UNITED STATES 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, 1998
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. (X )
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 10, 1999: $159,593,820. 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 10, 1999: 7,904,115.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into
Document which Incorporated
------------------------------- ----------------------
Proxy Statement for 1999 Annual
Meeting of Shareholders Part III
<PAGE>
RADISYS CORPORATION
FORM 10-K
TABLE OF CONTENTS
Part I
Item 1 Business 3
Item 2 Properties 9
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 11
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 17
Part III
Item 10 Directors and Executive Officers of the Registrant 17
Item 11 Executive Compensation 17
Item 12 Security Ownership of Certain Beneficial Owners
and Management 17
Item 13 Certain Relationships and Related Transactions 17
Part IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 17
Signatures 32
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PART I
ITEM 1. BUSINESS
RadiSys Corporation ( "RadiSys" or the "Company"), incorporated in 1987, is an
independent designer and manufacturer of embedded computer solutions used by
original equipment manufacturers ("OEMs") for products in the manufacturing
automation, telecommunications, medical devices, transportation, gaming,
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 or the Texas
Instruments C6x architectures 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, gaming equipment, anticollision systems, intelligent highway systems,
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 1998.
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 thousands 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.
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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
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 January 1999 the Company introduced INtime 2.0, which enhances the
Microsoft Windows NT 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
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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.
The Company markets its products primarily in North America, Western Europe and
Japan. In 1998, the Company had no customer whose sales were more than 10% of
total revenues; the top 25 customers accounted for approximately 74% of 1998
sales. In North America, products are sold principally by a direct sales force.
The Company has U.S. regional offices in Boston 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 28 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 1996, 1997 and 1998,
international sales represented approximately 27%, 30% and 29%, respectively, of
revenues. Substantially all of the Company's international sales are denominated
in U.S. dollars.
The Company has established distributor relationships with 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, 1998 consisted of
approximately 150 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 1996, 1997 and 1998, the Company
invested $8.2
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million, $11.7 million and $13.6 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 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 three automated lines for SMT board assembly, which are based on
equipment purchased primarily from Universal Instruments. Aggregate production
capacity exceeds 15,000 ultra-fine-pitch SMT boards per month. The Company
estimates that, as currently configured, the three lines have sufficient
capacity on multiple-shift operation to handle planned demand well into 1999.
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 through-hole 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 Sharp Electronics, 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
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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
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, 1998, the Company's backlog was approximately $26.3 million,
as compared to $38.7 million as of December 31, 1997. 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, 1998, the Company had 460 employees, of which 411 were
regular employees and 49 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
Statements and information in this Annual Report on Form 10-K, and the
statements the Company's management may make from time to time, regarding future
industry trends, the Company's expected revenues, earnings and anticipated gross
margins, the Company's future development and introduction of products, and the
Company's future liquidity, development, and business activities, constitute
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, including conditions precipitated by the Asian economies;
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 Corporation ("Intel"); dependence on Intel's support of
the embedded computer market; lower than expected customer orders or variations
in customer order patterns due to changes in demand for customers' products and
customer and channel inventory levels; 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
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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 owns three parcels of land adjacent to
its Hillsboro facility, which are being held for future expansion. The Company
also leases two small sales offices in the U.S. and one each in Swindon, 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
In the normal course of business the Company from time-to-time has ongoing
litigation. At December 31, 1998, the Company had no asserted legal matters. The
Company is aware of certain unasserted matters to which, if asserted, the
Company believes it has meritorious defenses. The Company does not expect these
matters to have a material financial effect on its operations or net assets, if
asserted.
In September 1998 the Company was named as a third party defendant in a third
party complaint filed in Maricopa County Superior Court in Arizona entitled
Interactive Flight Technologies, Inc. v. Avnet, Inc. v. Simple Technology
Incorporated v. RadiSys Corporation et. al. (No. CV 98-10285). The complaint
relates to an in-flight entertainment system designed by the Company that
incorporated allegedly failure-prone disk drives manufactured and distributed by
third parties. The Company has been informed that the cases have been dismissed
without prejudice.
The Company has no other 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 March 10, 1999, 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
---- --- -------------------------
<S> <C> <C>
Dr. Glenford J. Myers 52 Chairman of the Board,
President and Chief Executive Officer
Stuart F. Cohen 39 Vice President of Marketing
Ronald A. Dilbeck 45 Vice President and General Manager,
Automation Equipment Division
Douglas D. Goodyear 44 Senior Vice President of Sales
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Arif Kareem 46 Vice President and General Manager,
Telecommunications Division
John Sonneborn 41 Vice President of Manufacturing
Brian V. Turner 39 Vice President of Finance and Administration
and Chief Financial Officer
Stephen J. Verleye 43 Vice President and General Manager,
Automation Equipment Division
John D. Watkins 50 Vice President of Corporate Development
Diane M. Williams 45 Vice President of Human Resources
</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.
Stuart F. Cohen joined the Company in January 1999 as its Vice President of
Marketing. From 1997 to 1998, Mr. Cohen was Vice President, Worldwide Marketing
for InFocus Systems, Inc. From 1981 to 1997, Mr. Cohen held various sales and
marketing management positions for IBM, Inc., the most recent being Director of
Worldwide Marketing, Networking Division. Mr. Cohen holds a B.S. in Business
Administration from the Arizona State University.
Ronald A. Dilbeck joined the Company in May 1996 as its Vice President and
General Manager, Automation and Control Division. In October 1998, Mr. Dilbeck
was appointed joint responsibility of the merged Automation Equipment Division.
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.
Douglas D. Goodyear joined the Company in October 1998 as its Senior Vice
President of Sales. From 1995 to 1998, Mr Goodyear was Vice President, Worldwide
Sales of Actel Corp. From 1990 to 1995, Mr. Goodyear served as Vice President of
North American Sales for the Microelectronics Group of Sharp Electronics.
Additionally, he has held various sales and sales management positions with
Hitachi, Advanced Micro Devices, and Signetics Corp., a Philips Company. Mr.
Goodyear holds a B.S. in both Computer Science and Industrial Mgt. from the
University of Nebraska.
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
B.S.E.E. and an M.S.E.E. from Lehigh Universtiy, and an M.B.A. from the
University of Oregon.
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.
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Stephen J. Verleye joined the Company in September 1993 as its Vice President of
Marketing, and subsequently served as the Company's Vice President of Business
Development. In October 1998, Mr. Verleye was appointed joint responsibility of
the merged Automation Equipment Division. 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 November 1998, Mr.
Watkins was appointed to Vice President of Corporate Development relinquishing
responsibilities of sales. Mr. Watkins was appointed to Executive Vice President
in September 1994 and assumed responsibilities for sales until 1998. 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.
Diane M. Williams joined the company in August 1998 as its Vice President of
Human Resources. From 1990 to 1998 Ms. Williams held various roles at Sequent
Computer Systems, Inc., most recently Vice President of Human Resources. Ms.
Williams also spent time at Compaq Computer Corporation where she was Manager of
Enterprise Sales Development. Prior to Compaq and Sequent, Ms. Williams held
various human resources management positions at Amdahl Computer Corporation and
First City Bancorporation of Texas. She holds a B.A. Degree from State
University of New York at Stony Brook and an M.Ed. from the University of
Houston.
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 in 1995 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
---- ---
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
1998
First Quarter $38 5/8 $21 5/8
Second Quarter $29 3/4 $17 3/4
Third Quarter $22 1/2 $11 3/8
Fourth Quarter $31 5/8 $12
On March 10, 1999, the last reported sale price of the Common Stock on the
Nasdaq National Market was $29 1/2.
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.
11
<PAGE>
As of March 10, 1999, there were approximately 94 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.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended December 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenues $ 20,241 $ 35,025 $ 81,043 $125,442 $108,198
Gross profit 8,336 12,033 33,655 50,133 36,630
Income from operations 1,334 2,018 13,603 22,632 6,738
Net income 1,365 1,516 9,546 15,425 5,432
Net income per share (diluted) 0.35 0.35 1.30 1.93 0.68
Weighted average shares outstanding (diluted) 3,884 4,355 7,362 8,003 8,034
Consolidated Balance Sheet Data:
Working Capital $ 7,917 $ 31,808 $ 45,830 $ 58,808 $ 63,348
Total assets 12,367 39,112 80,253 94,943 94,454
Long term obligations, excluding
current portion - 884 648 399 88
Total shareholders' equity 9,649 34,819 56,778 75,882 81,696
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Total revenue was $108.2 million for 1998, compared to $125.4 million for 1997.
Net income was $5.4 million for 1998, compared to $15.4 million for 1997.
Although design wins continued being completed for production during 1998, the
effect of negative global economic conditions in the electronics market
adversely affected customer order volumes decreasing total revenue levels and
profitability, compared to 1997.
On April 29, 1996, the Company purchased substantially all of the assets of
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, including conditions precipitated by the Asian
economies; uncertainty of market development;
12
<PAGE>
dependence on a limited number of OEM customers; dependence on limited or sole
source suppliers; dependence on the relationship with Intel Corporation
("Intel"); dependence on Intel's support of the embedded computer market; lower
than expected customer orders or variations in customer order patterns due to
changes in demand for customers' products and customer and channel inventory
levels; 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 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, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales 58.5 60.0 66.1
------- ------- -------
Gross margin 41.5 40.0 33.9
Research and development 10.1 9.3 12.6
Selling, general and administrative 14.6 12.7 15.1
------- ------- -------
Income from operations 16.8 18.0 6.2
Interest income, net 1.3 0.9 1.5
------- ------- -------
Income before income tax provision 18.1 18.9 7.7
Income tax provision 6.3 6.6 2.7
------- ------- -------
Net income 11.8% 12.3% 5.0%
======= ======= =======
</TABLE>
Years Ended December 31, 1996, 1997, and 1998
Revenues. Revenues decreased 14% to $108.2 million for 1998 from $125.4 million
for 1997. The decrease in revenues in 1998 was primarily caused by customers
reducing orders precipitated by the effects of the global economic conditions in
the electronics market. For 1998, sales to the Company's 25 largest customers
constituted 74% of revenues, as compared to 65% and 73% for 1997 and 1996,
respectively.
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.
Gross Margin. Gross margin decreased to 33.9% for 1998 from 40.0% for 1997
primarily as a result of the product mix consisting of a larger portion of lower
margin product relative to higher margin product shipped and higher
manufacturing costs relative to revenue levels during 1998. 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 decreased for 1997 to 40.0% from 41.5% for 1996 because of lower
margin design wins ramping into production compared to 1996.
13
<PAGE>
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 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 16% to
$13.6 million for 1998 from $11.7 million for 1997, primarily as a result of
increased investment in new product development and costs of enhancements to
existing products. The Company continues to invest in new design wins for OEM
customers and the dollar increases reflect increases in the number of employees
working in research and development. Research and development expenses as a
percentage of total revenue increased in 1998, compared to 1997, primarily as a
result of lower revenue levels.
Research and development expenses increased 42% to $11.7 million for 1997 from
$8.2 million for 1996, primarily as the result of increased investment in new
product development and costs of enhancements to existing products.
Selling, General and Administrative. Selling, general and administrative
expenses increased 3% to $16.3 million for 1998 from $15.8 million for 1997.
Selling, general and administrative expenses increased in 1998 as a percentage
of revenues to 15.1%. The dollar increase and the increase as a percentage of
total revenue are primarily due to the selling effort to maintain high design
win activity with lower revenue levels, compared to 1997.
Selling, general and administrative expense increased 34% to $15.8 million for
1997 from $11.8 million for 1996 primarily as a result of increased personnel,
facilities, and travel, to support higher levels of sales since 1996, to support
the acquired Multibus operations in 1996 and increases in costs required to
expand international operations.
Interest Income, Net. Interest income, net increased 43% to $1.6 million for
1998 from $1.1 million in 1997, and remained stable for 1997 and 1996 at $1.1
million. The increase for 1998 was primarily the result of interest income
earned from increased average cash and cash equivalents balances throughout
1998.
Income Tax Provision. The income tax provisions for 1996, 1997 and 1998 reflect
effective income tax rates of 35.0%, 35.0% and 34.6%. The slight decrease in the
effective tax rate for 1998 is directly attributable to lower net income. The
income tax rate reflects statutory rates for the Company's operations, taking
into account financial reporting adjustments as they differ from statutory
treatment.
Liquidity and Capital Resources
As of December 31, 1998, the Company had $38.8 million in cash and equivalents,
which represents the Company's principal source of liquidity. As of December 31,
1998, the Company had working capital of approximately $63.3 million. The
working capital balance increased primarily due to cash generated from
operations and related decreases in current liabilities, all offset by the
decrease in accounts receivable and inventories balances.
Net cash provided by operating activities was $10.6 million, $7.2 million and
$20.6 million for 1996, 1997 and 1998, respectively. The increase in net cash
provided by operating activities in 1998 was largely attributable to decreases
in accounts receivable of $8.4 million and in inventories of $7.1 million
primarily related to lower revenue volume impact on accounts receivable
collections and inventory requirements.
14
<PAGE>
In October 1998, 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 lower of the IBOR plus 1.25 to 2.0% or lender's prime
rate. The Company has not drawn any funds under this line of credit.
Capital expenditures were $7.2 million, $3.7 million and $3.2 million in 1996,
1997 and 1998, respectively. These capital expenditures were primarily for the
purchase of leasehold improvements, manufacturing equipment, and plant
modernization. The Company began occupying its second building in Hillsboro,
Oregon in January 1998. In 1997 the Company purchased one adjacent parcel of
land for future expansion. Capital expenditures for 1999 are expected to range
from $3.0 million to $5.0 million for ongoing operational assets.
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 importance to its operations of Year 2000 issues and
is working to maintain the availability and integrity of its financial systems
and the reliability of its operational systems. In that regard, the Company has
already attempted to identify all internal information technology ("IT") and
non-IT systems which may be affected by the Year 2000 issues, as well as third
party IT and non-IT systems that the Company relies upon and the third parties'
Year 2000 readiness.
Within the last two years the Company has evaluated and upgraded or replaced the
software packages underlying the Company's financial systems, major
manufacturing systems, internal and external communication systems, and desktop
systems, as appropriate, to address Year 2000 readiness issues. The Company has
also performed an in-depth analysis of all of its products. An analysis of each
products' Year 2000 readiness is provided on the Company's webpage
(http://www.radisys.com/). In addition, the Company has been in contact with all
major external third party providers to assess their Year 2000 readiness; this
includes third parties who provide financial, payroll, communications,
component, and integration services to the Company.
Subsequent to performing the above steps, the Company has and will continue to
make certain investments in its systems, applications and products to address
Year 2000 issues. The Company believes that it has completed all of the basic
analysis of its Year 2000 readiness, completed the majority of system upgrades
and replacements it requires to be Year 2000 ready, and is now in the process of
evaluating non-material and non-mission critical applications. The Company
expects that it will continue to address Year 2000 readiness issues up to and
including the Year 2000, and will react as appropriate to newly-identified
issues.
The Company is in the process of establishing contingency plans for material IT
systems and third party providers that the Company relies upon.
The total cost associated with required modifications to become Year 2000
compliant has not been and is not expected to be material to the Company's
results of operations, liquidity and financial condition. The Company estimates
that it has incurred, and will incur, a total of approximately $0.5 million for
its Year 2000 readiness programs. These costs are a portion of ongoing company
resources and are not separately identifiable.
The above statements contain certain risks and uncertainties. These risks and
uncertainties could include the risk of unidentified bugs in the source code of
prepackaged or custom software, misrepresentation by third party vendors,
unidentified dependency upon a system that is not Year 2000 ready, unidentified
non-IT systems, or misdiagnosed Year
15
<PAGE>
2000 readiness in existing systems. Although the Company believes that its
efforts described above have significantly reduced the risk that Year 2000
issues could significantly interrupt the Company's normal business operations or
adversely affect the performance of the Company's products, due to general
uncertainty inherent in the Year 2000 problem and in particular about the
readiness of third parties, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial condition.
Subsequent Events
On March 1, 1999, the Company purchased assets of International Business Machine
Corporation ("IBM") dedicated to the design, manufacture and sale of all IBM's
ARTIC communications coprocessor adapter hardware and software for wide area
network (WAN) and other telephony applications (the "Acquisition"). In addition,
pursuant to the terms of the Acquisition, IBM licensed the use of certain
patents to the Company. The Acquisition will be accounted for using the purchase
method. The aggregate purchase price of approximately $28.0 million (including
direct costs of acquisition) was allocated to purchased inventory, certain fixed
assets and excess of purchase price over fair value of tangible assets acquired.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
Independent Accountants' Report 18
Consolidated Statement of Operations for the years ended 19
December 31, 1996, 1997 and 1998
Consolidated Balance Sheet at December 31, 1997 and 1998 20
Consolidated Statement of Changes in Shareholders' Equity for 21
the years ended December 31, 1996, 1997 and 1998
Consolidated Statement of Cash Flows for the years ended 22
December 31, 1996, 1997 and 1998
Notes to Consolidated Financial Statements 23
Schedule of Valuation and Qualifying Accounts 33
<TABLE>
<CAPTION>
Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
Year Ended December 31, 1997 Year Ended December 31, 1998
------------------------------------------- -------------------------------------------
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 $27,830 $29,796 $31,594 $36,222 $33,663 $24,125 $24,613 $25,797
Gross profit 11,645 11,921 12,719 13,848 12,119 7,485 7,805 9,221
Income from operations 5,000 5,422 5,954 6,256 4,481 210 504 1,543
Net income 3,422 3,700 4,025 4,278 3,125 323 611 1,373
Net income per share (basic) 0.46 0.48 0.52 0.55 0.40 0.04 0.08 0.18
Net income per share 0.43 0.46 0.49 0.53 0.39 0.04 0.08 0.17
(diluted)
</TABLE>
16
<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 18, 1999, 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
17
<PAGE>
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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
January 22, 1999, except as to Note 8,
which is as of March 1, 1999
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 81,043 $ 125,442 $ 108,198
Cost of sales 47,388 75,309 71,568
--------- --------- ---------
Gross profit 33,655 50,133 36,630
Research and development 8,222 11,712 13,591
Selling, general and administrative 11,830 15,789 16,301
--------- --------- ---------
Income from operations 13,603 22,632 6,738
Interest income, net 1,083 1,097 1,573
--------- --------- ---------
Income before income tax provision 14,686 23,729 8,311
Income tax provision 5,140 8,304 2,879
--------- --------- ---------
Net income $ 9,546 $ 15,425 $ 5,432
========= ========= =========
Net income per share (basic) $ 1.38 $ 2.01 $ 0.69
========= ========= =========
Net income per share (diluted) $ 1.30 $ 1.93 $ 0.68
========= ========= =========
The accompanying notes are an integral part of this statement.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
December 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,993 $ 38,831
Accounts receivable, net 27,983 19,603
Other receivables 503 216
Inventories 22,830 15,706
Other current assets 1,910 1,662
Deferred income taxes 251
----------- -----------
Total current assets 77,470 76,018
Property and equipment, net 12,174 11,759
Other assets, net 5,299 6,677
----------- -----------
Total assets $ 94,943 $ 94,454
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,840 $ 7,848
Income taxes payable 1,558 850
Accrued wages and bonuses 2,893 1,653
Accrued sales discounts 1,211 748
Deferred revenue 1,234 548
Deferred income taxes 190
Other accrued liabilities 712 556
Current portion of capital lease obligation 214 277
----------- -----------
Total current liabilities 18,662 12,670
----------- -----------
Obligations under capital lease 399 88
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized,
7,803,595 and 7,841,738 shares issued and outstanding 50,788 51,108
Retained earnings 26,271 31,703
Accumulated other comprehensive income:
Cumulative translation adjustment (1,177) (1,115)
----------- -----------
Total shareholders' equity 75,882 81,696
----------- -----------
Total liabilities and shareholders' equity $ 94,943 $ 94,454
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
Accumulated
Common Stock other Total
----------------------- comprehensive Retained comprehensive
Shares Amount Warrants income earnings Total income
---------- ---------- ---------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 6,014,709 $ 33,627 $ $ (108) $ 1,300 $ 34,819 $
Shares issued pursuant to
benefit plans 73,701 365 365
Tax effect of options exercised 569 569
Stock issued for acquisition 1,300,000 10,500 10,500
Warrants issued for acquisition 1,200 1,200
Translation adjustment (221) (221) (221)
Net income for the year 9,546 9,546 9,546
---------- ---------- ---------- ------------- ---------- ---------- -------------
Balances, December 31, 1996 7,388,410 45,061 1,200 (329) 10,846 56,778
Comprehensive income, year
ended 1996 9,325
=============
Exercise of warrants 166,667 1,200 (1,200)
Shares issued pursuant to
benefit plans 165,018 1,605 1,605
Tax effect of options exercised 513 513
Stock issued for acquisition 83,500 2,409 2,409
Translation adjustment (848) (848) (848)
Net income for the year 15,425 15,425 15,425
---------- ---------- ---------- ------------- ---------- ---------- -------------
Balances, December 31, 1997 7,803,595 50,788 0 (1,177) 26,271 75,882
Comprehensive income, year
ended 1997 $ 14,577
=============
Shares issued pursuant to
benefit plans 158,143 1,965 1,965
Shares repurchased (120,000) (1,802) (1,802)
Tax effect of options exercised 157 157
Translation adjustment 62 62 62
Net income for the year 5,432 5,432 5,432
---------- ---------- ---------- ------------- ---------- ---------- -------------
Balances, December 31, 1998 7,841,738 $ 51,108 $ 0 $ (1,115) $ 31,703 $ 81,696
========== ========== ========== ============= ========== ==========
Comprehensive income, year
ended 1998 $ 5,494
=============
The accompanying notes are an integral part of this statement.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,546 $ 15,425 $ 5,432
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,516 3,808 4,910
Deferred income taxes (1,497) 1,543 441
Net changes in current assets and current liabilities:
Decrease (increase) in accounts receivable (13,396) (7,178) 8,380
Decrease (increase) in other receivables 1,543 2,893 287
Decrease (increase) in inventories (5,857) (4,382) 7,124
Decrease (increase) in other current assets (143) (1,372) 248
Increase (decrease) in accounts payable 9,671 (733) (2,992)
Increase (decrease) in income taxes payable 2,849 (1,438) (708)
Increase (decrease) in accrued wages and bonuses 1,447 569 (1,240)
Increase (decrease) in accrued sales discounts 1,360 (149) (463)
Increase (decrease) in other accrued liabilities 1,936 (2,354) (156)
Increase (decrease) in deferred revenue 647 587 (686)
--------- --------- ---------
Net cash provided by operating activities 10,622 7,219 20,577
--------- --------- ---------
Cash flows from investing activities:
Decrease in short term investments 10,922
Business acquisitions (1,060)
Capital expenditures (7,240) (3,742) (3,193)
Capitalized software production costs (391) (1,539) (2,680)
--------- --------- ---------
Net cash provided by (used for) investing activities 3,291 (6,341) (5,873)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock, net 934 2,118 2,122
Repurchase of common stock (1,802)
Payments on notes payable (2,532)
Payments on capital lease obligation (236) (249) (248)
--------- --------- ---------
Net cash provided by (used for) financing activities 698 (663) 72
--------- --------- ---------
Effect of exchange rate changes on cash (221) (848) 62
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 14,390 (633) 14,838
Cash and cash equivalents, beginning of year 10,236 24,626 23,993
--------- --------- ---------
Cash and cash equivalents, end of year $ 24,626 $ 23,993 $ 38,831
========= ========= =========
The accompanying notes are an integral part of this statement.
</TABLE>
22
<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 $663
and $624 at December 31, 1997 and 1998, 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,
1997 1998
--------- ---------
Raw materials $ 15,388 $ 9,789
Work in process 1,844 1,223
Finished goods 5,598 4,694
--------- ---------
$ 22,830 $ 15,706
========= =========
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 $847 and $1,649 at December 31, 1997, and 1998, respectively.
23
<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, 1998 totaled
$1,268 with accumulated amortization of $909.
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 $1,943 and $3,603 are
included in other assets at December 31, 1997 and 1998, respectively.
Amortization of software production costs in 1996, 1997 and 1998 aggregated
$452, $722 and $1,020, respectively.
Cash flows
The Company made cash payments for income taxes of $3,205, $7,756 and $3,577 for
the years ended December 31, 1996, 1997 and 1998, respectively.
Fair value of financial assets and liabilities
The Company estimates the fair value of its monetary assets and liabilities
based upon comparative 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, 1997
and 1998.
Comprehensive income
The Company has adopted Financial Accounting Standards Board (FASB) Statement
No. 130, "Reporting Comprehensive Income" as of January 1, 1998. Translation
adjustment represents the Company's only Other Comprehensive Income item.
Translation adjustment consists of unrealized gains/losses in accordance with
SFAS No. 52, "Foreign Currency Translation". The Company has no intention of
liquidating the assets of the foreign subsidiaries in the foreseeable future.
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.
24
<PAGE>
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 standard
In 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133). FAS 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999 (January 1, 2000 for the
Company). FAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Company
anticipates that, due to its limited use of derivative instruments, the adoption
of FAS 133 will not have a significant effect on the Company's results of
operations or its financial position.
2. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Currently payable:
Federal $ 5,417 $ 5,834 $ 1,679
State 1,220 927 423
Foreign - - 336
--------- --------- ---------
6,637 6,761 2,438
--------- --------- ---------
Deferred:
Federal (1,180) 1,351 386
State (198) 192 55
--------- --------- ---------
(1,378) 1,543 441
--------- --------- ---------
Decrease in valuation allowance (119) - -
--------- --------- ---------
Total provision $ 5,140 $ 8,304 $ 2,879
========= ========= =========
</TABLE>
The provision for income taxes 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,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
Increase (decrease) in rates resulting from:
State taxes 4.5 3.3 4.0
Goodwill benefit from acquisition (2.1) (2.2) (5.1)
Deferred tax asset valuation allowance (.8) - -
Other (1.6) (1.1) 0.7
--------- --------- ---------
Effective tax rate 35.0% 35.0% 34.6%
========= ========= =========
</TABLE>
25
<PAGE>
Deferred tax assets/(liabilities) are comprised of the following components:
<TABLE>
<CAPTION>
December 31,
1997 1998
--------- ---------
<S> <C> <C>
Capitalized software $ (544) $ (1,529)
Depreciation (260) (352)
--------- ---------
Gross deferred tax liability (804) (1,881)
Deferred revenue 494 219
Inventory reserve 339 660
Allowance for doubtful accounts 265 250
Other (43) 562
--------- ---------
Net deferred tax asset (liabilities) $ 251 $ (190)
========= =========
</TABLE>
3. Property and Equipment
<TABLE>
<CAPTION>
December 31,
1997 1998
--------- ---------
<S> <C> <C>
Land $ 1,387 $ 1,391
Manufacturing Equipment 9,996 9,992
Office Equipment 7,255 8,056
Leasehold Improvements 1,801 2,697
--------- ---------
20,439 22,136
Less: Accumulated Depreciation 8,265 10,377
========= =========
$ 12,174 $ 11,759
========= =========
</TABLE>
4. Commitments and Contingencies
Line of Credit
In October 1998, 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 1999. The Company has
not drawn any funds under this line of credit.
26
<PAGE>
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,
1998:
Year Ending Operating
December 31, leases
------------ ---------
1999 $ 2,237
2000 2,175
2001 2,075
2002 1,887
2003 1,594
Thereafter 13,927
---------
$ 23,895
=========
Rent expense related to these operating leases aggregated $330, $1,288 and
$2,438 in 1996, 1997 and 1998, respectively.
5. Segment Information
The following is disclosure required for SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company is organized
primarily on the basis of embedded single board computers and other related
support operations. The operations not included in embedded single board
computers are immaterial for presentation.
The following is revenues and long-lived asset information by geographic area:
<TABLE>
<CAPTION>
Revenues Long-lived Assets
Year Ended December 31, December 31,
Country 1996 1997 1998 1997 1998
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
United States $ 58,971 $ 88,431 $ 76,917 $ 16,704 $ 17,806
Europe 18,825 32,325 27,954 618 480
Asia Pacific - Japan 2,542 4,000 1,784 151 150
Other foreign 705 686 1,543 - -
------- -------- -------- -------- -------- --------
Total $ 81,043 $125,442 $108,198 $ 17,473 $ 18,436
======== ======== ======== ======== ========
</TABLE>
One customer accounted for 10.1% of total revenue in 1996. No single customer
accounted for more than 10% of sales in 1997 and 1998.
27
<PAGE>
6. Shareholders' Equity
<TABLE>
<CAPTION>
EPS Reconciliation
Year Ended December 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Weighted Average Shares (basic) 6,924,000 7,679,000 7,885,000
Effect of Dilutive Stock Options 438,000 324,000 149,000
--------- --------- ---------
Weighted Average Shares (diluted) 7,362,000 8,003,000 8,034,000
========= ========= =========
</TABLE>
Options to purchase 139,128 and 134,410 shares of common stock were outstanding
in 1997 and 1998, respectively, but were excluded in the computation of diluted
EPS as the options' exercise price was greater than the average market price of
the Company's common stock.
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, 1996, 1997 and 1998 was immaterial. The
table below summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 359,321 $ 7.71 777,641 $ 26.08 985,809 $ 27.99
Granted 515,052 34.00 656,402 45.07 1,110,006 23.03
Canceled (51,308) 12.30 (376,699) 51.00 (789,388) 36.19
Exercised (45,424) 3.91 (71,535) 6.76 (82,673) 7.91
---------- ---------- ---------- ---------- ---------- ----------
Ending Balance 777,641 $ 26.08 985,809 $ 27.99 1,223,754 $ 19.56
========== ========== ========== ========== ========== ==========
</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
Remaining
Number of Weighted Average
Exercise Price Range Shares Average Price Contractual Life
-------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
$1.98 - $11.00 190,441 $ 9.79 2.38
$11.25 - $34.50 913,753 19.02 5.43
$36.25 - $38.75 84,350 38.10 4.90
$39.13 - $56.25 35,210 39.43 5.34
-------------- -------------- ----------------
1,223,754 $ 19.48 4.92
============== ============== ================
</TABLE>
Options exercisable at December 31, 1998 totaled 298,204 shares at a weighted
average exercise price of $17.05. Options available for grant at December 31,
1998 totaled 94,429 shares.
28
<PAGE>
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 1997 and 1998, the Company issued 93,483 and
75,470 shares under the plan, respectively.
Statement of Financial Accounting Standards No. 123 ("FAS 123")
The Company has elected to account for its stock based compensation under
Accounting Principles Board Opinion No. 25; however, as required by FAS 123 the
Company has computed for pro forma disclosure purposes the value of options
granted during 1996, 1997 and 1998 using the Black-Scholes option pricing model.
The weighted average assumptions used for stock option grants for 1996, 1997 and
1998 were a risk free interest rate of 6%, 5.4% and 5.11%, respectively, an
expected dividend yield of 0%, an expected life of 4 years, and an expected
volatility of 50%, 50% and 65%, respectively. The weighted average assumptions
used for ESPP rights for 1996, 1997 and 1998 were a risk free interest rate of
5.7%, 5.3% and 5.0%, respectively, an expected dividend yield of 0%,
respectively, an expected life of 1.5 years, respectively, and an expected
volatility of 50%, 50% and 62%, respectively. The weighted-average fair value of
ESPP rights granted in 1996, 1997 and 1998 were $242, $656 and $770,
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, 1996, 1997 and 1998, the total value of the options
granted was computed to be $9,205, $8,578 and $12,260, 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 FAS 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, 1996 Year Ended December 31, 1997 Year Ended December 31, 1998
------------------------------------ ------------------------------------ ------------------------------------
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 $ 9,546 $ 1.38 $ 1.30 $ 15,425 $ 2.01 $ 1.93 $ 5,432 $ 0.69 $ 0.68
Pro Forma $ 8,533 $ 1.23 $ 1.19 $ 12,904 $ 1.68 $ 1.60 $ 2,541 $ 0.32 $ 0.32
</TABLE>
The effects of applying FAS 123 for providing pro forma disclosure for 1996,
1997 and 1998 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.
29
<PAGE>
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
period, 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 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 period.
Year Ended December 31, 1996
(unaudited)
Revenues $ 101,387
Net Income $ 11,216
Earnings per share (basic) $ 1.52
Earnings per share (diluted) $ 1.42
8. Subsequent Events
On March 1, 1999, the Company purchased assets of International Business Machine
Corporation ("IBM") dedicated to the design, manufacture and sale of all IBM's
ARTIC communications coprocessor adapter hardware and software for wide area
network (WAN) and other telephony applications (the "Acquisition"). In addition,
pursuant to the terms of the Acquisition, IBM licensed the use of certain
patents to the Company. The Acquisition will be accounted for using the purchase
method. The aggregate purchase price of approximately $28.0 million (including
direct costs of acquisition) was allocated to purchased inventory, certain fixed
assets and excess of purchase price over fair value of tangible assets acquired.
30
<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.
2.3 Asset Purchase Agreement between RadiSys Corporation and
International Business Machines Corporation, dated as of March 1,
1999. Incorporated by reference as Exhibit 2.3 to the Company's
Current Report on Form 8-K dated March 1, 1999.
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 September 1, 1998.
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.
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedules
31
<PAGE>
+ Confidential treatment of portions of this document has been granted.
* This Exhibit constitutes a management contract or compensatory plan or
arrangement
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended December 31,
1998.
(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 10, 1999 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 10, 1999.
Signature Title
--------- -----
DR. GLENFORD J. MYERS
---------------------------------- Chairman of the Board, President
Dr. Glenford J. Myers and Chief Executive Officer
(Principal Executive Officer)
BRIAN V. TURNER
---------------------------------- Vice President of Finance and
Brian V. Turner Administration and Chief Financial
Officer (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
JEAN-PIERRE D. PATKAY
---------------------------------- Director
Jean-Pierre D. Patkay
32
<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, 1996 233,000 548,000 (75,000) 706,000
December 31, 1997 706,000 190,000 (233,000) 663,000
December 31, 1998 663,000 71,000 (110,000) 624,000
Warranty reserve Year ended:
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
December 31, 1998 171,000 2,884,000 (2,561,000) 494,000
Obsolescence reserve Year ended:
December 31, 1996 110,000 449,000 (30,000) 529,000
December 31, 1997 529,000 1,406,000 (1,088,000) 847,000
December 31, 1998 847,000 2,825,000 (2,023,000) 1,649,000
</TABLE>
33
<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 22, 1999 also included an audit of the Financial Statement
Schedule listed in Item 14(a)(2) 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.
PricewaterhouseCoopers LLP
Portland, Oregon
January 22, 1999
34
Ex. 10.11(a)
September 1, 1998
Mr. Brian V. Turner, Chief Financial Officer
RadiSys Corporation
15025 SW Koll Parkway
Beaverton, OR 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, 1999 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
September 1, 1998
Commitment Letter
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 financial financials.
Total Liabilities/Tangible BA or
Net Worth Prime LIBOR
------------------------------- ----- -----
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 amounts 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.
E) Irrevocability: Acceptance of a pricing
commitment from the Bank will constitute an
irrevocable agreement to borrow under the
revolving line of credit.
- --------------
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
September 1, 1998
Commitment Letter
F) Interest computed on a basis of a 360 day year
and the actual 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.
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 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.
<PAGE>
RadiSys Corporation Page 4
September 1, 1998
Commitment Letter
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
non-compliance with any term or condition stated
herein. Non-compliance with any term or condition
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.
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 maturity 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.
<PAGE>
RadiSys Corporation Page 5
September 1, 1998
Commitment Letter
2. Maximum Leverage Ratio: The ratio of Total
Liabilities to Tangible Net Worth not 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 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.
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 12, 1998.
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
Subsidiary Jurisdiction of
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
Exhibit 23.1
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 and 333-46473) of RadiSys
Corporation of our report dated January 22, 1999 appearing in 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 also appears in this Form
10-K.
PricewaterhouseCoopers LLP
Portland, Oregon
March 12, 1999
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 38,831
<SECURITIES> 0
<RECEIVABLES> 19,603
<ALLOWANCES> 624
<INVENTORY> 15,706
<CURRENT-ASSETS> 76,018
<PP&E> 11,759
<DEPRECIATION> 10,378
<TOTAL-ASSETS> 94,454
<CURRENT-LIABILITIES> 12,670
<BONDS> 0
0
0
<COMMON> 51,108
<OTHER-SE> 30,588
<TOTAL-LIABILITY-AND-EQUITY> 94,454
<SALES> 108,198
<TOTAL-REVENUES> 108,198
<CGS> 71,568
<TOTAL-COSTS> 29,892
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,573
<INCOME-PRETAX> 8,311
<INCOME-TAX> 2,879
<INCOME-CONTINUING> 5,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,432
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.68
</TABLE>
