-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TOAxgi7niwTrPJmI/3n02LqZ2avkA2tESboddHWSU4/W97UQkKtKFcGuy1ioctv2 nm6VZ2zsa5o9Dn/uBoJg/Q== 0000931763-00-000760.txt : 20000331 0000931763-00-000760.hdr.sgml : 20000331 ACCESSION NUMBER: 0000931763-00-000760 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIANT SYSTEMS INC CENTRAL INDEX KEY: 0000845818 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 112749765 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22065 FILM NUMBER: 587165 BUSINESS ADDRESS: STREET 1: 1000 ALDERMAN DR STREET 2: STE A CITY: ALPHARETTA STATE: GA ZIP: 30202 BUSINESS PHONE: 7707723000 MAIL ADDRESS: STREET 1: 1000 ALDERMAN DRIVE STREET 2: STE A CITY: ALPHARETTA STATE: GA ZIP: 30202 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ FORM 10-K _____________________ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 ______________________________ Commission File No. 0-22065 RADIANT SYSTEMS, INC. A Georgia Corporation (IRS Employer Identification No. 11-2749765) 3925 Brookside Parkway Alpharetta, Georgia 30022 (770) 576-6000 Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934: None Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the common stock of the registrant held by nonaffiliates of the registrant (10,534,187 shares) on March 15, 2000 was approximately $720,275,036 based on the closing price of the registrant's common stock as reported on The NASDAQ Stock Market on that date. For the purposes of this response, officers, directors and holders of 10% or more of the registrant's common stock are considered to be affiliates of the registrant at that date. The number of shares outstanding of the registrant's Common Stock, as of March 15, 2000: 17,511,433 shares of no par value Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement to be delivered to the shareholders in connection with the Annual Meeting of the Shareholders to be held on June 1, 2000 are incorporated by reference in response to Part III of this Report. 1 PART I Item 1. Business. - ------------------- General Radiant Systems, Inc. (the "Company" or "Radiant") provides enterprise-wide technology solutions to businesses that serve the consumer. The Company offers fully integrated retail automation solutions including point of sale systems, consumer-activated ordering systems, back office management systems, headquarters-based management systems and Web-enabled decision support systems. The Company's products provide integrated, end-to-end solutions that span from the consumer to the supply chain. The Company's products enable retailers to interact electronically with consumers, capture data at the point of sale, manage site operations analyze data, communicate electronically with their sites, and interact with vendors through electronic data interchange and Web- based marketplaces. The Company also develops and markets a variety of intelligent, Windows CE based devices that are specific to the retail industry. In addition, the Company offers professional services focusing on technical implementation, process improvement and change management as well as hardware maintenance services and 24-hour help desk support. Certain retail markets require many of the same product features and functionality. As a result, the Company believes it can continue to leverage its existing technology across various retail markets with limited incremental product development efforts. Moreover, management believes the Internet will provide an important opportunity for the Company to better serve its clients and offer increased functionality at a lower total cost. In addition to traditional methods, the Company intends to offer its software applications through Vertical Solutions Portals ("VSPs") - Internet destinations that address the unique needs of small to midsize retailers and their supply chain partners. The Company is currently marketing these products through its RetailEnterprise division. RetailEnterprise VSPs combine the advantages of hosted applications and digital marketplaces, an approach that is designed to help small and midsize retailers gain efficiencies and benefits traditionally available only to larger retailers. For example, retailers will be able to utilize a labor-scheduling application to more efficiently manage labor costs. In addition, retailers accessing these Web- enabled solutions can participate in a digital marketplace to generate substantial savings through open trading communities and online purchasing tools. Large clients of Radiant Systems will also benefit from VSP's by deploying these applications and services via client-specific portals that leverage their brand name in their franchisee and dealer communities. By way of example, a franchisee of XXX brand may elect to subscribe to the Company's offerings via RetailEnterprise or via XXXbrand.com. Since 1997, the Company has operated through two primary reportable segments (i) Global Solutions and (ii) Regional Solutions. Although both groups provide enterprise-wide technology solutions to the retail industry, the distinguishing factor between them is primarily size of the clients served and the nature of the services performed. Global Solutions' clients tend to be clients with greater than fifty owned and operated sites, while Regional Solutions' clients typically have less than fifty owned and operated sites. Additionally, the purchasing behavior of the Global Solutions' clients is typically characterized by the use of fewer, larger contracts. These contracts typically involve longer negotiating cycles, and often require the dedication of substantial amounts of working capital and other resources. See Note 12 to the Company's consolidated financial statements for certain financial information relating to these two segments. Recent Events In an effort to strengthen its product offerings across new and existing markets, during 1999 the Company launched product development efforts around Web-enabled, centrally hosted management systems software for retailers. Management believes these products will provide integrated, end-to-end solutions that span from the consumer through the supply chain. To further this strategy, on August 1, 1999, the Company entered into a preliminary agreement with America Online, Inc. ("AOL") and MovieFone, Inc., a subsidiary of AOL ("MF"), to form a strategic relationship in the retail point of sale business. Final agreements evidencing this relationship were entered into on March 3, 2000. This relationship, among other aspects, entails a ten- year marketing and development agreement whereby the Company will develop and manufacture point of sale systems and services for sale to the entertainment industry pursuant to MF's specifications, which will make these point of sale systems interoperable with MF's remote entertainment and event ticketing services. The relationship also contemplates future collaborative efforts between the companies. As part of this relationship, AOL purchased $10.0 million of the Company's common stock at a price of $15 per share. In addition, AOL has agreed to invest an additional $25.0 million in a to be formed subsidiary of the Company to engage in consumer interactive businesses other than in the entertainment segment (e.g., interactive fuel and dispenser business and interactive restaurant self-ordering business). In return for its investment, AOL will receive a 15% equity interest in the form of preferred stock of this subsidiary. To the extent AOL does not invest $25.0 million in the to be formed subsidiary, AOL has agreed to invest the balance in another to be formed subsidiary of the Company or purchase common stock of the Company at the then current market price. In March 1, 2000, the Company and Microsoft Corporation jointly announced, subject to execution of a definitive agreement, that both companies have joined forces to develop and market an integrated Web-enabled management system and supply chain solution to enable retailers to conduct business to business e- commerce over the Internet. In addition, Microsoft agreed to make an equity investment in the Company and committed to support the Company's solution through joint marketing programs, funding for product development, consulting services, developer support, and distribution via the Microsoft(R) bCentral(TM) small-business portal. Further, Microsoft and the Company have created an open structure that allows for other strategic and equity participants in this venture. Industry Background Successful retailers increasingly require information systems that capture detailed information of consumer activity at the point of sale and store that data in an easy to access fashion. Early technology innovators in the retail industry deployed robust, integrated information systems at the point of sale and used the information to react rapidly to changing consumer preferences, ultimately gaining market share in the process. In addition, these integrated information systems helped retailers achieve operational efficiencies. Many large national retailers have followed suit by investing in proprietary information systems. For many types of retailers, however, this type of information system did not make economic or business sense. In particular, merchants with a large number of relatively small sites, such as convenience stores, petroleum retailers, convenient automotive service centers, food service and entertainment venues, generally have not been able to cost-effectively develop and deploy sophisticated, enterprise-wide information systems. Economic and standardization problems for these markets are exacerbated by the fact that many sites operate as franchises, dealerships or other decentralized ownership and control structures. Without an investment in technology, these retailers continue to depend on labor and paper to process transactions. Management believes that high labor costs, lack of centralized management control of remote sites and inadequate informational reporting, together with emerging technology trends, have caused many of these retailers to reexamine how technology solutions can benefit their operations. At the end of 1999, there were more than 96,000 convenience stores nationwide, while the cinema industry had approximately 37,000 screens within approximately 7,500 sites nationwide. As of January 1999, the food service industry had over 496,000 domestic units, of which approximately 231,000 were classified as quick service restaurants ("QSR"). Typically, the existing information systems in these industries consist of stand-alone devices such as cash registers or other point of sale systems with little or no integration with either the back office of the site or an enterprise-wide information system. Implementation of information systems providing this functionality typically involves multiple vendors and an independent systems integration firm. The resulting proprietary solutions are often difficult to support and have inherently high risks associated with implementation. Management believes that technology solutions which are highly functional and scalable, relatively inexpensive and easy to deploy are critical for successful penetration in these retail markets. 2 In the absence of an integrated solution, retailers in these markets typically rely on manual reporting to capture data on site activity and disseminate it to different levels of management at the regional and national headquarters. Basic information on consumers (i.e., who they are, when they visit and what they buy) is not captured in sufficient detail, at the right time or in a manner that can be communicated easily to others in the organization. Similarly, information such as price changes does not flow from headquarters to individual sites in a timely manner. In addition, communications with vendors often remain manual, involving paperwork, delays and related problems. Recent trends in the retail industry have accelerated the need for enterprise-wide information and have heightened demand for integrated retailing systems. Based in part upon industry association reports and other studies, as well as the Company's experience in marketing its products, the Company believes consumer preferences have shifted away from retailer loyalty toward value and convenience, creating a greater need for timely data concerning consumer buying patterns and preferences. Management also believes that convenient consumer- activated ordering and payment systems, such as ATMs, voice response units and "pay at the pump" systems, have become important to retailers who wish to retain and build a client base. Additionally, through the use of integrated systems, retailers can improve operational and logistical efficiencies through better management of inventory, purchasing, merchandising, pricing, promotions and shrinkage control. Management believes that the constant flow of information among the point of sale, the back office, headquarters and the supply chain has become a key competitive advantage in the retail industry, resulting in retailers demanding more sophisticated, integrated solutions from their systems vendors. In a parallel development, technological advances have improved the capability of information systems that are available to retailers. With the price of computing power declining, technology investments have become economically feasible for many retailers. Further, computing power has become increasingly flexible and distributable, facilitating data capture and processing by applications located at the point of sale. Also, new front-end graphical user interfaces are making systems easier to use, which reduces training time and transaction costs and facilitates more types of consumer- activated applications. To meet increasing systems demands from retailers, providers of hardware and software point of sale solutions are attempting to integrate existing products. This process often requires independent systems integrators to provide enterprise-wide data communications. These systems often are based on proprietary, closed protocols and technology platforms from several different vendors. As a result, the effort required to implement and maintain these systems can be difficult, time consuming and expensive. Most recently, the advent of centrally hosted, Internet-enabled management software has opened new possibilities for businesses that want to deploy standardized software applications over geographically dispersed areas. By allowing management personnel from a retail site to access software over the Internet using a standard Web browser, retail chains are able to have consistent business applications and centrally consolidated data while avoiding the need to download large software programs to individual site-based PC workstations. The Radiant Solution The Company offers fully integrated technology solutions that enable retailers to improve site operations, serve consumers better and route information throughout their organization and supply chains. The Company believes its core technology and solutions are applicable to a variety of retail markets. The Company's suite of products links store level point of sale information with centralized merchandising and financial functions that ultimately drive replenishment communications with suppliers and vendors. The Company believes that its site solutions are easy to implement, typically requiring less than a week to install and a few hours to train individual users. The following summarizes the solutions provided by the Company: 3 CONSUMER-ACTIVATED BACK OFFICE WEB-BASED Touch Screen Interactive Inventory Control Inventory Control Video, Graphics, Audio Vendor Management Labor Scheduling Credit/Cash Payment Purchasing/Receiving Compact, Enclosed Terminals Employee Management SERVICES Suggestive Selling Recipe Management Consulting Menu Management Training Maintenance Technical Support POINT OF SALE Integration Touch Screen Interactive HEADQUARTERS Installation Transaction Auditing Executive Information Credit Processing Electronic Price Book Data Capture Vendor EDI Peripheral Integration Centralized Menu Management Cash Reconciliation Decision Support Systems Table Management
The Company's technology solutions allow retailers to enable consumers to place their own orders for items such as food, movie tickets and concessions through graphical touch screen interfaces; capture transaction information and communicate with credit card networks; manage and analyze in-store inventory movement, including electronic ordering; schedule and manage staffing; and connect headquarters to each of the retailer's local sites and vendors, enabling management to quickly change pricing and review operating performance in a timely and efficient manner. The Company's products have been deployed successfully in retail operations ranging in size from one to more than 25,000 sites. Retailers derive the following benefits from Radiant's solutions: Integrated information flows. The Company's technology solutions provide retailers with tools for monitoring and analyzing sales data, stock status, vendor relationships, merchandising and other important activities, both site and headquarter levels. These products further enable retailers to communicate electronically with their suppliers in order to exchange purchase orders, invoices and payments. Centralized management of highly decentralized operations. Information provided by the Company's solutions allows headquarters management to monitor site performance in a consistent manner on a near-real time basis, implement price changes simultaneously throughout the enterprise and rapidly initiate targeted marketing programs. Tighter on-site control over operations. The Company's back office systems enable site managers to closely manage inventory, reconcile accounts and control issues such as shift scheduling and hourly wage calculations. The Company's solutions incorporate sophisticated inventory management techniques to help a retailer optimize its merchandising strategy. Improved labor productivity. The Company incorporates user friendly graphics within its technology solutions, reducing employee training and order processing times which are important benefits in retail environments due to high employee turnover. The Company's back office solutions can alleviate extensive paperwork required of site managers, allowing them more time to focus on operations. Improved client service. The Company's consumer-activated ordering systems permit clients to place their own orders, answer surveys and electronically communicate with the retailer. These systems can improve client service, reduce site labor costs and, through automating suggestive selling concepts, help the retailer implement revenue enhancement opportunities. Company Strategy The Company's objective is to be the leading worldwide provider of enterprise- wide technology solutions to the retail markets it serves. The Company is pursuing the following strategies to achieve this objective: 4 Leverage e-commerce tools and business models. The Company believes it can access a wider array of clients through its e-commerce offerings, including Web-enabled management systems and its RetailEnterprise division. Additionally, its alliance with AOL creates opportunities to leverage the Company's presence in retail locations around the world into new revenue streams for the Company. Expand markets for the Company's solutions. The Company believes that its core technology and solutions are applicable to a variety of retail markets. The Company has made five acquisitions in the food service and entertainment markets, which combined with its existing systems and technology, has enabled it to enter and/or broaden its presence in these markets. Introduce new products to current markets. The Company has introduced a variety of new products and services since the beginning of 1996, including consumer-activated systems, a headquarters-based, enterprise-wide management system, Decision Support System ("DSS"), a Windows NT version of its local site-based products, consulting services and its multimedia networking platform. During 1998, the Company began developing Lighthouse, its next generation software technology. Throughout 1999, the Company enhanced its Lighthouse point-of-sale product and successfully introduced this technology into the convenience store, food service and entertainment markets. Management believes its Lighthouse generation of software products, which utilizes both Microsoft Windows CE and NT operating systems, represent an innovative platform based on open, modular software and hardware architecture and offer increased functionality and stability compared to other open systems in the marketplace at a lower total cost of ownership. The Company continues to introduce incremental new devices and software modules to complete its existing suite of products for the retail environment. Additionally, during 1999, the Company's launched product development efforts around Web-enabled, centrally hosted management software and integrated purchasing software built around industry-specific marketplaces. Management believes that these new product offerings open up significant opportunities for future new business. Better Serve the Smaller Retailer. A large portion of the food service and convenience store market is comprised of small businesses. Historically, a disproportionately small percentage of the Company's business has been derived from this small business part of the market. Management believes that along with its Web-enabled management software and its Retail Enterprise offering, the Company can grow this segment of the business in the future at a faster rate than in the past. Increase sales and marketing efforts outside the United States. Historically, the Company has not derived a significant portion of its revenues from clients outside the United States. Management believes that the growing number of large, multi-national companies who are among the Company's major domestic clients together with its successful record of implementing of solutions with retailers in Western Europe, Eastern Europe and Asia will allow it to make progress internationally in the future. The Company has previously executed international projects in Canada, the Czech Republic, Hong Kong, Japan, Malaysia, Poland, Sweden, Switzerland, Thailand, and the U.K. Make strategic acquisitions. The Company has accelerated its entry into new vertical markets through acquisitions and joint venture arrangements. Although the Company had no acquisitions in 1998 or 1999, to the extent the Company believes acquisitions can better position it to serve its current markets or penetrate others, it will pursue such opportunities. Expand existing position in selected markets. The Company believes that it is in a strong position to expand its current market share in the convenience store, food service, entertainment and convenient automotive service center markets due to its highly functional technology solutions and its practical experience in deploying and implementing retail solutions. The Company has experience integrating all aspects of its technology solutions into existing retail technology infrastructures. In particular, the Company has developed interfaces with a number of the widely used electronic information and payment networks, including networks of certain major petroleum retailers. The Company continues to develop interfaces to credit networks of additional major petroleum retailers which, if certified, will allow the Company access to a large number of potential sites. Attract and retain outstanding personnel. The Company believes its strongest asset is its people. To attract and retain top talent, the Company intends to maintain its entrepreneurial culture and to continue offering competitive benefit programs. The Company has granted stock options to a majority of its employees and will strive to continue to align employee interests with those of the Company's shareholders. 5 Retail Markets To date, the Company's product applications have been focused toward the convenience store, food service, entertainment and convenient automotive service center markets, as these markets require many of the same product features and functionality. The Company believes it can continue to leverage its existing technology across these and other retail markets with limited incremental product development efforts. Convenience Store Market In the United States, there currently are approximately 96,700 convenience store sites, which derive a significant portion of revenues from selling products other than gasoline. Additionally, the Company believes that the international convenience store market represents a substantial opportunity for its technology solutions. Management believes that the industry is currently under-invested in technology. Only 42% of the industry's retail sites use scanning equipment, compared to grocery stores, which have implemented scanning at approximately 90% of their locations. The Company believes that the demand for the Company's technology solutions in the convenience store market for the foreseeable future will remain strong. This demand is fueled because many convenience store operators are finding that their consumers prefer "pay at the pump" systems, and many operators are upgrading their POS systems to interface with these consumer-activated systems. Approximately 50% of convenience stores currently utilize pay at the pump technology. Implementing this technology requires a site to upgrade its system for controlling and managing fuel sales. Management believes that installation of pay at the pump systems will remain strong for the foreseeable future, encouraging additional investment in store automation. Management also believes that based on technology in recent years, and the positive return on investment associated with the Company's solutions, demand for new technology will remain from both new and existing clients. Food Service Market The domestic food service market includes approximately 496,000 sites as of the beginning of 1999. Restaurants increasingly require sophisticated technology systems which integrate with evolving headquarters information systems and enable more timely and accurate management of site operations. At the site, managers seek real time information access and management systems that permit employees to increase the speed and accuracy with which they take an order, prepare the food, and fill the order, often accommodating numerous concurrent orders at multiple table-top, counter-top and drive-through locations. Managers at all levels are seeking solutions to better manage menu and pricing functions, optimizing profitability and inventory management. The market for automated information and transaction systems for restaurants is typically more advanced than in the convenience store, convenient automotive service center and entertainment markets but is highly fragmented and includes a large number of proprietary, closed systems. 6 Entertainment Market The domestic cinema industry is concentrated, with the top six chains operating approximately 44% of the cinema screens. In addition to increasing the number of screens per site, "megaplexes" have evolved, which combine restaurants, movies and other forms of entertainment in one facility. There are approximately 37,000 cinema screens in the United States. These screens are operated at approximately 7,500 sites, with recent trends emphasizing more screens per site. While cinema sites typically are operated in a decentralized manner, the Company believes cinema operators are focused on implementing cost controls from headquarters. Convenient Automotive Service Center Market The convenient automotive service center market includes quick oil change centers, full service car washes and various repair centers. In the United States, there currently are approximately 15,000 quick oil change centers and approximately 7,000 full service car washes. The Company believes that the international automotive service center market also represents a substantial opportunity for its solutions, as well as various repair centers such as transmission and clutch specialty shops and tire stores. Retail Products While the Company believes that its core technology may be adapted to provide solutions to a variety of markets, it has concentrated its efforts to date in the convenience store, food service, entertainment and convenient automotive service center markets. The Company's principal products, sales and marketing efforts, clients and competitors are discussed below for these markets. The Company markets a variety of products and services as part of its strategy to serve as an integrated solutions provider. From consumer-activated ordering solutions to feature-rich, highly functional point of sale and back office systems tied into headquarters through advanced client/server software, the Company's enterprise-wide solutions interact with the consumer, site employees and management and the senior management of a retailer's operations. To help retailers optimize the impact these systems have on their operations, the Company also offers a wide array of consulting, training and support services provided by experienced professionals. The Company further provides "ruggedized" hardware systems designed to cope with harsh retailing environments. Consumer-Activated Ordering Systems Within each of the markets the Company serves, the trend towards more focused client service and less favorable labor demographics has created a demand for consumer-activated ordering systems. In response, the Company has developed an easy to use, consumer-activated system which allows a consumer to preview movies and purchase tickets or place a food order, pay with a plastic card and make inquiries and view promotions through the use of a touch screen application. The software development environment and authoring tools allow various media, such as video clips, logos, pictures and recordings, to be quickly integrated into a consumer-friendly application. Management believes consumer-activated technology allows a retailer to increase labor productivity, increase revenues through suggestive selling, increase consumer ordering speed and accuracy, capture consumer information at the point of sale and respond quickly to changing consumer preferences. Point of Sale Systems The Company offers a variety of point of sale products which can be licensed as modules or as a complete system. These point of sales products are comprehensive solutions that allow retailers to process transactions and capture data, as well as manage other front office operations. The products feature a touch screen interface, user-friendly applications and flexibility in set-up and configuration to accommodate operational variables at each site. They are based on an open architecture and run on either the Windows NT or Windows CE platform and other operating systems. The applications may support multiple point of sale terminals and a separate back office system and are upgradable so that clients can phase in their investment with additional hardware and software modules. The products offer clients scalability, such that the same application can be run in chains with widely varying numbers and sizes of sites; yet the enterprise solution remains consistent and supportive of each site. 7 Site Management Systems Site management systems, or back office software, provides various types of retail operators with the capabilities to manage employees and inventory, schedule labor, automate daily reports, analyze costs and forecast results. Additionally, these systems provide the means for retailers to readily gather point of sale and management information including real-time sales monitoring. The Company's back office management systems were developed with a user friendly, graphical interface and are based on open architecture. Headquarters-Based Management Systems Headquarters-based management systems permit retailers to manage individual sites from headquarters. This client/server based software application allows retailers to better manage multiple sites. The following is a summary of the features and functionality of the Company's headquarters application: . Price book-allows retailers to set prices for products in a timely manner on a site-by-site, zone-by-zone or system wide basis. Price book also allows retailers to target prices based on a variety of different factors, including markups based on cost, gross margins, and target margins. . Site configuration and management-allows retailers to define and control the parameters of site operations, such as prohibiting clerks from authorizing fuel dispensing without prepayment. . Fuel management-allows retailers to manage fuel inventory movement and pricing. Such features allow management to define and regulate site pricing and strategies, including responding to price changes at competitors' sites. . Decision Support System ("DSS")-supports headquarters analysis of site operations, such as sales vs. cost analysis, sales vs. budget analysis, labor productivity analysis and category management analysis. DSS also facilitates "what if" analyses, allowing retailers to incorporate and ascertain the sensitivities of operational variables such as price, cost and volume. . Electronic Data Interchange-supports the routing and analysis of purchase orders and vendor invoices. The Company believes that its headquarters-based product is one of the most functional and comprehensive headquarters management applications widely marketed to various retail chains. The product is built with state of the art software tools and is flexible and expandable based on application architecture and database structure. The application is written in PowerBuilder, and the database, Microsoft SQL Server, is highly scalable. The user interface is intuitive and easy to use. To provide food service, entertainment and convenient automotive service center operators with additional information and functionality at headquarters, the Company, through its Lighthouse suite of products, plans to combine certain features and functions of its convenience store headquarters-based product with the food service, entertainment and convenient automotive service center product lines. See "--Product Development". Next Generation Management Systems In 1999, the Company began developing its new generation of management systems products--WAVE. These products are designed to combine and expand the functionality of its Site Management Systems and Headquarter-Based Management Systems. Further, the Company's architecture and platforms for these products are entirely web-based, which the Company believes will enable it to increase the functionality while decreasing the costs of implementing and maintaining technology solutions for retailers. Sales and Marketing Through a dedicated sales effort designed to address the requirements of different retail operators, the Company believes its sales force is positioned to understand its clients' businesses, trends in the marketplace, competitive products and opportunities for new product development. This allows the Company to take a consultative approach to working with clients. The Company's sales personnel focuses on selling its technology solutions to major clients, both domestically and internationally. All sales personnel are compensated with a base salary and commission based on revenue quotas, gross margins and other profitability measures. To date, the Company's primary marketing objective has been to increase awareness of all of the Company's technology solutions. To this end, the Company has attended industry trade shows and selectively advertised in industry publications. The Company intends to increase its sales and marketing activities both domestically and internationally, and to expand its advertising in relevant industry publications. Additionally, the Company intends to continue developing an independent distribution network to sell and service its products to certain segments of the domestic and international markets. 8 Clients Clients who have selected the Company as their technology solutions provider operate over 80,000 sites. As of December 31, 1999, the Company has installed its technology solutions in over 25,000 of these sites. In 1999, one client, American Multi-Cinema, Inc., accounted for 13.3% of the Company's total revenues. In 1998, one client, Speedway SuperAmerica, LLC, formerly Emro Marketing Company, accounted for 10.3% of the Company's total revenues. In 1997, three clients accounted for 36.4% of the Company's total revenues, as follows: Speedway SuperAmerica, LLC, formerly Emro Marketing Company (12.8%), Ultramar Diamond Shamrock Corporation (12.2%) and Conoco, Inc. (11.4%). The following is a partial list of major clients who have licensed or purchased the Company's products and services: Advantica Restaurant Group, Inc. The Krystal Company American Multi-Cinema, Inc. Loews Cineplex Entertainment Corporation BP Amoco, p.l.c. National Amusements, Inc. Boston Chicken, Inc. Regal Cinemas, Inc. Car Spa, Inc. Ruby Tuesday, Inc. Chick-fil-A, Inc. Sephora U.S.A, LLC Clearview Cinemas Souper Salad, Inc. Compass Group USA, Inc. Speedway SuperAmerica, LLC, formerly Emro Marketing Company Conoco, Inc. Tricon Restaurant Services Group, Inc. Einstein/Noah Bagel Corporation Tosco Corporation General Cinema Theatres, Inc. Ultramar Diamond Shamrock Corporation VICORP Restaurants, Inc.
Competition In marketing its technology solutions, the Company faces intense competition, including internal efforts by some potential clients. The Company believes the principal competitive factors are product quality, reliability, performance, price, vendor and product reputation, financial stability, features and functions, ease of use, quality of support and degree of integration effort required with other systems. Within the markets it serves, the Company believes it is the only integrated technology solution provider of point of sale, back office and headquarters- based management systems. Within these product lines, the Company faces intense levels of competition from a variety of competitors. International Business Machines, Inc., NCR Corporation, Verifone, Inc. a subsidiary of Hewlett Packard Company, Dresser Industries, Inc., Gilbarco, Inc., Point of Sale Limited, Stores Automated Software, Inc., Pacer/CATS, a subsidiary of USA Networks, Inc., MovieFone, Inc., Micros Systems, Inc., Par Technology Corp. and others provide point of sale systems with varying degrees of functionality. Back office and headquarters client/server software providers include The Software Works!, Professional Datasolutions Inc., SAP AG and JDA Software Group, Inc. In addition, the Company faces additional competition from systems integrators who offer an integrated technology solutions approach by integrating other third party products. The Internet presents a new competition to the Company. Start-ups funded by venture capitalists and the public equity markets are able to gather resources rapidly. Further, these companies often offer new business models which may force the Company to change its terms of business to continue to maintain its market position. The Company believes there are barriers to entry in the market for convenience store automation solutions. The Company has invested a significant amount of time and effort to create the functionality of its consumer-activated point of sale and back office headquarters-based management systems. The Company believes that the time required for a competitor to duplicate the functionality of these products is substantial and would require detailed knowledge of a retailer's operations at local sites and headquarters. Also, developing a credit card network interface often can take an additional six to nine months, as the certification process can be time consuming. Moreover, the major petroleum companies are extremely selective about which automation system providers are permitted to interface to their credit networks. As of March 15, 2000, the Company was certified on nine credit networks, and it currently has initiated the process to become certified on three other major petroleum company credit networks. Professional Services The integration, design, implementation, application and installation of technology solutions are critical to the Company's ability to effectively market its solutions. The following is a summary of some of the professional services the Company provides: 9 Consulting. Business consultants, systems analysts and technical personnel assist retailers in all phases of systems development, including systems planning and design, client-specific configuration of application modules and on-site implementation or conversion from existing systems. Directors in the Company's consulting organization typically have significant consulting or retail technology experience. The Company's consulting personnel undergo extensive training in retail operations and the Company's products. Consulting services typically are billed on a per diem basis. Customization. The Company provides custom application development work for clients billed on a project or per diem basis. All customization remains the property of the Company. Training. The Company has a formal training program available to its clients, which is provided on a per diem rate at the Company's offices or at the client's site. Integration. Typically, as part of its site solution, the Company integrates standard PC components for its clients. This is done as part of the overall technology solution to maximize the quality of the overall site solution and to provide the clients with a system that is easy to support over the long term. The market for the Company's professional services is intensively competitive. The Company believes the principal competitive factors are the professional qualifications, expertise and experience of individual consultants. In the market for professional services, the Company competes with the consulting divisions of the big five accounting firms, Electronic Data Systems, Inc., International Business Machines and other systems integrators. Maintenance and Client Support The Company offers client support on a 24-hour basis, a service that historically has been purchased by a majority of its clients and also entitles the client to product upgrades. In some cases, hardware support is provided by third parties. The Company can remotely access its clients' systems in order to perform quick diagnostics and provide on-line assistance. The annual support option is typically priced at a percentage of the software and hardware cost. Product Development The Company's product development strategy is focused on creating common technology elements that can be leveraged in applications across various vertical retail markets. The Company's software architecture is based on open platforms and is modular thereby allowing it to phase into a retailer's operations. The Company has developed numerous applications running on a Windows NT platform. The software architecture incorporates Microsoft's Component Object Model, providing an efficient environment for application development. Throughout the course of 1997 and 1998, Radiant Systems entered additional retail markets facilitated primarily through the acquisition of several companies and product offerings. Combined with its existing products, the Company began developing, marketing, deploying and supporting a variety of products. As a result, during 1998 the Company's management determined that significant internal cost efficiencies and increased market appeal could be obtained through the consolidation of its legacy products into a single family of products, Lighthouse. This consolidation effort integrated the best business and technical knowledge from multiple markets. Throughout 1999, the Company enhanced its Lighthouse point-of-sale product and successfully introduced this replacement technology into the convenience store, food service and entertainment markets. Management believes the Lighthouse family of products will uniquely position the Company to serve the needs of retailers who cross business segments (i.e., a convenience store or cinema with a fast food operation), further differentiating the Company's systems from those of its competitors and allowing the Company to reduce significantly future development and support costs. Additionally during 1999, the Company launched product development efforts around Web-enabled, centrally hosted management software and integrated purchasing software built around industry-specific marketplaces. Management believes that these products will strengthen its product offerings by providing integrated, end-to-end solutions that span from the consumer to the supply chain. 10 Proprietary Rights The Company's success and ability to compete is dependent in part upon its proprietary technology, including its software source code. To protect its proprietary technology, the Company relies on a combination of trade secret, nondisclosure, copyright and patent law, which may afford only limited protection. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. Although the Company relies on the limited protection afforded by such intellectual property laws, it also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable maintenance are essential to establishing and maintaining a technology leadership position. The Company presently has two patents and six patents pending. The source code for the Company's various proprietary software products is protected both as a trade secret and as a copyrighted work. The Company generally enters into confidentiality or license agreements with its employees, consultants and clients and generally controls access to and distribution of its software, documentation and other proprietary information. Although the Company restricts client's use of the Company's software and does not permit the resale, sublicense or other transfer of such software, there can be no assurance that unauthorized use of the Company's technology will not occur. Despite the measures taken by the Company to protect its proprietary rights, unauthorized parties may attempt to reverse engineer or copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult. In addition, litigation may be necessary in the future to enforce the Company's intellectual property rights, such as to protect the Company's trade secrets, to determine the validity and scope of the Company's and or others proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results and financial condition. Certain technology used in conjunction with the Company's products is licensed from third parties, generally on a non-exclusive basis. These licenses usually require the Company to pay royalties and fulfill confidentiality obligations. The Company believes that there are alternative resources for each of the material components of technology licensed by the Company from third parties. However, the termination of any of these licenses, or the failure of the third- party licensors to adequately maintain or update their products, could result in delay in the Company's ability to ship certain of its products while it seeks to implement technology offered by alternative sources. Any required alternative licenses could prove costly. Also, any such delay, to the extent it becomes extended or occurs at or near the end of a fiscal quarter, could result in a material adverse effect on the Company's business, operating results and financial condition. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of the Company's products or relating to current or future technologies, there can be no assurance that the Company will be able to do so on commercially reasonable terms or at all. In the future, the Company may receive notices claiming that it is infringing on the proprietary rights of third parties, and there can be no assurance that the Company will not become the subject of infringement claims or legal proceedings by third parties with respect to current or future products. In addition, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Defending against any such claim could be time consuming, result in costly litigation, cause product shipment delays or force the Company to enter into royalty or license agreements rather than dispute the merits of such claims. Moreover, an adverse outcome in litigation or similar adversarial proceedings could subject the Company to significant liabilities to third parties, require the expenditure of significant resources to develop non- infringing technology, require disputed rights to be licensed from others or require the Company to cease the marketing or use of certain products, any of which could have a material adverse effect on the Company's business, operating results and financial condition. To the extent the Company desires or is required to obtain licenses to patents or proprietary rights of others, there can be no assurance that any such licenses will be made available on terms acceptable to the Company, if at all. As the number of software products in the industry increases and the functionality of these products further overlaps, the Company believes that software developers may become increasingly subject to infringement claims. Any such claims against the Company, with or without merit, as well as claims initiated by the Company against third parties, can be time consuming and expensive to defend, prosecute or resolve. 11 Employees As of December 31, 1999 the Company employed 790 persons. None of the Company's employees is represented by a collective bargaining agreement nor has the Company experienced any work stoppage. The Company considers its relations with its employees to be good. The Company's future operating results depend in significant part upon the continued service of its key technical, consulting and senior management personnel and its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will retain its key managerial or technical personnel or attract such personnel in the future. The Company has at times experienced and continues to experience difficulty recruiting qualified personnel, and there can be no assurance that the Company will not experience such difficulties in the future. The Company, either directly or through personnel search firms, actively recruits qualified product development, consulting and sales and marketing personnel. If the Company is unable to hire and retain qualified personnel in the future, such inability could have a material adverse effect on the Company's business, operating results and financial condition. Forward-Looking Statements Certain statements contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to financial results and plans for future business development activities, and are thus prospective. These statements appear in a number of places in this Annual Report and include all statements that are not statements of historical fact regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company's financing plans; (ii) trends affecting the Company's financial condition or results of operations; (iii) the Company's growth strategy and operating strategy; and (iv) the declaration and payment of dividends. The words "may," "would," "could," "will," "expect," "estimate," "anticipate," "believe," "intend," "plans," and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the Company's ability to control. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Among the key risks, assumptions and factors that may affect operating results, performance and financial condition are the Company's reliance on a small number of customers for a larger portion of its revenues, fluctuations in its quarterly results, ability to continue and manage its growth, liquidity and other capital resources issues, competition and the other factors discussed in detail in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" section below. Risk Factors In addition to the other information contained in this Report, the following risks should be considered carefully in evaluating the Company and its business. History of Operating Losses. Although the Company reported $7.6 million in net income in 1999, the Company incurred net losses of $3.4 million, $19.5 million and $2.2 million for fiscal years 1998, 1997 and 1996, respectively. As a result, there can be no assurance that the Company will be able to continue to achieve profitability for fiscal 2000 and beyond. The Company anticipates that completing its products under development, and marketing existing products and new releases will require substantial expenditures. Accordingly, an investment in the Common Stock is extremely speculative in nature and involves a high degree of risk. Impact of the Internet. The Company is embracing the Internet as part of its product development and sales and marketing strategy. To that extent, it is making significant investment in new products and business models. There can be no guarantee that these efforts will be successful, or, if successful, to what extent. Further, these investments could result in a material and adverse effect to the Company's financial results. The Internet has created new competitions and creative business models that the Company must contend. These competitive forces could result in the Company losing market share, reducing margins or increasing investments. As a result, the Company's business, operating results and financial condition could be materially and adversely effected. Management of Growth. The growth in the size and complexity of the Company's business and the expansion of its product lines and its client base will place a significant strain on the Company's management and operations. An increase in the demand for the Company's products could strain the Company's resources or result in delivery problems, delayed software releases, slow response time, or insufficient resources for assisting clients with implementation of the Company's products and services, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company anticipates that continued growth, if any, will require it to recruit, hire and assimilate a substantial number of new employees, including consulting, product development, sales and marketing personnel. The Company's ability to compete effectively and to manage future growth, if any, also will depend on its ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage its work force, particularly its direct sales force and consulting services organization. There can be no assurance that the Company will be able to manage any future growth, and any failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. The Company's ability to undertake new projects and increase revenues is dependent on the availability of the Company's personnel to assist in the development and implementation of the Company's technology solutions. The Company currently is attempting to increase consulting capacity in anticipation of future sales. Should the Company increase its consulting capacity and such sales fail to materialize, the Company's business, operating results and financial condition would be adversely affected. 12 Growth Through Acquisition. As part of its operating history and growth strategy, the Company has consummated and may seek to consummate the acquisition of other businesses. In the future, the Company may continue to seek acquisition candidates in selected markets and from time to time engages in exploratory discussions with suitable candidates. There can be no assurance, however, that the Company will be able to identify and acquire targeted businesses or obtain financing for such acquisitions on satisfactory terms. The process of integrating acquired businesses into the Company's operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention. In particular, the integration of acquired technologies with the Company's existing products could cause delays in the introduction of new products. In connection with future acquisitions, the Company may incur significant charges to earnings as a result of, among other things, the write-off of purchased research and development. For instance, in the second quarter of 1997, the Company recorded one-time accounting charges of approximately $30.1 million for the write-off of purchased research and development and compensation expense in connection with its 1997 acquisitions. Future acquisitions may be financed through the issuance of Common Stock, which may dilute the ownership of the Company's shareholders, or through the incurrence of additional indebtedness. Furthermore, there can be no assurance that competition for acquisition candidates will not escalate, thereby increasing the costs of making acquisitions or making suitable acquisitions unattainable. Fluctuations in Quarterly Operating Results. The Company has experienced and expects to continue to experience quarterly fluctuations in its operating results. The Company's revenue growth over the past several years should not be taken as indicative of the rate of revenue growth, if any, that can be expected in the future. The Company believes that period-to-period comparisons of its operating results are not meaningful and that the results for any period should not be relied upon as an indication of future performance. Moreover, a significant portion of the Company's quarterly revenues has been derived from a limited number of clients. The Company currently anticipates that this trend will continue. With a limited number of clients, fluctuations in their purchasing patterns resulting from budgeting or other considerations can have a significant effect on the Company's quarterly results. For example, in 1998 a number of factors impacted the Company's revenue growth and operating results, including the fact that several of the Company's larger clients were involved in mergers and acquisitions which, for a variety of reasons, interrupted or delayed roll outs of the Company's products. In addition, the purchasing behavior of the Company's largest clients became increasingly characterized by the use of fewer, larger contracts. These contracts typically involve longer negotiating cycles, require the dedication of substantial amounts of working capital and other resources, and in general require costs that may substantially precede recognition of associated revenues. Any significant cancellation or deferral of client orders could also have a material adverse effect on the Company's operating results in any particular quarter. The introduction of new research and development projects requires the Company to increase significantly its operating expenses to fund greater levels of product development and to develop and commercialize additional products and services. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, results of operations and financial condition may be materially and adversely affected. The Company's operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. These factors include the level of usage of computer-based and consumer- activated products and services, the size and timing of individual client orders, the introduction of new products or services by the Company or its competitors, pricing changes in the industry, technical difficulties with respect to the use of computer-based products and services developed by the Company, general economic conditions and economic conditions specific to the computer, convenience store, restaurant and entertainment markets. As a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on the Company's business, results of operations and financial condition. Due to all of the foregoing factors, in some future quarters the Company's operating results may fall below the expectations of securities analysts and investors. In such event, the trading price of the Company's Common Stock would likely be materially and adversely affected. Industry Concentration and Cyclicality. Greater than 47% of the Company's total revenue in both 1999 and 1998 was related to the convenience store market, which is dependent on the domestic and international economy. The convenience store market is affected by a variety of factors, including global and regional instability, governmental policy and regulation, natural disasters, consumer buying habits, consolidation in the petroleum industry, war and general economic conditions. Adverse developments in the convenience store market could materially and adversely affect the Company's business, operating results and financial condition. In addition, the Company believes the purchase of its products is relatively discretionary and generally involves a significant commitment of capital, because purchases of the Company's products are often accompanied by large scale hardware purchases. As a result, although the Company believes its products can assist convenience stores in a competitive 13 environment, demand for the Company's products and services could be disproportionately affected by instability or downturns in the convenience store market which may cause clients to exit the industry or delay, cancel or reduce planned expenditures for information management systems and software products. Concentration of Clients. The Company sells systems and services to a number of major clients. During 1999, approximately 40.9% of the Company's revenue were derived from five clients. During 1998, approximately 30.6% of the Company's revenue were derived from six clients. During 1997, approximately 36.4% of the Company's total revenues were derived from three clients. There can be no assurance that the loss of one or more of these clients will not have a material adverse effect on the Company's business, operating results and financial condition. New Product Development and Rapid Technological Change. The Company has a substantial ongoing commitment to research and development. In this regard, the Company is currently designing, coding and testing a number of new products and developing expanded functionality of its current products that will be important for the Company to remain competitive. The Company and its prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the rapidly evolving market for computer-based products and services. To address these risks, the Company must, among other things, continue to respond to competitive developments; attract, retain and motivate qualified personnel; implement and successfully execute its sales strategy; develop and market additional products and services in present and future markets; upgrade its technologies and commercialize products and services incorporating such technologies. There can be no assurance that the Company will be successful in addressing such risks. The types of products sold by the Company are subject to rapid and continual technological change. Products available from the Company, as well as from its competitors, have increasingly offered a wider range of features and capabilities. The Company believes that in order to compete effectively in selected vertical markets, it must provide compatible systems incorporating new technologies at competitive prices. There can be no assurance that the Company will be able to continue funding research and development at levels sufficient to enhance its current product offerings or will be able to develop and introduce on a timely basis new products that keep pace with technological developments and emerging industry standards and address the evolving needs of clients. There can also be no assurance that the Company will not experience difficulties that will result in delaying or preventing the successful development, introduction and marketing of new products in its existing markets or that its new products and product enhancements will adequately meet the requirements of the marketplace or achieve any significant degree of market acceptance. Likewise, there can be no assurance as to the acceptance of Company products in new markets, nor can there be any assurance as to the success of the Company's penetration of these markets, or to the revenue or profit margins with respect to these products. The inability of the Company, for any reason, to develop and introduce new products and product enhancements in a timely manner in response to changing market conditions or client requirements could materially adversely affect the Company's business, operating results and financial condition. In addition, the Company strives to achieve compatibility between the Company's products and retail systems the Company believes are or will become popular and widely adopted. The Company invests substantial resources in development efforts aimed at achieving such compatibility. Any failure by the Company to anticipate or respond adequately to technology or market developments could materially adversely affect the Company's business, operating results and financial condition. Competition. The market for retail information systems is intensely competitive. The Company believes the principal competitive factors in such market are product quality, reliability, performance and price, vendor and product reputation, financial stability, features and functions, ease of use and quality of support and degree of integration effort required with other systems. A number of companies offer competitive products addressing certain of the Company's target markets. See "-Competition". In addition, the Company believes that new market entrants may attempt to develop fully integrated systems targeting the retail industry. In the market for consulting services, the Company competes with the consulting divisions of the big five accounting firms, Electronic Data Systems, Inc. and other systems integrators. Many of the Company's existing competitors, as well as a number of potential new competitors, have significantly greater financial, technical and marketing resources than the Company. There can be no assurance that the Company will be able to compete successfully against its current or future competitors or that competition will not have a material adverse effect on the Company's business, operating results and financial condition. Dependence on Key Personnel; Ability to Attract and Retain Technical Personnel. The Company's future success depends in part on the performance of its executive officers and key employees. The Company does not have in place employment agreements with any of its executive officers. The Company maintains a $1.0 million "key person" life insurance policy on each of Erez Goren and Alon Goren, the Chief Executive Officer and Chief Technology Officer, respectively, of the Company. The loss of the services of any of its executive officers or other key employees could have a material adverse effect on the business, operating results and financial condition of the Company. The Company is heavily dependent upon its ability to 14 attract, retain and motivate skilled technical and managerial personnel, especially highly skilled engineers involved in ongoing product development and consulting personnel who assist in the development and implementation of the Company's total business solutions. The market for such individuals is intensely competitive. Due to the critical role of the Company's product development and consulting staffs, the inability to recruit successfully or the loss of a significant part of its product development or consulting staffs would have a material adverse effect on the Company. The software industry is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. There can be no assurance that the Company will be able to retain its current personnel, or that it will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to attract, hire or retain the necessary technical and managerial personnel could have a material adverse effect upon the Company's business, operating results and financial condition. Dependence on Proprietary Technology. The Company's success and ability to compete is dependent in part upon its ability to protect its proprietary technology. The Company relies on a combination of patent, copyright and trade secret laws and non-disclosure agreements to protect this proprietary technology. The Company enters into confidentiality and non-compete agreements with its employees and license agreements with its clients and potential clients which limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Certain technology used in conjunction with the Company's products is licensed from third parties, generally on a non-exclusive basis. The termination of any such licenses, or the failure of the third-party licensors to adequately maintain or update their products, could result in delay in the Company's ability to ship certain of its products while it seeks to implement technology offered by alternative sources, and any required replacement licenses could prove costly. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of the Company's products or relating to current or future technologies, there can be no assurance that the Company will be able to do so on commercially reasonable terms or at all. Ownership by Management. The Company's executive officers collectively own approximately 39.8% of the Company's outstanding common stock (the "Common Stock"). Consequently, together they will continue to be able to exert significant influence over the election of the Company's directors, the outcome of most corporate actions requiring shareholder approval and the business of the Company. Volatility of Market Price for Common Stock; Absence of Dividends. The market price for the Company's Common Stock has experienced substantial price volatility since its initial public offering in February 1997 and such volatility may continue in the future. Quarterly operating results of the Company or of other companies participating in the computer-based products and services industry, changes in conditions in the economy, the financial markets of the computer products and services industries, natural disasters or other developments affecting the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology stocks in particular and that have often been unrelated or disproportionate to the operating performance of these companies. For the foreseeable future, it is expected that earnings, if any, generated from the Company's operations will be used to finance the growth of its business, and that no dividends will be paid to holders of the Common Stock. Anti-Takeover Provisions. The Company's Amended and Restated Articles of Incorporation authorize the Board of Directors to issue up to 5,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of the preferred stock without further vote or action by the Company's shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. While the Company has no present intention to issue additional shares of preferred stock, such issuance, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, certain provisions of the Company's Articles of Incorporation and Bylaws may discourage proposals or bids to acquire the Company. This could limit the price that certain investors might be willing to pay in the future for shares of Common Stock. The Company's Articles of Incorporation divide the Board of Directors into three classes, as nearly equal in size as possible, with staggered three-year terms. One class will be elected each year. The classification of the Board of Directors could have the effect of making it more difficult for a third party to acquire control of the Company. The Company is also subject to certain provisions of the Georgia Business Corporation Code which relate to business combinations with interested shareholders. 15 Item 2. Properties. - -------------------- The Company's principal facility occupies approximately 107,000 square feet in Alpharetta, Georgia, under a ten year lease agreement. The lease agreement expires in October 2007. In November 1997, the Company signed a five-year lease to house the Integration and Client Support Operations. The building, also in Alpharetta, Georgia, is approximately 102,000 square feet. The Company also has regional offices in Pleasanton, California and Hillsboro, Oregon. Item 3. Legal Proceedings. - --------------------------- There are no material pending legal proceedings to which the Company is a party or of which any of its properties are subject; nor are there material proceedings known to the Company to be contemplated by any governmental authority. There are no material proceedings known to the Company, pending or contemplated, in which any director, officer or affiliate or any principal security holder of the Company, or any associate of any of the foregoing is a party or has an interest adverse to the Company. Item 4. Submission of Matters to a Vote of Security Holders. - -------------------------------------------------------------- No matter was submitted during the fourth quarter ended December 31, 1999 to a vote of security holders of the Company. 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - -------------------------------------------------------------------------------- The Common Stock has traded on The Nasdaq Stock Market under the symbol "RADS" since the Company's initial public offering on February 13, 1997. Prior to that time, there was no public market for the Common Stock. The following table sets forth the high and low sale prices per share for the Common Stock for the periods indicated as reported by The Nasdaq Stock Market.
Year ended December 31, 1998 High Low - ---------------------------------------------- ----------------- ----------------- First Quarter $ 28 5/8 $ 16 Second Quarter 25 11/16 13 5/8 Third Quarter 14 7/8 3 13/16 Fourth Quarter 8 5/16 5 Year ended December 31, 1999 High Low - ---------------------------------------------- ----------------- ----------------- First Quarter $ 12 3/8 $ 6 1/2 Second Quarter 14 1/4 9 5/16 Third Quarter 19 3/4 13 Fourth Quarter 45 3/4 14 3/8
As of March 16, 2000, there were 146 holders of record of the Common Stock. Management of the Company believes that these are in excess of 3,200 beneficial holders of its Common Stock. The Company currently anticipates that all of its earnings will be retained for development of the Company's business and does not anticipate paying any cash dividends in the foreseeable future. Future cash dividends, if any, will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's future earnings, operations, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as the Board of Directors may deem relevant. 17 Item 6. Selected Consolidated Financial Data - --------------------------------------------- The following table sets forth selected consolidated financial data of the Company for the periods indicated, which data has been derived from the consolidated financial statements of the Company. The consolidated financial statements of the Company as of, and for each of the years in the five-year period ended December 31, 1999, have been audited by Arthur Andersen LLP, independent public accountants. This selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and the notes thereto included elsewhere herein.
Year Ended December 31, (in thousands, except per share data) 1999 1998 1997 1996 1995 --------------------------------------------------- Statement of Operations Data: Revenues: System sales $ 91,946 $59,400 $ 66,798 $35,888 $14,078 Client support, maintenance and other services 37,720 23,535 11,205 5,055 1,804 --------------------------------------------------- Total revenues 129,666 82,935 78,003 40,943 15,882 Cost of revenues: System sales 46,001 28,877 34,019 22,270 9,863 Client support, maintenance and other services 29,989 20,288 10,298 5,465 2,300 --------------------------------------------------- Total cost of revenues 75,990 49,165 44,317 27,735 12,163 --------------------------------------------------- Gross profit 53,676 33,770 33,686 13,208 3,719 Operating expenses: Product development 11,125 11,199 6,897 3,328 1,640 Sales and marketing 12,302 11,730 5,819 1,487 607 Depreciation and amortization 6,057 4,665 2,384 948 583 Acquisition and other non-recurring charges -- 1,276 30,086 3,930 -- General and administrative 13,204 12,360 9,059 5,664 2,990 --------------------------------------------------- Income (loss) from operations 10,988 (7,460) (20,559) (2,149) (2,101) Interest (income)expense, net (1,613) (1,800) (989) 712 166 Minority interest in earnings of PrysmTech -- -- -- 628 -- Other income -- -- -- -- (406) --------------------------------------------------- Income (loss) before income taxes and extraordinary item 12,601 (5,660) (19,570) (3,489) (1,861) Income tax provision (benefit)(1) 4,992 (2,265) (212) (1,333) (709) Extraordinary item, net of taxes(2) -- -- 131 -- -- --------------------------------------------------- Net income (loss) $ 7,609 $(3,395) $(19,489) $(2,156) $(1,152) =================================================== Basic income (loss) per share: Income (loss) before extraordinary item $ 0.46 $ (0.21) $ (1.49) $ (0.26) $ (0.13) Extraordinary loss on early extinguishment of debt -- -- (0.01) -- -- --------------------------------------------------- Total basic income (loss) per share (3) $ 0.46 $ (0.21) $ (1.50) $ (0.26) $ (0.13) =================================================== Diluted income (loss) per share: Income (loss) before extraordinary item $ 0.41 $ (0.21) $ (1.49) $ (0.26) $ (0.13) Extraordinary loss on early extinquishment of debt -- -- (0.01) -- -- --------------------------------------------------- Total diluted income (loss) per share (3) $ 0.41 $ (0.21) $ (1.50) $ (0.26) $ (0.13) =================================================== Weighted average shares outstanding: Basic (3) 16,420 15,990 13,024 8,300 9,073 =================================================== Diluted (3) 18,346 15,990 13,024 8,300 9,073 ===================================================
December 31, --------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------------- Balance Sheet Data: Working capital $ 65,947 $47,329 $57,259 $ 812 $(3,664) Total assets 111,999 84,166 93,515 14,616 4,235 Long-term debt and shareholder loan, including current portion 4,355 4,267 4,728 9,174 970 Shareholders' equity (deficit) 85,935 69,245 71,021 (4,500) (3,154)
18 (1) As a result of its election to be treated as an S Corporation for income tax purposes, prior to completion of its initial public offering in February 1997, the Company was not subject to federal or state income taxes. For periods prior to the termination of the S Corporation status, pro forma net income amounts include additional income tax benefits determined by applying the Company's anticipated statutory tax rate to pretax income (loss), adjusted for permanent tax differences. From February (C Corporation inception) until December 31, 1997, the Company did not record a tax benefit, primarily due to nondeductible purchased research and development costs. A tax benefit was recorded in 1998 due to the net operating loss for the year. See Note 6 to the consolidated financial statements. (2) Represents loss from early extinguishment of debt, net of income tax of $82,000. (3) In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), effective for fiscal years ending after December 15, 1997. The Company adopted the new guidelines for the calculation and presentation of earnings per share, and all prior periods have been restated. Item 7. Management's Discussion and Analysis of Financial Condition and - --------------------------------------------------------------------------- Results of Operations. ---------------------- The following discussion should be read in conjunction with the consolidated financial statements of the Company (including the notes thereto) contained elsewhere in this Report. Overview The Company provides enterprise-wide technology solutions to the retail industry. The Company offers fully integrated retail automation solutions including point of sale systems, consumer-activated ordering systems, back office management systems and headquarters-based management systems. The Company's products enable retailers to interact electronically with their clients, capture detailed data at the point of sale, manage labor and inventory at their sites and communicate electronically with their sites, vendors and credit networks. In addition, the Company offers system planning, design and implementation services to tailor its solutions to each retailer's specifications. The Company derives its revenues primarily from the sale of integrated systems, including software, hardware and related support and consulting services. The Company plans to increase licensing of certain of its software products on a stand-alone basis. In addition, the Company offers implementation and integration services which are billed on a per diem basis. The Company's revenues from its various technology solutions are, for the most part, dependent on the number of installed sites a client has. Accordingly, while the typical sale is the result of a long, complex process, the Company's clients usually continue installing additional sites over an extended period of time. Revenues from software and systems sales are recognized as products are shipped, provided that collection is probable and no significant post shipment vendor obligations remain. Revenues from client support, maintenance and other services are generally recognized as the service is performed. Since November 1995, a number of events resulted in strong revenue growth for the Company. The Company developed new products, established relationships with new clients and increased sales to existing clients. The Company expanded its presence in the retail industry in November 1995 by entering into a joint venture (PrysmTech) to market enterprise-wide technology solutions to cinema operators. On December 31, 1996, the Company purchased the remaining interest in PrysmTech. Accordingly, the operations of PrysmTech are reflected in the 1996 financial statements of the Company with a deduction for the minority interest in the earnings of PrysmTech. Continuing its growth in the retail industry, in May 1996 the Company purchased Liberty Systems International, Inc. ("LSI"), a technology solution provider to the QSR operators. To broaden its presence in the food service market, the Company acquired Restaurant Management and Control Systems, Inc. ("ReMACS") and RSI Merger Corporation d.b.a. Twenty/20 Visual Systems, Inc. ("Twenty/20"), in May 1997 and RapidFire Software, Inc. and EquiLease Financial Services, Inc. (collectively "RapidFire") in October 1997. In November 1997, the Company acquired Logic Shop, Inc. ("Logic Shop") to serve the convenient automotive service centers. During this period, the Company also expanded its sales force and continued to add management, consulting and product development personnel. During 1998, the Company's internal reporting segments were reorganized. Most notably was the creation of the Global Solutions and Regional Solutions segments. Although both groups provide enterprise-wide technology solutions to the retail industry, the distinguishing factor between them is primarily the size of the clients served and the nature of the services performed. Global Solutions' clients tend to be clients with greater than fifty owned and operated sites, while Regional Solutions' clients typically have less than fifty owned and operated sites. 19 In 1998, a number of factors impacted the Company's revenue growth and operating results. Most notable was the fact that a number of the Company's larger clients were involved in mergers and acquisitions which, for a variety of reasons, interrupted or delayed roll outs of the Company's products. In addition, the purchasing behavior of the Company's largest clients became increasingly characterized by the use of fewer, larger contracts. These contracts typically involve longer negotiating cycles, require the dedication of substantial amounts of working capital and other resources, and in general require costs that may substantially precede recognition of associated revenues. Moreover, in return for larger, longer-term purchase commitments, clients often demand more stringent acceptance criteria, which can also cause revenue recognition delays. The above, coupled with investments by the Company in product development and other areas of the business negatively impacted operating results and contributed to losses during 1998. As a result of its election to be treated as an S Corporation for income tax purposes, prior to the completion of its initial public offering in February 1997, the Company was not subject to federal or state income taxes. Pro forma net loss amounts discussed herein include additional income tax benefits determined by applying the Company's anticipated statutory tax rate to pretax loss, adjusted for permanent tax differences. The Company's S Corporation status terminated upon completion of its initial public offering in February 1997. Results of Operations The following table sets forth, for the periods indicated, the percentage relationship of certain statement of operation items to total revenues:
Year ended December 31, 1999 1998 1997 ------------------------------------------------------- Revenues: System sales 70.9% 71.6% 85.6% Client support, maintenance and other services 29.1 28.4 14.4 ------------------------------------------------------- Total revenues 100.0 100.0 100.0 Cost of revenues: System sales 35.5 34.8 43.6 Client support, maintenance and other services 23.1 24.5 13.2 ------------------------------------------------------- Total cost of revenues 58.6 59.3 56.8 ------------------------------------------------------- Gross profit 41.4 40.7 43.2 Operating expenses: Product development 8.6 13.5 8.8 Sales and marketing 9.5 14.1 7.5 Depreciation and amortization 4.7 5.6 3.1 Acquisition and other non-recurring charges -- 1.6 38.6 General and administrative 10.2 14.9 11.6 ------------------------------------------------------- Income (loss) from operations 8.4 (9.0) (26.4) Interest income, net 1.2 2.2 1.3 ------------------------------------------------------- Income (loss) before income taxes and extraordinary item 9.6 (6.8) (25.1) Income tax provision (benefit) 3.8 (2.7) (0.3) Extraordinary item, net of taxes -- -- 0.2 ------------------------------------------------------- Net income (loss) 5.8% (4.1)% (25.0)% =======================================================
20 Year ended December 31, 1999 compared to year ended December 31, 1998 System Sales. The Company derives the majority of its revenues from sales and licensing fees for its headquarters and point of sale solutions. System sales increased 54.8% to $91.9 million for the year ended December 31, 1999 ("1999") from $59.4 million for the year ended December 31, 1998 ("1998"). In addition to increased sales and license fees from new and existing clients during 1999, the Company's Lighthouse software product was released to food service clients during the year, which contributed to this increase in system sales. Client Support, Maintenance and Other Services. The Company also derives revenues from client support, maintenance and other services, which increased 60.3% to $37.7 million in 1999 from $23.5 million in 1998. These increases were due to increased support, maintenance and services revenues within existing markets, resulting from an increased install base. Additionally, increased client demand for professional services such as training, custom software development, project management and implementation services contributed to these increases. Cost of System Sales. Cost of system sales consists primarily of hardware and peripherals for site-based systems and labor. These costs are expensed as products are shipped. Cost of system sales increased 59.3% during 1999 to $46.0 million compared to $28.9 million for 1998. These increases were directly attributable to the increase in system sales for 1999. Cost of system sales as a percentage of system revenues increased to 50.0% in 1999 from 48.6% in 1998. The increases were due primarily to decreases in software sales as a percentage of total system revenues, partially offset by increased efficiencies associated with the manufacture of site-based systems. Additionally, amortization of capitalized software development costs increased 80.8% to $1.1 million for 1999, compared to $625,000 for 1998. Cost of Client Support, Maintenance and Other Services. Cost of client support, maintenance and other services consists primarily of personnel and other costs associated with the Company's services operations. Cost of client support, maintenance and other services increased 47.8% to $30.0 million for 1999 from $20.3 for 1998. The increases were due primarily to increases in personnel associated with the effort of supporting higher revenues in this area. Cost of client support, maintenance and other services as a percentage of client support, maintenance and other services revenues decreased to 79.5% for 1999 from 86.2% in 1998, as a result of increased efficiencies and staff utilization. Product Development Expenses. Product development expenses consist primarily of wages and materials expended on product development efforts. During 1999, product development expenses decreased 0.7% to $11.1 million from $11.2 million for 1998 due primarily to higher capitalization of software costs associated with the Company's development of its Lighthouse generation of products and increased custom software development projects during the year which were billed to clients whose related costs are included in costs of client support, maintenance and other services noted above. In 1999, software development costs of $2.8 million, or 20.1% of its total product development costs, were capitalized by the Company, as compared to approximately $2.6 million, or 18.7% of its total product development costs for 1998. Product development expenses as a percentage of total revenues decreased to 8.6% in 1999 from 13.5% in 1998 as revenues increased at a pace higher than related product development expenses. Sales and Marketing Expenses. Sales and marketing expenses increased 4.9% to $12.3 million during 1999 from $11.7 million in 1998, due primarily to increased personnel costs and sales commissions associated with higher revenues. Sales and marketing expenses as a percentage of total revenues decreased to 9.5% for 1999 from 14.1% for 1998, as total revenues increased at a pace higher than related sales and marketing expenses. Depreciation and Amortization. Depreciation and amortization expenses increased 29.8% to $6.1 million during 1999 compared to $4.7 million during 1998. The increase resulted from an increase in computer equipment, leasehold improvements and other assets required to support an increased number of employees and locations. Depreciation and amortization as a percentage of total revenues decreased to 4.7% for 1999 from 5.6% in 1998. This decrease was primarily due to associated revenues increasing at a pace higher than associated personnel support. Acquisition and Other Non-Recurring Charges. The Company did not record any non- recurring charges during 1999. During the second half of 1998, the Company further integrated its acquisitions of ReMACS and RapidFire by consolidating their support and product development functions to its Alpharetta, Georgia location. As a result, the Company recorded approximately $876,000 of non- recurring charges related to severance arrangements. Additionally during 1998, the Company recorded an impairment charge of $400,000 on goodwill resulting from the Twenty/20 acquisition. 21 General and Administrative Expenses. General and administrative expenses increased 6.8% during 1999 to $13.2 million from $12.4 million during 1998. The increase was due primarily to personnel increases needed to support additional revenues. General and administrative expenses as a percentage of total revenues were 10.2% and 14.9% for 1999 and 1998, respectively, as total revenues grew at a pace faster than associated personnel and related expenses. Interest Income, Net. Net interest income decreased 10.4% to $1.6 million during 1999, compared to net interest income of $1.8 million for 1998. The Company's interest income is derived from the investment of its cash and cash equivalents. The decrease in net interest income in 1999 over 1998 resulted primarily from a decline in the weighted average interest rate of 5.26% during 1998 to a weighted average interest rate of 5.15% during 1999. See --"Liquidity and Capital Resources." Income Tax Provision (Benefit). The Company recorded a tax provision of 39.6% in 1999 compared to a tax benefit of 40.0% 1998. Net Income (Loss). Net income for 1999 was $7.6 million or $0.41 per diluted share, an increase of approximately $10.2 million or $0.57 per share over a net loss before non-recurring charges of $2.6 million, or $0.16 per share, for the prior year. Including the non-recurring charges for the year ended December 31, 1998, of approximately $1.3 million, net loss for 1998 was $3.4 million, or $0.21 per share. Year ended December 31, 1998 compared to year ended December 31, 1997 System Sales. The Company derives the majority of its revenues from sales and licensing fees for its headquarters and point of sale solutions. System sales decreased 11.1% to $59.4 million for the year ended December 31, 1998 ("1998") from $66.8 million for the year ended December 31, 1997 ("1997"). This decrease was primarily the result of interruptions and delays in client rollouts of the Company's solutions. In addition, sales cycles with new clients piloting the Company's products were lengthier than the Company has historically experienced resulting in delays in the recognition of revenues on these system sales. Client Support, Maintenance and Other Services. The Company's revenues from client support, maintenance and other services increased 110.0% to $23.5 million in 1998 from $11.2 million in 1997. This increase was due to increased support, maintenance and services revenues resulting from an increased install base and from the Company's 1997 acquisitions. Additionally, increased client demand of professional services such as training, custom software development, project management and implementation services contributed to this increase. Cost of System Sales. Cost of system sales consists primarily of hardware and peripherals for site-based systems and labor. These costs are expensed as products are shipped. Cost of system sales decreased 15.1% during 1998 to $28.9 million compared to $34.0 million for 1997 due primarily to the decrease in system sales. Cost of system sales as a percentage of system revenues decreased to 48.6% in 1998 from 50.9% in 1997. The decreases were due primarily to increased efficiencies associated with the manufacturing of site-based systems, as well as increased license fees of the Company's software products which have higher gross margins than the site-based systems, which bundle both hardware and software, sold by the Company. Cost of Client Support, Maintenance and Other Services. Cost of client support, maintenance and other services consists primarily of personnel and other costs associated with the Company's services operations. Cost of client support, maintenance and other services increased 97.0% to $20.3 million for 1998 from $10.3 for 1997. The increase was due primarily to the Company's decision to expand its professional services offerings and the related increase in wages associated with this effort. Cost of client support, maintenance and other services as a percentage of client support, maintenance and other services revenues decreased to 86.2% for 1998 from 91.9% in 1997, due to volume related efficiencies and changes in product mix. Product Development Expenses. Product development expenses consist primarily of wages and materials expended on product development efforts. During 1998, product development expenses increased 62.4% to $11.2 million from $6.9 million for 1997 due to higher development expenses associated with new product development. Product development expenses as a percentage of total revenues increased to 13.5% in 1998 from 8.8% in 1997. The Company capitalizes a portion of its software development costs. In 1998, software development costs of $2.6 million, or 18.7% of its total product development costs, were capitalized by the Company, as compared to approximately $1.4 million, or 16.5% of its total product development costs for 1997. This increase was due primarily to the Company's development of Lighthouse, its next generation software technology which leverages both Microsoft Windows CE and NT operating systems. 22 Sales and Marketing Expenses. Sales and marketing expenses increased 101.6% to $11.7 million during 1998 from $5.8 million in 1997. Sales and marketing expenses as a percentage of total revenues increased to 14.1% for 1998 from 7.5% for 1997. The increase was associated with the Company's 1997 acquisitions, continued expansion of its sales activities and increased commission expense. Depreciation and Amortization. Depreciation and amortization expenses increased 95.7% to $4.7 million during 1998 compared to $2.4 million during 1997 due to goodwill amortization associated with the Company's 1997 acquisitions and the increase in computer equipment and other assets required to support an increased number of employees and locations. Depreciation and amortization as a percentage of total revenues increased to 5.6% for 1998 from 3.1% in 1997 as depreciation and amortization cost increased at a faster pace than total revenues. Additionally, amortization of capitalized software development costs increased 90.5% to $625,000 for 1998, compared to $328,000 for 1997 as a result of increased investment by the Company in new product development. Acquisition and Other Non-Recurring Charges. Acquisition and other non- recurring charges decreased 95.8% to $1.3 million during 1998 compared to $30.1 million during 1997. During the second half of 1998, the Company further integrated its acquisitions of ReMACS and RapidFire by consolidating their support and product development functions to its Alpharetta, Georgia location. As a result, the Company recorded approximately $876,000 of non-recurring charges related to severance arrangements. Additionally, the Company recorded an impairment charge of $400,000 on goodwill resulting from the Twenty/20 acquisition. During 1997, in connection with the acquisitions of ReMACS, Twenty/20, RapidFire and Logic Shop, the Company recorded non-recurring charges of $28.9 million for purchased research and development costs. Purchased research and development costs represent the estimated fair value of acquired incomplete research and development projects as determined by independent appraisal. Additionally, in connection with the acquisition of Twenty/20, the Company granted stock options at an exercise price less than the current fair market value, a portion of which immediately vested. As a result, the Company recorded a non-recurring charge of $1.2 million. Stock compensation expense represents the excess of the fair market value of the Company's Common Stock on the date of the grant of stock options over the aggregate exercise price of such options. No such charge was recorded in 1998. General and Administrative Expenses. General and administrative expenses increased 36.4% during 1998 to $12.4 million from $9.1 million during 1997. The increases were due primarily to personnel increases and related costs associated with the Company's acquisitions. General and administrative expenses as a percentage of total revenues increased to 14.9% from 11.6% during 1998. Interest Income, Net. Net interest income increased 82.0% to $1.8 million during 1998, compared to net interest income of $989,000 for 1997. The increase resulted primarily from interest income earned on the proceeds of the sale of 5.4 million shares of the Company's Common Stock during 1997. Income Tax Benefit. A tax benefit of 40.0% was recorded in 1998 compared to a tax benefit of 1.1% in 1997. This increase resulted primarily from the non- deductible purchased research and development expenses incurred in connection with the Company's 1997 acquisition. As of December 31, 1998, the Company recorded a net deferred tax asset of $6.4 million. Realization is dependent upon generating sufficient taxable income in future periods. Although realization is not assured, management believes it is more likely than not that the deferred tax asset will be realized. Extraordinary Item. During 1997, a loss from early extinguishment of debt of $213,000, net of taxes of $82,000, was recognized due to the write off of certain unamortized loan origination costs and unamortized debt discounts associated with the repayment of outstanding indebtedness to Sirrom Capital Corporation of $4.5 million. No such charge was incurred during 1998. Net Loss. For the reasons discussed above, the net loss for the year ended December 31, 1998, before non-recurring charges, was $2.6 million or $0.16 per share, a decrease of approximately $8.9 million or $0.56 per share over net income before extraordinary items and acquisition related charges of $6.3 million or $0.40 per share for the year ended December 31, 1997. Including the non-recurring charges for the year ended December 31, 1998 of approximately $1.3 million, net loss for the period was $3.4 million, or $0.21 per share. Net loss for the year end period of 1997 was approximately $19.5 million or $1.50 per share, including acquisition related charges of approximately $25.6 million, net of tax benefits. 23 Liquidity and Capital Resources As of December 31, 1999, the Company had $53.4 million in cash and cash equivalents and working capital of $65.9 million. As more fully described in Note 13 of the consolidated financial statements, on March 3, 2000 AOL purchased $10.0 million of the Company's stock at a price of $15 per share and may invest an additional $25.0 million in a to be formed subsidiary of the Company at a later date. Additionally, on March 1, 2000, the Company and Microsoft Corporation jointly announced, subject to execution of a definitive agreement, that both companies have joined forces to develop and market an integrated Web- enabled management system and supply chain solution to enable retailers to conduct business-to-business e-commerce over the Internet. In addition to agreeing to make an equity investment in this solution, Microsoft committed to support the Company's technology solution through joint marketing programs, funding for product development, consulting services, developer support, and distribution via the Microsoft(R) bCentral(TM) small-business portal. Cash from operating activities in 1999 was $26.3 million compared to cash used in operating activities of $12.3 million and $8.4 million in 1998 and 1997, respectively. In 1999, cash provided from operating activities was primarily due to net income of $7.6 million during the year, as well as increased accounts payable and accrued liabilities due to timing of certain vendor payments partially offset by increases in accounts receivable and inventory. Additionally, client deposits and unearned revenues increased during 1999 as the Company received cash from clients in advance of products and/or services being delivered. In 1998, the Company's uses of cash were the primary result of the net loss for the period then ended; increased accounts receivables and inventories due to increased sales; decreased accounts payable and accrued liabilities due to timing of certain vendor payments; and a decrease in client deposits and unearned revenues as the Company delivered products and/or services previously paid by clients. Cash used in investing activities was $7.1 million, $8.9 million, and $15.0 million for 1999, 1998 and 1997, respectively. The uses of cash in investing activities for 1999 consisted primarily of the purchases of property and equipment of $4.2 million and capitalized software costs of $2.8 million. The uses of cash in investing activities during 1998 consisted primarily of the purchases of property and equipment of $6.3 million and capitalized software costs of $2.6 million. During 1998, the Company moved into two new leased facilities in Alpharetta, Georgia with approximately 210,000 combined square feet of space. As a result, the Company purchased equipment and furniture to accommodate the moves. Cash of $8.7 million was provided by financing activities during 1999 due primarily to cash received from the exercise of employee stock options of $4.4 million, partially offset by the Company's purchase of common stock pursuant to its stock repurchase program for approximately $514,000. The income tax benefit from the exercise of disqualified and non-qualified stock options provided $3.2 million of cash in 1999. Cash of $792,000 was used in financing activities during 1998 due primarily to an advance made by the Company to the former sole shareholder of RapidFire under an agreement to loan up to $1.5 million to that individual, which debt matures on October 31, 2005 and bears interest at 5.0% per annum, offset by cash received from the exercise of employee stock options of $1.4 million. In September 1998, the Board of Directors of the Company authorized a stock repurchase program pursuant to which management is authorized to repurchase up to 3,000,000 shares of common stock of the Company. As of March 1, 2000, the Company had repurchased in the open market an aggregate of 680,154 shares of its common stock for a total of $4.5 million. These purchases were, and any future purchase will be, financed from the Company's cash reserves. 24 Item 7 A. Quantitative and Qualitative Disclosures About Market Risk. - ----------------------------------------------------------------------- The Company's financial instruments that are subject to market risks are its cash and cash equivalents. During 1999, the weighted average interest rate on its cash balances was approximately 5.15%. A 10.0% decrease in this rate would impact interest income by approximately $160,000. 25 Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------- The following consolidated financial statements are filed with this Report: Report of Independent Public Accountants. Consolidated Balance Sheets at December 31, 1999 and 1998. Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Radiant Systems, Inc.: We have audited the accompanying consolidated balance sheets of RADIANT SYSTEMS, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Radiant Systems, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ARTHUR ANDERSEN LLP Atlanta, Georgia February 2, 2000 27 RADIANT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
1999 1998 ------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 53,435 $ 25,537 Accounts receivable, net of allowances for doubtful accounts of $1,375 and $750 in 1999 and 1998, respectively 17,929 17,645 Inventories 13,141 11,965 Deferred tax assets 1,563 687 Other 1,693 2,310 ------------------------------ Total current assets 87,761 58,144 PROPERTY AND EQUIPMENT, net 7,857 8,341 SOFTWARE DEVELOPMENT COSTS, net 5,394 3,718 INTANGIBLES, net 5,173 6,271 DEFERRED TAXES, long-term 3,726 5,680 OTHER ASSETS 2,088 2,012 ------------------------------ $111,999 $ 84,166 ============================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 9,565 $ 4,844 Accrued liabilities 4,901 3,210 Client deposits and deferred revenue 7,243 2,600 Current portion of long-term debt 105 161 ------------------------------ Total current liabilities 21,814 10,815 LONG-TERM DEBT, less current portion 4,250 4,106 ------------------------------ Total liabilities 26,064 14,921 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, no par value; 5,000,000 shares authorized, 0 shares issued -- -- Common stock, no par value; 30,000,000 shares authorized, 16,983,925 and 15,505,565 shares issued and outstanding at December 31, 1999 and 1998, respectively 0 0 Additional paid-in capital 101,003 92,144 Deferred compensation (131) (353) Accumulated deficit (14,937) (22,546) ------------------------------ Total shareholders' equity 85,935 69,245 ------------------------------ $111,999 $ 84,166 ==============================
The accompanying notes are an integral part of these consolidated balance sheets. 28 RADIANT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997 ----------------------------------------------- REVENUES: System sales $ 91,946 $59,400 $ 66,798 Client support, maintenance, and other services 37,720 23,535 11,205 ----------------------------------------------- Total revenues 129,666 82,935 78,003 ----------------------------------------------- COST OF REVENUES: System sales 46,001 28,877 34,019 Client support, maintenance, and other services 29,989 20,288 10,298 ----------------------------------------------- Total cost of revenues 75,990 49,165 44,317 ----------------------------------------------- GROSS PROFIT 53,676 33,770 33,686 OPERATING EXPENSES: Product development 11,125 11,199 6,897 Sales and marketing 12,302 11,730 5,819 Depreciation and amortization 6,057 4,665 2,384 Acquisition and other non-recurring charges -- 1,276 30,086 General and administrative 13,204 12,360 9,059 ----------------------------------------------- INCOME (LOSS) FROM OPERATIONS 10,988 (7,460) (20,559) INTEREST INCOME, NET 1,613 1,800 989 ----------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM 12,601 (5,660) (19,570) INCOME TAX PROVISION (BENEFIT) 4,992 (2,265) (212) ----------------------------------------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 7,609 (3,395) (19,358) EXTRAORDINARY ITEM: Loss from early extinguishment of debt, net of taxes -- -- 131 ----------------------------------------------- NET INCOME (LOSS) $ 7,609 $(3,395) $(19,489) =============================================== BASIC INCOME (LOSS) PER SHARE: Income (loss) before extraordinary item $ 0.46 $ (0.21) $ (1.49) Extraordinary loss on early extinguishment of debt -- -- (0.01) ----------------------------------------------- Total basic income (loss) per share $ 0.46 $ (0.21) $ (1.50) =============================================== DILUTED INCOME (LOSS) PER SHARE: Income (loss) before extraordinary item $ 0.41 $ (0.21) $ (1.49) Extrodinary loss on early extinguishment of debt -- -- (0.01) ----------------------------------------------- Total diluted income (loss) per share $ 0.41 $ (0.21) $ (1.50) =============================================== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 16,420 15,990 13,024 =============================================== Diluted 18,346 15,990 13,024 ===============================================
The accompanying notes are an integral part of these consolidated statements. 29 RADIANT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
Class A Common Stock Common Stock Deferred ---------------------------------- Deferred Sales Accumulated Shares Amount Shares Amount APIC Warrants Compensation Discount Deficit Total -------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1996 6,857 $ 0 1,443 $ 0 $ 2,100 $1,185 -- $ (132) $ (7,653) $(4,500) Issuance of common stock 5,428 -- -- -- 82,422 -- -- -- -- 82,422 Automatic conversion of Series A common stock 1,443 -- (1,443) -- -- -- -- -- -- -- Exercise of stock purchase of warrants 1,353 -- -- -- 2,658 (1,185) -- -- -- 1,473 Exercise of employee stock options 161 -- -- -- 441 -- -- -- -- 441 Shares issued for acquired companies 975 -- -- -- 11,571 -- -- -- -- 11,571 Stock options granted below fair market value -- -- -- -- 1,841 -- $ (627) -- -- 1,214 Amortization of deferred compensation -- -- -- -- -- -- 91 -- -- 91 Repurchase of common stock from a shareholder (600) -- -- -- (1,125) -- -- -- -- (1,125) Repurchase of common stock from a client (193) -- -- -- (997) -- -- -- -- (997) Sales of software licenses under warrent -- -- -- -- -- -- -- 132 -- 132 Reclassification of S corporation accumulated deficit -- -- -- -- (8,203) -- -- -- 8,203 -- Loss before pro forma income taxes and extraordinry item -- -- -- -- -- -- -- -- (19,570) (19,570) Extraordinary item, net of tax -- -- -- -- -- -- -- -- (131) (131) ----------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1997 15,424 0 -- -- 90,708 -- (536) -- (19,151) 71,021 Treasury stock purchase (607) 0 -- -- (4,027) -- -- -- -- (4,027) Exercise of employee stock options 647 0 -- -- 1,395 -- -- -- -- 1,395 Stock issued under employee stock purchase plan 42 -- -- -- 264 -- -- -- -- 264 Income tax benefit of stock options exercised -- -- -- -- 3,804 -- -- -- -- 3,804 Amortization of deferred compensation -- -- -- -- -- -- 183 -- -- 183 Net loss -- -- -- -- -- -- -- -- (3,395) (3,395) ----------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1998 15,506 0 -- -- 92,144 -- (353) -- (22,546) 69,245 Treasury stock purchase (73) 0 -- -- (514) -- -- -- -- (514) Exercise of employee stock options 1,356 0 -- -- 4,425 -- -- -- -- 4,425 Stock issued under employee stock purchase plan 195 0 -- -- 1,722 -- -- -- -- 1,722 Income tax benefit of stock options exercised -- -- -- -- 3,225 -- -- -- -- 3,225 Amortization of deferred compensation -- -- -- -- -- -- 223 -- -- 223 Net income -- -- -- -- -- -- -- -- 7,609 7,609 ----------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1999 16,984 $0 -- -- $101,003 -- $(131) -- $(14,937) $ 85,935 ===========================================================================================================
The accompanying notes are an integral part of these consolidated statements. 30 RADIANT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 ----------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 7,609 $ (3,395) $(19,489) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Pro forma tax benefit -- -- (212) Deferred income taxes 1,078 (3,428) (1,573) Accretion of note payable interest 226 226 34 Depreciation and amortization 7,187 5,067 2,384 Amortization of debt discount -- -- 332 Discounts earned on software license sales -- -- 132 Non-cash acquisition and other non-recurring charges -- 400 30,086 Amortization of deferred compensation 222 182 90 Changes in assets and liabilities, net of acquired entities: Accounts receivable (284) (88) (11,420) Inventories (1,176) (3,257) (5,194) Other assets 336 (921) (449) Accounts payable 4,720 (2,390) 1,748 Accrued liabilities 1,691 (2,677) 350 Client deposits and deferred revenue 4,643 (2,045) (5,227) -------------------------------------------- Net cash provided by (used in) operating activities 26,251 (12,326) (8,408) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (4,243) (6,342) (3,305) Purchases of acquired entities, net of cash acquired -- -- (10,314) Capitalized software development costs (2,807) (2,570) (1,365) -------------------------------------------- Net cash used in investing activities (7,050) (8,912) (14,984) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common stock, net of issuance costs -- -- 82,422 Proceeds from exercise of common stock warrants -- -- 960 Repurchase of common stock (514) (4,027) (2,122) Exercise of employee stock options 4,425 1,395 441 Stock issued under employee stock purchase plan 1,722 264 -- Issuance of shareholder loans, net (23) (1,540) (330) Income tax benefit of stock options exercised 3,225 3,804 -- Repayment of long-term debt (138) (687) (5,418) Repayments of note from shareholder -- -- (7,343) Other -- (1) 7 -------------------------------------------- Net cash provided by (used in) financing activities 8,697 (792) 68,617 -------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,898 (22,030) 45,225 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,537 47,567 2,342 -------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $53,435 $ 25,537 $ 47,567 ============================================
The accompany notes are an integral part of these consolidated statements. 31 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 1. ORGANIZATION AND BACKGROUND Radiant Systems, Inc. (the "Company") provides enterprise-wide technology solutions to the retail industry. The Company offers fully integrated retail automation solutions, including point of sale systems, consumer-activated order systems, back office management systems and headquarters-based management systems. The Company's products enable retailers to interact electronically with consumers, capture data at the point of sale, manage site operations and logistics and communicate electronically with their sites, vendors and credit networks. In addition, the Company offers system planning, design and implementation services that tailor the automation solution to each retailer's specifications as well as a variety of post-implementation services such as a help desk and technical support. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Radiant Systems, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Basis of Preparation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results could differ from those estimates. Revenue Recognition In January 1998, the Company adopted the ACIPA Statement of Position, 97-2 "Software Revenue Recognition" (the "Statement"). This Statement provides guidance on recognizing revenues on software transactions and did not have a significant impact on previous licensing or revenue recognition practices. The Company's revenue is generated primarily through software and system sales, support and maintenance and installation and training: Software and System Sales The Company generally sells its products, which include both software licenses and hardware, directly to end users. Revenue from software licenses and system sales is generally recognized as products are shipped, provided that no significant vendor and post-contract support obligations remain and that the collection of the related receivable is probable. Support and Maintenance The Company offers to its clients postcontract support in the form of maintenance, telephone support and unspecified software enhancements. Revenue from support and maintenance is generally recognized as the service is performed. Installation and Training The Company offers installation and training services to its clients. Revenue from installation and training is generally recognized at the time the service is performed. Payments received in advance are recorded as client deposits and deferred revenue in the accompanying balance sheets and are recognized as revenue when the related product is shipped or related revenue is earned. 32 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 Inventories Inventories consist principally of computer hardware and software media and are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight- line method over estimated useful lives of two to five years. Property and equipment at December 31, 1999 and 1998 are summarized as follows (in thousands):
1999 1998 --------- -------- Computers and office equipment $ 10,130 $ 8,195 Furniture and fixtures 2,589 2,373 Purchased software 2,878 2,319 Leasehold improvements 2,637 1,100 --------- -------- 18,234 13,987 Less accumulated depreciation and amortization (10,377) (5,646) --------- -------- $ 7,857 $ 8,341 ========= ========
Intangible Assets Intangible assets consisting of goodwill, product licenses and patents are amortized using the straight-line method over four to ten years. Goodwill represents the excess of purchase price over the estimated fair value of assets acquired. Amortization of intangibles was $1.3 million, $1.3 million and $572,000 in 1999, 1998 and 1997, respectively. Accumulated amortization was $2.8 million and $1.5 million at December 31, 1999 and 1998, respectively. Long-Lived Assets The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. As more fully described in Note 5, the Company recorded an impairment charge related to certain goodwill of $400,000 during 1998. No such charges were recorded in 1999 or 1997. Software Development Costs Capitalized software development costs consist principally of salaries and certain other expenses directly related to the development and modification of software products. Capitalization of such costs begins when a working model has been produced as evidenced by the completion of design, planning, coding and testing, such that the product meets its design specifications and has thereby established technological feasibility. Capitalization of such costs ends when the resulting product is available for general release to the public. Amortization of capitalized software development costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which the Company has determined is not more than three years. At December 31, 1999 and 1998, accumulated amortization of capitalized software development costs was $2.4 million and $1.3 million, respectively. Internally Developed Software Costs The Company applies the provisions of the AICPA Statement of Position 98-1 ("SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to the development of internal use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. 33 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 Purchased Research and Development Costs As more fully described in Note 4, based on independent appraisal, the Company allocated $28.9 million in 1997 of the purchase price for its acquisitions to incomplete research and development projects. Accordingly, these costs were expensed as of the acquisition date. These allocations represent the estimated fair value based on risk-adjusted cash flows related to incomplete projects. The development of these projects had not yet reached technological feasibility, and the technology has no alternative future use. The technology acquired in these acquisitions will require substantial additional development by the Company. No such charges related to purchased research and development projects were recorded in 1999 or 1998. Stock-based Compensation Employee stock awards under the Company's compensation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In January 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Net Income (Loss) Per Share Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of shares outstanding. Diluted net income (loss) per share includes the dilutive effect of stock options. A reconciliation of the weighted average number of common shares outstanding assuming dilution is as follows (in thousands):
1999 1998 1997 ------------------------------------------------------ Average common shares outstanding 16,420 15,990 13,024 Dilutive effect of outstanding stock options 1,926 -- -- ------- ------- ------- Average common shares outstanding assuming dilution 18,346 15,990 13,024 ======= ======= =======
For the years ended December 31, 1999, 1998 and 1997, options with an antidilutive impact of approximately 180,000, 3.4 million and 3.0 million shares of common stock were excluded from the above reconciliation. Fair Value of Financial Instruments The book values of cash, trade accounts receivable, trade accounts payable and other financial instruments approximate their fair values principally because of the short-term maturities of these instruments. The fair value of the Company's long-term debt is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company's fair value of long-term debt was not significantly different than the stated value at December 31, 1999 and 1998. Statements of Cash Flows The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash. Cash paid for interest was $30,833, $166,000 and $432,000 in 1999, 1998 and 1997, respectively. Cash paid for income taxes was $100,000, $0 and $155,000 in 1999, 1998 and 1997, respectively. The Company acquired equipment of $0, $0 and $43,000 in 1999, 1998 and 1997, respectively, under capital lease obligations. During 1999, 1998 and 1997, the Company recorded bad debt expense of approximately $625,000, $400,000 and $150,000, respectively. 34 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 Concentration of Business and Credit Risk Financial instruments, which potentially subject the Company to credit risk, consist principally of trade receivables and interest bearing investments. The Company performs on-going credit evaluations of its clients and generally does not require collateral. The Company maintains adequate reserves for potential losses and such losses, which have historically been minimal, have been included in management's estimates. The Company's revenues are derived from a limited number of clients. During the years ended December 31, 1999, 1998 and 1997, the following clients individually accounted for more than 10.0% of the Company's revenue:
December 31, 1999 1998 1997 -------------------------------------------- Client A * * 11.4% Client B * 10.3% 12.8 Client C * * 12.2 Client D 13.3% * *
* Accounted for less than 10.0% of total revenues for the period indicated. At December 31, 1999, 28.8% of the Company's accounts receivable related to Client D. Comprehensive Income The Company currently has no other comprehensive income items as defined by Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company will be required to adopt FAS 133 for the quarter ended March 31, 2001. The Company does not expect the adoption to have a material impact on its results of operations. In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." The SAB does not change existing accounting literature on revenue recognition, but rather explains the SEC staff's general framework for revenue recognition. SAB No. 101 states that changes in accounting to apply the guidance in SAB No. 101 may be accounted for as a change in accounting principle and must be recorded in the second quarter of 2000. The Company is currently reviewing its revenue recognition policy and does not expect the adoption of SAB No. 101 to have a material impact on the Company results of operations. Reclassifications Certain reclassifications have been made to prior year financial statements to conform to the current year presentation. 3. PRODUCT DEVELOPMENT EXPENDITURES Product development expenditures, excluding purchased research and development costs (Notes 2 and 4) for the years ended December 31, 1999, 1998 and 1997 are summarized as follows (in thousands):
1999 1998 1997 ---------------------------------------------------- Total development expenditures $13,932 $13,769 $8,262 Less additions to capitalized software development costs prior to amortization 2,807 2,570 1,365 --------------- -------------- ------------- Product development expense $11,125 $11,199 $6,897 =============== ============== =============
35 The activity in the capitalized software development account during 1999, 1998 and 1997 is summarized as follows (in thousands):
December 31, 1999 1998 1997 --------------------- ------------------- ----------- Balance at beginning of period, net $ 3,718 $ 1,773 $ 736 Additions 2,807 2,570 1,365 Amortization expense (1,131) (625) (328) --------------------- ------------------- ----------- Balance at end of period, net $ 5,394 $ 3,718 $1,773 ===================== =================== ===========
Amortizaton of capitalized software costs is included in system costs of revenues in the accompanying statements of operations. 4. ACQUISITIONS During fiscal 1997, the Company acquired four businesses, all of which were accounted for under the purchase method of accounting. These businesses were acquired for a combination of cash, notes payable and shares of the Company's common stock. The value of the common stock reflects the market value of the Company's common stock at the closing of each acquisition, adjusted to account for restrictions common to unregistered securities and for registration rights, if applicable. The Company made no acquisitions during 1999 or 1998. The following describes each of the acquisitions completed by the Company in 1997: ReMACS On May 23, 1997, the Company purchased all of the outstanding common stock of Restaurant Management and Control Systems, Inc. ("ReMACS"), a provider of back office management systems for clients in the food service industry. The purchase price consisted of 627,500 shares of common stock, $3.3 million in cash, $3.3 million in notes and assumption of net liabilities of $4.5 million. Total consideration, including transaction costs of approximately $150,000, was $18.5 million. Intangibles of $3.2 million were recorded, after adjusting for purchased research and development costs of $15.8 million, which are being amortized over four to ten years. In connection with the acquisition, the Company entered into employment agreements with five employees for terms expiring June 2002 (Note 8). Twenty/20 On May 30, 1997, the Company purchased all of the outstanding common stock of RSI Merger Corporation (d.b.a. Twenty/20 Visual Systems) ("Twenty/20"), a provider of point of sale and table management systems for full service restaurants. The purchase price consisted of 199,074 shares of common stock and $1.3 million in cash. Total consideration, including transaction costs of approximately $100,000, was $3.7 million. Intangibles of $644,000 were recorded, after adjusting for purchased research and development costs of $3.4 million, which are being amortized over four to ten years. See further discussion at Note 5. RapidFire On October 31, 1997, the Company purchased all of the outstanding common stock of RapidFire Software, Inc. ("RapidFire Software") and EquiLease Financial Services, Inc. ("EquiLease"), (collectively "RapidFire"), a leading provider of point of sale systems to the pizza industry and other delivery restaurants. The purchase price consisted of 102,230 shares of common stock, $4.2 million in cash and $3.8 million in notes. Intangibles of $5.2 million were recorded, after adjusting for purchased research and development costs of $6.9 million, which are being amortized over four to ten years. Separately, the Company agreed to loan up to $1.5 million to the sole shareholder, which debt matures October 31, 2005 and bears interest at a rate of 5.0% per annum (Notes 11 and 13). The Company also entered into a five-year employment agreement with the sole shareholder (Note 8). 36 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 Logic Shop On November 18, 1997, the Company purchased all of the outstanding common stock of Logic Shop, Inc. ("Logic Shop"), a provider of point of sale and back office management software to the convenient automotive service center market. The purchase price consisted of 46,032 shares of common stock and $2.0 million in cash. Intangibles of approximately $829,000 were recorded, after adjusting for purchased research and development costs of $2.8 million, which are being amortized over four to ten years. The Company's unaudited pro forma consolidated results of operations for 1997 shown below are presented assuming that the Company's business combinations had been consummated on January 1, 1997 (in thousands, except per share data):
For the Year Ended December 31, 1997 ------------------------ Pro forma revenue $87,863 Pro forma net income (loss) 3,801 Income (loss) per share: Basic $ 0.28 Diluted 0.23
The Company's unaudited pro forma results of operations are presented for informational purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated these businesses as of January 1, 1997. 5. ACQUISITION AND OTHER NON-RECURRING CHARGES During the second half of 1998, the Company further integrated its acquisitions of ReMACS and RapidFire by consolidating their support and product development functions to its Alpharetta, Georgia location. As a result, the Company recorded a pretax charge of approximately $876,000 related to severance arrangements. In the fourth quarter of 1998, the Company recorded a charge of approximately $400,000 for the impairment of goodwill associated with its acquisition of Twenty/20. The Company's management determined certain factors existed which indicated the goodwill was impaired. As a result, the goodwill was evaluated for impairment based on comparing the unamortized goodwill to projected undiscounted operating results, and the impairment charge recorded. During 1997, the Company incurred $30.1 million in non-recurring charges, of which, $28.9 million related to purchased research and development costs (Note 4) and $1.2 million related to stock compensation expenses (Note 9). 37 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 6. LONG-TERM DEBT Long-term debt, including obligations under capital leases, consists of the following (in thousands):
December 31, 1999 1998 ------------------------------ Capital lease obligations, interest ranging from 5.0% to 31.0%, payable monthly through 1999, $ -- $ 76 secured by equipment Noninterest bearing promissory note; lump-sum payment of $6.0 million due October 31, 2005 4,250 4,024 net of imputed interest of $1.8 million and $2.0 million at December 31, 1999 and 1998, respectively at an interest rate of 6.0% Other 105 167 ------------------------------ 4,355 4,267 Less current portion (105) (161) ------------------------------ $4,250 $4,106 ==============================
In connection with the purchase of RapidFire on October 31, 1997, the Company issued a noninterest-bearing note in the amount of $6.0 million to the sole shareholder of the acquired company. The note is nonnegotiable and nonassignable. All outstanding principal is due and payable in full in a single lump-sum payment on October 31, 2005, unless maturity is accelerated by RapidFire's ability to attain certain net income levels. A principal payment not to exceed $2.0 million is due on March 31, 1999, 2000 and 2001 if RapidFire meets or exceeds specified net income levels for the years ended December 31, 1998, 1999 and 2000, respectively. During both 1999 and 1998 RapidFire did not meet such specified net income levels. Accordingly, the initial payment on March 31, 1999 and the second installment on March 31, 2000 are not due. As more fully described in Note 13, the Company and the former sole shareholder of RapidFire reached an agreement to extinguish this obligation subsequent to year end. At December 31, 1999, aggregate maturities of long-term debt, including obligations under capital leases, are as follows (in thousands): 2000 $ 105 2001 -- 2002 -- 2003 -- 2004 -- Thereafter 4,250 ------ $4,355 ======
7. INCOME TAXES Prior to the Company's initial public offering ("IPO"), the Company elected to be treated as an S corporation for federal and state income tax purposes. Accordingly, all income or losses of the Company were recognized by the Company shareholders on their individual tax returns. In connection with the IPO, the Company converted from an S corporation to a C corporation and is now subject to federal and state income taxes. Upon conversion to C corporation status, the Company recorded net deferred tax assets of $592,000. Simultaneously, with the recording of these deferred tax assets, the Company recorded a tax benefit of $305,000 and a valuation allowance of $287,000. 38 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 For all periods presented, the accompanying financial statements reflect provisions for income taxes computed in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." For those periods prior to the IPO, the tax benefit has been presented on a pro forma basis as if the Company had been liable for federal and state income taxes during those periods. The following summarizes the components of the income tax provision (benefit) (in thousands):
1999 1998 1997 -------------------- -------------- ----------------- Current taxes: Federal $ 5,311 $ -- $ 2,280 State 759 -- 394 Deferred taxes (1,078) (2,265) (2,674) Pro forma taxes -- -- (212) -------------------- -------------- ----------------- Income tax provision (benefit) $ 4,992 $(2,265) $ (212) ==================== ============== =================
In addition to the above, the Company recorded a tax benefit of $82,240 in 1997 related to the extraordinary loss from early extinguishment of debt. Reconciliation from the federal statutory rate to the combined pro forma and actual income tax benefit, is as follows:
1999 1998 1997 ------------------- --------------- ----------------- Statutory federal tax rate 35.0 % (35.0)% (35.0)% State income taxes, net of federal tax benefit 5.0 (5.0) (5.0) Purchased research and development -- -- 40.2 Conversion from S corporation to C corporation -- -- (1.6) Other (0.4) -- 0.3 ------------------- --------------- ----------------- 39.6 % (40.0)% (1.1)% =================== =============== =================
The components of the net deferred tax asset as of December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 --------------------- -------------- Deferred tax assets: Net operating loss carry forward $ 2,207 $ 3,123 Inventory reserve 694 399 Depreciation 245 131 Allowance for doubtful accounts 875 468 Accrued expenses -- 13 Intangibles 3,876 3,665 Deferred revenue 221 591 --------------------- -------------- 8,118 8,390 Valuation allowance (507) (507) --------------------- -------------- Total deferred tax assets 7,611 7,883 --------------------- -------------- Deferred tax liabilities: Capitalized software (2,158) (1,411) Other (164) (105) --------------------- -------------- Total deferred tax liabilities (2,322) (1,516) --------------------- -------------- Net deferred tax asset $ 5,289 $ 6,367 ===================== ==============
39 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 During fiscal 1998, the valuation allowance was increased $220,000 for unrealized tax benefits from stock option exercises. Upon realizing the tax benefit, through utilization of net operating loss carry forwards, the valuation allowance will be reduced with an offsetting increase to additional paid-in- capital. As of December 31, 1999, the Company has recorded net operating losses of $5.5 million which are available for carryforward through 2012. As of December 31, 1999, the Company has recorded a net deferred tax asset of $5.3 million. Realization is dependent upon generating sufficient taxable income in future periods. Although realization is not assured, management believes it is more likely than not that the deferred tax asset will be realized. 8. COMMITMENTS AND CONTINGENCIES Leases The Company leases office space, equipment and certain vehicles under noncancelable operating lease agreements expiring on various dates through 2008. At December 31, 1999, future minimum rental payments for noncancelable leases with terms in excess of one year were as follows (in thousands): 2000 $3,841 2001 3,572 2002 3,181 2003 2,785 2004 2,192 Thereafter 7,157
Total rent expense under operating leases was approximately $4.2 million, $2.7 million and $1.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. Employment Agreements As of December 31, 1997 the Company had entered into employment agreements with eight employees. During 1998, four of the employees under employment agreements terminated their employment with the Company, including the former sole shareholder of RapidFire, and the primary shareholders of ReMACS and PrysmTech. During 1999, another employee under an employment agreement terminated his employment with the Company. As of December 31, 1999, the Company has no further obligation under such agreements. Under each of the remaining three employment agreements, in the event employment is terminated (other than voluntarily by the employee or by the Company for cause or upon the death of the employee), the Company is committed to pay certain benefits, including specified monthly severance of not more than $13,000 per month. The benefits are to be paid from the date of termination to June 2002. 40 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 9. SHAREHOLDERS' EQUITY Stock Stock Offerings In February 1997, the Company completed an IPO of its common stock. The Company issued 2.8 million shares, including the underwriters' overallotment of 325,000 shares, at an offering price of $9.50. The total proceeds of the IPO, net of underwriting discounts and offering expenses, were approximately $24.2 million. Subsequent to the public offering of common stock, the Company repaid outstanding debt of $8.7 million and repurchased and subsequently retired 793,093 shares of common stock from two shareholders for a total of $2.1 million. In July 1997, the Company completed a follow-on public offering of its common stock. The Company issued 2.6 million shares at an offering price of $23.75. The total proceeds of the offering, net of underwriting discounts and offering expenses, were approximately $58.2 million. Stock Repurchase Program On September 18, 1998, the Company's Board of Directors authorized the Company to repurchase up to 3.0 million shares of its common stock from time to time in the open market, negotiated or block transactions. As of December 31, 1999, the Company had repurchased and subsequently retired approximately 680,000 shares at prices ranging from $6 3/8 to $8 per share, for total consideration of approximately $4.5 million. Preferred Stock In January 1997, the Company authorized 5,000,000 shares of preferred stock with no par value. The Company's Board of Directors has the authority to issue these shares and to fix dividends, voting and conversion rights, redemption provisions, liquidation preferences and other rights and restrictions. Warrants Client Warrants In May 1994, the Company and one of its clients (the "Client") entered into an agreement (the "Agreement") whereby the Client was granted the right (the "Client Warrant") to acquire 10.0% of the Company's outstanding common stock for $800,000, provided the Client meets certain purchase criteria. A deferred sales discount of $240,000 was charged on the date of grant, which represented the fair market value of the Client Warrant on such date, and was amortized as a reduction of sales as the Client makes purchases under the Agreement. In February 1996, the Company amended the Agreement such that the Client Warrant was increased to 12.0% of the Company's outstanding common shares. An additional deferred sales discount of $79,000 was charged on the date of grant, which represented the fair market value on the date of the increase of the Client Warrant. The Company had the option to repurchase one-sixth of the shares issuable under the Client Warrant at a price midway between the Client's exercise price and the fair market value of the shares. Because the Company intended to exercise its option to repurchase the shares, it was accreting to the expected redemption value of the shares. For the year ended December 31, 1996, the Company recorded accretion of $826,000. In February 1997, the Company repurchased 193,060 shares of common stock for approximately $1.0 million, which represented one-sixth of the shares issuable under the Client Warrant. Additionally, the client exercised the remaining 646,304 shares issuable under the warrant for proceeds of $6,463. 41 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 Put Warrants In connection with the issuance of certain debt, the Company issued Put Warrants to purchase 1.5% of the Company's outstanding common stock at an exercise price of $.01 per share. In February 1997, the debt holder exercised its warrant to purchase 1.5% of the Company's outstanding common stock, which represented 174,642 shares of common stock. Loan Origination Warrant In 1996, the Company issued warrants to purchase 20,000 shares of common stock at an exercise price of $.01 for payment of loan origination fees. The fair value of the warrant was determined to be $40,000 and has been capitalized as loan origination fees. In February 1997, the warrant was exercised for proceeds of $200. Deferred Compensation As part of the acquisition of Twenty/20, the Company granted two employees options to purchase 140,000 shares of the Company's common stock at an exercise price less than the fair market value of the Company's common stock on the date of such grant. In connection with the issuance of the 100,000 options, which vested immediately, the Company recorded a nonrecurring compensation charge of $1.2 million. Additionally, the Company recorded $303,500 as deferred compensation for 40,000 options that vested over four years, for the excess of the fair market value of the Company's common stock on the date of grant over the aggregate exercise price of such options. The deferred compensation will be amortized ratably over the four-year vesting period. Also during 1997, the Company issued certain employees options to purchase 26,500 of shares of the Company's common stock at a price less than fair market value on the date of grant. Deferred compensation of $323,375 was recorded and is being amortized ratably over a four-year vesting period. 10. EMPLOYEE BENEFITS Stock-Based Compensations Plans Employee Stock Purchase Plan In April 1998, the Company's Board of Directors adopted the 1998 Employee Stock Purchase Plan (the "ESPP"). Under the ESPP, an aggregate of 1,000,000 shares of common stock is reserved for purchase by qualified employees, at 85.0% of the appropriate market price. The ESPP provides that qualified employees may purchase shares at the lower of the market price in effect on the day the offering starts or the day the offering terminates. In 1999 and 1998, the Company issued 195,198 and 42,693 shares under the ESPP at an average price of $8.82 and $6.27 per share, respectively. Directors Stock Option Plan During 1997, the Company's Board of Directors adopted the Non-Management Directors' Stock Option Plan (the "Directors' Plan") for non-management directors of the Company, under which the Company may grant up to 100,000 options to nonemployee directors of the Company to purchase shares of the Company's common stock. Options are granted at an exercise price, which is not less than fair value as estimated by the Board of Directors. Initial grants to new directors are exercisable over three years, while annual grants are exercisable six months after the grant date. Options granted under the Plan expire ten years from the date of grant. The Company has granted 60,000 options under the Directors' Plan at December 31, 1999. 1995 Stock Option Plan The Company's 1995 Stock Option Plan (the "Plan"), as amended, provides for the issuance of up to 6,000,000 incentive and nonqualified stock options to key employees. Options are granted at an exercise price which is not less than fair value as estimated by the Board of Directors and become exercisable as determined by the Board of Directors, generally over a period of four to five years. Options granted under the Plan expire ten years from the date of grant. At December 31, 1999, options to purchase 1,342,738 shares of common stock were available for future grant under the Plan. The Company has granted 540,690 nonqualified stock options outside the Plan, of which, 359,490 have been cancelled and 181,200 have been exercised. 42 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 Sharp declines in the market price of the Company's common stock during 1998 resulted in many outstanding employee stock options being exercisable at prices that exceeded the current market price, thereby substantially impairing the effectiveness of such options as performance incentives. Consistent with the Company's philosophy of using such equity incentives to motivate and retain management and employees, the Company's Board of Directors determined it to be in the best interests of the Company and its shareholders to restore the performance incentives intended to be provided by employee stock options by repricing such options at a price equal to the average price since the decline, or $6.875 per share. Certain stock options of non-management directors and executive management were not repriced from their original exercise price. Consequently, on September 18, 1998, the Board of Directors of the Company decided to cancel and reissue certain employee stock options which had exercise prices in excess of such price. Stock option activity for each of the three years ended December 31, 1999 is as follows:
1999 1998 1997 --------------------------------------------------------------------------------------------------- Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price -------------------------------- --------------------------------- ------------------------- Outstanding at beginning of year 3,870,954 $ 4.52 4,661,160 $ 7.01 3,335,750 $ 2.64 Granted 1,415,701 22.07 1,643,408 8.44 1,660,163 15.26 Canceled (453,082) 6.54 (1,787,141) 15.65 (165,550) 15.71 Exercised (1,356,162) 3.36 (646,493) 2.11 (169,203) 2.80 -------------- ----------- -------------- ------------ ------------- ----------- Outstanding at end of year 3,477,411 $11.87 3,870,934 $ 4.52 4,661,160 $ 7.01 ============== =========== ============== ============ ============= =========== Options exercisable at end of year 543,505 $ 6.60 1,001,814 $ 5.27 698,279 $ 5.03 ============== =========== ============== ============ ============= ===========
The following table sets forth the range of exercise prices, number of shares, weighted average exercise price and remaining contractual lives by groups of similar price and grant date:
Options Outstanding Options Exercisable ----------------------------------------------------------------------------------------- Weighted Average Weighted Remaining Weighted Range at Number of Average Contractual Number Average Exercise Price Shares Price Life (Years) of Shares Price - -------------------------------------------------------------------------------------------------------------------- $1.00-$6.00 913,955 $ 1.67 6.20 195,255 $ 2.72 $6.25-$7.38 1,189,451 6.81 7.78 281,820 6.90 $9.06-$15.69 571,405 11.32 9.07 56,430 14.58 $16.75-$34.25 802,600 31.37 9.88 10,000 28.50 ------------ ----------- Total 3,477,411 $11.87 543,505 $ 6.60 ------------ -----------
Fair Value Disclosure The Company has elected to account for its stock-based compensation plan under APB 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted during 1999, 1998 and 1997 using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following weighted average assumptions used for grants in 1999, 1998 and 1997:
1999 1998 1997 ---------------------------------------------------------- Risk free interest rate 5.75% 4.8% 5.9% Expected dividend yield 0.0% 0.0% 0.0% Expected lives 4.0 years 4.5 years 4.0 years Expected volatility 81.0% 68.0% 62.0%
43 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 The total value of the options granted during the years ended December 31, 1999, 1998 and 1997 were computed as approximately $18,836,717, $4,687,000, and $10,734,000, respectively, which would be amortized over the vesting period of the options. If the Company had accounted for these plans in accordance with SFAS 123, the Company's reported pro forma net income (loss) and pro forma net income (loss) per share for the years ended December 31, 1999, 1998 and 1997 would have resulted in the following pro forma amounts (in thousands, except per share data): 1999 1998 1997 ------------------------------------------------- Net income (loss): As reported $7,609 $(3,395) $(19,489) Pro forma 4,509 (7,559) (22,409) Basic: As reported $ 0.46 $ (0.21) $ (1.50) Pro forma 0.28 (0.47) (1.72) Diluted: As reported $ 0.41 $ (0.21) $ (1.50) Pro forma 0.25 (0.47) (1.72) Employee Benefit Plan The Company has a 401(k) profit-sharing plan (the "Plan") available to all employees of the Company who have attained age 21. The Plan includes a salary deferral arrangement pursuant to which employees may contribute a minimum of 1.0% and a maximum of 15.0% of their salary on a pretax basis. The Company may make both matching and additional contributions at the discretion of the Company's Board of Directors. The Company made no such contributions during 1999, 1998 or 1997. 11. RELATED-PARTY TRANSACTIONS In June 1996, a shareholder sold 200,000 shares of Class A common stock for $1.875 per share. The shareholder also issued to one of the Company's principal shareholders an option to repurchase the remaining 600,033 shares of Class A common stock for $1.875 per share through June 1997. In January 1997, the principal shareholder assigned this option to the Company, at which time the Company repurchased all 600,033 shares for $1,125,062. During 1997, two shareholders received a loan from the Company in the amount of $165,000 each. The notes, together with interest at a rate of 7.0% per year, mature on December 31, 2001. During 1998 one of the shareholders repaid both the note balance and accrued interest in full. During 1999, the remaining shareholder repaid both the note balance and accrued the interest in full. Interest income recorded during 1999, 1998 and 1997 related to these notes was approximately $11,550, $21,000 and $16,000, respectively. As more fully described in Note 4, as part of the acquisition of RapidFire the Company agreed to loan the former sole shareholder of RapidFire $1.5 million. During 1998, the Company advanced $1.5 million under the loan agreement. As more fully described in Note 13, subsequent to year end an agreement was reached between the Company and the former sole shareholder and this note was repaid in full. Interest income recorded during 1999 and 1998 related to this note was approximately 75,000 and $58,000, respectively. During 1998, a shareholder received a loan from the Company in the amount of $225,000. The loan bears interest at 7.0% and is payable in certain specified increments beginning July 2000 with final payment due December 2001. During 1999, this note balance along with accrued interest was repaid in full. Interest income recorded during 1999 and 1998 related to the note was approximately $14,500 and $4,000. 44 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 During 1998 and 1999, a shareholder received two loans from the Company in the aggregate amount outstanding of $181,750 at December 31, 1999. The loans bear interest at 5.5% and are payable in certain specified increments beginning September 2001, with final payment due April 2002. Interest income recorded during 1999 related to the notes was approximately $8,000. 12. SEGMENT REPORTING DATA The Company operates through two primary reportable segments (i) Global Solutions and (ii) Regional Solutions. Although both groups provide enterprise- wide technology solutions to the retail industry, the distinguishing factor between them is primarily the size of the clients served and the nature of the services performed. Global Solutions' clients tend to be clients with greater than fifty owned and operated sites, while Regional Solutions' clients typically have less than fifty owned and operated sites. Additionally, the purchasing behavior of the Global Solutions' clients is typically characterized by the use of fewer, larger contracts. These contracts typically involve longer negotiating cycles, and often require the dedication of substantial amounts of working capital and other resources. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies. The Company's management evaluates the performance of the segments based on an internal measure of contribution margin, or income and loss from operations, before certain allocated costs of development and corporate overhead. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The Other nonreportable segment includes miscellaneous businesses, certain unallocated corporate operating expenses and the elimination of intersegment sales. The summary of the Company's operating segments is as follows (in thousands):
For the year ended December 31, 1999 ----------------------------------------------------- Global Regional Solutions Solutions Other Consolidation ----------------------------------------------------- Revenues $111,880 $17,786 -- $129,666 Contribution margin 33,384 1,216 $(1,461) 33,139 Operating income (loss) 14,603 (2,154) (1,461) 10,988 Identifiable assets (1) 26,239 16,848 68,912 111,999
For the year ended December 31, 1998 --------------------------------------------------- Global Regional Solutions Solutions Other Consolidation --------------------------------------------------- Revenues $ 67,403 $15,532 -- $ 82,935 Contribution margin 15,663 (1,888) $(1,333) 12,442 Acquisition and other non-recurring charges 1,123 153 -- 1,276 Operating loss (445) (5,682) (1,333) (7,460) Identifiable assets (1) 30,353 11,631 42,182 84,166
For the year ended December 31, 1997 --------------------------------------------------- Global Regional Solutions Solutions Other Consolidation --------------------------------------------------- Revenues $ 74,811 $ 3,192 -- $ 78,003 Contribution margin 19,402 43 $ (17) 19,428 Acquisition and other non-recurring charges 20,349 9,737 -- 30,086 Operating loss (10,681) (9,861) (17) (20,559) Identifiable assets (1) 31,075 9,441 52,999 93,515
45 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 (1) Identifiable assets allocated between the segments are comprised primarily of accounts receivable, inventory and intangible assets. All assets included in the Other segment are shared among all segments. 13. SUBSEQUENT EVENTS (unaudited) On March 1, 2000, the Company and Microsoft Corporation jointly announced, subject to execution of a definitive agreement, that both companies have joined forces to develop and market an integrated Web-enabled management system and supply chain solution to enable retailers to conduct business to business e-commerce over the Internet. In addition, Microsoft agreed to make an equity investment in the Company and committed to support the Company's solution through joint marketing programs, funding for product development, consulting services, developer support, and distribution via the Microsoft(R) bCentral(TM) small-business portal. Further, Microsoft and the Company have created an open structure that allows for other strategic and equity participants. On March 3, 2000, the Company finalized an agreement with America Online, Inc. ("AOL") and MovieFone, Inc., a subsidiary of AOL ("MF"), to form a strategic relationship in the retail point of sale business. This relationship, among other aspects, entails a ten-year marketing and development agreement whereby the Company will develop and manufacture point of sale systems and services for sale to the entertainment industry pursuant to MF's specifications, which will make such point of sale systems interoperable with MF's remote entertainment and event ticketing services. The relationship also contemplates future collaborative efforts between the companies. As part of this relationship, AOL purchased $10.0 million of the Company's common stock at a price of $15 per share. In addition, AOL has agreed to invest $25.0 million in a to be formed subsidiary of the Company to engage in consumer interactive businesses other than in the entertainment industry (e.g., interactive fuel and dispenser business and interactive restaurant self-ordering business). In return for its investment, AOL will receive a 15% equity interest in the form of preferred stock of this subsidiary. To the extent AOL does not invest $25.0 million in the to be formed subsidiary, AOL has agreed to invest the balance in another to be formed subsidiary of the Company or purchase common stock of the Company at the then current market price. On March 30, 2000 the Company and the former sole shareholder of RapidFire reached an agreement whereby the Company paid to the former shareholder $200,000 and forgave a $1.5 million note receivable (Note 4), and in return was relieved in full of its indebtedness to the shareholder. As more fully described in Note 6, this indebtedness consisted of a noninterest-bearing note with a lump-sum payment of $6.0 million due October 31, 2005 ($4.3 million at December 31, 1999) and was issued October 31, 1997 as part of the Company's acquisition of RapidFire. As a result of this early extinguishment of debt, the Company will record an extraordinary gain of approximately $1.6 million, net of tax, during the first quarter ended March 31, 2000. 14. SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (unaudited) The following tables set forth certain unaudited financial data for each of the Company's last eight calendar quarters. The information has been derived from unaudited consolidated financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period. 46 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997
Quarter ended ------------------------------------------- Mar. 31, June 30, Sept 30, Dec. 31, 1999 1999 1999 1999 ------------------------------------------- (In thousands, except per share data) Revenues: System sales $17,235 $21,316 $24,949 $28,446 Client support, maintenance and other services 7,039 9,264 9,981 11,436 ------------------------------------------- Total revenues 24,274 30,580 34,930 39,882 Cost of revenues: System sales 8,484 10,519 12,295 14,703 Client support, maintenance and other services 5,886 7,234 7,893 8,976 ------------------------------------------- Total cost of revenues 14,370 17,753 20,188 23,679 ------------------------------------------- Gross profit 9,904 12,827 14,742 16,203 Operating expenses: Product development 2,575 2,945 2,640 2,965 Sales and marketing 2,927 3,159 3,034 3,182 Depreciation and amortization 1,379 1,551 1,536 1,591 General and administrative 3,159 3,194 3,190 3,661 ------------------------------------------- Income (loss) from operations (136) 1,978 4,342 4,804 ------------------------------------------- Interest income, net 343 342 408 520 ------------------------------------------- Income before income taxes 207 2,320 4,750 5,324 Income tax provision 83 928 1,900 2,081 ------------------------------------------- Net income $ 124 $ 1,392 $ 2,850 $ 3,243 =========================================== Basic and diluted income per share: Basic income per share $ 0.01 $ 0.09 $ 0.17 $ 0.19 =========================================== Diluted income per share $ 0.01 $ 0.08 $ 0.15 $ 0.17 =========================================== Weighted average shares outstanding: Basic 16,078 16,313 16,536 16,708 =========================================== Diluted 17,491 17,965 18,479 18,769 ===========================================
47 RADIANT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997
Quarter ended ------------------------------------------- Mar. 31, June 30, Sept 30, Dec. 31, 1998 1998 1998 1998 ------------------------------------------- (In thousands, except per share data) Revenues: System sales $16,647 $13,793 $13,706 $15,254 Client support, maintenance and other services 4,897 5,732 6,072 6,834 ------------------------------------------- Total revenues 21,544 19,525 19,778 22,088 Cost of revenues: System sales 7,996 7,150 6,284 7,447 Client support, maintenance and other services 4,154 5,062 5,293 5,779 ------------------------------------------- Total cost of revenues 12,150 12,212 11,577 13,226 ------------------------------------------- Gross profit 9,394 7,313 8,201 8,862 Operating expenses: Product development 2,793 3,020 2,748 2,638 Sales and marketing 2,823 3,073 3,105 2,729 Depreciation and amortization 987 1,188 1,214 1,276 Acquisition and other non-recurring charges -- -- 455 821 General and administrative 3,051 3,052 3,072 3,185 ------------------------------------------- Loss from operations (260) (3,020) (2,393) (1,787) ------------------------------------------- Interest income, net 539 472 407 382 ------------------------------------------- Income (loss) before income taxes 279 (2,548) (1,986) (1,405) Income tax provision (benefit) 111 (1,019) (795) (562) ------------------------------------------- Net income (loss) $ 168 $(1,529) $(1,191) $ (843) =========================================== Basic and diluted (income) loss per share: Basic income (loss) per share $ 0.01 $ (0.10) $ (0.07) $ (0.05) =========================================== Diluted income (loss) per share $ 0.01 $ (0.10) $ (0.07) $ (0.05) =========================================== Weighted average shares outstanding: Basic 15,926 15,991 16,062 15,983 =========================================== Diluted 18,624 15,991 16,062 15,983 ===========================================
Net income (loss) per share is computed independently for each of the quarters presented. As such, the summation of the quarterly amounts may not equal the total net income (loss) per share reported for the year. 48 Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure. --------------------- There has been no occurrence requiring a response to this Item. PART III Items 10, 11, 12 and 13 will be furnished by amendment hereto on or prior to April 28, 2000 or the Company will otherwise have filed a definitive proxy statement involving election of directors pursuant to Regulation 14A which will contain such information PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements. The following consolidated financial statements, together with the applicable report of independent public accountants, have been filed as Item 8 in Part II of this Report: Report of Independent Public Accountants Consolidated Balance Sheets at December 31, 1999, 1998 and 1997 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements 2. Financial Statement Schedules. No schedules are included with this Report, as they are not applicable or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. 3. Exhibits. The following exhibits are filed with or incorporated by reference into this report. The exhibits which are denominated by an asterisk (*) were previously filed as a part of, and are hereby incorporated by reference from (i) a Registration Statement on Form S-1 for the Registrant, Registration No. 333- 17723, as amended (referred to herein as "2/97 S-1"), (ii) a Registration Statement on Form S-1 for the Registrant, Registration No. 333-30289 (referred to herein as "6/97 S-1"), (iii) a Registration Statement on Form S-8 for the Registrant, Registration No. 333-41291 (referred to herein as "1997 S-8"), (iv) a Registration Statement on Form S-8 for the Registrant, Registration No. 333- 62157 (referred to herein as "1998 S-8"), (v) a Registration Statement on Form S-8 for the Registrant, Registration No. 333-62151 (referred to herein as "ESPP S-8") and (vi) the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998, Commission File No. 0-22065 (referred to herein as "1998 10-K"). Except as otherwise indicated, the exhibit number corresponds to the exhibit number in the referenced document. 49 Exhibit Number Description of Exhibit - --------------------------------------------------------------------------- *3. (i) Amended and Restated Articles of Incorporation (2/97 S-1) *3. (ii) Amended and Restated Bylaws (2/97 S-1) *4.1 Specimen Certificate of Common Stock (2/97 S-1) *10.1 Form of License, Support and Equipment Purchase Agreement (2/97 S-1) *10.2 Employee Stock Purchase Plan (ESPP S-8, Exhibit 10.1) *10.3 Amended and Restated 1995 Stock Option Plan (2/97 S-1) *10.3. Amendment No. 1 to Amended and Restated 1995 Stock Option Plan (1997 S-8) *10.3.2 Amendment No. 2 to Amended and Restated 1995 Stock Option Plan (1998 S-8) *10.4 Lease Agreement dated October 7, 1997, by and between Weeks Realty, L.P. and the Registrant for lease of office space in Alpharetta, Georgia (Brookside Parkway) (1998 10-K) *10.4.1 Amendment No. 1 to Lease Agreement dated October 7, 1997, by and between Weeks Realty, L.P. and the Registrant for lease of office space in Alpharetta, Georgia (Brookside Parkway) (1998 10-K) *10.4.2 Amendment No. 2 to Lease Agreement dated October 7, 1997, by and between Weeks Realty, L.P. and the Registrant for lease of office space in Alpharetta, Georgia (Brookside Parkway) (1998 10-K) *10.5 Lease Agreement dated November 12, 1997 by and between Meadows Industrial, LLC and the Registrant for lease of office space in Alpharetta, Georgia (Shiloh Road) (1998 10-K) *10.5.1 Amendment No. 1 to Lease Agreement dated November 12, 1997 by and between Meadows Industrial, LLC and the Registrant for lease of office space in Alpharetta, Georgia (Shiloh Road) (1998 10-K) *10.10 Software License, Support and Equipment Purchase Agreement dated May 27, 1994, as amended, by and between the Registrant and Emro Marketing Company (2/97 S-1) *10.13 Non-Management Directors' Stock Option Plan (6/97 S-1) *21.1 Subsidiaries of the Registrant (1998 10-K) 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule (for SEC use only) 50 SIGNATURES In accordance with the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, in the City of Alpharetta, State of Georgia on March 30, 2000. RADIANT SYSTEMS, INC. /s/ Erez Goren --------------------------- By: Erez Goren Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date - ------------------------------------------------------------------------------------------------------------- /s/ Erez Goren Co-Chairman of the Board and March 30, 2000 - ---------------------------------- Chief Executive Officer Erez Goren (principal executive officer) /s/ Alon Goren Co-Chairman of the Board and March 30, 2000 - ---------------------------------- Chief Technology Officer Alon Goren /s/ John H. Heyman Executive Vice President, March 30, 2000 - ---------------------------------- Chief Financial Officer and John H. Heyman Director (principal financial officer) /s/ Paul J. Ilse Vice President, Finance March 30, 2000 - ---------------------------------- (principal accounting officer) Paul J. Ilse /s/ James S. Balloun Director March 30, 2000 - ---------------------------------- James S. Balloun /s/ Evan O. Grossman Director March 30, 2000 - ---------------------------------- Evan O. Grossman
51 EXHIBIT INDEX Exhibit Number Description of Exhibit 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule (for SEC use only) 52 EX-23.1 2 CONSENT TO ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (File No's. 333-23237, 333-41291, 333-41327, 333-62151 and 333-62157). /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Atlanta, Georgia March 27, 2000 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 53,435 0 19,304 (1,375) 13,141 3,256 18,234 (10,377) 111,999 21,814 0 0 0 0 85,935 111,999 129,666 129,666 75,990 75,990 42,688 0 (1,613) 12,601 4,992 7,609 0 0 0 7,609 0.46 0.41
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