-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GuUWjH1dI3f85fgmkTjbmIXfcE94vOY6j15z5EhkxDXc59eIzExS1SRf++DL+7O8 Uby59sZUr9pLrC04gKiV7A== 0000893877-99-000168.txt : 19990322 0000893877-99-000168.hdr.sgml : 19990322 ACCESSION NUMBER: 0000893877-99-000168 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADISYS CORP CENTRAL INDEX KEY: 0000873044 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 930945232 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26844 FILM NUMBER: 99569174 BUSINESS ADDRESS: STREET 1: 5445 NE DAWSON CREEK DR CITY: HILLSBORO STATE: OR ZIP: 97124 BUSINESS PHONE: 5036461800 10-K405 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 0-26844 RADISYS CORPORATION (Exact name of registrant as specified in its charter) OREGON 93-0945232 (State or other jurisdiction of (I.R.S Employer Incorporation or Organization) Identification Number) 5445 N.E. Dawson Creek Drive Hillsboro, OR 97124 (Address of principal executive offices, including zip code) (503) 615-1100 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. (X ) Aggregate market value of the voting stock held by non-affiliates of the Registrant at March 10, 1999: $159,593,820. For purposes of the calculation executive officers, directors and holders of 10% or more of the outstanding Common Stock are considered affiliates. Number of shares of Common Stock outstanding as of March 10, 1999: 7,904,115. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K into Document which Incorporated ------------------------------- ---------------------- Proxy Statement for 1999 Annual Meeting of Shareholders Part III RADISYS CORPORATION FORM 10-K TABLE OF CONTENTS Part I Item 1 Business 3 Item 2 Properties 9 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 Item 4(a) Executive Officers of the Registrant 9 Part II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters 11 Item 6 Selected Financial Data 12 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8 Financial Statements and Supplementary Data 16 Item 9 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 17 Part III Item 10 Directors and Executive Officers of the Registrant 17 Item 11 Executive Compensation 17 Item 12 Security Ownership of Certain Beneficial Owners and Management 17 Item 13 Certain Relationships and Related Transactions 17 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 17 Signatures 32 2 PART I ITEM 1. BUSINESS RadiSys Corporation ( "RadiSys" or the "Company"), incorporated in 1987, is an independent designer and manufacturer of embedded computer solutions used by original equipment manufacturers ("OEMs") for products in the manufacturing automation, telecommunications, medical devices, transportation, gaming, retail/office automation, and the test and measurement industries. Unlike general purpose computers, embedded computer solutions are incorporated into systems and equipment to provide a single or a limited number of critical system control functions and are generally integrated into larger automated systems. RadiSys' embedded computers are based upon the Intel x86 or the Texas Instruments C6x architectures and are typically capable of running PC-compatible operating systems and application software. The Company offers a broad spectrum of solutions, including application-specific embedded computer subsystems, board-level modules, software and chip-level products. Embedded Computer Market Embedded computers are a key segment of the broad electronics market and form the backbone and control system for many types of today's electronics systems requiring advanced capabilities for human interface, data analysis and system communications and control. Embedded computers differ from general purpose computers, such as PCs, in several key respects. First, embedded computers are closely integrated into larger systems, perform a single or limited number of complex applications and adhere to specific requirements regarding size, reliability and ability to withstand the demands of extreme environmental conditions. Additionally, embedded computers are design-intensive solutions that require substantial engineering know-how and a comprehensive understanding of the specific end product into which they are to be incorporated. Embedded computer solutions are incorporated into a broad range of products, including blood analyzers, patient monitors, ultrasound machines, voice message systems, local area network routers, cellular base stations, semiconductor manufacturing equipment, electronics assembly equipment, metal grinding equipment, gaming equipment, anticollision systems, intelligent highway systems, bar code scanners, point of sale terminals and automated teller machines. Unlike PC products, which have experienced and will likely continue to experience short product cycles, a typical embedded computer solution has a relatively long product life, with most designs lasting through the life cycles of the products into which they are integrated, often three to seven or more years. The embedded computer market can be segmented by annual unit volume. At unit volumes of above about 50,000 units per year, OEMs generally decide to produce their own solutions. At low unit volumes of less than 500 units per year, where customized requirements such as space, cost, functionality and power usually cannot be met efficiently by OEMs, such OEMs typically use off-the-shelf catalog bus/board products. In the intermediate segment (between 500 and 50,000 units per year), unit volumes are sufficient to support a significant design effort but are not large enough to take advantage of very high volume manufacturing channels or to support custom semiconductor designs. Industry applications contained within this intermediate segment of the market include manufacturing automation equipment, telecommunications equipment, medical devices, transportation systems, retail automation equipment and test and measurement equipment. Based on industry sources, the Company believes sales of embedded computer solutions into the intermediate segment of the embedded computer market represented over two-thirds of dollar sales in the total embedded computer market in 1998. In recent years, the increasing complexity of electronics subsystems and components, together with a widespread trend in many industries to rationalize internal manufacturing resources, has led to a significant growth in the outsourcing of the design and manufacture of electronics subsystems and components by major OEMs. As a result, the Company believes there is a significant opportunity for independent manufacturers to provide OEMs with cost-effective, reliable and high value-added embedded computer solutions. 3 Strategy The Company's objective is to be the leading supplier of embedded computer solutions to major OEMs in the manufacturing automation, telecommunications, medical devices, transportation systems, test and measurement, and retail/office automation industries. The key elements of the Company's strategy to achieve this objective are: Leverage Intel x86 Expertise in Embedded Computer Market. RadiSys combines the technical expertise of thousands of man-years of Intel x86 architecture experience with a close working relationship with Intel to design and manufacture innovative Intel-based solutions for its OEM customers. The Company intends to capitalize on the widespread acceptance of the Intel x86 architecture, the availability of powerful yet inexpensive software, and the development of flexible I/O and peripheral devices to increase adoption of Intel x86 architecture as the preferred solution of OEMs. Additionally, the Company and Intel's Computer Enhancement Group are working together to develop and market chip-level and board-level products for the embedded computer market in order to facilitate the implementation of x86 designs into a broadening array of new OEM end products. Focus on the High Volume OEM Market. The Company is targeting the segment of the embedded computer market where product volumes typically range from 1,000 to 50,000 units annually. The Company believes this segment includes the largest number of OEM products requiring embedded computer solutions, and that sales of embedded computer solutions into this market segment represent over two-thirds of the aggregate dollar volume of annual embedded computer product sales. The Company also believes that the need for complex, customer-specific embedded computers within this segment typically requires considerable design and manufacturing expertise, which are the Company's core strengths and the combination of which are frequently unavailable from traditional design and manufacturing sources. Expand Long-Term OEM Sales Opportunities. The Company seeks to develop and expand long-term relationships with OEMs where it acts as a "virtual division" by developing a close working relationship in which the OEM views RadiSys as playing an integral role in its product development processes. This approach allows the OEM to outsource the design and manufacture of its embedded computer solutions while continuing to control and coordinate this process. At the same time, this approach provides RadiSys with the opportunity to achieve attractive unit sales volumes for products with relatively long life cycles and also provides RadiSys with access to new product opportunities. Provide Broad Set of Technical Solutions to Meet Customer-Specific Needs. The Company provides a high degree of design, product, and manufacturing flexibility to address the needs of its customers for customized solutions in a wide range of applications. The Company provides products with a variety of physical form factors and levels of integration, from application-specific embedded computer subsystems to board-level modules to chip-level products. The Company also offers a broad range of custom solutions and maintains a large and expanding library of designs, containing specifications, logic designs, firmware, device driver software, real time extension software, test specifications, DSP algorithms and manufacturing rules. The Company believes that its broad range of solutions is critical to its ability to find the solution that best fits its customers' technical and business needs. Capitalize on Manufacturing Expertise. The Company is ISO9001 certified and its high quality manufacturing facility, its sophisticated control systems, and its advanced test processes enable it to meet its customers' demands for highly reliable and rugged products. By both designing and manufacturing embedded computer solutions, the Company offers its customers a stable, long-term source of supply, a single point of accountability, design expertise, and reduced time-to-market. Products RadiSys designs and manufactures embedded computer solutions based on the Intel x86 architecture to address the specific requirements of its OEM customers. A typical solution combines the level of integration, degree of customization and specified form factors and standards required to meet the customer's needs. 4 Integration. The level of integration of the Company's products ranges from complete solutions in the form of application-specific embedded computer subsystems to board-level modules to chip-level products to software. The Company provides its customers with alternative solutions at each of these three levels based on the customers' needs, and uses products developed at lower levels of integration as components of more highly integrated designs. Application-specific embedded computers are subsystems designed to function without additional configuration by the OEM. These subsystems can be specific integrated configurations of standard products, semi-custom products, or highly integrated single-board-solutions. Application-specific embedded computers generally range in price from $500 to $4,000. The Company has over 100 application-specific embedded computers in production. Board-level modules are usually designed to be components of larger systems employing standard modular bus structures. These modules consist of printed circuit boards such as processor boards and I/O interfaces, backplanes (interconnect boards), power supplies and mechanical packaging. Modules are typically sold to OEM customers who have designed a complete system comprising boards purchased from the Company along with other boards purchased from other suppliers and still others designed in-house. Board-level products typically range in price from about $300 to over $3,000. The Company has over 150 module products in production supporting the Multibus I, Multibus II, VME architectures as well as Baby AT and ATX form factor baseboards. Chip-level products, like modules, are used as components for higher levels of integration and as products for direct sale to customers who build their own board-level solutions. RadiSys has introduced three companion chips, supporting Intel's family of long-lived embedded processors. The RadiSys R300EX and R380EX embedded system controllers support the Intel386 EX(TM) embedded processor, which is a highly integrated version of the standard Intel386 developed specifically for embedded design. The RadiSys R400EX supports the Intel486(TM) family of embedded processors, including SX, DX2, and DX4 versions as well as Intel's ultra-low power 486. Intel continues to make specific versions of the Intel 486 available to the embedded market because of its wide acceptance in embedded designs. The Company's companion chips make product designs with the Intel386 EX and the family of Intel 486 processors easier, smaller, and less expensive by integrating design features essential to embedded designers such as integrated real time clock, watch-dog-timer, IDE disk controllers, serial ports, and chip selects, in addition to traditional companion chip features such as memory control, I/O chip interfacing, and timing control, all in a single integrated device. Customization. The degree of customization of the Company's products ranges from modifications of standard products, to custom solutions comprised solely of newly developed modules. The Company uses its extensive design experience and large design library to create products with varying degrees of customization. The Company believes that the degree of customization will tend to increase in the future. Form Factors and Standards. The form factors and standards of the Company's products represent a large set of product parameters that characterize specific product and customer needs. The Company has expertise across a broad range of form factors, microprocessors, software environments and communication standards including, but not limited to, cPCI, EMC, PC/104, ISA bus, PCI bus, PCMCIA, SBC, VME bus, VXI bus and Multibus. Software. In January 1999 the Company introduced INtime 2.0, which enhances the Microsoft Windows NT real-time capabilities for use by OEMs in the embedded market. "Real-time" is the term typically used to describe those applications on the upper end of embedded applications that require system response times in the sub-millisecond range. Sales and Marketing The Company typically experiences long life cycles for products designed for its OEM customers. RadiSys views the design process as an opportunity to build long-term OEM customer relationships. In the initial phases of the relationship, considerable attention is given to the establishment of communications links, such as electronic mail, to enable the 5 customer's and the Company's sales and engineering staffs to interact on a real-time or rapid response basis. The Company believes that close and frequent communication during the design process allows RadiSys to operate as a "virtual division" within the customer's internal organization. RadiSys' in-depth understanding of embedded computer technology and applications assists the customer in resolving its overall product design issues while regular customer feedback enables RadiSys to increase and continually refresh its understanding of its customer's specific design requirements. The Company markets its products primarily in North America, Western Europe and Japan. In 1998, the Company had no customer whose sales were more than 10% of total revenues; the top 25 customers accounted for approximately 74% of 1998 sales. In North America, products are sold principally by a direct sales force. The Company has U.S. regional offices in Boston and San Jose. Each region has a regional sales manager, and four to six sales and applications engineers. The field sales force is supported by approximately 28 factory-based applications engineers, product marketing personnel and sales support personnel. In addition, the Company's management plays a key role in the Company's marketing and selling efforts. In Japan, the Company sells its products through a wholly-owned Japanese subsidiary, RadiSys K.K., that markets the Company's products directly and through several distributors in Japan. In Europe, the Company sells its products through wholly owned subsidiaries in the United Kingdom, RadiSys UK Ltd., and RadiSys International, and through approximately 23 distributors throughout Europe. RadiSys has regional sales offices in Swindon, United Kingdom; Munich, Germany; Paris, France and Eindhoven, Netherlands. In 1996, 1997 and 1998, international sales represented approximately 27%, 30% and 29%, respectively, of revenues. Substantially all of the Company's international sales are denominated in U.S. dollars. The Company has established distributor relationships with Arrow/Schweber Electronics, Pioneer-Standard Electronics, Inc., and Wyle Electronics in North America and approximately 26 distributors in Europe to market the Company's chip-level and Multibus products. Research, Development and Engineering The Company believes its research, development and engineering expertise represents an important competitive advantage. The Company's research, development and engineering staff at December 31, 1998 consisted of approximately 150 engineers and technicians. Most of the Company's research, development and engineering efforts are focused on joint projects with its OEM customers resulting in the development of custom products. For these projects, the Company's engineering staff works closely with the customer and the customers generally pay the Company non-recurring engineering fees as certain milestones are attained. From time to time, the Company also engages in joint research and development of other products with certain of its customers and other parties. The Company is engaged in research and development of additional chip-level products designed to give the Company's board-level products additional competitive advantages in terms of functionality, cost, reliability, reduced time-to-market and increased product life longevity and to capitalize on the Company's expertise in embedded computer system design by providing innovative chips to meet the requirements of OEM customers. The Company typically retains the rights to any technology developed as a part of the design process. In some cases, the Company agrees to share technology rights, including manufacturing rights, with the customer, but generally retains nonexclusive rights to use the technology. The embedded computer market is subject to rapid technological development, product innovation and competitive pressures. Consequently, the Company has invested and will continue to invest resources in the research and development of (i) building blocks such as embedded modules, platforms, chips and low-level firmware, (ii) application-specific embedded computers for specific customers and (iii) design processes and tools. In 1996, 1997 and 1998, the Company invested $8.2 6 million, $11.7 million and $13.6 million, respectively, on research and development. Manufacturing The Company currently manufactures most of the board-level and system-level products it sells. The Company builds its products in a highly automated ISO9001 certified manufacturing plant at its headquarters in Hillsboro, Oregon. This plant encompasses surface-mount technology ("SMT") board assembly, test, mechanical assembly and system assembly and test. ISO9001 certification is the international designation, developed by the International Organization of Standardization, a pan-governmental agency, for demonstrating that the Company's systems support the design and production of products of consistently high quality. The Company has three automated lines for SMT board assembly, which are based on equipment purchased primarily from Universal Instruments. Aggregate production capacity exceeds 15,000 ultra-fine-pitch SMT boards per month. The Company estimates that, as currently configured, the three lines have sufficient capacity on multiple-shift operation to handle planned demand well into 1999. Each of the lines is modular and thus readily expandable by adding additional inline equipment. Because the products into which embedded computers are integrated typically have long life cycles, dynamic stress testing of embedded computer products must be particularly exacting to ensure the reliability of such products. The Company believes its test processes represent a significant competitive advantage in this area. The Company uses a variety of commercial and proprietary test processes including highly accelerated life testing, highly accelerated stress screening, bed-of-nails, in-circuit and functional test equipment. The highly accelerated stress screening process detects early lifetime failures by subjecting products to a series of cycles of rapid temperature change, and random mechanical vibration while the products are running a self-test program and are being monitored. The Company has equipment to perform temperature, humidity, and vibration analysis of products. The Company relies on external suppliers for bare printed-circuit board fabrication, machine-inserted through-hole circuit boards, semiconductor components, mechanical assemblies, and semiconductor foundry services. Although many of the raw materials and much of the equipment used in the Company's manufacturing operation are available from a number of alternate sources, certain of these components are obtained from a single supplier or a limited number of suppliers. The Company is dependent on third parties for a continuing supply of the components it uses in the manufacture of its products. For example, the Company is dependent solely on Intel for the supply of microprocessors and other components and depends on Sharp Electronics, Maxim Integrated Products, Inc. and Cirrus Logic, Inc. as sole source suppliers for other components, for some of which the Company would encounter difficulty in locating alternative sources of supply. The Company relies on a third party foundry to produce its core logic chip product offerings. There is no assurance that the third party will be willing or able to supply the Company with sufficient core logic chips to meet its needs in the future or, if the party were not to meet the Company's needs, that the Company could obtain satisfactory core logic chips from alternative sources in sufficient quantities and at acceptable prices. Competition The embedded computer industry is highly competitive and fragmented, and the Company's competitors differ depending on product type, geographic market and application type. The Company believes that, from a customer's perspective, the main competitive factors in the embedded computer industry are product cost, product quality, design effectiveness, time-to-market, and long-term stability of both the product and the supplier. Because many OEM customers view their embedded computer requirements from a make versus buy perspective, the Company often competes against its OEM customers' ability to design and manufacture satisfactory embedded computer 7 products in-house. A customer may be capable of manufacturing an embedded computer product at lower cost and with better quality control than the Company can, and may wish to use underutilized internal design and manufacturing resources. On the other hand, if the OEM customer wishes to rely on outside expertise, desires quicker time-to-market, is lacking internal design and/or manufacturing resources, and wishes to avoid certain issues of product stability, new technologies, and redesign due to end-of-life components, the customer may opt to purchase the Company's embedded computer solution. Off-the-shelf product manufacturers comprise a second set of competitors, although this product segment is highly fragmented by physical and electrical form factor. Electronics contract manufacturers form a third set of potential competitors, although most have no specific product or application design expertise and simply manufacture to a third party's design. Finally, the Company competes against embedded computer systems that rely on non-Intel-based architectures, including the Power PC architecture manufactured by IBM and Motorola. Motorola's 68000 family of microprocessors has achieved relative dominance of the embedded computer market for applications requiring a VME bus form factor. Backlog As of December 31, 1998, the Company's backlog was approximately $26.3 million, as compared to $38.7 million as of December 31, 1997. The Company includes in its backlog all purchase orders scheduled for delivery within twelve months, although a majority of the backlog is typically scheduled for delivery within 90 days. Intellectual Property The Company has two Multibus patents, but relies principally on trade secrets for protection of its intellectual property. The Company believes, however, that its financial performance will depend much more on the pace of its product development and its relationships with its customers than upon such protection. The Company has no pending claims against it alleging any possible infringement of patents or other intellectual property rights of others. Employees As of December 31, 1998, the Company had 460 employees, of which 411 were regular employees and 49 were agency temporary employees or contractors. The Company is not subject to any collective bargaining agreement, has never been subject to a work stoppage, and believes that its relations with employees are good. Forward Looking Statements Statements and information in this Annual Report on Form 10-K, and the statements the Company's management may make from time to time, regarding future industry trends, the Company's expected revenues, earnings and anticipated gross margins, the Company's future development and introduction of products, and the Company's future liquidity, development, and business activities, constitute forward looking statements that involve a number of risks and uncertainties. The following are among the factors that could cause actual results to differ materially from the forward looking statements: business conditions and growth in the electronics industry and general economies, both domestic and international, including conditions precipitated by the Asian economies; uncertainty of market development; dependence on a limited number of OEM customers; dependence on limited or sole source suppliers; dependence on the relationship with Intel Corporation ("Intel"); dependence on Intel's support of the embedded computer market; lower than expected customer orders or variations in customer order patterns due to changes in demand for customers' products and customer and channel inventory levels; competitive factors, including increased competition, new product offerings by competitors and price pressures; the availability of parts and components at reasonable prices; changes in product mix; dependence on proprietary technology; technological difficulties and resource constraints encountered in developing new products; and product shipment interruptions due to manufacturing difficulties. See 8 Items 7 and 14 of this report. The forward looking statements contained in this Annual Report on Form 10-K regarding industry trends, product development and introductions, and liquidity and future business activities should be considered in light of these factors. ITEM 2. PROPERTIES The Company leases an aggregate of approximately 130,000 square feet of office and manufacturing space in two buildings in Hillsboro, Oregon, 13,000 square feet of office space in Newton, Massachusetts and 20,000 square feet of office space in Beaverton, Oregon. The company owns three parcels of land adjacent to its Hillsboro facility, which are being held for future expansion. The Company also leases two small sales offices in the U.S. and one each in Swindon, United Kingdom, Toyko, Japan, Eindhoven, the Netherlands, Paris, France and Munich, Germany. Total lease costs of all these facilities are approximately $2.0 million per year, plus certain building operating expenses. ITEM 3. LEGAL PROCEEDINGS In the normal course of business the Company from time-to-time has ongoing litigation. At December 31, 1998, the Company had no asserted legal matters. The Company is aware of certain unasserted matters to which, if asserted, the Company believes it has meritorious defenses. The Company does not expect these matters to have a material financial effect on its operations or net assets, if asserted. In September 1998 the Company was named as a third party defendant in a third party complaint filed in Maricopa County Superior Court in Arizona entitled Interactive Flight Technologies, Inc. v. Avnet, Inc. v. Simple Technology Incorporated v. RadiSys Corporation et. al. (No. CV 98-10285). The complaint relates to an in-flight entertainment system designed by the Company that incorporated allegedly failure-prone disk drives manufactured and distributed by third parties. The Company has been informed that the cases have been dismissed without prejudice. The Company has no other material litigation currently pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 4(a) EXECUTIVE OFFICERS OF THE REGISTRANT As of March 10, 1999, the names, ages and positions held by the directors and executive officers of the Company were as follows:
Name Age Position with the Company ---- --- ------------------------- Dr. Glenford J. Myers 52 Chairman of the Board, President and Chief Executive Officer Stuart F. Cohen 39 Vice President of Marketing Ronald A. Dilbeck 45 Vice President and General Manager, Automation Equipment Division Douglas D. Goodyear 44 Senior Vice President of Sales 9 Arif Kareem 46 Vice President and General Manager, Telecommunications Division John Sonneborn 41 Vice President of Manufacturing Brian V. Turner 39 Vice President of Finance and Administration and Chief Financial Officer Stephen J. Verleye 43 Vice President and General Manager, Automation Equipment Division John D. Watkins 50 Vice President of Corporate Development Diane M. Williams 45 Vice President of Human Resources
Dr. Glenford J. Myers co-founded the Company in March 1987 and has served as the Company's Chairman of the Board, President and Chief Executive Officer since that time. From 1981 to 1987, he held various management positions with Intel, including Manager of Microprocessor Product Line Architecture and Manager of the Microprocessor Strategic Business Segment. While at Intel, Dr. Myers had primary management responsibility for the feasibility and design of Intel's 386 and 80960 microprocessor chips, both of which became industry standards in their respective application areas. From 1968 to 1981, Dr. Myers held various engineering and management positions with IBM. Dr. Myers holds a Ph.D. from the Polytechnic Institute of New York, M.S. from Syracuse University and B.S.E.E. from Clarkson College. Stuart F. Cohen joined the Company in January 1999 as its Vice President of Marketing. From 1997 to 1998, Mr. Cohen was Vice President, Worldwide Marketing for InFocus Systems, Inc. From 1981 to 1997, Mr. Cohen held various sales and marketing management positions for IBM, Inc., the most recent being Director of Worldwide Marketing, Networking Division. Mr. Cohen holds a B.S. in Business Administration from the Arizona State University. Ronald A. Dilbeck joined the Company in May 1996 as its Vice President and General Manager, Automation and Control Division. In October 1998, Mr. Dilbeck was appointed joint responsibility of the merged Automation Equipment Division. From 1994 to 1996, Mr. Dilbeck was President and Chief Executive Officer of nCUBE, Inc. From 1983 to 1994, he held various engineering management positions, the most recent being Director of Integration Services. Mr. Dilbeck holds an M.S.E.E. from Washington State University and B.S.E.E. and B.S. Mathematics from Oregon State University. Douglas D. Goodyear joined the Company in October 1998 as its Senior Vice President of Sales. From 1995 to 1998, Mr Goodyear was Vice President, Worldwide Sales of Actel Corp. From 1990 to 1995, Mr. Goodyear served as Vice President of North American Sales for the Microelectronics Group of Sharp Electronics. Additionally, he has held various sales and sales management positions with Hitachi, Advanced Micro Devices, and Signetics Corp., a Philips Company. Mr. Goodyear holds a B.S. in both Computer Science and Industrial Mgt. from the University of Nebraska. Arif Kareem joined the Company in July 1997 as Vice President, Telecom Business Unit, and was appointed Vice President and General Manager, Telecommunications Division in October 1997. From 1980 to 1997 Mr. Kareem held various engineering and marketing management roles at Tektronix, Inc. before serving as General Manager of Tektronix's Telecom Product Line, and subsequently General Manager of the Communications Test Business Unit. His most recent role at Tektronix was as Director of Strategic Marketing for the Measurement Division. Mr. Kareem holds a B.S.E.E. and an M.S.E.E. from Lehigh Universtiy, and an M.B.A. from the University of Oregon. John Sonneborn joined the Company in August 1996 as its Vice President of Manufacturing. From 1981 to 1996, Mr. Sonneborn held various operations and engineering positions at Tektronix, Inc., lastly as the Director of Quality for the Measurement Business Division. Mr. Sonneborn holds a B.S. in Applied and Engineering Physics from Cornell University. Brian V. Turner joined the Company in October 1995 as its Vice President of Finance. Mr. Turner was appointed Chief Financial Officer and Vice President of Finance and Administration in December 1995. From 1982 to October 1995, Mr. Turner held various positions with Price Waterhouse LLP. Mr. Turner is a certified public accountant and holds a B.B.A. in Accounting and a B.A. in Political Science from the University of Washington. 10 Stephen J. Verleye joined the Company in September 1993 as its Vice President of Marketing, and subsequently served as the Company's Vice President of Business Development. In October 1998, Mr. Verleye was appointed joint responsibility of the merged Automation Equipment Division. Mr. Verleye was appointed Vice President and General Manager, Commercial Equipment Division, in May 1996. From 1986 to 1993, Mr. Verleye held various marketing management roles at Sequent Computer Systems, Inc., the most recent being Director of Product Marketing. From 1977 to 1986, Mr. Verleye held various sales and marketing roles at Intel. Mr. Verleye holds a B.S.E.E. from the University of Notre Dame. John D. Watkins joined the Company in December 1988 as the Chief Financial Officer and Vice President of Finance and Administration. In November 1998, Mr. Watkins was appointed to Vice President of Corporate Development relinquishing responsibilities of sales. Mr. Watkins was appointed to Executive Vice President in September 1994 and assumed responsibilities for sales until 1998. From 1984 to 1988, Mr. Watkins was Chief Operating Officer of Interconnect Technology, Inc., an electronics manufacturing company. Mr. Watkins is a certified public accountant. Mr. Watkins holds a B.S. in Economics from Portland State University. Diane M. Williams joined the company in August 1998 as its Vice President of Human Resources. From 1990 to 1998 Ms. Williams held various roles at Sequent Computer Systems, Inc., most recently Vice President of Human Resources. Ms. Williams also spent time at Compaq Computer Corporation where she was Manager of Enterprise Sales Development. Prior to Compaq and Sequent, Ms. Williams held various human resources management positions at Amdahl Computer Corporation and First City Bancorporation of Texas. She holds a B.A. Degree from State University of New York at Stony Brook and an M.Ed. from the University of Houston. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock has been traded on the Nasdaq National Market since the Company's initial public offering in 1995 under the symbol "RSYS". The following table sets forth, for the periods indicated, the highest and lowest closing sale prices for the Common Stock, as reported by the Nasdaq National Market. High Low ---- --- 1997 First Quarter $66 1/2 $23 1/4 Second Quarter $42 1/2 $27 3/4 Third Quarter $54 3/4 $34 Fourth Quarter $48 1/4 $36 1/4 1998 First Quarter $38 5/8 $21 5/8 Second Quarter $29 3/4 $17 3/4 Third Quarter $22 1/2 $11 3/8 Fourth Quarter $31 5/8 $12 On March 10, 1999, the last reported sale price of the Common Stock on the Nasdaq National Market was $29 1/2. The Company has never paid any cash dividends on its Common Stock and does not expect to declare cash dividends on the Common Stock in the foreseeable future. The Company's current policy is to retain all of its earnings to finance future growth. 11 As of March 10, 1999, there were approximately 94 holders of record of the Company's Common Stock. The Company believes that the number of beneficial owners is substantially greater than the number of record holders because a large portion of the Company's outstanding Common Stock is held of record in broker "street names" for the benefit of individual investors. ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data) Year Ended December 31, 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Consolidated Statement of Operations Data Revenues $ 20,241 $ 35,025 $ 81,043 $125,442 $108,198 Gross profit 8,336 12,033 33,655 50,133 36,630 Income from operations 1,334 2,018 13,603 22,632 6,738 Net income 1,365 1,516 9,546 15,425 5,432 Net income per share (diluted) 0.35 0.35 1.30 1.93 0.68 Weighted average shares outstanding (diluted) 3,884 4,355 7,362 8,003 8,034 Consolidated Balance Sheet Data: Working Capital $ 7,917 $ 31,808 $ 45,830 $ 58,808 $ 63,348 Total assets 12,367 39,112 80,253 94,943 94,454 Long term obligations, excluding current portion - 884 648 399 88 Total shareholders' equity 9,649 34,819 56,778 75,882 81,696
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Total revenue was $108.2 million for 1998, compared to $125.4 million for 1997. Net income was $5.4 million for 1998, compared to $15.4 million for 1997. Although design wins continued being completed for production during 1998, the effect of negative global economic conditions in the electronics market adversely affected customer order volumes decreasing total revenue levels and profitability, compared to 1997. On April 29, 1996, the Company purchased substantially all of the assets of Intel that were dedicated to the design, manufacture and sale of all standard and custom Multibus I and Multibus II products ("Multibus"). On February 18, 1997, the Company purchased substantially all the assets of Sonitech International, Inc., a provider of digital signal processing hardware and software solutions for embedded applications. Both acquisitions were accounted for using the purchase method. The results of operations for these acquisitions have been included in the financial statements since the dates of acquisition. Except for the historical statements and information, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward looking statements that involve a number of risks and uncertainties. The following are among the factors that could cause actual results to differ materially from the forward looking statements: business conditions and growth in the electronics industry and general economies, both domestic and international, including conditions precipitated by the Asian economies; uncertainty of market development; 12 dependence on a limited number of OEM customers; dependence on limited or sole source suppliers; dependence on the relationship with Intel Corporation ("Intel"); dependence on Intel's support of the embedded computer market; lower than expected customer orders or variations in customer order patterns due to changes in demand for customers' products and customer and channel inventory levels; competitive factors, including increased competition, new product offerings by competitors and price pressures; the availability of parts and components at reasonable prices; changes in product mix; dependence on proprietary technology; technological difficulties and resource constraints encountered in developing new products; and product shipment interruptions due to manufacturing difficulties. The forward looking statements contained in this MD&A regarding industry trends, product development and introductions, and liquidity and future business activities should be considered in light of these factors. Results of Operations The following table sets forth certain operating data as a percentage of revenues for the years ended December 31, 1996, 1997 and 1998.
Year Ended December 31, 1996 1997 1998 ------- ------- ------- Revenues 100.0% 100.0% 100.0% Cost of sales 58.5 60.0 66.1 ------- ------- ------- Gross margin 41.5 40.0 33.9 Research and development 10.1 9.3 12.6 Selling, general and administrative 14.6 12.7 15.1 ------- ------- ------- Income from operations 16.8 18.0 6.2 Interest income, net 1.3 0.9 1.5 ------- ------- ------- Income before income tax provision 18.1 18.9 7.7 Income tax provision 6.3 6.6 2.7 ------- ------- ------- Net income 11.8% 12.3% 5.0% ======= ======= =======
Years Ended December 31, 1996, 1997, and 1998 Revenues. Revenues decreased 14% to $108.2 million for 1998 from $125.4 million for 1997. The decrease in revenues in 1998 was primarily caused by customers reducing orders precipitated by the effects of the global economic conditions in the electronics market. For 1998, sales to the Company's 25 largest customers constituted 74% of revenues, as compared to 65% and 73% for 1997 and 1996, respectively. Revenues increased 55% to $125.4 million for 1997 from $81.0 million for 1996. The increase in revenues in 1997 resulted primarily from design wins ramping into production during 1997 and reporting a full year of revenues in 1997 from the acquisition of Multibus on April 29, 1996. Gross Margin. Gross margin decreased to 33.9% for 1998 from 40.0% for 1997 primarily as a result of the product mix consisting of a larger portion of lower margin product relative to higher margin product shipped and higher manufacturing costs relative to revenue levels during 1998. The Company's general business model is to price its products for new design wins at roughly 30-35% gross margins, because the Company believes this gross margin represents the best elasticity point to maximize design wins and long term growth. As such, the Company expects gross margins to decline gradually over time as new design wins ramp into production. Typically, products ramp into production 12 to 24 months after the design is won. Gross margin decreased for 1997 to 40.0% from 41.5% for 1996 because of lower margin design wins ramping into production compared to 1996. 13 OEM sales are characterized by longer product life cycles and generally lower gross margins that can vary throughout the product life cycle. Gross margins are typically lower in the early stages of production for OEM sales and have the potential to improve over time. The Company establishes gross margin targets based on the nature of the sales it is pursuing and the desire to establish new OEM relationships by pricing aggressively to achieve key sales. However, many of the factors affecting gross margins, such as variances in unit volumes and timing of orders and component cost, are difficult or impossible to predict and can cause the Company to be subject to unplanned margin variances. Gross margins on OEM sales are also particularly sensitive to changes in customer mix because of both margin variances among individual products and the relative importance of a single large sale on overall operating results. To mitigate the effect of short-term margin variances, the Company may employ "step pricing" techniques in which unit prices decline over the life of the product to reflect anticipated production efficiencies and/or component cost reductions, or various "cost sharing" or "cost plus" pricing techniques that serve to reduce the margin risk to the Company. Research and Development. Research and development expenses increased 16% to $13.6 million for 1998 from $11.7 million for 1997, primarily as a result of increased investment in new product development and costs of enhancements to existing products. The Company continues to invest in new design wins for OEM customers and the dollar increases reflect increases in the number of employees working in research and development. Research and development expenses as a percentage of total revenue increased in 1998, compared to 1997, primarily as a result of lower revenue levels. Research and development expenses increased 42% to $11.7 million for 1997 from $8.2 million for 1996, primarily as the result of increased investment in new product development and costs of enhancements to existing products. Selling, General and Administrative. Selling, general and administrative expenses increased 3% to $16.3 million for 1998 from $15.8 million for 1997. Selling, general and administrative expenses increased in 1998 as a percentage of revenues to 15.1%. The dollar increase and the increase as a percentage of total revenue are primarily due to the selling effort to maintain high design win activity with lower revenue levels, compared to 1997. Selling, general and administrative expense increased 34% to $15.8 million for 1997 from $11.8 million for 1996 primarily as a result of increased personnel, facilities, and travel, to support higher levels of sales since 1996, to support the acquired Multibus operations in 1996 and increases in costs required to expand international operations. Interest Income, Net. Interest income, net increased 43% to $1.6 million for 1998 from $1.1 million in 1997, and remained stable for 1997 and 1996 at $1.1 million. The increase for 1998 was primarily the result of interest income earned from increased average cash and cash equivalents balances throughout 1998. Income Tax Provision. The income tax provisions for 1996, 1997 and 1998 reflect effective income tax rates of 35.0%, 35.0% and 34.6%. The slight decrease in the effective tax rate for 1998 is directly attributable to lower net income. The income tax rate reflects statutory rates for the Company's operations, taking into account financial reporting adjustments as they differ from statutory treatment. Liquidity and Capital Resources As of December 31, 1998, the Company had $38.8 million in cash and equivalents, which represents the Company's principal source of liquidity. As of December 31, 1998, the Company had working capital of approximately $63.3 million. The working capital balance increased primarily due to cash generated from operations and related decreases in current liabilities, all offset by the decrease in accounts receivable and inventories balances. Net cash provided by operating activities was $10.6 million, $7.2 million and $20.6 million for 1996, 1997 and 1998, respectively. The increase in net cash provided by operating activities in 1998 was largely attributable to decreases in accounts receivable of $8.4 million and in inventories of $7.1 million primarily related to lower revenue volume impact on accounts receivable collections and inventory requirements. 14 In October 1998, the Company renewed its $10.0 million line of credit with a bank. Amounts outstanding under the line of credit will accrue interest at an annual rate equal to the lower of the IBOR plus 1.25 to 2.0% or lender's prime rate. The Company has not drawn any funds under this line of credit. Capital expenditures were $7.2 million, $3.7 million and $3.2 million in 1996, 1997 and 1998, respectively. These capital expenditures were primarily for the purchase of leasehold improvements, manufacturing equipment, and plant modernization. The Company began occupying its second building in Hillsboro, Oregon in January 1998. In 1997 the Company purchased one adjacent parcel of land for future expansion. Capital expenditures for 1999 are expected to range from $3.0 million to $5.0 million for ongoing operational assets. The Company believes its existing cash and cash equivalents and cash from operations will be sufficient to fund its operations for at least the next 12 months. Because the Company's capital requirements cannot be predicted with certainty, there is no assurance that the Company will not require additional financing prior to the expiration of 12 months. Year 2000 Issues The Company recognizes the importance to its operations of Year 2000 issues and is working to maintain the availability and integrity of its financial systems and the reliability of its operational systems. In that regard, the Company has already attempted to identify all internal information technology ("IT") and non-IT systems which may be affected by the Year 2000 issues, as well as third party IT and non-IT systems that the Company relies upon and the third parties' Year 2000 readiness. Within the last two years the Company has evaluated and upgraded or replaced the software packages underlying the Company's financial systems, major manufacturing systems, internal and external communication systems, and desktop systems, as appropriate, to address Year 2000 readiness issues. The Company has also performed an in-depth analysis of all of its products. An analysis of each products' Year 2000 readiness is provided on the Company's webpage (http://www.radisys.com/). In addition, the Company has been in contact with all major external third party providers to assess their Year 2000 readiness; this includes third parties who provide financial, payroll, communications, component, and integration services to the Company. Subsequent to performing the above steps, the Company has and will continue to make certain investments in its systems, applications and products to address Year 2000 issues. The Company believes that it has completed all of the basic analysis of its Year 2000 readiness, completed the majority of system upgrades and replacements it requires to be Year 2000 ready, and is now in the process of evaluating non-material and non-mission critical applications. The Company expects that it will continue to address Year 2000 readiness issues up to and including the Year 2000, and will react as appropriate to newly-identified issues. The Company is in the process of establishing contingency plans for material IT systems and third party providers that the Company relies upon. The total cost associated with required modifications to become Year 2000 compliant has not been and is not expected to be material to the Company's results of operations, liquidity and financial condition. The Company estimates that it has incurred, and will incur, a total of approximately $0.5 million for its Year 2000 readiness programs. These costs are a portion of ongoing company resources and are not separately identifiable. The above statements contain certain risks and uncertainties. These risks and uncertainties could include the risk of unidentified bugs in the source code of prepackaged or custom software, misrepresentation by third party vendors, unidentified dependency upon a system that is not Year 2000 ready, unidentified non-IT systems, or misdiagnosed Year 15 2000 readiness in existing systems. Although the Company believes that its efforts described above have significantly reduced the risk that Year 2000 issues could significantly interrupt the Company's normal business operations or adversely affect the performance of the Company's products, due to general uncertainty inherent in the Year 2000 problem and in particular about the readiness of third parties, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. Subsequent Events On March 1, 1999, the Company purchased assets of International Business Machine Corporation ("IBM") dedicated to the design, manufacture and sale of all IBM's ARTIC communications coprocessor adapter hardware and software for wide area network (WAN) and other telephony applications (the "Acquisition"). In addition, pursuant to the terms of the Acquisition, IBM licensed the use of certain patents to the Company. The Acquisition will be accounted for using the purchase method. The aggregate purchase price of approximately $28.0 million (including direct costs of acquisition) was allocated to purchased inventory, certain fixed assets and excess of purchase price over fair value of tangible assets acquired. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Page Independent Accountants' Report 18 Consolidated Statement of Operations for the years ended 19 December 31, 1996, 1997 and 1998 Consolidated Balance Sheet at December 31, 1997 and 1998 20 Consolidated Statement of Changes in Shareholders' Equity for 21 the years ended December 31, 1996, 1997 and 1998 Consolidated Statement of Cash Flows for the years ended 22 December 31, 1996, 1997 and 1998 Notes to Consolidated Financial Statements 23 Schedule of Valuation and Qualifying Accounts 33
Quarterly Financial Data (Unaudited) (In thousands, except per share amounts) Year Ended December 31, 1997 Year Ended December 31, 1998 ------------------------------------------- ------------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Revenues $27,830 $29,796 $31,594 $36,222 $33,663 $24,125 $24,613 $25,797 Gross profit 11,645 11,921 12,719 13,848 12,119 7,485 7,805 9,221 Income from operations 5,000 5,422 5,954 6,256 4,481 210 504 1,543 Net income 3,422 3,700 4,025 4,278 3,125 323 611 1,373 Net income per share (basic) 0.46 0.48 0.52 0.55 0.40 0.04 0.08 0.18 Net income per share 0.43 0.46 0.49 0.53 0.39 0.04 0.08 0.17 (diluted)
16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this Report in that the Registrant will file its definitive proxy statement for the Annual Meeting of Stockholders to be held on May 18, 1999, pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy Statement"), not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the Proxy Statement is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to directors of the Company is included under "Election of Directors" in the Company's Proxy Statement and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report. Information with respect to Section 16(a) of the Securities and Exchange Act is included under "Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is included under "Executive Compensation" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is included under "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information with respect to certain relationships and related transactions is included under "Certain Relationships and Related Transactions" in the Company's Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements 17 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of RadiSys Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in shareholders' equity, and of cash flows present fairly, in all material respects, the financial position of RadiSys Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Portland, Oregon January 22, 1999, except as to Note 8, which is as of March 1, 1999 18
CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 1996 1997 1998 --------- --------- --------- Revenues $ 81,043 $ 125,442 $ 108,198 Cost of sales 47,388 75,309 71,568 --------- --------- --------- Gross profit 33,655 50,133 36,630 Research and development 8,222 11,712 13,591 Selling, general and administrative 11,830 15,789 16,301 --------- --------- --------- Income from operations 13,603 22,632 6,738 Interest income, net 1,083 1,097 1,573 --------- --------- --------- Income before income tax provision 14,686 23,729 8,311 Income tax provision 5,140 8,304 2,879 --------- --------- --------- Net income $ 9,546 $ 15,425 $ 5,432 ========= ========= ========= Net income per share (basic) $ 1.38 $ 2.01 $ 0.69 ========= ========= ========= Net income per share (diluted) $ 1.30 $ 1.93 $ 0.68 ========= ========= ========= The accompanying notes are an integral part of this statement.
19
CONSOLIDATED BALANCE SHEET (in thousands, except share amounts) December 31, 1997 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 23,993 $ 38,831 Accounts receivable, net 27,983 19,603 Other receivables 503 216 Inventories 22,830 15,706 Other current assets 1,910 1,662 Deferred income taxes 251 ----------- ----------- Total current assets 77,470 76,018 Property and equipment, net 12,174 11,759 Other assets, net 5,299 6,677 ----------- ----------- Total assets $ 94,943 $ 94,454 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,840 $ 7,848 Income taxes payable 1,558 850 Accrued wages and bonuses 2,893 1,653 Accrued sales discounts 1,211 748 Deferred revenue 1,234 548 Deferred income taxes 190 Other accrued liabilities 712 556 Current portion of capital lease obligation 214 277 ----------- ----------- Total current liabilities 18,662 12,670 ----------- ----------- Obligations under capital lease 399 88 ----------- ----------- Commitments and contingencies Shareholders' equity: Common stock, no par value, 50,000,000 shares authorized, 7,803,595 and 7,841,738 shares issued and outstanding 50,788 51,108 Retained earnings 26,271 31,703 Accumulated other comprehensive income: Cumulative translation adjustment (1,177) (1,115) ----------- ----------- Total shareholders' equity 75,882 81,696 ----------- ----------- Total liabilities and shareholders' equity $ 94,943 $ 94,454 =========== =========== The accompanying notes are an integral part of this statement.
20
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands, except share amounts) Accumulated Common Stock other Total ----------------------- comprehensive Retained comprehensive Shares Amount Warrants income earnings Total income ---------- ---------- ---------- ------------- ---------- ---------- ------------- Balances, December 31, 1995 6,014,709 $ 33,627 $ $ (108) $ 1,300 $ 34,819 $ Shares issued pursuant to benefit plans 73,701 365 365 Tax effect of options exercised 569 569 Stock issued for acquisition 1,300,000 10,500 10,500 Warrants issued for acquisition 1,200 1,200 Translation adjustment (221) (221) (221) Net income for the year 9,546 9,546 9,546 ---------- ---------- ---------- ------------- ---------- ---------- ------------- Balances, December 31, 1996 7,388,410 45,061 1,200 (329) 10,846 56,778 Comprehensive income, year ended 1996 9,325 ============= Exercise of warrants 166,667 1,200 (1,200) Shares issued pursuant to benefit plans 165,018 1,605 1,605 Tax effect of options exercised 513 513 Stock issued for acquisition 83,500 2,409 2,409 Translation adjustment (848) (848) (848) Net income for the year 15,425 15,425 15,425 ---------- ---------- ---------- ------------- ---------- ---------- ------------- Balances, December 31, 1997 7,803,595 50,788 0 (1,177) 26,271 75,882 Comprehensive income, year ended 1997 $ 14,577 ============= Shares issued pursuant to benefit plans 158,143 1,965 1,965 Shares repurchased (120,000) (1,802) (1,802) Tax effect of options exercised 157 157 Translation adjustment 62 62 62 Net income for the year 5,432 5,432 5,432 ---------- ---------- ---------- ------------- ---------- ---------- ------------- Balances, December 31, 1998 7,841,738 $ 51,108 $ 0 $ (1,115) $ 31,703 $ 81,696 ========== ========== ========== ============= ========== ========== Comprehensive income, year ended 1998 $ 5,494 ============= The accompanying notes are an integral part of this statement.
21
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) Year Ended December 31, 1996 1997 1998 --------- --------- --------- Cash flows from operating activities: Net income $ 9,546 $ 15,425 $ 5,432 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,516 3,808 4,910 Deferred income taxes (1,497) 1,543 441 Net changes in current assets and current liabilities: Decrease (increase) in accounts receivable (13,396) (7,178) 8,380 Decrease (increase) in other receivables 1,543 2,893 287 Decrease (increase) in inventories (5,857) (4,382) 7,124 Decrease (increase) in other current assets (143) (1,372) 248 Increase (decrease) in accounts payable 9,671 (733) (2,992) Increase (decrease) in income taxes payable 2,849 (1,438) (708) Increase (decrease) in accrued wages and bonuses 1,447 569 (1,240) Increase (decrease) in accrued sales discounts 1,360 (149) (463) Increase (decrease) in other accrued liabilities 1,936 (2,354) (156) Increase (decrease) in deferred revenue 647 587 (686) --------- --------- --------- Net cash provided by operating activities 10,622 7,219 20,577 --------- --------- --------- Cash flows from investing activities: Decrease in short term investments 10,922 Business acquisitions (1,060) Capital expenditures (7,240) (3,742) (3,193) Capitalized software production costs (391) (1,539) (2,680) --------- --------- --------- Net cash provided by (used for) investing activities 3,291 (6,341) (5,873) --------- --------- --------- Cash flows from financing activities: Issuance of common stock, net 934 2,118 2,122 Repurchase of common stock (1,802) Payments on notes payable (2,532) Payments on capital lease obligation (236) (249) (248) --------- --------- --------- Net cash provided by (used for) financing activities 698 (663) 72 --------- --------- --------- Effect of exchange rate changes on cash (221) (848) 62 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 14,390 (633) 14,838 Cash and cash equivalents, beginning of year 10,236 24,626 23,993 --------- --------- --------- Cash and cash equivalents, end of year $ 24,626 $ 23,993 $ 38,831 ========= ========= ========= The accompanying notes are an integral part of this statement.
22 RADISYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share amounts) 1. Significant Accounting Policies Organization of the Company RadiSys Corporation (the Company) was incorporated in March 1987 under the laws of the State of Oregon for the purpose of developing, producing and marketing computer system (hardware and software) products for embedded computer applications in manufacturing automation, medical, transportation, telecommunications and test equipment marketplaces. Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Cash and cash equivalents Cash and cash equivalents include short-term investments with an original maturity of less than three months. Revenue recognition The Company recognizes revenue from non-distributor product sales upon shipment. For sales through distributors, the Company recognizes revenue upon shipment of the Company's product from the distributor. The Company may grant certain sales discounts to distributors. Such sales discounts are accrued at the time revenues are recorded for distributor sales. Accounts receivable Trade accounts receivable are net of an allowance for doubtful accounts of $663 and $624 at December 31, 1997 and 1998, respectively. The Company's customers are concentrated in the technology industry. Therefore, the Company's operations and collection of its accounts receivable are directly associated with the results of the technology industry. Inventories Inventories are stated at the lower of cost or market. The Company uses the first-in, first-out (FIFO) method to determine cost. Inventories consist of: December 31, 1997 1998 --------- --------- Raw materials $ 15,388 $ 9,789 Work in process 1,844 1,223 Finished goods 5,598 4,694 --------- --------- $ 22,830 $ 15,706 ========= ========= The Company periodically evaluates its inventory in terms of obsolete or slow-moving items. Inventories are net of a reserve for obsolete and slow-moving items of $847 and $1,649 at December 31, 1997, and 1998, respectively. 23 Property and equipment Property and equipment is recorded at cost and depreciated for financial reporting purposes on a straight-line basis over estimated useful lives of three to five years. Equipment under capital leases is amortized on a straight-line basis over the shorter of the lease term or the economic life of the underlying asset. Ordinary maintenance and repair expenditures are charged to expense when incurred. Equipment recorded under capital leases at December 31, 1998 totaled $1,268 with accumulated amortization of $909. Research and development Expenditures for research and development are expensed as incurred. Computer software production costs Software production costs incurred subsequent to establishment of technological feasibility, but before release to customers, are capitalized. Upon general release of the product, cost capitalization is terminated and the accumulated costs are amortized based on the greater of the proportion of current revenues to total revenue estimates for the related product, or straight-line amortization over the remaining estimated economic life of the product not to exceed two years. Unamortized software production costs of $1,943 and $3,603 are included in other assets at December 31, 1997 and 1998, respectively. Amortization of software production costs in 1996, 1997 and 1998 aggregated $452, $722 and $1,020, respectively. Cash flows The Company made cash payments for income taxes of $3,205, $7,756 and $3,577 for the years ended December 31, 1996, 1997 and 1998, respectively. Fair value of financial assets and liabilities The Company estimates the fair value of its monetary assets and liabilities based upon comparative market values of instruments of a similar nature and degree of risk. The Company estimates that the carrying amount of all of its monetary assets and liabilities approximate fair value as of December 31, 1997 and 1998. Comprehensive income The Company has adopted Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income" as of January 1, 1998. Translation adjustment represents the Company's only Other Comprehensive Income item. Translation adjustment consists of unrealized gains/losses in accordance with SFAS No. 52, "Foreign Currency Translation". The Company has no intention of liquidating the assets of the foreign subsidiaries in the foreseeable future. Foreign currency translation Assets and liabilities of international operations are translated into U.S. dollars at current exchange rates. Income and expense accounts are translated into U.S. dollars at average rates of exchange prevailing during the period. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in income. 24 Certain risks and uncertainties The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. New standard In 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. 2. Income Taxes The provision for income taxes consists of the following:
Year Ended December 31, 1996 1997 1998 --------- --------- --------- Currently payable: Federal $ 5,417 $ 5,834 $ 1,679 State 1,220 927 423 Foreign - - 336 --------- --------- --------- 6,637 6,761 2,438 --------- --------- --------- Deferred: Federal (1,180) 1,351 386 State (198) 192 55 --------- --------- --------- (1,378) 1,543 441 --------- --------- --------- Decrease in valuation allowance (119) - - --------- --------- --------- Total provision $ 5,140 $ 8,304 $ 2,879 ========= ========= =========
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to pretax income as a result of the following differences:
Year Ended December 31, 1996 1997 1998 --------- --------- --------- Statutory federal tax rate 35.0% 35.0% 35.0% Increase (decrease) in rates resulting from: State taxes 4.5 3.3 4.0 Goodwill benefit from acquisition (2.1) (2.2) (5.1) Deferred tax asset valuation allowance (.8) - - Other (1.6) (1.1) 0.7 --------- --------- --------- Effective tax rate 35.0% 35.0% 34.6% ========= ========= =========
25 Deferred tax assets/(liabilities) are comprised of the following components:
December 31, 1997 1998 --------- --------- Capitalized software $ (544) $ (1,529) Depreciation (260) (352) --------- --------- Gross deferred tax liability (804) (1,881) Deferred revenue 494 219 Inventory reserve 339 660 Allowance for doubtful accounts 265 250 Other (43) 562 --------- --------- Net deferred tax asset (liabilities) $ 251 $ (190) ========= =========
3. Property and Equipment
December 31, 1997 1998 --------- --------- Land $ 1,387 $ 1,391 Manufacturing Equipment 9,996 9,992 Office Equipment 7,255 8,056 Leasehold Improvements 1,801 2,697 --------- --------- 20,439 22,136 Less: Accumulated Depreciation 8,265 10,377 ========= ========= $ 12,174 $ 11,759 ========= =========
4. Commitments and Contingencies Line of Credit In October 1998, the Company renewed its $10.0 million unsecured line of credit, with an interest rate based upon the lower of the IBOR plus 1.25 to 2.0% or the bank's prime rate. The line of credit expires in October 1999. The Company has not drawn any funds under this line of credit. 26 Operating leases The Company leases its facilities and office equipment under non-cancelable operating leases which require minimum lease payments as follows at December 31, 1998: Year Ending Operating December 31, leases ------------ --------- 1999 $ 2,237 2000 2,175 2001 2,075 2002 1,887 2003 1,594 Thereafter 13,927 --------- $ 23,895 ========= Rent expense related to these operating leases aggregated $330, $1,288 and $2,438 in 1996, 1997 and 1998, respectively. 5. Segment Information The following is disclosure required for SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company is organized primarily on the basis of embedded single board computers and other related support operations. The operations not included in embedded single board computers are immaterial for presentation. The following is revenues and long-lived asset information by geographic area:
Revenues Long-lived Assets Year Ended December 31, December 31, Country 1996 1997 1998 1997 1998 ------- -------- -------- -------- -------- -------- United States $ 58,971 $ 88,431 $ 76,917 $ 16,704 $ 17,806 Europe 18,825 32,325 27,954 618 480 Asia Pacific - Japan 2,542 4,000 1,784 151 150 Other foreign 705 686 1,543 - - ------- -------- -------- -------- -------- -------- Total $ 81,043 $125,442 $108,198 $ 17,473 $ 18,436 ======== ======== ======== ======== ========
One customer accounted for 10.1% of total revenue in 1996. No single customer accounted for more than 10% of sales in 1997 and 1998. 27 6. Shareholders' Equity
EPS Reconciliation Year Ended December 31, 1996 1997 1998 --------- --------- --------- Weighted Average Shares (basic) 6,924,000 7,679,000 7,885,000 Effect of Dilutive Stock Options 438,000 324,000 149,000 --------- --------- --------- Weighted Average Shares (diluted) 7,362,000 8,003,000 8,034,000 ========= ========= =========
Options to purchase 139,128 and 134,410 shares of common stock were outstanding in 1997 and 1998, respectively, but were excluded in the computation of diluted EPS as the options' exercise price was greater than the average market price of the Company's common stock. Stock option plan During 1988 and 1995, the shareholders approved stock option plans. First time options granted to new employees become exercisable one-third annually, with no options exercisable in the first year following the grant date. Options granted to existing employees are not exercisable until between the second and fourth anniversary of the date of grant. The difference between the fair market value of the Company's common stock and the option exercise price at the date of grant, if material, is recorded as compensation expense ratably over the vesting period of the related options. Compensation expense related to the stock option plan for the years ended December 31, 1996, 1997 and 1998 was immaterial. The table below summarizes the Company's stock option activity:
1996 1997 1998 ---- ---- ---- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- ---------- ---------- ---------- ---------- ---------- Beginning balance 359,321 $ 7.71 777,641 $ 26.08 985,809 $ 27.99 Granted 515,052 34.00 656,402 45.07 1,110,006 23.03 Canceled (51,308) 12.30 (376,699) 51.00 (789,388) 36.19 Exercised (45,424) 3.91 (71,535) 6.76 (82,673) 7.91 ---------- ---------- ---------- ---------- ---------- ---------- Ending Balance 777,641 $ 26.08 985,809 $ 27.99 1,223,754 $ 19.56 ========== ========== ========== ========== ========== ==========
The following table sets forth the exercise price range, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price and grant date:
Weighted Remaining Number of Weighted Average Exercise Price Range Shares Average Price Contractual Life -------------------- -------------- -------------- ---------------- $1.98 - $11.00 190,441 $ 9.79 2.38 $11.25 - $34.50 913,753 19.02 5.43 $36.25 - $38.75 84,350 38.10 4.90 $39.13 - $56.25 35,210 39.43 5.34 -------------- -------------- ---------------- 1,223,754 $ 19.48 4.92 ============== ============== ================
Options exercisable at December 31, 1998 totaled 298,204 shares at a weighted average exercise price of $17.05. Options available for grant at December 31, 1998 totaled 94,429 shares. 28 Employee stock purchase plan In December 1995, the Company established an Employee Stock Purchase Plan (ESPP). Under the plan, the Company is authorized to sell up to 250,000 shares of common stock in a series of eighteen month offerings. Substantially all employees are eligible to receive rights under the plan. The purchase price is the lesser of 85% of the fair market value of the common stock on date of grant or on the purchase date. During 1997 and 1998, the Company issued 93,483 and 75,470 shares under the plan, respectively. Statement of Financial Accounting Standards No. 123 ("FAS 123") The Company has elected to account for its stock based compensation under Accounting Principles Board Opinion No. 25; however, as required by FAS 123 the Company has computed for pro forma disclosure purposes the value of options granted during 1996, 1997 and 1998 using the Black-Scholes option pricing model. The weighted average assumptions used for stock option grants for 1996, 1997 and 1998 were a risk free interest rate of 6%, 5.4% and 5.11%, respectively, an expected dividend yield of 0%, an expected life of 4 years, and an expected volatility of 50%, 50% and 65%, respectively. The weighted average assumptions used for ESPP rights for 1996, 1997 and 1998 were a risk free interest rate of 5.7%, 5.3% and 5.0%, respectively, an expected dividend yield of 0%, respectively, an expected life of 1.5 years, respectively, and an expected volatility of 50%, 50% and 62%, respectively. The weighted-average fair value of ESPP rights granted in 1996, 1997 and 1998 were $242, $656 and $770, respectively. Options were assumed to be exercised upon vesting for purposes of this valuation. Adjustments are made for options forfeited prior to vesting. For the years ended December 31, 1996, 1997 and 1998, the total value of the options granted was computed to be $9,205, $8,578 and $12,260, respectively, which would be amortized on a straight line basis over the vesting period of the options. If the Company had accounted for these plans in accordance with FAS 123, the Company's net income and pro forma net income per share would have been reported as follows:
Year Ended December 31, 1996 Year Ended December 31, 1997 Year Ended December 31, 1998 ------------------------------------ ------------------------------------ ------------------------------------ Earnings per Share Earnings per Share Earnings per Share ------------------------------------ ------------------------------------ ------------------------------------ Net Income Basic Diluted Net Income Basic Diluted Net Income Basic Diluted ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- As Reported $ 9,546 $ 1.38 $ 1.30 $ 15,425 $ 2.01 $ 1.93 $ 5,432 $ 0.69 $ 0.68 Pro Forma $ 8,533 $ 1.23 $ 1.19 $ 12,904 $ 1.68 $ 1.60 $ 2,541 $ 0.32 $ 0.32
The effects of applying FAS 123 for providing pro forma disclosure for 1996, 1997 and 1998 are not likely to be representative of the effects on reported net income and earnings per share for future years since options vest over several years and additional awards are made each year. 7. Multibus Acquisition On April 29, 1996, the Company purchased substantially all of the assets of Intel Corporation ("Intel") that were dedicated to the design, manufacture and sale of all standard and custom Multibus I and Multibus II products ("Multibus") (collectively the "Acquisition"). In addition, pursuant to the terms of the Acquisition, Intel licensed certain Intel software to the Company. The purchase price consisted of 1,300,000 shares of the Company's common stock ("Common Stock") and warrants to purchase an additional 300,000 shares of Common Stock exercisable within 24 months at prices per share ranging from $13.50 to $15.00, plus an aggregate of $1.2 million in cash to be paid in 1997. 29 The Acquisition was accounted for using the purchase method. The results of operations for Multibus have been included in the financial statements since the date of acquisition. The aggregate purchase price of $13.2 million (including direct costs of acquisition) was allocated to purchased inventory, equipment and in-process research and development. Included within cost of goods sold for 1996 is $1.3 million of inventory valuation adjustments that resulted from purchase accounting and within research and development for 1996 is $225,000 to expense in-process research and development acquired in connection with the Multibus acquisition. The non cash portions have been excluded from the accompanying Consolidated Statement of Cash Flows. The following unaudited pro forma information presents the results of operations of the Company as if the Acquisition had occurred as of the beginning of the period, after giving effect to increases in operating, research and development, and general and administrative costs to operate the business, depreciation of acquired fixed assets, and adjustments to reflect the estimated impact on tax expense of the Acquisition. The unaudited pro forma financial statements are not necessarily indicative of what actual results would have been had the Multibus acquisition occurred at the beginning of the period. Year Ended December 31, 1996 (unaudited) Revenues $ 101,387 Net Income $ 11,216 Earnings per share (basic) $ 1.52 Earnings per share (diluted) $ 1.42 8. Subsequent Events On March 1, 1999, the Company purchased assets of International Business Machine Corporation ("IBM") dedicated to the design, manufacture and sale of all IBM's ARTIC communications coprocessor adapter hardware and software for wide area network (WAN) and other telephony applications (the "Acquisition"). In addition, pursuant to the terms of the Acquisition, IBM licensed the use of certain patents to the Company. The Acquisition will be accounted for using the purchase method. The aggregate purchase price of approximately $28.0 million (including direct costs of acquisition) was allocated to purchased inventory, certain fixed assets and excess of purchase price over fair value of tangible assets acquired. 30 (a)(2) Financial Statement Schedule Page in Form 10-K Schedule II - Valuation and Qualifying Accounts Report of Independent Accountants on Financial Statement Schedule (a)(3) Exhibits Exhibit No. Description - ------- ----------- +2.1 Asset Purchase Agreement between RadiSys Corporation and Intel Corporation, dated as of April 29, 1996. Incorporated by reference as Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 29, 1996. 2.2 List of omitted schedules to Asset Purchase Agreement between Radisys Corporation and Intel Corporation, dated as of April 29, 1996. Incorporated by reference as Exhibit 2.2 to the Company's Current Report on Form 8-K dated April 29, 1996. 2.3 Asset Purchase Agreement between RadiSys Corporation and International Business Machines Corporation, dated as of March 1, 1999. Incorporated by reference as Exhibit 2.3 to the Company's Current Report on Form 8-K dated March 1, 1999. 3.1 Second Restated Articles of Incorporation and Amendments thereto. Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-95892) (the "Form S-1"), and by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 3.2 Restated Bylaws and amendments thereto. Incorporated by reference to Exhibit 3.2 to the Form S-1. 4.1 See Article IV of Exhibit 3.1 and Article VI of Exhibit 3.2 *10.1 1988 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to the Form S-1. *10.2 1995 Stock Incentive Plan, as amended. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on From 10-Q for the quarterly period ended June 30, 1997. *10.3 1996 Employee Stock Purchase Plan. Incorporated by reference to Appendix A to the Company's Proxy Statement related to its annual meeting held on May 28, 1996, which was filed with the Securities and Exchange Commission on April 15, 1996. *10.4 Form of Incentive Stock Option Agreement. Incorporated by reference to Exhibit 10.3 to the Form S-1. *10.5 Form of Non-Statutory Stock Option Agreement. Incorporated by reference to Exhibit 10.4 to the Form S-1. 10.8 Lease between Registrant and Commercial Real Estate Company, L.L.C. dated December 15, 1995. Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.9 Master Equipment Lease No. 10551, dated as of March 2, 1995, between U.S. Bancorp Leasing & Financial, as Lessor, and the Registrant, as Lessee, including Schedules 10551.001, 10551.002 and 10551.003, dated March 2, 1995, March 29, 1995 and May 23, 1995, respectively. Incorporated by reference to Exhibit 10.8 to the Form S-1. *10.10 Form of Indemnity Agreement. Incorporated by reference to Exhibit 10.9 to the Form S-1. 10.11 Revolving line of credit agreement between the Company and United States National Bank of Oregon dated September 12, 1996. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 10.11(a) Renewal of September 12, 1996 revolving line of credit agreement between the Company and United States National Bank of Oregon dated September 1, 1998. 10.12 Dawson Creek II lease, dated March 21, 1997, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 21.1 List of Subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP 27.1 Financial Data Schedules 31 + Confidential treatment of portions of this document has been granted. * This Exhibit constitutes a management contract or compensatory plan or arrangement (b) Reports on Form 8-K No Current Reports on Form 8-K were filed during the quarter ended December 31, 1998. (c) See (a)(3) above. (d) See (a)(2) above. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 10, 1999 RADISYS CORPORATION By: DR. GLENFORD J. MYERS ------------------------------------- Dr. Glenford J. Myers Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 10, 1999. Signature Title --------- ----- DR. GLENFORD J. MYERS ---------------------------------- Chairman of the Board, President Dr. Glenford J. Myers and Chief Executive Officer (Principal Executive Officer) BRIAN V. TURNER ---------------------------------- Vice President of Finance and Brian V. Turner Administration and Chief Financial Officer (Principal Financial and Accounting Officer) Directors: JAMES F. DALTON ---------------------------------- Director James F. Dalton RICHARD J. FAUBERT ---------------------------------- Director Richard J. Faubert C. SCOTT GIBSON ---------------------------------- Director C. Scott Gibson DR. WILLIAM W. LATTIN ---------------------------------- Director Dr. William W. Lattin JEAN CLAUDE PETERSCHMITT ---------------------------------- Director Jean Claude Peterschmitt JEAN-PIERRE D. PATKAY ---------------------------------- Director Jean-Pierre D. Patkay 32
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to beginning of costs and Balance at period expenses Deductions end of period ------ -------- ---------- ------------- Allowance for doubtful accounts Year ended: December 31, 1996 233,000 548,000 (75,000) 706,000 December 31, 1997 706,000 190,000 (233,000) 663,000 December 31, 1998 663,000 71,000 (110,000) 624,000 Warranty reserve Year ended: December 31, 1996 334,000 1,154,000 (261,000) 1,227,000 December 31, 1997 1,227,000 1,727,000 (2,783,000) 171,000 December 31, 1998 171,000 2,884,000 (2,561,000) 494,000 Obsolescence reserve Year ended: December 31, 1996 110,000 449,000 (30,000) 529,000 December 31, 1997 529,000 1,406,000 (1,088,000) 847,000 December 31, 1998 847,000 2,825,000 (2,023,000) 1,649,000
33 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of RadiSys Corporation Our audits of the consolidated financial statements referred to in our report dated January 22, 1999 also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Portland, Oregon January 22, 1999 34 EX-10.11(A) 2 COMMITMENT LETTER Ex. 10.11(a) September 1, 1998 Mr. Brian V. Turner, Chief Financial Officer RadiSys Corporation 15025 SW Koll Parkway Beaverton, OR 97006-6056 Dear Brian: I am pleased to advise you that U.S. Bank, National Association ("Bank") has approved the renewal of the revolving line of credit and Corporate Visa facility for RadiSys Corporation, subject to the following terms and conditions: Borrower: RadiSys Corporation ("RadiSys") Operating Line of Credit - ------------------------ Purpose: Working Capital and general corporate purposes. Borrowing Limit: $10,000,000 Guarantors: None. Expiry Date: September 30, 1999 or upon non-compliance with any term or condition stated herein, or any material misrepresentation of fact by the Borrower. Pricing: Fees: Upfront Fee of 5 basis points ($5,000) on the committed amount, due upon acceptance. Quarterly fee of 1/8 of 1 percent (annualized) based upon the unused portion of the line, due quarterly in arrears. RadiSys Corporation Page 2 September 1, 1998 Commitment Letter Interest Rate: Pricing based upon U.S. Bank, National Association's Prime Rate/1, Bankers' Acceptances ("BA"), or London Interbank Offering Rates ("LIBOR"), at the Borrower's option. The Prime Rate will be fully floating and computed on a 360 day year. The spread over the base rates will be determined quarterly by the Borrower's Total Liabilities / Tangible Net Worth* Ratio as expressed in the chart below. The rate will be adjusted within 5 business days of receipt of either the quarterly 10-Q report or the audited financial financials. Total Liabilities/Tangible BA or Net Worth Prime LIBOR ------------------------------- ----- ----- Greater then 0.65:1.00 +0% +2.00% 0.41:1.00 to 0.65:1.00 +0% +1.75% 0.26:1.00 to 0.40:1.00 +0% +1.50% Less than or equal to 0.25:1.00 +0% +1.25% B/A financing available to Borrower in minimum amount of $1,000,000 to maximum of 90 days. LIBOR Terms: A) Minimum amounts of $500,000 and $100,000 increments thereafter. B) Maturity and availability: One, two or three month periods. C) Prepayment of LIBOR borrowings not permitted. D) Notification: Two day notification prior to 12:00 noon on the day of notification. E) Irrevocability: Acceptance of a pricing commitment from the Bank will constitute an irrevocable agreement to borrow under the revolving line of credit. - -------------- 1/ If the interest rate charged to the Borrower is tied to the Prime Rate of U.S. Bank, Borrower is advised that U.S. Bank's Prime Rate is the rate of interest which the Bank from time to time identifies and publicly announces as its Prime Rate and is not necessarily, for example, the lowest rate of interest which the Bank collects from any borrower or group of borrowers. RadiSys Corporation Page 3 September 1, 1998 Commitment Letter F) Interest computed on a basis of a 360 day year and the actual number of days elapsed. * Tangible Net Worth is defined as Total Shareholder's Equity less Intangibles (e.g., Goodwill, Patents, Software development costs, etc.). All other capitalized terms are defined in accordance with GAAP. All reasonable out of pocket expenses for documentation and collateral examination fees to be paid by Borrower. Repayment Terms: Optional advance note. Interest payable monthly, in arrears. Principal due at maturity. Repayment of each advance received by the Borrower under the line of credit is subject to the terms and conditions of the promissory note evidencing that advance as well as all conditions of this letter. In the event of any conflict between the two, the terms and conditions of the promissory note shall control. Collateral: The revolving line of credit provides for a flexible collateral position according to the following matrix. The assets of the Borrower which are referenced below include accounts and inventory. Quick Ratio Collateral -------------------------------------------------------------------------- Greater than 1.50:1.00 Unsecured with negative pledge agreement. -------------------------------------------------------------------------- Less than or equal to 1.50:1.00 Unsecured with negative pledge, if not borrowing, but converts to secured if ratio falls below 1.50 benchmark for two consecutive quarters. If Borrowing and equal to, or less than 1.50, then the line of credit is secured. -------------------------------------------------------------------------- Less than or equal to 1.15:1.00 Line is secured and margined at 80% of eligible A/R**. -------------------------------------------------------------------------- * Quick Ratio is defined as ((Cash plus Trade Accounts Receivable, Net)/(Current Liabilities)) Advances: Advances limited to Borrowing Limit when Quick Ratio is greater than 1.15:1.0. When Quick Ratio is less than or equal to 1.15:1.00 the advances will be limited to 80% of eligible A/R to 90 days after date of invoice. RadiSys Corporation Page 4 September 1, 1998 Commitment Letter Ineligible accounts will be datings, COD or cash sales, inter-company, employee, progress billings, consignments, retainage, potential offset and accounts where more than 25% of the balance is beyond 90 days after date of invoice. Foreign accounts receivable will be considered eligible at the discretion of the Bank. Disbursements under the line of credit shall terminate on the earlier occurrence of the date indicated above as the Expiry Date or the date on which this Bank, in its sole discretion, determines that there has been a material adverse change in the financial condition or management of the Borrower, or determines that there has been any non-compliance with any term or condition stated herein. Non-compliance with any term or condition and terms of this letter of will be considered as an event of default, entitling the Bank to all the default provisions as provided for in documents evidencing this line of credit. Corporate Visa Facility: - ------------------------ Borrowing Limit: $120,000 Terms and Conditions: Terms as outlined in Corporate Visa agreement and application. Foreign Exchange Currency Transactions: - --------------------------------------- General Parameters: Availability to facilitate issuance of forward and spot currency contracts. Maximum forward settlement 13 months, with the maturity not to exceed March 31, 1999. Further details are available upon request. General Conditions: - ------------------- Covenants: The following covenants will be measured quarterly: 1. Minimum Current Ratio: The ratio of Current Assets to Current Liabilities not to be less than 2.00 to 1.00. RadiSys Corporation Page 5 September 1, 1998 Commitment Letter 2. Maximum Leverage Ratio: The ratio of Total Liabilities to Tangible Net Worth not be more than 0.75 to 1.00. 3. Minimum Tangible Net Worth: Tangible Net Worth shall not be less than $48,000,000. Failure to comply with any the above covenants constitutes an event of default under the terms of the Bank's documents. Financial Reporting: 1. Audited annual financial statements. 2. Quarterly interim financial statements and all material documents filed with the SEC. 3. If the Quick Ratio (as defined above) falls below 1.15 to 1.00: A borrowers certificate with each advance, and a borrowers certificate to accompany the monthly A/R and A/P agings. Additionally, if a Bank Collateral Survey is performed then further refinement of the advance structure may be necessary. Documentation: Execution of notes, loan agreements, borrowing resolutions, incumbency certificates and other documents as required by the Bank on forms prepared by the Bank. If the above terms and conditions to extend credit to RadiSys Corporation are acceptable to you, please sign and return the acknowledgment copy of this letter on or before October 12, 1998. We are pleased to provide you this borrowing accommodation and look forward to serving your banking needs in the future. Sincerely, ROSS A. BEATON Ross A. Beaton Vice President EX-21.1 3 LIST OF SUBSIDIARIES Exhibit 21.1 RADISYS CORPORATION LIST OF SUBSIDIARIES Subsidiary Jurisdiction of Incorporation ---------------------------------------------- ------------------------ RadiSys International Oregon RadiSys K.K. Japan Radisys G.m.b.H. Germany RadiSys B.V. Netherlands RadiSys International Sales Corp. Barbados RadiSys SARL France RadiSys UK Limited United Kingdom EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-80577 and 333-00514 and 333-46473) of RadiSys Corporation of our report dated January 22, 1999 appearing in this Annual Report on Form 10-K. We also hereby consent to the incorporation by reference of our report on the Financial Statement Schedule, which also appears in this Form 10-K. PricewaterhouseCoopers LLP Portland, Oregon March 12, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 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. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 38,831 0 19,603 624 15,706 76,018 11,759 10,378 94,454 12,670 0 0 0 51,108 30,588 94,454 108,198 108,198 71,568 29,892 0 0 1,573 8,311 2,879 5,432 0 0 0 5,432 0.69 0.68
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