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, 1997
Commission file number 0-26844
RADISYS CORPORATION
(Exact name of registrant as specified in its charter)
OREGON 93-0945232
(State or other jurisdiction of (I.R.S Employer
Incorporation or Organization) Identification Number)
5445 N.E. Dawson Creek Drive
Hillsboro, OR 97124
(Address of principal executive offices,
including zip code)
(503) 615-1100
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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 the 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 in any amendment to
this Form 10-K. ( )
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 20, 1998: $190,595,000. For purposes of the calculation
executive officers, directors and holders of 10% or more of the outstanding
Common Stock are considered affiliates.
Number of shares of Common Stock outstanding as of March 20, 1998 are 7,858,383.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into
Document which Incorporated
-------------------------------- ----------------------
Proxy Statement for 1998
Annual Meeting of Shareholders Part III
<PAGE>
RADISYS CORPORATION
FORM 10-K
TABLE OF CONTENTS (To be updated upon completion)
Part I
Item 1 Business 3
Item 2 Properties 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 4(a) Executive Officers of the Registrant 9
Part II
Item 5 Market for the Registrant's Common Equity and
Related Shareholder Matters 10
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 8 Financial Statements and Supplementary Data 14
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 14
Part III
Item 10 Directors and Executive Officers of the Registrant 15
Item 11 Executive Compensation 15
Item 12 Security Ownership of Certain Beneficial Owners and Management 15
Item 13 Certain Relationships and Related Transactions 15
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 15
Signatures 30
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PART I
ITEM 1. BUSINESS
RadiSys Corporation ("RadiSys" or the "Company") is a significant independent
designer and manufacturer of embedded computer solutions used by original
equipment manufacturers ("OEMs") for products in the manufacturing automation,
telecommunications, medical devices, transportation, retail/office automation,
and the test and measurement industries. Unlike general purpose computers,
embedded computer solutions are incorporated into systems and equipment to
provide a single or a limited number of critical system control functions and
are generally integrated into larger automated systems. RadiSys' embedded
computers are based upon the Intel x86 architecture and are typically capable of
running PC-compatible operating systems and application software. The Company
offers a broad spectrum of solutions, including application-specific embedded
computer subsystems, board-level modules, software and chip-level products.
Embedded Computer Market
Embedded computers are a key segment of the broad electronics market and form
the backbone and control system for many types of today's electronics systems
requiring advanced capabilities for human interface, data analysis and system
communications and control. Embedded computers differ from general purpose
computers, such as PCs, in several key respects. First, embedded computers are
closely integrated into larger systems, perform a single or limited number of
complex applications and adhere to specific requirements regarding size,
reliability and ability to withstand the demands of extreme environmental
conditions. Additionally, embedded computers are design-intensive solutions that
require substantial engineering know-how and a comprehensive understanding of
the specific end product into which they are to be incorporated.
Embedded computer solutions are incorporated into a broad range of products,
including blood analyzers, patient monitors, ultrasound machines, voice message
systems, local area network routers, cellular base stations, semiconductor
manufacturing equipment, electronics assembly equipment, metal grinding
equipment, anticollision systems, intelligent highway systems, locomotive motor
control devices, bar code scanners, point of sale terminals and automated teller
machines. Unlike PC products, which have experienced and will likely continue to
experience short product cycles, a typical embedded computer solution has a
relatively long product life, with most designs lasting through the life cycles
of the products into which they are integrated, often three to seven or more
years.
The embedded computer market can be segmented by annual unit volume. At unit
volumes of above about 50,000 units per year, OEMs generally decide to produce
their own solutions. At low unit volumes of less than 500 units per year, where
customized requirements such as space, cost, functionality and power usually
cannot be met efficiently by OEMs, such OEMs typically use off-the-shelf catalog
bus/board products. In the intermediate segment (between 500 and 50,000 units
per year), unit volumes are sufficient to support a significant design effort
but are not large enough to take advantage of very high volume manufacturing
channels or to support custom semiconductor designs. Industry applications
contained within this intermediate segment of the market include manufacturing
automation equipment, telecommunications equipment, medical devices,
transportation systems, retail automation equipment and test and measurement
equipment. Based on industry sources, the Company believes sales of embedded
computer solutions into the intermediate segment of the embedded computer market
represented over two-thirds of dollar sales in the total embedded computer
market in 1997.
In recent years, the increasing complexity of electronics subsystems and
components, together with a widespread trend in many industries to rationalize
internal manufacturing resources, has led to a significant growth in the
outsourcing of the design and manufacture of electronics subsystems and
components by major OEMs. As a result, the Company believes there is a
significant opportunity for independent manufacturers to provide OEMs with
cost-effective, reliable and high value-added embedded computer solutions.
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Strategy
The Company's objective is to be the leading supplier of embedded computer
solutions to major OEMs in the manufacturing automation, telecommunications,
medical devices, transportation systems, test and measurement, and retail/office
automation industries. The key elements of the Company's strategy to achieve
this objective are:
Leverage Intel x86 Expertise in Embedded Computer Market. RadiSys combines the
technical expertise of hundreds of man-years of Intel x86 architecture
experience with a close working relationship with Intel to design and
manufacture innovative Intel-based solutions for its OEM customers. The Company
intends to capitalize on the widespread acceptance of the Intel x86
architecture, the availability of powerful yet inexpensive software, and the
development of flexible I/O and peripheral devices to increase adoption of Intel
x86 architecture as the preferred solution of OEMs. Additionally, the Company
and Intel's Computer Enhancement Group are working together to develop and
market chip-level and board-level products for the embedded computer market in
order to facilitate the implementation of x86 designs into a broadening array of
new OEM end products.
Focus on the High Volume OEM Market. The Company is targeting the segment of the
embedded computer market where product volumes typically range from 1,000 to
50,000 units annually. The Company believes this segment includes the largest
number of OEM products requiring embedded computer solutions, and that sales of
embedded computer solutions into this market segment represent over two-thirds
of the aggregate dollar volume of annual embedded computer product sales. The
Company also believes that the need for complex, customer-specific embedded
computers within this segment typically requires considerable design and
manufacturing expertise, which are the Company's core strengths and the
combination of which are frequently unavailable from traditional design and
manufacturing sources.
Expand Long-Term OEM Sales Opportunities. The Company seeks to develop and
expand long-term relationships with OEMs where it acts as a "virtual division"
by developing a close working relationship in which the OEM views RadiSys as
playing an integral role in its product development processes. This approach
allows the OEM to outsource the design and manufacture of its embedded computer
solutions while continuing to control and coordinate this process. At the same
time, this approach provides RadiSys with the opportunity to achieve attractive
unit sales volumes for products with relatively long life cycles and also
provides RadiSys with access to new product opportunities.
Provide Broad Set of Technical Solutions to Meet Customer-Specific Needs. The
Company provides a high degree of design, product, and manufacturing flexibility
to address the needs of its customers for customized solutions in a wide range
of applications. The Company provides products with a variety of physical form
factors and levels of integration, from application-specific embedded computer
subsystems to board-level modules to chip-level products. The Company also
offers a broad range of custom solutions and maintains a large and expanding
library of designs, containing specifications, logic designs, firmware, device
driver software, real time extension software, test specifications, DSP
algorithms and manufacturing rules. The Company believes that its broad range of
solutions is critical to its ability to find the solution that best fits its
customers' technical and business needs.
Capitalize on Manufacturing Expertise. The Company is ISO9001 certified and its
high quality manufacturing facility, its sophisticated control systems, and its
advanced test processes enable it to meet its customers' demands for highly
reliable and rugged products. By both designing and manufacturing embedded
computer solutions, the Company offers its customers a stable, long-term source
of supply, a single point of accountability, design expertise, and reduced
time-to-market.
Products
RadiSys designs and manufactures embedded computer solutions based on the Intel
x86 architecture to address the specific requirements of its OEM customers. A
typical solution combines the level of integration, degree of customization and
specified form factors and standards required to meet the customer's needs.
Integration. The level of integration of the Company's products ranges from
complete solutions in the form of application-specific embedded computer
subsystems to board-level modules to chip-level products to software. The
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Company provides its customers with alternative solutions at each of these three
levels based on the customers' needs, and uses products developed at lower
levels of integration as components of more highly integrated designs.
Application-specific embedded computers are subsystems designed to function
without additional configuration by the OEM. These subsystems can be specific
integrated configurations of standard products, semi-custom products, or highly
integrated single-board-solutions. Application-specific embedded computers
generally range in price from $500 to $4,000. The Company has over 100
application-specific embedded computers in production.
Board-level modules are usually designed to be components of larger systems
employing standard modular bus structures. These modules consist of printed
circuit boards such as processor boards and I/O interfaces, backplanes
(interconnect boards), power supplies and mechanical packaging. Modules are
typically sold to OEM customers who have designed a complete system comprising
boards purchased from the Company along with other boards purchased from other
suppliers and still others designed in-house. Board-level products typically
range in price from about $300 to over $3,000. The Company has over 150 module
products in production supporting the Multibus I, Multibus II, VME architectures
as well as Baby AT and ATX form factor baseboards.
Chip-level products, like modules, are used as components for higher levels of
integration and as products for direct sale to customers who build their own
board-level solutions. RadiSys has introduced three companion chips, supporting
Intel's family of long-lived embedded processors. The RadiSys R300EX and R380EX
embedded system controllers support the Intel386 EX(TM) embedded processor,
which is a highly integrated version of the standard Intel386 developed
specifically for embedded design. The RadiSys R400EX supports the Intel486(TM)
family of embedded processors, including SX, DX2, and DX4 versions as well as
Intel's ultra-low power 486. Intel continues to make specific versions of the
Intel 486 available to the embedded market because of its wide acceptance in
embedded designs. The Company's companion chips make product designs with the
Intel386 EX and the family of Intel 486 processors easier, smaller, and less
expensive by integrating design features essential to embedded designers such as
integrated real time clock, watch-dog-timer, IDE disk controllers, serial ports,
and chip selects, in addition to traditional companion chip features such as
memory control, I/O chip interfacing, and timing control, all in a single
integrated device.
Customization. The degree of customization of the Company's products ranges from
modifications of standard products, to custom solutions comprised solely of
newly developed modules. The Company uses its extensive design experience and
large design library to create products with varying degrees of customization.
The Company believes that the degree of customization will tend to increase in
the future.
Form Factors and Standards. The form factors and standards of the Company's
products represent a large set of product parameters that characterize specific
product and customer needs. The Company has expertise across a broad range of
form factors, microprocessors, software environments and communication standards
including, but not limited to, cPCI, EMC, PC/104, ISA bus, PCI bus, PCMCIA, SBC,
VME bus, VXI bus and Multibus.
Software. In June 1997 the Company introduced INtime which extends Microsoft
Windows NT with real-time capabilities for use by OEMs in the embedded market.
"Real-time" is the term typically used to describe those applications on the
upper end of embedded applications that require system response times in the
sub-millisecond range.
Sales and Marketing
The Company typically experiences long life cycles for products designed for its
OEM customers. RadiSys views the design process as an opportunity to build
long-term OEM customer relationships. In the initial phases of the relationship,
considerable attention is given to the establishment of communications links,
such as electronic mail, to enable the customer's and the Company's sales and
engineering staffs to interact on a real-time or rapid response basis. The
Company believes that close and frequent communication during the design process
allows RadiSys to operate as a "virtual division" within the customer's internal
organization. RadiSys' in-depth understanding of embedded computer technology
and applications assists the customer in resolving its overall product design
issues while regular customer feedback enables RadiSys to increase and
continually refresh its understanding of its customer's specific design
requirements.
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The Company markets its products primarily in North America, Western Europe and
Japan. In 1997, the Company had no customer whose sales exceeded 10% of total
revenues; the top 25 customers accounted for approximately 65% of 1997 sales. In
North America, products are sold principally by a direct sales force. The
Company has U.S. regional offices in Philadelphia and San Jose. Each region has
a regional sales manager, and four to six sales and applications engineers. The
field sales force is supported by approximately 24 factory-based applications
engineers, product marketing personnel and sales support personnel. In addition,
the Company's management plays a key role in the Company's marketing and selling
efforts.
In Japan, the Company sells its products through a wholly owned Japanese
subsidiary, RadiSys K.K., that markets the Company's products directly and
through several distributors in Japan. In Europe, the Company sells its products
through wholly owned subsidiaries in the United Kingdom, RadiSys UK Ltd., and
RadiSys International, and through approximately 23 distributors throughout
Europe. RadiSys has regional sales offices in Swindon, United Kingdom; Munich,
Germany; Paris, France and Eindhoven, Netherlands. In 1995, 1996 and 1997,
international sales represented approximately 17%, 27% and 30%, respectively, of
revenues. Substantially all of the Company's international sales are denominated
in U.S. dollars.
The Company has established distributor relationships with Anthem,
Arrow/Schweber Electronics, Pioneer-Standard Electronics, Inc., and Wyle
Electronics in North America and approximately 26 distributors in Europe to
market the Company's chip-level and Multibus products.
Research, Development and Engineering
The Company believes its research, development and engineering expertise
represents an important competitive advantage. The Company's research,
development and engineering staff at December 31, 1997 consisted of 112
engineers and technicians.
Most of the Company's research, development and engineering efforts are focused
on joint projects with its OEM customers resulting in the development of custom
products. For these projects, the Company's engineering staff works closely with
the customer and the customers generally pay the Company non-recurring
engineering fees as certain milestones are attained. From time to time, the
Company also engages in joint research and development of other products with
certain of its customers and other parties.
The Company is engaged in research and development of additional chip-level
products designed to give the Company's board-level products additional
competitive advantages in terms of functionality, cost, reliability, reduced
time-to-market and increased product life longevity and to capitalize on the
Company's expertise in embedded computer system design by providing innovative
chips to meet the requirements of OEM customers.
The Company typically retains the rights to any technology developed as a part
of the design process. In some cases, the Company agrees to share technology
rights, including manufacturing rights, with the customer, but generally retains
nonexclusive rights to use the technology.
The embedded computer market is subject to rapid technological development,
product innovation and competitive pressures. Consequently, the Company has
invested and will continue to invest resources in the research and development
of (i) building blocks such as embedded modules, platforms, chips and low-level
firmware, (ii) application-specific embedded computers for specific customers
and (iii) design processes and tools. In 1995, 1996 and 1997, the Company
invested $3.3 million, $8.2 million and $11.7 million, respectively, on research
and development.
Manufacturing
The Company currently manufactures most of the board-level and system-level
products it sells. The Company builds its products in a highly automated ISO9001
certified manufacturing plant at its headquarters in Hillsboro, Oregon. This
plant
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encompasses surface-mount technology ("SMT") board assembly, test, mechanical
assembly and system assembly and test. ISO9001 certification is the
international designation, developed by the International Organization of
Standardization, a pan-governmental agency, for demonstrating that the Company's
systems support the design and production of products of consistently high
quality.
The Company has four automated lines for SMT board assembly, which are based on
equipment purchased primarily from Universal Instruments. Aggregate production
capacity exceeds 18,000 ultra-fine-pitch SMT boards per month. The Company
estimates that, as currently configured, the four lines have sufficient capacity
on multiple-shift operation to handle planned demand well into 1998. Each of the
lines is modular and thus readily expandable by adding additional inline
equipment.
Because the products into which embedded computers are integrated typically have
long life cycles, dynamic stress testing of embedded computer products must be
particularly exacting to ensure the reliability of such products. The Company
believes its test processes represent a significant competitive advantage in
this area. The Company uses a variety of commercial and proprietary test
processes including highly accelerated life testing, highly accelerated stress
screening, bed-of-nails, in-circuit and functional test equipment. The highly
accelerated stress screening process detects early lifetime failures by
subjecting products to a series of cycles of rapid temperature change, and
random mechanical vibration while the products are running a self-test program
and are being monitored. The Company has equipment to perform temperature,
humidity, and vibration analysis of products.
The Company relies on external suppliers for bare printed-circuit board
fabrication, machine-inserted throughole circuit boards, semiconductor
components, mechanical assemblies, and semiconductor foundry services. Although
many of the raw materials and much of the equipment used in the Company's
manufacturing operation are available from a number of alternate sources,
certain of these components are obtained from a single supplier or a limited
number of suppliers. The Company is dependent on third parties for a continuing
supply of the components it uses in the manufacture of its products. For
example, the Company is dependent solely on Intel for the supply of
microprocessors and other components and depends on Maxim Integrated Products,
Inc. and Cirrus Logic, Inc. as sole source suppliers for other components, for
some of which the Company would encounter difficulty in locating alternative
sources of supply.
The Company relies on a third party foundry to produce its core logic chip
product offerings. There is no assurance that the third party will be willing or
able to supply the Company with sufficient core logic chips to meet its needs in
the future or, if the party were not to meet the Company's needs, that the
Company could obtain satisfactory core logic chips from alternative sources in
sufficient quantities and at acceptable prices.
Competition
The embedded computer industry is highly competitive and fragmented, and the
Company's competitors differ depending on product type, geographic market and
application type. The Company believes that, from a customer's perspective, the
main competitive factors in the embedded computer industry are product cost,
product quality, design effectiveness, time-to-market, and long-term stability
of both the product and the supplier.
Because many OEM customers view their embedded computer requirements from a make
versus buy perspective, the Company often competes against its OEM customers'
ability to design and manufacture satisfactory embedded computer products
in-house. A customer may be capable of manufacturing an embedded computer
product at lower cost and with better quality control than the Company can, and
may wish to use underutilized internal design and manufacturing resources. On
the other hand, if the OEM customer wishes to rely on outside expertise, desires
quicker time-to-market, is lacking internal design and/or manufacturing
resources, and wishes to avoid certain issues of product stability, new
technologies, and redesign due to end-of-life components, the customer may opt
to purchase the Company's embedded computer solution.
Off-the-shelf product manufacturers comprise a second set of competitors,
although this product segment is highly fragmented by physical and electrical
form factor. Electronics contract manufacturers form a third set of potential
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competitors, although most have no specific product or application design
expertise and simply manufacture to a third party's design.
Finally, the Company competes against embedded computer systems that rely on
non-Intel-based architectures, including the Power PC architecture manufactured
by IBM and Motorola. Motorola's 68000 family of microprocessors has achieved
relative dominance of the embedded computer market for applications requiring a
VME bus form factor.
Backlog
As of December 31, 1997, the Company's backlog was approximately $38.7 million,
as compared to $33.6 million as of December 31, 1996. The Company includes in
its backlog all purchase orders scheduled for delivery within twelve months,
although a majority of the backlog is typically scheduled for delivery within 90
days.
Intellectual Property
The Company has two Multibus patents, but relies principally on trade secrets
for protection of its intellectual property. The Company believes, however, that
its financial performance will depend much more on the pace of its product
development and its relationships with its customers than upon such protection.
The Company has no pending claims against it alleging any possible infringement
of patents or other intellectual property rights of others.
Employees
As of December 31, 1997, the Company had 511 employees, of which 413 were
regular employees and 98 were agency temporary employees or contractors. The
Company is not subject to any collective bargaining agreement, has never been
subject to a work stoppage, and believes that its relations with employees are
good.
Forward Looking Statements
Except for the historical statements and information, this Annual Report on Form
10-K contains, and from time to time the Company may issue, forward looking
statements that involve a number of risks and uncertainties. The following are
among the factors that could cause actual results to differ materially from the
forward looking statements: business conditions and growth in the electronics
industry and general economies, both domestic and international; uncertainty of
market development; dependence on a limited number of OEM customers; dependence
on limited or sole source suppliers; dependence on the relationship with Intel;
dependence on Intel's support of the embedded computer market; lower than
expected customer orders; competitive factors, including increased competition,
new product offerings by competitors and price pressures; the availability of
parts and components at reasonable prices; changes in product mix; dependence on
proprietary technology; technological difficulties and resource constraints
encountered in developing new products; and product shipment interruptions due
to manufacturing difficulties. See Items 7 and 14 of this report. The forward
looking statements contained in this Annual Report on Form 10-K regarding
industry trends, product development and introductions, and liquidity and future
business activities should be considered in light of these factors.
ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 130,000 square feet of office
and manufacturing space in two buildings in Hillsboro, Oregon, 13,000 square
feet of office space in Newton, Massachusetts and 20,000 square feet of office
space in Beaverton, Oregon. The Company also leases four small sales offices in
the U.S. and one each in Swindon,
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United Kingdom, Toyko, Japan, Eindhoven, the Netherlands, Paris, France and
Munich, Germany. Total lease costs of all these facilities are approximately
$2.0 million per year, plus certain building operating expenses.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material litigation currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4(a) EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 28, 1998, the names, ages and positions held by the directors and
executive officers of the Company were as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
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<S> <C> <C>
Dr. Glenford J. Myers 51 Chairman of the Board,
President and Chief Executive Officer
Ronald A. Dilbeck 44 Vice President and General Manager,
Automation and Control Division
Arif Kareem 45 Vice President and General Manager,
Telecommunications Division
John Sonneborn 40 Vice President of Manufacturing
Brian V. Turner 38 Vice President of Finance and Administration
and Chief Financial Officer
Stephen J. Verleye 42 Vice President and General Manager,
Commercial Equipment Division
John D. Watkins 49 Executive Vice President of Worldwide Sales
</TABLE>
Dr. Glenford J. Myers co-founded the Company in March 1987 and has served as the
Company's Chairman of the Board, President and Chief Executive Officer since
that time. From 1981 to 1987, he held various management positions with Intel,
including Manager of Microprocessor Product Line Architecture and Manager of the
Microprocessor Strategic Business Segment. While at Intel, Dr. Myers had primary
management responsibility for the feasibility and design of Intel's 386 and
80960 microprocessor chips, both of which became industry standards in their
respective application areas. From 1968 to 1981, Dr. Myers held various
engineering and management positions with IBM. Dr. Myers holds a Ph.D. from the
Polytechnic Institute of New York, M.S. from Syracuse University and B.S.E.E.
from Clarkson College.
Ronald A. Dilbeck joined the Company in May 1996 as its Vice President and
General Manager, Automation and Control Division (ACD). From 1994 to 1996, Mr.
Dilbeck was President and Chief Executive Officer of nCUBE, Inc. From 1983 to
1994, he held various engineering management positions, the most recent being
Director of Integration Services. Mr. Dilbeck holds an M.S.E.E. from Washington
State University and B.S.E.E. and B.S. Mathematics from Oregon State University.
Arif Kareem joined the Company in July 1997 as Vice President, Telecom Business
Unit, and was appointed Vice President and General Manager, Telecommunications
Division in October 1997. From 1980 to 1997 Mr. Kareem held various engineering
and marketing management roles at Tektronix, Inc. before serving as General
Manager of Tektronix's Telecom Product Line, and subsequently General Manager of
the Communications Test Business Unit. His most recent role at Tektronix was as
Director of Strategic Marketing for the Measurement Division. Mr. Kareem holds a
BSEE and an MSEE from Lehigh Universtiy, and an MBA from the University of
Oregon.
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John Sonneborn joined the Company in August 1996 as its Vice President of
Manufacturing. From 1981 to 1996, Mr. Sonneborn held various operations and
engineering positions at Tektronix, Inc., lastly as the Director of Quality for
the Measurement Business Division. Mr. Sonneborn holds a B.S. in Applied and
Engineering Physics from Cornell University.
Brian V. Turner joined the Company in October 1995 as its Vice President of
Finance. Mr. Turner was appointed Chief Financial Officer and Vice President of
Finance and Administration in December 1995. From 1982 to October 1995, Mr.
Turner held various positions with Price Waterhouse LLP. Mr. Turner is a
certified public accountant and holds a B.B.A. in Accounting and a B.A. in
Political Science from the University of Washington.
Stephen J. Verleye joined the Company in September 1993 as Vice President of
Marketing, and subsequently served as the Company's Vice President of Business
Development. Mr. Verleye was appointed Vice President and General Manager,
Commercial Equipment Division, in May 1996. From 1986 to 1993, Mr. Verleye held
various marketing management roles at Sequent Computer Systems, Inc., the most
recent being Director of Product Marketing. From 1977 to 1986, Mr. Verleye held
various sales and marketing roles at Intel. Mr. Verleye holds a B.S.E.E. from
the University of Notre Dame.
John D. Watkins joined the Company in December 1988 as the Chief Financial
Officer and Vice President of Finance and Administration. In September 1994, Mr.
Watkins was appointed to Executive Vice President and assumed responsibilities
for sales. From 1984 to 1988, Mr. Watkins was Chief Operating Officer of
Interconnect Technology, Inc., an electronics manufacturing company. Mr. Watkins
is a certified public accountant. Mr. Watkins holds a B.S. in Economics from
Portland State University.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The Company's Common Stock has been traded on the Nasdaq National Market since
the Company's initial public offering under the symbol "RSYS". The following
table sets forth, for the periods indicated, the highest and lowest closing sale
prices for the Common Stock, as reported by the Nasdaq National Market.
High Low
---- ---
1996
First Quarter $18 1/2 $ 9
Second Quarter $37 $15
Third Quarter $51 1/8 $20
Fourth Quarter $74 1/2 $38 3/4
1997
First Quarter $66 1/2 $23 1/4
Second Quarter $42 1/2 $27 3/4
Third Quarter $54 3/4 $34
Fourth Quarter $48 1/4 $36 1/4
On March 20, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $36.50.
The Company has never paid any cash dividends on its Common Stock and does not
expect to declare cash dividends on the Common Stock in the foreseeable future.
The Company's current policy is to retain all of its earnings to finance future
growth.
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As of March 20, 1998, there were approximately 115 holders of record of the
Company's Common Stock. The Company believes that the number of beneficial
owners is substantially greater than the number of record holders because a
large portion of the Company's outstanding Common Stock is held of record in
broker "street names" for the benefit of individual investors.
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data) Year Ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues $15,351 $20,241 $35,025 $81,043 $125,442
Gross profit 5,938 8,336 12,033 33,655 50,133
Income from operations 663 1,334 2,018 13,603 22,632
Net income 767 1,365 1,516 9,546 15,425
Net income per share (diluted) 0.20 0.35 0.35 1.30 1.93
Weighted average shares outstanding 3,823 3,884 4,355 7,362 8,003
Consolidated Balance Sheet Data:
Working Capital $ 6,804 $ 7,917 $31,808 $45,830 $ 58,808
Total Assets 9,712 12,367 39,112 80,253 94,943
Long term obligations, excluding 884 648 399
current portion
Total shareholders' equity 8,126 9,649 34,819 56,778 75,882
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Total revenue was $125.4 million for 1997, compared to $81.0 million for 1996.
Net income was $15.4 million for 1997, an increase of 62% from $9.5 million for
1996. Revenues and net income increased primarily due to higher revenues from
design wins ramping into production during 1997 and the effect of acquisitions.
On April 29, 1996, the Company purchased substantially all of the assets of
Intel Corporation ("Intel") that were dedicated to the design, manufacture and
sale of all standard and custom Multibus I and Multibus II products
("Multibus"). On February 18, 1997, the Company purchased substantially all the
assets of Sonitech International, Inc., a provider of digital signal processing
hardware and software solutions for embedded applications. Both acquisitions
were accounted for using the purchase method. The results of operations for
these acquisitions have been included in the financial statements since the
dates of acquisition.
Except for the historical statements and information, this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward looking statements that involve a number of risks and
uncertainties. The following are among the factors that could cause actual
results to differ materially from the forward looking statements: business
conditions and growth in the electronics industry and general economies, both
domestic and international; uncertainty of market development; dependence on a
limited number of OEM customers; dependence on limited or sole source suppliers;
dependence on the relationship with Intel; dependence on Intel's support of the
embedded computer market; lower than expected customer orders; competitive
factors, including increased competition, new product offerings by competitors
and price pressures; the availability of parts and components at reasonable
prices; changes in product mix; dependence on proprietary technology;
technological difficulties and resource constraints encountered in developing
new products; and product shipment interruptions due to manufacturing
difficulties. The
11
<PAGE>
forward looking statements contained in this MD&A regarding
industry trends, product development and introductions, and liquidity and future
business activities should be considered in light of these factors.
Results of Operations
The following table sets forth certain operating data as a percentage of
revenues for the years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales 65.6 58.5 60.0
------ ------ ------
Gross margin 34.4 41.5 40.0
Research and development 9.4 10.1 9.3
Selling, general and administrative 19.2 14.6 12.7
------ ------ ------
Income from operations 5.8 16.8 18.0
Interest income, net 0.5 1.3 0.9
------ ------ ------
Income before income tax provision 6.3 18.1 18.9
Income tax provision 2.0 6.3 6.6
------ ------ ------
Net income 4.3% 11.8% 12.3%
====== ====== ======
</TABLE>
Years Ended December 31, 1995, 1996, and 1997
Revenues. Revenues increased 55% to $125.4 million for 1997 from $81.0 million
for 1996. The increase in revenues in 1997 resulted primarily from design wins
ramping into production during 1997 and reporting a full year of revenues in
1997 from the acquisition of Multibus on April 29, 1996. For 1997, sales to the
Company's 25 largest customers constituted 65% of revenues, as compared to 73%
and 80% for 1996 and 1995, respectively.
Revenues increased 131% to $81.0 million for 1996 from $35.0 million for 1995.
The increase in revenues in 1996 resulted primarily from the acquisition of
Multibus from Intel on April 29, 1996 and from volume increases in OEM sales.
Additionally, included within revenues for 1996 is $1.4 million of royalty
payments from Intel in connection with backlog retained by Intel pursuant to the
terms of the Acquisition.
Gross Margin. Gross margin for 1997 decreased to 40.0% from 41.5% for 1996
because of lower margin design wins ramping into production. The Company's
general business model is to price its products for new design wins at roughly
30-35% gross margins, because the Company believes this gross margin represents
the best elasticity point to maximize design wins and long term growth. As such,
the Company expects gross margins to decline gradually over time as new design
wins ramp into production. Typically, products ramp into production 12 to 24
months after the design is won.
Gross margin for 1996 increased to 41.5% from 34.4% for 1995 primarily as a
result of royalties received from Intel for backlog retained in connection with
the Multibus acquisition, component price decreasing faster than price changes
to the Company's customers, the mix of product sold through distributors versus
direct sales, and product mix for 1996 consisting of a larger portion of higher
margin products shipped relative to lower margin products shipped. Additionally,
included within cost of goods sold for 1996 is $1.3 million of inventory
valuation adjustments that resulted from purchase accounting in connection with
the Multibus acquisition.
OEM sales are characterized by longer product life cycles and generally lower
gross margins that can vary throughout the product life cycle. Gross margins are
typically lower in the early stages of production for OEM sales and have the
potential to improve over time. The Company establishes gross margin targets
based on the nature of the sales it is pursuing and the desire to establish new
OEM relationships by pricing aggressively to achieve key sales. However, many of
the factors affecting gross margins, such as variances in unit volumes and
timing of orders and component cost, are difficult or
12
<PAGE>
impossible to predict and can cause the Company to be subject to unplanned
margin variances. Gross margins on OEM sales are also particularly sensitive to
changes in customer mix because of both margin variances among individual
products and the relative importance of a single large sale on overall operating
results. To mitigate the effect of short-term margin variances, the Company may
employ "step pricing" techniques in which unit prices decline over the life of
the product to reflect anticipated production efficiencies and/or component cost
reductions, or various "cost sharing" or "cost plus" pricing techniques that
serve to reduce the margin risk to the Company.
Research and Development. Research and development expenses increased 42% to
$11.7 million for 1997 from $8.2 million for 1996, primarily as a result of
increased investment in new product development. The Company continues to invest
in new design wins for OEM customers and the dollar increases reflect steady
increases in the number of employees working in research and development.
Research and development expenses increased 149% to $8.2 million for 1996 from
$3.3 million for 1995, primarily as the result of increased investment in new
product development and costs of enhancements to existing products. Also
included within research and development for 1996 is $225,000 to expense
in-process research and development acquired in connection with the Multibus
acquisition.
Selling, General and Administrative. Selling, general and administrative
expenses increased 33.5% to $15.8 million for 1997 from $11.8 million for 1996,
and 76% to $11.8 million for 1996 from $6.7 million for 1995. Selling, general
and administrative expense have increased primarily as a result of increased
personnel, facilities, and travel, to support higher levels of sales since 1995
and to support the acquired Multibus operations in 1996. Selling, general and
administrative expenses have steadily declined as a percentage of revenues to
12.7% for 1997, from 14.6% and 19.2% for 1996 and 1995, respectively, primarily
as a result of operating efficiencies achieved by spreading fixed costs over a
larger revenue base, offset partially by increases in costs required to expand
international operations.
Interest Income, Net. Interest income, net remained stable at $1.1 million for
1997 and 1996, and increased 537% for 1996 from $0.2 for 1995. The increases for
1996 were primarily the result of interest income earned from the net proceeds
of the Company's initial public offering in October 1995.
Income Tax Provision. The income tax provisions for 1995, 1996 and 1997 reflect
effective income tax rates of 30.7%, 35% and 35%, respectively. The increases in
the provision for income tax are primarily attributable to the exhaustion of the
majority of the Company's tax loss carryforwards in 1994 and the depletion of
tax credits in 1995.
Liquidity and Capital Resources
As of December 31, 1997, the Company had $24.0 million in cash and equivalents,
which represents the Company's principal source of liquidity. As of December 31,
1997, the Company had working capital of approximately $58.8 million. The
working capital balance increased primarily due to cash generated from
operations and the increase in accounts receivable and inventories as a result
of increased sales of the Company.
Net cash provided by or (used for) operating activities was $(3.0), $10.6, and
$7.2 million for 1995, 1996 and 1997, respectively. The decrease in net cash
provided by operating activities in 1997 was largely attributable to increases
in accounts receivable of $7.2 million and in inventories of $4.4 million in
connection with the expansion of the Company's operations.
In October 1997, the Company renewed its $10.0 million line of credit with a
bank. Amounts outstanding under the line of credit will accrue interest at an
annual rate equal to the lender's prime rate. The Company has not drawn any
funds under this line of credit.
Capital expenditures were $1.7, $7.2, and $3.7 million in 1995, 1996 and 1997,
respectively. These capital expenditures were primarily for the purchase of
leasehold improvements, manufacturing equipment, and plant modernization. The
Company moved to a new headquarters and manufacturing facility in October 1996,
and took possession of a new engineering design facility in December 1997. In
addition the Company purchased in early 1996 two adjacent parcels of
13
<PAGE>
land and in early 1997 one adjacent parcel of land for future expansion. Capital
expenditures for the next 12 months, including expenditures related to the new
engineering design center, are expected to range from $4.0 million to $7.0
million.
The Company believes its existing cash and cash equivalents and cash from
operations will be sufficient to fund its operations for at least the next 12
months. Because the Company's capital requirements cannot be predicted with
certainty, there is no assurance that the Company will not require additional
financing prior to the expiration of 12 months.
Year 2000 Issues
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. The Company is addressing
this issue to ensure the availability and integrity of its financial systems and
the reliability of its operational systems. The Company has and will continue to
make certain investments in its software systems and applications to ensure the
Company is Year 2000 compliant. The financial impact on the Company has not been
and is not anticipated to be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
Independent Accountants' Report 15
Consolidated Statement of Operations for the years 17
ended December 31, 1995, 1996 and 1997
Consolidated Balance Sheet at December 31, 1996 and 1997 18
Consolidated Statement of Changes in Shareholders' Equity 19
for the years ended December 31, 1995, 1996 and 1997
Consolidated Statement of Cash Flows for the years 20
ended December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements 21
Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1997
------------------------------------------- -------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $11,065 $20,034 $22,459 $27,485 $27,830 $29,796 $31,594 $36,222
Gross profit 3,667 8,066 10,453 11,469 11,645 11,921 12,719 13,848
Income from operations 634 2,795 4,910 5,264 5,000 5,422 5,954 6,256
Net income 550 1,996 3,379 3,621 3,422 3,700 4,025 4,278
Net income per share (basic) 0.09 0.29 0.46 0.49 0.46 0.48 0.52 0.55
Net income per share (diluted) 0.09 0.27 0.43 0.46 0.43 0.46 0.49 0.53
</TABLE>
14
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file its definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 19, 1998, pursuant to Regulation 14A of the
Securities Exchange Act of 1934 (the "Proxy Statement"), not later than 120 days
after the end of the fiscal year covered by this Report, and certain information
included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors of the Company is included under
"Election of Directors" in the Company's Proxy Statement and is incorporated
herein by reference. Information with respect to executive officers of the
Company is included under Item 4(a) of Part I of this Report. Information with
respect to Section 16(a) of the Securities and Exchange Act is included under
"Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under "Executive
Compensation" in the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is included under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related transactions
is included under "Certain Relationships and Related Transactions" in the
Company's Proxy Statement and is incorporated herein by reference.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
RadiSys Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity, and
of cash flows present fairly, in all material respects, the financial position
of RadiSys Corporation and its subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
January 23, 1998
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 35,025 $ 81,043 $ 125,442
Cost of sales 22,992 47,388 75,309
---------- ---------- ----------
Gross profit 12,033 33,655 50,133
Research and development 3,301 8,222 11,712
Selling, general and administrative 6,714 11,830 15,789
---------- ---------- ----------
Income from operations 2,018 13,603 22,632
Interest income, net 170 1,083 1,097
---------- ---------- ----------
Income before income tax provision 2,188 14,686 23,729
Income tax provision 672 5,140 8,304
---------- ---------- ----------
Net income $ 1,516 $ 9,546 $ 15,425
========== ========== ==========
Net income per share (basic) $ 0.36 $ 1.38 $ 2.01
========== ========== ==========
Net income per share (diluted) $ 0.35 $ 1.30 $ 1.93
========== ========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
December 31,
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,626 $ 23,993
Accounts receivable, net 20,265 27,983
Other receivables 3,396 503
Inventories 17,834 22,830
Other current assets 742 1,910
Deferred income taxes 1,794 251
---------- ----------
Total current assets 68,657 77,470
Property and equipment, net 11,171 12,174
Other assets 425 5,299
---------- ----------
Total assets $ 80,253 $ 94,943
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,461 $ 10,840
Income taxes payable 2,996 1,558
Accrued wages and bonuses 2,230 2,893
Accrued sales discounts 1,360 1,211
Deferred revenue 647 1,234
Other accrued liabilities 2,719 712
Notes payable 1,200
Current portion of capital lease obligation 214 214
---------- ----------
Total current liabilities 22,827 18,662
---------- ----------
Obligations under capital lease 648 399
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized,
7,388,410 and 7,803,595 shares issued and outstanding 45,061 50,788
Warrants 1,200
Cumulative translation adjustment (329) (1,177)
Retained earnings 10,846 26,271
---------- ----------
Total shareholders' equity 56,778 75,882
---------- ----------
Total liabilities and shareholders' equity $ 80,253 $ 94,943
========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
Page 1 of 2
Preferred Stock
-------------------
Series A Series B Series C Common Stock
------------------ ------------------- -------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount Warrants
-------- ------- --------- ------- ---------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 355,556 $ 1,500 1,820,988 $ 4,917 2,159,504 $ 2,973 1,482,200 $ 475 $
Shares issued pursuant to
benefit plans 58,524 106
Issuance of common stock 2,175,000 23,656
Conversion of preferred
stock (355,556) (1,500) (1,820,988) (4,917) (2,159,504) (2,973) 2,298,985 9,390
Translation adjustment
Net income for the year
-------- ------- --------- ------- ---------- ------- --------- ------- --------
Balances, December 31, 1995 0 0 0 0 0 0 6,014,709 33,627
Shares issued pursuant to
benefit plans 73,701 365
Tax effect of options
exercised 569
Translation adjustment
Stock issued for acquisition 1,300,000 10,500
Warrants issued for
acquisition 1,200
Net income for the year
-------- ------- --------- ------- ---------- ------- --------- ------- --------
Balances, December 31, 1996 0 0 0 0 0 0 7,388,410 45,061 1,200
Exercise of warrants 166,667 1,200 (1,200)
Shares issued pursuant to
benefit plans 165,018 1,605
Tax effect of options
exercised 513
Translation adjustment
Stock issued for acquisition 83,500 2,409
Net income for the year
Balances, December 31, 1997 0 $ 0 0 $ 0 0 $ 0 7,803,595 $50,788 $ 0
======== ======= ========= ======= ========== ======= ========= ======= ========
The accompanying notes are an integral part of this statement.
</TABLE>
19a
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
Page 2 of 2
Cumulative
transaction (deficit)
adjustment earnings Total
---------- -------- --------
<S> <C> <C> <C>
Balances, December 31, 1994 $ $ (216) $ 9,649
Shares issued pursuant to
benefit plans 106
Issuance of common stock 23,656
Conversion of preferred
stock
Translation adjustment (108) (108)
Net income for the year 1,516 1,516
---------- -------- --------
Balances, December 31, 1995 (108) 1,300 34,819
Shares issued pursuant to
benefit plans 365
Tax effect of options
exercised 569
Translation adjustment (221) (221)
Stock issued for acquisition 10,500
Warrants issued for
acquisition 1,200
Net income for the year 9,546 9,546
---------- -------- --------
Balances, December 31, 1996 (329) 10,846 56,778
Exercise of warrants
Shares issued pursuant to
benefit plans 1,605
Tax effect of options
exercised 513
Translation adjustment (848) (848)
Stock issued for acquisition 2,409
Net income for the year 15,425 15,425
Balances, December 31, 1997 $ (1,177) $ 26,271 $ 75,882
========== ======== ========
The accompanying notes are an integral part of this statement.
</TABLE>
19b
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,516 $ 9,546 $ 15,425
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,435 2,516 3,808
Deferred income taxes (37) (1,497) 1,543
Net changes in current assets and current liabilities:
Increase in accounts receivable (3,053) (13,396) (7,178)
Decrease in other receivables 1,543 2,893
Increase in inventories (3,136) (5,857) (4,382)
Increase in other assets (163) (143) (1,372)
Increase (decrease) in accounts payable 252 9,671 (733)
Increase (decrease) in income tax payable (151) 2,849 (1,438)
Increase in accrued wages and bonuses 218 1,447 569
Increase (decrease) in accrued sales discounts 1,360 (149)
Increase (decrease) in other accrued liabilities 158 1,936 (2,354)
Increase in deferred revenue 647 587
-------- -------- --------
Net cash provided by (used for) operating activities (2,961) 10,622 7,219
-------- -------- --------
Cash flows from investing activities:
(Increase) decrease in short term investments (10,922) 10,922
Business acquisitions (1,060)
Capital expenditures (1,704) (7,240) (3,742)
Capitalized software production costs (626) (391) (1,539)
-------- -------- --------
Net cash provided (used for) by investing activities (13,252) 3,291 (6,341)
-------- -------- --------
Cash flows from financing activities:
Proceeds from line of credit 1,700
Repayment of line of credit (1,700)
Issuance of common stock, net 23,762 934 2,118
Payments on notes payable (2,532)
Payments on capital lease obligation (170) (236) (249)
-------- -------- --------
Net cash provided by (used for) financing activities 23,592 698 (663)
-------- -------- --------
Effect of exchange rate changes on cash (108) (221) (848)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 7,271 14,390 (633)
Cash and cash equivalents, beginning of period 2,965 10,236 24,626
-------- -------- --------
Cash and cash equivalents, end of period $ 10,236 $ 24,626 $ 23,993
======== ======== ========
The accompanying notes are an integral part of this statement.
</TABLE>
20
<PAGE>
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. Significant Accounting Policies
Organization of the Company
RadiSys Corporation (the Company) was incorporated in March 1987 under the laws
of the State of Oregon for the purpose of developing, producing and marketing
computer system (hardware and software) products for embedded computer
applications in manufacturing automation, medical, transportation,
telecommunications and test equipment marketplaces.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Cash and cash equivalents
Cash and cash equivalents include short-term investments with an original
maturity of less than three months.
Revenue recognition
The Company recognizes revenue from non-distributor product sales upon shipment.
For sales through distributors, the Company recognizes revenue upon shipment of
the Company's product from the distributor. The Company may grant certain sales
discounts to distributors. Such sales discounts are accrued at the time revenues
are recorded for distributor sales.
Accounts receivable
Trade accounts receivable are net of an allowance for doubtful accounts of $706
and $663 at December 31, 1996 and 1997, respectively. The Company's customers
are concentrated in the technology industry. Therefore, the Company's operations
and collection of its accounts receivable are directly associated with the
results of the technology industry.
Inventories
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out (FIFO) method to determine cost. Inventories consist of:
December 31,
-------------------------
1996 1997
---------- ----------
Raw materials $ 12,555 $ 15,388
Work in process 3,538 1,844
Finished goods 1,741 5,598
---------- ----------
$ 17,834 $ 22,830
========== ==========
The Company periodically evaluates its inventory in terms of obsolete or
slow-moving items. Inventories are net of a reserve for obsolete and slow-moving
items of $529 and $847 at December 31, 1996, and 1997, respectively.
21
<PAGE>
Property and Equipment
Property and equipment is recorded at cost and depreciated for financial
reporting purposes on a straight-line basis over estimated useful lives of three
to five years. Equipment under capital leases is amortized on a straight-line
basis over the shorter of the lease term or the economic life of the underlying
asset. Ordinary maintenance and repair expenditures are charged to expense when
incurred. Equipment recorded under capital leases at December 31, 1997 totaled
$1,268 with accumulated amortization of $655.
Research and development
Expenditures for research and development are expensed as incurred.
Computer software production costs
Software production costs incurred subsequent to establishment of technological
feasibility, but before release to customers, are capitalized. Upon general
release of the product, cost capitalization is terminated and the accumulated
costs are amortized based on the greater of the proportion of current revenues
to total revenue estimates for the related product, or straight-line
amortization over the remaining estimated economic life of the product not to
exceed two years. Unamortized software production costs of $338 and $1,943 are
included in other assets at December 31, 1996 and 1997, respectively.
Amortization of software production costs in 1995, 1996 and 1997 aggregated
$378, $452 and $722, respectively.
Cash flows
The Company made cash payments for income taxes of $547, $3,205 and $7,756 for
the years ended December 31, 1995, 1996 and 1997, respectively.
Fair value of financial assets and liabilities
The Company estimates the fair value of its monetary assets and liabilities
based upon comparative current market values of instruments of a similar nature
and degree of risk. The Company estimates that the carrying amount of all of its
monetary assets and liabilities approximate fair value as of December 31, 1996
and 1997.
Foreign currency translation
Assets and liabilities of international operations are translated into U.S.
dollars at current exchange rates. Income and expense accounts are translated
into U.S. dollars at average rates of exchange prevailing during the period.
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are recorded as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are included
in income.
Certain risks and uncertainties
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 and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
New Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". These statements require entities to
report changes in equity that result from transactions and economic events other
than those with shareholders,
22
<PAGE>
and to provide information about the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates, respectively. These will be adopted by the Company in 1998, as
required by the statements. Management expects that the adoption of these
pronouncements will have no effect on reported earnings. The Company's
comprehensive income component will consist only of the SFAS 52 cumulative
translation adjustment, already included in the consolidated statement of
shareholders' equity.
2. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Currently payable:
Federal $ 532 $ 5,417 $ 5,834
State 182 1,220 927
--------- --------- ---------
714 6,637 6,761
--------- --------- ---------
Deferred:
Federal 201 (1,180) 1,351
State (14) (198) 192
--------- --------- ---------
187 (1,378) 1,543
--------- --------- ---------
Decrease in valuation allowance (229) (119) -
--------- --------- ---------
Total provision $ 672 $ 5,140 $ 8,304
========= ========= =========
</TABLE>
The provision for income tax differs from the amount computed by applying the
statutory federal income tax rate to pretax income as a result of the following
differences:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 35.0% 35.0%
Increase (decrease) in rates resulting from:
State taxes 5.0 4.5 3.3
Goodwill benefit from acquisition (2.1) (2.2)
Deferred tax asset valuation allowance (10.3) (.8)
Other 2.0 (1.6) (1.1)
--------- --------- ---------
Effective tax rate 30.7% 35.0% 35.0%
========= ========= =========
</TABLE>
Deferred tax assets/(liabilities) are comprised of the following components:
<TABLE>
<CAPTION>
December 31,
1996 1997
--------- ---------
<S> <C> <C>
Warranty reserve $ 491 $ 68
Accrued expenses 810 781
Other 493 (598)
--------- ---------
Net deferred tax asset $ 1,794 $ 251
</TABLE>
23
<PAGE>
3. Property and Equipment
<TABLE>
<CAPTION>
December 31,
1996 1997
--------- ---------
<S> <C> <C>
Land $ 1,230 $ 1,387
Manufacturing Equipment 8,472 9,996
Office Equipment 5,548 7,255
Leasehold Improvements 1,129 1,801
--------- ---------
16,379 20,439
Less: Accumulated Depreciation 5,208 8,265
========= =========
$ 11,171 $ 12,174
========= =========
</TABLE>
4. Commitments and Contingencies
Line of Credit
In October 1997, the Company renewed its $10.0 million unsecured line of credit,
with an interest rate based upon the lower of the IBOR plus 1.25 to 2.0% or the
bank's prime rate. The line of credit expires in October 1998. The Company has
not drawn any funds under this line of credit.
Operating leases
The Company leases its facilities and office equipment under non-cancelable
operating leases which require minimum lease payments as follows at December 31,
1997:
Year Ending Operating
December 31, leases
----------- ---------
1998 $ 1,945
1999 1,960
2000 1,963
2001 1,860
2002 1,860
Thereafter 17,504
---------
$ 27,092
=========
Rent expense related to these operating leases aggregated $352, $330 and $1,288
in 1995, 1996 and 1997, respectively.
24
<PAGE>
During 1995, the Company entered into capital leases for certain manufacturing
equipment. The minimum payments under these leases are as follows:
Year Ending Operating
December 31, leases
----------- ---------
1998 289
1999 289
2000 75
---------
653
Less: amount representing interest (40)
---------
Present value of lease payments 613
Less: portion due in the next year (214)
---------
Long-term portion of capital lease obligation $ 399
=========
5. Export Sales and Major Customers
Export sales were $6,061, $22,072 and $37,011 in 1995, 1996 and 1997,
respectively. Such export sales were made to customers in the following
countries:
<TABLE>
<CAPTION>
Country Year Ended December 31,
------- 1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Japan $ 678 $ 2,542 $ 4,000
The Netherlands 1,912 4,865 9,393
Sweden 395 3,600 2,518
Switzerland 2,534 3,678 2,274
Other 542 7,387 18,826
--------- --------- ---------
Total $ 6,061 $ 22,072 $ 37,011
========= ========= =========
</TABLE>
One customer accounted for 10.4% and 10.1% of 1995 and 1996 sales. No customer
accounted for more than 10% of sales in 1997.
6. Shareholders' Equity
<TABLE>
<CAPTION>
EPS Reconciliation
Year Ended December 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted Average Shares (basic) 4,242,000 6,924,000 7,679,000
Effect of Dilutive Stock Options 113,000 438,000 324,000
--------- --------- ---------
Weighted Average Shares (diluted) 4,355,000 7,362,000 8,003,000
========= ========= =========
</TABLE>
Options to purchase 139,128 shares of common stock were outstanding in 1997 but
were excluded in the computation of diluted EPS as the options' exercise price
was greater than the average market price of common shares.
25
<PAGE>
Stock option plan
During 1988 and 1995, the shareholders approved stock option plans. First time
options granted to new employees become exercisable one-third annually, with no
options exercisable in the first year following the grant date. Options granted
to existing employees are not exercisable until between the second and fourth
anniversary of the date of grant. The difference between the fair market value
of the Company's common stock and the option exercise price at the date of
grant, if material, is recorded as compensation expense ratably over the vesting
period of the related options. Compensation expense related to the stock option
plan for the years ended December 31, 1995, 1996 and 1997 was immaterial. The
table below summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 177,796 $2.45 359,321 $7.71 777,641 $26.08
Granted 247,307 $9.98 515,052 $34.00 656,402 $45.07
Canceled (7,258) $2.80 (51,308) $12.30 (376,699) $51.00
Exercised (58,524) $1.81 (45,424) $3.91 (71,535) $6.76
=========== ============ ============ ============ ========== ============
Ending Balance 359,321 $7.71 777,641 26.08 985,809 $27.99
=========== ============ ============ ============ ========== ============
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
Weighted
Number of Weighted Remaining Average
Exercise Price Range Shares Average Price Contractual Life
------------------------------- ------------- -------------- ------------------
<S> <C> <C> <C>
$0 - $11.00 282,818 $ 9.02 3.23
$11.25 - $36.00 208,707 $ 27.61 5.60
$36.25 - $38.75 314,000 $ 37.96 5.16
$38.88 - $58.00 180,284 $ 40.82 5.36
============= ============== ==================
985,809 $ 27.99 4.74
============= ============== ==================
</TABLE>
Options exercisable at December 31, 1997 totaled 196,905 shares at a weighted
average exercise price of $15.85. Options available for grant at December 31,
1997 totaled 661,329 shares.
Employee stock purchase plan
In December 1995, the Company established an Employee Stock Purchase Plan
(ESPP). Under the plan, the Company is authorized to sell up to 250,000 shares
of common stock in a series of eighteen month offerings. Substantially all
employees are eligible to receive rights under the plan. The purchase price is
the lesser of 85% of the fair market value of the common stock on date of grant
or on the purchase date. During 1996 and 1997, the Company issued 28,277 and
93,483 shares under the plan, respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
The Company has elected to account for its stock based compensation under
Accounting Principles Board Opinion No. 25; however, as required by SFAS 123 the
Company has computed for pro forma disclosure purposes the value of options
granted during 1995, 1996 and 1997 using the Black-Scholes option pricing model.
The weighted average assumptions used for stock option grants for 1995, 1996 and
1997 were a risk free interest rate of 5.5%, 6% and 5.4%, respectively, an
26
<PAGE>
expected dividend yield of 0%, 0% and 0%, respectively, an expected life of 5, 4
and 4 years, respectively, and an expected volatility of 0%, 50% and 50%,
respectively. The weighted average assumptions used for ESPP rights for 1996 and
1997 were a risk free interest rate of 5.7%, and 5.3%, respectively, an expected
dividend yield of 0% and 0%, respectively, an expected life of 1.5 years and 1.5
years, respectively, and an expected volatility of 50% and 50%, respectively.
The weighted-average fair value of ESPP rights granted in 1996 and 1997 were
$242 and $656, respectively.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For the
years ended December 31, 1995, 1996 and 1997, the total value of the options
granted was computed to be $612, $9,205 and $8,578, respectively, which would be
amortized on a straight line basis over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS 123, the
Company's net income and pro forma net income per share would have been reported
as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1996 Year Ended December 31, 1997
-------------------------------- -------------------------------- --------------------------------
Earnings per Share Earnings per Share Earnings per Share
------------------ ------------------ ------------------
Net Income Basic Diluted Net Income Basic Diluted Net Income Basic Diluted
---------- ----- ------- ---------- ----- ------- ---------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As Reported $1,516 $0.36 $0.35 $9,546 $1.38 $1.30 $15,425 $2.01 $1.93
Pro Forma $1,510 $0.36 $0.35 8,533 $1.23 $1.19 $12,904 $1.68 $1.60
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosure for 1996 and
1997 are not likely to be representative of the effects on reported net income
and earnings per share for future years since options vest over several years
and additional awards are made each year.
7. Multibus Acquisition
On April 29, 1996, the Company purchased substantially all of the assets of
Intel Corporation ("Intel") that were dedicated to the design, manufacture and
sale of all standard and custom Multibus I and Multibus II products ("Multibus")
(collectively the "Acquisition"). In addition, pursuant to the terms of the
Acquisition, Intel licensed certain Intel software to the Company. The purchase
price consisted of 1,300,000 shares of the Company's common stock ("Common
Stock") and warrants to purchase an additional 300,000 shares of Common Stock
exercisable within 24 months at prices per share ranging from $13.50 to $15.00,
plus an aggregate of $1.2 million in cash to be paid in 1997.
The Acquisition was accounted for using the purchase method. The results of
operations for Multibus have been included in the financial statements since the
date of acquisition. The aggregate purchase price of $13.2 million (including
direct costs of acquisition) was allocated to purchased inventory, equipment and
in-process research and development. Included within cost of goods sold for 1996
is $1.3 million of inventory valuation adjustments that resulted from purchase
accounting and within research and development for 1996 is $225,000 to expense
in-process research and development acquired in connection with the Multibus
acquisition. The non cash portions have been excluded from the accompanying
Consolidated Statement of Cash Flows.
The following unaudited pro forma information presents the results of operations
of the Company as if the Acquisition had occurred as of the beginning of the
respective periods, after giving effect to increases in operating, research and
development, and general and administrative costs to operate the business,
depreciation of acquired fixed assets, and
27
<PAGE>
adjustments to reflect the estimated impact on tax expense of the Acquisition.
The unaudited pro forma financial statements are not necessarily indicative of
what actual results would have been had the Multibus acquisition occurred at the
beginning of the respective periods.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996
--------- ---------
(unaudited)
<S> <C> <C>
Revenues $ 110,152 $ 101,387
Net Income $ 6,857 $ 11,216
Earnings per share (basic) $ 1.24 $ 1.52
Earnings per share (diluted) $ 1.15 $ 1.42
</TABLE>
28
<PAGE>
(a)(2) Financial Statement Schedule
Page in Form 10-K
Schedule II - Valuation and Qualifying Accounts
Report of Independent Accountants on Financial Statement Schedule
(a)(3) Exhibits
Exhibit
No. Description
- ------- -----------
+2.1 Asset Purchase Agreement between Radisys Corporation and Intel
Corporation, dated as of April 29, 1996. Incorporated by reference as
Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 29,
1996.
2.2 List of omitted schedules to Asset Purchase Agreement between Radisys
Corporation and Intel Corporation, dated as of April 29, 1996.
Incorporated by reference as Exhibit 2.2 to the Company's Current
Report on Form 8-K dated April 29, 1996.
3.1 Second Restated Articles of Incorporation and Amendments thereto.
Incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-95892) (the "Form S-1"), and
by reference to Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997.
3.2 Restated Bylaws and amendments thereto. Incorporated by reference to
Exhibit 3.2 to the Form S-1.
4.1 See Article IV of Exhibit 3.1 and Article VI of Exhibit 3.2
*10.1 1988 Stock Option Plan, as amended. Incorporated by reference to
Exhibit 10.1 to the Form S-1.
*10.2 1995 Stock Incentive Plan, as amended. Incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on From 10-Q for the
quarterly period ended June 30, 1997.
*10.3 1996 Employee Stock Purchase Plan. Incorporated by reference to
Appendix A to the Company's Proxy Statement related to its annual
meeting held on May 28, 1996, which was filed with the Securities and
Exchange Commission on April 15, 1996.
*10.4 Form of Incentive Stock Option Agreement. Incorporated by reference to
Exhibit 10.3 to the Form S-1.
*10.5 Form of Non-Statutory Stock Option Agreement. Incorporated by reference
to Exhibit 10.4 to the Form S-1.
10.8 Lease between Registrant and Commercial Real Estate Company, L.L.C.
dated December 15, 1995. Incorporated by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
10.9 Master Equipment Lease No. 10551, dated as of March 2, 1995, between
U.S. Bancorp Leasing & Financial, as Lessor, and the Registrant, as
Lessee, including Schedules 10551.001, 10551.002 and 10551.003, dated
March 2, 1995, March 29, 1995 and May 23, 1995, respectively.
Incorporated by reference to Exhibit 10.8 to the Form S-1.
*10.10 Form of Indemnity Agreement. Incorporated by reference to Exhibit 10.9
to the Form S-1.
10.11 Revolving line of credit agreement between the Company and United
States National Bank of Oregon dated September 12, 1996. Incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
10.11(a) Renewal of September 12, 1996 revolving line of credit agreement
between the Company and United States National Bank of Oregon dated
October 17, 1997.
10.12 Dawson Creek II lease, dated March 21, 1997, incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997.
<PAGE>
21.1 List of Subsidiaries
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
+ Confidential treatment of portions of this document has been granted.
* This Exhibit constitutes a management contract or compensatory plan or
arrangement
29
<PAGE>
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended December 31,
1997.
(c) See (a)(3) above.
(d) See (a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 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, thereunto duly authorized.
Dated: March 30, 1998 RADISYS CORPORATION
By: DR. GLENFORD J. MYERS
-------------------------------------
Dr. Glenford J. Myers
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 1998.
Signature Title
- --------- -----
DR. GLENFORD J. MYERS Chairman of the Board,
- ----------------------------- President and
Dr. Glenford J. Myers Chief Executive Officer
(Principal Executive Officer)
BRIAN V. TURNER Vice President of Finance and Administration
- ----------------------------- and Chief Financial Officer
Brian V. Turner (Principal Financial and Accounting Officer)
Directors:
JAMES F. DALTON Director
- -----------------------------
James F. Dalton
RICHARD J. FAUBERT Director
- -----------------------------
Richard J. Faubert
C. SCOTT GIBSON Director
- -----------------------------
C. Scott Gibson
DR. WILLIAM W. LATTIN Director
- -----------------------------
Dr. William W. Lattin
JEAN CLAUDE PETERSCHMITT Director
- -----------------------------
Jean Claude Peterschmitt
30
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
beginning of costs and Balance at
period expenses Deductions end of period
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts -
Year ended:
December 31, 1995 $ 118,000 $ 163,000 $ (48,000) $ 233,000
December 31, 1996 233,000 548,000 (75,000) 706,000
December 31, 1997 706,000 190,000 (233,000) 663,000
Warranty reserve -
Year ended:
December 31, 1995 220,000 466,000 (352,000) 334,000
December 31, 1996 334,000 1,154,000 (261,000) 1,227,000
December 31, 1997 1,227,000 1,727,000 (2,783,000) 171,000
Obsolescence reserve -
Year ended:
December 31, 1995 186,000 125,000 (201,000) 110,000
December 31, 1996 110,000 449,000 (30,000) 529,000
December 31, 1997 529,000 1,406,000 (1,088,000) 847,000
</TABLE>
32
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of
RadiSys Corporation
Our audits of the consolidated financial statements referred to in our report
dated January 23, 1998, also included an audit of the Financial Statement
Schedule listed in Item 14(a) of this Form 10-K. In our opinion, the Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
Price Waterhouse LLP
Portland, Oregon
January 23, 1998
33
[Ex 10.11(a)]
October 17, 1997
Mr. Brian V. Turner, Chief Financial Officer
RadiSys Corporation
15025 SW Koll Parkway
Beaverton, Oregon 97006-6056
Dear Brian:
I am pleased to advise you that U.S. Bank, National Association ("Bank") has
approved the renewal of the revolving line of credit and Corporate Visa facility
for RadiSys Corporation, subject to the following terms and conditions:
Borrower: RadiSys Corporation ("RadiSys").
Operating Line of Credit
- ------------------------
Purpose: Working Capital and general corporate purposes.
Borrowing Limit: $10,000,000
Guarantors: None.
Expiry Date: September 30, 1998 or upon non-compliance with any
term or condition stated herein, or any material
misrepresentation of fact by the Borrower.
Pricing:
Fees: Upfront Fee of 5 basis points ($5,000) on the
committed amount due upon acceptance.
Quarterly fee of 1/8 of 1 percent (annualized) based
upon the unused portion of the line, due quarterly
in arrears.
<PAGE>
RadiSys Corporation Page 2
October 17, 1997
Interest Rate: Pricing based upon U.S. Bank, National Association's
Prime Rate,1 Bankers' Acceptances ("BA"), or London
Interbank Offering Rates ("LIBOR"), at the
Borrower's option. The Prime Rate will be
fully floating and computed on a 360 day
year.
The spread over the base rates will be
determined quarterly by the Borrower's
Total Liabilities / Tangible Net Worth*
Ratio as expressed in the chart below. The
rate will be adjusted within 5 business
days of receipt of either the quarterly
10-Q report or the audited annual
financials.
Total Liabilities/Tangible Net Prime BA or LIBOR
------------------------------ ----- -----------
Worth
-----
Greater then 0.65:1.00 + 0% +2.00%
0.41:1.00 to 0.65:1.00 + 0% +1.75%
0.26:1.00 to 0.40:1.00 + 0% +1.50%
Less than or equal to 0.25:1.00 + 0% +1.25%
B/A financing available to Borrower in minimum amount
of $1,000,000 to maximum of 90 days.
LIBOR Terms:
A) Minimum amount of $500,000 and $100,000
increments thereafter.
B) Maturity and availability: One, two
or three month periods.
C) Prepayment of LIBOR borrowings not permitted.
D) Notification: Two day notification prior to 12:
00 noon on the day of notification.
- ---------------------
1 If the interest rate charged to the Borrower is tied to the Prime Rate of
U.S. Bank, Borrower is advised that U.S. Bank's Prime Rate is the rate of
interest which the Bank from time to time identifies and publicly announces
as its Prime Rate and is not necessarily, for example, the lowest rate of
interest which the Bank collects from any borrower or group of borrowers.
<PAGE>
RadiSys Corporation Page 3
October 17, 1997
E) Irrevocability: Acceptance of a pricing commitment
from the Bank will constitute an irrevocable agreement
to borrow under the revolving line of credit.
F) Interest computed on the basis of a 360 day year and
the number of days elapsed.
* Tangible Net Worth is defined as Total Shareholder's
Equity less Intangibles (e.g. Goodwill, Patents,
Software development costs, etc.). All other
capitalized terms are defined in accordance with GAAP.
All reasonable out of pocket expenses for
documentation and collateral examination
fees to be paid by Borrower.
Repayment Terms: Optional advance note. Interest payable monthly, in
arrears. Principal due at maturity.
Repayment of each advance received by the
Borrower under the line of credit is
subject to the terms and conditions of the
promissory note evidencing that advance as
well as all conditions of this letter. In
the event of any conflict between the two,
the terms and conditions of the promissory
note shall control.
Collateral: The revolving line of credit provides for a flexible
collateral position according to the following matrix.
The assets of the Borrower which are referenced below
include accounts and inventory.
<PAGE>
RadiSys Corporation Page 4
October 17, 1997
- --------------------------------------------------------------------------------
Quick Ratio Collateral
----------- ----------
- --------------------------------------------------------------------------------
Greater than 1.50:1.00 Unsecured with
negative pledge agreement.
- --------------------------------------------------------------------------------
Less than or equal to 1.50:1.00 Unsecured with negative pledge, if not
borrowing, but converts to secured if
ratio falls below 1.50 benchmark for
two consecutive quarters. If Borrowing
and equal to, or less than 1.50, then
the line of credit is secured.
- --------------------------------------------------------------------------------
Less than or equal to 1.15:1.00 Line is secured and margined at 80%
of eligible A/R**.
- --------------------------------------------------------------------------------
* Quick Ratio is defined as ((Cash plus Trade Accounts
Receivable, Net)/(Current Liabilities))
Advances: Advances limited to the Borrowing Limit when Quick
Ratio is greater than 1.15:1.0. When Quick Ratio is
less than or equal to 1.15:1.00 the advances will be
limited to 80% of eligible A/R to 90 days after date
of invoice. Ineligible accounts will be datings, COD
or cash sales, inter-company, employee, progress
billings, consignments, retainage, potential offset
and accounts where more than 25% of the balance is
beyond 90 days after date of invoice. Foreign accounts
receivable will be considered eligible at the
discretion of the Bank.
Disbursements under the line of credit shall terminate
on the earlier occurrence of the date indicated above
as the Expiry Date or the date on which this Bank, in
its sole discretion, determines that there has been a
material adverse change in the financial condition or
management of the Borrower, or determines that there
has been any noncompliance with any term or
condition stated herein. Noncompliance with the
conditions and terms of this letter of will be
considered as an event of default, entitling the Bank
to all the default provisions as provided for in
documents evidencing this line of credit.
<PAGE>
RadiSys Corporation Page 5
October 17, 1997
Corporate Visa Facility:
- ------------------------
Borrowing Limit: $120,000
Terms and Conditions: Terms as outlined in Corporate Visa agreement and
application.
Foreign Exchange Currency Transactions:
- ---------------------------------------
General Parameters: Availability to facilitate
issuance of forward and spot currency contracts.
Maximum forward settlement 13 months, with the
majority not to exceed March 31, 1999. Further
details are available upon request.
General Conditions:
- -------------------
Covenants: The following covenants will be measured quarterly:
1. Minimum Current Ratio: The ratio of Current
Assets to Current Liabilities not to be less than
2.00 to 1.00.
2. Maximum Leverage Ratio: The ratio of Total
Liabilities to Tangible Net Worth not to be more
than 0.75 to 1.00.
3. Minimum Tangible Net Worth: Tangible Net Worth
shall not be less than $48,000,000.
Failure to comply with any the above listed covenants
constitutes an event of default under the terms of the
Bank's documents.
Financial Reporting:
1. Audited annual financial statements.
2. Quarterly interim financial statements and all
material documents filed with the SEC.
3. If the Quick Ratio (as defined above) falls below
1.15 to 1.00: A borrowers certificate with each
advance, and a borrowers certificate to accompany
the monthly A/R and A/P agings. Additionally, if
a Bank Collateral Survey is performed then further
refinement of the advance structure may be
necessary.
<PAGE>
RadiSys Corporation Page 6
October 17, 1997
Documentation: Execution of notes, loan agreements, borrowing
resolutions, incumbency certificates and other
documents as required by the Bank on forms prepared
by the Bank.
If the above terms and conditions to extend credit to RadiSys Corporation are
acceptable to you, please sign and return the acknowledgment copy of this letter
on or before October 31, 1997.
We are pleased to provide you this borrowing accommodation and look forward to
serving your banking needs in the future.
Sincerely,
ROSS A. BEATON
- --------------
Ross A. Beaton
Vice President
Exhibit 21.1
RADISYS CORPORATION
LIST OF SUBSIDIARIES
Jurisdiction of
Subsidiary Incorporation
--------------------------------- ------------------------
RadiSys International Oregon
RadiSys K.K. Japan
Radisys G.m.b.H. Germany
RadiSys B.V. Netherlands
RadiSys International Sales Corp. Barbados
RadiSys SARL France
RadiSys UK Limited United Kingdom
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-80577 and 333-00514) of RadiSys Corporation of
our report dated January 23, 1998 appearing on page 16 of this Annual Report on
Form 10-K. We also hereby consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page 32 of this
10-K.
Price Waterhouse LLP
Portland, Oregon
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,993
<SECURITIES> 0
<RECEIVABLES> 27,983
<ALLOWANCES> 663
<INVENTORY> 22,830
<CURRENT-ASSETS> 77,470
<PP&E> 12,174
<DEPRECIATION> 8,265
<TOTAL-ASSETS> 94,943
<CURRENT-LIABILITIES> 18,662
<BONDS> 0
0
0
<COMMON> 50,788
<OTHER-SE> 25,094
<TOTAL-LIABILITY-AND-EQUITY> 94,943
<SALES> 125,442
<TOTAL-REVENUES> 125,442
<CGS> 75,309
<TOTAL-COSTS> 27,501
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,097
<INCOME-PRETAX> 23,729
<INCOME-TAX> 8,304
<INCOME-CONTINUING> 15,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,425
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 1.93
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 23,417 21,881 23,144
<SECURITIES> 0 0 0
<RECEIVABLES> 26,077 23,046 24,091
<ALLOWANCES> 674 658 738
<INVENTORY> 20,768 20,024 20,008
<CURRENT-ASSETS> 74,072 68,923 72,048
<PP&E> 12,571 12,570 12,156
<DEPRECIATION> 7,276 6,645 5,858
<TOTAL-ASSETS> 91,429 88,134 88,386
<CURRENT-LIABILITIES> 19,564 18,723 24,782
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 49,414 49,356 48,132
<OTHER-SE> 21,989 17,530 14,885
<TOTAL-LIABILITY-AND-EQUITY> 91,429 86,134 88,386
<SALES> 89,220 57,626 27,830
<TOTAL-REVENUES> 89,220 57,626 27,830
<CGS> 62,935 34,080 16,185
<TOTAL-COSTS> 19,909 13,144 6,645
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 772 634 264
<INCOME-PRETAX> 17,148 10,956 5,264
<INCOME-TAX> 6,001 3,834 1,842
<INCOME-CONTINUING> 11,147 7,122 3,422
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 11,147 7,122 3,422
<EPS-PRIMARY> 1.37 0.89 0.43
<EPS-DILUTED> 1.37 0.89 0.43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<CASH> 24,626 28,388 18,753 20,049 10,236
<SECURITIES> 0 0 1,050 1,000 10,922
<RECEIVABLES> 20,971 15,044 16,050 7,275 7,008
<ALLOWANCES> 706 699 517 227 233
<INVENTORY> 17,834 12,089 9,497 5,453 6,380
<CURRENT-ASSETS> 68,657 59,887 51,611 34,768 35,217
<PP&E> 16,379 9,250 8,410 4,321 3,179
<DEPRECIATION> 5,208 5,171 4,598 4,162 3,832
<TOTAL-ASSETS> 80,253 69,735 60,848 39,875 39,112
<CURRENT-LIABILITIES> 22,827 15,585 10,227 3,656 3,409
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 45,061 44,400 44,147 33,633 33,627
<OTHER-SE> 11,717 8,415 4,876 1,760 1,192
<TOTAL-LIABILITY-AND-EQUITY> 80,253 69,736 80,648 39,875 39,112
<SALES> 81,043 53,558 31,099 11,065 35,025
<TOTAL-REVENUES> 81,043 53,558 31,099 11,065 35,025
<CGS> 47,388 31,372 19,366 7,398 22,992
<TOTAL-COSTS> 20,052 13,848 8,304 3,033 10,015
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 1,083 812 525 253 170
<INCOME-PRETAX> 14,686 9,152 3,954 887 2,188
<INCOME-TAX> 5,140 3,228 1,408 337 672
<INCOME-CONTINUING> 9,546 5,924 2,546 550 1,516
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 9,546 5,924 2,546 550 1,516
<EPS-PRIMARY> 1.30 0.83 0.37 0.09 0.35
<EPS-DILUTED> 1.30 0.83 0.37 0.09 0.35
</TABLE>
