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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, 1999
______________________________
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 [X] 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 (10,534,187 shares) on March 15, 2000 was
approximately $720,275,036 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, 2000: 17,511,433 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 June 1, 2000 are incorporated by reference in response to Part III of
this Report.
1
PART I
Item 1. Business.
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General
Radiant Systems, Inc. (the "Company" or "Radiant") provides enterprise-wide
technology solutions to businesses that serve the consumer. The Company offers
fully integrated retail automation solutions including point of sale systems,
consumer-activated ordering systems, back office management systems,
headquarters-based management systems and Web-enabled decision support systems.
The Company's products provide integrated, end-to-end solutions that span from
the consumer to the supply chain. The Company's products enable retailers to
interact electronically with consumers, capture data at the point of sale,
manage site operations analyze data, communicate electronically with their
sites, and interact with vendors through electronic data interchange and Web-
based marketplaces. The Company also develops and markets a variety of
intelligent, Windows CE based devices that are specific to the retail industry.
In addition, the Company offers professional services focusing on technical
implementation, process improvement and change management as well as hardware
maintenance services and 24-hour help desk support.
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. Moreover, management believes the Internet will
provide an important opportunity for the Company to better serve its clients and
offer increased functionality at a lower total cost. In addition to traditional
methods, the Company intends to offer its software applications through Vertical
Solutions Portals ("VSPs") - Internet destinations that address the unique needs
of small to midsize retailers and their supply chain partners. The Company is
currently marketing these products through its RetailEnterprise division.
RetailEnterprise VSPs combine the advantages of hosted applications and digital
marketplaces, an approach that is designed to help small and midsize retailers
gain efficiencies and benefits traditionally available only to larger retailers.
For example, retailers will be able to utilize a labor-scheduling application to
more efficiently manage labor costs. In addition, retailers accessing these Web-
enabled solutions can participate in a digital marketplace to generate
substantial savings through open trading communities and online purchasing
tools.
Large clients of Radiant Systems will also benefit from VSP's by deploying these
applications and services via client-specific portals that leverage their brand
name in their franchisee and dealer communities. By way of example, a franchisee
of XXX brand may elect to subscribe to the Company's offerings via
RetailEnterprise or via XXXbrand.com.
Since 1997, the Company has operated 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.
Recent Events
In an effort to strengthen its product offerings across new and existing
markets, during 1999 the Company launched product development efforts around
Web-enabled, centrally hosted management systems software for retailers.
Management believes these products will provide integrated, end-to-end solutions
that span from the consumer through the supply chain.
To further this strategy, on August 1, 1999, the Company entered into a
preliminary agreement with America Online, Inc. ("AOL") and MovieFone, Inc., a
subsidiary of AOL ("MF"), to form a strategic relationship in the retail point
of sale business. Final agreements evidencing this relationship were entered
into on March 3, 2000. This relationship, among other aspects, entails a ten-
year marketing and development agreement whereby the Company will develop and
manufacture point of sale systems and services for sale to the entertainment
industry pursuant to MF's specifications, which will make these point of sale
systems interoperable with MF's remote entertainment and event ticketing
services. The relationship also contemplates future collaborative efforts
between the companies. As part of this relationship, AOL purchased $10.0 million
of the Company's common stock at a price of $15 per share. In addition, AOL has
agreed to invest an additional $25.0 million in a to be formed subsidiary of the
Company to engage in consumer interactive businesses other than in the
entertainment segment (e.g., interactive fuel and dispenser business and
interactive restaurant self-ordering business). In return for its investment,
AOL will receive a 15% equity interest in the form of preferred stock of this
subsidiary. To the extent AOL does not invest $25.0 million in the to be formed
subsidiary, AOL has agreed to invest the balance in another to be formed
subsidiary of the Company or purchase common stock of the Company at the then
current market price.
In March 1, 2000, the Company and Microsoft Corporation jointly announced,
subject to execution of a definitive agreement, that both companies have joined
forces to develop and market an integrated Web-enabled management system and
supply chain solution to enable retailers to conduct business to business e-
commerce over the Internet. In addition, Microsoft agreed to make an equity
investment in the Company and committed to support the Company's solution
through joint marketing programs, funding for product development, consulting
services, developer support, and distribution via the Microsoft(R) bCentral(TM)
small-business portal. Further, Microsoft and the Company have created an open
structure that allows for other strategic and equity participants in this
venture.
Industry Background
Successful retailers increasingly require information systems that capture
detailed information of consumer activity at the point of sale and store that
data in an easy to access 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 information system 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.
At the end of 1999, there were more than 96,000 convenience stores nationwide,
while the cinema industry had approximately 37,000 screens within approximately
7,500 sites nationwide. As of January 1999, the food service industry had over
496,000 domestic units, of which approximately 231,000 were classified as quick
service restaurants ("QSR"). Typically, the existing information 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
information 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
which are highly functional and scalable, relatively inexpensive and easy to
deploy are critical for successful penetration in these retail markets.
2
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 retail 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, through the use of integrated systems,
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, resulting in
retailers demanding more sophisticated, integrated solutions from their systems
vendors. In a parallel development, technological advances have improved the
capability of information systems that are 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.
Most recently, the advent of centrally hosted, Internet-enabled management
software has opened new possibilities for businesses that want to deploy
standardized software applications over geographically dispersed areas. By
allowing management personnel from a retail site to access software over the
Internet using a standard Web browser, retail chains are able to have consistent
business applications and centrally consolidated data while avoiding the need to
download large software programs to individual site-based PC workstations.
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:
3
CONSUMER-ACTIVATED BACK OFFICE WEB-BASED
Touch Screen Interactive Inventory Control Inventory Control
Video, Graphics, Audio Vendor Management Labor Scheduling
Credit/Cash Payment Purchasing/Receiving
Compact, Enclosed Terminals Employee Management SERVICES
Suggestive Selling Recipe Management Consulting
Menu Management Training
Maintenance
Technical Support
POINT OF SALE Integration
Touch Screen Interactive HEADQUARTERS Installation
Transaction Auditing Executive Information
Credit Processing Electronic Price Book
Data Capture Vendor EDI
Peripheral Integration Centralized Menu Management
Cash Reconciliation Decision Support Systems
Table Management
The Company's technology solutions allow retailers to enable 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 25,000
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
site and headquarter levels. 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 allows 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 technology 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:
4
Leverage e-commerce tools and business models. The Company believes it can
access a wider array of clients through its e-commerce offerings, including
Web-enabled management systems and its RetailEnterprise division.
Additionally, its alliance with AOL creates opportunities to leverage the
Company's presence in retail locations around the world into new revenue
streams for the Company.
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, has enabled it to enter and/or broaden its presence in these
markets.
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. Throughout 1999, the Company
enhanced its Lighthouse point-of-sale product and successfully introduced
this technology into the convenience store, food service and entertainment
markets. Management believes its Lighthouse generation of software
products, which utilizes both Microsoft Windows CE and NT operating
systems, represent an innovative platform based on open, modular software
and hardware architecture and offer increased functionality and stability
compared to other open systems in the marketplace at a lower total cost of
ownership. The Company continues to introduce incremental new devices
and software modules to complete its existing suite of products for the
retail environment.
Additionally, during 1999, the Company's launched product development
efforts around Web-enabled, centrally hosted management software and
integrated purchasing software built around industry-specific marketplaces.
Management believes that these new product offerings open up significant
opportunities for future new business.
Better Serve the Smaller Retailer. A large portion of the food service and
convenience store market is comprised of small businesses. Historically, a
disproportionately small percentage of the Company's business has been
derived from this small business part of the market. Management believes
that along with its Web-enabled management software and its Retail
Enterprise offering, the Company can grow this segment of the business in
the future at a faster rate than in the past.
Increase sales and marketing efforts outside the United States.
Historically, the Company has not derived a significant portion of its
revenues from clients outside the United States. Management believes that
the growing number of large, multi-national companies who are among the
Company's major domestic clients together with its successful record of
implementing of solutions with retailers in Western Europe, Eastern Europe
and Asia will allow it to make progress internationally in the future. The
Company has previously executed international projects in Canada, the Czech
Republic, Hong Kong, Japan, Malaysia, Poland, Sweden, Switzerland,
Thailand, and the U.K.
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 or 1999, to the extent the
Company believes acquisitions can better position it to serve its current
markets or penetrate others, it will pursue such opportunities.
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 technology solutions
and its practical experience in deploying and implementing retail
solutions. The Company has experience integrating all aspects of its
technology 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.
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.
5
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 96,700 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 technology
solutions. Management believes that the industry is currently under-invested in
technology. Only 42% of the industry's retail sites use scanning equipment,
compared to grocery stores, which have implemented scanning at approximately 90%
of their locations.
The Company believes that the demand for the Company's technology solutions
in the convenience store market for the foreseeable future will remain strong.
This demand is fueled because 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 50% 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 496,000 sites as of the
beginning of 1999. Restaurants increasingly require sophisticated technology
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
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.
6
Entertainment Market
The domestic cinema industry is concentrated, with the top six chains operating
approximately 44% of the cinema screens. In addition to increasing the number of
screens per site, "megaplexes" have evolved, which combine restaurants, movies
and other forms of entertainment in one facility. There are approximately 37,000
cinema screens in the United States. These screens are operated at approximately
7,500 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.
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 site. 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.
7
Site Management Systems
Site management systems, or 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, these systems provide 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 headquarters application:
. 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.
. 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.
. 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.
. 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.
. 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".
Next Generation Management Systems
In 1999, the Company began developing its new generation of management systems
products--WAVE. These products are designed to combine and expand the
functionality of its Site Management Systems and Headquarter-Based Management
Systems. Further, the Company's architecture and platforms for these products
are entirely web-based, which the Company believes will enable it to increase
the functionality while decreasing the costs of implementing and maintaining
technology solutions for retailers.
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's sales personnel focuses on selling its technology 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 to 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.
8
Clients
Clients who have selected the Company as their technology solutions provider
operate over 80,000 sites. As of December 31, 1999, the Company has installed
its technology solutions in over 25,000 of these sites. In 1999, one client,
American Multi-Cinema, Inc., accounted for 13.3% of the Company's total
revenues. 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%).
The following is a partial list of major clients who have licensed or purchased
the Company's products and services:
Advantica Restaurant Group, Inc. The Krystal Company
American Multi-Cinema, Inc. Loews Cineplex Entertainment Corporation
BP Amoco, p.l.c. National Amusements, Inc.
Boston Chicken, Inc. Regal Cinemas, Inc.
Car Spa, Inc. Ruby Tuesday, Inc.
Chick-fil-A, Inc. Sephora U.S.A, LLC
Clearview Cinemas Souper Salad, Inc.
Compass Group USA, Inc. Speedway SuperAmerica, LLC, formerly Emro Marketing Company
Conoco, Inc. Tricon Restaurant Services Group, Inc.
Einstein/Noah Bagel Corporation Tosco Corporation
General Cinema Theatres, Inc. Ultramar Diamond Shamrock Corporation
VICORP Restaurants, Inc.
Competition
In marketing its technology solutions, the Company faces intense competition,
including internal efforts by some 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 Internet presents a new competition to the Company. Start-ups funded
by venture capitalists and the public equity markets are able to gather
resources rapidly. Further, these companies often offer new business models
which may force the Company to change its terms of business to continue to
maintain its market position.
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,
2000, the Company was certified on nine 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 following is a summary of some of the professional services
the Company provides:
9
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. All customization
remains the property of the Company.
Training. The Company has a formal 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 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 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
platforms and is modular thereby allowing it to phase 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.
Throughout 1999, the Company enhanced its Lighthouse point-of-sale product and
successfully introduced this replacement technology into the convenience store,
food service and entertainment markets. 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 reduce significantly future
development and support costs.
Additionally during 1999, the Company launched product development efforts
around Web-enabled, centrally hosted management software and integrated
purchasing software built around industry-specific marketplaces. Management
believes that these products will strengthen its product offerings by providing
integrated, end-to-end solutions that span from the consumer to the supply
chain.
10
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 two
patents and six patents pending. The source code for the Company's various
proprietary software products 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 client's use of the Company's
software and does not permit the resale, 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, such as to protect the Company's trade secrets, to
determine the validity and scope of the Company's and or others 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 of these 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 alternative
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 business, operating results and
financial condition. 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. Defending against 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.
11
Employees
As of December 31, 1999 the Company employed 790 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. These statements appear in a
number of places in this Annual Report and include all statements that are not
statements of historical fact regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) the Company's financing plans; (ii) trends affecting the
Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. The words "may," "would," "could," "will," "expect," "estimate,"
"anticipate," "believe," "intend," "plans," and similar expressions and
variations thereof are intended to identify forward-looking statements.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, many of
which are beyond the Company's ability to control. Actual results may differ
materially from those projected in the forward-looking statements as a result of
various factors. Among the key risks, assumptions and factors that may affect
operating results, performance and financial condition are the Company's
reliance on a small number of customers for a larger portion of its revenues,
fluctuations in its quarterly results, ability to continue and manage its
growth, liquidity and other capital resources issues, competition and the other
factors discussed in detail in the Company's filings with the Securities and
Exchange Commission, including the "Risk Factors" section below.
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. Although the Company reported $7.6 million in net
income in 1999, the Company incurred net losses of $3.4 million, $19.5 million
and $2.2 million for fiscal years 1998, 1997 and 1996, respectively. As a
result, there can be no assurance that the Company will be able to continue to
achieve profitability for fiscal 2000 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.
Impact of the Internet. The Company is embracing the Internet as part of its
product development and sales and marketing strategy. To that extent, it is
making significant investment in new products and business models. There can be
no guarantee that these efforts will be successful, or, if successful, to what
extent. Further, these investments could result in a material and adverse effect
to the Company's financial results.
The Internet has created new competitions and creative business models that the
Company must contend. These competitive forces could result in the Company
losing market share, reducing margins or increasing investments. As a result,
the Company's business, operating results and financial condition could be
materially and adversely effected.
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.
12
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. 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 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. 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 increase significantly 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 47% of the Company's
total revenue in both 1999 and 1998 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 and adversely 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
13
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 1999, approximately 40.9% of the Company's revenue were
derived from five 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. 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 and degree of integration effort required with other systems.
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
14
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 39.8% of the Company's outstanding common stock (the "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 continue 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.
15
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, 1999 to a
vote of security holders of the Company.
16
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, 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
Year ended December 31, 1999 High Low
- ---------------------------------------------- ----------------- -----------------
First Quarter $ 12 3/8 $ 6 1/2
Second Quarter 14 1/4 9 5/16
Third Quarter 19 3/4 13
Fourth Quarter 45 3/4 14 3/8
As of March 16, 2000, there were 146 holders of record of the Common Stock.
Management of the Company believes that these are in excess of 3,200
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.
17
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, 1999, 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) 1999 1998 1997 1996 1995
---------------------------------------------------
Statement of Operations Data:
Revenues:
System sales $ 91,946 $59,400 $ 66,798 $35,888 $14,078
Client support, maintenance and other services 37,720 23,535 11,205 5,055 1,804
---------------------------------------------------
Total revenues 129,666 82,935 78,003 40,943 15,882
Cost of revenues:
System sales 46,001 28,877 34,019 22,270 9,863
Client support, maintenance and other services 29,989 20,288 10,298 5,465 2,300
---------------------------------------------------
Total cost of revenues 75,990 49,165 44,317 27,735 12,163
---------------------------------------------------
Gross profit 53,676 33,770 33,686 13,208 3,719
Operating expenses:
Product development 11,125 11,199 6,897 3,328 1,640
Sales and marketing 12,302 11,730 5,819 1,487 607
Depreciation and amortization 6,057 4,665 2,384 948 583
Acquisition and other non-recurring charges -- 1,276 30,086 3,930 --
General and administrative 13,204 12,360 9,059 5,664 2,990
---------------------------------------------------
Income (loss) from operations 10,988 (7,460) (20,559) (2,149) (2,101)
Interest (income)expense, net (1,613) (1,800) (989) 712 166
Minority interest in earnings of PrysmTech -- -- -- 628 --
Other income -- -- -- -- (406)
---------------------------------------------------
Income (loss) before income taxes and extraordinary item 12,601 (5,660) (19,570) (3,489) (1,861)
Income tax provision (benefit)(1) 4,992 (2,265) (212) (1,333) (709)
Extraordinary item, net of taxes(2) -- -- 131 -- --
---------------------------------------------------
Net income (loss) $ 7,609 $(3,395) $(19,489) $(2,156) $(1,152)
===================================================
Basic income (loss) per share:
Income (loss) before extraordinary item $ 0.46 $ (0.21) $ (1.49) $ (0.26) $ (0.13)
Extraordinary loss on early extinguishment of debt -- -- (0.01) -- --
---------------------------------------------------
Total basic income (loss) per share (3) $ 0.46 $ (0.21) $ (1.50) $ (0.26) $ (0.13)
===================================================
Diluted income (loss) per share:
Income (loss) before extraordinary item $ 0.41 $ (0.21) $ (1.49) $ (0.26) $ (0.13)
Extraordinary loss on early extinquishment of debt -- -- (0.01) -- --
---------------------------------------------------
Total diluted income (loss) per share (3) $ 0.41 $ (0.21) $ (1.50) $ (0.26) $ (0.13)
===================================================
Weighted average shares outstanding:
Basic (3) 16,420 15,990 13,024 8,300 9,073
===================================================
Diluted (3) 18,346 15,990 13,024 8,300 9,073
===================================================
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 65,947 $47,329 $57,259 $ 812 $(3,664)
Total assets 111,999 84,166 93,515 14,616 4,235
Long-term debt and shareholder loan,
including current portion 4,355 4,267 4,728 9,174 970
Shareholders' equity (deficit) 85,935 69,245 71,021 (4,500) (3,154)
18
(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 in the retail industry in November 1995 by entering into a joint
venture (PrysmTech) to market enterprise-wide technology solutions to cinema
operators. On December 31, 1996, the Company purchased the remaining interest in
PrysmTech. Accordingly, the operations of PrysmTech are reflected in the 1996
financial statements of the Company with a deduction for the minority interest
in the earnings of PrysmTech. Continuing its growth in the retail industry, in
May 1996 the Company purchased Liberty Systems International, Inc. ("LSI"), a
technology solution provider to the 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.
19
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 the business negatively impacted
operating results and contributed to losses during 1998.
As a result of its election to be treated as an S Corporation for income tax
purposes, prior to the completion of its initial public offering in February
1997, the Company was not subject to federal or state income taxes. Pro forma
net loss amounts discussed herein include additional income tax benefits
determined by applying the Company's anticipated statutory tax rate to pretax
loss, adjusted for permanent tax differences. The Company's S Corporation
status terminated upon completion of its initial public offering in February
1997.
Results of Operations
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,
1999 1998 1997
-------------------------------------------------------
Revenues:
System sales 70.9% 71.6% 85.6%
Client support, maintenance and other services 29.1 28.4 14.4
-------------------------------------------------------
Total revenues 100.0 100.0 100.0
Cost of revenues:
System sales 35.5 34.8 43.6
Client support, maintenance and other services 23.1 24.5 13.2
-------------------------------------------------------
Total cost of revenues 58.6 59.3 56.8
-------------------------------------------------------
Gross profit 41.4 40.7 43.2
Operating expenses:
Product development 8.6 13.5 8.8
Sales and marketing 9.5 14.1 7.5
Depreciation and amortization 4.7 5.6 3.1
Acquisition and other non-recurring charges -- 1.6 38.6
General and administrative 10.2 14.9 11.6
-------------------------------------------------------
Income (loss) from operations 8.4 (9.0) (26.4)
Interest income, net 1.2 2.2 1.3
-------------------------------------------------------
Income (loss) before income taxes and extraordinary item 9.6 (6.8) (25.1)
Income tax provision (benefit) 3.8 (2.7) (0.3)
Extraordinary item, net of taxes -- -- 0.2
-------------------------------------------------------
Net income (loss) 5.8% (4.1)% (25.0)%
=======================================================
20
Year ended December 31, 1999 compared to year ended December 31, 1998
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 54.8% to $91.9 million for the year ended December 31, 1999 ("1999")
from $59.4 million for the year ended December 31, 1998 ("1998"). In addition
to increased sales and license fees from new and existing clients during 1999,
the Company's Lighthouse software product was released to food service clients
during the year, which contributed to this increase in system sales.
Client Support, Maintenance and Other Services. The Company also derives
revenues from client support, maintenance and other services, which increased
60.3% to $37.7 million in 1999 from $23.5 million in 1998. These increases were
due to increased support, maintenance and services revenues within existing
markets, resulting from an increased install base. Additionally, increased
client demand for professional services such as training, custom software
development, project management and implementation services contributed to these
increases.
Cost of System Sales. Cost of system sales consists primarily of hardware and
peripherals for site-based systems and labor. These costs are expensed as
products are shipped. Cost of system sales increased 59.3% during 1999 to $46.0
million compared to $28.9 million for 1998. These increases were directly
attributable to the increase in system sales for 1999. Cost of system sales as a
percentage of system revenues increased to 50.0% in 1999 from 48.6% in 1998. The
increases were due primarily to decreases in software sales as a percentage of
total system revenues, partially offset by increased efficiencies associated
with the manufacture of site-based systems. Additionally, amortization of
capitalized software development costs increased 80.8% to $1.1 million for 1999,
compared to $625,000 for 1998.
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 47.8% to $30.0 million for 1999 from
$20.3 for 1998. The increases were due primarily to increases in personnel
associated with the effort of supporting higher revenues in this area. Cost of
client support, maintenance and other services as a percentage of client
support, maintenance and other services revenues decreased to 79.5% for 1999
from 86.2% in 1998, as a result of increased efficiencies and staff utilization.
Product Development Expenses. Product development expenses consist primarily of
wages and materials expended on product development efforts. During 1999,
product development expenses decreased 0.7% to $11.1 million from $11.2 million
for 1998 due primarily to higher capitalization of software costs associated
with the Company's development of its Lighthouse generation of products and
increased custom software development projects during the year which were billed
to clients whose related costs are included in costs of client support,
maintenance and other services noted above. In 1999, software development costs
of $2.8 million, or 20.1% of its total product development costs, were
capitalized by the Company, as compared to approximately $2.6 million, or 18.7%
of its total product development costs for 1998. Product development expenses as
a percentage of total revenues decreased to 8.6% in 1999 from 13.5% in 1998 as
revenues increased at a pace higher than related product development expenses.
Sales and Marketing Expenses. Sales and marketing expenses increased 4.9% to
$12.3 million during 1999 from $11.7 million in 1998, due primarily to increased
personnel costs and sales commissions associated with higher revenues. Sales
and marketing expenses as a percentage of total revenues decreased to 9.5% for
1999 from 14.1% for 1998, as total revenues increased at a pace higher than
related sales and marketing expenses.
Depreciation and Amortization. Depreciation and amortization expenses increased
29.8% to $6.1 million during 1999 compared to $4.7 million during 1998. The
increase resulted from an increase in computer equipment, leasehold improvements
and other assets required to support an increased number of employees and
locations. Depreciation and amortization as a percentage of total revenues
decreased to 4.7% for 1999 from 5.6% in 1998. This decrease was primarily due to
associated revenues increasing at a pace higher than associated personnel
support.
Acquisition and Other Non-Recurring Charges. The Company did not record any non-
recurring charges during 1999. 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 during 1998,
the Company recorded an impairment charge of $400,000 on goodwill resulting from
the Twenty/20 acquisition.
21
General and Administrative Expenses. General and administrative expenses
increased 6.8% during 1999 to $13.2 million from $12.4 million during 1998. The
increase was due primarily to personnel increases needed to support additional
revenues. General and administrative expenses as a percentage of total revenues
were 10.2% and 14.9% for 1999 and 1998, respectively, as total revenues grew at
a pace faster than associated personnel and related expenses.
Interest Income, Net. Net interest income decreased 10.4% to $1.6 million during
1999, compared to net interest income of $1.8 million for 1998. The Company's
interest income is derived from the investment of its cash and cash equivalents.
The decrease in net interest income in 1999 over 1998 resulted primarily from a
decline in the weighted average interest rate of 5.26% during 1998 to a weighted
average interest rate of 5.15% during 1999. See --"Liquidity and Capital
Resources."
Income Tax Provision (Benefit). The Company recorded a tax provision of 39.6% in
1999 compared to a tax benefit of 40.0% 1998.
Net Income (Loss). Net income for 1999 was $7.6 million or $0.41 per diluted
share, an increase of approximately $10.2 million or $0.57 per share over a net
loss before non-recurring charges of $2.6 million, or $0.16 per share, for the
prior year. Including the non-recurring charges for the year ended December 31,
1998, of approximately $1.3 million, net loss for 1998 was $3.4 million, or
$0.21 per share.
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's revenues from
client support, maintenance and other services 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.
22
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
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 before extraordinary items and acquisition related charges of
$6.3 million or $0.40 per share for the year ended December 31, 1997. 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.
23
Liquidity and Capital Resources
As of December 31, 1999, the Company had $53.4 million in cash and cash
equivalents and working capital of $65.9 million. As more fully described in
Note 13 of the consolidated financial statements, on March 3, 2000 AOL purchased
$10.0 million of the Company's stock at a price of $15 per share and may invest
an additional $25.0 million in a to be formed subsidiary of the Company at a
later date. Additionally, on March 1, 2000, the Company and Microsoft
Corporation jointly announced, subject to execution of a definitive agreement,
that both companies have joined forces to develop and market an integrated Web-
enabled management system and supply chain solution to enable retailers to
conduct business-to-business e-commerce over the Internet. In addition to
agreeing to make an equity investment in this solution, Microsoft committed to
support the Company's technology solution through joint marketing programs,
funding for product development, consulting services, developer support, and
distribution via the Microsoft(R) bCentral(TM) small-business portal.
Cash from operating activities in 1999 was $26.3 million compared to cash used
in operating activities of $12.3 million and $8.4 million in 1998 and 1997,
respectively. In 1999, cash provided from operating activities was primarily
due to net income of $7.6 million during the year, as well as increased accounts
payable and accrued liabilities due to timing of certain vendor payments
partially offset by increases in accounts receivable and inventory.
Additionally, client deposits and unearned revenues increased during 1999 as the
Company received cash from clients in advance of products and/or services being
delivered. In 1998, the Company's uses of cash were the primary result of the
net loss for the period then ended; increased accounts receivables and
inventories due to increased sales; decreased accounts payable and accrued
liabilities due to timing of certain vendor payments; and a decrease in client
deposits and unearned revenues as the Company delivered products and/or services
previously paid by clients.
Cash used in investing activities was $7.1 million, $8.9 million, and $15.0
million for 1999, 1998 and 1997, respectively. The uses of cash in investing
activities for 1999 consisted primarily of the purchases of property and
equipment of $4.2 million and capitalized software costs of $2.8 million. The
uses of cash in investing activities during 1998 consisted primarily of the
purchases of property and equipment of $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 210,000 combined square
feet of space. As a result, the Company purchased equipment and furniture to
accommodate the moves.
Cash of $8.7 million was provided by financing activities during 1999 due
primarily to cash received from the exercise of employee stock options of $4.4
million, partially offset by the Company's purchase of common stock pursuant to
its stock repurchase program for approximately $514,000. The income tax benefit
from the exercise of disqualified and non-qualified stock options provided $3.2
million of cash in 1999. Cash of $792,000 was used in financing activities
during 1998 due primarily to an advance made by the Company to the former sole
shareholder of RapidFire under an agreement to loan up to $1.5 million to that
individual, which debt matures on October 31, 2005 and bears interest at 5.0%
per annum, offset by cash received from the exercise of employee stock options
of $1.4 million.
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, 2000, the
Company had repurchased in the open market an aggregate of 680,154 shares of its
common stock for a total of $4.5 million. These purchases were, and any future
purchase will be, financed from the Company's cash reserves.
24
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 1999, the weighted average interest rate on
its cash balances was approximately 5.15%. A 10.0% decrease in this rate would
impact interest income by approximately $160,000.
25
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, 1999 and 1998.
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Radiant Systems, Inc.:
We have audited the accompanying consolidated balance sheets of RADIANT SYSTEMS,
INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1999 and 1998
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 2, 2000
27
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
1999 1998
------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 53,435 $ 25,537
Accounts receivable, net of allowances for doubtful accounts of $1,375 and
$750 in 1999 and 1998, respectively 17,929 17,645
Inventories 13,141 11,965
Deferred tax assets 1,563 687
Other 1,693 2,310
------------------------------
Total current assets 87,761 58,144
PROPERTY AND EQUIPMENT, net 7,857 8,341
SOFTWARE DEVELOPMENT COSTS, net 5,394 3,718
INTANGIBLES, net 5,173 6,271
DEFERRED TAXES, long-term 3,726 5,680
OTHER ASSETS 2,088 2,012
------------------------------
$111,999 $ 84,166
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,565 $ 4,844
Accrued liabilities 4,901 3,210
Client deposits and deferred revenue 7,243 2,600
Current portion of long-term debt 105 161
------------------------------
Total current liabilities 21,814 10,815
LONG-TERM DEBT, less current portion 4,250 4,106
------------------------------
Total liabilities 26,064 14,921
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, 16,983,925 and
15,505,565 shares issued and outstanding at December 31, 1999 and 1998,
respectively 0 0
Additional paid-in capital 101,003 92,144
Deferred compensation (131) (353)
Accumulated deficit (14,937) (22,546)
------------------------------
Total shareholders' equity 85,935 69,245
------------------------------
$111,999 $ 84,166
==============================
The accompanying notes are an integral part of these consolidated balance
sheets.
28
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
-----------------------------------------------
REVENUES:
System sales $ 91,946 $59,400 $ 66,798
Client support, maintenance, and other services 37,720 23,535 11,205
-----------------------------------------------
Total revenues 129,666 82,935 78,003
-----------------------------------------------
COST OF REVENUES:
System sales 46,001 28,877 34,019
Client support, maintenance, and other services 29,989 20,288 10,298
-----------------------------------------------
Total cost of revenues 75,990 49,165 44,317
-----------------------------------------------
GROSS PROFIT 53,676 33,770 33,686
OPERATING EXPENSES:
Product development 11,125 11,199 6,897
Sales and marketing 12,302 11,730 5,819
Depreciation and amortization 6,057 4,665 2,384
Acquisition and other non-recurring charges -- 1,276 30,086
General and administrative 13,204 12,360 9,059
-----------------------------------------------
INCOME (LOSS) FROM OPERATIONS 10,988 (7,460) (20,559)
INTEREST INCOME, NET 1,613 1,800 989
-----------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM 12,601 (5,660) (19,570)
INCOME TAX PROVISION (BENEFIT) 4,992 (2,265) (212)
-----------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 7,609 (3,395) (19,358)
EXTRAORDINARY ITEM:
Loss from early extinguishment of debt, net of taxes -- -- 131
-----------------------------------------------
NET INCOME (LOSS) $ 7,609 $(3,395) $(19,489)
===============================================
BASIC INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 0.46 $ (0.21) $ (1.49)
Extraordinary loss on early extinguishment of debt -- -- (0.01)
-----------------------------------------------
Total basic income (loss) per share $ 0.46 $ (0.21) $ (1.50)
===============================================
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 0.41 $ (0.21) $ (1.49)
Extrodinary loss on early extinguishment of debt -- -- (0.01)
-----------------------------------------------
Total diluted income (loss) per share $ 0.41 $ (0.21) $ (1.50)
===============================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 16,420 15,990 13,024
===============================================
Diluted 18,346 15,990 13,024
===============================================
The accompanying notes are an integral part of these consolidated statements.
29
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
Class A
Common Stock Common Stock Deferred
---------------------------------- Deferred Sales Accumulated
Shares Amount Shares Amount APIC Warrants Compensation Discount Deficit Total
--------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1996 6,857 $ 0 1,443 $ 0 $ 2,100 $1,185 -- $ (132) $ (7,653) $(4,500)
Issuance of common stock 5,428 -- -- -- 82,422 -- -- -- -- 82,422
Automatic conversion of
Series A common stock 1,443 -- (1,443) -- -- -- -- -- -- --
Exercise of stock
purchase of 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 compensation -- -- -- -- -- -- 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
warrent -- -- -- -- -- -- -- 132 -- 132
Reclassification of
S corporation
accumulated deficit -- -- -- -- (8,203) -- -- -- 8,203 --
Loss before pro forma
income taxes and
extraordinry 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
Treasury stock
purchase (73) 0 -- -- (514) -- -- -- -- (514)
Exercise of employee
stock options 1,356 0 -- -- 4,425 -- -- -- -- 4,425
Stock issued under
employee stock
purchase plan 195 0 -- -- 1,722 -- -- -- -- 1,722
Income tax benefit of
stock options
exercised -- -- -- -- 3,225 -- -- -- -- 3,225
Amortization of
deferred compensation -- -- -- -- -- -- 223 -- -- 223
Net income -- -- -- -- -- -- -- -- 7,609 7,609
-----------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1999 16,984 $0 -- -- $101,003 -- $(131) -- $(14,937) $ 85,935
===========================================================================================================
The accompanying notes are an integral part of these consolidated statements.
30
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
-----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,609 $ (3,395) $(19,489)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Pro forma tax benefit -- -- (212)
Deferred income taxes 1,078 (3,428) (1,573)
Accretion of note payable interest 226 226 34
Depreciation and amortization 7,187 5,067 2,384
Amortization of debt discount -- -- 332
Discounts earned on software license sales -- -- 132
Non-cash acquisition and other non-recurring charges -- 400 30,086
Amortization of deferred compensation 222 182 90
Changes in assets and liabilities, net of acquired entities:
Accounts receivable (284) (88) (11,420)
Inventories (1,176) (3,257) (5,194)
Other assets 336 (921) (449)
Accounts payable 4,720 (2,390) 1,748
Accrued liabilities 1,691 (2,677) 350
Client deposits and deferred revenue 4,643 (2,045) (5,227)
--------------------------------------------
Net cash provided by (used in) operating activities 26,251 (12,326) (8,408)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,243) (6,342) (3,305)
Purchases of acquired entities, net of cash acquired -- -- (10,314)
Capitalized software development costs (2,807) (2,570) (1,365)
--------------------------------------------
Net cash used in investing activities (7,050) (8,912) (14,984)
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 (514) (4,027) (2,122)
Exercise of employee stock options 4,425 1,395 441
Stock issued under employee stock purchase plan 1,722 264 --
Issuance of shareholder loans, net (23) (1,540) (330)
Income tax benefit of stock options exercised 3,225 3,804 --
Repayment of long-term debt (138) (687) (5,418)
Repayments of note from shareholder -- -- (7,343)
Other -- (1) 7
--------------------------------------------
Net cash provided by (used in) financing activities 8,697 (792) 68,617
--------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,898 (22,030) 45,225
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,537 47,567 2,342
--------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $53,435 $ 25,537 $ 47,567
============================================
The accompany notes are an integral part of these consolidated statements.
31
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
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. All intercompany
transactions and balances have been eliminated in consolidation.
Basis of Preparation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, and expenses and
disclosure of contingent assets and liabilities. The estimates and assumptions
used in the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the date
of the financial statements. Actual results could differ from those estimates.
Revenue Recognition
In January 1998, the Company adopted the ACIPA 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 post-contract 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.
32
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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, 1999 and 1998 are summarized as
follows (in thousands):
1999 1998
--------- --------
Computers and office equipment $ 10,130 $ 8,195
Furniture and fixtures 2,589 2,373
Purchased software 2,878 2,319
Leasehold improvements 2,637 1,100
--------- --------
18,234 13,987
Less accumulated depreciation and amortization (10,377) (5,646)
--------- --------
$ 7,857 $ 8,341
========= ========
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. Amortization of intangibles was $1.3 million, $1.3 million and
$572,000 in 1999, 1998 and 1997, respectively. Accumulated amortization was
$2.8 million and $1.5 million at December 31, 1999 and 1998, respectively.
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. No such charges were recorded in 1999 or 1997.
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, 1999 and 1998, accumulated amortization of
capitalized software development costs was $2.4 million and $1.3 million,
respectively.
Internally Developed Software Costs
The Company applies the provisions of the AICPA Statement of Position 98-1 ("SOP
98-1), "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires all costs related to the development of
internal use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software.
33
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Purchased Research and Development Costs
As more fully described in Note 4, based on independent appraisal, the Company
allocated $28.9 million in 1997 of the purchase price for its acquisitions to
incomplete research and development projects. Accordingly, these costs were
expensed as of the acquisition date. 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 related to purchased research and development projects
were recorded in 1999 or 1998.
Stock-based 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 Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted-average number of shares outstanding. Diluted net income
(loss) per share includes the dilutive effect of stock options.
A reconciliation of the weighted average number of common shares outstanding
assuming dilution is as follows (in thousands):
1999 1998 1997
------------------------------------------------------
Average common shares outstanding 16,420 15,990 13,024
Dilutive effect of outstanding stock options 1,926 -- --
------- ------- -------
Average common shares outstanding assuming dilution 18,346 15,990 13,024
======= ======= =======
For the years ended December 31, 1999, 1998 and 1997, options with an
antidilutive impact of approximately 180,000, 3.4 million and 3.0 million shares
of common stock were excluded from the above reconciliation.
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, 1999 and 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 $30,833, $166,000 and $432,000 in 1999, 1998 and
1997, respectively. Cash paid for income taxes was $100,000, $0 and $155,000 in
1999, 1998 and 1997, respectively. The Company acquired equipment of $0, $0 and
$43,000 in 1999, 1998 and 1997, respectively, under capital lease obligations.
During 1999, 1998 and 1997, the Company recorded bad debt expense of
approximately $625,000, $400,000 and $150,000, respectively.
34
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
The Company's revenues are derived from a limited number of clients. During the
years ended December 31, 1999, 1998 and 1997, the following clients individually
accounted for more than 10.0% of the Company's revenue:
December 31,
1999 1998 1997
--------------------------------------------
Client A * * 11.4%
Client B * 10.3% 12.8
Client C * * 12.2
Client D 13.3% * *
* Accounted for less than 10.0% of total revenues for the period
indicated.
At December 31, 1999, 28.8% of the Company's accounts receivable related to
Client D.
Comprehensive Income
The Company currently has no other comprehensive income items as defined by
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130).
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company will be required to adopt FAS 133 for the quarter ended March 31, 2001.
The Company does not expect the adoption to have a material impact on its
results of operations.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." The SAB does
not change existing accounting literature on revenue recognition, but rather
explains the SEC staff's general framework for revenue recognition. SAB No. 101
states that changes in accounting to apply the guidance in SAB No. 101 may be
accounted for as a change in accounting principle and must be recorded in the
second quarter of 2000. The Company is currently reviewing its revenue
recognition policy and does not expect the adoption of SAB No. 101 to have a
material impact on the Company results of operations.
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, 1999, 1998 and 1997 are
summarized as follows (in thousands):
1999 1998 1997
----------------------------------------------------
Total development expenditures $13,932 $13,769 $8,262
Less additions to capitalized software
development costs prior to amortization 2,807 2,570 1,365
--------------- -------------- -------------
Product development expense $11,125 $11,199 $6,897
=============== ============== =============
35
The activity in the capitalized software development account during 1999, 1998
and 1997 is summarized as follows (in thousands):
December 31,
1999 1998 1997
--------------------- ------------------- -----------
Balance at beginning of period, net $ 3,718 $ 1,773 $ 736
Additions 2,807 2,570 1,365
Amortization expense (1,131) (625) (328)
--------------------- ------------------- -----------
Balance at end of period, net $ 5,394 $ 3,718 $1,773
===================== =================== ===========
Amortizaton of capitalized software costs is included in system costs of
revenues in the accompanying statements of operations.
4. ACQUISITIONS
During fiscal 1997, the Company acquired four 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 1999 or 1998.
The following describes each of the acquisitions completed by the Company in
1997:
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 (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 (Notes 11 and 13). The
Company also entered into a five-year employment agreement with the sole
shareholder (Note 8).
36
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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
shown below are presented assuming that the Company's business combinations had
been consummated on January 1, 1997 (in thousands, except per share data):
For the Year Ended
December 31, 1997
------------------------
Pro forma revenue $87,863
Pro forma net income (loss) 3,801
Income (loss) per share:
Basic $ 0.28
Diluted 0.23
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, 1997.
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.
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, of
which, $28.9 million related to purchased research and development costs (Note
4) and $1.2 million related to stock compensation expenses (Note 9).
37
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
6. LONG-TERM DEBT
Long-term debt, including obligations under capital leases, consists of the
following (in thousands):
December 31,
1999 1998
------------------------------
Capital lease obligations, interest ranging from 5.0% to 31.0%, payable monthly through 1999, $ -- $ 76
secured by equipment
Noninterest bearing promissory note; lump-sum payment of $6.0 million due October 31, 2005 4,250 4,024
net of imputed interest of $1.8 million and $2.0 million at December 31, 1999 and 1998,
respectively at an interest rate of 6.0%
Other 105 167
------------------------------
4,355 4,267
Less current portion (105) (161)
------------------------------
$4,250 $4,106
==============================
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 both 1999 and 1998 RapidFire did not
meet such specified net income levels. Accordingly, the initial payment on
March 31, 1999 and the second installment on March 31, 2000 are not due. As
more fully described in Note 13, the Company and the former sole shareholder of
RapidFire reached an agreement to extinguish this obligation subsequent to year
end.
At December 31, 1999, aggregate maturities of long-term debt, including
obligations under capital leases, are as follows (in thousands):
2000 $ 105
2001 --
2002 --
2003 --
2004 --
Thereafter 4,250
------
$4,355
======
7. INCOME TAXES
Prior to the Company's initial public offering ("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.
38
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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 provision (benefit) (in thousands):
1999 1998 1997
-------------------- -------------- -----------------
Current taxes:
Federal $ 5,311 $ -- $ 2,280
State 759 -- 394
Deferred taxes (1,078) (2,265) (2,674)
Pro forma taxes -- -- (212)
-------------------- -------------- -----------------
Income tax provision (benefit) $ 4,992 $(2,265) $ (212)
==================== ============== =================
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:
1999 1998 1997
------------------- --------------- -----------------
Statutory federal tax rate 35.0 % (35.0)% (35.0)%
State income taxes, net of federal tax benefit 5.0 (5.0) (5.0)
Purchased research and development -- -- 40.2
Conversion from S corporation to C corporation -- -- (1.6)
Other (0.4) -- 0.3
------------------- --------------- -----------------
39.6 % (40.0)% (1.1)%
=================== =============== =================
The components of the net deferred tax asset as of December 31, 1999 and 1998
are as follows (in thousands):
1999 1998
--------------------- --------------
Deferred tax assets:
Net operating loss carry forward $ 2,207 $ 3,123
Inventory reserve 694 399
Depreciation 245 131
Allowance for doubtful accounts 875 468
Accrued expenses -- 13
Intangibles 3,876 3,665
Deferred revenue 221 591
--------------------- --------------
8,118 8,390
Valuation allowance (507) (507)
--------------------- --------------
Total deferred tax assets 7,611 7,883
--------------------- --------------
Deferred tax liabilities:
Capitalized software (2,158) (1,411)
Other (164) (105)
--------------------- --------------
Total deferred tax liabilities (2,322) (1,516)
--------------------- --------------
Net deferred tax asset $ 5,289 $ 6,367
===================== ==============
39
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
During fiscal 1998, the valuation allowance was increased $220,000 for
unrealized tax benefits from stock option 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, 1999, the Company has recorded net operating losses
of $5.5 million which are available for carryforward through 2012.
As of December 31, 1999, the Company has recorded a net deferred tax asset of
$5.3 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, 1999, future minimum rental payments for noncancelable leases
with terms in excess of one year were as follows (in thousands):
2000 $3,841
2001 3,572
2002 3,181
2003 2,785
2004 2,192
Thereafter 7,157
Total rent expense under operating leases was approximately $4.2 million, $2.7
million and $1.1 million for the years ended December 31, 1999, 1998 and 1997,
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.
During 1999, another employee under an employment agreement terminated his
employment with the Company. As of December 31, 1999, the Company has no
further obligation under such agreements.
Under each of the remaining three employment 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.
40
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
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, 1999, the
Company had repurchased and subsequently retired approximately 680,000 shares at
prices ranging from $6 3/8 to $8 per share, for total consideration of
approximately $4.5 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 10.0% of the Company's outstanding 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 was 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 12.0% 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.
41
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Put Warrants
In connection with the issuance of certain debt, the Company issued Put Warrants
to purchase 1.5% of the Company's outstanding common stock at an exercise price
of $.01 per share.
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 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 1999 and 1998, the
Company issued 195,198 and 42,693 shares under the ESPP at an average price of
$8.82 and $6.27 per share, respectively.
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 60,000 options
under the Directors' Plan at December 31, 1999.
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, 1999, options to purchase 1,342,738 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, 359,490 have been
cancelled and 181,200 have been exercised.
42
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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, 1999 is as
follows:
1999 1998 1997
---------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------------- --------------------------------- -------------------------
Outstanding at beginning of year 3,870,954 $ 4.52 4,661,160 $ 7.01 3,335,750 $ 2.64
Granted 1,415,701 22.07 1,643,408 8.44 1,660,163 15.26
Canceled (453,082) 6.54 (1,787,141) 15.65 (165,550) 15.71
Exercised (1,356,162) 3.36 (646,493) 2.11 (169,203) 2.80
-------------- ----------- -------------- ------------ ------------- -----------
Outstanding at end of year 3,477,411 $11.87 3,870,934 $ 4.52 4,661,160 $ 7.01
============== =========== ============== ============ ============= ===========
Options exercisable at end of
year 543,505 $ 6.60 1,001,814 $ 5.27 698,279 $ 5.03
============== =========== ============== ============ ============= ===========
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-$6.00 913,955 $ 1.67 6.20 195,255 $ 2.72
$6.25-$7.38 1,189,451 6.81 7.78 281,820 6.90
$9.06-$15.69 571,405 11.32 9.07 56,430 14.58
$16.75-$34.25 802,600 31.37 9.88 10,000 28.50
------------ -----------
Total 3,477,411 $11.87 543,505 $ 6.60
------------ -----------
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 1999, 1998 and 1997 using the Black-Scholes
option pricing model as prescribed by SFAS 123 using the following weighted
average assumptions used for grants in 1999, 1998 and 1997:
1999 1998 1997
----------------------------------------------------------
Risk free interest rate 5.75% 4.8% 5.9%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives 4.0 years 4.5 years 4.0 years
Expected volatility 81.0% 68.0% 62.0%
43
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The total value of the options granted during the years ended December 31, 1999,
1998 and 1997 were computed as approximately $18,836,717, $4,687,000, and
$10,734,000, 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 income (loss) and pro forma net
income (loss) per share for the years ended December 31, 1999, 1998 and 1997
would have resulted in the following pro forma amounts (in thousands, except per
share data):
1999 1998 1997
-------------------------------------------------
Net income (loss):
As reported $7,609 $(3,395) $(19,489)
Pro forma 4,509 (7,559) (22,409)
Basic:
As reported $ 0.46 $ (0.21) $ (1.50)
Pro forma 0.28 (0.47) (1.72)
Diluted:
As reported $ 0.41 $ (0.21) $ (1.50)
Pro forma 0.25 (0.47) (1.72)
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
1999, 1998 or 1997.
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. During 1999, the remaining
shareholder repaid both the note balance and accrued the interest in full.
Interest income recorded during 1999, 1998 and 1997 related to these notes was
approximately $11,550, $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. As
more fully described in Note 13, subsequent to year end an agreement was reached
between the Company and the former sole shareholder and this note was repaid in
full. Interest income recorded during 1999 and 1998 related to this note was
approximately 75,000 and $58,000, respectively.
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. During
1999, this note balance along with accrued interest was repaid in full.
Interest income recorded during 1999 and 1998 related to the note was
approximately $14,500 and $4,000.
44
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
During 1998 and 1999, a shareholder received two loans from the Company in the
aggregate amount outstanding of $181,750 at December 31, 1999. The loans bear
interest at 5.5% and are payable in certain specified increments beginning
September 2001, with final payment due April 2002. Interest income recorded
during 1999 related to the notes was approximately $8,000.
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 policies. 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, 1999
-----------------------------------------------------
Global Regional
Solutions Solutions Other Consolidation
-----------------------------------------------------
Revenues $111,880 $17,786 -- $129,666
Contribution margin 33,384 1,216 $(1,461) 33,139
Operating income (loss) 14,603 (2,154) (1,461) 10,988
Identifiable assets (1) 26,239 16,848 68,912 111,999
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, 1997
---------------------------------------------------
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
45
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(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.
13. SUBSEQUENT EVENTS (unaudited)
On March 1, 2000, the Company and Microsoft Corporation jointly announced,
subject to execution of a definitive agreement, that both companies have joined
forces to develop and market an integrated Web-enabled management system and
supply chain solution to enable retailers to conduct business to business
e-commerce over the Internet. In addition, Microsoft agreed to make an equity
investment in the Company and committed to support the Company's solution
through joint marketing programs, funding for product development, consulting
services, developer support, and distribution via the Microsoft(R) bCentral(TM)
small-business portal. Further, Microsoft and the Company have created an
open structure that allows for other strategic and equity participants.
On March 3, 2000, the Company finalized an agreement with America Online, Inc.
("AOL") and MovieFone, Inc., a subsidiary of AOL ("MF"), to form a strategic
relationship in the retail point of sale business. This relationship, among
other aspects, entails a ten-year marketing and development agreement whereby
the Company will develop and manufacture point of sale systems and services for
sale to the entertainment industry pursuant to MF's specifications, which will
make such point of sale systems interoperable with MF's remote entertainment and
event ticketing services. The relationship also contemplates future
collaborative efforts between the companies. As part of this relationship, AOL
purchased $10.0 million of the Company's common stock at a price of $15 per
share. In addition, AOL has agreed to invest $25.0 million in a to be formed
subsidiary of the Company to engage in consumer interactive businesses other
than in the entertainment industry (e.g., interactive fuel and dispenser
business and interactive restaurant self-ordering business). In return for its
investment, AOL will receive a 15% equity interest in the form of preferred
stock of this subsidiary. To the extent AOL does not invest $25.0 million in the
to be formed subsidiary, AOL has agreed to invest the balance in another to be
formed subsidiary of the Company or purchase common stock of the Company at the
then current market price.
On March 30, 2000 the Company and the former sole shareholder of RapidFire
reached an agreement whereby the Company paid to the former shareholder $200,000
and forgave a $1.5 million note receivable (Note 4), and in return was relieved
in full of its indebtedness to the shareholder. As more fully described in Note
6, this indebtedness consisted of a noninterest-bearing note with a lump-sum
payment of $6.0 million due October 31, 2005 ($4.3 million at December 31, 1999)
and was issued October 31, 1997 as part of the Company's acquisition of
RapidFire. As a result of this early extinguishment of debt, the Company will
record an extraordinary gain of approximately $1.6 million, net of tax, during
the first quarter ended March 31, 2000.
14. 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.
46
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Quarter ended
-------------------------------------------
Mar. 31, June 30, Sept 30, Dec. 31,
1999 1999 1999 1999
-------------------------------------------
(In thousands, except per share data)
Revenues:
System sales $17,235 $21,316 $24,949 $28,446
Client support, maintenance and other services 7,039 9,264 9,981 11,436
-------------------------------------------
Total revenues 24,274 30,580 34,930 39,882
Cost of revenues:
System sales 8,484 10,519 12,295 14,703
Client support, maintenance and other services 5,886 7,234 7,893 8,976
-------------------------------------------
Total cost of revenues 14,370 17,753 20,188 23,679
-------------------------------------------
Gross profit 9,904 12,827 14,742 16,203
Operating expenses:
Product development 2,575 2,945 2,640 2,965
Sales and marketing 2,927 3,159 3,034 3,182
Depreciation and amortization 1,379 1,551 1,536 1,591
General and administrative 3,159 3,194 3,190 3,661
-------------------------------------------
Income (loss) from operations (136) 1,978 4,342 4,804
-------------------------------------------
Interest income, net 343 342 408 520
-------------------------------------------
Income before income taxes 207 2,320 4,750 5,324
Income tax provision 83 928 1,900 2,081
-------------------------------------------
Net income $ 124 $ 1,392 $ 2,850 $ 3,243
===========================================
Basic and diluted income per share:
Basic income per share $ 0.01 $ 0.09 $ 0.17 $ 0.19
===========================================
Diluted income per share $ 0.01 $ 0.08 $ 0.15 $ 0.17
===========================================
Weighted average shares outstanding:
Basic 16,078 16,313 16,536 16,708
===========================================
Diluted 17,491 17,965 18,479 18,769
===========================================
47
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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
===========================================
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.
48
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 28, 2000 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, 1999, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.
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"), (v) a Registration Statement on
Form S-8 for the Registrant, Registration No. 333-62151 (referred to herein as
"ESPP S-8") and (vi) the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998, Commission File No. 0-22065 (referred to herein as
"1998 10-K"). Except as otherwise indicated, the exhibit number corresponds to
the exhibit number in the referenced document.
49
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)
*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. 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) (1998 10-K)
*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) (1998 10-K)
*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) (1998 10-K)
*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) (1998 10-K)
*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) (1998 10-K)
*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 (1998 10-K)
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
50
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, 2000.
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, 2000
- ---------------------------------- Chief Executive Officer
Erez Goren (principal executive officer)
/s/ Alon Goren Co-Chairman of the Board and March 30, 2000
- ---------------------------------- Chief Technology Officer
Alon Goren
/s/ John H. Heyman Executive Vice President, March 30, 2000
- ---------------------------------- Chief Financial Officer and
John H. Heyman Director (principal financial officer)
/s/ Paul J. Ilse Vice President, Finance March 30, 2000
- ---------------------------------- (principal accounting officer)
Paul J. Ilse
/s/ James S. Balloun Director March 30, 2000
- ----------------------------------
James S. Balloun
/s/ Evan O. Grossman Director March 30, 2000
- ----------------------------------
Evan O. Grossman
51
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
52