<PAGE>
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, 2000 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 reports), 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 9, 2000
WAS 17,307,775.
<PAGE>
RADISYS CORPORATION
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet - September 30, 2000 and December 31, 1999 3
Consolidated Statement of Operations - Three months ended
September 30, 2000 and 1999, and nine months ended September
30, 2000 and 1999 4
Consolidated Statement of Changes In Shareholders' Equity - December 31,
1999 through September 30, 2000 5
Consolidated Statement of Cash Flows - Nine months ended September 30,
2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE>
RADISYS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 86,147 $ 15,708
Short term investments 66,481 --
Accounts receivable, net 67,711 58,619
Inventories, net 50,730 41,374
Other current assets 2,678 1,747
Deferred income taxes 4,873 4,723
--------------- ----------------
Total current assets 278,620 122,171
Property and equipment, net 25,653 21,211
Goodwill and intangible assets, net 31,525 34,177
Other assets 14,144 10,004
--------------- ----------------
Total assets $ 349,942 $ 187,563
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 33,108 $ 19,878
Short term borrowings -- 13,931
Income taxes payable 5,999 3,527
Accrued wages and bonuses 8,276 6,706
Other accrued liabilities 9,187 9,266
--------------- ----------------
Total current liabilities 56,570 53,308
--------------- ----------------
Convertible subordinated notes 116,475 --
--------------- ----------------
Total liabilities 173,045 53,308
--------------- ----------------
Shareholders' equity
Common stock, 100,000 shares authorized,
17,293 and 16,489 shares issued and
outstanding 160,510 141,030
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (1,558) (1,546)
Unrealized gain (loss) on securities available for 161 (349)
sale
Accumulated earnings (deficit) 17,784 (4,880)
--------------- ----------------
Total shareholders' equity 176,897 134,255
--------------- ----------------
Total liabilities and shareholders' equity $ 349,942 $ 187,563
=============== ================
The accompanying notes are an integral part of this statement.
</TABLE>
3
<PAGE>
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
--------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 90,719 $ 64,096 $ 258,183 $ 178,145
Cost of goods sold 59,338 40,724 167,409 113,023
--------------- -------------- -------------- -----------------
Gross profit 31,381 23,372 90,774 65,122
Research and development 9,542 7,438 27,828 21,973
Selling, general and administrative 9,716 9,385 28,965 26,991
Goodwill and intangibles amortization 1,557 722 5,008 1,733
Combination costs -- 5,971 -- 5,971
--------------- -------------- -------------- -----------------
Income (loss) from operations 10,566 (144) 28,973 8,454
Interest income, net 403 229 606 936
Other income, net 333 2,007 939 2,007
--------------- -------------- -------------- -----------------
Income before income tax provision 11,302 2,092 30,518 11,397
Income tax provision (benefit) 2,115 1,147 7,854 (1,807)
--------------- -------------- -------------- -----------------
Net income $ 9,187 $ 945 $ 22,664 $ 13,204
=============== ============== ============== =================
Net income per share (basic) $ 0.54 $ 0.06 $ 1.34 $ 0.82
=============== ============== ============== =================
Net income per share (diluted) $ 0.50 $ 0.06 $ 1.24 $ 0.79
=============== ============== ============== =================
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE UNREALIZED ACCUMULATED TOTAL OTHER
COMMON STOCK TRANSLATION GAIN/(LOSS) EARNINGS COMPREHENSIVE
SHARES AMOUNT ADJUSTMENT ON SECURITIES (DEFICIT) TOTAL INCOME
------------ ----------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1999 16,489 $141,030 $ (1,546) $ (349) $ (4,880) $134,255
Shares issued pursuant to
benefit plans 804 12,889 12,889
Tax effect of options exercised 6,591 6,591
Translation adjustment (12) (12) $ (12)
Unrealized gain on securities 510 510 510
Net income for the period 22,664 22,664 22,664
------------ ----------- ------------ ------------ ------------ ------------ ------------
Balances, September 30, 2000 17,293 $160,510 $ (1,558) $ 161 $ 17,784 $176,897
============ =========== ============ ============ ============ ============
Total other comprehensive
income, nine months ended
September 30, 2000 $ 23,162
============
</TABLE>
The accompanying notes are an integral part of this statement
5
<PAGE>
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,664 $ 13,204
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 12,582 6,889
Non-cash interest expense 75 --
Gain on sale of marketable securities (856) (2,157)
Deferred income taxes (2,392) (6,845)
Tax effect of options exercised 6,591 2,067
Net changes in current assets and current liabilities:
Decrease (increase) in accounts receivable (9,092) (16,742)
Decrease (increase) in inventories (9,356) (10,919)
Decrease (increase) in other current assets (931) 183
Increase (decrease) in accounts payable 13,230 21,847
Increase (decrease) in income taxes payable 2,472 2,655
Increase (decrease) in accrued wages and bonuses 1,570 253
Increase (decrease) in other accrued liabilities (6) 2,691
-------------- ---------------
Net cash provided by operating activities 36,551 13,126
-------------- ---------------
Cash flows from investing activities:
Purchase of short-term investments (66,481) --
Business acquisitions (2,366) (27,376)
Capital expenditures (9,737) (5,137)
Sale of marketable securities 350 --
Proceeds from divestitures -- 1,500
Capitalized software production costs and other assets (2,841) (2,728)
-------------- ---------------
Net cash used for investing activities (81,075) (33,741)
-------------- ---------------
Cash flows from financing activities:
Issuance of common stock, net 12,889 1,664
Issuance of convertible subordinated notes, net 116,090 -
Payments on short-term borrowings (13,931) -
Payments on capital lease obligation (73) (221)
-------------- ---------------
Net cash provided by financing activities 114,975 1,443
-------------- ---------------
Effect of exchange rate changes on cash (12) (378)
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 70,439 (19,550)
Cash and cash equivalents, beginning of period 15,708 43,792
-------------- ---------------
Cash and cash equivalents, end of period $ 86,147 $ 24,242
============== ===============
</TABLE>
The accompanying notes are an integral part of this statement
6
<PAGE>
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
RadiSys Corporation (the Company) was incorporated in March 1987 under
the laws of the State of Oregon. The accompanying consolidated
financial statements include the accounts of the Company and its wholly
owned subsidiaries, which are located in Western Europe, Israel, and
Japan.
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, 1999. 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.
NEW PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition,"
which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB
101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition
policies. Management believes that SAB 101 will have no material effect
on the financial position or results of operations of the Company.
In April 2000, FASB Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" - an interpretation of APB
Opinion No. 25 - was issued. FIN No. 44 clarifies the definition of
employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the
accounting consequences of various modifications to the terms of a
previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination.
Management believes that FIN 44 will not have a material effect
on the Company's financial position and results of operations.
7
<PAGE>
RECLASSIFICATIONS
Reclassifications have been made to certain amounts in prior years.
These changes had no impact on previously reported results of
operations or shareholders' equity.
CASH FLOWS
Non cash investing and financing activities include the effect of the
change in market value of the Company's available for sale investment
in General Automation common stock. The impact was a decrease of $.2
million, net of tax, to unrealized gain on securities available for
sale and long-term assets for the three month period ended September
30, 2000 and an increase of $.5 million, net of tax, for the nine month
period ended September 30, 2000.
2. ACCOUNTS RECEIVABLE
Trade accounts receivable are net of an allowance for doubtful accounts
of $928 and $933 at September 30, 2000 and December 31, 1999,
respectively. The Company's customers are concentrated in the
technology industry.
3. INVENTORIES
Net inventories consist of the following:
<TABLE>
<CAPTION>
SEPT 30, DEC 31,
2000 1999
--------- --------
<S> <C> <C>
Raw materials $ 44,152 $ 30,986
Work in process 4,317 2,465
Finished goods 2,261 7,923
--------- --------
$ 50,730 $ 41,374
========= =========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPT 30, DEC 31,
2000 1999
---- ----
<S> <C> <C>
Land and building $ 3,919 $ 1,391
Manufacturing equipment 19,671 17,950
Office equipment 24,701 19,746
Leasehold improvements 5,116 4,835
--------- ---------
53,407 43,922
Less: accumulated depreciation 27,754 22,711
--------- ---------
$ 25,653 $ 21,211
========= =========
</TABLE>
8
<PAGE>
On August 15, 2000, the Company purchased a building adjacent to its
Hillsboro campus for a purchase price of $2,528. The acquisition
included land valued at $772. The Company intends to use the new
building as an additional manufacturing site in the near future.
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets decreased by $2.7 million, net from
$34.2 million at December 31, 1999 to $31.5 million at September 30,
2000. Goodwill and intangibles increased by $2.3 million resulting from
increased purchase price recorded for the OCP acquisition based upon a
formula tied to certain OCP revenues pursuant to the acquisition
agreement. Amortization for the nine months ended September 30, 2000
was $5.0 million. Amortization periods range from five to fifteen
years.
6. OTHER ASSETS
Other assets include capitalized software, deferred tax asset,
investments in marketable securities, and unamortized note issuance
costs. During the quarter ended September 30, 2000 the Company
increased its investment in General Automation (GA) common stock by 786
shares, or $663, resulting from a conversion of a $500 note receivable
plus associated accrued interest, per the terms of the original
settlement agreement with GA. Previously, the note receivable had been
fully reserved on the Company's books. As of September 30, 2000 the
Company held 2,227 shares of GA with an associated market value of
approximately $1.9 million.
Additionally, during the third quarter the Company recorded unamortized
note issuance costs of $304 as a result of the $120 million debt
offering in the third quarter. The note issuance costs are being
amortized over 7 years using the effective interest method.
The Company's deferred tax asset increased by $2.2 million since
December 31, 1999 as a result of the recognition of the 1999 research
and experimentation tax credit carry-forward and the book/tax
difference in goodwill amortization related to acquisitions.
7. LONG-TERM DEBT
During the quarter ended September 30, 2000, the Company received
$116.1 million in net proceeds, after discount and note issuance costs,
from a private placement of $120 million aggregate principal amount of
5.5% convertible subordinated notes due 2007. The notes are unsecured
obligations, convertible into Company Common Stock at a conversion
price of $67.80 per share and are subordinated to all present and
future senior indebtedness of the Company. Interest on the subordinated
notes accrues at 5.5% per year and is payable semi-annually on February
15 and August 15, beginning February 15, 2001. The Company used a
portion of the proceeds to pay off the Company's existing line of
credit of $13.9 million during the quarter ended September 30, 2000.
On October 27, 2000 the Company repurchased $20 million principal
amount of the 5.5% subordinated notes at a discount in a negotiated
transaction with a third party. The repurchase of the notes resulted in
an after-tax extraordinary gain of approximately $3.3 million.
8. 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. This calculation does not include the effects of the
convertible debt, as it was anti-dilutive.
Weighted average shares consist of the following:
9
<PAGE>
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
------------------ ------------------
SEP 30, SEP 30, SEP 30, SEP 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares (basic) 17,144 16,212 16,907 16,082
Effect of dilutive stock options 1,331 958 1,384 674
------ ------ ------ ------
Weighted average shares (diluted) 18,475 17,170 18,291 16,756
====== ====== ====== ======
</TABLE>
9. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards
for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas and major
customers. The method for determining what information to report is
based on the way that management organizes the segments within the
Company for making operating decisions and assessing financial
performance.
The Company's chief operating decision maker is considered to be the
President and Chief Executive Officer ("CEO"). The Company's CEO
evaluates both consolidated and disaggregated financial information in
deciding how to allocate resources and assess performance. The CEO
receives certain disaggregated information for three operating
divisions within the Company.
The Company has aggregated divisional results of operations into a
single reportable segment as allowed under SFAS 131 because divisional
results of operations reflect similar long-term economic
characteristics, including average gross margins. Additionally, the
divisional operations are similar with respect to the nature of
products sold, types of customers, production processes employed and
distribution methods used. Accordingly, the Company describes its
reportable segment as designing and manufacturing embedded computing
solutions. All of the Company's revenues result from sales within this
segment.
Information about the Company's geographic operations and sales is as
follows:
REVENUE
-------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------------- ---------------------------
SEP 30, SEP 30, SEP 30, SEP 30,
2000 1999 2000 1999
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
COUNTRY
United States $54,010 $41,175 $149,770 $119,805
Europe 28,305 21,551 95,306 55,327
Asia Pacific - Japan 5,730 1,188 9,960 1,955
Other foreign 2,674 182 3,147 1,058
-------------- -------------- ------------ ------------
$90,719 $64,096 $258,183 $ 178,145
============== ============== ============ ============
</TABLE>
<TABLE>
<CAPTION>
LONG LIVED ASSETS
-----------------
SEP 30, DEC 31,
2000 1999
---- ----
<S> <C> <C>
COUNTRY
United States $24,455 $20,724
Europe 1,130 404
Asia Pacific - Japan 68 83
----------- -----------
$25,653 $21,211
=========== ===========
</TABLE>
Two customers accounted for $11.0 million and $10.9 million, or 12.1%
and 12.0% respectively, of total revenue for the three months ended
September 30, 2000, and one customer accounted for $30.4 million, or
11.8%, of total revenue for the nine months ended September 30, 2000.
No customers accounted for more than 10% of total revenue for the three
months or the nine months ended September 30, 1999.
10
<PAGE>
10. MERGER WITH TEXAS MICRO AND RELATED CHARGES
In connection with the merger of Texas Micro Inc., which was completed
on August 13, 1999, the Company recorded a charge to operating expenses
of approximately $6.0 million for merger-related costs during 1999.
Merger and related costs consist of the following:
<TABLE>
<CAPTION>
COMBINATION COSTS BALANCE
RECORDED YEAR ENDED ACCRUED AS OF
DEC 31, 1999 SEP 30, 2000
------------ ------------
<S> <C> <C>
Professional & filing fees $3,251 $ 18
Severance, retention, relocation & benefits alignment 1,538 --
Contract termination costs 799 90
Marketing, information systems conversion, and
other miscellaneous costs 383 8
-------- -----
Total $5,971 $ 116
======== =====
</TABLE>
Accrued combination costs totaling $116 at September 30, 2000 are
included in Other accrued liabilities in the Consolidated Balance
Sheet.
11. GAIN ON SALE OF ASSETS
During the first quarter of 2000 the Company sold a total of 367 shares
of General Automation common stock resulting in a recorded net gain of
$856. This gain is reflected in Other income in the Consolidated
Statement of Operations. There were no sales of assets during the
second and third quarters of 2000.
12. ACQUISITIONS AND MERGERS
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"). The purchase price aggregated $27.0 million in
cash consideration. The acquisition of ARTIC was accounted for using
the purchase method. The results of operations for ARTIC have been
included in the financial statements since the date of acquisition. The
aggregate purchase price of $27.5 million included $.6 million of
direct costs of acquisition and was allocated to fixed assets ($.4
million), inventories ($6.5 million), patents ($5.0 million) and the
remainder to goodwill.
OCP BUSINESS UNIT ACQUISITION
On December 28, 1999, the Company purchased certain assets of IBM's
Open Computing Platform (OCP) operation. OCP develops and sells
integrated computer-based solutions based on Intel architecture,
11
<PAGE>
primarily to OEMs of telecommunications equipment. The purchase
price consisted of an aggregate of $13.9 million in cash
consideration. The acquisition of OCP was accounted for using the
purchase method. The results of operations of OCP have been included
in the financial statements since the date of acquisition. The
aggregate purchase price recorded as of December 31, 1999 of $14.1
million included $.1 million direct costs of acquisition and $.1
million of contingent consideration and was allocated to fixed
assets ($.2 million), inventories ($.9 million) and the remainder to
goodwill. Pursuant to the terms of the acquisition agreement, the
Company may be required to make additional future payments in March
of 2001, 2002, and 2003 based upon a formula tied to future OCP
revenues. Accordingly, during the three months ended September 30,
2000 the Company recorded an additional $.6 million in purchase
price resulting from OCP revenues during the quarter. During the
nine months ended September 30, 2000, the Company recorded a total
of $2.3 million in additional purchase price resulting from OCP
revenues. The additional purchase price has been recorded as
goodwill. The total consideration for the acquisition is limited to
$30.0 million.
UNAUDITED PRO FORMA DISCLOSURES OF ACQUISITIONS
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisitions described above had
occurred as of the beginning of 1999, after giving effect to
adjustments of amortization of patents and goodwill, estimated
reduction of interest income and the estimated impact on the income tax
provision. The unaudited pro forma information is not necessarily
indicative of what actual results would have been had the ARTIC and OCP
acquisitions occurred at the beginning of the respective periods. The
unaudited pro forma information should be read in conjunction with the
Current Reports of the Company on Form 8-K dated March 1, 1999 and
December 28, 1999 for ARTIC and OCP, respectively, the Current
Report of the Company on Form 8-K dated October 18, 2000, and the
Current Reports of the Company on Form 8-K/A filed April 22, 1999,
and March 13, 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEP 30, 1999 SEP 30, 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues $76,429 $223,666
Net income 1,454 18,015
Net income per share (basic) .09 1.12
Net income per share (diluted) .08 1.08
</TABLE>
13. SUBSEQUENT EVENTS
The Company announced in October 2000 that its board of directors
authorized the repurchase of up to 850 of its outstanding shares.
Shares of common stock will be purchased in the open market or through
privately negotiated transactions over the next several months,
subject to market conditions.
12
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
OVERVIEW
Total revenue was $90.7 million for the three months ended September
30, 2000 compared to $64.1 million for the three months ended September
30, 1999, and $258.2 million for the nine months ended September 30,
2000 compared to $178.1 million for the nine months ended September 30,
1999. Net income was $9.2 million for the three months ended September
30, 2000 compared to $.9 million for the three months ended September
30, 1999, and $22.7 million for the nine months ended September 30,
2000 compared to $13.2 million for the nine months ended September 30,
1999.
During 1999, the Company merged with one company (Texas Micro in August
1999) and acquired assets in two other transactions (ARTIC in March
1999 and OCP in late December 1999) in order to expand the expertise
the Company believes it needs to compete effectively in the
communications market. These acquisitions have resulted in increased
sales volume as well as increased operating and manufacturing capacity
through both internal and external sources. Additionally, the merger
with Texas Micro has resulted in certain operating efficiencies.
Therefore, total operating expenses have increased in dollar volume but
efficiencies combined with increased sales volume have resulted in a
decrease of operating expenses as a percentage of revenue for the three
months ended and nine months ended September 30, 2000. The Company
expects to continue to acquire companies and technologies that are
complementary to the Company's business and product offerings.
REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 90,719 42% $ 64,096 $ 258,183 45% $ 178,145
</TABLE>
Revenues increased by $26.6 million or 42% for the three months
ended September 30, 2000 compared to the three months ended
September 30, 1999 and $80.0 million or 45% for the nine months
ended September 30, 2000 compared to the nine months ended September
30, 1999. The increase in revenues in the three months and nine
months ended September 30, 2000 was primarily due to growth within
existing products and customers, movement into higher growth
markets, primarily communications, and the inclusion of revenues
from the Company's acquisition of OCP in December 1999. The
Company's top five customers collectively represented approximately
44.7% and 41.4% of revenue for the three months and nine months
ended September 30, 2000, respectively.
13
<PAGE>
COST OF GOODS SOLD
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Cost of goods sold $ 59,338 46% $ 40,724 $ 167,409 48% $113,023
As a % of revenues 65% 64% 65% 63%
</TABLE>
Cost of goods sold increased by $18.6 million or 46% for the three
months ended September 30, 2000 compared to the three months ended
September 30, 1999 and $54.4 million or 48% for the nine months ended
September 30, 2000 compared to the nine months ended September 30,
1999. The cost of goods sold increase was primarily as a result of
increased revenues. The slight increase in cost of goods sold as a
percentage of revenues for the three months ended and the nine months
ended September 30, 2000 was due to the change in product mix in 2000
compared to 1999.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Research and development $ 9,542 28% $ 7,438 $ 27,828 27% $21,973
As a % of revenues 11% 12% 11% 12%
</TABLE>
Although overall research and development expenses have increased,
they have declined by 1% as a percentage of revenue for the three
months and nine months ended September 30, 2000 compared to the
three months ended and nine months ended September 30, 1999. This
percentage decline is primarily attributable to increased
efficiencies as a result of the integration of Texas Micro as well
as the impact of greater revenue volume. In addition, the impact of
the OCP acquisition resulted in lower research and development costs
as a percentage of revenues, because OCP's business model
incorporated lower R&D expenses as a percentage of revenues.
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Selling, general & admin. $ 9,716 4% $ 9,385 $ 28,965 7% $26,991
As a % of revenues 11% 15% 11% 15%
</TABLE>
Selling, general and administrative (SG&A) expenses as a percentage of
revenues have declined by 4% for the three months ended and nine months
ended September 30, 2000 compared to the three months ended and nine
months ended September 30, 1999. The decline is largely a result of the
integration of Texas Micro into the Company. For example, the Company
experienced significant savings by combining the sales organizations
and eliminating manufacturing representatives from the Texas Micro
model. In addition, the OCP acquisition resulted in lower SG&A
expenses, as OCP's business model incorporated lower SG&A expenses as a
percentage of revenues.
14
<PAGE>
GOODWILL AND INTANGIBLES AMORTIZATION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Goodwill and intangibles
amortization $1,557 116% $ 722 $ 5,008 189% $ 1,733
As a % of revenues 2% 1% 2% 1%
</TABLE>
Goodwill amortization expense increased by $.8 million for the three
months ended September 30, 2000 compared to the three months ended
September 30, 1999, and increased $3.3 million for the nine months
ended September 30, 2000 compared to the nine months ended September
30, 1999. This is a result of the ARTIC acquisition in March 1999 and
the OCP acquisition in December 1999. Amortization of these amounts
commenced in the three months ended March 31, 1999 and the three months
ended March 31, 2000, respectively. Amortization periods for goodwill
and intangibles range from five to fifteen years.
COMBINATION COSTS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Combination costs $ 0 100% $ 5,971 $ 0 100% $ 5,971
As a % of revenues 0% 9% 0% 3%
</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 year ended accrued as of
Dec 31,1999 Sep 30, 2000
--------------------- ---------------------
<S> <C> <C>
Professional & filing fees $ 3,251 $ 18
Severance, retention, relocation & benefits alignment 1,538 --
Contract termination costs 799 90
Marketing, information systems conversion, and
other miscellaneous costs 383 8
--------------------- ---------------------
Total $ 5,971 $ 116
===================== =====================
</TABLE>
INTEREST INCOME, OTHER INCOME AND INCOME TAX PROVISION
15
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30,
2000 Change 1999 2000 Change 1999
------ ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income, net $ 403 76% $ 229 $ 606 (35)% $ 936
Other income, net $ 333 (83)% $ 2,007 $ 939 (53)% $ 2,007
Income tax provision (benefit) $2,115 84% $ 1,147 $ 7,854 535% $ (1,807)
</TABLE>
Interest income, net decreased $330 for the nine months ended September
30, 2000 compared to the nine months ended September 30, 1999. This
decrease was due to the lower cash and cash equivalents levels
resulting from the funding of the ARTIC Business Unit acquisition on
March 1, 1999, non-recurring charges associated with the Texas Micro
acquisition on August 13, 1999, and the funding of the OCP Business
Unit acquisition on December 28, 1999. In addition, interest expense
incurred from the convertible note issuance was offset by interest
income earned on short-term investments during the three months
ended September 30, 2000.
Other income, net decreased by $1,068 for the nine months ended
September 30, 2000 compared to the nine months ended September 30,
1999. During the quarter ended September 30, 1999 the Company
received the final consideration owed in connection with the 1996
sale of Texas Micro's Sequoia Enterprise Systems business unit to
General Automation (GA). Final consideration consisted of $1.5
million in cash, $750 in notes, and 1,133 shares of GA common stock.
The receipt of this consideration resulted in a gain to the Company
of $2.2 million in the third quarter of 1999. During the first
quarter of 2000, the Company sold 367 shares of GA common stock
resulting in a gain of $856. In the third quarter of 2000, the
Company exercised a warrant and converted $500 in notes receivable
and associated accrued interest from GA which it had previously
fully reserved, for 786 shares in GA common stock. The exchange
resulted in a net gain of $605. Together these gains were offset by
foreign exchange currency losses totaling approximately $500 for the
nine months ended September 30, 2000.
The increase in the income tax provision is attributable to increased
net income before taxes of $19.1 million for the nine months ended
September 30, 2000 compared to the nine months ended September 30,
1999. Additionally, the effective income tax rate for the nine months
ended September 30, 2000 was 26% compared to (16)% for the nine months
ended September 30, 1999. The lower rate in 1999 was attributed to a
favorable impact from an income tax law change that allowed the Company
to utilize certain Texas Micro net operating loss carryforwards to
offset the Company's taxable income which resulted in a tax benefit.
During the quarter ended September 30, 2000, the Company realized
additional research and experimentation tax credits for 1999, which
lowered the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had $86.1 million in cash and
cash equivalents, $66.5 million in short-term investments, and
working capital of approximately $222.1 million. The significant
increase in working capital from $68.9 million as of December 31,
1999 to $222.1 million as of September 30, 2000 was substantially
due to the Company's issuance of $120 million principal amount of
convertible subordinated notes. The Company used $13.9 million of
the proceeds to pay off the outstanding line of credit and invested
$66.5 million in short-term investments. The remaining proceeds are
being held in commercial paper, which has a maturity of less than 90
days.
Cash and cash equivalents increased by $70.4 million during the nine
months ended September 30, 2000, and decreased by $19.6 million in
the nine months ended September 30, 1999. Activities impacting cash
and cash equivalents are as follows:
16
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEP 30, SEP 30,
2000 1999
---- ----
<S> <C> <C>
Cash provided by operating activities $ 36.5 $ 13.1
Cash used for investing activities (81.1) (33.7)
Cash provided by financing activities 115.0 1.4
Effect of exchange rate changes on cash -- (.4)
------ --------
Net increase (decrease) $ 70.4 $ (19.6)
====== ========
</TABLE>
In addition to net income of $22.7 million, depreciation and
amortization of $12.6 million contributed to the increase in cash from
operations for the nine months ended September 30, 2000 as compared to
the nine months ended September 30, 1999. The significant increase in
accounts payable of $13.2 million was offset by an increase in accounts
receivable of $9.1 million and increase in inventory of $9.4 million.
These increases were a result of the overall volume increases in the
Company's revenues and operations.
Significant investing activities impacting cash for the nine months
ended September 30, 2000 included $12.6 million in capital
expenditures and capital software additions and $66.5 million in
short-term investments. Capital expenditures primarily consisted of
the purchase of the building and land adjacent to the Company's
Hillsboro facility, SAP implementation and network upgrades. The
Company's financing activities included $116.1 million in net
proceeds from issuance of convertible subordinated notes and $19.5
million in proceeds from common stock issuance in connection with
the exercise of options under the Stock Incentive Plan and the purchase
of shares under the Employee Stock Puchase Plan. The Company paid
off its line of credit of $13.9 million during the quarter ended
September 30, 2000.
SUBSEQUENT FINANCING ACTIVITY:
In October, 2000 the Company repurchased $20 million principal
amount of 5.5% convertible subordinated notes in a negotiated
transaction with a third party. The repurchase of the notes resulted
in an after-tax extraordinary gain of approximately $3.3 million.
During October 2000, the Company also announced that its board of
directors authorized the repurchase of up to 850 of its outstanding
shares. These shares of common stock will be purchased in the open
market or through privately negotiated transactions over the next
several months, subject to market conditions.
The Company believes its existing cash and cash equivalents, short-term
investments, and cash from operations will be sufficient to fund its
current 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 before the expiration of 12 months.
17
<PAGE>
OUTLOOK:
This outlook section contains a number of forward-looking
statements, all of which are based on current expectations. Actual
results may differ materially.
Recently, the Company has experienced increased volatility from certain
of its customers, primarily in legacy products within the
communications market, ranging from uncertainty relative to their
forecasts to actual reductions in near-term forecasted orders. As a
result, sequential improvements in both revenues and earnings is not
considered likely for the quarters ending December 31, 2000 and March
31, 2001. Comparatively, both revenue and earnings results in line with
the quarter ended September 30, 2000 are expected for the next three to
six months.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
Statements and information in this Quarterly Report on Form 10-Q and
the statements the Company's management may make from time to time
concerning the Company's future liquidity, development, business
activities, potential acquisitions, capital expenditures and trends in
revenues and earnings 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:
- dependence on the relationship with Intel Corporation and its
products;
- lower than expected delayed sales in the communications market;
- lower than expected or delayed design wins with key OEMs;
- failure of leading OEMs to incorporate the Company's solutions in
successful products;
- deliveries of products containing errors, defects and bugs;
- dependence on a limited number of suppliers or, in some cases, one
supplier for components and equipment used to manufacture products;
- difficulties in integrating acquired businesses and assets;
- competition in the embedded computer market, which may lead to lower
than expected sales prices and volume;
- political, economic and regulatory risks associated with
international operations;
- technological developments;
- the inability to protect the Company's intellectual property or
successfully to defend against infringement claims by others;
- availability of qualified personnel;
- business conditions in the general economy and in the markets the
Company serves, particularly the communications market;
- technological difficulties and resource constraints encountered in
developing new products; and
- difficulty or inability to meet our obligations to repay
indebtedness.
The forward-looking statements should be considered in light of these
factors.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates, foreign
currency exchange rates, and equity trading prices, which could impact its
results of operations and financial condition.
INTEREST RATE RISK. The Company invests its excess cash in debt instruments of
the U.S. Government and its agencies, and in high-quality corporate issuers. The
Company attempts to protect and preserve its invested funds by limiting default,
market and reinvestment risk. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates and the Company may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates.
FOREIGN CURRENCY RISK. The Company pays the expenses of its international
operations in local currencies. The Company's international operations are
subject to risks typical of an international business, including, but not
limited to: differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility. Accordingly, the Company's future results could be
materially adversely impacted by changes in these or other factors. The
Company is also exposed to foreign exchange rate fluctuations as they relate
to revenues and operating expenses as the financial results of foreign
subsidiaries are translated into U.S. dollars in consolidation. Because
exchange rates vary, these results, when translated, may vary from
expectations and adversely impact overall expected profitability. The impact
of foreign exchange rate fluctuations on the Company for the nine months
ended September 30, 2000 was approximately $500. The effect of foreign
exchange rate fluctuations on the Company in 1999 was not material.
EQUITY PRICE RISK. The Company is exposed to equity price risk due to the equity
investments held by the Company. The Company typically does not attempt to
reduce or eliminate its market exposure on these securities. Neither a 10%
increase nor a 10% decrease in equity prices would have a material effect on the
Company's financial position, results of operations, or cash flow.
20
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
<TABLE>
<S> <C>
4.1 Resale Registration Rights Agreement dated August 9, 2000
among the Company and SG Cowen Securities Corporation,
Banc of America Securities LLC, J.P. Morgan & Co. and First
Security Van Kasper. Incorporated by reference to Exhibit 4.3
to the Company's Registration Statement on Form S-3 (No. 333-49092).
4.2 Indenture dated August 9, 2000 between the Company and U.S. Trust Company,
National Association. Incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement of Form S-3 (No. 333-49092).
4.3 Form of Note. Incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-3 (No. 333-49092).
27 Financial Data Schedule.
(b) Reports on Form 8-K The Company filed a Form 8-K dated August 4, 2000 reporting Item 5.
The Company filed a Form 8-K dated September 7, 2000 reporting Item 5.
</TABLE>
21
<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.
Date: November 13, 2000 RADISYS CORPORATION
By: /s/ STEPHEN LOUGHLIN
Stephen F. Loughlin
Vice President of Finance and Administration and
Chief Financial Officer
(Authorized officer and Principal Financial
Officer)
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
---------- -----------
<S> <C>
4.1 Resale Registration Rights Agreement dated August 9, 2000
among the Company and SG Cowen Securities Corporation,
Banc of America Securities LLC, J.P. Morgan & Co. and First
Security Van Kasper. Incorporated by reference to Exhibit 4.3
to the Company's Registration Statement on Form S-3 (No. 333-49092).
4.2 Indenture dated August 9, 2000 between the Company and U.S. Trust Company,
National Association. Incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement of Form S-3 (No. 333-49092).
4.3 Form of Note. Incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-3 (No. 333-49092).
27 Financial Data Schedule.
</TABLE>
23
