-----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, PJ4mYUWz+yUMMweMbW8ilulllHGHXwsMzL+WfqJ2neLvGrdxeY8jMqtd3GDHAGF6 Yly4ly1AaWvsJSFhDHCifg== 0000893877-99-000724.txt : 19991117 0000893877-99-000724.hdr.sgml : 19991117 ACCESSION NUMBER: 0000893877-99-000724 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 000-26844 FILM NUMBER: 99756456 BUSINESS ADDRESS: STREET 1: 5445 NE DAWSON CREEK DR CITY: HILLSBORO STATE: OR ZIP: 97124 BUSINESS PHONE: 5036461800 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1999 or ( ) Transition report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from ______________ to _____________. Commission file number: 0-26844 RADISYS CORPORATION (Exact name of registrant as specified in its charter) Oregon 93-0945232 (State or other jurisdiction (I.R.S. Employer of organization or incorporation) Identification Number) 5445 NE Dawson Creek Drive Hillsboro, OR 97124 (Address of principal executive offices, including zip code) (503) 615-1100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock outstanding as of November 10, 1999 was 10,925,920. RADISYS CORPORATION PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Consolidated Financial Statements Consolidated Balance Sheet - September 30, 1999 and December 31, 1998 3 Consolidated Statement of Operations - Three months ended September 30, 1999 and 1998, and nine months ended September 30, 1999 and 1998 4 Consolidated Statement of Changes in Shareholders' Equity - December 31, 1998 through September 30, 1999 5 Consolidated Statement of Cash Flows - Nine months ended September 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2
RadiSys Corporation Consolidated Balance Sheet (in thousands, except share amounts) (unaudited) ASSETS September 30, December 31, 1999 1998 ------------ ------------ (restated) Current assets Cash and cash equivalents $ 24,242 $ 43,792 Accounts receivable, net 50,403 33,661 Inventories, net 44,757 27,382 Other current assets 2,072 2,255 Deferred income taxes 3,455 805 ------------ ------------ Total current assets 124,929 107,895 Equipment, net 19,251 17,011 Goodwill and intangible assets, net 21,882 3,142 Other assets 9,577 3,679 ------------ ------------ Total assets $ 175,639 $ 131,727 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 34,400 $ 12,553 Income taxes payable 3,707 1,052 Accrued wages and bonuses 4,525 4,272 Accrued sales discounts 1,303 748 Other accrued liabilities 8,046 5,910 Current portion of capital lease obligation 144 277 ------------ ------------ Total current liabilities 52,125 24,812 Non-current portion of capital lease obligation - 88 ------------ ------------ Total liabilities 52,125 24,900 ------------ ------------ Commitments and contingent liabilities Shareholders' equity Common stock, 50,000,000 shares authorized, 10,832,650 and 10,559,224 shares issued and outstanding 136,099 132,368 Accumulated other comprehensive loss: Cumulative translation adjustment (1,474) (1,096) Unrealized loss on securities available for sale (438) (568) Accumulated deficit (10,673) (23,877) ------------ ------------ Total shareholders' equity 123,514 106,827 ------------ ------------ Total liabilities and shareholders' equity $ 175,639 $ 131,727 ============ ============ See accompanying notes to consolidated financial statements.
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RadiSys Corporation Consolidated Statement of Operations (in thousands, except per share amounts) (unaudited) Three Months Ended Nine Months Ended ----------------------- ----------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 --------- --------- --------- --------- (restated) (restated) Revenues $ 64,096 $ 44,934 $ 178,145 $ 138,693 Cost of goods sold 40,724 29,921 113,023 92,713 --------- --------- --------- --------- Gross profit 23,372 15,013 65,122 45,980 Research and development 7,438 5,795 21,973 16,674 Selling, general and administrative 9,385 7,937 26,991 23,198 Goodwill and intangibles amortization 722 27 1,733 27 Combination costs 5,971 - 5,971 - --------- --------- --------- --------- Income (loss) from operations (144) 1,254 8,454 6,081 Interest income, net 229 592 936 1,633 Other income 2,007 - 2,007 - --------- --------- --------- --------- Income before income tax provision (benefit) 2,092 1,846 11,397 7,714 Income tax provision (benefit) 1,147 403 (1,807) 2,317 --------- --------- --------- --------- Net income $ 945 $ 1,443 $ 13,204 $ 5,397 ========= ========= ========= ========= Net income per share (basic) $ 0.09 $ 0.14 $ 1.23 $ 0.51 ========= ========= ========= ========= Net income per share (diluted) $ 0.08 $ 0.14 $ 1.18 $ 0.51 ========= ========= ========= ========= Shares used in the calculation of net income per share - basic 10,808 10,580 10,722 10,569 ========= ========= ========= ========= Shares used in the calculation of net income per share - diluted 11,447 10,677 11,171 10,687 ========= ========= ========= ========= See accompanying notes to consolidated financial statements.
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RadiSys Corporation Consolidated Statement of Changes in Shareholders' Equity (in thousands, except share amounts) Common stock Cumulative Unrealized Total other ---------------------- translation gain/loss on Accumulated comprehensive Shares Amount adjustment securities deficit Total income ---------- ---------- ----------- ------------ ----------- --------- ------------ Balances, December 31, 1998 10,559,224 $ 132,368 $ (1,096) $ (568) $ (23,877) $ 106,827 Shares issued pursuant to benefit plans 273,426 3,731 - - - 3,731 Translation adjustment - - (378) - - (378) $ (378) Unrealized gain on securities - - - 130 - 130 130 Net income for the period - - - - 13,204 13,204 13,204 ---------- ---------- ----------- ------------ ----------- --------- --------- Balances, September 30, 1999 (unaudited) 10,832,650 $ 136,099 $ (1,474) $ (438) $ (10,673) $ 123,514 ========== ========== =========== ============ =========== ========= Total other comprehensive income, nine months ended September 30, 1999 (unaudited) $ 12,956 ========= See accompanying notes to consolidated financial statements.
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RadiSys Corporation Consolidated Statement of Cash Flows (in thousands) (unaudited) Nine Months Ended ------------------------- Sept. 30, Sept. 30, 1999 1998 ---------- ---------- (restated) Cash flows from operating activities: Net Income $ 13,204 $ 5,397 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 6,889 4,205 Gain on sale of assets (2,157) - Deferred income taxes (6,845) (206) Net changes in current assets and current liabilities: Decrease (increase) in accounts receivable (16,742) 10,090 Decrease (increase) in inventories (10,919) 5,312 Decrease (increase) in other current assets 183 884 Increase (decrease) in accounts payable 21,847 (3,423) Increase (decrease) in income taxes payable 2,655 (633) Increase (decrease) in accrued wages and bonuses 253 (1,444) Increase (decrease) in accrued sales discounts 555 (505) Increase (decrease) in other accrued liabilities 2,136 (72) ---------- ---------- Net cash provided by operating activities 11,059 19,605 ---------- ---------- Cash flows from investing activities: Business acquisitions (27,376) - Capital expenditures (5,137) (4,652) Proceeds from divestitures 1,500 1,240 Capitalized software production costs and other assets (2,728) (3,356) ---------- ---------- Net cash used for investing activities (33,741) (6,768) ---------- ---------- Cash flows from financing activities: Issuance of common stock 3,731 1,441 Repurchase of common stock - (1,802) Purchase of treasury stock - - Payments on capital lease obligation (221) (180) ---------- ---------- Net cash provided by (used for) financing activities 3,510 (541) ---------- ---------- Effect of exchange rate changes on cash (378) (544) ---------- ---------- Net increase (decrease) in cash and cash equivalents (19,550) 11,752 Cash and cash equivalents, beginning of period 43,792 30,847 ---------- ---------- Cash and cash equivalents, end of period $ 24,242 $ 42,599 ========== ========== See accompanying notes to consolidated financial statements.
6 RADISYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share amounts) (unaudited) September 30, 1999 1. Basis of Presentation The accompanying consolidated financial statements are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of results for the interim periods. Reclassifications have been made to amounts in prior years to conform to current year presentation. These changes had no impact on previously reported results of operations or shareholders' equity. See Note 8 regarding the merger with Texas Micro Inc., and the restatement of the Company's financial statements. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. The results of operations for interim periods are not necessarily indicative of the results for the entire year. Management Estimates -------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates and judgements made by management of the Company include matters such as collectibility of accounts receivable, realizability of inventories and recoverability of capitalized software and deferred tax assets. Reclassifications ----------------- Reclassifications have been made to amounts in certain prior years. These changes had no impact on previously reported results of operations or shareholders' equity. Change in Estimates ------------------- During the third quarter of 1999 the Company changed its estimate relative to the rate of potential product returns from distributors to reflect contractual return limitations. This change resulted in an increase to third quarter income from operations of $.4 million. 2. Accounts Receivable Trade accounts receivable are net of an allowance for doubtful accounts of $948 and $1,481 at September 30, 1999 and December 31, 1998, respectively. The Company's customers are concentrated in the technology industry. 7 3. Inventories Inventories consist of the following:
Sep 30, Dec 31, 1999 1998 ----------- ----------- Raw Materials $ 28,087 $ 17,520 Work in Process 14,984 3,728 Finished Goods 1,686 6,134 ----------- ----------- $ 44,757 $ 27,382 =========== ===========
4. Property and Equipment Property and equipment consists of the following:
Sep 30, Dec 31, 1999 1998 ----------- ----------- Land $ 1,391 $ 1,391 Manufacturing Equipment 15,930 14,591 Office Equipment 17,780 12,917 Leasehold Improvements 5,217 5,835 ----------- ----------- 40,318 34,734 Less: Accumulated Depreciation 21,067 17,723 ----------- ----------- $ 19,251 $ 17,011 =========== ===========
5. Goodwill and Intangible Assets Goodwill and intangible assets increased by $18.8 million, from $3.1 million at December 31, 1998 to $21.9 million at September 30, 1999. This increase is due to goodwill and intangibles recorded from the ARTIC acquisition (see Note 10) of $19.1 million (net of amortization), and from the Sonitech acquisition of $4.4 million (net of amortization), offset by $0.3 million amortization from the Sonitech acquisition and other intangibles. Amortization periods range from five to fifteen years. 6. Earnings Per Share Net income per share is based on the weighted average number of shares of common stock and common stock equivalents (stock options) outstanding during the periods, computed using the treasury stock method for stock options. Weighted average shares consist of the following:
Three Nine months ended months ended ------------------- ------------------- Sep 30, Sep 30, Sep 30, Sep 30, 1999 1998 1999 1998 -------- -------- -------- -------- Weighted Average Shares (basic) 10,808 10,580 10,722 10,569 Effect of Dilutive Stock Options 639 97 449 118 -------- -------- -------- -------- Weighted Average Shares (diluted) 11,447 10,677 11,171 10,687 ======== ======== ======== ========
8 7. Segment Information The Company is organized primarily on the basis of embedded single board computers and other related support operations. The operations not included in embedded single board computers are immaterial for presentation. Information concerning principal geographic areas is as follows:
Revenue Three Nine months ended months ended ------------------- ------------------- Sep 30, Sep 30, Sep 30, Sep 30, 1999 1998 1999 1998 -------- -------- -------- -------- Country United States $ 41,175 $ 31,910 $119,805 $ 99,573 Europe 21,551 11,999 55,327 35,824 Asia Pacific - Japan 1,188 601 1,955 2,218 Other foreign 182 424 1,058 1,078 -------- -------- -------- -------- $ 64,096 $ 44,934 $178,145 $138,693 ======== ======== ======== ======== Long Lived Assets Sep 30, Dec 31, 1999 1998 -------- -------- Country United States $ 18,752 $ 16,373 Europe 409 538 Asia Pacific - Japan 90 99 -------- -------- $ 19,251 $ 17,011 ======== ========
No customer accounted for more than 10% of total revenue for the three and nine month periods ended September 30, 1999 and 1998. 8. Merger with Texas Micro and Related Charges On August 13, 1999, the Company completed a merger transaction with Texas Micro Inc. ("Texas Micro"), a publicly-traded embedded computer company headquartered in Houston, Texas. As a result, the outstanding Texas Micro common stock was converted into approximately 2.8 million shares of RadiSys common stock, based on an exchange ratio of approximately 4.96 shares of Texas Micro common stock for each share of RadiSys common stock. The merger was accounted for as a pooling-of-interests under Accounting Principles Board Opinion No. 16, and accordingly, financial statements presented for all periods have been restated to reflect combined operations and financial position. All intercompany transactions have been eliminated. The merger-related costs consisted primarily of fees for investment bankers, attorneys, accountants and financial printing. Certain reclassifications were made to Texas Micro's accounts to conform to the Company's presentation. Consolidated results of operations for the period January 1, 1999 through June 30, 1999 of the Company and Texas Micro on a stand-alone basis are as follows: RadiSys Texas Micro Combined Revenue $ 70,395 $ 43,654 $ 114,049 ========= ========= ========= Net Income $ 4,448 $ 2,618 $ 7,066 ========= ========= ========= 9 In connection with the merger, the Company recorded a charge to operating expenses of approximately $6.0 million for merger-related costs during the third quarter of 1999. Merger and related costs are comprised of the following:
Combination costs Balance recorded quarter accrued as of ending 9/30/99 9/30/99 ----------------- -------------- Professional & filing fees $ 3,251 $ 400 Severance, retention, relocation & benefits alignment 1,538 249 Contract termination costs 799 205 Marketing 226 141 Information systems conversion 83 4 Other miscellaneous 74 0 -------- ------- Total $ 5,971 $ 999 ======== =======
Accrued combination costs totalling $1.0 million at September 30, 1999 are included in other accrued liabilities in the Consolidated Balance Sheet. As a result of the merger transaction with Texas Micro, the Company restated its financial statements including recognition of a tax benefit in the second quarter 1999. The Company has accounted for certain changes in the federal income tax laws that took effect on June 25, 1999. The tax law change made certain Texas Micro net operating loss carryforwards available to offset RadiSys taxable income. This portion of the restatement increased net income of the Company by $5.2 million for the quarter ended June 30, 1999. 9. Gain on Sale of Assets On September 30, 1999, the Company received the final consideration owing in connection with the prior (1996) sale (by Texas Micro) of Texas Micro's Sequoia Enterprise Systems business unit to General Automation, Inc. Final consideration consisted of $1.5 million in cash, $750 in notes, and 1,133,333 shares of General Automation common stock. The receipt of this consideration resulted in a gain of $2.2 million in the quarter and is reflected in other income in the Statement of Operations. 10. ARTIC Business Unit Acquisition On March 1, 1999, the Company purchased certain assets of International Business Machines Corporation ("IBM") dedicated to the design, manufacture and sale of IBM's ARTIC communications coprocessor adapter hardware and software for wide area network and other telephony applications ("ARTIC Business Unit") (collectively the "Acquisition"). The purchase price consisted of an aggregate of $27.0 million in cash consideration. The Acquisition was accounted for using the purchase method. The results of operations for ARTIC Business Unit have been included in the financial statements since the date of acquisition. The aggregate purchase price of $27.4 million, including direct costs of acquisition, was allocated to purchased inventory, furniture and equipment, patents and goodwill related to the excess of the purchase price over the fair value of the tangible assets acquired. The following unaudited pro forma information presents the results of operations of the Company as if the Acquisition had occurred as of the beginning of the respective three and nine-month periods, after giving effect to adjustments for amortization of patents and goodwill, estimated reduction of interest income and the estimated impact on the income tax provision. The unaudited pro forma financial statements are not necessarily indicative of what actual results would have been had the ARTIC Business Unit acquisition occurred at the beginning of the respective periods. The unaudited pro forma information should be read in conjunction with the Current Report of the Company on Form 8-K dated March 1, 1999 and the Current Report of the Company on Form 8-K/A filed April 22, 1999. 10
Three months ended Nine months ended ------------------- ------------------- Sept 30, Sept 30, Sept 30, Sept 30, 1999 1998 1999 1998 -------- -------- -------- -------- (unaudited) (unaudited) Revenues $ 64,096 $ 58,546 $187,735 $172,399 Net Income $ 945 $ 6,353 $ 15,453 $ 10,178 Net income per share (basic) $ .09 $ .60 $ .96 $ 1.44 Net income per share (diluted) $ .08 $ .60 $ .95 $ 1.38
11. Subsequent Event On October 19, 1999 the Company's board of directors declared a three-for-two stock split of the shares of common stock of the Company to be effected by means of a stock dividend. The shareholders of record on November 8, 1999 will receive one additional share of common stock for every two shares held. The stock dividend will be distributed on November 29, 1999. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands except percentage amounts) OVERVIEW Total revenue was $64.1 million for the three months ended September 30, 1999 compared to $44.9 million for the three months ended September 30, 1998, and $178.1 million for the nine months ended September 30, 1999 compared to $138.7 million for the nine months ended September 30, 1998. Net income was $0.9 million for the three months ended September 30, 1999 compared to $1.4 million for the three months ended September 30, 1998, and $13.2 million for the nine months ended September 30, 1999 compared to $5.4 million for the nine months ended September 30, 1998. The 1999 results include costs related to the merger with Texas Micro in 1999, the gain related to the General Automation settlement and the one-time tax benefit as discussed below. On March 1, 1999, the Company purchased certain assets of International Business Machines Corporation ("IBM") dedicated to the design, manufacture and sale of IBM's ARTIC communications coprocessor adapter hardware and software for wide area network and other telephony applications. The purchase price, including direct acquisition costs, was $27.4 million. The acquisition was accounted for using the purchase method. The results of operations for this acquisition have been included in the financial statements since the date of the acquisition. On August 13, 1999, the Company completed its merger transaction with Texas Micro, a publicly-traded embedded computer company headquartered in Houston, Texas, by issuing approximately 2.8 million shares of the Company's stock for all the outstanding common stock of Texas Micro. The merger was accounted for as a pooling-of-interests under Accounting Principles Board Opinion No. 16, and accordingly, the financial statements have been restated for all periods prior to the merger to reflect the combined results of operations, financial position and cash flows. In connection with the merger, the Company recorded a charge to operating expenses of approximately $6.0 million for merger-related costs in the third quarter of 1999.
REVENUES Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30, 1999 Change 1998 1999 Change 1998 --------- ---------- --------- --------- ---------- --------- Revenues $ 64,096 43% $ 44,934 $ 178,145 28% $ 138,693
The increase in revenues for the three and nine months ended September 30, 1999 compared to the same periods in 1998 was the result of sales related to the ARTIC Business Unit acquisition since March 1, 1999, design wins ramping into production and volume increases in other OEM sales. The percentage change for the nine months ended September 30, 1999 compared to September 30, 1998 was lower than the three month change due to the results of operations of the ARTIC acquisition included in revenue beginning March, 1999 combined with a decrease in revenues in the second quarter of 1998. The decreased revenue experienced in the second quarter of 1998 was caused by customers delaying or canceling orders precipitated by the effects of the global economic conditions in the electronics market and decrease in sales from one OEM customer. COST OF GOODS SOLD
Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30, 1999 Change 1998 1999 Change 1998 --------- ---------- --------- --------- ---------- --------- Cost of Goods Sold $ 40,724 36% $ 29,921 $ 113,023 22% $ 92,713 As a % of Revenues 64% 67% 63% 67%
12 Cost of goods sold increased on a dollar basis for the three and nine months ended September 30, 1999 compared to the three and nine months ended September 30, 1998 primarily as a result of higher revenues. Cost of goods sold as a percentage of revenues decreased for the three and nine months ended September 30, 1999 compared to the three and nine months ended September 30, 1998 primarily as a result of the product mix consisting of a larger portion of higher margin product related to the ARTIC Business Unit acquisition on March 1, 1999. The percentage change for the nine months ended September 30, 1999 compared to September 30, 1998 was lower than the three month change due to lower manufacturing costs associated with the revenue level comparisons described above. RESEARCH AND DEVELOPMENT
Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30, 1999 Change 1998 1999 Change 1998 --------- ---------- --------- --------- ---------- --------- Research and Development $ 7,438 28% $ 5,795 $ 21,973 32% $ 16,674 As a % of Revenues 12% 13% 12% 12%
The dollar increases in research and development expenses were primarily the result of increased investment in new product development, costs of enhancements to existing products and engineers brought on by the ARTIC Business Unit acquisition on March 1, 1999. The Company continues to invest in new design wins for OEM customers and the dollar increases reflect steady increases in the number of employees working in research and development. SELLING, GENERAL AND ADMINISTRATIVE
Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30, 1999 Change 1998 1999 Change 1998 --------- ---------- --------- --------- ---------- --------- Selling, General & Admin. $ 9,385 18% $ 7,937 $ 26,991 16% $ 23,198 As a % of Revenues 15% 18% 15% 17%
Selling, general and administrative expenses have increased in dollar amount in the three and nine months ended September 30, 1999 compared to the three and nine months ended September 30, 1998 primarily as a result of increased personnel, facilities and travel costs to support higher levels of sales associated with the ARTIC business unit acquisition on March 1, 1999 and the Texas Micro merger on August 13, 1999. Selling, general and administrative expenses decreased slightly as a percentage of revenues for the three and nine months ended September 30, 1999 compared to the three and nine months ended September 30, 1998 primarily as a result of higher revenue volumes in 1999. GOODWILL AND INTANGIBLES AMORTIZATION
Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30, 1999 Change 1998 1999 Change 1998 --------- ---------- --------- --------- ---------- --------- Goodwill & Intangibles Amort. $ 722 2,574% $ 27 $ 1,733 6,319% $ 27 As a % of Revenues 1% 0% 1% 0%
Amortization expense relates to goodwill and intangibles recorded in connection with the Sonitech acquisition (Q1 97 - $3.0 million) and the ARTIC acquisition (Q1 99 - $20.7 million). Amortization periods range from five to fifteen years. 13 COMBINATION COSTS
Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30, 1999 Change 1998 1999 Change 1998 --------- ---------- --------- --------- ---------- --------- Combination costs $ 5,971 - $ 0 $ 5,971 - $ 0 As a % of Revenues 9% 0% 3% 0%
Combination costs for the three and nine months ended September 30, 1999 resulted from the Texas Micro merger on August 13, 1999. The Company recorded a charge to operating expenses of approximately $6.0 million for merger-related costs during the third quarter of 1999. Merger and related costs are comprised of the following:
Combination costs Balance recorded quarter accrued as of ending 9/30/99 9/30/99 ----------------- ------------- Professional & filing fees $ 3,251 $ 400 Severance, retention, relocation & benefits alignment 1,538 249 Contract termination costs 799 205 Marketing 226 141 Information systems conversion 83 4 Other miscellaneous 74 0 --------- --------- Total $ 5,971 $ 999 ========= =========
Accrued combination costs totalling $1.0 million at September 30, 1999 are included in other accrued liabilities in the Consolidated Balance Sheet. INTEREST INCOME, OTHER INCOME AND INCOME TAX PROVISION
Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- Sep 30, Percentage Sep 30, Sep 30, Percentage Sep 30, 1999 Change 1998 1999 Change 1998 --------- ---------- --------- --------- ---------- --------- Interest income, net $ 229 (61%) $ 592 $ 936 (43%) $ 1,633 Other income $ 2,007 100%) $ 0 $ 2,007 (100%) $ 0 Income tax provision (benefit) $ 1,147 185% $ 403 $ (1,807) (178%) $ 2,317
Interest income, net, decreased from 1998 due to lower cash and cash equivalents levels primarily associated with the funding of the ARTIC Business Unit acquisition on March 1, 1999 and capital additions. The Company received the final consideration owing in connection with the prior (1996) sale of Texas Micro's Sequoia Enterprise Systems business unit to General Automation. Final consideration consisted of $1.5 million in cash, $750,000 in notes, and 1,133,333 shares of General Automation common stock. The receipt of this consideration resulted in a gain to the Company of $2.2 million in the third quarter of 1999 and is reflected in other income. The Company's effective tax rate for the three months ended September 30, 1999 and 1998 was 54.8% and 21.8% respectively. The increase in the effective tax rate is primarily attributable to expenses of the Texas Micro merger that are capitalized for income tax purposes and not deductible. The tax benefit for the nine months ended September 30, 1999 is the result of a tax benefit recorded in the second quarter of 1999. The Company has accounted for certain changes in the federal income tax laws that were effective on June 25, 1999. The tax law change eliminated some restrictions on the utilization of certain Texas Micro net operating loss 14 carryforwards. Some of the Texas Micro net operating loss carryforwards are now available to offset RadiSys taxable income. The adjustment relating to this tax law change resulted in a decrease to the tax provision for the quarter ended June 30, 1999 and an increase to net income after tax of $5.2 million. YEAR 2000 ISSUES The Company recognizes the importance to its operations of Year 2000 issues and is working to maintain the availability and integrity of its financial systems and the reliability of its operational systems. In that regard, the Company has already attempted to identify all internal information technology ("IT") and non-IT systems which may be affected by the Year 2000 issues, as well as third party IT and non-IT systems that the Company relies upon and the third parties' Year 2000 readiness. Within the last two years the Company has evaluated and upgraded or replaced the software and hardware underlying the Company's internal financial systems, manufacturing equipment and systems, product development tools and systems, internal and external communication systems, and desktop systems, as appropriate, to address Year 2000 readiness issues. The Company has also performed an in-depth analysis of all of its products. An analysis of each product's Year 2000 readiness is provided on the Company's website (http://www.radisys.com/). In addition, the Company has been in contact with all major external third party providers to assess their Year 2000 readiness; this includes third parties who provide financial, payroll, communications, component, and integration services to the Company. Subsequent to performing the above steps, the Company has and will continue to make certain investments in its systems, applications and products to address Year 2000 issues. The Company believes that it has completed the analysis of its Year 2000 readiness, completed the majority of mission-critical system upgrades and replacements it requires to be Year 2000 ready, and is now in the process of upgrading or replacing non-material and non-mission critical applications. The Company expects that it will continue to address Year 2000 readiness issues up to and during the Year 2000, and will react as appropriate to newly-identified issues. The total cost associated with required modifications to become Year 2000 compliant has not been and is not expected to be material to the Company's results of operations, liquidity and financial condition. The above statements contain certain risks and uncertainties. These risks and uncertainties could include the risk of unidentified bugs in the source code of prepackaged or custom software, misrepresentation by third party vendors, unidentified dependency upon a system that is not Year 2000 ready, unidentified non-IT systems, or misdiagnosed Year 2000 readiness in existing systems. Although the Company believes that its efforts described above have significantly reduced the risk that Year 2000 issues could significantly interrupt the Company's normal business operations or adversely affect the performance of the Company's products, due to general uncertainty inherent in the Year 2000 problem and in particular about the readiness of third parties, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had $24.2 million in cash and cash equivalents, which represents the Company's principal source of liquidity. The Company had working capital of approximately $72.8 million. The Company has a $20.0 million line of credit with a bank which expires October 2000. The Company has not drawn any funds under this line of credit. Cash and cash equivalents decreased $19.6 million during the nine months ended September 30, 1999 primarily as a result of the cash paid for the ARTIC Business Unit acquisition ($27.4 million) on March 1, 1999, increases in accounts receivable ($16.7 million), inventories ($10.9 million), deferred income taxes ($2.7 million), capital expenditures ($5.1 million) and capitalized software production costs and other assets ($6.9 million). These cash uses were offset by cash and cash equivalent increases from accounts payable ($21.8 million), net income ($13.2 million), depreciation and amortization ($6.9 million), accrued income taxes ($2.7 million) and other accrued liabilities ($2.1 million). The Company believes that existing cash and cash equivalents and cash from operations and the bank line of credit will be sufficient to fund its current operations for at least the next 12 months. 15 FORWARD-LOOKING STATEMENTS Information contained in this Quarterly Report on Form 10-Q and statements that may be made in the future by the Company's management regarding future industry trends, the Company's expected revenues and anticipated gross margins, the Company's future development and introduction of products, and the Company's future liquidity, development, and business activities constitute forward looking statements that involve a number of risks and uncertainties. The following are among the factors that could cause actual results to differ materially from the forward looking statements: business conditions and growth in the electronics industry and general economies, both domestic and international, including conditions precipitated by the Asian economies; uncertainty of market development; dependence on a limited number of OEM customers; dependence on limited or sole source suppliers; dependence on the relationship with Intel Corporation ("Intel"); dependence on Intel's support of the embedded computer market; lower than expected customer orders or variations in customer order patterns due to changes in demand for customers' products and customer and channel inventory levels; competitive factors, including increased competition, new product offerings by competitors and price pressures; the availability of parts and components at reasonable prices; changes in product mix; dependence on proprietary technology; technological difficulties and resource constraints encountered in developing new products; and product shipment interruptions due to manufacturing difficulties. The forward looking statements contained in this MD&A regarding industry trends, product development and introductions, and liquidity and future business activities should be considered in light of these factors and the risk factors described in the Company's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on July 7, 1999. 16 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Company's Special Meeting on August 12, 1999, the holders of the Company's outstanding Common Stock took the actions described below. At the Special Meeting 7,982,851 shares of Common Stock were issued and outstanding and entitled to vote. The shareholders voted in favor of the issuance of common stock of the Company to Texas Micro stockholders under the terms of the merger agreement among the Company, Texas Micro and Tabor Merger Corp., a wholly owned subsidiary of the Company. 6,396,720 Shares in favor 36,359 Shares against or withheld 50,274 Broker non-votes The shareholders voted in favor of an amendment to the Company's 1995 Stock Incentive Plan to increase the number of shares reserved for issuance under the plan from 2,250,000 to up to 2,750,000 shares. 3,820,097 Shares in favor 2,663,256 Shares against or withheld 0 Broker non-votes Item 6. Exhibits, Reports on Form 8-K (a) Exhibits 2.1 Agreement of Reorganization and Merger dated as of May 24, 1999, between the Company, Texas Micro Inc. and Tabor Merger Corp. Incorporated by reference to Appendix A to the Company's Joint Proxy Statement / Prospectus dated July 7, 1999, which is part of the Company's Registration Statement on Form S-4 (No. 333-82401). 10.1 Renewal of and increase in September 12, 1996 revolving line of credit agreement between the Company and United States National Bank of Oregon dated September 30, 1999. 27 Financial Data Schedule (b) Reports on Form 8-K On August 13, 1999, the Company filed a Form 8-K dated August 13, 1999 reporting Items 2 and 7. 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RADISYS CORPORATION STEPHEN F. LOUGHLIN ----------------------------------------- Date: November 15, 1999 Stephen F. Loughlin Vice President of Finance and Administration and Chief Financial Officer (Authorized officer and Principal Financial Officer) 18 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 2.1 Agreement of Reorganization and Merger dated as of May 24, 1999, between the Company, Texas Micro Inc. and Tabor Merger Corp. Incorporated by reference to Appendix A to the Company's Joint Proxy Statement / Prospectus dated July 7, 1999, which is part of the Company's Registration Statement on Form S-4 (No. 333-82401). 10.1 Renewal of and increase in September 12, 1996 revolving line of credit agreement between the Company and United States National Bank of Oregon dated September 30, 1999. 27 Financial Data Schedule EX-10.1 2 LINE OF CREDIT LETTER [US Bank Logo] September 30, 1999 Mr. Stephen F. Loughlin, Chief Financial Officer RadiSys Corporation 5445 NE Dawson Creek Drive Hillsboro, OR 97124 Dear Stephen: I am pleased to advise you that U.S. Bank, National Association ("Bank") has approved the renewal of, and an increase in, the revolving line of credit for RadiSys Corporation, subject to the following terms and conditions: Borrower: RadiSys Corporation ("RadiSys"). Operating Line of Credit - ------------------------ Purpose: Working Capital and general corporate purposes. Borrowing Limit: $20,000,000 (Twenty Million Dollars) Guarantors: None. Expiry Date: September 30, 2000 or upon non-compliance with any term or condition stated herein, or any material misrepresentation of fact by the Borrower. Pricing: Fees: Upfront Fee of 5 basis points ($ 1 0,000) on the committed amount, due upon acceptance. Quarterly fee of 1/8 of I percent (annualized) based upon the unused portion of the line, due quarterly in arrears. RadiSys Corporation Page 2 September 30, 1999 Commitment Letter Interest Rate: Pricing based upon U.S. Bank, National Association's Prime Rate/1, Bankers' Acceptances ("BA"), or London Interbank Offering Rates ("LIBOR"), at the Borrower's option. The Prime Rate will be fully floating and computed on a 360 day year. The spread over the base rates will be determined quarterly by the Borrower's Total Liabilities / Tangible Net Worth* Ratio as expressed in the chart below. The rate will be adjusted within 5 business days of receipt of either the quarterly I O-Q report or the audited annual financials.
Total Liabilities/ Tangible Net Worth Prime BA or 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 amount of $500,000 and $100,000 increments thereafter. B) Maturity and availability: One, two or three month periods. C) Prepayment of LIBOR borrowings not permitted. D) Notification: Two day notification prior to 12:00 noon on the day of notification. E) Irrevocability: Acceptance of a pricing commitment from the Bank will constitute an irrevocable agreement to borrow under the revolving line of credit. - -------------- 1/ If the interest rate charged to the Borrower is tied to the Prime Rate of U.S. Bank, Borrower is advised that U.S. Bank's Prime Rate is the rate of interest which the Bank from time to time identifies and publicly announces as its Prime Rate and is not necessarily, for example, the lowest rate of interest which the Bank collects from any borrower or group of borrowers. RadiSys Corporation Page 3 September 30, 1999 Commitment Letter F) Interest computed on the basis of a 360 day year and the actual number of days elapsed. * Tangible Net Worth is defined as Total Shareholder's Equity less Intangibles (e.g. Goodwill, Patents, Software development costs, etc.). All other capitalized terms are defined in accordance with GAAP. All reasonable out of pocket expenses for documentation and collateral examination fees to be paid by Borrower. Repayment Terms: Optional advance note. Interest payable monthly, in arrears. Principal due at maturity. Repayment of each advance received by the Borrower under the line of credit is subject to the ten-ns and conditions of the promissory note evidencing that advance as well as all conditions of this letter. In the event of any conflict between the two, the ten-ns and conditions of the promissory note shall control. Collateral: The revolving line of credit provides for a flexible collateral position according to the following matrix. The assets of the Borrower which are referenced below include accounts and inventory. Quick Ratio Collateral ----------- ---------- Greater than 1.50:1.00 Unsecured with negative pledge agreement. Less than or equal to 1.50:1.00 Unsecured with negative pledge, if not borrowing, but converts to secured if ratio falls below 1.50 benchmark for two consecutive quarters. If Borrowing and equal to, or less than 1.50, then the line of credit is secured. Less than or equal to 1.15:1.00 Line is secured and margined at 80% of eligible A/R**. * Quick Ratio is defined as ((Cash plus Trade Accounts Receivable, Net)/(Current Liabilities)) Advances: Advances limited to the Borrowing Limit when Quick Ratio is greater than 1. 15: I.O. When Quick Ratio is less than or equal to 1. 15: 1. 00 the advances will be limited to RadiSys Corporation Page 4 September 30, 1999 Commitment Letter 80% of eligible A/R to 90 days after date of invoice. Ineligible accounts will be datings, COD or cash sales, inter-company, employee, progress billings, consignments, retainage, potential offset and accounts where more than 25% of the balance is beyond 90 days after date of invoice. Foreign accounts receivable will be considered eligible at the discretion of the Bank. Disbursements under the line of credit shall terminate on the earlier occurrence of the date indicated above as the Expiry Date or the date on which this Bank, in its sole discretion, determines that there has been a material adverse change in the financial condition or management of the Borrower, or determines that there has been any noncompliance with any term or condition stated herein. Noncompliance with the conditions and terms of this letter of will be considered as an event of default, entitling the Bank to all the default provisions as provided for in documents evidencing this line of credit. General Conditions: - ------------------- Covenants: The following covenants will be measured quarterly: 1. Minimum Current Ratio: The ratio of Current Assets to Current Liabilities not to be less than 2.00 to 1.00. 2. Maximum Leverage Ratio: The ratio of Total Liabilities to Tangible Net Worth not to be more than 0.75 to 1.00. 3. Minimum Tangible Net Worth: Tangible Net Worth shall not be less than $75,000,000. Failure to comply with any the above listed covenants constitutes an event of default under the terms of the Bank's documents. Financial Reporting: 1. Audited annual financial statements. 2. Quarterly interim financial statements and all material documents filed with the SEC. RadiSys Corporation Page 5 September 30, 1999 Commitment Letter RadiSys Corporation Page 5 September 30, 1999 Commitment Letter 3. If the Quick Ratio (as defined above) falls below 1. 1 5 to 1.00: A borrowers certificate with each advance, and a borrowers certificate to accompany the monthly A/R and A/P agings. Additionally, if a Bank Collateral Survey is performed then further refinement of the advance structure may be necessary. Documentation: Execution of notes, loan agreements, borrowing resolutions, incumbency certificates and other documents as required by the Bank on forms prepared by the Bank. If the above terms and conditions to extend credit to RadiSys Corporation are acceptable to you, please sign and return the acknowledgment copy of this letter on or before October 15, 1999. We are pleased to provide you this borrowing accommodation and look forward to serving your banking needs in the future. Respectfully, ROSS A. BEATON Ross A. Beaton Vice President BY OREGON STATUE (ORS 41.580), THE FOLLOWING DISCLOSURE IS REQUIRED: UNDER OREGON LAW MOST AGREEMENTS PROMISES AND COMMITMENTS MADE BY LENDERS AFTER OCTOBER 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER TO BE ENFORCEABLE RadiSys Corporation Page 6 September 30, 1999 Commitment Letter THE UNDERSIGNED HEREBY ACKNOWLEDGES AND ACCEPTS THIS OFFER TO EXTEND CREDIT SUBJECT TO THE TERMS AND CONDITIONS STATED ABOVE. RadiSys Corporation BY: STEPHEN F. LOUGHLIN CFO September 30, 1999 -------------------------- ------------------ Title Date EX-27 3 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 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 24,242 0 50,403 948 44,757 124,929 19,251 21,067 175,639 52,125 0 0 0 136,099 (12,585) 175,639 178,145 178,145 113,023 56,668 0 0 2,943 11,397 (1,807) 13,204 0 0 0 13,204 1.23 1.18
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