SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1999 or
( ) Transition report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ---------- to
----------.
Commission file number: 0-26844
RADISYS CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0945232
(State or other jurisdiction (I.R.S. Employer
of organization or incorporation) Identification Number)
5445 NE Dawson Creek Drive
Hillsboro, OR 97124
(Address of principal executive offices, including zip code)
(503) 615-1100
(Registrant's telephone number, including area code)
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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of common stock outstanding as of May 10, 1999 was
7,952,557.
<PAGE>
RADISYS CORPORATION
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet - March 31, 1999 and
December 31, 1998 3
Consolidated Statement of Operations - Three months
ended March 31, 1999 and 1998 4
Consolidated Statement of Changes In Shareholders' Equity -
December 31, 1996 through March 31, 1999 5
Consolidated Statement of Cash Flows - Three months ended
March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
<TABLE>
<CAPTION>
RadiSys Corporation
Consolidated Balance Sheet
(in thousands, except share amounts)
ASSETS
March 31 December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 14,348 $ 38,831
Accounts receivable 23,995 19,603
Other receivables 110 216
Inventories 21,928 15,706
Other current assets 1,555 1,662
Deferred income taxes 419
------------- -------------
Total current assets 62,355 76,018
Equipment, net of accumulated depreciation of
$11,026 and $10,377 11,538 11,759
Goodwill and intangible assets 23,274 3,003
Other assets 4,072 3,674
------------- -------------
Total assets $ 101,239 $ 94,454
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 10,848 $ 7,848
Income taxes payable 2,127 850
Accrued wages and bonuses 1,942 1,653
Accrued sales discounts 806 748
Deferred revenue 700 548
Deferred income taxes 190
Other accrued liabilities 398 556
Current portion of capital lease obligation 281 277
------------- -------------
Total current liabilities 17,102 12,670
------------- -------------
Obligations under capital lease 88
------------- -------------
Total liabilities 17,102 12,758
------------- -------------
Commitments and contingent liabilities
Shareholders' equity
Common stock, 50,000,000 shares
authorized, 7,935,764 and 7,841,738
shares issued and outstanding 51,916 51,108
Accumulated other comprehensive income:
Cumulative translation adjustment (1,194) (1,115)
Retained earnings 33,415 31,703
------------- -------------
Total shareholders' equity 84,137 81,696
------------- -------------
Total liabilities and shareholders' equity $ 101,239 $ 94,454
============= =============
See accompanying notes to cosolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
RadiSys Corporation
Consolidated Statement of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31, March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Revenues $ 31,559 $ 33,663
Cost of sales 20,285 21,544
-------------- --------------
Gross Profit 11,274 12,119
Research and development 4,633 3,536
Selling, general and administrative 4,427 4,102
-------------- --------------
Income from operations 2,214 4,481
Interest income, net 304 326
-------------- --------------
Income before income tax provision 2,518 4,807
Income tax provision 806 1,682
-------------- --------------
Net income $ 1,712 $ 3,125
============== ==============
Net income per share (basic) $ 0.22 $ 0.40
============== ==============
Net income per share (diluted) $ 0.21 $ 0.39
============== ==============
See accompanying notes to cosolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
RadiSys Corporation
Consolidated Statement of Changes in Shareholders' Equity
(in thousands, except share amounts)
Common stock Cumulative Total
--------------------- translation Retained Comprehensive
Shares Amount Warrants adjustment earnings Total Income
---------- --------- ---------- ----------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 7,388,410 45,061 1,200 (329) 10,846 56,778
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 - (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
Repurchase of common stock (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 - (1,115) 31,703 81,696
Comprehensive Income,
year ended 1998 $ 5,494
===========
Shares issued pursuant to
benefit plans 94,026 808 808
Translation adjustment (79) (79) (79)
Net income for the period 1,712 1,712 1,712
---------- --------- ---------- ----------- --------- -------- -----------
Balances, March 31, 1999
(unaudited) 7,935,764 $ 51,916 $ - $ (1,194)$ 33,415 $ 84,137
========== ========= ========== =========== ========= ========
Comprehensive Income, three
months ended March 31, 1999
(unaudited) $ 1,633
===========
See accompanying notes to cosolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
RadiSys Corporation
Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
March 31, March 31,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,712 $ 3,125
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 1,601 1,152
Deferred income taxes (609) (542)
Net changes in current assets and current liabilities:
Decrease (increase) in accounts receivable (4,392) (3,219)
Decrease (increase) in other receivables 106 (238)
Decrease (increase) in inventories 234 1,895
Decrease (increase) in other current assets 107 294
Increase (decrease) in accounts payable 3,000 (3,677)
Increase (decrease) in income taxes payable 1,277 2,142
Increase (decrease) in accrued wages and bonuses 289 (1,452)
Increase (decrease) in accrued sales discounts 58 (226)
Increase (decrease) in deferred revenue 152 (53)
Increase (decrease) in other accrued liabilities (158) 173
------------- -------------
Net cash provided by (used for) operating activities 3,377 (626)
------------- -------------
Cash flows from investing activities:
Business acquisitions (27,513) -
Capital expenditures (222) (1,910)
Capitalized software production costs and other assets (770) (705)
------------- -------------
Net cash used for investing activities (28,505) (2,615)
------------- -------------
Cash flows from financing activities:
Issuance of common stock, net 808 1,098
Payments on capital lease obligation (84) (45)
------------- -------------
Net cash provided by financing activities 724 1,053
------------- -------------
Effect of exchange rate changes on cash (79) (609)
------------- -------------
Net decrease in cash and cash equivalents (24,483) (2,797)
Cash and cash equivalents, beginning of period 38,831 23,993
------------- -------------
Cash and cash equivalents, end of period $ 14,348 $ 21,196
============= =============
See accompanying notes to cosolidated financial statements.
</TABLE>
6
<PAGE>
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
(unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements are unaudited and have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission and in the opinion of management include
all adjustments, consisting only of normal recurring adjustments, necessary
for the fair statement of results for the interim periods. Certain
information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1998. The results of operations for interim periods are not
necessarily indicative of the results for the entire year.
Reclassifications have been made to amounts in prior years to conform to
current year presentation. These changes had no impact on previously
reported results of operations or shareholders' equity.
2. Accounts Receivable
Trade accounts receivable are net of an allowance for doubtful accounts of
$565 and $624 at March 31, 1999 and December 31, 1998, respectively. The
Company's customers are concentrated in the technology industry.
3. Inventories
Inventories consist of the following:
<TABLE>
Mar 31, Dec 31,
1999 1998
--------- --------
<S> <C> <C>
Raw Materials $ 13,529 $ 9,789
Work in Process 1,906 1,223
Finished Goods 6,493 4,694
--------- --------
$ 21,928 $ 15,706
========= ========
</TABLE>
7
<PAGE>
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
Mar 31, Dec 31,
1999 1998
--------- ---------
<S> <C> <C>
Land $ 1,391 $ 1,391
Manufacturing Equipment 10,248 9,992
Office Equipment 8,228 8,056
Leasehold Improvements 2,697 2,697
--------- ---------
22,564 22,136
Less: Accum. Depr. 11,026 10,377
--------- ---------
$ 11,538 $ 11,759
========= =========
</TABLE>
5. Earnings Per Share
Net income per share is based on the weighted average number of shares of
common stock and common stock equivalents (stock options and warrants)
outstanding during the periods, computed using the treasury stock method
for stock options and warrants.
Weighted average shares consist of the following:
<TABLE>
For the three
months ended
Mar 31, Mar 31,
1999 1998
----- -----
<S> <C> <C>
Weighted Average Shares (basic) 7,879 7,838
Effect of Dilutive Stock Options 422 218
----- -----
Weighted Average Shares (diluted) 8,301 8,056
===== =====
</TABLE>
6. ARTIC Business Unit Acquisition
On March 1, 1999, the Company purchased certain assets of International
Business Machines Corporation ("IBM") dedicated to the design, manufacture
and sale of IBM's ARTIC communications coprocessor adapter hardware and
software for wide area network and other telephony applications ("ARTIC
Business Unit") (collectively the "Acquisition"). The purchase price
consisted of an aggregate of $27.0 million in cash consideration.
The Acquisition was accounted for using the purchase method. The results of
operations for ARTIC Business Unit have been included in the financial
statements since the date of acquisition. The aggregate purchase price of
$27.5 million, including direct costs of acquisition, was allocated to
purchased inventory, furniture and equipment, patents and goodwill related
to the excess of the purchase price over the fair value of the tangible
assets acquired.
The following unaudited pro forma information presents the results of
operations of the Company as if the Acquisition had occurred as of the
beginning of the respective three-month periods, after giving effect to
adjustments for amortization of patents and goodwill, estimated reduction
of interest income and the estimated impact on the income tax provision.
The unaudited pro forma financial statements are not necessarily indicative
of what actual results would have been had the ARTIC Business Unit
acquisition occurred at the beginning of the respective periods. The
unaudited pro forma information should be read in conjunction with the
Current Report of the
8
<PAGE>
Company on Form 8-K dated March 1, 1999 and the Current Report of the
Company on Form 8-K/A filed April 22, 1999.
<TABLE>
Three Months Ended
Mar 31, Mar 31,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Revenues $ 41,149 $ 43,191
Net Income $ 3,952 $ 4,032
Net income per share (basic) $ .50 $ .51
Net income per share (diluted) $ .48 $ .50
</TABLE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Total revenue was $31.6 million for the three months ended March 31, 1999
compared to $33.7 million for the three months ended March 31, 1998. Net
income was $1.7 million for the three months ended March 31, 1999 compared
to $3.1 million for the three months ended March 31, 1998.
On March 1, 1999, the Company purchased certain assets of International
Business Machines Corporation ("IBM") million dedicated to the design,
manufacture and sale of IBM's ARTIC communications coprocessor adapter
hardware and software for wide area network and other telephony
applications. The purchase price, including direct acquisition costs, was
$27.5 million. The acquisition was accounted for using the purchase method.
The results of operations for this acquisition have been included in the
financial statements since the date of the acquisition.
Information contained in this Quarterly Report on Form 10-Q and statements
that may be made in the future by the Company's management regarding future
industry trends, the Company's expected revenues 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. 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.
9
<PAGE>
REVENUES
<TABLE>
Three Months Ended
------------------
(in thousands, except percentage amounts)
March 31, Percentage March 31,
1999 Change 1998
---- ------ ----
<S> <C> <C> <C>
Revenues $31,559 (6%) $33,663
</TABLE>
The decrease in revenues for the three months ended March 31, 1999 compared
to the three months ended March 31, 1998 resulted primarily from a
significant decrease in sales from one OEM customer, offset by sales
related to the ARTIC Business Unit acquisition on March 1, 1999, design
wins ramping into production and volume increases in other OEM sales.
COST OF GOODS SOLD
<TABLE>
Three Months Ended
------------------
(in thousands, except percentage amounts)
March 31, Percentage March 31,
1999 Change 1998
---- ------ ----
<S> <C> <C> <C>
Cost of Goods Sold $20,285 (6%) $21,544
As a Percentage of
Revenues 64% 64%
</TABLE>
Cost of goods sold decreased for the three months ended March 31, 1999
compared to the three months ended March 31, 1998 primarily as a result of
the lower revenues. Cost of goods sold as a percentage of revenues remained
stable despite a larger portion of lower margin product relative to higher
margin product shipped during the first quarter of 1999 compared to the
first quarter of 1998, offset by higher margin products related to the
ARTIC Business Unit acquisition on March 1, 1999.
RESEARCH AND DEVELOPMENT
<TABLE>
Three Months Ended
------------------
(in thousands, except percentage amounts)
March 31, Percentage March 31,
1999 Change 1998
---- ------ ----
<S> <C> <C> <C>
Research and Development $4,633 31% $3,536
As a Percentage of
Revenues 15% 11%
</TABLE>
The dollar increases in research and development expenses were primarily
the result of increased investment in new product development, costs of
enhancements to existing products and engineers brought on by the ARTIC
Business Unit acquisition on March 1, 1999. The Company continues to invest
in new design wins for OEM customers and the dollar increases reflect
steady increases in the number of employees working in research and
development.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
Three Months Ended
------------------
(in thousands, except percentage amounts)
March 31, Percentage March 31,
1999 Change 1998
---- ------ ----
<S> <C> <C> <C>
Selling, General &
Admin. $ 4,427 8% $ 4,102
As a Percentage of
Revenues 14% 12%
</TABLE>
Selling, general and administrative expenses have increased in dollar
amount in the three months ended March 31, 1999 compared to the three
months ended March 31, 1998, primarily as a result of increased personnel,
facilities and travel costs to support higher levels of sales and
amortization associated with the ARTIC Business Unit acquisition on March
1, 1999. The increase as a percentage of revenues was primarily the result
of the amortization associated with the ARTIC Business Unit acquisition on
March 1, 1999.
INTEREST INCOME, NET AND INCOME TAX PROVISION
<TABLE>
Three Months Ended
------------------
(in thousands, except percentage amounts)
March 31, Percentage March 31,
1999 Change 1998
---- ------ ----
<S> <C> <C> <C>
Interest Income, net $ 304 (7%) $ 326
Income Tax Provision $ 806 (52%) $1,682
</TABLE>
Interest income, net includes interest income, interest expense, bank
charges and foreign currency transaction gains or losses. Interest income,
net decreased from recent quarters due to the cash payment associated with
the ARTIC Business Unit acquisition on March 1, 1999.
The decrease in the income tax provision is attributable to decreased net
income before taxes and the decrease in the effective tax rate applied at
32% in 1999. The Company's effective tax rate was at approximately 35% in
1998. The decline in the effective tax rate from 1998 to 1999 was due to
tax benefits from increased research and experimentation tax credits and an
increase foreign operations taxed at favorable rates.
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 and hardware underlying the Company's internal
financial systems, manufacturing equipment and systems, product development
tools and 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 website
(http://www.radisys.com/). In addition, the Company has been in contact
with all major external third party providers to assess their Year
11
<PAGE>
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 the
analysis of its Year 2000 readiness, completed the majority of
mission-critical system upgrades and replacements it requires to be Year
2000 ready, and is now in the process of upgrading or replacing
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 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 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had $14.3 million in cash and cash
equivalents, which represents the Company's principal source of liquidity.
The Company had working capital of approximately $45.3 million. The Company
maintains a $10.0 million line of credit with a bank which has been
extended to October 1999. The Company has not drawn any funds under this
line of credit.
Cash and cash equivalents decreased $24.5 million during the three months
ended March 31, 1999 primarily as a result of the cash paid for the ARTIC
Business Unit acquisition ($27.5 million) on March 1, 1999, increases in
accounts receivable ($4.4 million) and capitalized software production
costs and other assets ($.8 million). These decreases were offset by cash
and cash equivalent increases from accounts payable ($3.0 million), net
income ($1.7 million), depreciation and amortization ($1.6 million) and
income taxes payable ($1.3 million).
The Company believes that existing cash and cash equivalents and cash from
operations will be sufficient to fund its operations for at least the next
12 months.
12
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On March 4, 1999, the Company filed a Form 8-K dated March 1,
1999 reporting Item 2. On April 22, 1999, the Company filed a Form
8-K/A.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RADISYS CORPORATION
By: STEPHEN F. LOUGHLIN
-------------------------------------
Date: May 14, 1999 Stephen F. Loughlin
Vice President of Finance and
Administration and Chief Financial
Officer
(Authorized officer and Principal
Financial Officer)
14
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,348
<SECURITIES> 0
<RECEIVABLES> 23,995
<ALLOWANCES> 565
<INVENTORY> 21,928
<CURRENT-ASSETS> 62,355
<PP&E> 11,538
<DEPRECIATION> 11,026
<TOTAL-ASSETS> 101,239
<CURRENT-LIABILITIES> 17,102
<BONDS> 0
0
0
<COMMON> 51,916
<OTHER-SE> 32,221
<TOTAL-LIABILITY-AND-EQUITY> 101,239
<SALES> 31,559
<TOTAL-REVENUES> 31,559
<CGS> 20,285
<TOTAL-COSTS> 9,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> 2,518
<INCOME-TAX> 806
<INCOME-CONTINUING> 1,712
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,712
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
