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| RADS > SEC Filings for RADS > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Introduction
Management's Discussion and Analysis ("MD&A") is intended to facilitate an understanding of Radiant's business and results of operations. This MD&A should be read in conjunction with the MD&A included in our Form 10-K for the year ended December 31, 2007 as well as Radiant's Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. MD&A consists of the following sections:
• Overview: A summary of Radiant's business and opportunities
• Results of Operations: A discussion of operating results
• Liquidity and Capital Resources: An analysis of cash flows, sources and uses of cash, contractual obligations and financial position
• Critical Accounting Policies and Procedures: A discussion of critical accounting policies that require the exercise of judgments and estimates
• Recent Accounting Pronouncements: A summary of recent accounting pronouncements and the effects on the Company
Overview
We are a leading provider of retail technology focused on the development, installation and delivery of solutions for managing site operations of hospitality and retail businesses. Our point-of-sale and back-office technology is designed to enable businesses to deliver exceptional client service while improving profitability. We offer a full range of products that are tailored to specific hospitality and retail market needs, including hardware, software and professional services. The Company offers best-of-breed solutions designed for ease of integration in managing site operations, thus enabling operators to improve customer service while reducing costs. We believe our approach to site operations is unique in that our product solutions provide enterprise visibility and control at the site, field and headquarters levels.
We operate in two primary segments: (i) Hospitality, and (ii) Retail. Each segment focuses on delivering site management systems, including point-of-sale, self-service kiosk and back-office systems, designed specifically for each of the core vertical markets.
Acquisition of Orderman GmbH
On July 1, 2008, the Company acquired Orderman GmbH ("Orderman"), one of the leading manufacturers of wireless handheld ordering and payment devices for the hospitality industry. Headquartered in Salzburg, Austria, Orderman has provided innovative mobile solutions since 1994. Orderman distributes its solutions through a reseller network of more than 600 partners that have deployed approximately 50,000 handheld devices, predominately in Europe. The acquisition enables Radiant to accelerate the adoption of mobile devices in the global hospitality sector. Total cash consideration of approximately $30.9 million was paid on the date of closing. The Company expects the acquisition of Orderman to be dilutive to 2008 earnings as adjusted to exclude amortization of intangible assets. The operations of the Orderman business have been included in our condensed consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Jadeon
On May 1, 2008, Radiant acquired Jadeon, Inc. ("Jadeon"), a wholly-owned subsidiary of Innuity, Inc. and one of the Company's channel partners in California. Headquartered in Irvine, just outside Los Angeles, Jadeon has been delivering and supporting Radiant's hospitality point-of-sale solutions since 2001. Jadeon offers a full range of technology systems and implementation and support services throughout the West coast and has installed more than 3,000 systems to date. The acquisition enables Radiant to strengthen its service capabilities and relationships with key accounts. Jadeon also serves as a platform for Radiant to strengthen its West coast market presence, specifically in the Los Angeles and San Francisco markets, allowing better penetration in the largest market in North America. Total cash consideration of $7.0 million was paid on the date of closing. The Company expects the acquisition of Jadeon to be accretive to 2008 earnings as adjusted to exclude amortization of intangible assets. The operations of the Jadeon business have been included in our condensed consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Hospitality EPoS Systems
On April 4, 2008, the Company acquired Hospitality EPoS Systems Ltd. ("Hospitality EPoS"), a leading technology supplier to the U.K. hospitality market for more than 16 years. Headquartered in Kent, England, just outside London, Hospitality EPoS provides substantial capabilities for sales, implementation and support services. For more than eight years, Hospitality EPoS has represented Radiant's suite of hospitality products including Aloha point-of-sale software, Enterprise.com above-store reporting, gift card and loyalty programs, MenuLink back office and Radiant hardware. Total cash consideration of approximately $6.0 million was paid on the date of closing. The Company expects the acquisition of Hospitality EPoS to be accretive to 2008 earnings as adjusted to exclude amortization of intangible assets. The operations of the Hospitality EPoS business have been included in our condensed consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
Acquisition of Quest Retail Technology
On January 1, 2008, the Company acquired substantially all of the assets of Quest Retail Technology Pty Ltd ("Quest"), a privately held company based in Adelaide, Australia. Quest is a global provider of point of sale and back office solutions to stadiums, arenas, convention centers, race courses, theme parks and various other industries. Total cash consideration of approximately $53.4 million was paid on the date of closing. The Company expects the acquisition of Quest to be accretive to 2008 earnings as adjusted to exclude amortization of intangible assets. The operations of the Quest business have been included in the Company's condensed consolidated results of operations and financial position from the date of acquisition. The results of these operations are reported under the Hospitality segment.
To the extent that we believe acquisitions or joint ventures can position us to better to serve our current segments, we will continue to pursue such opportunities in the future.
Results of Operations
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007 and June 30, 2008, and the Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007.
System sales - The Company derives the majority of its revenues from sales and licensing fees for its point-of-sale hardware, software and site management software solutions. System sales during the third quarter of 2008 were approximately $43.1 million. This is an increase of $7.7 million, or 22%, from the same period in 2007, and an increase of $3.7 million, or 10%, from the second quarter of 2008. System sales during the nine-month period ended September 30, 2008 were $121.5 million compared to $104.0 million for the same period in 2007, an increase of 17%. These increases are primarily due to the additional revenues resulting from the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon, the continued growth and market penetration of the products acquired in acquisitions, the continued expansion of direct sales in the Hospitality segment and the continued success of selling our hardware products into our hospitality markets. The increases from 2007 to 2008 were partially offset by decreases in our Retail business segment.
Client support, maintenance and other services - The Company also derives revenues from client support, maintenance and other services, including training, custom software development, subscription and hosting, and implementation services (professional services). The majority of these revenues are from support and maintenance which is structured on a recurring revenue basis and is associated with installed sites. The additional professional services are related to projects for new sales of products or their implementation.
Revenues from client support, maintenance and other services during the third quarter of 2008 were approximately $39.3 million. This is an increase of $12.1 million, or 44%, from the same period in 2007, and an increase of $4.8 million, or 14%, from the second quarter of 2008. Service sales during the nine-month period ended September 30, 2008 were $104.8 million compared to $78.9 million for the same period in 2007, an increase of 33%. These increases are primarily due to the additional revenues resulting from the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon, the additional revenues generated in both software and hardware support and maintenance resulting from increased software and hardware sales, the increase in revenues generated from the Company's subscription products due to continued marketing efforts around this product line, and the additional revenues generated through the growth of custom development and consulting projects within both of our segments.
System sales gross profit - Cost of system sales consists primarily of hardware and peripherals for site-based systems and amortization of capitalized labor costs for internally developed software. All costs, other than capitalized software development costs, are expensed as products are shipped, while capitalized software development costs are amortized to expense on a straight-line basis over the estimated useful life of the software.
System sales gross profit in the third quarter of 2008 increased by $3.9 million, or 24%, as compared to the same period in 2007, while the gross profit percentage was 47%, an increase of 1 point, compared to the same period in 2007. Systems sales gross profit for the third quarter of 2008 increased by approximately $1.1 million, or 6%, compared to the second quarter of 2008, while the gross profit percentage was 47%, a decrease of approximately 1 point. For the nine-month period ended September 30, 2008 as compared to the same period in 2007, system sales gross profit increased by approximately $8.8 million, or 18%, while the gross profit percentage remained constant at 48%.
Client support, maintenance and other services gross profit - Cost of client support, maintenance and other services consists primarily of personnel and other costs associated with the Company's services operations.
The gross profit on service sales increased by approximately $3.4 million, or 31%, in the third quarter of 2008 as compared to the same period in 2007, while the gross profit percentage decreased by 4 points to 37%. The gross profit on service sales increased by approximately $1.7 million, or 13%, in the third quarter of 2008 as compared to the second quarter of 2008, while the gross profit percentage remained relatively constant. For the nine-month period ended September 30, 2008, the gross profit on service sales increased by approximately $7.8 million, or 25%, as compared to the same period in 2007, while the gross profit percentage decreased by 2 points to 38%. The changes in the gross profit percentage on service sales are primarily due to normal fluctuations between product development projects and maintenance projects that occur throughout the year. We have also incurred higher repair and material costs within our hardware maintenance line during 2008.
Segment revenues - During the third quarter of 2008, total revenues in the Hospitality business segment increased by approximately $21.7 million, or 52%, as compared to the same period in 2007, and increased by $9.3 million, or 17%, as compared to the second quarter of 2008. For the nine months ended September 30, 2008, total revenues in the Hospitality business segment increased by approximately $47.4 million, or 39%, as compared to the same period in 2007. These increases are primarily due to the additional revenues resulting from the acquisitions of Orderman, Quest, Hospitality EPoS, and Jadeon, and an increase in sales throughout the Hospitality segment.
During the third quarter of 2008, total revenues in the Retail business segment decreased by approximately $2.0 million, or 10%, as compared to the same period in 2007, and decreased by approximately $1.1 million, or 6%, as compared to the second quarter of 2008. For the nine months ended September 30, 2008, total revenues in the Retail business segment decreased by approximately $4.7 million, or 8%, as compared to the same period in 2007. The decreases from 2007 and the second quarter of 2008 are primarily attributable to economic factors that have resulted in a decrease in demand by convenience store operators.
Segment net income before allocation of central costs - The Company measures segment profit based on net income before the allocation of certain central costs. During the third quarter of 2008, total net income before allocation of central costs in the Hospitality business segment increased by approximately $1.8 million, or 20%, as compared to the same period in 2007, and increased by $0.7 million, or 7%, as compared to the second quarter of 2008. For the nine months ended September 30, 2008, total net income before the allocation of central costs in the Hospitality business segment increased by approximately $7.2 million, or 29%, as compared to the same period in 2007. The increases from 2007 are primarily due to the profitability driven by the acquisitions of Quest, Hospitality EPoS and Jadeon, and our ability to better leverage the operating costs of the segment. The increases from our food service operating unit were partially offset by expected decreases in our entertainment operating unit.
During the third quarter of 2008, total net income before allocation of central costs in the Retail business segment decreased by approximately $1.6 million, or 45%, as compared to the same period in 2007, and decreased by $0.4 million, or 16%, as compared to the second quarter of 2008. For the nine months ended September 30, 2008, total net income before the allocation of central costs in the Retail business segment decreased by approximately $5.4 million, or 45%, as compared to the same period in 2007. The decreases from 2007 and the second quarter of 2008 are primarily the result of a reduction in revenue from the Retail business segment (specifically our petroleum and convenience store operating unit), a decrease in gross profit due to changes in product mix, and an increase in segment operating expenses.
Total operating expenses - The Company's total operating expenses increased by approximately $10 million, or 46%, during the third quarter of 2008 as compared to the same period in 2007, by approximately $13.9 million, or 21%, for the nine months ended September 30, 2008 as compared to the same period in 2007, and by approximately $6.9 million, or 28%, as compared to the second quarter of 2008 due to the following:
• Product development expenses - Product development expenses consist primarily of wages and materials expended on product development efforts, excluding any development expenses related to associated revenues, which are included in costs of client support, maintenance and other services. Product development expenses increased during the third quarter of 2008 by approximately $0.8 million, or 14%, as compared to the same period in 2007, by $1.1 million, or 6%, during the nine months ended September 30, 2008 as compared to the same period in 2007, and by $0.3 million, or 6%, as compared to the second quarter of 2008. The increases are primarily the result of an increase in the level of investments in our future products and the additional expense structure assumed by the acquisitions made during the year. Product development expenses as a percentage of revenues were 8% for the third quarter of 2008 compared to 9% for the same period in 2007, 8% for the nine months ended September 30, 2008 compared to 9% for the same period in 2007, and 8% for the second quarter of 2008.
• Sales and marketing expenses - Sales and marketing expenses increased during the third quarter of 2008 by approximately $3.0 million, or 41%, as compared to the same period in 2007, by $5.5 million, or 26%, during the nine months ended September 30, 2008 as compared to the same period in 2007, and by $1.7 million, or 19%, as compared to the second quarter of 2008. These increases are primarily related to the hiring of additional personnel to manage and support our continued sales growth, and incremental sales and marketing expenses resulting from the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon. Sales and marketing expenses as a percentage of revenues were 13% for the third quarter of 2008 compared to 12% for the same period in 2007, 12% for the nine months ended September 30, 2008 and 2007, and 12% for the second quarter of 2008.
• Depreciation and amortization expenses - Depreciation and amortization expenses increased during the third quarter of 2008 by approximately $1.5 million, or 73%, as compared to the same period of 2007, by approximately $2.5 million, or 40%, during the nine month period ended September 30, 2008 as compared to the same period in 2007, and by $1.0 million, or 38%, as compared to the second quarter of 2008. The increases from 2007 are directly related to the amortization of certain intangible assets related to the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon, as well as additional depreciation expense resulting from the growth in our fixed assets. The increase from the second quarter of 2008 is directly related to the amortization of certain intangible assets related to the Orderman acquisition. Depreciation and amortization expenses as a percentage of revenues were 4% for the third quarter of 2008 compared to 3% for the same period in 2007, 4% for the nine-month periods ended September 30, 2008 and 2007, and 4% for the second quarter of 2008.
• General and administrative expenses - General and administrative expenses increased during the third quarter of 2008 by approximately $2.6 million, or 41%, as compared to the same period in 2007, by $4.0 million, or 20%, during the nine months ended September 30, 2008 as compared to the same period in 2007, and by $1.3 million, or 17%, as compared to the second quarter of 2008. The increases from 2007 are primarily due to additional investments in general and administrative areas to accommodate the growth of our business and the additional expense structure assumed by the acquisitions made during the year. General and administrative expenses as a percentage of revenues were 11% for the third quarter of 2008 compared to 10% for the same period in 2007, 11% for the nine months ended September 30, 2008 and 2007, and 10% for the second quarter of 2008.
During the third quarter of 2008, the Company recorded a restructuring charge of $2.1 million related to amending a sublease agreement on a facility in Alpharetta, Georgia, as discussed in Note 7 to the condensed consolidated financial statements.
During the second quarter of 2008, the Company recorded a gain of approximately $0.5 million as a result of entering into a forward exchange contract in preparation for the acquisition of Orderman.
During the first quarter of 2008, the Company recorded a gain of approximately $0.3 million as a result of entering into a forward exchange contract in preparation for the acquisition of Quest. This gain was offset by approximately $0.4 million in debt cost write-offs and penalties associated with early termination of the WFF Credit Agreement as described in Note 6 to the condensed consolidated financial statements.
During the second quarter of 2007, the Company recorded a one-time expense of $1.2 million to write off accumulated transaction costs for multiple corporate development activities that we elected not to pursue.
In 2006, Radiant relocated its offices in Bedford, Texas to a facility in Fort Worth, Texas. The Company was contractually liable for the lease payments on the abandoned Bedford facility through September 2007 (lease expiration). In accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), the Company recorded a lease restructuring charge based on the fair value of the remaining lease payments and estimated maintenance costs at the abandonment date. The restructuring charges were attributable to the Company's Hospitality business segment. The abandonment of the Bedford facility resulted in a restructuring charge of approximately $1.4 million in the second quarter of 2006, which consisted of the fair value of the remaining lease liability and ongoing maintenance costs. During the first quarter of 2007, the Company updated its restructuring reserve analysis and reduced the reserve by $0.1 million, as the initial assumption regarding ongoing maintenance costs changed. During the third quarter of 2005, Radiant decided to consolidate certain facilities located in Alpharetta, Georgia, in order to reduce future operating costs. This resulted in the abandonment of one facility, which formerly housed the Company's customer support call center. The restructuring charges were not attributable to any of the Company's reportable segments. In accordance with SFAS 146, the Company recorded a lease restructuring charge based on the fair value of the remaining lease payments at the abandonment date less the estimated sublease rentals that could reasonably be obtained from the property. This consolidation resulted in a restructuring charge of approximately $1.5 million in the third quarter of 2005, which consisted of $1.2 million for facility consolidations and $0.3 million of fixed asset write-offs associated with the facility consolidation. During the first quarter of 2007, the Company updated its restructuring reserve analysis and reduced the reserve by $0.2 million as the initial assumption regarding the ability to sublease the facility changed.
Interest expense, net - The Company's interest expense includes interest expense incurred on its long-term debt, revolving line of credit and capital lease obligations. Interest expense increased by approximately $0.7 million, or 123%, in the third quarter of 2008 as compared to the same period in 2007, by $1.8 million, or 93% during the nine months ended September 30, 2008 as compared to the same period in 2007, and increased by $0.2 million, or 19%, as compared to the second quarter of 2008. These increases are directly attributable to the debt assumed when the Company entered into the JPM Credit Agreement and additional borrowings obtained on its revolving loan during the nine months of 2008 to finance the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon, as further described in Notes 3 and 6 to the condensed consolidated financial statements.
Income tax provision - The Company's effective tax rates for the quarters ended September 2008 and 2007 were equal to 28% and 45%, respectively, inclusive of discrete events. For the nine month period ended September 30, 2008 as compared to the same period in 2007, the Company's effective tax rates were 33% and 43%, respectively, inclusive of discrete events. This decrease was due to the relative mix of earnings expected throughout 2008, mainly attributable to a larger portion of earnings generated being outside the United States of America in lower tax jurisdictions.
Liquidity and Capital Resources
Prior to January 2008, the Company had a senior secured credit facility with Wells Fargo Foothill, Inc. (the "WFF Credit Agreement"). The WFF Credit Agreement provided for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $15 million and a term loan facility in an aggregate principal amount of up to $31 million. The revolving loan amount available to the Company was derived from a monthly borrowing base calculation using the Company's various accounts receivable balances. The amount derived from this borrowing base calculation was further reduced by the total amount of letters of credit outstanding. Loans under the WFF Credit Agreement bore interest, at Radiant's option, at either the London Interbank Offering Rate plus two and one half percent or at the prime rate of Wells Fargo Bank, N.A.
The WFF Credit Agreement was scheduled to expire on March 31, 2010; however, it was refinanced on January 2, 2008 upon the execution of the credit agreement with JPMorgan Chase Bank, N.A., as arranger, and JPMorgan Chase Bank, N.A, SunTrust Bank, Bank of America and Guaranty Bank, as initial lenders (the "JPM Credit Agreement"). The JPM Credit Agreement provides for extensions of credit, upon satisfaction of certain conditions, in the form of revolving loans in an aggregate principal amount of up to $80 million and a term loan facility in an aggregate principal amount of up to $30 million. An amendment to the JPM Credit Agreement was signed on July 31, 2008 that gives the Company the right to increase its revolving credit commitment by up to $25 million. As of September 30, 2008, aggregate borrowings under this facility totaled $100.9 million, comprised of $73.9 million in revolving loans and $27.0 million in term loan facility borrowings. As of September 30, 2008, revolving loan borrowings available to the Company were equal to $6.1 million.
The JPM Credit Agreement is guaranteed by the Company and its subsidiaries and
is secured by the assets of the Company and its subsidiaries. The maturity date
of the JPM Credit Agreement is January 2, 2013. Interest accrues on amounts
outstanding under the loan facility, at the Company's option, at either (1) the
London Interbank Offered Rate (LIBOR) plus a margin ranging between 1.25% and
2.00% based upon the Company's consolidated leverage ratio, as defined, or
(2) the higher of the administrative agent's prime rate or one-half of one
percent over the federal funds effective rate plus a margin ranging between
0.25% and 1.00% based on the Company's consolidated leverage ratio, as defined.
The JPM Credit Agreement contains certain customary representations and
warranties from the Company. In addition, the JPM Credit Agreement contains
certain financial and non-financial covenants, with which the Company was in
compliance as of September 30, 2008. Further explanation of this agreement is
presented in Note 6 to the condensed consolidated financial statements.
The Company's working capital decreased by approximately $10.7 million, or 21%, to $40.9 million at September 30, 2008 as compared to $51.7 million at December 31, 2007. This decrease was attributable to the fact that working capital was utilized to finance the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon, all of which closed during 2008. In addition, the Company's unearned revenue balances increased by approximately $9.2 million compared to December 31, 2007 as a result of the acquisitions of Orderman, Quest, Hospitality EPoS and Jadeon as well as normal quarterly fluctuations, which also contributed to the decrease in working capital. The Company has historically funded its business through cash generated by operations.
Cash provided by operating activities during the nine months ended September 30, 2008 was approximately $10.7 million. Cash from operations was mainly generated through income from operations, adjusted to exclude the effect of non-cash . . .
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