE
platform and other operating systems. The applications may support
multiple point of sale terminals and a separate back office system and
are upgradable so that clients can phase in their investment with
additional hardware and software modules. The products offer clients
scalability, such that the same application can be run in chains with
widely varying numbers and sizes of sites; yet the enterprise solution
remains consistent and supportive of each site.
Back Office Management Systems
Back office software provides various types of retail operators with
the capabilities to manage employees and inventory, schedule labor,
automate daily reports, analyze costs and forecast results.
Additionally, this system provides the means for retailers to readily
gather point of sale and management information including real-time
sales monitoring. The Company's back office management systems were
developed with a user friendly, graphical interface and are based on
open architecture.
Headquarters-Based Management Systems
Headquarters-based management systems permit retailers to manage
individual sites from headquarters. This client/server based software
application allows retailers to better manage multiple sites. The
following is a summary of the features and functionality of the
Company's headquarter's application:
[BULLET] Price book-allows retailers to set prices for products
in a timely manner on a site-by-site, zone-by-zone or
system wide basis. Price book also allows retailers to
target prices based on a variety of different factors,
including markups based on cost, gross margins, and
target margins.
[BULLET] Site configuration and management-allows retailers to
define and control the parameters of site operations,
such as prohibiting clerks from authorizing fuel
dispensing without prepayment.
[BULLET] Fuel management-allows retailers to manage fuel
inventory movement and pricing. Such features allow
management to define and regulate site pricing and
strategies, including responding to price changes at
competitors' sites.
[BULLET] Decision Support System ("DSS")-supports headquarters
analysis of site operations, such as sales vs. cost
analysis,sales vs. budget analysis, labor productivity
analysis and category management analysis. DSS also
facilitates "what if" analyses, allowing retailers to
incorporate and ascertain the sensitivities of
operational variables such as price, cost and volume.
[BULLET] Electronic Data Interchange-supports the routing and
analysis of purchase orders and vendor invoices.
The Company believes that its headquarters-based product is one of the
most functional and comprehensive headquarters management applications
widely marketed to various retail chains. The product is built with
state of the art software tools and is flexible and expandable based
on application architecture and database structure. The application
is written in PowerBuilder, and the database, Microsoft SQL Server, is
highly scalable. The user interface is intuitive and easy to use.
To provide food service, entertainment and convenient automotive
service center operators with additional information and functionality
at headquarters, the Company, through its Lighthouse suite of
products, plans to combine certain features and functions of its
convenience store headquarters-based product with the food service,
entertainment and convenient automotive service center product lines.
See "-- Product Development".
Sales and Marketing
Through a dedicated sales effort designed to address the requirements
of different retail operators, the Company believes its sales force is
positioned to understand its clients' businesses, trends in the
marketplace, competitive products and opportunities for new product
development. This allows the Company to take a consultative approach
to working with clients.
The Company has a staff of personnel focusing on selling its solutions
to major clients, both domestically and internationally. All sales
personnel are compensated with a base salary and commission based on
revenue quotas, gross margins and other profitability measures.
To date, the Company's primary marketing objective has been to
increase awareness of all of the Company's technology solutions. To
this end, the Company has attended industry trade shows and
selectively advertised in industry publications. The Company intends
to increase its sales and marketing activities both domestically and
internationally, and will expand its advertising in relevant industry
publications. Additionally, the Company intends to continue developing
an independent distribution network to sell and service its products
to certain segments of the domestic and international markets.
Clients
Clients who have selected the Company as their technology solutions
provider operate over 22,000 sites. As of December 31, 1998, the
Company has installed its technology solutions in over 13,000 of these
sites. In 1998, one client, Speedway SuperAmerica, LLC, formerly Emro
Marketing Company, accounted for 10.3% of the Company's total
revenues. In 1997, three clients accounted for 36.4% of the Company's
total revenues, as follows: Speedway SuperAmerica, LLC, formerly Emro
Marketing Company (12.8%), Ultramar Diamond Shamrock Corporation
(12.2%) and Conoco, Inc. (11.4%). During 1996, four clients accounted
for greater than 10.0% of the Company's total revenues, as follows:
Ultramar Diamond Shamrock Corporation (21.5%), Loews Theatre
Management Corp. (13.8%), Emro Marketing Company (13.2%), and Sheetz,
Inc. (11.7%).
The following is a partial list of major clients who have licensed or
purchased the Company's products and services:
Advantica Restaurant Group, Inc.
BP Amoco, p.l.c.
Boston Chicken, Inc.
Chick-fil-A, Inc.
Compass Group USA, Inc.
Conoco, Inc.
General Cinema Theatres, Inc.
Loews Cineplex Entertainment Corporation
MAPCO, Inc.
Marsh Supermarkets, LLC
National Amusements, Inc.
Q-Lube, Inc.
Regal Cinemas, Inc.
Ruby Tuesday, Inc.
Souper Salad, Inc.
Speedway SuperAmerica, LLC, formerly Emro Marketing Company
The Neiman Marcus Group, Inc.
Tricon Restaurant Services Group, Inc.
Tosco Corporation
Ultramar Diamond Shamrock Corporation
VICORP Restaurants, Inc.
Competition
In marketing its technology solutions, the Company faces intense
competition, including internal efforts by potential clients. The
Company believes the principal competitive factors are product
quality, reliability, performance, price, vendor and product
reputation, financial stability, features and functions, ease of use,
quality of support and degree of integration effort required with
other systems.
Within the markets it serves, the Company believes it is the only
integrated technology solution provider of point of sale, back office
and headquarters-based management systems. Within these product
lines, the Company faces intense levels of competition from a variety
of competitors. International Business Machines, Inc., NCR
Corporation, Verifone, Inc. a subsidiary of Hewlett Packard Company,
Dresser Industries, Inc., Gilbarco, Inc., Point of Sale Limited,
Stores Automated Software, Inc., Pacer/CATS, a subsidiary of USA
Networks, Inc., MovieFone, Inc., Micros Systems, Inc., Par Technology
Corp. and others provide point of sale systems with varying degrees of
functionality. Back office and headquarters client/server software
providers include The Software Works!, Professional Datasolutions
Inc., SAP AG and JDA Software Group, Inc. In addition, the Company
faces additional competition from systems integrators who offer an
integrated technology solutions approach by integrating other third
party products.
The Company believes there are barriers to entry in the market for
convenience store automation solutions. The Company has invested a
significant amount of time and effort to create the functionality of
its consumer-activated point of sale and back office
headquarters-based management systems. The Company believes that the
time required for a competitor to duplicate the functionality of these
products is substantial and would require detailed knowledge of a
retailer's operations at local sites and headquarters. Also,
developing a credit card network interface often can take an
additional six to nine months, as the certification process can be
time consuming. Moreover, the major petroleum companies are extremely
selective about which automation system providers are permitted to
interface to their credit networks. As of March 15, 1999, the Company
was certified on eight credit networks, and it currently has initiated
the process to become certified on three other major petroleum company
credit networks.
Professional Services
The integration, design, implementation, application and installation
of technology solutions are critical to the Company's ability to
effectively market its solutions. The Company's Radiant Solutions
Group provides these services to its clients. The following is a
summary of some of the professional services the Company provides:
Consulting. Business consultants, systems analysts and technical
personnel assist retailers in all phases of systems development,
including systems planning and design, client-specific
configuration of application modules and on-site implementation
or conversion from existing systems. Directors in the Company's
consulting organization typically have significant consulting or
retail technology experience. The Company's consulting personnel
undergo extensive training in retail operations and the Company's
products. Consulting services typically are billed on a per diem
basis.
Customization. The Company provides custom application
development work for clients billed on a project or per diem
basis. Such enhancements remain the property of the Company.
Training. The Company has a formalized training program
available to its clients, which is provided on a per diem rate at
the Company's offices or at the client's site.
Integration. Typically, as part of its site solution, the
Company integrates standard PC components for its clients. This
is done as part of the overall technology solution for the
clients to maximize the quality of the overall site solution and
to provide the clients with a system that is easy to support over
the long term.
The market for the Company's professional services is intensively
competitive. The Company believes the principal competitive factors
are the professional qualifications, expertise and experience of
individual consultants. In the market for professional services, the
Company competes with the consulting divisions of the big five
accounting firms, Electronic Data Systems, Inc., International
Business Machines, Inc. and other systems integrators.
Maintenance and Client Support
The Company offers client support on a 24-hour basis, a service that
historically has been purchased by a majority of its clients and also
entitles the client to product upgrades. In some cases, hardware
support is provided by third parties. The Company can remotely access
its clients' systems in order to perform quick diagnostics and provide
on-line assistance. The annual support option is typically priced at
a percentage of the software and hardware cost.
Product Development
The Company's product development strategy is focused on creating
common technology elements that can be leveraged in applications
across various vertical retail markets. The Company's software
architecture is based on open platform and is modular allowing it to
phased into a retailer's operations. The Company has developed
numerous applications running on a Windows NT platform. The software
architecture incorporates Microsoft's Component Object Model,
providing an efficient environment for application development.
Throughout the course of 1997 and 1998, Radiant Systems entered
additional retail markets facilitated primarily through the
acquisition of several companies and product offerings. Combined with
its existing products, the Company began developing, marketing,
deploying and supporting a variety of products. As a result, during
1998 the Company's management determined that significant internal
cost efficiencies and increased market appeal could be obtained
through the consolidation of its legacy products into a single family
of products, Lighthouse. This consolidation effort integrated the
best business and technical knowledge from multiple markets.
The Company is now developing and plans to market a single family of
products that serves the needs of multiple marketplaces. Management
believes the Lighthouse family of products will uniquely position the
Company to serve the needs of retailers who cross business segments
(i.e., a convenience store or cinema with a fast food operation),
further differentiating the Company's systems from those of its
competitors and allowing the Company to significantly reduce future
development and support costs.
Proprietary Rights
The Company's success and ability to compete is dependent in part upon
its proprietary technology, including its software source code. To
protect its proprietary technology, the Company relies on a
combination of trade secret, nondisclosure, copyright and patent law,
which may afford only limited protection. In addition, effective
copyright and trade secret protection may be unavailable or limited in
certain foreign countries. Although the Company relies on the
limited protection afforded by such intellectual property laws, it
also believes that factors such as the technological and creative
skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable maintenance are essential
to establishing and maintaining a technology leadership position. The
Company presently has one patent and one patent pending. The source
code for the Company's proprietary software is protected both as a
trade secret and as a copyrighted work. The Company generally enters
into confidentiality or license agreements with its employees,
consultants and clients and generally controls access to and
distribution of its software, documentation and other proprietary
information. Although the Company restricts the use by the client of
the Company's software and does not permit the re-sale, sublicense or
other transfer of such software, there can be no assurance that
unauthorized use of the Company's technology will not occur.
Despite the measures taken by the Company to protect its proprietary
rights, unauthorized parties may attempt to reverse engineer or copy
aspects of the Company's products or to obtain and use information
that the Company regards as proprietary. Policing unauthorized use of
the Company's products is difficult. In addition, litigation may be
necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend
against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have
a material adverse effect on the Company's business, operating results
and financial condition.
Certain technology used in conjunction with the Company's products is
licensed from third parties, generally on a non-exclusive basis.
These licenses usually require the Company to pay royalties and
fulfill confidentiality obligations. The Company believes that there
are alternative resources for each of the material components of
technology licensed by the Company from third parties. However, the
termination of any such licenses, or the failure of the third-party
licensors to adequately maintain or update their products, could
result in delay in the Company's ability to ship certain of its
products while it seeks to implement technology offered by alternative
sources. Any required replacement licenses could prove costly. Also,
any such delay, to the extent it becomes extended or occurs at or near
the end of a fiscal quarter, could result in a material adverse effect
on the Company's results of operations. While it may be necessary or
desirable in the future to obtain other licenses relating to one or
more of the Company's products or relating to current or future
technologies, there can be no assurance that the Company will be able
to do so on commercially reasonable terms or at all.
In the future, the Company may receive notices claiming that it is
infringing on the proprietary rights of third parties, and there can
be no assurance that the Company will not become the subject of
infringement claims or legal proceedings by third parties with respect
to current or future products. In addition, the Company may initiate
claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Any such claim could be time consuming,
result in costly litigation, cause product shipment delays or force
the Company to enter into royalty or license agreements rather than
dispute the merits of such claims. Moreover, an adverse outcome in
litigation or similar adversarial proceedings could subject the
Company to significant liabilities to third parties, require the
expenditure of significant resources to develop non-infringing
technology, require disputed rights to be licensed from others or
require the Company to cease the marketing or use of certain products,
any of which could have a material adverse effect on the Company's
business, operating results and financial condition. To the extent
the Company desires or is required to obtain licenses to patents or
proprietary rights of others, there can be no assurance that any such
licenses will be made available on terms acceptable to the Company, if
at all. As the number of software products in the industry increases
and the functionality of these products further overlaps, the Company
believes that software developers may become increasingly subject to
infringement claims. Any such claims against the Company, with or
without merit, as well as claims initiated by the Company against
third parties, can be time consuming and expensive to defend,
prosecute or resolve.
Employees
As of December 31, 1998 the Company employed 650 persons. None of the
Company's employees is represented by a collective bargaining
agreement nor has the Company experienced any work stoppage. The
Company considers its relations with its employees to be good.
The Company's future operating results depend in significant part upon
the continued service of its key technical, consulting and senior
management personnel and its continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for
such personnel is intense, and there can be no assurance that the
Company will retain its key managerial or technical personnel or
attract such personnel in the future. The Company has at times
experienced and continues to experience difficulty recruiting
qualified personnel, and there can be no assurance that the Company
will not experience such difficulties in the future. The Company,
either directly or through personnel search firms, actively recruits
qualified product development, consulting and sales and marketing
personnel. If the Company is unable to hire and retain qualified
personnel in the future, such inability could have a material adverse
effect on the Company's business, operating results and financial
condition.
Forward-Looking Statements
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, such as statements relating to financial results
and plans for future business development activities, and are thus
prospective. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include,
but are not limited to, economic conditions, competition and other
uncertainties detailed from time to time in the Company's Securities
and Exchange Commission filings. See "-Risk Factors".
Risk Factors
In addition to the other information contained in this Report, the
following risks should be considered carefully in evaluating the
Company and its business.
History of Operating Losses. The Company incurred net losses of $3.4
million, $19.5 million and $2.2 million for fiscal years 1998, 1997
and 1996, respectively. There can be no assurance that the Company
will be able to achieve profitability for fiscal 1999 and beyond. The
Company anticipates that completing its products under development,
and marketing existing products and new releases will require
substantial expenditures. Accordingly, an investment in the Common
Stock is extremely speculative in nature and involves a high degree of
risk.
Management of Growth. The growth in the size and complexity of the
Company's business and the expansion of its product lines and its
client base will place a significant strain on the Company's
management and operations. An increase in the demand for the
Company's products could strain the Company's resources or result in
delivery problems, delayed software releases, slow response time, or
insufficient resources for assisting clients with implementation of
the Company's products and services, which could have a material
adverse effect on the Company's business, operating results
and financial condition. The Company anticipates that continued
growth, if any, will require it to recruit, hire and assimilate a
substantial number of new employees, including consulting, product
development, sales and marketing personnel.
The Company's ability to compete effectively and to manage future
growth, if any, also will depend on its ability to continue to
implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate
and manage its work force, particularly its direct sales force and
consulting services organization. There can be no assurance that the
Company will be able to manage any future growth, and any failure to
do so could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's ability to undertake new projects and increase revenues
is dependent on the availability of the Company's personnel to assist
in the development and implementation of the Company's technology
solutions. The Company currently is attempting to increase consulting
capacity in anticipation of future sales. Should the Company increase
its consulting capacity and such sales fail to materialize, the
Company's business, operating results and financial condition would be
adversely affected.
Growth Through Acquisition. As part of its operating history and
growth strategy, the Company has consummated and may seek to
consummate the acquisition of other businesses. In the future, the
Company may continue to seek acquisition candidates in selected
markets and from time to time engages in exploratory discussions with
suitable candidates. There can be no assurance, however, that the
Company will be able to identify and acquire targeted businesses or
obtain financing for such acquisitions on satisfactory terms. The
process of integrating acquired businesses into the Company's
operations may result in unforeseen difficulties and may require a
disproportionate amount of resources and management attention. In
particular, the integration of acquired technologies with the
Company's existing products could cause delays in the introduction of
new products. In connection with future acquisitions, the Company may
incur significant charges to earnings
as a result of, among other things, the write-off of purchased
research and development. For instance, in the second quarter of
1997, the Company recorded one-time accounting charges of
approximately $30.1 million for the write-off of purchased research
and development and compensation expense in connection with its 1997
acquisitions. Future acquisitions may be financed through the issuance
of Common Stock, which may dilute the ownership of the Company's
shareholders, or through the incurrence of additional indebtedness.
Furthermore, there can be no assurance that competition for
acquisition candidates will not escalate, thereby increasing the costs
of making acquisitions or making suitable acquisitions unattainable.
Fluctuations in Quarterly Operating Results. The Company has
experienced and expects to continue to experience quarterly
fluctuations in its operating results. The Company's revenue growth
over the past several years should not be taken as indicative of the
rate of revenue growth, if any, that can be expected in the future.
The Company believes that period-to-period comparisons of its
operating results are not meaningful and that the results for any
period should not be relied upon as an indication of future
performance. Moreover, a significant portion of the Company's
quarterly revenues has been derived from a limited number of clients
in the convenience store market. The Company currently anticipates
that this trend will continue. With a limited number of clients,
fluctuations in their purchasing patterns resulting from budgeting or
other considerations can have a significant effect on the Company's
quarterly results. For example, in 1998 a number of factors impacted
the Company's revenue growth and operating results, including the fact
that several of the Company's larger clients were involved in mergers
and acquisitions which, for a variety of reasons, interrupted or
delayed roll outs of the Company's products. In addition, the
purchasing behavior of the Company's largest clients became
increasingly characterized by the use of fewer, larger contracts.
These contract typically involve longer negotiating cycles, require
the dedication of substantial amounts of working capital and other
resources, and in general require costs that may substantially precede
recognition of associated revenues. Any significant cancellation or
deferral of client orders could also have a material adverse effect on
the Company's operating results in any particular quarter.
The introduction of new research and development projects requires the
Company to significantly increase its operating expenses to fund
greater levels of product development and to develop and commercialize
additional products and services. To the extent that such expenses
precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition may
be materially and adversely affected.
The Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside
the Company's control. These factors include the level of usage of
computer-based and consumer-activated products and services, the size
and timing of individual client orders, the introduction of new
products or services by the Company or its competitors, pricing
changes in the industry, technical difficulties with respect to the
use of computer-based products and services developed by the Company,
general economic conditions and economic conditions specific to the
computer, convenience store, restaurant and entertainment markets. As
a strategic response to changes in the competitive environment, the
Company may from time to time make certain pricing, service or
marketing decisions or acquisitions that could have a material adverse
effect on the Company's business, results of operations and financial
condition.
Due to all of the foregoing factors, in some future quarters the
Company's operating results may fall below the expectations of
securities analysts and investors. In such event, the trading price of
the Company's Common Stock would likely be materially and adversely
affected.
Industry Concentration and Cyclicality. Greater than 50.0% of the
Company's total revenue in both 1998 and 1997 was related to the
convenience store market, which is dependent on the domestic and
international economy. The convenience store market is affected by a
variety of factors, including global and regional instability,
governmental policy and regulation, natural disasters, consumer buying
habits, consolidation in the petroleum industry, war and general
economic conditions. Adverse developments in the convenience store
market could materially affect the Company's business, operating
results and financial condition. In addition, the Company believes the
purchase of its products is relatively discretionary and generally
involves a significant commitment of capital, because purchases of the
Company's products are often accompanied by large scale hardware
purchases. As a result, although the Company believes its products
can assist convenience stores in a competitive environment, demand for
the Company's products and services could be disproportionately
affected by instability or downturns in the convenience store market
which may cause clients to exit the industry or delay, cancel or
reduce planned expenditures for information management systems and
software products.
Concentration of Clients. The Company sells systems and services to a
number of major clients. During 1998, approximately 30.6% of the
Company's revenue were derived from six clients. During 1997,
approximately 36.4% of the Company's total revenues were derived from
three clients. During 1996, approximately 60.2% of the Company's
total revenues were derived from four clients. There can be no
assurance that the loss of one or more of these clients will not have
a material adverse effect on the Company's business, operating results
and financial condition.
New Product Development and Rapid Technological Change. The Company
has a substantial ongoing commitment to research and development. In
this regard, the Company is currently designing, coding and testing a
number of new products and developing expanded functionality of its
current products that will be important for the Company to remain
competitive. The Company and its prospects must be considered in
light of the risks, expenses and difficulties frequently encountered
by companies in the rapidly evolving market for computer-based
products and services. To address these risks, the Company must, among
other things, continue to respond to competitive developments;
attract, retain and motivate qualified personnel; implement and
successfully execute its sales strategy; develop and market additional
products and services in present and future markets; upgrade its
technologies and commercialize products and services incorporating
such technologies. There can be no assurance that the Company will be
successful in addressing such risks.
The types of products sold by the Company are subject to rapid and
continual technological change. Products available from the Company,
as well as from its competitors, have increasingly offered a wider
range of features and capabilities. The Company believes that in order
to compete effectively in selected vertical markets, it must provide
compatible systems incorporating new technologies at competitive
prices. There can be no assurance that the Company will be able to
continue funding research and development at levels sufficient to
enhance its current product offerings or will be able to develop and
introduce on a timely basis new products that keep pace with
technological developments and emerging industry standards and address
the evolving needs of clients. There can also be no assurance that the
Company will not experience difficulties that will result in delaying
or preventing the successful development, introduction and marketing
of new products in its existing markets or that its new products and
product enhancements will adequately meet the requirements of the
marketplace or achieve any significant degree of market acceptance.
Likewise, there can be no assurance as to the acceptance of Company
products in new markets, nor can there be any assurance as to the
success of the Company's penetration of these markets, or to the
revenue or profit margins with respect to these products. The
inability of the Company, for any reason, to develop and introduce new
products and product enhancements in a timely manner in response to
changing market conditions or client requirements could materially
adversely affect the Company's business, operating results and
financial condition.
In addition, the Company strives to achieve compatibility between the
Company's products and retail systems the Company believes are or will
become popular and widely adopted. The Company invests substantial
resources in development efforts aimed at achieving such
compatibility. Any failure by the Company to anticipate or respond
adequately to technology or market developments could materially
adversely affect the Company's business, operating results and
financial condition.
Competition. The market for retail information systems is intensely
competitive. The Company believes the principal competitive factors in
such market are product quality, reliability, performance and price,
vendor and product reputation, financial stability, features and
functions, ease of use and quality of support. A number of companies
offer competitive products addressing certain of the Company's target
markets. See "-Competition". In addition, the Company believes that
new market entrants may attempt to develop fully integrated systems
targeting the retail industry. In the market for consulting services,
the Company competes with the consulting divisions of the big five
accounting firms, Electronic Data Systems, Inc. and other systems
integrators. Many of the Company's existing competitors, as well as a
number of potential new competitors, have significantly greater
financial, technical and marketing resources than the Company. There
can be no assurance that the Company will be able to compete
successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Key Personnel; Ability to Attract and Retain Technical
Personnel. The Company's future success depends in part on the
performance of its executive officers and key employees. The Company
does not have in place employment agreements with any of its executive
officers. The Company maintains a $1.0 million "key person" life
insurance policy on each of Erez Goren and Alon Goren, the Chief
Executive Officer and Chief Technology Officer, respectively, of the
Company. The loss of the services of any of its executive officers or
other key employees could have a material adverse effect on the
business, operating results and financial condition of the Company.
The Company is heavily dependent upon its ability to attract, retain
and motivate skilled technical and managerial personnel, especially
highly skilled engineers involved in ongoing product development and
consulting personnel who assist in the development and implementation
of the Company's total business solutions. The market for such
individuals is intensely competitive. Due to the critical role of the
Company's product development and consulting staffs, the inability to
recruit successfully or the loss of a significant part of its product
development or consulting staffs would have a material adverse effect
on the Company. The software industry is characterized by a high
level of employee mobility and aggressive recruiting of skilled
personnel. There can be no assurance that the Company will be able to
retain its current personnel, or that it will be able to attract,
assimilate or retain other highly qualified technical and managerial
personnel in the future. The inability to attract, hire or retain the
necessary technical and managerial personnel could have a material
adverse effect upon the Company's business, operating results and
financial condition.
Dependence on Proprietary Technology. The Company's success and
ability to compete is dependent in part upon its ability to protect
its proprietary technology. The Company relies on a combination of
patent, copyright and trade secret laws and non-disclosure agreements
to protect this proprietary technology. The Company enters into
confidentiality and non-compete agreements with its employees and
license agreements with its clients and potential clients which limits
access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that the steps
taken by the Company to protect its proprietary rights will be
adequate to prevent misappropriation of its technology or that the
Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology.
In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the
United States.
Certain technology used in conjunction with the Company's products is
licensed from third parties, generally on a non-exclusive basis. The
termination of any such licenses, or the failure of the third-party
licensors to adequately maintain or update their products, could
result in delay in the Company's ability to ship certain of its
products while it seeks to implement technology offered by alternative
sources, and any required replacement licenses could prove costly.
While it may be necessary or desirable in the future to obtain other
licenses relating to one or more of the Company's products or relating
to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at
all.
Ownership by Management. The Company's executive officers
collectively own approximately 43.5% of the outstanding Common Stock.
Consequently, together they will continue to be able to exert
significant influence over the election of the Company's directors,
the outcome of most corporate actions requiring shareholder approval
and the business of the Company.
Volatility of Market Price for Common Stock; Absence of Dividends.
The market price for the Company's Common Stock has experienced
substantial price volatility since its initial public offering in
February 1997 and such volatility may occur in the future. Quarterly
operating results of the Company or of other companies participating
in the computer-based products and services industry, changes in
conditions in the economy, the financial markets of the computer
products and services industries, natural disasters or other
developments affecting the Company or its competitors could cause the
market price of the Common Stock to fluctuate substantially. In
addition, the stock market has experienced extreme price and volume
fluctuations that have affected the market price of many technology
stocks in particular and that have often been unrelated or
disproportionate to the operating performance of these companies. For
the foreseeable future, it is expected that earnings, if any,
generated from the Company's operations will be used to finance the
growth of its business, and that no dividends will be paid to holders
of the Common Stock.
Anti-Takeover Provisions. The Company's Amended and Restated Articles
of Incorporation authorize the Board of Directors to issue up to
5,000,000 shares of preferred stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of
the preferred stock without further vote or action by the Company's
shareholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. While
the Company has no present intention to issue additional shares of
preferred stock, such issuance, while providing desired flexibility in
connection with possible acquisitions and other corporate purposes,
could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. In
addition, certain provisions of the Company's Articles of
Incorporation and Bylaws may discourage proposals or bids to acquire
the Company. This could limit the price that certain investors might
be willing to pay in the future for shares of Common Stock. The
Company's Articles of Incorporation divide the Board of Directors into
three classes, as nearly equal in
size as possible, with staggered three-year terms. One class will be
elected each year. The classification of the Board of Directors could
have the effect of making it more difficult for a third party to
acquire control of the Company. The Company is also subject to certain
provisions of the Georgia Business Corporation Code which relate to
business combinations with interested shareholders.
Item 2. Properties.
The Company's principal facility occupies approximately 107,000 square
feet in Alpharetta, Georgia, under a ten year lease agreement. The
lease agreement expires in October 2007.
In November 1997, the Company signed a five-year lease to house the
Integration and Client Support Operations. The building, also in
Alpharetta, Georgia, is approximately 102,000 square feet. The
Company also has regional offices in Pleasanton, California and
Hillsboro, Oregon.
Item 3. Legal Proceedings.
There are no material pending legal proceedings to which the Company
is a party or of which any of its properties are subject; nor are
there material proceedings known to the Company to be contemplated by
any governmental authority. There are no material proceedings known to
the Company, pending or contemplated, in which any director, officer
or affiliate or any principal security holder of the Company, or any
associate of any of the foregoing is a party or has an interest
adverse to the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter ended December 31,
1998 to a vote of security holders of the Company.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Common Stock has traded on The Nasdaq Stock Market under the
symbol "RADS" since the Company's initial public offering on February
13, 1997. Prior to that time, there was no public market for the
Common Stock. The following table sets forth the high and low sale
prices per share for the Common Stock for the periods indicated as
reported by The Nasdaq Stock Market.
Year ended December 31, 1997 High Low
- -------------------------------------- --------- --------
First Quarter (from February 13, 1997) $ 14 1/8 $ 8 1/4
Second Quarter 26 1/4 7
Third Quarter 27 18 1/2
Fourth Quarter 29 3/8 17 3/4
Year ended December 31, 1998 High Low
- -------------------------------------- --------- --------
First Quarter $ 28 5/8 $16
Second Quarter 25 11/16 13 5/8
Third Quarter 14 7/8 3 13/16
Fourth Quarter 8 5/16 5
As of March 16, 1999, there were 226 holders of record of the Common
Stock. Management of the Company believes that these are in excess of
400 beneficial holders of its Common Stock.
The Company currently anticipates that all of its earnings will be
retained for development of the Company's business and does not
anticipate paying any cash dividends in the foreseeable future. Future
cash dividends, if any, will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the
Company's future earnings, operations, capital requirements and
surplus, general financial condition, contractual restrictions and
such other factors as the Board of Directors may deem relevant.
Item 6. Selected Consolidated Financial Data
The following table sets forth selected consolidated financial data of
the Company for the periods indicated, which data has been derived
from the consolidated financial statements of the Company. The
consolidated financial statements of the Company as of, and for each
of the years in the five-year period ended December 31, 1998, have
been audited by Arthur Andersen LLP, independent public accountants.
This selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements of the Company and the notes thereto included elsewhere
herein.
Year Ended December 31,
-----------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
Statement of Operations Data:
Revenues:
System sales $ 59,400 $ 66,798 $35,888 $14,078 $13,529
Client support, maintenance and other services 23,535 11,205 5,055 1,804 919
-------- -------- ------- ------- -------
Total revenues 82,935 78,003 40,943 15,882 14,448
Cost of revenues:
System sales 28,877 34,019 22,270 9,863 9,459
Client support, maintenance and other services 20,288 10,298 5,465 2,300 1,208
-------- -------- ------- ------- -------
Total cost of revenues 49,165 44,317 27,735 12,163 10,667
-------- -------- ------- ------- -------
Gross profit 33,770 33,686 13,208 3,719 3,781
Operating expenses:
Product development 11,199 6,897 3,328 1,640 984
Sales and marketing 11,730 5,819 1,487 607 470
Depreciation and amortization 4,665 2,384 948 583 178
Acquisition and other non-recurring charges 1,276 30,086 3,930 -- --
General and administrative 12,360 9,059 5,664 2,990 2,243
-------- -------- ------- ------- -------
Loss from operations (7,460) (20,559) (2,149) (2,101) (94)
Interest (income)expense, net (1,800) (989) 712 166 82
Minority interest in earnings of PrysmTech -- -- 628 -- --
Other income -- -- -- (406) --
-------- -------- ------- ------- -------
Loss before income taxes and extraordinary item (5,660) (19,570) (3,489) (1,861) (176)
Income tax benefit(1) (2,265) (212) (1,333) (709) (61)
Extraordinary item, net of taxes(2) -- 131 -- -- --
-------- -------- ------- ------- -------
Net loss $ (3,395) $(19,489) $(2,156) $(1,152) $ (115)
======== ======== ======= ======= =======
Basic loss per share:
Loss before extraordinary item $ (0.21) $ (1.49) $ (0.26) $ (0.13) $ (0.01)
Extraordinary loss on early extinguishment of debt -- (0.01) -- -- --
-------- -------- ------- ------- -------
Total basic loss per share (3) $ (0.21) $ (1.50) $ (0.26) $ (0.13) $ (0.01)
======== ======== ======= ======= =======
Diluted loss per share:
Loss before extraordinary item $ (0.21) $ (1.49) $ (0.26) $ (0.13) $ (0.01)
Extraordinary loss on early extinquishment of debt -- (0.01) -- -- --
-------- -------- ------- ------- -------
Total diluted loss per share (3) $ (0.21) $ (1.50) $ (0.26) $ (0.13) $ (0.01)
======== ======== ======= ======= =======
Weighted average shares outstanding:
Basic (3) 15,990 13,024 8,300 9,073 13,199
======== ======== ======= ======= =======
Diluted (3) 15,990 13,024 8,300 9,073 13,199
======== ======== ======= ======= =======
December 31,
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
Balance Sheet Data:
Working capital $ 47,329 $ 57,259 $ 812 $(3,664) $(1,027)
Total assets 84,166 93,515 14,616 4,235 4,818
Long-term debt and shareholder loan,
including current portion 4,267 4,728 9,174 970 1,067
Shareholders' equity (deficit) 69,245 71,021 (4,500) (3,154) (722)
(1) As a result of its election to be treated as an S Corporation for
income tax purposes, prior to completion of its initial public
offering in February 1997, the Company was not subject to federal
or state income taxes. For periods prior to the termination of
the S Corporation status, pro forma net income amounts include
additional income tax benefits determined by applying the
Company's anticipated statutory tax rate to pretax income (loss),
adjusted for permanent tax differences. From February (C
Corporation inception) until December 31, 1997, the Company did
not record a tax benefit, primarily due to nondeductible
purchased research and development costs. A tax benefit was
recorded in 1998 due to the net operating loss for the year. See
Note 6 to the consolidated financial statements.
(2) Represents loss from early extinguishment of debt, net of income
tax of $82,000.
(3) In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"), effective for fiscal years ending after
December 15, 1997. The Company adopted the new guidelines for
the calculation and presentation of earnings per share, and all
prior periods have been restated.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion should be read in conjunction with the
consolidated financial statements of the Company (including the notes
thereto) contained elsewhere in this Report.
Overview
The Company provides enterprise-wide technology solutions to the
retail industry. The Company offers fully integrated retail
automation solutions including point of sale systems,
consumer-activated ordering systems, back office management systems
and headquarters-based management systems. The Company's products
enable retailers to interact electronically with their clients,
capture detailed data at the point of sale, manage labor and inventory
at their sites and communicate electronically with their sites,
vendors and credit networks. In addition, the Company offers system
planning, design and implementation services to tailor its solutions
to each retailer's specifications.
The Company derives its revenues primarily from the sale of integrated
systems, including software, hardware and related support and
consulting services. The Company plans to increase licensing of
certain of its software products on a stand-alone basis. In addition,
the Company offers implementation and integration services which are
billed on a per diem basis. The Company's revenues from its various
technology solutions are, for the most part, dependent on the number
of installed sites a client has. Accordingly, while the typical sale
is the result of a long, complex process, the Company's clients
usually continue installing additional sites over an extended period
of time. Revenues from software and systems sales are recognized as
products are shipped, provided that collection is probable and no
significant post shipment vendor obligations remain. Revenues from
client support, maintenance and other services are generally
recognized as the service is performed.
Since November 1995, a number of events resulted in strong revenue
growth for the Company. The Company developed new products,
established relationships with new clients and increased sales to
existing clients. The Company expanded its presence into the retail
industry in November 1995 by entering into a joint venture (PrysmTech)
to market enterprise-wide technology solutions to the cinema
operators. On December 31, 1996, the Company purchased the remaining
interest in PrysmTech. Accordingly, the operations of PrysmTech are
reflected in the 1996 financial statements of the Company with a
deduction for the minority interest in the earnings of PrysmTech.
Continuing its growth in the retail industry, in May 1996 the Company
purchased Liberty Systems International, Inc. ("LSI"), a technology
solution provider to the QSR operators. To broaden its presence in
the food service market, the Company acquired Restaurant Management
and Control Systems, Inc. ("ReMACS") and RSI Merger Corporation d.b.a.
Twenty/20 Visual Systems, Inc. ("Twenty/20"), in May 1997 and
RapidFire Software, Inc. and EquiLease Financial Services, Inc.
(collectively "RapidFire") in October 1997. In November 1997, the
Company acquired Logic Shop, Inc. ("Logic Shop") to serve the
convenient automotive service centers. During this period, the Company
also expanded its sales force and continued to add management,
consulting and product development personnel.
During 1998, the Company's internal reporting segments were
reorganized. Most notably was the creation of the Global Solutions
and Regional Solutions segments. Although both groups provide
enterprise-wide technology solutions to the retail industry, the
distinguishing factor between them is primarily the size of the
clients served and the nature of the
services performed. Global Solutions' clients tend to be clients with
greater than fifty owned and operated sites, while Regional Solutions'
clients typically have less than fifty owned and operated sites.
In 1998, a number of factors impacted the Company's revenue growth and
operating results. Most notable was the fact that a number of the
Company's larger clients were involved in mergers and acquisitions
which, for a variety of reasons, interrupted or delayed roll outs of
the Company's products. In addition, the purchasing behavior of the
Company's largest clients became increasingly characterized by the use
of fewer, larger contracts. These contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of
working capital and other resources, and in general require costs that
may substantially precede recognition of associated revenues.
Moreover, in return for larger, longer-term purchase commitments,
clients often demand more stringent acceptance criteria, which can
also cause revenue recognition delays. The above, coupled with
investments by the Company in product development and other areas
of business negatively impacted operating results and contributed to
losses during 1998.
As a result of its election to be treated as an S Corporation for
income tax purposes, prior to the completion of its initial public
offering in February 1997, the Company was not subject to federal or
state income taxes. Pro forma net loss amounts discussed herein
include additional income tax benefits determined by applying the
Company's anticipated statutory tax rate to pretax loss, adjusted for
permanent tax differences. The Company's S Corporation status
terminated upon completion of its initial public offering in February
1997.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship of certain statement of operation items to
total revenues:
Year ended December 31,
-------------------------------
1998 1997 1996
-------------------------------
Revenues:
System sales 71.6% 85.6% 87.7%
Client support, maintenance and other services 28.4 14.4 12.3
-------------------------------
Total revenues 100.0 100.0 100.0
Cost of revenues:
System sales 34.8 43.6 54.4
Client support, maintenance and other services 24.5 13.2 13.3
-------------------------------
Total cost of revenues 59.3 56.8 67.7
-------------------------------
Gross profit 40.7 43.2 32.3
Operating expenses:
Product development 13.5 8.8 8.1
Sales and marketing 14.1 7.5 3.6
Depreciation and amortization 5.6 3.1 2.3
Acquisition and other non-recurring charges 1.6 38.6 9.6
General and administrative 14.9 11.6 13.9
-------------------------------
Loss from operations (9.0) (26.4) (5.2)
Interest (income) expense, net (2.2) (1.3) 1.7
Minority interest in earnings of PrysmTech -- -- 1.6
Other income -- -- --
-------------------------------
Loss before income taxes and extraordinary item (6.8) (25.1) (8.5)
Income tax benefit (2.7) (0.3) (3.3)
Extraordinary item, net of taxes -- 0.2 --
-------------------------------
Net loss (4.1)% (25.0)% (5.2)%
==============================
Year ended December 31, 1998 compared to year ended December 31, 1997
System Sales. The Company derives the majority of its revenues from
sales and licensing fees for its headquarters and point of sale
solutions. System sales decreased 11.1% to $59.4 million for the year
ended December 31, 1998 ("1998") from $66.8 million for the year ended
December 31, 1997 ("1997"). This decrease was primarily the result of
interruptions and delays in client rollouts of the Company's
solutions. In addition, sales cycles with new clients piloting the
Company's products were lengthier than the Company has historically
experienced resulting in delays in the recognition of revenues on
these system sales.
Client Support, Maintenance and Other Services. The Company also
derives revenues from client support, maintenance and other services,
which increased 110.0% to $23.5 million in 1998 from $11.2 million in
1997. This increase was due to increased support, maintenance and
services revenues resulting from an increased install base and from
the Company's 1997 acquisitions. Additionally, increased client
demand of professional services such as training, custom software
development, project management and implementation services
contributed to this increase.
Cost of System Sales. Cost of system sales consists primarily of
hardware and peripherals for site-based systems and labor. These costs
are expensed as products are shipped. Cost of system sales decreased
15.1% during 1998 to $28.9 million compared to $34.0 million for 1997
due primarily to the decrease in system sales. Cost of system sales
as a percentage of system revenues decreased to 48.6% in 1998 from
50.9% in 1997. The decreases were due primarily to increased
efficiencies associated with the manufacturing of site-based systems,
as well as increased license fees of the Company's software products
which have higher gross margins than the site-based systems, which
bundle both hardware and software, sold by the Company.
Cost of Client Support, Maintenance and Other Services. Cost of
client support, maintenance and other services consists primarily of
personnel and other costs associated with the Company's services
operations. Cost of client support, maintenance and other services
increased 97.0% to $20.3 million for 1998 from $10.3 for 1997. The
increase was due primarily to the Company's decision to expand its
professional services offerings and the related increase in wages
associated with this effort. Cost of client support, maintenance and
other services as a percentage of client support, maintenance and
other services revenues decreased to 86.2% for 1998 from 91.9% in
1997, due to volume related efficiencies and changes in product mix.
Product Development Expenses. Product development expenses consist
primarily of wages and materials expended on product development
efforts. During 1998, product development expenses increased 62.4% to
$11.2 million from $6.9 million for 1997 due to higher development
expenses associated with new product development. Product development
expenses as a percentage of total revenues increased to 13.5% in 1998
from 8.8% in 1997. The Company capitalizes a portion of its software
development costs. In 1998, software development costs of $2.6
million, or 18.7% of its total product development costs, were
capitalized by the Company, as compared to approximately $1.4 million,
or 16.5% of its total product development costs for 1997. This
increase was due primarily to the Company's development of Lighthouse,
its next generation software technology which leverages both Microsoft
Windows CE and NT operating systems.
Sales and Marketing Expenses. Sales and marketing expenses increased
101.6% to $11.7 million during 1998 from $5.8 million in 1997. Sales
and marketing expenses as a percentage of total revenues increased to
14.1% for 1998 from 7.5% for 1997. The increase was associated with
the Company's 1997 acquisitions, continued expansion of its sales
activities and increased commission expense.
Depreciation and Amortization. Depreciation and amortization expenses
increased 95.7% to $4.7 million during 1998 compared to $2.4 million
during 1997 due to goodwill amortization associated with the Company's
1997 acquisitions and the increase in computer equipment and other
assets required to support an increased number of employees and
locations. Depreciation and amortization as a percentage of total
revenues increased to 5.6% for 1998 from 3.1% in 1997 as depreciation
and amortization cost increased at a faster pace than total revenues.
Additionally, amortization of capitalized software development costs
increased 90.5% to $625,000 for 1998, compared to $328,000 for 1997 as
a result of increased investment by the Company in new product
development.
Acquisition and Other Non-Recurring Charges. Acquisition and other
non-recurring charges decreased 95.8% to $1.3 million during 1998
compared to $30.1 million during 1997. During the second half of
1998, the Company further integrated its acquisitions of ReMACS and
RapidFire by consolidating their support and product development
functions to its Alpharetta, Georgia location. As a result, the
Company recorded approximately $876,000 of non-recurring charges
related to severance arrangements. Additionally, the Company recorded
an impairment charge of $400,000 on goodwill resulting from the
Twenty/20 acquisition. During 1997, in connection with the
acquisitions of ReMACS, Twenty/20, RapidFire and Logic Shop, the
Company recorded non-recurring charges of $28.9 million for purchased
research and development costs. Purchased research and development
costs represent the estimated fair value of acquired incomplete
research and development projects as determined by independent
appraisal. Additionally, in connection with the acquisition of
Twenty/20, the Company granted stock options at an exercise price less
than the current fair market value, a portion of which immediately
vested. As a result, the Company, recorded a non-recurring charge of
$1.2 million. Stock compensation expense represents the excess of the
fair market value of the Company's Common Stock on the date of the
grant of stock options over the aggregate exercise price of such
options. No such charge was recorded in 1998.
General and Administrative Expenses. General and administrative
expenses increased 36.4% during 1998 to $12.4 million from $9.1
million during 1997. The increases were due primarily to personnel
increases and related costs associated with the Company's
acquisitions. General and administrative expenses as a percentage of
total revenues increased to 14.9% from 11.6% during 1998.
Interest Income, Net. Net interest income increased 82.0% to $1.8
million during 1998, compared to net interest income of $989,000 for
1997. The increase resulted primarily from interest income earned on
the proceeds of the sale of 5.4 million shares of the Company's Common
Stock during 1997.
Income Tax Benefit. A tax benefit of 40.0% was recorded in 1998
compared to a tax benefit of 1.1% in 1997. This increase resulted
primarily from the non-deductible purchased research and development
expenses incurred in connection with the Company's 1997 acquisition.
As of December 31, 1998, the Company has recorded a net deferred tax
asset of $6.4 million. Realization is dependent upon generating
sufficient taxable income in future periods. Although realization is
not assured, management believes it is more likely than not that the
deferred tax asset will be realized.
Extraordinary Item. During 1997, a loss from early extinguishment of
debt of $213,000, net of taxes of $82,000, was recognized due to the
write off of certain unamortized loan origination costs and
unamortized debt discounts associated with the repayment of
outstanding indebtedness to Sirrom Capital Corporation of $4.5
million. No such charge was incurred during 1998.
Net Loss. For the reasons discussed above, the net loss for the year
ended December 31, 1998, before non-recurring charges, was $2.6
million or $0.16 per share, a decrease of approximately $8.9 million
or $0.56 per share over net income of $6.3 million or $0.40 per share
for the year ended December 31, 1997, before extraordinary items and
acquisition related charges. Including the non-recurring charges for
the year ended December 31, 1998, of approximately $1.3 million, net
loss for the period was $3.4 million, or $0.21 per share. Net loss
for the year end period of 1997 was approximately $19.5 million or
$1.50 per share, including acquisition related charges of
approximately $25.6 million, net of tax benefits.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
System Sales. The Company derives the majority of its revenues from
sales and licensing fees for its headquarters and point of sale
solutions. System sales increased 86.1% to $66.8 million for the year
ended December 31, 1997 ("1997"), compared to $35.9 million for the
year ended December 31, 1996 ("1996"). The increase related to sales
and license fees from new and existing clients, and the expansion of
the Company through its acquisitions of ReMACS and Twenty/20 in the
second quarter of 1997 and RapidFire and Logic Shop in the fourth
quarter of 1997.
Client Support, Maintenance and Other Services. The Company also
derives revenues from client support, maintenance and other services,
which increased 121.7% to $11.2 million for 1997, compared to $5.1
million for 1996. The increase was due to increased support,
maintenance and services revenues, within its existing markets as well
as those related to the Company's 1997 acquisitions. Additionally,
increased client demand of professional services which the Company
began offering in the first quarter of 1996 contributed to this
increase.
Cost of System Sales. Cost of system sales consists primarily of
hardware and peripherals for site-based systems and labor. These costs
are expensed as products are shipped. Cost of system sales increased
52.8% to $34.0 million for 1997, compared to $22.3 million for 1996.
The increase was directly attributable to the increase in system
sales. Cost of system sales as a percentage of system revenues
decreased to 50.9% from 62.1%. The decrease was due primarily to
increased efficiencies associated with the manufacturing of site-based
systems; as well as increased sales of existing and newly introduced
and acquired products, such as its back office and headquarters-based
management systems software. These products typically have higher
gross margins than the site-based systems sold by the Company.
Cost of Client Support, Maintenance and Other Services. Cost of
client support, maintenance and other services consists primarily of
personnel and other costs associated with the Company's services
operations. Cost of client support, maintenance and other services
increased 88.4% to $10.3 million for 1997 from $5.5 million for 1996.
The increase was due primarily to the Company's decision to expand its
professional services offerings and the related increase in wages
associated with this effort. Cost of client support, maintenance and
other services as a percentage of client support, maintenance and
other services revenues decreased to 91.9% from 108.1%.
Product Development Expenses. Product development expenses consist
primarily of wages and materials expended on product development
efforts. Product development expenses increased 107.2% to $6.9
million for 1997, compared to $3.3 million for 1996. The increase was
due to higher development costs associated with new product
development, including development activity associated with the
acquisitions of ReMACS, Twenty/20, RapidFire and Logic Shop and the
development of new credit card network interfaces. Product
development expenses as a percentage of total revenues increased to
8.8% from 8.1%, as product development expenses increased at a faster
pace than total revenues. The Company capitalizes a portion of its
software development costs. In 1997, software development costs of
$1.4 million, or 16.5% of its total product development costs, were
capitalized by the Company, as compared to approximately $635,000, or
16.0% of its total product development costs for 1996.
Acquisition and Other Non-Recurring Charges. During 1997, in
connection with the acquisitions of ReMACS, Twenty/20, RapidFire, and
Logic Shop, the Company recorded non-recurring charges of $28.9
million for purchased research and development costs. Purchased
research and development costs represent the estimated fair value of
acquired incomplete research and development projects as determined by
independent appraisal. Additionally, in connection with the
acquisition of Twenty/20, the Company granted such stock options, a
portion of which immediately vested, and recorded a non-recurring
charge of $1.2 million. Stock compensation expense represents the
excess of the fair market value of the Company's Common Stock on the
date of the grant of stock options over the aggregate exercise price
of such options.. No such charge was recorded in 1996.
Sales and Marketing Expenses. Sales and marketing expenses increased
291.3% to $5.8 million during 1997, compared to $1.5 million in 1996.
The increase was associated with the Company's acquisitions, continued
expansion of its sales activities and increased commission expense
attributable to higher sales. Sales and marketing expenses as a
percentage of total revenues increased to 7.5% from 3.6%.
Depreciation and Amortization. Depreciation and amortization expenses
increased 151.5% to $2.4 million for 1997, compared to approximately
$948,000 for 1996. The increase resulted from an increase in computer
equipment and other assets required to support an increased number of
employees, as well as increased goodwill amortization resulting from
acquisitions. Depreciation and amortization as a percentage of total
revenues increased to 3.1% from 2.3% during the period, primarily
because associated personnel support costs increased at a pace higher
than associated revenues. Additionally, amortization of capitalized
software development costs increased 37.2% to $328,000 for 1997,
compared to $239,000 for 1996 as a result of increased investment by
the Company in new product development.
General and Administrative Expenses. General and administrative
expenses increased 59.9% to $9.1 million for 1997, compared to $5.7
million for 1996. The increase was due primarily to personnel
increases in 1997 and the Company's acquisitions. General and
administrative expenses as a percentage of total revenues declined to
11.6% from 13.9% as a result of higher sales volumes.
Interest (Income) Expense. Interest (income) expense increased 238.9%
to net interest income of $989,000 for 1997, compared to net interest
expense of $712,000 for 1996. The increase resulted primarily from
interest income earned on the proceeds of the sale of 5.4 million
shares of the Company's Common Stock during 1997, compared to interest
expense resulting from the Company borrowing $4.5 million in 1996 and
the borrowing costs associated therewith.
Minority Interest in Earnings of PrysmTech. In 1997, the Company
recognized no minority interest in earnings of PrysmTech compared to
$628,000 in 1996, as the remaining interest in PrysmTech was acquired
by the Company during the fourth quarter of 1996.
Income Tax Benefit. As a result of its election to be treated as an S
Corporation for income tax purposes, the Company, prior to the
completion of its initial public offering in February 1997, was not
subject to federal or state income taxes. The Company's S Corporation
status was terminated upon completion of its initial public offering
in February 1997 and upon termination of its S Corporation status, the
Company recorded deferred tax assets in the amount of $592,000.
Simultaneously, with the recording of these deferred tax assets, the
Company recorded a tax benefit of $305,000 and a valuation allowance
of $287,000. The valuation allowance was recorded due to the
uncertainty surrounding the future utilization of such deferred tax
assets. For all periods presented, the accompanying financial
statements reflect provisions for income taxes computed in accordance
with the provisions of Statement of Accounting Standards No. 109,
"Accounting for Income Taxes". For those periods prior to the
Company's initial public offering, the tax benefit has been presented
on a pro forma basis as if the Company had been liable for federal and
state income taxes during those periods. The pro forma effective tax
rate for the period from January 1, 1997 through February 19, 1997,
the date the Company terminated its S Corporation status was a benefit
of 1.1%, compared to a benefit of 38.2% for 1996. The decrease
resulted primarily from nondeductible purchased research and
development costs.
Extraordinary Item. During 1997, a loss from early extinguishment of
debt of $213,000, net of taxes of $82,000, was recognized due to the
write off of certain unamortized loan origination costs and
unamortized debt discounts associated with the repayment of
outstanding indebtedness to Sirrom Capital Corporation of $4.5
million.
Net Loss. For 1997, the Company recognized a net loss of $19.5
million compared to a net loss of $2.2 million for 1996. The loss in
1997 resulted from the recording of acquisition-related expenses
consisting of purchased research and development costs and stock
compensation expense associated with the purchase of ReMACS,
Twenty/20, RapidFire and Logic Shop during 1997 of $30.1 million,
which were partially offset by increased revenues and improved margins
during 1997 as compared to 1996. Net income before extraordinary
items and acquisition related charges for 1997, was $6.3 million or
$0.40 per share, an increase of $6.1 million or $0.38 per share over
the net income of $273,000 or $0.02 per share for 1996.
Liquidity and Capital Resources
In July 1997, the Company completed a public offering of 2.6 million
shares of common stock and received net proceeds of approximately
$58.4 million after deducting estimated underwriting discounts and
offering expenses. A portion of the offering proceeds was used to
repay $3.3 million of debt incurred in connection with the acquisition
of ReMACS. The remaining proceeds will be used for general corporate
purposes, including research and development, sales and marketing,
possible strategic acquisitions and the increased working capital
requirements of the Company generated by its growth. As of December
31, 1998, the Company had $25.5 million in cash and cash equivalents.
The Company's operating activities used cash of $12.3 million, $8.4
million and $1.4 million during, 1998, 1997 and 1996 respectively. In
1998, the Company's uses of cash were primarily a result of the net
loss for the period then ended; increased inventories due to increased
committed sales backlog, decreased accounts payable and accrued
liabilities due to timing of vendor payments; and decreased client
deposits and unearned revenues as the Company delivered products
and/or services previously paid by clients. The Company's uses of
cash in 1997 were primarily the result of increased accounts
receivables and inventory purchases due to increased sales and a
decrease in client deposits and unearned revenues, as products were
delivered to clients. During 1996, the Company's use of operating cash
was primarily the result of cash payments received from clients in
advance of shipments offset by increased accounts receivables and
inventories.
Cash used in investing activities was $8.9 million, $15.0 million and
$727,000 for 1998, 1997 and 1996, respectively. The uses of cash in
investing activities for 1998 consisted of the purchases of property
and equipment for approximately $6.3 million and capitalized software
costs of $2.6 million. During 1998, the Company moved into two new
leased facilities in Alpharetta, Georgia with approximately 209,000
combined square feet. As a result, the Company purchased equipment
and furniture to accommodate the moves. The use of cash for 1997 in
investing activities consisted primarily of the acquisitions of
ReMACS, Twenty/20, RapidFire, and Logic Shop for approximately $10.3
million in cash consideration. During 1996, the use of cash for
investing activities consisted primarily of capitalized software costs
of $635,000 and purchases of property and equipment of $493,000.
These costs were primarily for purchases of computer
equipment, furniture and fixtures. Total product development
expenditures were $13.8 million, $8.3 million and $4.0 million in
1998, 1997 and 1996, respectively. Of these costs, the Company
capitalized $2.6 million, $1.4 million and $635,000 in software
development costs in 1998, 1997 and 1996, respectively.
Cash used in financing activities was approximately $792,000 in 1998,
while $68.6 million and $4.3 million was provided by financing
activities during 1997 and 1996, respectively. During 1998, cash used
in financing activities was primarily a result of the Company's
purchase of common stock from shareholders for $4.0 million and an
advance made by the Company to the former sole shareholder of
RapidFire under its agreement to loan up to $1.5 million, which debt
matures October 31, 2005 and bears interest at 5.0% per annum offset
by the income tax effect of stock options exercised of $3.8 million.
In 1997, the cash provided by financing activities primarily resulted
from the issuance of common stock of approximately $82.4 million,
offset by the repayment of long-term debt and shareholder loans of
approximately $12.8 million. Financing activities in 1996 consisted
primarily of borrowings of $4.5 million from Sirrom Capital
Corporation. These loan proceeds were partially offset by payment of
loan origination fees as well as continued repayments of borrowings
under capital lease agreements.
In September 1998, the Board of Directors of the Company authorized a
stock repurchase program pursuant to which management is authorized to
repurchase up to 3,000,000 shares of common stock of the Company. As
of March 1, 1999, the Company had repurchased an aggregate of 680,154
shares of its common stock in the open market for a total of $4.5
million. These purchases were, and any future purchase will be,
financed from the Company's cash reserves.
Year 2000 Computer Matter
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to process transactions or invoices sent, or
engage in similar normal business activities.
The Company is in the process of conducting an inventory and business
risk assessment of its non-information technology systems. The
Company will develop remediation plans for such non-information
technology systems if its business risk assessment indicates such is
warranted. All costs associated with analyzing the Year 2000 Issue or
making conversions to existing systems are being expensed as incurred.
Management presently believes that the costs to modify its information
technology infrastructure to be Year 2000 compliant will not have a
material adverse impact to its financial condition or results of
operations during any quarterly or annual reporting period. However,
the Company is currently identifying and considering various
contingency options to minimize the risk of any Year 2000 problems.
The Company is planning formal communications with all of its
significant suppliers of goods and services to determine the extent to
which the Company's operations and systems are vulnerable to those
third parties' failure to remediate their own Year 2000 Issues. There
can be no guarantee that the systems of other companies on which the
Company's operations and systems rely will be timely converted and
would not have an adverse effect on the Company's systems or
result of operations.
The Company will utilize predominantly internal resources to
reprogram, or replace, and test the software for Year 2000
modifications. The Company anticipates completing the Year 2000
project by September 1, 1999, which is prior to any anticipated impact
on its operating systems.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain
resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
Specific factors that might cause such material difference include,
but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
Item 7 A. Quantitative and Qualitative Disclosures About Market
Risk.
The Company's financial instruments that are subject to market risks
are its cash and cash equivalents. During 1998, the weighted average
interest rate on its cash balances was approximately 5.26%. A 10.0%
decrease in this rate would impact interest income by approximately
$180,000.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements are filed with
this Report:
Report of Independent Public Accountants.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Radiant Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
RADIANT SYSTEMS, INC. (a Georgia corporation) AND SUBSIDIARIES as of
December 31, 1998 and 1997 and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Radiant
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 4, 1999
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $25,537 $47,567
Accounts receivable, net of allowances for doubtful accounts of $750 and
$350 in 1998 and 1997, respectively 17,645 17,557
Inventories 11,965 8,706
Deferred tax assets 687 179
Other 2,310 1,688
------- -------
Total current assets 58,144 75,697
PROPERTY AND EQUIPMENT, net 8,341 4,844
SOFTWARE DEVELOPMENT COSTS, net 3,718 1,773
INTANGIBLES, net 6,271 10,332
DEFERED TAXES, long-term 5,680 345
OTHER ASSETS 2,012 524
------- -------
$84,166 $93,515
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,844 $ 7,234
Accrued liabilities 3,210 5,887
Client deposits and deferred revenue 2,600 4,645
Current portion of long-term debt 161 672
------- -------
Total current liabilities 10,815 18,438
LONG-TERM DEBT, less current portion 4,106 4,056
------- -------
Total liabilities 14,921 22,494
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000 shares authorized, 0 shares issued -- --
Common stock, no par value; 30,000,000 shares authorized, 15,505,565 and
15,423,587 shares issued and outstanding in 1998 and 1997, respectively 0 0
Additional paid-in capital 92,144 90,708
Deferred compensation (353) (536)
Accumulated deficit (22,546) (19,151)
------- -------
Total shareholders' equity 69,245 71,021
------- -------
$84,166 $93,515
======= =======
The accompanying notes are an integral part of these consolidated
balance sheets.
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
------- -------- -------
REVENUES:
System sales $59,400 $ 66,798 $35,888
Client support, maintenance, and other services 23,535 11,205 5,055
------- -------- -------
Total revenues 82,935 78,003 40,943
------- -------- -------
COST OF REVENUES:
System sales 28,877 34,019 22,270
Client support, maintenance, and other services 20,288 10,298 5,465
------- -------- -------
Total cost of revenues 49,165 44,317 27,735
------- -------- -------
GROSS PROFIT 33,770 33,686 13,208
OPERATING EXPENSES:
Product development 11,199 6,897 3,328
Sales and marketing 11,730 5,819 1,487
Depreciation and amortization 4,665 2,384 948
Acquisition and other non-recurring charges 1,276 30,086 3,930
General and administrative 12,360 9,059 5,664
------- -------- -------
LOSS FROM OPERATIONS (7,460) (20,559) (2,149)
INTEREST (INCOME) EXPENSE, NET (1,800) (989) 712
MINORITY INTEREST IN EARNING OF PRYSMTECH -- -- 628
------- -------- -------
LOSS BEFORE INCOME TAX AND EXTRAORDINARY ITEM (5,660) (19,570) (3,489)
INCOME TAX BENEFIT (2,265) (212) (1,333)
------- -------- -------
LOSS BEFORE EXTRAORDINARY ITEM (3,395) (19,358) (2,156)
EXTRAORDINARY ITEM:
Loss from early extinguishment of debt, net of taxes -- 131 --
------- -------- -------
NET LOSS $(3,395) $(19,489) $(2,156)
======= ======== =======
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item $ (0.21) $ (1.49) $ (0.26)
Extraordinary loss on early extinguishment of debt -- (0.01) --
------- -------- -------
Total basic loss per share $ (0.21) $ (1.50) $ (0.26)
======= ======== =======
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 15,990 13,024 8,300
======= ======== =======
Diluted 15,990 13,024 8,300
======= ======== =======
The accompanying notes are an integral part of these consolidated
statements.
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
Class A Deferred Deferred Accumu-
Common Stock Common Stock Compen- Sales ated
Shares Amount Shares Amount APIC Warrants ation Discount Deficit Total
-------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1995: 6,857 $ 0 1,143 $ 0 -- $ 240 -- $ (112) $ (3,282) $(3,154)
Issuance of client
warrant -- -- -- -- -- 79 -- (79) -- --
Sales of software
licenses under
client warrants -- -- -- -- -- -- -- 59 -- 59
Shares issued in
PrysmTech
acquisition -- -- 300 0 $ 2,100 -- -- -- -- 2,100
Issuance of
warrant for loan
origination fees -- -- -- -- -- 40 -- -- -- 40
Accretion of
put warrants -- -- -- -- -- -- -- -- (45) (45)
Accretion of
client warrants -- -- -- -- -- 826 -- -- (826) --
Distributions to
shareholders -- -- -- -- -- -- -- -- (11) (11)
Loss before pro
forma income taxes -- -- -- -- -- -- -- -- (3,489) (3,489)
-------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1996: 6,857 -- 1,443 -- 2,100 1,185 -- (132) (7,653) (4,500)
Issuance of
common stock 5,428 -- -- -- 82,422 -- -- -- -- 82,422
Automatic conver-
sion of Series
A common stock 1,443 -- (1,443) -- -- -- -- -- -- --
Exercise of stock
purchase warrants 1,353 -- -- -- 2,658 (1,185) -- -- -- 1,473
Exercise of
employee stock
options 161 -- -- -- 441 -- -- -- -- 441
Shares issued for
acquired companies 975 -- -- -- 11,571 -- -- -- -- 11,571
Stock options
granted below
fair market value -- -- -- -- 1,841 -- (627) -- -- 1,214
Amortization of
deferred compens-
ation -- -- -- -- -- -- 91 -- -- 91
Repurchase of
common stock
from a shareholder (600) -- -- -- (1,125) -- -- -- -- (1,125)
Repurchase of
common stock
from a client (193) -- -- -- (997) -- -- -- -- (997)
Sales of software
licenses under
warrant -- -- -- -- -- -- -- 132 -- 132
Reclassification of
S corporation
accumulated deficit -- -- -- -- (8,203) -- -- -- 8,203 --
Loss before pro
forma income
taxes and
extraordinary item -- -- -- -- -- -- -- -- (19,570) (19,570)
Extraordinary item,
net of tax -- -- -- -- -- -- -- -- (131) (131)
-------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1997: 15,424 0 -- -- 90,708 -- (536) -- (19,151) 71,021
Treasury stock
purchase (607) 0 -- -- (4,027) -- -- -- -- (4,027)
Exercise of
employee stock
options 647 0 -- -- 1,395 -- -- -- -- 1,395
Stock issued
under employee
stock purchase plan 42 -- -- -- 264 -- -- -- -- 264
Income tax benefit
of stock options
exercised -- -- -- -- 3,804 -- -- -- -- 3,804
Amortization of
deferred
compensation -- -- -- -- -- -- 183 -- -- 183
Net loss -- -- -- -- -- -- -- -- (3,395) (3,395)
-------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1998: 15,506 $ 0 -- -- $92,144 -- $ (353) -- $ (22,546) $69,245
=================================================================================================
The accompanying notes are an integral part of these consolidated
statements.
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,395) $(19,489) $ (2,156)
Adjustments to reconcile net loss to net
cash used in operating activities:
Pro forma tax benefit -- (212) (1,333)
Deferred income taxes (3,428) (1,573) --
Accretion of note payable interest 226 34 --
Depreciation and amortization 5,067 2,384 948
Amortization of debt discount -- 332 306
Discounts earned on software license sales -- 132 59
Non-cash acquisition and other non-recurring charges 400 30,086 3,930
Amortization of deferred compensation 182 90 --
Minority interest in earnings of PrysmTech -- -- (628)
Changes in assets and liabilities, net of acquired entities:
Accounts receivable (88) (11,420) (3,230)
Inventories (3,257) (5,194) (774)
Other assets (921) (449) (503)
Accounts payable (2,390) 1,748 563
Accrued liabilities (2,677) 350 711
Accrued client rebates -- -- 58
Client deposits and deferred revenue (2,045) (5,227) 674
--------- -------- --------
Net cash used in operating activities (12,326) (8,408) (1,375)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,342) (3,305) (493)
Purchases of acquired entities, net of cash acquired -- (10,314) 401
Capitalized software development costs (2,570) (1,365) (635)
--------- -------- --------
Net cash used in investing activities (8,912) (14,984) (727)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock, net of issuance costs -- 82,422 --
Proceeds from exercise of common stock warrants -- 960 --
Repurchase of common stock (4,027) (2,122) --
Exercise of employee stock options 1,395 441 --
Stock issued under employee stock purchase plan 264 -- --
Issuance of shareholder loans, net (1,540) (330) (157)
Borrowings of long-term debt -- -- 4,594
Income tax benefit of stock options exercised 3,804 -- --
Issuance of long-term debt (687) (5,418) (458)
Dividends received from PrysmTech -- -- 255
Repayments of note from shareholder -- (7,343) 30
Other (1) 7 15
--------- -------- --------
Net cash (used in) provided by financing activities (792) 68,617 4,279
--------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (22,030) 45,225 2,177
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 47,567 2,342 165
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 25,537 $ 47,567 $ 2,342
========= ======== ========
The accompany notes are an integral part of these consolidated
statements.
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND BACKGROUND
Radiant Systems, Inc. (the "Company") provides enterprise-wide
technology solutions to the retail industry. The Company offers fully
integrated retail automation solutions, including point of sale
systems, consumer-activated order systems, back office management
systems and headquarters-based management systems. The Company's
products enable retailers to interact electronically with consumers,
capture data at the point of sale, manage site operations and
logistics and communicate electronically with their sites, vendors and
credit networks. In addition, the Company offers system planning,
design and implementation services that tailor the automation solution
to each retailer's specifications as well as a variety of
post-implementation services such as a help desk and technical
support.
The Company originally was organized under the laws of the state of
New York on August 1, 1985 and was subsequently reincorporated under
the laws of the state of Georgia on October 27, 1995. The name of the
company was changed to Radiant Systems, Inc. from Softsense Computer
Products, Inc. on November 13, 1996. In connection with the
reincorporation of the Company in October 1995, each outstanding share
of common stock and Class A common stock of the Company was exchanged
for 109,714 shares of common stock and Class A common stock, as
applicable. The shares outstanding and all other references to shares
of common stock and Class A common stock reported have been restated
to give effect to the reincorporation.
Upon completion of the initial public offering (the "IPO") (See Note
9), the Company converted from an S corporation to a C corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Radiant Systems, Inc. and its wholly owned subsidiaries.
Presentation
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition
In January 1998, the Company adopted Statement of Position, 97-2
"Software Revenue Recognition" (the "Statement"). This Statement
provides guidance on recognizing revenues on software transactions and
did not have a significant impact on previous licensing or revenue
recognition practices.
The Company's revenue is generated primarily through software and
system sales, support and maintenance and installation and training:
Software and System Sales
The Company generally sells its products, which include both
software licenses and hardware, directly to end users. Revenue
from software licenses and system sales is generally recognized
as products are shipped, provided that no significant vendor and
postcontract support obligations remain and that the collection
of the related receivable is probable.
Support and Maintenance
The Company offers to its clients postcontract support in the
form of maintenance, telephone support and unspecified software
enhancements. Revenue from support and maintenance is generally
recognized as the service is performed.
Installation and Training
The Company offers installation and training services to its
clients. Revenue from installation and training is generally
recognized at the time the service is performed.
Payments received in advance are recorded as client deposits and
deferred revenue in the accompanying balance sheets and are recognized
as revenue when the related product is shipped or related revenue is
earned.
Inventories
Inventories consist principally of computer hardware and software
media and are stated at the lower of cost (first-in, first-out method)
or market.
Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
provided using the straight-line method over estimated useful lives of
two to five years.
Property and equipment at December 31, 1998 and 1997 are summarized as
follows (in thousands):
1998 1997
------- -------
Computers and office equipment $ 8,195 $ 4,732
Furniture and fixtures 2,373 1,249
Purchased software 2,319 1,111
Leasehold improvements 1,100 552
------- -------
13,987 7,644
Less accumulated depreciation and amortization (5,646) (2,800)
------- --------
$ 8,341 $ 4,844
======= ========
Intangible Assets
Intangible assets consisting of goodwill, product licenses and patents
are amortized using the straight-line method over four to ten years.
Goodwill represents the excess of purchase price over the estimated
fair value of assets acquired.
Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those
assets. As more fully described in Note 5, the Company recorded an
impairment charge related to certain goodwill of $400,000 during 1998.
Software Development Costs
Capitalized software development costs consist principally of salaries
and certain other expenses directly related to the development and
modification of software products. Capitalization of such costs begins
when a working model has been produced as evidenced by the completion
of design, planning, coding and testing, such that the product meets
its design specifications and has thereby established technological
feasibility. Capitalization of such costs ends when the resulting
product is available for general release to the public. Amortization
of capitalized software development costs is provided at the greater
of the ratio of current product revenue to the total of current and
anticipated product revenue or on a straight-line basis over the
estimated economic life of the software, which the Company has
determined is not more than three years. At December 31, 1998 and
1997, accumulated amortization of capitalized software development
costs was $1.3 million and $689,000, respectively.
Purchased Research and Development Costs
As more fully described in Note 4, based on independent appraisal, the
Company allocated $28.9 million in 1997 and $3.9 million in 1996 of
the purchase price for its acquisitions to incomplete research and
development projects. Accordingly, these costs were expensed as of
the acquisition dates. These allocations represent the estimated fair
value based on risk-adjusted cash flows related to incomplete
projects. The development of these projects had not yet reached
technological feasibility, and the technology has no alternative
future use. The technology acquired in these acquisitions will
require substantial additional development by the Company. No such
charges were recorded in 1998.
Stock Compensation
Employee stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25). In
January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128), effective for fiscal years ending after December 15, 1997. The
Company adopted the new guidelines for the calculation and
presentation of earnings per share, and all prior periods have been
restated. Basic loss per share is based on the weighted average number
of shares outstanding. Diluted loss per share is based on the
weighted average number of shares outstanding and the dilutive effect
of common stock equivalent shares ("CSEs") issuable upon the exercise
of stock options and warrants (using the treasury stock method). For
all periods presented, CSE's have been excluded from diluted weighted
average shares outstanding, as their impact was antidilutive.
Fair Value of Financial Instruments
The book values of cash, trade accounts receivable, trade accounts
payable and other financial instruments approximate their fair values
principally because of the short-term maturities of these instruments.
The fair value of the Company's long-term debt is estimated based on
the current rates offered to the Company for debt of similar terms and
maturities. Under this method, the Company's fair value of long-term
debt was not significantly different than the stated value at December
31, 1998.
Statements of Cash Flows
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash.
Cash paid for interest was $166,000, $432,000 and $244,000 in 1998,
1997 and 1998, respectively. Cash paid for income taxes was $0,
$155,000 and $0 in 1998, 1997 and 1996, respectively. The Company
acquired equipment of $0, $43,000 and $307,000 in 1998, 1997 and 1996,
respectively, under capital lease obligations.
During 1998, 1997 and 1996, the Company recorded bad debt expense of
approximately $400,000, $150,000 and $110,000, respectively.
Concentration of Business and Credit Risk
Financial instruments which potentially subject the Company to credit
risk consist principally of trade receivables and interest bearing
investments. The Company performs on-going credit evaluations of its
clients and generally does not require collateral. The Company
maintains adequate reserves for potential losses and such losses,
which have historically been minimal, have been included in
management's estimates.
A majority of the Company's clients operate within the convenience
store market, and a significant portion of the Company's revenues is
derived from a limited number of clients. During the years ended
December 31, 1998, 1997 and 1996, the following clients individually
accounted for more than 10.0% of the Company's revenue:
December 31,
1998 1997 1996
-----------------------------
Client A * 11.4% *
Client B 10.3% 12.8 13.2%
Client C * 12.2 21.5
Client D * * 11.7
Client E * * 13.8
*Accounted for less than 10.0% of total revenues for the period
indicated.
At December 31, 1998, 3.4% of the Company's accounts receivable
related to Client B.
Recent Accounting Pronouncements
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting and
disclosing comprehensive
income and its components. Comprehensive income is defined as the
change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from
non-owner sources. In addition to net income, SFAS 130 requires the
reporting of other comprehensive income, defined as revenues,
expenses, gains and losses that under generally accepted accounting
principles are not included in net income. As of December 31, 1998,
the Company had no items of other comprehensive income.
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information" (SFAS 131). SFAS
131 establishes standards for the way that public business enterprises
report information about operating segments in its financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
clients. Operating segments are defined as components of an
enterprise about which separate financial information is available
that is evaluated by the chief decision makers in deciding how to
allocate resources and assessing performance. SFAS 131 also allows
the aggregation of segments which meet certain criteria. See further
discussion at Note 12.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133) which
established accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value, and changes
in the derivative fair value be recognized currently in earnings
unless specific accounting criteria are met. The Company plans to
adopt SFAS 133 in the first quarter of fiscal 2000. Management does
not believe that adoption of this statement will have a material
effect on the consolidated financial statements of the Company.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." Under
SOP 98-1, computer software costs incurred in the preliminary project
stage are expensed as incurred. Additional, specified upgrades and
enhancements may be capitalized; however, external costs related to
maintenance, unspecified upgrades, and enhancements should be
recognized as expense over the contract period on a systematic basis.
Internal costs incurred for maintenance should be expensed as
incurred. SOP 98-1 is effective for the Company's fiscal year
beginning January 1, 1999. In the opinion of management, the adoption
of SOP 98-1 will not have a material effect on the consolidated
financial statements of the Company.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.
3. PRODUCT DEVELOPMENT EXPENDITURES
Product development expenditures, excluding purchased research and
development costs (Notes 2 and 4) for the years ended December 31,
1998, 1997 and 1996 are summarized as follows (in thousands):
1998 1997 1996
------- ------ ------
Total development expenditures $13,769 $8,262 $3,963
Less additions to capitalized software development
Costs prior to amortization 2,570 1,365 635
------- ------ ------
Product development expense $11,199 $6,897 $3,328
======= ====== ======
The activity in the capitalized software development account during
1998 and 1997 is summarized as follows (in thousands):
December 31,
1998 1997
------- ------
Balance at beginning of period, net $ 1,773 $ 736
Additions 2,570 1,365
Amortization expense (625) (328)
------- -----
Balance at end of period, net $ 3,718 $1,773
======= ======
4. ACQUISITIONS
From January 1, 1996 through December 31, 1997, the Company acquired
six businesses, all of which were accounted for under the purchase
method of accounting. These businesses were acquired for a
combination of cash, notes payable and shares of the Company's common
stock. The value of the common stock reflects the market value of the
Company's common stock at the closing of each acquisition, adjusted to
account for restrictions common to unregistered securities and for
registration rights, if applicable. The Company made no acquisitions
during 1998.
The following describes each of the acquisitions completed by the
Company in 1996 and 1997:
PrysmTech
In November 1995, the Company and Billmart, L.L.C. ("Billmart") formed
PrysmTech to pursue the development and sale of integrated site
solutions to the entertainment market. The Company contributed an
exclusive license to market its
software to the entertainment market, while Billmart contributed net
assets of $143,000 and an exclusive license to modify and market the
Billmart software. Each party received a 50% interest for its
contribution.
On December 31, 1996, the Company acquired Billmart's interest in
PrysmTech for 300,000 shares of common stock and $3.2 million in
notes. Total consideration, including transaction costs of
approximately $100,000, was $5.4 million. Intangibles of $869,000
were recorded, after adjusting for purchased research and development
costs of $3.9 million (Note 2), which are being amortized over five
years. The accompanying financial statements include the operating
results of PrysmTech since January 1, 1995, with applicable deductions
for minority interest earnings.
LSI
On May 17, 1996, the Company acquired LSI for $100 cash and assumed
net liabilities of $78,000. Intangibles of $48,000 were recorded,
after adjusting for purchased research and development costs of
$30,000, which are being amortized over seven years.
ReMACS
On May 23, 1997, the Company purchased all of the outstanding common
stock of Restaurant Management and Control Systems, Inc. ("ReMACS"), a
provider of back office management systems for clients in the food
service industry. The purchase price consisted of 627,500 shares of
common stock, $3.3 million in cash, $3.3 million in notes and
assumption of net liabilities of $4.5 million. Total consideration,
including transaction costs of approximately $150,000, was $18.5
million. Intangibles of $3.2 million were recorded, after adjusting
for purchased research and development costs of $15.8 million, which
are being amortized over four to ten years. In connection with the
acquisition, the Company entered into employment agreements with five
employees for terms expiring June 2002 (See Note 8).
Twenty/20
On May 30, 1997, the Company purchased all of the outstanding common
stock of RSI Merger Corporation (d.b.a. Twenty/20 Visual Systems)
("Twenty/20"), a provider of point of sale and table management
systems for full service restaurants. The purchase price consisted of
199,074 shares of common stock and $1.3 million in cash. Total
consideration, including transaction costs of approximately $100,000,
was $3.7 million. Intangibles of $644,000 were recorded, after
adjusting for purchased research and development costs of $3.4
million, which are being amortized over four to ten years. See
further discussion at Note 5.
RapidFire
On October 31, 1997, the Company purchased all of the outstanding
common stock of RapidFire Software, Inc. ("RapidFire Software") and
EquiLease Financial Services, Inc. ("EquiLease"), (collectively
"RapidFire"), a leading provider of point of sale systems to the pizza
industry and other delivery restaurants. The purchase price consisted
of 102,230 shares of common stock, $4.2 million in cash and $3.8
million in notes. Intangibles of $5.2 million were recorded, after
adjusting for purchased research and development costs of $6.9
million, which are being amortized over four to ten years.
Separately, the Company agreed to loan up to $1.5 million to the sole
shareholder, which debt matures October 31, 2005 and bears interest at
a rate of 5.0% per annum (See Note 11). The Company also entered into
a five-year employment agreement with the sole shareholder (See Note
8).
Logic Shop
On November 18, 1997, the Company purchased all of the outstanding
common stock of Logic Shop, Inc. ("Logic Shop"), a provider of point
of sale and back office management software to the convenient
automotive service center market. The purchase price consisted of
46,032 shares of common stock and $2.0 million in cash. Intangibles
of approximately $829,000 were recorded, after adjusting for purchased
research and development costs of $2.8 million, which are being
amortized over four to ten years.
The Company's unaudited pro forma consolidated results of operations
for 1997 and 1996 shown below are presented assuming that the
Company's business combinations had been consummated on January 1,
1996 (in thousands, except per share data):
For the Years Ended
December 31,
1997 1996
------ -------
Pro forma revenue $87,863 $56,905
Pro forma net income (loss) 3,801 (2,658)
Income (loss) per share:
Basic $ 0.28 $ (0.29)
Diluted 0.23 (0.29)
The Company's unaudited pro forma results of operations are presented
for informational purposes only and may not necessarily reflect the
future results of operations of the Company or what the results of
operations would have been had the Company owned and operated these
businesses as of January 1, 1996.
5. ACQUISITION AND OTHER NON-RECURRING CHARGES
During the second half of 1998, the Company further integrated its
acquisitions of ReMACS and RapidFire by consolidating their support
and product development functions to its Alpharetta, Georgia location.
As a result, the Company recorded a pretax charge of approximately
$876,000 related to severance arrangements, of which approximately
$500,000 was paid in 1998.
In the fourth quarter of 1998, the Company recorded a charge of
approximately $400,000 for the impairment of goodwill associated with
its acquisition of Twenty/20. The Company's management determined
certain factors existed which indicated the goodwill was impaired. As
a result, the goodwill was evaluated for impairment based on comparing
the unamortized goodwill to projected undiscounted operating results,
and the impairment charge recorded.
During 1997, the Company incurred $30.1 million in non-recurring
charges. As more fully described in Note 4, these non-recurring
charges were comprised of $28.9 million in purchased research and
development costs and $1.2 million in stock compensation expenses (see
Note 9) incurred in connection with the Company's 1997 acquisitions.
6. LONG-TERM DEBT
Long-term debt, including obligations under capital leases, consists
of the following (in thousands):
December 31,
1998 1997
------ -------
Capital lease obligations, interest ranging from 5.0% to 31.0%,
payable monthly through 1999, secured by equipment $ 76 $ 375
Noninterest bearing promissory note; lump-sum payment of
$6.0 million due October 31, 2005 (earlier acceleration upon
the attainment certain financial targets); net of imputed
interest of $2.0 million and $2.2 million at December 31,
1998 and 1997, respectively at an interest rate of 6.0% 4,024 3,798
Notes payable; unsecured; payable in monthly installments of
$23,556, including interest between 12.0% and 19.0%;
maturing through September 2001 -- 355
Other 167 200
------ -------
4,267 4,728
Less current portion (161) (672)
------ -------
$4,106 $ 4,056
====== =======
In connection with the purchase of RapidFire on October 31, 1997, the
Company issued a noninterest-bearing note in the amount of $6.0
million to the sole shareholder of the acquired company. The note is
nonnegotiable and nonassignable. All outstanding principal is due and
payable in full in a single lump-sum payment on October 31, 2005,
unless maturity is accelerated by RapidFire's ability to attain
certain net income levels. A principal payment not to exceed $2.0
million is due on March 31, 1999, 2000 and 2001 if RapidFire meets or
exceeds specified net income levels for the years ended December 31,
1998, 1999 and 2000, respectively. During 1998 RapidFire did not meet
such specified net income levels. Accordingly, the initial payment on
March 31, 1999 is not due.
At December 31, 1998, aggregate maturities of long-term debt,
including obligations under capital leases, are as follows (in
thousands):
1999 $ 161
2000 82
2001 --
2002 --
2003 --
Thereafter 4,024
-------
$ 4,267
=======
7. INCOME TAXES
Prior to the Company's IPO, the Company elected to be treated as an S
corporation for federal and state income tax purposes. Accordingly,
all income or losses of the Company were recognized by the Company
shareholders on their individual tax returns. In connection with the
IPO, the Company converted from an S corporation to a C corporation
and is now subject to federal and state income taxes. Upon conversion
to C corporation status, the Company recorded net deferred tax assets
of $592,000. Simultaneously, with the recording of these deferred tax
assets, the Company recorded a tax benefit of $305,000 and a valuation
allowance of $287,000.
For all periods presented, the accompanying financial statements
reflect provisions for income taxes computed in accordance with the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." For those periods prior to the IPO,
the tax benefit has been presented on a pro forma basis as if the
Company had been liable for federal and state income taxes during
those periods. The following summarizes the components of the income
tax benefit (in thousands):
1998 1997 1996
------- ------- -------
Current taxes:
Federal $ -- $ 2,280 $ --
State -- 394 --
Deferred taxes (2,264) (2,674) --
Pro forma taxes -- (212) (1,333)
------- ------- -------
Income tax benefit $(2,264) $ (212) $(1,333)
======= ======== =======
In addition to the above, the Company recorded a tax benefit of
$82,240 in 1997 related to the extraordinary loss from early
extinguishment of debt.
Reconciliation from the federal statutory rate to the combined pro
forma and actual income tax benefit, is as follows:
1998 1997 1996
----- ----- -----
Statutory federal tax rate (35.0)% (35.0)% (34.0)%
State income taxes, net of federal tax benefit (5.0) (5.0) (4.5)
Purchased research and development -- 40.2 --
Conversion from S corporation to C corporation -- (1.6) --
Other -- 0.3 0.3
----- ---- ----
(40.0)% (1.1)% (38.2)%
===== ==== =====
The components of the net deferred tax asset as of December 31, 1998
and 1997 are as follows (in thousands):
1998 1997
------- -------
Deferred tax assets:
Accrued expenses $ 13 $ 57
Net operating loss carry forward 3,123 --
Inventory reserve 399 161
Depreciation 131 27
Allowance for doubtful accounts 468 140
Intangibles 3,665 999
Deferred revenue 591 520
------- -------
8,390 1,904
Valuation allowance (507) (287)
------- -------
Total deferred tax assets 7,883 1,617
------- -------
Deferred tax liabilities:
Capitalized software (1,411) (709)
Other (105) (384)
------- -------
Total deferred tax liabilities (1,516) (1,093)
------- -------
Net deferred tax asset $ 6,367 $ 524
======= =======
During fiscal 1998, the valuation allowance was increased $220,000 for
unrealized tax benefits from stock options exercises. Upon realizing
the tax benefit, through utilization of net operating loss carry
forwards, the valuation allowance will be reduced with an offsetting
increase to additional paid-in-capital. As of December 31, 1998, the
Company has recorded net operating losses of $7.8 million which are
available for carryforward through 2012. Additionally, in connection
with the filing of the Company's 1997 income tax returns, the Company
revised the tax basis of the intangible assets acquired in connection
with its fourth quarter 1997 acquisitions of RapidFire and Logic Shop
resulting in an increase in deferred tax assets with an offsetting
reduction of intangible assets of $2.3 million.
As of December 31, 1998, the Company has recorded a net deferred tax
asset of $6.4 million. Realization is dependent upon generating
sufficient taxable income in future periods. Although realization is
not assured, management believes it is more likely than not that the
deferred tax asset will be realized.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space, equipment and certain vehicles under
noncancelable operating lease agreements expiring on various dates
through 2008. At December 31, 1998, future minimum rental payments
for noncancelable leases with terms in excess of one year were as
follows (in thousands):
1999 $3,171
2000 2,863
2001 2,755
2002 2,502
2003 1,908
Thereafter 8,344
Total rent expense under operating leases was approximately $2.7
million, $1.1 million and $504,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
Employment Agreements
As of December 31, 1997 the Company had entered into employment
agreements with eight employees. During 1998 four of the employees
under employment agreements terminated their employment with the
Company, including the
former sole shareholder of RapidFire, and the primary shareholders of
ReMACS and PrysmTech. As of December 31, 1998, the Company has no
further obligation under such agreements.
Under each of the remaining four agreements, in the event employment
is terminated (other than voluntarily by the employee or by the
Company for cause or upon the death of the employee), the Company is
committed to pay certain benefits, including specified monthly
severance of not more than $13,000 per month. The benefits are to be
paid from the date of termination to June 2002.
9. SHAREHOLDERS' EQUITY
Stock
Stock Offerings
In February 1997, the Company completed an IPO of its common stock.
The Company issued 2.8 million shares, including the underwriters'
overallotment of 325,000 shares, at an offering price of $9.50. The
total proceeds of the IPO, net of underwriting discounts and offering
expenses, were approximately $24.2 million. Subsequent to the public
offering of common stock, the Company repaid outstanding debt of $8.7
million and repurchased and subsequently retired 793,093 shares of
common stock from two shareholders for a total of $2.1 million.
In July 1997, the Company completed a follow-on public offering of its
common stock. The Company issued 2.6 million shares at an offering
price of $23.75. The total proceeds of the offering, net of
underwriting discounts and offering expenses, were approximately $58.2
million.
Common Stock
At December 31, 1996, the authorized capital of the Company consists
of 40,000,000 shares of capital stock comprised of 30,000,000 shares
of no par common stock and 10,000,000 shares of no par Class A common
stock. Both classes of stock have a stated value of $.00001 per
share. In February 1997, the Class A common stock was automatically
converted into common stock at a rate of one share of common stock for
one share of Class A common stock.
Stock Repurchase Program
On September 18, 1998, the Company's Board of Directors authorized the
Company to repurchase up to 3.0 million shares of its common stock
from time to time in the open market, negotiated or block transactions.
As of December 31, 1998, the Company had repurchased and subsequently
retired approximately 607,000 shares at prices ranging from $6 3/8 to
$7 7/8 per share, for total consideration of approximately $4.0 million.
Preferred Stock
In January 1997, the Company authorized 5,000,000 shares of preferred
stock with no par value. The Company's Board of Directors has the
authority to issue these shares and to fix dividends, voting and
conversion rights, redemption provisions, liquidation preferences and
other rights and restrictions.
Warrants
Client Warrants
In May 1994, the Company and one of its clients (the "Client") entered
into an agreement (the "Agreement") whereby the Client was granted the
right (the "Client Warrant") to acquire 10% of the Company's
outstanding Class A common stock for $800,000, provided the Client
meets certain purchase criteria. A deferred sales discount of $240,000
was charged on the date of grant, which represented the fair market
value of the Client Warrant on such date, and is being amortized as a
reduction of sales as the Client makes purchases under the Agreement.
In February 1996, the Company amended the Agreement such that the
Client Warrant was increased to 12% of the Company's outstanding
common shares. An additional deferred sales discount of $79,000 was
charged on the date of grant, which represented the fair market value
on the date of the increase of the Client Warrant. The Company had
the option to repurchase one-sixth of the shares issuable under the
Client Warrant at a price midway between the Client's exercise
price and the fair market value of the shares. Because the Company
intended to exercise its option to repurchase the shares, it was
accreting to the expected redemption value of the shares. For the
year ended December 31, 1996, the Company recorded accretion of
$826,000.
In February 1997, the Company repurchased 193,060 shares of common
stock for approximately $1.0 million, which represented one-sixth of
the shares issuable under the Client Warrant. Additionally, the
client exercised the remaining 646,304 shares issuable under the
warrant for proceeds of $6,463.
Put Warrants
In connection with the issuance of the debt, the Company issued Put
Warrants to purchase 1.5% of the Company's outstanding common stock at
an exercise price of $.01.
In February 1997, the debt holder exercised its warrant to purchase
1.5% of the Company's outstanding common stock, which represented
174,642 shares of common stock.
Loan Origination Warrant
In 1996, the Company issued warrants to purchase 20,000 shares of
Class A common stock at an exercise price of $.01 for payment of loan
origination fees. The fair value of the warrant was determined to be
$40,000 and has been capitalized as loan origination fees. In
February 1997, the warrant was exercised for proceeds of $200.
Deferred Compensation
As part of the acquisition of Twenty/20, the Company granted two
employees options to purchase 140,000 shares of the Company's common
stock at an exercise price less than the fair market value of the
Company's common stock on the date of such grant. In connection with
the issuance of the 100,000 options, which vested immediately, the
Company recorded a nonrecurring compensation charge of $1.2 million.
Additionally, the Company recorded $303,500 as deferred compensation
for 40,000 options that vested over four years, for the excess of the
fair market value of the Company's common stock on the date of grant
over the aggregate exercise price of such options. The deferred
compensation will be amortized ratably over the four-year vesting
period. Also during 1997, the Company issued certain employees
options to purchase 26,500 of shares of the Company's common stock at
a price less than fair market value on the date of grant. Deferred
compensation of $323,375 was recorded and is being amortized ratably
over a four-year vesting period.
10. EMPLOYEE BENEFITS
Stock-Based Compensations Plans
Employee Stock Purchase Plan
In April 1998, the Company's Board of Directors adopted the 1998
Employee Stock Purchase Plan (the "ESPP"). Under the ESPP, an
aggregate of 1,000,000 shares of common stock is reserved for purchase
by qualified employees, at 85.0% of the appropriate market price. The
ESPP provides that qualified employees may purchase shares at the
lower of the market price in effect on the day the offering starts or
the day the offering terminates. In 1998, the Company issued 42,693
shares under the ESPP at an average price of $6.27 per share.
Directors Stock Option Plan
During 1997, the Company's Board of Directors adopted the
Non-Management Directors' Stock Option Plan (the "Directors' Plan")
for non-management directors of the Company, under which the Company
may grant up to 100,000 options to nonemployee directors of the
Company to purchase shares of the Company's common stock. Options are
granted at an exercise price, which is not less than fair value as
estimated by the Board of Directors. Initial grants to new
directors are exercisable over three years, while annual grants are
exercisable six months after the grant date. Options granted under
the Plan expire ten years from the date of grant. The Company has
granted 50,000 options under the Directors' Plan at December 31, 1998.
1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "Plan"), as amended,
provides for the issuance of up to 6,000,000 incentive and
nonqualified stock options to key employees. Options are granted at
an exercise price which is not less than fair value as estimated by
the Board of Directors and become exercisable as determined by the
Board of Directors, generally over a period of four to five years.
Options granted under the Plan expire ten years from the date of
grant. At December 31, 1998, options to purchase 1,627,370 shares of
common stock were available for future grant under the Plan.
The Company has granted 540,690 nonqualified stock options outside the
Plan, of which, 276,690 have been cancelled. Of these remaining
options, 164,000 vest over four years, and the remaining 100,000
options vest over periods no greater than four years, subject to
acceleration based on specified terms within the agreements.
Sharp declines in the market price of the Company's common stock
during 1998 resulted in many outstanding employee stock options being
exercisable at prices that exceeded the current market price, thereby
substantially impairing the effectiveness of such options as
performance incentives. Consistent with the Company's philosophy of
using such equity incentives to motivate and retain management and
employees, the Company's Board of Directors determined it to be in the
best interests of the Company and its shareholders to restore the
performance incentives intended to be provided by employee stock
options by repricing such options at a price equal to the average
price since the decline, or $6.875 per share. Certain stock options
of non-management directors and executive management were not repriced
from their original exercise price. Consequently, on September 18,
1998, the Board of Directors of the Company decided to cancel and
reissue certain employee stock options which had exercise prices in
excess of such price.
Stock option activity for each of the three years ended December 31,
1998 is as follows:
1998 1997 1996
------------------------ ----------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------ ----------------------- -----------------------
Outstanding at beginning of year 4,661,160 $ 7.01 3,335,750 $ 2.64 1,774,000 $ 1.00
Granted 1,643,408 8.44 1,660,163 15.26 1,625,750 4.51
Canceled (1,787,141) 15.65 (165,550) 15.71 (64,000) 1.00
Exercised (646,493) 2.11 (169,203) 2.80 -- --
------------------------ ----------------------- -----------------------
Outstanding at end of year 3,870,934 $ 4.52 4,661,160 $ 7.01 3,335,750 $ 2.64
======================== ======================= =======================
Options exercisable at end of year 1,001,814 $ 5.27 698,279 $ 5.03 253,661 $ 2.77
======================== ======================= =======================
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price and remaining contractual
lives by groups of similar price and grant date:
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Weighted
Average
Weighted Remaining Weighted
Range at Number of Average Contractual Number Average
Exercise Price Shares Price Life (Years) of Shares Price
- -------------- --------- -------- ----------- --------- --------
$1.00-$2.00 1,541,535 $ 1.17 7.06 292,690 $ 1.27
$4.00-$6.00 536,250 4.62 7.80 286,448 4.74
$6.25-$7.00 1,651,369 6.83 8.57 356,246 6.94
$7.06-$28.50 141,780 13.64 8.67 66,430 14.83
--------- ---------
Total 3,870,934 $ 4.52 7.86 1,001,814 $ 5.27
--------- ---------
Fair Value Disclosure
The Company has elected to account for its stock-based compensation
plan under APB 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during 1998, 1997
and 1996 using the Black-Scholes option pricing model as prescribed by
SFAS 123 using the following weighted average assumptions used for
grants in 1998, 1997 and 1996:
1998 1997 1996
-------- ------- -------
Risk free interest rate 4.8% 5.9% 5.8%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives 4.5 years 4 years 4 years
Expected volatility 68.0% 62.0% 56.0%
The total value of the options granted during the years ended December
31, 1998, 1997 and 1996 were computed as approximately $4,687,000,
$10,734,000 and $3,527,000 respectively, which would be amortized over
the vesting period of the options. If the Company had accounted for
these plans in accordance with SFAS 123, the Company's reported pro
forma net loss and pro forma net loss per share for the years ended
December 31, 1998, 1997 and 1996 would have increased to the following
pro forma amounts (in thousands, except per share data):
1998 1997 1996
------- -------- -------
Net loss:
As reported $(3,395) $(19,489) $(2,156)
Pro forma (7,559) (22,409) (2,984)
Basic:
As reported $ (0.21) $ (1.50) $ (0.26)
Pro forma (0.47) (1.72) (0.36)
Diluted:
As reported $ (0.21) $ (1.50) $ (0.26)
Pro forma (0.47) (1.72) (0.36)
Employee Benefit Plan
The Company has a 401(k) profit-sharing plan (the "Plan") available to
all employees of the Company who have attained age 21. The Plan
includes a salary deferral arrangement pursuant to which employees may
contribute a minimum of 1.0% and a maximum of 15.0% of their salary on
a pretax basis. The Company may make both matching and additional
contributions at the discretion of the Company's Board of Directors.
The Company made no such contributions during 1998, 1997 or 1996.
11. RELATED-PARTY TRANSACTIONS
In June 1996, a shareholder sold 200,000 shares of Class A common
stock for $1.875 per share. The shareholder also issued to one of the
Company's principal shareholders an option to repurchase the remaining
600,033 shares of Class A common stock for $1.875 per share through
June 1997. In January 1997, the principal shareholder assigned this
option to the Company, at which time the Company repurchased all
600,033 shares for $1,125,062.
During 1997, two shareholders received a loan from the Company in the
amount of $165,000 each. The notes, together with interest at a rate
of 7.0% per year, mature on December 31, 2001. During 1998 one of the
shareholders repaid both the note balance and accrued interest in
full. Interest income recorded during 1998 and 1997 related to these
notes was approximately $21,000 and $16,000, respectively.
As more fully described in Note 4, as part of the acquisition of
RapidFire the Company agreed to loan the former sole shareholder of
RapidFire $1.5 million. During 1998, the Company advanced $1.5
million under the loan agreement and recorded interest income related
thereto of approximately $58,000.
During 1998, a shareholder received a loan from the Company in the
amount of $225,000. The loan bears interest at 7.0% and is payable in
certain specified increments beginning July 2000 with final payment
due December 2001. Interest income recorded during 1998 related to
the note was approximately $4,000.
12. SEGMENT REPORTING DATA
The Company operates through two primary reportable segments (i)
Global Solutions and (ii) Regional Solutions. Although both groups
provide enterprise-wide technology solutions to the retail industry,
the distinguishing factor between them is primarily the size of the
clients served and the nature of the services performed. Global
Solutions' clients tend to be clients with greater than fifty owned
and operated sites, while Regional Solutions' clients typically have
less than fifty owned and operated sites. Additionally, the
purchasing behavior of the Global Solutions' clients is typically
characterized by the use of fewer, larger contracts. These contracts
typically involve longer negotiating cycles, and often require the
dedication of substantial amounts of working capital and other
resources.
The accounting policies of the segments are substantially the same as
those described in the summary of significant accounting polices. The
Company's management evaluates the performance of the segments based
on an internal measure of contribution margin, or income and loss from
operations, before certain allocated costs of development and
corporate overhead.
The Company accounts for intersegment sales and transfers as if the
sales or transfers were to third parties, that is, at current market
prices.
The Other nonreportable segment includes miscellaneous businesses,
certain unallocated corporate operating expenses and the elimination
of intersegment sales.
The summary of the Company's operating segments is as follows (in
thousands):
For the year ended December 31, 1998
----------------------------------------------------------
Global Regional
Solutions Solutions Other Consolidation
--------- --------- ------- -------------
Revenues $ 67,403 $ 15,532 -- $ 82,935
Contribution margin 15,663 (1,888) $(1,333) 12,442
Acquisition and other non-recurring charges 1,123 153 -- 1,276
Operating loss (445) (5,682) (1,333) (7,460)
Identifiable assets (1) 30,353 11,631 42,182 84,166
For the year ended December 31, 1998
----------------------------------------------------------
Global Regional
Solutions Solutions Other Consolidation
--------- --------- ------- -------------
Revenues $ 74,811 $ 3,192 -- $ 78,003
Contribution margin 19,402 43 $ (17) 19,428
Acquisition and other non-recurring charges 20,349 9,737 -- 30,086
Operating loss (10,681) (9,861) (17) (20,559)
Identifiable assets (1) 31,075 9,441 52,999 93,515
(1) Identifiable assets allocated between the segments are comprised
primarily of accounts receivable, inventory and intangible
assets. All assets included in the Other segment are shared
among all segments.
During 1996, the Company's internal financial statements were not
segmented to include Global and Regional Solutions. As such, no
financial data is presented. International sales for the years ended
December 31, 1998, 1997 and 1996 were not material.
13. SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (unaudited)
The following tables set forth certain unaudited financial data for
each of the Company's last eight calendar quarters. The information
has been derived from unaudited consolidated financial statements
that, in the opinion of management, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such quarterly information. The operating results for
any quarter are not necessarily indicative of the results to be
expected for any future period.
Quarter ended
Mar. 31, June 30, Sept 30, Dec. 31,
1998 1998 1998 1998
----------------------------------------------------
(In thousands, except per share data)
Revenues:
System sales $16,647 $13,793 $13,706 $15,254
Client support, maintenance and other services 4,897 5,732 6,072 6,834
----------------------------------------------------
Total revenues 21,544 19,525 19,778 22,088
Cost of revenues:
System sales 7,996 7,150 6,284 7,447
Client support, maintenance and other services 4,154 5,062 5,293 5,779
----------------------------------------------------
Total cost of revenues 12,150 12,212 11,577 13,226
----------------------------------------------------
Gross profit 9,394 7,313 8,201 8,862
Operating expenses:
Product development 2,793 3,020 2,748 2,638
Sales and marketing 2,823 3,073 3,105 2,729
Depreciation and amortization 987 1,188 1,214 1,276
Acquisition and other non-recurring charges -- -- 455 821
General and administrative 3,051 3,052 3,072 3,185
----------------------------------------------------
Loss from operations (260) (3,020) (2,393) (1,787)
----------------------------------------------------
Interest income, net (539) (472) (407) (382)
----------------------------------------------------
Income (loss) before income taxes 279 (2,548) (1,986) (1,405)
Income tax provision (benefit) 111 (1,019) (795) (562)
----------------------------------------------------
Net income (loss) $ 168 $(1,529) $(1,191) $ (843)
====================================================
Basic and diluted (income) loss per share:
Basic income (loss) per share $ 0.01 $ (0.10) $ (0.07) $ (0.05)
====================================================
Diluted income (loss) per share $ 0.01 $ (0.10) $ (0.07) (0.05)
====================================================
Weighted average shares outstanding:
Basic 15,926 15,991 16,062 15,983
====================================================
Diluted 18,624 15,991 16,062 15,983
====================================================
Quarter ended
Mar. 31, June 30, Sept 30, Dec. 31,
1997 1997 1997 1997
(In thousands, except per share data)
Revenues:
System sales $10,742 $14,466 $17,532 $24,058
Client support, maintenance and other services 1,818 2,694 3,258 3,435
--------------------------------------------------
Total revenues 12,560 17,160 20,790 27,493
Cost of revenues:
System sales 6,278 7,942 8,071 11,728
Client support, maintenance and other services 1,749 2,395 2,795 3,359
--------------------------------------------------
Total cost of revenues 8,027 10,337 10,866 15,087
--------------------------------------------------
Gross profit 4,533 6,823 9,924 12,406
Operating expenses:
Product development 1,153 1,466 1,984 2,294
Sales and marketing 872 1,243 1,447 2,257
Depreciation and amortization 367 533 666 818
Acquisition and other non-recurring charges -- 20,348 -- 9,738
General and administrative 1,689 1,911 2,424 3,035
--------------------------------------------------
Income (loss) from operations 452 (18,678) 3,403 (5,736)
Interest (income) expense, net 209 (44) (576) (578)
--------------------------------------------------
Income (loss) before income taxes and extraordinary item 243 (18,634) 3,979 (5,158)
Income tax provision (benefit) (212) -- 1,532 (1,532)
Extraordinary item, net of taxes 131 -- -- --
--------------------------------------------------
Net income (loss) $ 324 $(18,634) $ 2,447 $(3,626)
==================================================
Basic income (loss) per share:
Income (loss) before extraordinary item $ 0.03 $ (1.55) $ 0.17 $ (0.24)
Extraordinary income (loss) on early extinguishment of debt (0.01) -- -- --
--------------------------------------------------
Total basic income (loss) per share $ 0.02 $ (1.55) $ 0.17 $ (0.24)
==================================================
Diluted income (loss) per share:
Income (loss) before extraordinary item $ 0.02 $ (1.55) $ 0.14 $ (0.24)
Extraordinary loss on early extinquishment of debt (0.01) -- -- --
--------------------------------------------------
Total diluted income (loss) per share $ 0.01 $ (1.55) $ 0.14 $ (0.24)
==================================================
Weighted average shares outstanding:
Basic 15,926 12,045 14,646 15,356
==================================================
Diluted 18,624 12,045 17,844 15,356
==================================================
Net income (loss) per share is computed independently for each of the
quarters presented. As such, the summation of the quarterly amounts
may not equal the total net income (loss) per share reported for the
year.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There has been no occurrence requiring a response to this Item.
PART III
Items 10, 11, 12 and 13 will be furnished by amendment hereto on or
prior to April 30, 1999 or the Company will otherwise have filed a
definitive proxy statement involving election of directors pursuant to
Regulation 14A which will contain such information
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
(a)
1. Financial Statements. The following consolidated
financial statements, together with the applicable report of
independent public accountants, have been filed as Item 8 in Part II
of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. No schedules are
included with this Report, as they are not applicable or the
information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
3. 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
(referred to herein as "2/97 S-1"), (ii) a Registration Statement on
Form S-1 for the Registrant, Registration No. 333-30289 (referred to
herein as "6/97 S-1"), (iii) a Registration Statement on Form S-8 for
the Registrant, Registration No. 333-41291 (referred to herein as
"1997 S-8"), (iv) a Registration Statement on Form S-8 for the
Registrant, Registration No. 333-62157 (referred to herein as ("1998
S-8"), and (v) a Registration Statement on Form S-8 for the
Registrant, Registration No. 333-62151 (referred to herein as ("ESPP
S-8"). Except as otherwise indicated, the exhibit number corresponds
to the exhibit number in the referenced document.
Exhibit
Number Description of Exhibit
*3. (i) Amended and Restated Articles of Incorporation (2/97
S-1)
*3. (ii) Amended and Restated Bylaws (2/97 S-1)
*4.1 Specimen Certificate of Common Stock (2/97 S-1)
Exhibit
Number Description of Exhibit (cont.)
*10.1 Form of License, Support and Equipment Purchase
Agreement (2/97 S-1)
*10.2 Employee Stock Purchase Plan (ESPP S-8, Exhibit 10.1)
*10.3 Amended and Restated 1995 Stock Option Plan (2/97 S-1)
*10.3.1 Amendment No. 1 to Amended and Restated 1995 Stock
Option Plan (1997 S-8)
*10.3.2 Amendment No. 2 to Amended and Restated 1995 Stock
Option Plan (1998 S-8)
10.4 Lease Agreement dated October 7, 1997, by and between
Weeks Realty, L.P. and the Registrant for lease of
office space in Alpharetta, Georgia (Brookside Parkway)
10.4.1 Amendment No. 1 to Lease Agreement dated October 7,
1997, by and between Weeks Realty, L.P. and the
Registrant for lease of office space in Alpharetta,
Georgia (Brookside Parkway)
10.4.2 Amendment No. 2 to Lease Agreement dated October 7,
1997, by and between Weeks Realty, L.P. and the
Registrant for lease of office space in Alpharetta,
Georgia (Brookside Parkway)
10.5 Lease Agreement dated November 12, 1997 by and between
Meadows Industrial, LLC and the Registrant for lease of
office space in Alpharetta, Georgia (Shiloh Road)
10.5.1 Amendment No. 1 to Lease Agreement dated November 12,
1997 by and between Meadows Industrial, LLC and the
Registrant for lease of office space in Alpharetta,
Georgia (Shiloh Road)
*10.10 Software License, Support and Equipment Purchase
Agreement dated May 27, 1994, as amended, by and
between the Registrant and Emro Marketing Company
(2/97 S-1)
*10.13 Non-Management Directors' Stock Option Plan (6/97 S-1)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
SIGNATURES
In accordance with the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, in the City of Alpharetta,
State of Georgia on March 30, 1999.
RADIANT SYSTEMS, INC.
/s/ Erez Goren
By: Erez Goren
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
- -------------------- ---------------------------- -------------
/s/ Erez Goren Co-Chairman of the Board and March 30, 1999
Erez Goren Chief Executive Officer
(principal executive officer)
/s/ Alon Goren Co-Chairman of the Board and March 30, 1999
Alon Goren Chief Technology Officer
/s/ Eric B. Hinkle President, Chief Operating March 30, 1999
Eric B. Hinkle Officer and Director
/s/ John H. Heyman Executive Vice President, March 30, 1999
John H. Heyman Chief Financial Officer and
Director (principal financial
officer)
/s/ Paul J. Ilse Vice President, Finance March 30, 1999
Paul J. Ilse (principal accounting officer)
/s/ James S. Balloun Director March 30, 1999
James S. Balloun
/s/ Evan O. Grossman Director March 30, 1999
Evan O. Grossman
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.4 Lease Agreement dated October 7, 1997, by and between
Weeks Realty, L.P. and the Registrant for lease of
office space in Alpharetta, Georgia (Brookside Parkway)
10.4.1 Amendment No. 1 to Lease Agreement dated October 7,
1997, by and between Weeks Realty, L.P. and the
Registrant for lease of office space in Alpharetta,
Georgia (Brookside Parkway)
10.4.2 Amendment No. 2 to Lease Agreement dated October 7,
1997, by and between Weeks Realty, L.P. and the
Registrant for lease of office space in Alpharetta,
Georgia (Brookside Parkway)
10.5 Lease Agreement dated November 12, 1997 by and between
Meadows Industrial, LLC and the Registrant for lease of
office space in Alpharetta, Georgia (Shiloh Road)
10.5.1 Amendment No. 1 to Lease Agreement dated November 12,
1997 by and between Meadows Industrial, LLC and the
Registrant for lease of office space in Alpharetta,
Georgia (Shiloh Road)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)