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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, 2000
______________________________
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 (17,574,411 shares) on March 20, 2000 was
approximately $212,000,120 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
20, 2001: 27,906,875 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 28, 2001 are incorporated by reference in response to Part III of
this Report.
PART I
Item 1. Business.
- -------------------
General
Radiant Systems, Inc. (the "Company" or "Radiant") provides enterprise-wide
technology solutions to 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 1999, the Company began
developing its new generation of management systems products--WAVE(TM). This
product architecture is designed to combine and expand the functionality of its
Site Management Systems and Headquarter-Based Management Systems. 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.
Additionally, the Company has extended its WAVE technology to include web-
enabled, centrally hosted management software and integrated purchasing
software. Management believes that these products will strengthen its offerings
by providing integrated, end-to-end solutions that span from the consumer to the
supply chain. Further, the Company's architecture and platforms for WAVE 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. For example, retailers will be able to
utilize a labor-scheduling application to more efficiently manage labor costs.
The Company intends to offer its WAVE software primarily through the application
service provider, or "ASP," delivery model. In the ASP delivery model, the
Company will remotely host applications from an off-site central server that
users can access over dedicated lines, virtual private networks or the Internet.
Additionally, the Company plans to offer the product through installations
directly in client locations as "client-hosted" systems. The Company also
intends to offer Internet solutions that will allow clients to utilize the
Internet to enhance site management and conduct business-to-business e-commerce.
The Company is continuing to develop its WAVE solution and to establish
strategic relationships to facilitate these product offerings. Management
expects WAVE to be generally released in early 2002.
In connection with its strategy to develop ASP-delivered products, in April 2000
the Company began converting certain new and existing products to a
subscription-based pricing model. Under this subscription-pricing model,
clients will pay a fixed, monthly fee for use of WAVE and the necessary hosting
services to utilize those applications and solutions. This represents a change
in the Company's historical pricing model in which clients were charged an
initial licensing fee for use of the Company's products and continuing
maintenance and support during the license period. The Company began offering
its products and services on the subscription-pricing model in the second
quarter of 2000. The Company will initially continue to derive a majority of
its revenue from its traditional sales model of one-time software license
revenues, hardware sales and software maintenance and support fees that will be
paid by existing clients. However, as a result of the transition to the
subscription-pricing model and the decline of revenues from legacy site
management and headquarter management solutions, the Company expects to see a
decline in the one-time revenues from software license fees and hardware sales,
replaced over time by monthly subscription fees. In addition, the Company
expects revenue from maintenance and support from existing clients to decline
and to be replaced by subscription fees as existing clients convert to the
subscription-pricing model. The Company expects the percentage of revenue that
is recurring in nature to increase substantially as a result of the change to a
subscription-pricing model.
On March 3, 2000, the Company entered into an agreement with America Online,
Inc. ("AOL"), whereby AOL agreed, among other items, 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), with any
amount not invested by AOL to be callable by the Company into common shares of
the Company. On March 19, 2001, the Company and AOL amended this strategic
relationship. Based on the new agreement, the Company's theater exhibition
point-of-sale and management systems solution will become AOL Moviefone's
preferred offering in the cinema and entertainment industry. In addition, the
Company will support AOL Moviefone clients currently operating the MARS point of
sale product. Additionally, both companies have agreed not to pursue forming a
subsidiary to address potential business-to-consumer applications over the
Internet. Alternatively, AOL, as part of the amended agreement, has agreed to
fund an undisclosed amount of money to enable current MARS clients to upgrade to
the Company's systems and for the Company to perform certain professional
services for AOL and certain MARS' clients.
On March 1, 2000, the Company and Microsoft Corporation ("Microsoft") jointly
announced, subject to the 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. As of March 26, 2001,
the Company and Microsoft remain in discussions concerning the terms of the
definitive agreement. Management anticipates the final agreement, when signed,
will not include an equity investment by Microsoft in the Web-enabled solution.
Rather, the agreement will focus on a joint sale and marketing arrangement
between the companies promoting the integrated web-based management system and
supply chain solution, developed by the Company using Microsoft technology
platforms, to targeted large and small business enterprises.
On October 2, 2000, the Company and Tricon Global Restaurants, Inc. ("Tricon")
jointly announced a multi-year arrangement to implement WAVE exclusively
in Tricon's company-owned restaurants around the world. Tricon's franchises will
also be able to subscribe to WAVE under the same terms as the company-owned
restaurants. The Company expects to enter into definitive agreements evidencing
this arrangement within the next 30 days. As part of the definitive agreements,
the Company will purchase from Tricon its source code and object code for
certain back office software previously developed by Tricon for $16.4 million
payable in specified annual installments through December 31, 2003.
2
Prior to January 1, 2000 the Company operated through two primary reportable
segments (i) Global Solutions and (ii) Regional Solutions. Effective January 1,
2000, the Company restructured its business units and as a result, currently
operates under one segment, providing enterprise technology solutions to
businesses that serve the consumer. To date, the Company's product
applications have been focused on the petroleum and convenience store,
hospitality and food service and entertainment markets, as these markets require
many of the same product features and functionality. See Note 12 to the
Company's consolidated financial statements for certain financial information
relating to these two markets.
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 2000, there were more than 119,000 convenience stores nationwide,
while the cinema industry had approximately 37,000 screens within approximately
7,500 sites nationwide. As of January 2000, the food service industry had over
670,000 domestic units, of which approximately 220,000 were classified as quick
service restaurants. 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.
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
3
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:
CONSUMER-ACTIVATED BACK OFFICE WEB-BASED
Touch Screen Interactive Inventory Control Enterprise Management
Video, Graphics, Audio Vendor Management Procurement
Credit/Cash Payment Purchasing/Receiving Channel Management
Compact, Enclosed Terminals Employee Management Employee Management
Suggestive Selling Recipe Management
Menu Management
POINT OF SALE HEADQUARTERS SERVICES
Touch Screen Interactive Executive Information Consulting
Transaction Auditing Electronic Price Book Training
Credit Processing Vendor EDI Maintenance
Data Capture Centralized Menu Management Technical Support
Peripheral Integration Decision Support Systems Integration
Cash Reconciliation Installation
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.
Retailers derive the following benefits from Radiant's solutions:
Integrated information flows. The Company's technology solutions provide
retailers with tools for monitoring and analyzing sales data, stock status,
vendor relationships, merchandising and other important activities, both at
their site and headquarter levels. These products further enable
retailers to communicate electronically with their suppliers in order to
exchange purchase orders, invoices and payments.
4
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:
Leverage e-commerce tools and business models. The Company believes it can
access a wider array of clients through its web enabled management systems.
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. During 1998, the Company began
developing Lighthouse, its next generation software technology. Throughout
2000, 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.
In 1999, the Company began developing its new generation of management
systems products--WAVE. WAVE is being designed to combine and expand the
functionality of its Site Management Systems and Headquarter-Based
Management Systems. Further, the 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. 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 offering and utilizing
distribution partners, the Company can grow this segment in the future at a
faster rate than in the past.
5
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 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. The Company currently has sales offices in Prague,
Czech Republic, and Singapore.
Make strategic acquisitions. The Company has accelerated its entry into
new vertical markets through acquisitions and joint venture arrangements.
During 2000, the Company consummated the acquisition of TimeCorp, , a
workforce management and planning software business operation owned by
Verifone, Inc., a division of Hewlett Packard Company ("TimeCorp"). 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
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 119,000 convenience
stores, 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 point of sale systems to interface with these consumer-activated
systems. Approximately 67% 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.
6
Food Service Market
The domestic food service market includes approximately 670,000 sites as of the
beginning of 2001. 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.
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. Due to economic conditions during 2000, the
entertainment market suffered significant financial losses including
bankruptcies and site closings. As more fully detailed in Note 12 of the
consolidated financial statements, the Company's revenues from this industry
declined over those in 1999 due to this market downturn. - See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 credit 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.
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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 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.
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."
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Next Generation Management Systems - WAVE
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. Management expects WAVE to be generally
released in early 2002.
Workforce Management Software
Workforce management software provide retailers the ability to ensure compliance
with corporate hiring policies, create and manage labor schedules, provide
timeclock interface for ease in monitoring hours worked, job costing and
exception reporting, as well as management reporting functionality. The
Company's workforce management systems were developed with a user friendly,
graphical interface and are based on open architecture and have been installed
in various supermarket, retail, food service and hospitality chains.
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 focus 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.
Clients
Clients who have selected the Company as their technology solutions provider
operate over 100,000 sites. As of December 31, 2000, the Company has installed
its technology solutions in over 40,000 of these sites. In 2000, one client,
Speedway SuperAmerica, LLC, accounted for 10.2% of the Company's total revenues,
while 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.
The following is a partial list of major clients who have licensed or purchased
the Company's products and services:
American Multi-Cinema, Inc. Loews Cineplex Entertainment Corporation
American Stores Maverick Country Stores
AmeriKing Corporation Muvico Theatres, Inc.
Boston Chicken, Inc. National Amusements, Inc.
BP Amoco, p.l.c. Regal Cinemas, Inc.
Chick-fil-A, Inc. Ruby Tuesday, Inc.
Compass Group USA, Inc. Sephora U.S.A, LLC
Conoco, Inc. Souper Salad, Inc.
Crown Central Petroleum Corporation Speedway SuperAmerica, LLC, formerly Emro Marketing Company
Einstein/Noah Bagel Corporation The Krystal Company
Furr's Supermarkets, Inc. Tosco Corporation
General Cinema Theatres, Inc. Tricon Restaurant Services Group, Inc.
Holiday Stationstores Ultramar Diamond Shamrock Corporation
JC Penney Wawa, Inc.
Kroger Corporation Westwind, Inc.
Lenscrafters
9
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 Wayne, Marconi Plc., Retalix, Ltd., I2 Technologies, Inc.,
Ariba, Inc., Stores Automated Software, Inc., Pacer/CATS, a subsidiary of USA
Networks, Inc., AOL 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, Oracle, Corp., 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 ten 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:
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.
10
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 be phased into a retailer's
operations. The Company has developed numerous applications running on a
Windows NT platform. The software architecture incorporates Microsoft's
Component Object Model, providing an efficient environment for application
development.
Throughout the course of 1997 and 1998, Radiant Systems entered additional
retail markets facilitated primarily through the acquisition of several
companies and product offerings. Combined with its existing products, the
Company began developing, marketing, deploying and supporting a variety of
products. As a result, during 1998 the Company's management determined that
significant internal cost efficiencies and increased market appeal could be
obtained through the consolidation of its legacy products into a single family
of products, Lighthouse. This consolidation effort integrated the best business
and technical knowledge from multiple markets.
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. By the end of 2000, Lighthouse had been
released in all of the markets the Company serves. Management believes the
Lighthouse family of products uniquely positions 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.
In 1999, the Company began developing its new generation of management systems
products--WAVE. This product architecture is designed to combine and expand the
functionality of its Site Management Systems and Headquarter-Based Management
Systems. 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. Additionally, the Company has extended its
WAVE technology to include 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. Management expects WAVE to be generally released in early 2002.
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 six
patents and nineteen patents pending. The source code for the Company's various
proprietary software products are 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.
11
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, 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.
Employees
As of December 31, 2000 the Company employed 949 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.
12
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 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; (iv) the Company's new or future product
offerings, and (v) 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 net income of $6.8
million and $7.6 million in 2000 and 1999, respectively, 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 2001 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 Company's 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 competitors 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.
13
The Company's ability to undertake new projects and increase revenues is
dependent on the availability of the Company's personnel to assist in the
development and implementation of the Company's technology solutions. The
Company currently is attempting to increase consulting capacity in anticipation
of future sales. Should the Company increase its consulting capacity and such
sales fail to materialize, the Company's business, operating results and
financial condition would be adversely affected.
Growth Through Acquisition. As part of its operating history and growth
strategy, the Company has consummated 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. This is especially true due to the Company's introduction in April
2000 of its subscription-based pricing model. 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.
14
Industry Concentration and Cyclicality. Approximately 47% of the Company's
total revenue in both 2000 and 1999 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
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 2000, approximately 38.0% of the Company's revenue were
derived from five 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. 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.
To date the Company has capitalized approximately $5.0 million in software
development costs related to its WAVE product. While management expects to
continue to capitalize additional software development costs associated with
WAVE until its expected generally release in early 2002, there can be no
assurances as to the date or the success this product may achieve.
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
15
targeting the retail industry. In the market for consulting services, the
Company competes with the consulting divisions of the big five accounting firms,
Electronic Data Systems, Inc. and other systems integrators. Many of the
Company's existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical and marketing
resources than the Company. There can be no assurance that the Company will be
able to compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on Key Personnel; Ability to Attract and Retain Technical Personnel.
The Company's future success depends in part on the performance of its executive
officers and key employees. The Company does not have in place employment
agreements with any of its executive officers. The Company maintains a $1.0
million "key person" life insurance policy on each of Erez Goren and Alon Goren,
the Chief Executive Officer and Chief Technology Officer, respectively, of the
Company. The loss of the services of any of its executive officers or other key
employees could have a material adverse effect on the business, operating
results and financial condition of the Company. The Company is heavily
dependent upon its ability to attract, retain and motivate skilled technical and
managerial personnel, especially highly skilled engineers involved in ongoing
product development and consulting personnel who assist in the development and
implementation of the Company's total business solutions. The market for such
individuals is intensely competitive. Due to the critical role of the Company's
product development and consulting staffs, the inability to recruit successfully
or the loss of a significant part of its product development or consulting
staffs would have a material adverse effect on the Company. The software
industry is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. There can be no assurance that the Company
will be able to retain its current personnel, or that it will be able to
attract, assimilate or retain other highly qualified technical and managerial
personnel in the future. The inability to attract, hire or retain the necessary
technical and managerial personnel could have a material adverse effect upon the
Company's business, operating results and financial condition.
Dependence on Proprietary Technology. The Company's success and ability to
compete is dependent in part upon its ability to protect its proprietary
technology. The Company relies on a combination of patent, copyright and trade
secret laws and non-disclosure agreements to protect this proprietary
technology. The Company enters into confidentiality and non-compete agreements
with its employees and license agreements with its clients and potential
clients, which limits access to and distribution of its software, documentation
and other proprietary information. There can be no assurance that the steps
taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States.
Certain technology used in conjunction with the Company's products is licensed
from third parties, generally on a non-exclusive basis. The termination of any
such licenses, or the failure of the third-party licensors to adequately
maintain or update their products, could result in delay in the Company's
ability to ship certain of its products while it seeks to implement technology
offered by alternative sources, and any required replacement licenses could
prove costly. While it may be necessary or desirable in the future to obtain
other licenses relating to one or more of the Company's products or relating to
current or future technologies, there can be no assurance that the Company will
be able to do so on commercially reasonable terms or at all.
Ownership by Management. The Company's executive officers collectively own
approximately 37.0% of the Company's outstanding common stock. Consequently,
together they 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.
16
Anti-Takeover Provisions. The Company's Amended and Restated Articles of
Incorporation authorize the Board of Directors to issue up to 5,000,000 shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of the preferred stock without further
vote or action by the Company's shareholders. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. While the
Company has no present intention to issue additional shares of preferred stock,
such issuance, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, certain provisions of the Company's Articles
of Incorporation and Bylaws may discourage proposals or bids to acquire the
Company. This could limit the price that certain investors might be willing to
pay in the future for shares of Common Stock. The Company's Articles of
Incorporation divide the Board of Directors into three classes, as nearly equal
in size as possible, with staggered three-year terms. One class will be elected
each year. The classification of the Board of Directors could have the effect of
making it more difficult for a third party to acquire control of the Company.
The Company is also subject to certain provisions of the Georgia Business
Corporation Code which relate to business combinations with interested
shareholders.
Item 2. Properties.
- --------------------
The Company's principal facilities occupy approximately 230,000 square feet in
Alpharetta, Georgia, under ten-year lease agreements. The lease agreements
expire in 2008, 2010 and 2011.
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. As of December 31, 2000, the Company also
had regional offices in Pleasanton, California and Hillsboro, Oregon. However,
as more fully described in Note 13 of the consolidated financial statements, in
January 2001, the Company announced the closing of these offices and recorded a
one-time charge related to this action.
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, 2000 to a
vote of security holders of the Company.
17
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, 2000 High Low
- ---------------------------------------------- ----------------- -----------------
First Quarter $79.500 $21.583
Second Quarter 42.000 12.625
Third Quarter 25.000 16.250
Fourth Quarter 29.125 17.000
Year ended December 31, 1999 High Low
- ---------------------------------------------- ----------------- -----------------
First Quarter $ 8.333 $ 4.250
Second Quarter 9.667 6.208
Third Quarter 15.167 8.667
Fourth Quarter 31.333 9.333
As of April 1, 2000, the Company effected a 3-for-2 stock split. As such, the
applicable share prices above have been restated to account for the split.
As of March 20, 2001, there were 141 holders of record of the Common Stock.
Management of the Company believes that these are in excess of 7,000 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.
18
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, 2000, 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,
---------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
System sales $ 79,987 $ 91,946 $ 59,400 $ 66,798 $35,888
Client support, maintenance and other services 48,057 37,720 23,535 11,205 5,055
---------------------------------------------------
Total revenues 128,044 129,666 82,935 78,003 40,943
Cost of revenues:
System sales 39,620 46,001 28,877 34,019 22,270
Client support, maintenance and other services 37,356 29,989 20,288 10,298 5,465
---------------------------------------------------
Total cost of revenues 76,976 75,990 49,165 44,317 27,735
---------------------------------------------------
Gross profit 51,068 53,676 33,770 33,686 13,208
Operating expenses:
Product development 11,030 11,125 11,199 6,897 3,328
Sales and marketing 12,720 12,302 11,730 5,819 1,487
Depreciation and amortization 7,706 6,057 4,665 2,384 948
Acquisition and other non-recurring charges -- -- 1,276 30,086 3,930
General and administrative 15,818 13,204 12,360 9,059 5,664
---------------------------------------------------
Income (loss) from operations 3,794 10,988 (7,460) (20,559) (2,149)
Interest (income)expense, net (3,240) (1,613) (1,800) (989) 712
Minority interest in earnings of PrysmTech -- -- -- -- 628
---------------------------------------------------
Income (loss) before income taxes and extraordinary items 7,034 12,601 (5,660) (19,570) (3,489)
Income tax provision (benefit)(1) 1,773 4,992 (2,265) (212) (1,333)
Extraordinary items, net of taxes(2)(3) (1,520) -- -- 131 --
---------------------------------------------------
Net income (loss) $ 6,781 $ 7,609 $ (3,395) $(19,489) $(2,156)
===================================================
Basic income (loss) per share:
Income (loss) before extraordinary items $ 0.19 $ 0.31 $ (0.14) $ (0.99) $ (0.17)
Extraordinary gain (loss) on early extinguishment of debt 0.05 -- -- (0.01) --
---------------------------------------------------
Total basic income (loss) per share(4)(5) $ 0.24 $ 0.31 $ (0.14) $ (1.00) $ (0.17)
===================================================
Diluted income (loss) per share:
Income (loss) before extraordinary item $ 0.18 $ 0.28 $ (0.14) $ (0.99) $ (0.17)
Extraordinary gain (loss) on early extinguishment of debt 0.05 -- -- (0.01) --
---------------------------------------------------
Total diluted income (loss) per share(4)(5) $ 0.23 $ 0.28 $ (0.14) $ (1.00) $ (0.17)
===================================================
Weighted average shares outstanding:
Basic(4)(5) 27,294 24,630 23,985 19,536 12,450
=====================================================
Diluted(4)(5) 29,791 27,519 23,985 19,536 12,450
=====================================================
December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------
Balance Sheet Data:
Working capital $ 70,882 $ 65,947 $47,329 $57,259 $ 812
Total assets 131,261 111,999 84,166 93,515 14,616
Long-term debt and shareholder loan,
including current portion -- 4,355 4,267 4,728 9,174
Shareholders' equity (deficit) 108,387 85,935 69,245 71,021 (4,500)
19
(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 7 to the consolidated financial
statements.
(2) During 1997, the Company recorded a loss from early extinguishment of debt
of 131,000, net of income tax.
(3) During 2000, the Company recorded a gain on early extinguishment of debt of
approximately $1.5 million, net of income tax.
(4) 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.
(5) On April 1, 2000 the Company effected a 3-for-2 stock split. As such, all
historical shares and weighted average shares have been restated to account
for this split.
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 derives its revenues primarily from the sale of integrated systems,
including software, hardware and related support and professional services. As
discussed below, during the second quarter of 2000, the Company announced and
began offering these products pursuant to a new subscription-based pricing
model. 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 for a client. 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.
In 1999, the Company began developing its new generation of management systems
products--WAVE. This product architecture is designed to combine and expand
the functionality of its Site Management Systems and Headquarter-Based
Management Systems. 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. Additionally, the Company has extended its
WAVE technology to include 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.
The Company intends to offer its WAVE software primarily through the application
service provider, or "ASP," delivery model. In the ASP delivery model, the
Company would remotely host applications from an off-site central server that
users can access over dedicated lines, virtual private networks or the Internet.
Additionally, the Company plans to offer the product through installations
directly in client locations as "client-hosted" systems. The Company also
intends to offer Internet solutions that will allow clients to utilize the
Internet to enhance site management and conduct business-to-business e-commerce.
The Company is continuing to develop its WAVE solution and to establish
strategic relationships to facilitate these product offerings.
20
In connection with its strategy to develop ASP-delivered products, in April 2000
the Company began converting certain new and existing products to a
subscription-based pricing model. Under this subscription-pricing model,
clients will pay a fixed, monthly fee for use of WAVE and the necessary hosting
services to utilize those applications and solutions. This represents a change
in the Company's historical pricing model in which clients were charged an
initial licensing fee for use of the Company's products and continuing
maintenance and support during the license period. The Company began offering
its products and services on the subscription-pricing model in the second
quarter of 2000. The Company will initially continue to derive a majority of
its revenue from its traditional sales model of one-time software license
revenues, hardware sales and software maintenance and support fees that will be
paid by existing clients. However, as a result of the transition to the
subscription-pricing model and the decline of revenues from legacy site
management and headquarters solutions, the Company expects to see a decline in
the one-time revenues from software license fees and hardware sales, replaced
over time by monthly subscription fees. In addition, the Company expects
revenue from maintenance and support from existing clients to decline and to be
replaced by subscription fees as existing clients convert to the subscription-
pricing model. Although the Company's subscription-based revenues during 2000
were immaterial to total revenues, the Company expects the percentage of revenue
that is recurring in nature to increase substantially as a result of the change
to a subscription-pricing model.
This change in the Company's product strategy to develop and offer ASP-delivered
and Internet solutions and the transition to a subscription-pricing model
involve certain risks and assumptions. There can be no assurance that the
Company will successfully implement these changes in its organization, product
strategy or pricing model or that the changes will not have a material adverse
effect on the Company's business, financial condition or results of operations.
On April 1, 2000 the Company effected a 3-for-2 stock split. All historical
share data and weighted average shares have been restated to account for this
split.
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,
-------------------------------------------------------
2000 1999 1998
-------------------------------------------------------
Revenues:
System sales 62.5% 70.9% 71.6%
Client support, maintenance and other services 37.5 29.1 28.4
-------------------------------------------------------
Total revenues 100.0 100.0 100.0
Cost of revenues:
System sales 30.9 35.5 34.8
Client support, maintenance and other services 29.2 23.1 24.5
-------------------------------------------------------
Total cost of revenues 60.1 58.6 59.3
-------------------------------------------------------
Gross profit 39.9 41.4 40.7
Operating expenses:
Product development 8.6 8.6 13.5
Sales and marketing 9.9 9.5 14.1
Depreciation and amortization 6.0 4.7 5.6
Acquisition and other non-recurring charges -- -- 1.6
General and administrative 12.4 10.2 14.9
-------------------------------------------------------
Income (loss) from operations 3.0 8.4 (9.0)
Interest income, net 2.5 1.2 2.2
-------------------------------------------------------
Income (loss) before income taxes and extraordinary item 5.5 9.6 (6.8)
Income tax provision (benefit) 1.4 3.8 (2.7)
Extraordinary item, net of taxes 1.2 -- --
-------------------------------------------------------
Net income (loss) 5.3% 5.8% (4.1)%
=======================================================
21
Year ended December 31, 2000 compared to year ended December 31, 1999
System Sales. The Company derives the majority of its revenues from sales and
licensing fees of its headquarters-based, back office management, and point of
sale solutions. System sales decreased 13.0% to $80.0 million for the year ended
December 31, 2000 ("2000") from $91.9 million for the year ended December 31,
1999 ("1999"). This decrease was primarily the result of the Company's strategy
to convert certain new and existing products and clients to the subscription-
pricing model, as well as declining sales to entertainment industry clients as a
result of financial difficulties being experienced by these clients.
Client Support, Maintenance and Other Services. The Company also derives
revenues from client support, maintenance and other services, which increased
27.4% to $48.1 million in 2000 from $37.7 million in 1999. These increases were
due to increased support, maintenance and services revenues within existing
markets, resulting from an increased installed base. Additionally, increased
clients 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 decreased 13.9% during 2000 to $39.6
million compared to $46.0 million for 1999. This decrease was directly
attributable to reduced system sales in 2000 over 1999 due to the implementation
of the subscription-pricing model. Cost of system sales as a percentage of
system revenues decreased to 49.5% in 2000 from 50.0% in 1999. This decrease
was due primarily to increased software sales as a percentage of total system
revenues as well as increased efficiencies associated with the manufacture of
site-based systems. Amortization of capitalized software development costs
increased 73.9% to $2.0 million for 2000, compared to $1.1 million for 1999 as
products previously capitalized were generally released during 2000.
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 24.6% to $37.4 million for 2000 from
$30.0 million for 1999. 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 77.7% for 2000
from 79.5% in 1999, 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 2000,
product development expenses decreased 0.9% to $11.0 million from $11.1 million
for 1999 due primarily to higher capitalization of software costs associated
with the Company's development of its WAVE 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 2000, software development costs of $5.9
million, or 35.0% of its total product development costs, were capitalized by
the Company, as compared to approximately $2.8 million, or 20.1% of its total
product development costs for 1999. Product development expenses as a percentage
of total revenues remained constant at 8.6% in both 2000 and 1999.
Sales and Marketing Expenses. Sales and marketing expenses increased 3.4% to
$12.7 million during 2000 from $12.3 million in 1999, due primarily to increased
personnel costs and sales activities during 2000. Sales and marketing expenses
as a percentage of total revenues increased to 9.9% for 2000 from 9.5% for 1999,
as sales and marketing costs increased at a pace higher than related revenues.
Depreciation and Amortization. Depreciation and amortization expenses increased
27.2% to $7.7 million during 2000 compared to $6.1 million during 1999. The
increase resulted from an increase in computer equipment, leasehold improvements
and other assets required to support an increased number of employees and
locations as well as the amortization of intangible assets associated with the
Company's acquisition of TimeCorp (see Note 4 of the consolidated financial
statements). Depreciation and amortization as a percentage of total revenues
increased to 6.0% for 2000 from 4.7% in 1999.
General and Administrative Expenses. General and administrative expenses
increased 19.8% during 2000 to $15.8 million from $13.2 million during 1999. The
increase was due primarily to personnel increases needed to support current
revenues as well as to support the Company's move to the subscription-pricing
model. General and administrative expenses as a percentage of total revenues
were 12.4% and 10.2% for 2000 and 1999, respectively, as general and
administrative expenses grew at a pace faster than associated total revenues.
22
Interest Income, Net. Net interest income increased 100.9% to $3.2 million
during 2000, compared to net interest income of $1.6 million for 1999. The
Company's interest income is derived from the investment of its cash and cash
equivalents. The increases in net interest income resulted primarily from an
increase in cash and cash equivalents from an average cash balance of $39.5
million during 1999 to an average cash balance of $51.5 million during 2000 as
well as higher interest rates earned on cash investments. See "--Liquidity and
Capital Resources."
Income Tax Provision (Benefit). The Company recorded a tax provision of $1.8
million, or 25.2% of pre-tax income in 2000 compared to a tax provision of $5.0
million, or 39.6% of pre-tax income, in 1999. During 2000, the Company
performed a research and development tax study, which resulted in the Company
recording a deferred tax asset of $2.4 million, net of a valuation reserve of
$1.4 million.
Extraordinary Item. During 2000, the Company and the former sole shareholder of
RapidFire reached an agreement whereby the Company paid the former shareholder
$200,000 and forgave a $1.5 million note receivable, and in return, was relieved
in full of its indebtedness to the shareholder. 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 recorded an extraordinary gain of
approximately $2.5 million, net of taxes of $1.0 million, during the first
quarter of 2000. No such item was recorded in 1999.
Net Income. Net income for 2000, before extraordinary item, was $5.3 million,
or $0.18 per diluted share, a decrease of $2.3 million, or $0.10 per diluted
share, compared to net income of $7.6 million, or $0.28 per diluted share, for
1999.
Year ended December 31, 1999 compared to year ended December 31, 1998
System Sales. 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. Revenues from client support,
maintenance and other services 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 installed 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 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 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. 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.
23
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.
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
the 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 $0.28 per diluted
share, an increase of approximately $10.2 million or $0.38 per share over a net
loss before non-recurring charges of $2.6 million, or $0.11 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
$0.14 per share.
Liquidity and Capital Resources
As of December 31, 2000, the Company had $49.6 million in cash and cash
equivalents and working capital of $70.9 million.
Cash from operating activities in 2000 was $8.4 million compared to cash from
operating activities of $29.5 million in 1999 and cash used in operating
activities of $8.5 million in 1998. In 2000, cash provided from operating
activities was primarily due to net income before extraordinary item of $5.3
million during the year, as well as increased accounts payable due to timing of
certain vendor payments, partially offset by increases in accounts receivable
and inventory. Additionally, client deposits and unearned revenues increased
during 2000 as the Company received cash from clients in advance of products
and/or services being delivered. The income tax benefit from the exercise of
disqualified and non-qualified stock options provided $3.3 million of cash in
2000. 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. The income tax benefit from the exercise of disqualified and non-
qualified stock options provided $3.2 million of cash in 1999.
Cash used in investing activities was $24.3 million, $7.1 million, and $8.9
million for 2000, 1999 and 1998, respectively. The uses of cash in investing
activities for 2000 consisted of the purchases of property and equipment of
$12.4 million, purchase of TimeCorp for $6.0 million (see Note 4 of consolidated
financial statements) and capitalized software costs of $5.9 million. The uses
of cash in investing activities during 1999 consisted primarily of the purchases
of property and equipment of $4.2 million and capitalized software costs of $2.8
million.
24
Cash of $12.1 million was provided by financing activities during 2000 due
primarily to cash received from AOL's purchase in March 2000 of $10.0 million of
the Company's stock at a price of $10 per share, as more fully described in Note
9 of the consolidated financial statements. Additionally, cash was provided by
financing activities from the exercise of employee stock options of $2.6 million
and stock issued under the employee stock purchase plan of $1.5 million
partially offset by the Company's purchase of common stock pursuant to its stock
repurchase program for approximately $1.8 million. Cash of $5.5 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.
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. During 1998 and 1999, the
Company 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 under this plan. In May 2000, the Board of Directors
of the Company authorized a new stock repurchase program pursuant to which
management is authorized to repurchase up to 1.0 million shares of common stock
of the Company over the next twelve months. During 2000, the Company repurchased
and subsequently retired approximately 90,000 shares at prices ranging from $18
1/4 to $19 15/16 per share, for total consideration of approximately $1.8
million. During 2001, the Company has repurchased and subsequently retired
approximately 125,000 shares at prices ranging from 12 9/16 to 18 11/16 per
share, for total consideration of approximately $2.0 million. As of March 26,
2001, the Company had repurchased in the open market an aggregate of
approximately 895,000 shares of its common stock for a total of $6.3 million,
under these repurchase plans.
On October 2, 2000, the Company and Tricon Global Restaurants, Inc. ("Tricon")
jointly announced a multi-year arrangement to implement WAVE exclusively
in Tricon's company-owned restaurants around the world. Tricon's franchises
will also be able to subscribe to WAVE under the same terms as the company-owned
restaurants. The Company expects to enter into definitive agreements evidencing
this arrangement within the next 30 days. As part of the definitive agreements,
the Company will purchase from Tricon its source code and object code for
certain back office software previously developed by Tricon for $16.4 million
payable in specific annual installments through December 31, 2003.
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 was required to adopt FAS 133 effective January 1, 2001. The adoption
did not have a material impact on the Company's 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. The
adoption of SAB No. 101 did not have a material impact on the Company's results
of operations.
In March 2000, the Emerging Issues Task Force issued EITF 00-03, "Application of
Statement of Position 97-2 in Hosting Arrangements." The software element
covered by SOP 97-2 is only present in a hosting arrangement if the customer has
a contractual right to take possession of the software at any time during the
hosting period. Arrangements that do not give the customer such an option are
service contracts outside the scope of SOP 97-2. This statement did not have a
material impact on the Company's consolidated financial position, results of
operation or cash flows during 2000.
In July 2000, the Emerging Issues Task Force issued EITF 00-15, "Classification
in the Statement of Cash Flows of the Income Tax Benefit Realized by a Company
upon Employee Exercise of a Nonqualified Stock Option." EITF 00-15 states that
the income tax benefit realized by the Company upon employee exercise should be
classified in the operating section of the statement of cash flows. The Company
has elected to adopt EITF 00-15 as of June 2000. All comparative financial
statements have been restated to reflect the change in classification within the
statements of cash flows from financing activities to operating activities.
25
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 2000, the weighted average interest rate on
its cash balances was approximately 6.47%. A 10.0% decrease in this rate would
impact interest income by approximately $325,000.
Item 8. Financial Statements and Supplementary Data.
- ------------------------------------------------------
The following consolidated financial statements are filed with this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
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, 2000 and 1999
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
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, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 2, 2001
27
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49,560 $ 53,435
Accounts receivable, net of allowances for doubtful accounts of $2,000 and
$1,375 in 2000 and 1999, respectively 22,302 17,929
Inventories 17,172 13,141
Deferred tax assets 1,451 1,563
Other 3,271 1,693
-----------------------
Total current assets 93,756 87,761
PROPERTY AND EQUIPMENT, net 14,092 7,857
SOFTWARE DEVELOPMENT COSTS, net 9,358 5,394
INTANGIBLES, net 9,924 5,173
DEFERRED TAXES, long-term 3,882 3,726
OTHER ASSETS 249 2,088
-----------------------
$131,261 $111,999
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,611 $ 9,565
Accrued liabilities 2,875 4,901
Client deposits and deferred revenue 6,388 7,243
Current portion of long-term debt -- 105
-----------------------
Total current liabilities 22,874 21,814
LONG-TERM DEBT, less current portion -- 4,250
-----------------------
Total liabilities 22,874 26,064
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000 shares authorized, no shares issued -- --
Common stock, no par value; 100,000,000 shares authorized, 27,647,830 and
16,983,925 shares issued and outstanding at December 31, 2000 and 1999, respectively 0 0
Additional paid-in capital 116,623 101,003
Deferred compensation (80) (131)
Accumulated deficit (8,156) (14,937)
-----------------------
Total shareholders' equity 108,387 85,935
-----------------------
$131,261 $111,999
=======================
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, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
--------------------------------------
REVENUES:
System sales $ 79,987 $ 91,946 $59,400
Client support, maintenance, and other services 48,057 37,720 23,535
--------------------------------------
Total revenues 128,044 129,666 82,935
--------------------------------------
COST OF REVENUES:
System sales 39,620 46,001 28,877
Client support, maintenance, and other services 37,356 29,989 20,288
--------------------------------------
Total cost of revenues 76,976 75,990 49,165
--------------------------------------
GROSS PROFIT 51,068 53,676 33,770
OPERATING EXPENSES:
Product development 11,030 11,125 11,199
Sales and marketing 12,720 12,302 11,730
Depreciation and amortization 7,706 6,057 4,665
Acquisition and other non-recurring charges -- -- 1,276
General and administrative 15,818 13,204 12,360
--------------------------------------
INCOME (LOSS) FROM OPERATIONS 3,794 10,988 (7,460)
INTEREST INCOME, NET 3,240 1,613 1,800
--------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 7,034 12,601 (5,660)
INCOME TAX PROVISION (BENEFIT) 1,773 4,992 (2,265)
--------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 5,261 7,609 (3,395)
EXTRAORDINARY ITEM:
Gain from early extinguishment of debt, net of taxes 1,520 -- --
--------------------------------------
NET INCOME (LOSS) $ 6,781 $ 7,609 $(3,395)
======================================
BASIC INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 0.19 $ 0.31 $ (0.14)
Extraordinary gain on early extinguishment of debt 0.05 -- --
--------------------------------------
Total basic income (loss) per share $ 0.24 $ 0.31 $ (0.14)
======================================
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 0.18 $ 0.28 $ (0.14)
Extraordinary gain on early extinguishment of debt 0.05 -- --
--------------------------------------
Total diluted income (loss) per share $ 0.23 $ 0.28 $ (0.14)
======================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 27,294 24,630 23,985
======================================
Diluted 29,791 27,519 23,985
======================================
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, 2000, 1999 AND 1998
(IN THOUSANDS)
Common Stock
----------------- Deferred Accumulated
Shares Amount APIC Compensation Deficit Total
-------------------------------------------------------------------
BALANCE, December 31, 1997 15,424 $0 $ 90,708 $(536) $(19,151) $ 71,021
Treasury stock purchase and retirement (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 and retirement (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 -- -- 3,226 -- -- 3,226
Amortization of deferred compensation -- -- -- 222 -- 222
Net income -- -- -- -- 7,609 7,609
-------------------------------------------------------------------
BALANCE, December 31, 1999 16,984 0 101,003 (131) (14,937) 85,935
Three-for-two stock split effected
in the form of a stock dividend 8,463 -- -- -- -- --
Issuance of common stock 1,000 0 10,000 -- -- 10,000
Treasury stock purchase and retirement (90) 0 (1,754) -- -- (1,754)
Exercise of employee stock options 1,210 0 2,566 -- -- 2,566
Stock issued under employee stock
purchase plan 81 0 1,545 -- -- 1,545
Income tax benefit of stock options exercised -- -- 3,263 -- -- 3,263
Amortization of deferred compensation -- -- -- 51 -- 51
Net income -- -- -- -- 6,781 6,781
-------------------------------------------------------------------
BALANCE, December 31, 2000 27,648 $0 $116,623 $ (80) $ (8,156) $108,387
===================================================================
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, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,781 $ 7,609 $ (3,395)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on early extinguishment of debt before taxes (2,529) -- --
Deferred income taxes (44) 1,078 (3,428)
Accretion of note payable interest 56 226 226
Depreciation and amortization 9,671 7,187 5,067
Non-cash acquisition and other non-recurring charges -- -- 400
Amortization of deferred compensation 51 222 183
Income tax benefit of stock options exercised 3,263 3,226 3,804
Changes in assets and liabilities, net of acquired entities:
Accounts receivable (3,362) (284) (88)
Inventories (4,031) (1,176) (3,257)
Other assets (1,244) 334 (922)
Accounts payable 3,958 4,720 (2,390)
Accrued liabilities (2,171) 1,691 (2,677)
Client deposits and deferred revenue (2,039) 4,643 (2,045)
--------------------------------------------
Net cash provided by (used in) operating activities 8,360 29,476 (8,522)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,359) (4,243) (6,342)
Purchases of acquired entities, net of cash acquired (6,000) -- --
Capitalized software development costs (5,929) (2,807) (2,570)
--------------------------------------------
Net cash used in investing activities (24,288) (7,050) (8,912)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock, net of issuance costs 10,000 -- --
Repurchase of common stock (1,754) (514) (4,027)
Exercise of employee stock options 2,566 4,425 1,395
Stock issued under employee stock purchase plan 1,545 1,722 264
Issuance of shareholder loans, net -- (23) (1,540)
Repayment of long-term debt (304) (138) (687)
Other -- -- (1)
--------------------------------------------
Net cash provided by (used in) financing activities 12,053 5,472 (4,596)
--------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,875) 27,898 (22,030)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 53,435 25,537 47,567
--------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 49,560 $53,435 $ 25,537
============================================
The accompanying notes are an integral part of these consolidated statements.
31
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND BACKGROUND
Radiant Systems, Inc. (the "Company") 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 order 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, 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 a 24-hour help desk 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 accounting principals
generally accepted in the United States 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 AICPA 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 the Company's 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:
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.
Subscription-based revenues
In April 2000, the Company began offering its customers subscription
pricing for some of its products. Contracts are generally for a period of
three to five years with revenue being recognized ratably over the contract
period commencing, generally, when the product has been installed and
training has been completed.
Support and Maintenance
The Company offers 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.
32
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Payments received in advance are recorded as client deposits and deferred
revenue in the accompanying balance sheets and are recognized as revenue when
the related product is shipped or related revenue is earned.
Inventories
Inventories consist principally of computer hardware and software media and are
stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation of property and equipment is provided using the
straight-line method over estimated useful lives of two to five years. Leasehold
improvements are amortized over the terms of the respective leases or useful
lives of the improvements, whichever is shorter.
Property and equipment at December 31, 2000 and 1999 are summarized as
follows (in thousands):
2000 1999
------------------------
Computers and office equipment $ 15,081 $ 10,130
Leasehold improvements 4,536 2,637
Purchased software 4,128 2,878
Furniture and fixtures 3,599 2,589
Land 2,517 --
------------------------
29,861 18,234
Less accumulated depreciation and amortization (15,769) (10,377)
------------------------
$ 14,092 $ 7,857
========================
Depreciation expense for 2000, 1999 and 1998 was approximately $6.1 million,
$4.8 million and $3.2 million, respectively.
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 $1.6 million, $1.3 million and $1.3
million in 2000, 1999 and 1998, respectively. Accumulated amortization was $4.4
million and $2.8 million at December 31, 2000 and 1999, 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 2000 or 1999.
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 detail program or
a working model has been produced as evidenced by the completion of design,
planning, coding and testing, such that the product meets its design
specifications and has thereby established technological feasibility.
Capitalization of such costs ends when the resulting product is available for
general release to the public. Amortization of capitalized software development
costs is provided at the greater of the ratio of current product revenue to the
total of current and anticipated product revenue or on a straight-line basis
over the estimated economic life of the software, which the Company has
determined is not more than three years. At December 31, 2000 and 1999,
accumulated amortization of capitalized software development costs was $4.4
million and $2.4 million, respectively.
33
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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.
Common Stock
On February 9, 2000, the Company's Board of Directors approved a three-for-two
split to be effected in the form of a stock dividend payable to shareholders of
record as of March 1, 2000. On April 1, 2000, the Company effected the three-
for-two stock split. Shares presented in the consolidated balance sheets and
consolidated statements of shareholders' equity reflect the actual shares
outstanding for each period presented. All share, per share, common stock and
stock option amounts contained elsewhere in the consolidated financial
statements and related notes for all periods presented have been restated to
reflect the effect of this split.
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):
2000 1999 1998
----------------------------
Average common shares outstanding 27,294 24,630 23,985
Dilutive effect of outstanding stock options 2,497 2,889 --
------ ------ ------
Average common shares outstanding assuming dilution 29,791 27,519 23,985
====== ====== ======
For the years ended December 31, 2000, 1999 and 1998, options with an
antidilutive impact of approximately 530,000, 270,000, and 5.1 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.
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 $3,000, $30,833, and $166,000 in 2000, 1999 and 1998,
respectively. Cash paid for income taxes was $120,000, $100,000, and $0 in
2000, 1999 and 1998, respectively.
34
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
During 2000, 1999 and 1998, the Company recorded bad debt expense of
approximately $425,000, $625,000, and $400,000, respectively.
Concentration of Business and Credit Risk
Financial instruments, which potentially subject the Company to credit risk,
consist principally of trade receivables and interest bearing investments. The
Company performs on-going credit evaluations of its clients and generally does
not require collateral. The Company maintains adequate reserves for potential
losses and such losses, which have historically been minimal, have been included
in management's estimates.
The Company's revenues are derived from a limited number of clients. During
2000, approximately 38.0% of the Company's revenue were derived from five
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 the years ended December 31, 2000, 1999
and 1998, the following clients individually accounted for more than 10.0% of
the Company's revenue:
December 31,
-------------------------------------
2000 1999 1998
-------------------------------------
Client A 10.2% * 10.3%
Client B * 13.3% *
*Accounted for less than 10.0% of total revenues for the period
indicated.
At December 31, 2000, less than 1.0% of the Company's accounts receivable
related to Client A.
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 was required to adopt FAS 133 effective January 1, 2001. The adoption
did not have a material impact on the Company's 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. The
adoption of SAB No. 101 did not have a material impact on the Company's results
of operations.
In March 2000, the Emerging Issues Task Force issued EITF 00-03, "Application of
Statement of Position 97-2 in Hosting Arrangements." The software element
covered by SOP 97-2 is only present in a hosting arrangement if the customer has
a contractual right to take possession of the software at any time during the
hosting period. Arrangements that do not give the customer such an option are
service contracts outside the scope of SOP 97-2. This statement did not have a
material impact on the Company's consolidated financial position, results of
operation or cash flows during 2000.
In July 2000, the Emerging Issues Task Force issued EITF 00-15, "Classification
in the Statement of Cash Flows of the Income Tax Benefit Realized by a Company
upon Employee Exercise of a Nonqualified Stock Option." EITF 00-15 states that
the income tax benefit realized by the Company upon employee exercise should be
classified in the operating section of the statement of cash flows. The Company
has elected to adopt EITF 00-15 as of June 2000. All comparative financial
statements have been restated to reflect the change in classification within the
statements of cash flows from financing activities to operating activities.
35
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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 for the years ended December 31, 2000, 1999 and 1998 are summarized as
follows (in thousands):
2000 1999 1998
------------------------------
Total development expenditures $16,959 $13,932 $13,769
Less additions to capitalized software development costs prior to 5,929 2,807 2,570
amortization
------- ------- -------
Product development expense $11,030 $11,125 $11,199
======= ======= =======
The activity in the capitalized software development account during 2000, 1999
and 1998 is summarized as follows (in thousands):
December 31,
--------------------------------------
2000 1999 1998
------- ------- ------
Balance at beginning of period, net $ 5,394 $ 3,718 $1,773
Additions 5,929 2,807 2,570
Amortization expense (1,965) (1,131) (625)
------- ------- ------
Balance at end of period, net $ 9,358 $ 5,394 $3,718
======= ======= ======
Amortizaton of capitalized software costs is included in system costs of
revenues in the accompanying statements of operations.
4. ACQUISITIONS
TimeCorp
On June 22, 2000, the Company consummated the acquisition of TimeCorp
("TimeCorp"), a workforce management and planning software business operation
owned by VeriFone, Inc., a subsidiary of Hewlett-Packard, Inc. The purchase
price consisted of $6.0 million in cash as assumption of $400,000 in liabilities
and included substantially all the assets of TimeCorp, including software
products, intellectual property and client contracts and was accounted for under
the purchase method of accounting. Intangibles of approximately $6.4 million
were recorded, which are being amortized over four to ten years.
1997 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. 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. 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. 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. 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.
36
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
5. ACQUISITION AND OTHER NON-RECURRING CHARGES
During the second half of 1998, the Company further integrated its fiscal 1997
acquisitions 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.
6. LONG-TERM DEBT
Long-term debt, including obligations under capital leases, consists of the
following (in thousands):
December 31,
--------------------
2000 1999
--------------------
Noninterest bearing promissory note; lump-sum payment of $6.0 million due October 31, 2005 -- 4,250
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
--------------------
-- 4,355
Less current portion -- (105)
--------------------
-- $4,250
====================
On March 30, 2000 the Company and the former sole shareholder of RapidFire
reached an agreement whereby the Company paid the former shareholder $200,000
and forgave a $1.5 million note receivable, and in return, was relieved in full
of its indebtedness to the shareholder. 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 recorded an extraordinary gain of
approximately $2.5 million, net of taxes of $1.0 million, during 2000.
7. INCOME TAXES
The following summarizes the components of the income tax provision (benefit)
(in thousands):
2000 1999 1998
------ ------ -------
Current taxes:
Federal $1,513 $5,311 $ --
State 216 759 --
Deferred taxes 44 (1,078) (2,265)
------ ------ --------
Income tax provision (benefit) $1,773 $4,992 $(2,265)
====== ====== =======
In addition to the above, the Company recorded a tax expense of $1.0 million in
2000 related to the extraordinary gain from early extinguishment of debt.
37
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
The total tax provision is different from the amount that would have been
recorded by applying the U.S. statutory federal income tax rate to income before
taxes. Reconciliation of these differences is as follows:
2000 1999 1998
------ ------ ------
Statutory federal tax rate 35.0 % 35.0 % (35.0) %
State income taxes, net of federal tax benefit 5.0 5.0 (5.0)
Research and development tax credit (10.5) -- --
Other (0.4) (0.4) --
----- ---- -----
29.1 % 39.6 % (40.0) %
===== ==== =====
The components of the net deferred tax asset as of December 31, 2000 and 1999
are as follows (in thousands):
2000 1999
------- -------
Deferred tax assets:
Net operating loss carryforward $ 3,058 $ 2,207
Research tax credit 2,400 --
Inventory reserve 697 694
Depreciation 1,091 245
Allowance for doubtful accounts 1,107 875
Intangibles 2,982 3,876
Deferred revenue -- 221
------- -------
11,335 8,118
Valuation allowance (1,907) (507)
------- -------
Total deferred tax assets 9,428 7,611
------- -------
Deferred tax liabilities:
Capitalized software (3,743) (2,158)
Other basis differences (352) (164)
-------
Total deferred tax liabilities (4,095) (2,322)
------- -------
Net deferred tax asset $ 5,333 $ 5,289
======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 2000 and
1999, the Company had potential tax benefits of $5.4 million and $2.2 million,
respectively, related to research and development tax credits and net operating
loss carryforwards for income tax purposes.
The net operating loss carryforwards are primarily attributable to tax
deductions related to the exercise of stock options. At December 31, 2000 and
1999, the tax benefit related to the stock options exercised totaled
approximately $3.3 million and $3.2 million, respectively. Because stock option
deductions are not recognized as an expense for financial purposes, the tax
benefit for stock option deductions must be credited to additional paid-in
capital.
The tax losses and tax credit carryforwards (if not utilized against taxable
income) expire from 2012 to 2020. A valuation allowance of $1.9 million and
$507,000 has been provided at December 31, 2000 and 1999, respectively, to
offset the related deferred tax assets due to uncertainty of realizing the
benefit of the loss carryforwards and tax credits.
As of December 31, 2000, 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.
38
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space, equipment and certain vehicles under
noncancelable operating lease agreements expiring on various dates through 2009.
At December 31, 2000, future minimum rental payments for noncancelable leases
with terms in excess of one year were as follows (in thousands):
2001 $ 5,822
2002 5,306
2003 5,021
2004 4,348
2005 3,948
Thereafter 15,059
Total rent expense under operating leases was approximately $3.2 million, $4.2
million, and $2.7 million for the years ended December 31, 2000, 1999 and 1998,
respectively. See Note 13.
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, 2000, 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.
9. SHAREHOLDERS' EQUITY
Stock
Stock Offerings
On March 3, 2000, the Company entered into an agreement with America Online,
Inc. ("AOL") and MovieFone, Inc., a subsidiary of AOL ("MF" or collectively AOL
Moviefone), 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 $10 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. See Note 13.
39
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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. During 2000, the Company
repurchased and subsequently retired approximately 90,000 shares at prices
ranging from $18 1/4 to $19 15/16 per share, for total consideration of
approximately $1.8 million. During 1998 and 1999, the Company 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.
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 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 is being
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 1,500,000 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 2000, 1999 and 1998, the
Company issued approximately 82,000, 195,000 and 43,000 shares under the ESPP at
an average price of $19.00, $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 150,000
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. During 2000, the Company granted
10,000 options under the Directors' Plan. At December 31, 2000 the Company has
granted 100,000 options under the Directors' Plan.
40
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "Plan"), as amended, provides for the
issuance of up to 13,000,000 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, 2000, options to purchase 4,080,591 shares of common stock were
available for future grant under the Plan. The Company has granted 811,035
nonqualified stock options outside the Plan, of which, 539,235 have been
cancelled and 271,800 have been exercised.
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 $4.60 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, 2000 is as
follows (in thousands, except weighted average exercise price):
2000 1999 1998
----------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------------
Outstanding at beginning of year 5,216 $ 7.91 5,806 $ 3.01 6,992 $ 4.67
Granted 1,257 25.16 2,124 14.71 2,465 5.63
Canceled (452) 13.84 (680) 4.36 (2,681) 10.43
Exercised (1,210) 2.14 (2,034) 2.24 (970) 1.41
------- ------ ------ ------ ------- ------
Outstanding at end of year 4,811 13.36 5,216 $ 7.91 5,806 $ 3.01
======= ====== ====== ====== ======= ======
Options exercisable at end of
year 1,394 $ 7.65 815 $ 4.40 1,503 $ 3.51
======= ====== ====== ====== ======= ======
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 (in thousands, except weighted average price and
remaining contractual life):
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------
Weighted-
Average
Weighted- Remaining Weighted-
Range of Number of Average Contractual Number Average
Exercise Price Shares Price Life (Years) of Shares Price
- --------------------------------------------------------------------------------------------------------------------
$0.67-$4.50 856 $ 2.56 6.29 514 $ 1.93
$4.58-$7.00 1,084 4.83 6.76 410 4.64
$7.29-$20.88 1,014 11.15 8.43 227 9.54
$21.50-$22.83 1,277 22.51 9.18 228 22.83
$23.75-$45.58 580 28.99 9.26 15 26.79
------ -------
Total 4,811 $13.36 1,394 $ 7.65
====== =======
41
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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 2000, 1999 and 1998 using the Black-Scholes
option pricing model as prescribed by SFAS 123 using the following weighted
average assumptions used for grants in 2000, 1999 and 1998:
2000 1999 1998
--------------------------------------------------
Risk free interest rate 5.75% 5.75% 4.8%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives 4.0 years 4.0 years 4.5 years
Expected volatility 90% 81.0% 68.0%
The total value of the options granted during the years ended December 31, 2000,
1999 and 1998 were computed as approximately $21.3 million, $18.8 million, and
$4.7 million, 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, 2000, 1999 and 1998
would have resulted in the following pro forma amounts (in thousands, except per
share data):
2000 1999 1998
--------------------------------------------------
Net income (loss):
As reported $ 6,781 $7,609 $(3,395)
Pro forma (2,644) 4,509 (7,559)
Basic:
As reported $ 0.24 $ 0.31 $ (0.14)
Pro forma (0.10) 0.18 (0.32)
Diluted:
As reported $ 0.23 $ 0.28 $ (0.14)
Pro forma (0.09) 0.16 (0.32)
Employee Benefit Plan
The Company has a 401(k) profit-sharing plan (the "401(k) Plan") available to
all employees of the Company who have attained age 21. The 401(k) 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 contributions of $372,000,
$0 and $0 during 2000, 1999 and 1998.
11. RELATED-PARTY TRANSACTIONS
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 6, an
agreement was reached between the Company and the former sole shareholder and
this note was repaid in full. Interest income recorded during 2000, 1999 and
1998 related to this note was approximately $19,000, $75,000 and $58,000,
respectively.
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 2000, 1999 and 1998 related to the notes was approximately $11,000,
$8,000 and $1,000, respectively.
42
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
12. SEGMENT REPORTING DATA
Prior to January 1, 2000 the Company operated through two primary reportable
segments (i) Global Solutions and (ii) Regional Solutions. Effective January 1,
2000, the Company restructured its business units and as a result, currently
operates under one segment, providing enterprise technology solutions to
businesses that serve the consumer. To date, the Company's product applications
have been focused on the convenience store, hospitality and food service, and
entertainment markets, as these markets require many of the same product
features and functionality.
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, 2000
----------------------------------------------------------------------------------------
Petroleum/ Hospitality
Convenience And Food
Store Service Entertainment Other Consolidation
----------------------------------------------------------------------------------------
Revenues $68,882 $32,318 $22,994 $ 3,850 $128,044
Contribution margin 21,858 738 6,400 (751) $ 28,245
Operating income (loss) 7,979 (5,743) 2,681 (1,123) 3,794
Identifiable assets (1) $11,821 $18,875 $ 3,879 $96,686 $131,261
For the year ended December 31, 1999
----------------------------------------------------------------------------------------
Petroleum/ Hospitality
Convenience And Food
Store Service Entertainment Other Consolidation
-----------------------------------------------------------------------------------------
Revenues $61,240 $29,827 $38,599 -- $129,666
Contribution margin 15,940 3,071 15,589 $(1,461) 33,139
Operating income (loss) 7,202 (3,483) 8,730 (1,461) 10,988
Identifiable assets (1) $ 8,105 $13,466 $ 8,769 $81,659 $111,999
For the year ended December 31, 1998
----------------------------------------------------------------------------------------
Petroleum/ Hospitality
Convenience And Food
Store Service Entertainment Other Consolidation
----------------------------------------------------------------------------------------
Revenues $44,186 $22,253 $16,496 -- $82,935
Contribution margin 8,205 1,376 4,194 (1,333) 12,442
Acquisition and other
non-recurring charges -- 1,276 -- -- 1,276
Operating income (loss) 25 (6,983) 831 (1,333) (7,460)
Identifiable assets (1) $11,197 $13,800 $ 5,308 $53,861 84,166
(1) Identifiable assets allocated between the segments are comprised
primarily of accounts receivable and intangible assets. All assets
included in the Other segment are shared among all segments.
43
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
13. SUBSEQUENT EVENTS (Unaudited)
On January 23 and 26, 2001, respectively, the Company announced the permanent
closure of its facilities in Hillsboro, Oregon and Pleasanton, California. The
decision was made to reduce costs and consolidate operations at the Company's
headquarters in Alpharetta, Georgia. The Hillsboro office had served primarily
as a sales office for the Company's small business food products, while the
Pleasanton office had served primarily as a sales office for hospitality and
food service products. The office closure costs related to these two offices are
comprised of severance benefits, relocation expenses and lease reserves. As
part of the closings, the Company terminated 25 of the 34 employees. In
accordance with U.S. labor law and practice, the Company paid during 2001, one-
time severance benefits to all terminated employees in the aggregate amount of
approximately $200,000. The Company will record a charge of approximately $1.1
million associated with this action during its first quarter ended March 31,
2001.
On March 3, 2000, AOL agreed, among other items, to invest $25.0 million in the
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), with any
amount not invested by AOL to be callable by the Company into common shares of
the Company. On March 19, 2001, the Company and AOL amended this strategic
relationship. Based on the new agreement, the Company's theater exhibition
point-of-sale and management systems solution will become AOL Moviefone's
preferred offering in the cinema and entertainment industry. In addition, the
Company will support AOL Moviefone's current clients' operating its MARS point
of sale product. Additionally, both companies have agreed not to pursue forming
a subsidiary to address potential business-to-consumer applications over the
Internet. Alternatively, AOL, as part of the amended agreement, has agreed to
fund an undisclosed amount of money to enable current MARS clients to upgrade to
the Company's systems and for the Company to perform certain professional
services for AOL and certain MARS' clients.
44
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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.
Quarter ended
Mar. 31, June 30, Sept 30, Dec. 31,
2000 2000 2000 2000
--------------------------------------
(In thousands, except per share data)
Revenues:
System sales $21,130 $18,956 $18,862 $21,039
Client support, maintenance and other services 11,286 11,321 12,384 13,066
-------------------------------------
Total revenues 32,416 30,277 31,246 34,105
Cost of revenues:
System sales 9,989 8,596 9,477 11,558
Client support, maintenance and other services 8,712 9,458 9,678 9,508
-------------------------------------
Total cost of revenues 18,701 18,054 19,155 21,066
-------------------------------------
Gross profit 13,715 12,223 12,091 13,039
Operating expenses:
Product development 2,191 2,963 3,059 2,817
Sales and marketing 2,901 3,280 3,062 3,477
Depreciation and amortization 1,605 1,802 2,090 2,209
General and administrative 3,379 4,049 3,854 4,536
-------------------------------------
Income from operations 3,639 129 26 --
-------------------------------------
Interest income, net 707 885 792 856
-------------------------------------
Income before income tax and extraordinary item 4,346 1,014 818 856
Income tax provision (benefit) 1,734 406 328 (695)
-------------------------------------
Income before extraordinary item 2,612 608 490 1,551
Gain on early extinguishment of debt, net of taxes 1,520 -- -- --
-------------------------------------
Net income $ 4,132 $ 608 $ 490 $ 1,551
=====================================
Basic income per share:
Income before extraordinary item $ 0.10 $ 0.02 0.02 $ 0.06
Extraordinary gain on early extinguishment of debt 0.05 -- -- --
-------------------------------------
Total basic income per share $ 0.15 $ 0.02 0.02 $ 0.06
=====================================
Diluted income per share:
Income before extraordinary item $ 0.09 $ 0.02 $ 0.02 $ 0.05
Extraordinary gain on early extinguishment of debt 0.05 -- -- --
-------------------------------------
Total diluted income per share $ 0.14 $ 0.02 $ 0.02 $ 0.05
=====================================
Weighted average shares outstanding:
Basic 26,438 27,410 27,571 27,645
=====================================
Diluted 29,711 29,803 29,727 29,719
=====================================
45
RADIANT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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 $ 0.06 $ 0.11 $ 0.13
======================================
Diluted income per share $ 0.01 $ 0.05 $ 0.10 $ 0.11
======================================
Weighted average shares outstanding:
Basic 24,117 24,470 24,804 25,062
======================================
Diluted 26,237 26,948 27,719 28,154
======================================
Net income 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 per share reported for the year.
46
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, 2000 and 1999
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
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. 3
33-17723, 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"), (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"), (vii) the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 (the "March 2000 10-Q") and (viii) the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 (the "June 2000 10-Q").
Except as otherwise indicated, the exhibit number corresponds to the exhibit
number in the referenced document.
47
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)
*10.14 Securities Purchase Agreement dated as of March 3, 2000 by and between Radiant Systems, Inc. and
America Online, Inc. (March 2000 10-Q)
*10.15 Marketing and Development Agreement dated as of March 3, 2000 by and among Radiant Systems, Inc.
America Online, Inc. and AOL Moviefone, Inc. (March 2000 10-Q)**
*10.16 Asset Purchase Agreement dated June 14, 2000 by and between Radiant Systems, Inc. and Hewlett-
Packard Company and Verifone, Inc. (June 2000 10-Q)
*10.17 Amendment No. 1 to Asset Purchase Agreement dated as of June 22, 2000 by and among Radiant.
Systems, Inc., Hewlett-Packard Company and Verifone, Inc. (June 2000 10-Q)
*21.1 Subsidiaries of the Registrant (1998 10-K)
23.1 Consent of Arthur Andersen LLP
**Confidential treatment has been granted for certain confidential portions of
this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended. In accordance with this rule, these confidential portions
have been omitted from this exhibit and filed separately with the Securities
and Exchange Commission.
48
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, 2001
- ----------------------------- Chief Executive Officer
Erez Goren (principal executive officer)
/s/ Alon Goren Co-Chairman of the Board and March 30, 2001
- ----------------------------- Chief Technology Officer
Alon Goren
/s/ John H. Heyman Executive Vice President, March 30, 2001
- ----------------------------- Chief Financial Officer and
John H. Heyman Director (principal financial officer)
/s/ Paul J. Ilse Vice President, Finance March 30, 2001
- ----------------------------- (principal accounting officer)
Paul J. Ilse
/s/ James S. Balloun Director March 30, 2001
- -----------------------------
James S. Balloun
/s/ Evan O. Grossman Director March 30, 2001
- -----------------------------
Evan O. Grossman
49
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -----------------------------------------------------------
23.1 Consent of Arthur Andersen LLP
50