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 September 30, 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 November 10,
1999 was 10,925,920.
<PAGE>
RADISYS CORPORATION
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet - September 30, 1999 and
December 31, 1998 3
Consolidated Statement of Operations - Three months
ended September 30, 1999 and 1998, and nine months
ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Shareholders'
Equity - December 31, 1998 through September 30, 1999 5
Consolidated Statement of Cash Flows - Nine months
ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
<TABLE>
<CAPTION>
RadiSys Corporation
Consolidated Balance Sheet
(in thousands, except share amounts)
(unaudited)
ASSETS
September 30, December 31,
1999 1998
------------ ------------
(restated)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 24,242 $ 43,792
Accounts receivable, net 50,403 33,661
Inventories, net 44,757 27,382
Other current assets 2,072 2,255
Deferred income taxes 3,455 805
------------ ------------
Total current assets 124,929 107,895
Equipment, net 19,251 17,011
Goodwill and intangible assets, net 21,882 3,142
Other assets 9,577 3,679
------------ ------------
Total assets $ 175,639 $ 131,727
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 34,400 $ 12,553
Income taxes payable 3,707 1,052
Accrued wages and bonuses 4,525 4,272
Accrued sales discounts 1,303 748
Other accrued liabilities 8,046 5,910
Current portion of capital lease obligation 144 277
------------ ------------
Total current liabilities 52,125 24,812
Non-current portion of capital lease obligation - 88
------------ ------------
Total liabilities 52,125 24,900
------------ ------------
Commitments and contingent liabilities
Shareholders' equity
Common stock, 50,000,000 shares
authorized, 10,832,650 and 10,559,224
shares issued and outstanding 136,099 132,368
Accumulated other comprehensive loss:
Cumulative translation adjustment (1,474) (1,096)
Unrealized loss on securities available
for sale (438) (568)
Accumulated deficit (10,673) (23,877)
------------ ------------
Total shareholders' equity 123,514 106,827
------------ ------------
Total liabilities and shareholders' equity $ 175,639 $ 131,727
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
RadiSys Corporation
Consolidated Statement of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(restated) (restated)
<S> <C> <C> <C> <C>
Revenues $ 64,096 $ 44,934 $ 178,145 $ 138,693
Cost of goods sold 40,724 29,921 113,023 92,713
--------- --------- --------- ---------
Gross profit 23,372 15,013 65,122 45,980
Research and development 7,438 5,795 21,973 16,674
Selling, general and administrative 9,385 7,937 26,991 23,198
Goodwill and intangibles amortization 722 27 1,733 27
Combination costs 5,971 - 5,971 -
--------- --------- --------- ---------
Income (loss) from operations (144) 1,254 8,454 6,081
Interest income, net 229 592 936 1,633
Other income 2,007 - 2,007 -
--------- --------- --------- ---------
Income before income tax provision (benefit) 2,092 1,846 11,397 7,714
Income tax provision (benefit) 1,147 403 (1,807) 2,317
--------- --------- --------- ---------
Net income $ 945 $ 1,443 $ 13,204 $ 5,397
========= ========= ========= =========
Net income per share (basic) $ 0.09 $ 0.14 $ 1.23 $ 0.51
========= ========= ========= =========
Net income per share (diluted) $ 0.08 $ 0.14 $ 1.18 $ 0.51
========= ========= ========= =========
Shares used in the calculation of
net income per share - basic 10,808 10,580 10,722 10,569
========= ========= ========= =========
Shares used in the calculation of
net income per share - diluted 11,447 10,677 11,171 10,687
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
RadiSys Corporation
Consolidated Statement of Changes in Shareholders' Equity
(in thousands, except share amounts)
Common stock Cumulative Unrealized Total other
---------------------- translation gain/loss on Accumulated comprehensive
Shares Amount adjustment securities deficit Total income
---------- ---------- ----------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 10,559,224 $ 132,368 $ (1,096) $ (568) $ (23,877) $ 106,827
Shares issued pursuant to
benefit plans 273,426 3,731 - - - 3,731
Translation adjustment - - (378) - - (378) $ (378)
Unrealized gain on securities - - - 130 - 130 130
Net income for the period - - - - 13,204 13,204 13,204
---------- ---------- ----------- ------------ ----------- --------- ---------
Balances, September 30, 1999
(unaudited) 10,832,650 $ 136,099 $ (1,474) $ (438) $ (10,673) $ 123,514
========== ========== =========== ============ =========== =========
Total other comprehensive income,
nine months ended September 30, 1999
(unaudited) $ 12,956
=========
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
RadiSys Corporation
Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
-------------------------
Sept. 30, Sept. 30,
1999 1998
---------- ----------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 13,204 $ 5,397
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 6,889 4,205
Gain on sale of assets (2,157) -
Deferred income taxes (6,845) (206)
Net changes in current assets and current liabilities:
Decrease (increase) in accounts receivable (16,742) 10,090
Decrease (increase) in inventories (10,919) 5,312
Decrease (increase) in other current assets 183 884
Increase (decrease) in accounts payable 21,847 (3,423)
Increase (decrease) in income taxes payable 2,655 (633)
Increase (decrease) in accrued wages and bonuses 253 (1,444)
Increase (decrease) in accrued sales discounts 555 (505)
Increase (decrease) in other accrued liabilities 2,136 (72)
---------- ----------
Net cash provided by operating activities 11,059 19,605
---------- ----------
Cash flows from investing activities:
Business acquisitions (27,376) -
Capital expenditures (5,137) (4,652)
Proceeds from divestitures 1,500 1,240
Capitalized software production costs and other assets (2,728) (3,356)
---------- ----------
Net cash used for investing activities (33,741) (6,768)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 3,731 1,441
Repurchase of common stock - (1,802)
Purchase of treasury stock - -
Payments on capital lease obligation (221) (180)
---------- ----------
Net cash provided by (used for) financing activities 3,510 (541)
---------- ----------
Effect of exchange rate changes on cash (378) (544)
---------- ----------
Net increase (decrease) in cash and cash equivalents (19,550) 11,752
Cash and cash equivalents, beginning of period 43,792 30,847
---------- ----------
Cash and cash equivalents, end of period $ 24,242 $ 42,599
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
(unaudited)
September 30, 1999
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.
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. See Note 8
regarding the merger with Texas Micro Inc., and the restatement of the
Company's financial statements. 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.
Management Estimates
--------------------
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. Significant estimates and judgements made by management of the
Company include matters such as collectibility of accounts receivable,
realizability of inventories and recoverability of capitalized software and
deferred tax assets.
Reclassifications
-----------------
Reclassifications have been made to amounts in certain prior years. These
changes had no impact on previously reported results of operations or
shareholders' equity.
Change in Estimates
-------------------
During the third quarter of 1999 the Company changed its estimate relative
to the rate of potential product returns from distributors to reflect
contractual return limitations. This change resulted in an increase to
third quarter income from operations of $.4 million.
2. Accounts Receivable
Trade accounts receivable are net of an allowance for doubtful accounts of
$948 and $1,481 at September 30, 1999 and December 31, 1998, respectively.
The Company's customers are concentrated in the technology industry.
7
<PAGE>
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
Sep 30, Dec 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw Materials $ 28,087 $ 17,520
Work in Process 14,984 3,728
Finished Goods 1,686 6,134
----------- -----------
$ 44,757 $ 27,382
=========== ===========
</TABLE>
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Sep 30, Dec 31,
1999 1998
----------- -----------
<S> <C> <C>
Land $ 1,391 $ 1,391
Manufacturing Equipment 15,930 14,591
Office Equipment 17,780 12,917
Leasehold Improvements 5,217 5,835
----------- -----------
40,318 34,734
Less: Accumulated Depreciation 21,067 17,723
----------- -----------
$ 19,251 $ 17,011
=========== ===========
</TABLE>
5. Goodwill and Intangible Assets
Goodwill and intangible assets increased by $18.8 million, from $3.1
million at December 31, 1998 to $21.9 million at September 30, 1999. This
increase is due to goodwill and intangibles recorded from the ARTIC
acquisition (see Note 10) of $19.1 million (net of amortization), and from
the Sonitech acquisition of $4.4 million (net of amortization), offset by
$0.3 million amortization from the Sonitech acquisition and other
intangibles. Amortization periods range from five to fifteen years.
6. 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) outstanding
during the periods, computed using the treasury stock method for stock
options.
Weighted average shares consist of the following:
<TABLE>
<CAPTION>
Three Nine
months ended months ended
------------------- -------------------
Sep 30, Sep 30, Sep 30, Sep 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average Shares (basic) 10,808 10,580 10,722 10,569
Effect of Dilutive Stock Options 639 97 449 118
-------- -------- -------- --------
Weighted Average Shares (diluted) 11,447 10,677 11,171 10,687
======== ======== ======== ========
</TABLE>
8
<PAGE>
7. Segment 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.
Information concerning principal geographic areas is as follows:
<TABLE>
<CAPTION>
Revenue
Three Nine
months ended months ended
------------------- -------------------
Sep 30, Sep 30, Sep 30, Sep 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Country
United States $ 41,175 $ 31,910 $119,805 $ 99,573
Europe 21,551 11,999 55,327 35,824
Asia Pacific - Japan 1,188 601 1,955 2,218
Other foreign 182 424 1,058 1,078
-------- -------- -------- --------
$ 64,096 $ 44,934 $178,145 $138,693
======== ======== ======== ========
Long Lived Assets
Sep 30, Dec 31,
1999 1998
-------- --------
<S> <C> <C>
Country
United States $ 18,752 $ 16,373
Europe 409 538
Asia Pacific - Japan 90 99
-------- --------
$ 19,251 $ 17,011
======== ========
</TABLE>
No customer accounted for more than 10% of total revenue for the three and
nine month periods ended September 30, 1999 and 1998.
8. Merger with Texas Micro and Related Charges
On August 13, 1999, the Company completed a merger transaction with Texas
Micro Inc. ("Texas Micro"), a publicly-traded embedded computer company
headquartered in Houston, Texas. As a result, the outstanding Texas Micro
common stock was converted into approximately 2.8 million shares of RadiSys
common stock, based on an exchange ratio of approximately 4.96 shares of
Texas Micro common stock for each share of RadiSys common stock. The merger
was accounted for as a pooling-of-interests under Accounting Principles
Board Opinion No. 16, and accordingly, financial statements presented for
all periods have been restated to reflect combined operations and financial
position. All intercompany transactions have been eliminated. The
merger-related costs consisted primarily of fees for investment bankers,
attorneys, accountants and financial printing. Certain reclassifications
were made to Texas Micro's accounts to conform to the Company's
presentation.
Consolidated results of operations for the period January 1, 1999 through
June 30, 1999 of the Company and Texas Micro on a stand-alone basis are as
follows:
RadiSys Texas Micro Combined
Revenue $ 70,395 $ 43,654 $ 114,049
========= ========= =========
Net Income $ 4,448 $ 2,618 $ 7,066
========= ========= =========
9
<PAGE>
In connection with the merger, the Company recorded a charge to operating
expenses of approximately $6.0 million for merger-related costs during the
third quarter of 1999. Merger and related costs are comprised of the
following:
<TABLE>
<CAPTION>
Combination costs Balance
recorded quarter accrued as of
ending 9/30/99 9/30/99
----------------- --------------
<S> <C> <C>
Professional & filing fees $ 3,251 $ 400
Severance, retention, relocation & benefits alignment 1,538 249
Contract termination costs 799 205
Marketing 226 141
Information systems conversion 83 4
Other miscellaneous 74 0
-------- -------
Total $ 5,971 $ 999
======== =======
</TABLE>
Accrued combination costs totalling $1.0 million at September 30, 1999 are
included in other accrued liabilities in the Consolidated Balance Sheet.
As a result of the merger transaction with Texas Micro, the Company
restated its financial statements including recognition of a tax benefit in
the second quarter 1999. The Company has accounted for certain changes in
the federal income tax laws that took effect on June 25, 1999. The tax law
change made certain Texas Micro net operating loss carryforwards available
to offset RadiSys taxable income. This portion of the restatement increased
net income of the Company by $5.2 million for the quarter ended June 30,
1999.
9. Gain on Sale of Assets
On September 30, 1999, the Company received the final consideration owing
in connection with the prior (1996) sale (by Texas Micro) of Texas Micro's
Sequoia Enterprise Systems business unit to General Automation, Inc. Final
consideration consisted of $1.5 million in cash, $750 in notes, and
1,133,333 shares of General Automation common stock. The receipt of this
consideration resulted in a gain of $2.2 million in the quarter and is
reflected in other income in the Statement of Operations.
10. 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
$27.4 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 and nine-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 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.
10
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------- -------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 64,096 $ 58,546 $187,735 $172,399
Net Income $ 945 $ 6,353 $ 15,453 $ 10,178
Net income per share (basic) $ .09 $ .60 $ .96 $ 1.44
Net income per share (diluted) $ .08 $ .60 $ .95 $ 1.38
</TABLE>
11. Subsequent Event
On October 19, 1999 the Company's board of directors declared a
three-for-two stock split of the shares of common stock of the Company to
be effected by means of a stock dividend. The shareholders of record on
November 8, 1999 will receive one additional share of common stock for
every two shares held. The stock dividend will be distributed on November
29, 1999.
11
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands except percentage amounts)
OVERVIEW
Total revenue was $64.1 million for the three months ended September 30,
1999 compared to $44.9 million for the three months ended September 30,
1998, and $178.1 million for the nine months ended September 30, 1999
compared to $138.7 million for the nine months ended September 30, 1998.
Net income was $0.9 million for the three months ended September 30, 1999
compared to $1.4 million for the three months ended September 30, 1998, and
$13.2 million for the nine months ended September 30, 1999 compared to $5.4
million for the nine months ended September 30, 1998. The 1999 results
include costs related to the merger with Texas Micro in 1999, the gain
related to the General Automation settlement and the one-time tax benefit
as discussed below.
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. The
purchase price, including direct acquisition costs, was $27.4 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.
On August 13, 1999, the Company completed its merger transaction with Texas
Micro, a publicly-traded embedded computer company headquartered in
Houston, Texas, by issuing approximately 2.8 million shares of the
Company's stock for all the outstanding common stock of Texas Micro. The
merger was accounted for as a pooling-of-interests under Accounting
Principles Board Opinion No. 16, and accordingly, the financial statements
have been restated for all periods prior to the merger to reflect the
combined results of operations, financial position and cash flows. In
connection with the merger, the Company recorded a charge to operating
expenses of approximately $6.0 million for merger-related costs in the
third quarter of 1999.
<TABLE>
<CAPTION>
REVENUES
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
1999 Change 1998 1999 Change 1998
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 64,096 43% $ 44,934 $ 178,145 28% $ 138,693
</TABLE>
The increase in revenues for the three and nine months ended September 30,
1999 compared to the same periods in 1998 was the result of sales related
to the ARTIC Business Unit acquisition since March 1, 1999, design wins
ramping into production and volume increases in other OEM sales. The
percentage change for the nine months ended September 30, 1999 compared to
September 30, 1998 was lower than the three month change due to the results
of operations of the ARTIC acquisition included in revenue beginning March,
1999 combined with a decrease in revenues in the second quarter of 1998.
The decreased revenue experienced in the second quarter of 1998 was caused
by customers delaying or canceling orders precipitated by the effects of
the global economic conditions in the electronics market and decrease in
sales from one OEM customer.
COST OF GOODS SOLD
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
1999 Change 1998 1999 Change 1998
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cost of Goods Sold $ 40,724 36% $ 29,921 $ 113,023 22% $ 92,713
As a % of Revenues 64% 67% 63% 67%
</TABLE>
12
<PAGE>
Cost of goods sold increased on a dollar basis for the three and nine
months ended September 30, 1999 compared to the three and nine months ended
September 30, 1998 primarily as a result of higher revenues. Cost of goods
sold as a percentage of revenues decreased for the three and nine months
ended September 30, 1999 compared to the three and nine months ended
September 30, 1998 primarily as a result of the product mix consisting of a
larger portion of higher margin product related to the ARTIC Business Unit
acquisition on March 1, 1999. The percentage change for the nine months
ended September 30, 1999 compared to September 30, 1998 was lower than the
three month change due to lower manufacturing costs associated with the
revenue level comparisons described above.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
1999 Change 1998 1999 Change 1998
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Research and Development $ 7,438 28% $ 5,795 $ 21,973 32% $ 16,674
As a % of Revenues 12% 13% 12% 12%
</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.
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
1999 Change 1998 1999 Change 1998
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Selling, General & Admin. $ 9,385 18% $ 7,937 $ 26,991 16% $ 23,198
As a % of Revenues 15% 18% 15% 17%
</TABLE>
Selling, general and administrative expenses have increased in dollar
amount in the three and nine months ended September 30, 1999 compared to
the three and nine months ended September 30, 1998 primarily as a result of
increased personnel, facilities and travel costs to support higher levels
of sales associated with the ARTIC business unit acquisition on March 1,
1999 and the Texas Micro merger on August 13, 1999. Selling, general and
administrative expenses decreased slightly as a percentage of revenues for
the three and nine months ended September 30, 1999 compared to the three
and nine months ended September 30, 1998 primarily as a result of higher
revenue volumes in 1999.
GOODWILL AND INTANGIBLES AMORTIZATION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
1999 Change 1998 1999 Change 1998
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Goodwill & Intangibles Amort. $ 722 2,574% $ 27 $ 1,733 6,319% $ 27
As a % of Revenues 1% 0% 1% 0%
</TABLE>
Amortization expense relates to goodwill and intangibles recorded in
connection with the Sonitech acquisition (Q1 97 - $3.0 million) and the
ARTIC acquisition (Q1 99 - $20.7 million). Amortization periods range from
five to fifteen years.
13
<PAGE>
COMBINATION COSTS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
1999 Change 1998 1999 Change 1998
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Combination costs $ 5,971 - $ 0 $ 5,971 - $ 0
As a % of Revenues 9% 0% 3% 0%
</TABLE>
Combination costs for the three and nine months ended September 30, 1999
resulted from the Texas Micro merger on August 13, 1999. The Company
recorded a charge to operating expenses of approximately $6.0 million for
merger-related costs during the third quarter of 1999. Merger and related
costs are comprised of the following:
<TABLE>
<CAPTION>
Combination costs Balance
recorded quarter accrued as of
ending 9/30/99 9/30/99
----------------- -------------
<S> <C> <C>
Professional & filing fees $ 3,251 $ 400
Severance, retention, relocation & benefits alignment 1,538 249
Contract termination costs 799 205
Marketing 226 141
Information systems conversion 83 4
Other miscellaneous 74 0
--------- ---------
Total $ 5,971 $ 999
========= =========
</TABLE>
Accrued combination costs totalling $1.0 million at September 30, 1999 are
included in other accrued liabilities in the Consolidated Balance Sheet.
INTEREST INCOME, OTHER INCOME AND INCOME TAX PROVISION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
1999 Change 1998 1999 Change 1998
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income, net $ 229 (61%) $ 592 $ 936 (43%) $ 1,633
Other income $ 2,007 100%) $ 0 $ 2,007 (100%) $ 0
Income tax provision (benefit) $ 1,147 185% $ 403 $ (1,807) (178%) $ 2,317
</TABLE>
Interest income, net, decreased from 1998 due to lower cash and cash
equivalents levels primarily associated with the funding of the ARTIC
Business Unit acquisition on March 1, 1999 and capital additions.
The Company received the final consideration owing in connection with the
prior (1996) sale of Texas Micro's Sequoia Enterprise Systems business unit
to General Automation. Final consideration consisted of $1.5 million in
cash, $750,000 in notes, and 1,133,333 shares of General Automation common
stock. The receipt of this consideration resulted in a gain to the Company
of $2.2 million in the third quarter of 1999 and is reflected in other
income.
The Company's effective tax rate for the three months ended September 30,
1999 and 1998 was 54.8% and 21.8% respectively. The increase in the
effective tax rate is primarily attributable to expenses of the Texas Micro
merger that are capitalized for income tax purposes and not deductible. The
tax benefit for the nine months ended September 30, 1999 is the result of a
tax benefit recorded in the second quarter of 1999. The Company has
accounted for certain changes in the federal income tax laws that were
effective on June 25, 1999. The tax law change eliminated some restrictions
on the utilization of certain Texas Micro net operating loss
14
<PAGE>
carryforwards. Some of the Texas Micro net operating loss carryforwards are
now available to offset RadiSys taxable income. The adjustment relating to
this tax law change resulted in a decrease to the tax provision for the
quarter ended June 30, 1999 and an increase to net income after tax of $5.2
million.
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 product's 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 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
during the Year 2000, and will react as appropriate to newly-identified
issues.
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 September 30, 1999, the Company had $24.2 million in cash and cash
equivalents, which represents the Company's principal source of liquidity.
The Company had working capital of approximately $72.8 million. The Company
has a $20.0 million line of credit with a bank which expires October 2000.
The Company has not drawn any funds under this line of credit.
Cash and cash equivalents decreased $19.6 million during the nine months
ended September 30, 1999 primarily as a result of the cash paid for the
ARTIC Business Unit acquisition ($27.4 million) on March 1, 1999, increases
in accounts receivable ($16.7 million), inventories ($10.9 million),
deferred income taxes ($2.7 million), capital expenditures ($5.1 million)
and capitalized software production costs and other assets ($6.9 million).
These cash uses were offset by cash and cash equivalent increases from
accounts payable ($21.8 million), net income ($13.2 million), depreciation
and amortization ($6.9 million), accrued income taxes ($2.7 million) and
other accrued liabilities ($2.1 million).
The Company believes that existing cash and cash equivalents and cash from
operations and the bank line of credit will be sufficient to fund its
current operations for at least the next 12 months.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
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 and the risk factors described in the
Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on July 7, 1999.
16
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Special Meeting on August 12, 1999, the holders of the
Company's outstanding Common Stock took the actions described below. At the
Special Meeting 7,982,851 shares of Common Stock were issued and outstanding and
entitled to vote.
The shareholders voted in favor of the issuance of common stock of the Company
to Texas Micro stockholders under the terms of the merger agreement among the
Company, Texas Micro and Tabor Merger Corp., a wholly owned subsidiary of the
Company.
6,396,720 Shares in favor
36,359 Shares against or withheld
50,274 Broker non-votes
The shareholders voted in favor of an amendment to the Company's 1995 Stock
Incentive Plan to increase the number of shares reserved for issuance under the
plan from 2,250,000 to up to 2,750,000 shares.
3,820,097 Shares in favor
2,663,256 Shares against or withheld
0 Broker non-votes
Item 6. Exhibits, Reports on Form 8-K
(a) Exhibits
2.1 Agreement of Reorganization and Merger dated as of May 24,
1999, between the Company, Texas Micro Inc. and Tabor Merger
Corp. Incorporated by reference to Appendix A to the
Company's Joint Proxy Statement / Prospectus dated July 7,
1999, which is part of the Company's Registration Statement
on Form S-4 (No. 333-82401).
10.1 Renewal of and increase in September 12, 1996 revolving line
of credit agreement between the Company and United States
National Bank of Oregon dated September 30, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 13, 1999, the Company filed a Form 8-K dated August
13, 1999 reporting Items 2 and 7.
17
<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
STEPHEN F. LOUGHLIN
-----------------------------------------
Date: November 15, 1999 Stephen F. Loughlin
Vice President of Finance and
Administration and Chief Financial
Officer (Authorized officer and Principal
Financial Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Agreement of Reorganization and Merger dated as of May
24, 1999, between the Company, Texas Micro Inc. and Tabor
Merger Corp. Incorporated by reference to Appendix A to
the Company's Joint Proxy Statement / Prospectus dated
July 7, 1999, which is part of the Company's Registration
Statement on Form S-4 (No. 333-82401).
10.1 Renewal of and increase in September 12, 1996 revolving
line of credit agreement between the Company and United
States National Bank of Oregon dated September 30, 1999.
27 Financial Data Schedule
[US Bank Logo]
September 30, 1999
Mr. Stephen F. Loughlin, Chief Financial Officer
RadiSys Corporation
5445 NE Dawson Creek Drive
Hillsboro, OR 97124
Dear Stephen:
I am pleased to advise you that U.S. Bank, National Association ("Bank") has
approved the renewal of, and an increase in, the revolving line of credit 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: $20,000,000 (Twenty Million Dollars)
Guarantors: None.
Expiry Date: September 30, 2000 or upon non-compliance with any
term or condition stated herein, or any material
misrepresentation of fact by the Borrower.
Pricing:
Fees: Upfront Fee of 5 basis points ($ 1 0,000) on the
committed amount, due upon acceptance.
Quarterly fee of 1/8 of I percent (annualized)
based upon the unused portion of the line, due
quarterly in arrears.
<PAGE>
RadiSys Corporation Page 2
September 30, 1999
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 I O-Q
report or the audited annual financials.
<TABLE>
<CAPTION>
Total Liabilities/
Tangible Net Worth Prime BA or LIBOR
------------------ ----- -----------
<S> <C> <C>
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%
</TABLE>
B/A financing available to Borrower in minimum
amount of $1,000,000 to maximum of 90 days.
LIBOR Terms:
A) Minimum amount of $500,000 and $100,000
increments thereafter.
B) Maturity and availability: One, two or three
month periods.
C) Prepayment of LIBOR borrowings not permitted.
D) Notification: Two day notification prior to
12:00 noon on the day of notification.
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 30, 1999
Commitment Letter
F) Interest computed on the 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 ten-ns
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 ten-ns 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 the Borrowing Limit when Quick
Ratio is greater than 1. 15: I.O. When Quick Ratio
is less than or equal to 1. 15: 1. 00 the advances
will be limited to
<PAGE>
RadiSys Corporation Page 4
September 30, 1999
Commitment Letter
80% of eligible A/R to 90 days after date of
invoice. Ineligible accounts will be datings, COD
or cash sales, inter-company, employee, progress
billings, consignments, retainage, potential offset
and accounts where more than 25% of the balance is
beyond 90 days after date of invoice. Foreign
accounts receivable will be considered eligible at
the discretion of the Bank. Disbursements under the
line of credit shall terminate on the earlier
occurrence of the date indicated above as the
Expiry Date or the date on which this Bank, in its
sole discretion, determines that there has been a
material adverse change in the financial condition
or management of the Borrower, or determines that
there has been any noncompliance with any term or
condition stated herein. Noncompliance with the
conditions and terms of this letter of will be
considered as an event of default, entitling the
Bank to all the default provisions as provided for
in documents evidencing this line of credit.
General Conditions:
- -------------------
Covenants: The following covenants will be measured quarterly:
1. Minimum Current Ratio: The ratio of Current
Assets to Current Liabilities not to be less
than 2.00 to 1.00.
2. Maximum Leverage Ratio: The ratio of Total
Liabilities to Tangible Net Worth not to be
more than 0.75 to 1.00.
3. Minimum Tangible Net Worth: Tangible Net
Worth shall not be less than $75,000,000.
Failure to comply with any the above listed covenants constitutes an
event of default under the terms of the Bank's documents.
Financial Reporting:
1. Audited annual financial statements.
2. Quarterly interim financial statements and all
material documents filed with the SEC. RadiSys
Corporation Page 5 September 30, 1999
Commitment Letter
<PAGE>
RadiSys Corporation Page 5
September 30, 1999
Commitment Letter
3. If the Quick Ratio (as defined above) falls
below 1. 1 5 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 15, 1999.
We are pleased to provide you this borrowing accommodation and look forward to
serving your banking needs in the future.
Respectfully,
ROSS A. BEATON
Ross A. Beaton
Vice President
BY OREGON STATUE (ORS 41.580), THE FOLLOWING DISCLOSURE IS REQUIRED: UNDER
OREGON LAW MOST AGREEMENTS PROMISES AND COMMITMENTS MADE BY LENDERS AFTER
OCTOBER 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR
PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER
TO BE ENFORCEABLE
<PAGE>
RadiSys Corporation Page 6
September 30, 1999
Commitment Letter
THE UNDERSIGNED HEREBY ACKNOWLEDGES AND ACCEPTS THIS OFFER TO EXTEND CREDIT
SUBJECT TO THE TERMS AND CONDITIONS STATED ABOVE.
RadiSys Corporation
BY: STEPHEN F. LOUGHLIN CFO September 30, 1999
-------------------------- ------------------
Title Date
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,242
<SECURITIES> 0
<RECEIVABLES> 50,403
<ALLOWANCES> 948
<INVENTORY> 44,757
<CURRENT-ASSETS> 124,929
<PP&E> 19,251
<DEPRECIATION> 21,067
<TOTAL-ASSETS> 175,639
<CURRENT-LIABILITIES> 52,125
<BONDS> 0
0
0
<COMMON> 136,099
<OTHER-SE> (12,585)
<TOTAL-LIABILITY-AND-EQUITY> 175,639
<SALES> 178,145
<TOTAL-REVENUES> 178,145
<CGS> 113,023
<TOTAL-COSTS> 56,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,943
<INCOME-PRETAX> 11,397
<INCOME-TAX> (1,807)
<INCOME-CONTINUING> 13,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,204
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.18
</TABLE>
