10-Q 1 a10-q.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 JUNE 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-26844 ------------------------ RADISYS CORPORATION (Exact name of registrant as specified in its charter) OREGON 93-0945232 (State or other jurisdiction (I.R.S. Employer of organization or incorporation) Identification Number)
5445 NE DAWSON CREEK DRIVE HILLSBORO, OR 97124 (Address of principal executive offices, including zip code) (503) 615-1100 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 10, 2000 WAS 17,073,746. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- RADISYS CORPORATION PART I. FINANCIAL INFORMATION
PAGE NO. -------- Item 1. Consolidated Financial Statements 3 Consolidated Balance Sheet--June 30, 2000 and December 31, 1999...................................................... 4 Consolidated Statement of Operations--Three months ended June 30, 2000 and 1999, and six months ended June 30, 2000 and 1999.................................................. 5 Consolidated Statement of Changes In Shareholders' Equity--December 31, 1999 through June 30, 2000........... 6 Consolidated Statement of Cash Flows--Six months ended June 30, 2000 and 1999......................................... 7 Notes to Consolidated Financial Statements.................. Item 2. Management's Discussion and Analysis of Financial Condition 12 and Results of Operations................................. Item 3. Quantitative and Qualitative Disclosures about Market 16 Risk...................................................... 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............................ 18 Signatures............................................................... 19
2 RADISYS CORPORATION CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents............................... $ 42,391 $ 15,708 Accounts receivable, net................................ 68,858 58,619 Inventories, net........................................ 46,234 41,374 Other current assets.................................... 2,122 1,747 Deferred income taxes................................... 3,814 4,723 -------- -------- Total current assets.................................. 163,419 122,171 Property and equipment, net............................. 21,360 21,211 Goodwill and intangible assets, net..................... 32,485 34,177 Other assets............................................ 11,434 10,004 -------- -------- Total assets.......................................... $228,698 $187,563 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable........................................ $ 32,979 $ 19,878 Short term borrowings................................... 13,931 13,931 Income taxes payable.................................... 4,429 3,527 Accrued wages and bonuses............................... 8,771 6,706 Other accrued liabilities............................... 8,688 9,266 -------- -------- Total liabilities..................................... 68,798 53,308 -------- -------- Shareholders' equity Common stock, 100,000 shares authorized, 17,018 and 16,489 shares issued and outstanding....... 152,431 141,030 Accumulated other comprehensive income (loss): Cumulative translation adjustment..................... (1,538) (1,546) Unrealized gain (loss) on securities available for sale................................................ 410 (349) Accumulated earnings (deficit).......................... 8,597 (4,880) -------- -------- Total shareholders' equity............................ 159,900 134,255 -------- -------- Total liabilities and shareholders' equity............ $228,698 $187,563 ======== ========
The accompanying notes are an integral part of this statement. 3 RADISYS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED --------------------- --------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- ---------- -------- ---------- (RESTATED) (RESTATED) Revenues........................................... $86,170 $61,351 $167,463 $114,049 Cost of goods sold................................. 55,635 38,440 108,070 72,299 ------- ------- -------- -------- Gross profit....................................... 30,535 22,911 59,393 41,750 Research and development........................... 9,306 7,873 18,286 14,535 Selling, general and administrative................ 9,707 9,101 19,249 17,606 Goodwill and intangibles amortization.............. 1,727 712 3,451 1,011 ------- ------- -------- -------- Income from operations............................. 9,795 5,225 18,407 8,598 Interest income, net............................... 260 269 203 707 Other income (expense)............................. (232) (38) 606 -- ------- ------- -------- -------- Income before income tax provision................. 9,823 5,456 19,216 9,305 Income tax provision (benefit)..................... 2,977 (3,886) 5,739 (2,954) ------- ------- -------- -------- Net income......................................... $ 6,846 $ 9,342 $ 13,477 $ 12,259 ======= ======= ======== ======== Net income per share (basic)....................... $ 0.40 $ 0.58 $ 0.80 $ 0.77 ======= ======= ======== ======== Net income per share (diluted)..................... $ 0.38 $ 0.55 $ 0.74 $ 0.73 ======= ======= ======== ========
The accompanying notes are an integral part of this statement. 4 RADISYS CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED)
COMMON STOCK CUMULATIVE UNREALIZED ACCUMULATED TOTAL OTHER ------------------- TRANSLATION GAIN/(LOSS) EARNINGS COMPREHENSIVE SHARES AMOUNT ADJUSTMENT ON SECURITIES (DEFICIT) TOTAL INCOME -------- -------- ----------- ------------- ------------ -------- -------------- Balances, December 31, 1999........ 16,489 $141,030 $(1,546) $(349) $(4,880) $134,255 Shares issued pursuant to benefit plans............................ 529 7,862 7,862 Tax effect of Options exercised.... 3,539 3,539 Translation adjustment............. 8 8 8 Unrealized gain on securities...... 759 759 759 Net income for the period.......... 13,477 13,477 13,477 ------ -------- ------- ----- ------- -------- ------- Balances, June 30, 2000............ 17,018 $152,431 $(1,538) $ 410 $ 8,597 $159,900 ====== ======== ======= ===== ======= ======== Total other comprehensive income, six months ended June 30, 2000... $14,244 =======
The accompanying notes are an integral part of this statement. 5 RADISYS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED ----------------------------- JUNE 30, 2000 JUNE 30, 1999 ------------- ------------- (RESTATED) Cash flows from operating activities: Net Income................................................ $ 13,477 $ 12,259 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization........................... 8,496 4,257 Gain on sale of assets.................................. (856) -- Deferred income taxes................................... 909 (6,135) Net changes in current assets and current liabilities:.......................................... -- Decrease (increase) in accounts receivable............ (10,239) (9,204) Decrease (increase) in other receivables.............. -- 110 Decrease (increase) in inventories.................... (4,860) (459) Decrease (increase) in other current assets........... (375) (1,025) Increase (decrease) in accounts payable............... 13,101 6,169 Increase (decrease) in income taxes payable........... 902 1,158 Increase (decrease) in accrued wages and bonuses...... 2,065 1,156 Increase (decrease) in other accrued liabilities...... (505) 499 -------- -------- Net cash provided by operating activities............... 22,115 8,785 -------- -------- Cash flows from investing activities: Business acquisitions..................................... (1,761) (27,505) Capital expenditures...................................... (3,712) (2,844) Sale of assets............................................ 350 -- Capitalized software production costs and other assets.... (1,645) (1,755) -------- -------- Net cash used for investing activities.................. (6,768) (32,104) -------- -------- Cash flows from financing activities: Issuance of common stock, net............................. 11,401 2,377 Payments on capital lease obligation...................... (73) (151) -------- -------- Net cash provided by financing activities............... 11,328 2,226 -------- -------- Effect of exchange rate changes on cash..................... 8 (350) -------- -------- Net increase (decrease) in cash and cash equivalents........ 26,683 (21,443) Cash and cash equivalents, beginning of period.............. 15,708 43,792 -------- -------- Cash and cash equivalents, end of period.................... $ 42,391 $ 22,349 ======== ========
The accompanying notes are an integral part of this statement. 6 RADISYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) JUNE 30, 2000 1. BASIS OF PRESENTATION 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. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, which are located in Western Europe, Israel, and Japan. The accompanying consolidated financial statements are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of results for the interim periods. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. The results of operations for interim periods are not necessarily indicative of the results for the entire year. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates and judgements made by management of the Company include matters such as collectibility of accounts receivable, realizability of inventories and recoverability of capitalized software and deferred tax assets. NEW PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the impact of SAB 101 will have no material effect on the financial position or results of operations of the Company. RECLASSIFICATIONS Reclassifications have been made to certain amounts in prior years. These changes had no impact on previously reported results of operations or shareholders' equity. CASH FLOWS Non cash investing and financing activities include the effect of the change in market value of the Company's available for sale investment in General Automation common stock. The impact was a 7 decrease of $1.7 million, net of tax, to unrealized gain on securities available for sale and long-term assets for the three month period ended June 30, 2000 and an increase of $.8 million, net of tax, for the six month period ended June 30, 2000. 2. ACCOUNTS RECEIVABLE Trade accounts receivable are net of an allowance for doubtful accounts of $941 and $933 at June 30, 2000 and December 31, 1999, respectively. The Company's customers are concentrated in the technology industry. 3. INVENTORIES Inventories consist of the following:
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Raw materials.......................................... $36,246 $30,986 Work in process........................................ 3,935 2,465 Finished goods......................................... 6,053 7,923 ------- ------- $46,234 $41,374 ======= =======
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Land................................................... $ 1,391 $ 1,391 Manufacturing equipment................................ 18,882 17,950 Office equipment....................................... 22,190 19,746 Leasehold improvements................................. 4,924 4,835 ------- ------- 47,387 43,922 Less: accumulated depreciation......................... 26,027 22,711 ------- ------- $21,360 $21,211 ======= =======
5. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets decreased by $1.7 million, net from $34.2 million at December 31, 1999 to $32.5 million at June 30, 2000. Goodwill and intangibles increased by $1.7 million resulting from increased purchase price recorded for the OCP acquisition based upon a formula tied to certain OCP revenues pursuant to the acquisition agreement. This increase was offset by $3.4 million in amortization of goodwill and other intangible assets. 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 and warrants) outstanding during the periods, computed using the treasury stock method for stock options and warrants. 8 Weighted average shares consist of the following:
THREE MONTHS SIX MONTHS ENDED ENDED ------------------- ------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- -------- -------- -------- Weighted average shares (basic)............................ 16,905 16,132 16,788 16,017 Effect of dilutive stock options........................... 1,288 726 1,411 702 ------ ------ ------ ------ Weighted average shares (diluted).......................... 18,193 16,858 18,199 16,719 ====== ====== ====== ======
7. SEGMENT INFORMATION The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company's chief operating decision maker is considered to be the President and Chief Executive Officer ("CEO"). The Company's CEO evaluates both consolidated and disaggregated financial information in deciding how to allocate resources and assess performance. The CEO receives certain disaggregated information for three operating divisions within the Company. The Company has aggregated divisional results of operations into a single reportable segment as allowed under SFAS 131 because divisional results of operations reflect similar long-term economic characteristics, including average gross margins. Additionally, the divisional operations are similar with respect to the nature of products sold, types of customers, production processes employed and distribution methods used. Accordingly, the Company describes its reportable segment as designing and manufacturing embedded computing solutions. All of the Company's revenues result from sales within this segment. Information about the Company's geographic operations and sales is as follows:
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED ------------------- ------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, REVENUE 2000 1999 2000 1999 ------- -------- -------- -------- -------- COUNTRY United States......................... $49,459 $42,393 $ 95,760 $ 79,537 Europe................................ 34,299 18,396 67,001 32,559 Asia Pacific--Japan................... 2,412 562 4,230 1,226 Other foreign......................... -- -- 472 727 ------- ------- -------- -------- $86,170 $61,351 $167,463 $114,049 ======= ======= ======== ========
JUNE 30, DECEMBER 31, LONG LIVED ASSETS 2000 1999 ----------------- -------- ------------ COUNTRY United States.......................................... $20,308 $20,724 Europe................................................. 988 404 Asia Pacific--Japan.................................... 64 83 ------- ------- $21,360 $21,211 ======= =======
9 One customer accounted for $10.8 million, or 12.5%, of total revenue for the three months ended June 30, 2000 and $22.8 million, or 13.6%, of total revenue for the six months ended June 30, 2000. No other customers accounted for more than 10% of total revenue for the three months or the six months ended June 30, 2000. 8. MERGER WITH TEXAS MICRO AND RELATED CHARGES In connection with the merger of Texas Micro Inc. on August 13, 1999, the Company recorded a charge to operating expenses of approximately $6.0 million for merger-related costs during 1999. Merger and related costs are comprised of the following:
COMBINATION COSTS BALANCE RECORDED YEAR ENDED ACCRUED AS OF DECEMBER 31, 1999 JUNE 30, 2000 ------------------- ------------- Professional & filing fees.................... $3,251 $ 9 Severance, retention, relocation & benefits alignment................................... 1,538 161 Contract termination costs.................... 799 117 Marketing, information systems conversion, and other miscellaneous costs................... 383 24 ------ ---- Total......................................... $5,971 $311 ====== ====
Accrued combination costs totaling $311 at June 30, 2000 are included in Other accrued liabilities in the Consolidated Balance Sheet. 9. GAIN ON SALE OF ASSETS During the first quarter of 2000 the Company sold a total of 367 shares of General Automation common stock resulting in a recorded net gain of $856. This gain is reflected in Other income in the Consolidated Statement of Operations. There were no sales of assets during the second quarter of 2000. 10. ACQUISITIONS AND MERGERS ARTIC BUSINESS UNIT ACQUISITION On March 1, 1999, the Company purchased certain assets of International Business Machines Corporation ("IBM") dedicated to the design, manufacture and sale of IBM's ARTIC communications coprocessor adapter hardware and software for wide area network and other telephony applications ("ARTIC"). The purchase price aggregated $27.0 million in cash consideration. The acquisition of ARTIC was accounted for using the purchase method. The results of operations for ARTIC have been included in the financial statements since the date of acquisition. The aggregate purchase price of $27.5 million included $.6 million of direct costs of acquisition and was allocated to fixed assets ($.4 million), inventories ($6.5 million), patents ($5.0 million) and the remainder to goodwill. OCP BUSINESS UNIT ACQUISITION On December 28, 1999, the Company purchased certain assets of IBM's Open Computing Platform (OCP) operation. OCP develops and sells integrated computer-based solutions based on Intel architecture, primarily to OEM's of telecommunications equipment. The purchase price consisted of an aggregate of $13.9 million in cash consideration. The acquisition of OCP was accounted for using the purchase method. The results of operations of OCP have been included in the financial statements since the date of acquisition. The aggregate purchase price recorded as of December 31, 1999 of $14.1 million included $.1 million direct costs of acquisition and $.1 million of contingent consideration and was allocated to fixed assets ($.2 million), inventories ($.9 million) and the remainder to goodwill. 10 Pursuant to the terms of this agreement, the Company may be required to make additional future payments in March of 2001, 2002, and 2003 based upon a formula tied to future OCP revenues. Accordingly, during the three months ended June 30, 2000 the Company recorded an additional $.7 million in purchase price resulting from OCP revenues during the quarter. During the six months ended June 30, 2000, the Company recorded a total of $1.7 million in additional purchase price resulting from OCP revenues. The additional purchase price has been recorded as goodwill. The total consideration for the acquisition is limited to $30.0 million. UNAUDITED PRO FORMA DISCLOSURES OF ACQUISITIONS The following unaudited pro forma information presents the results of operations of the Company as if the acquisitions described above had occurred as of the beginning of 1999, after giving effect to adjustments of amortization of patents and goodwill, estimated reduction of interest income and the estimated impact on the income tax provision. The unaudited pro forma information is not necessarily indicative of what actual results would have been had the ARTIC and OCP acquisitions occurred at the beginning of the respective period. 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 December 28, 1999 for ARTIC and OCP, respectively, and the Current Reports of the Company on Form 8-K/A filed April 22, 1999 and March 10, 2000, respectively.
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1999 JUNE 30, 1999 -------------- -------------- (UNAUDITED) (UNAUDITED) Revenues........................................... $71,830 $147,237 Net Income......................................... 10,332 16,561 Net income per share (basic)....................... .64 1.03 Net income per share (diluted)..................... .61 0.99
11. SUBSEQUENT EVENTS During August 2000, the Company issued $100 million aggregate principal amount of convertible subordinated notes at a stated interest rate of 5.5% per annum due August 2007. The notes are convertible into the Company's common stock at the option of the holders at a conversion rate of 67.8038 per share. The Company may use a portion of the net proceeds to acquire or invest in complementary businesses, products or technologies when the opportunity arises. The Company has no understandings, commitments or agreements with respect to any acquisition. The Company expects to use the net proceeds from this offering to fund expansion and repay debt and for general corporate purposes, including capital expenditures and working capital. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS) OVERVIEW Total revenue was $86.2 million for the three months ended June 30, 2000 compared to $61.4 million for the three months ended June 30, 1999 and $167.5 million for the six months ended June 30, 2000 compared to $114.0 million for the six months ended June 30, 1999. Net income was $6.8 million for the three months ended June 30, 2000 compared to $9.3 million for the three months ended June 30, 1999, and $13.5 million for the six months ended June 30, 2000 compared to $12.3 million for the six months ended June 30, 1999. During 1999, the Company merged with one company (Texas Micro in August 1999) and acquired assets in two other transactions (ARTIC in March 1999 and OCP in late December 1999) in order to expand the expertise the Company believes it needs to compete effectively in the communications market. These acquisitions have resulted in increased sales volume as well as increased operating and manufacturing capacity through both internal and external sources. Additionally, the merger with Texas Micro has resulted in certain operating efficiencies. Therefore, total operating expenses have increased in dollar volume but efficiencies combined with increased sales volume have resulted in a decrease of operating expenses as a percentage of revenue for the three months ended and six months ended June 30, 2000. The Company expects to continue to acquire companies and technologies that are complementary to the Company's business and product offerings. REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- -------------------------------- JUNE 30, PERCENTAGE JUNE 30, JUNE 30, PERCENTAGE JUNE 30, 2000 CHANGE 1999 2000 CHANGE 1999 -------- ---------- -------- -------- ---------- -------- Revenues........................ $86,170 40% $ 61,351 $167,463 47% $114,049
Revenues increased by $24.8 million or 40% for the three months ended June 30, 2000 compared to the three months ended June 30, 1999 and $53.4 million or 47% for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. The increase in revenues is due to growth within existing product lines and movement into higher growth markets, primarily communications. In addition, revenue in the six months ended June 30, 2000 includes revenues from the Company's 1999 acquisitions (ARTIC in March 1999 and OCP in late December 1999) for the entire period. The Company's top five customers collectively represented approximately 43% and 40% of revenue for the three months and six months ended June 30, 2000, respectively. COST OF GOODS SOLD
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- -------------------------------- JUNE 30, PERCENTAGE JUNE 30, JUNE 30, PERCENTAGE JUNE 30, 2000 CHANGE 1999 2000 CHANGE 1999 -------- ---------- -------- -------- ---------- -------- Cost of goods sold................ $55,635 45% $38,440 $108,070 49% $72,299 As a % of revenues................ 65% 63% 65% 63%
Cost of goods sold increased by $17.2 million or 45% for the three months ended June 30, 2000 compared to the three months ended June 30, 1999 and $35.8 million or 49% for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. This was primarily as a result of 12 increased revenues. The slight increase in cost of goods sold as a percentage of revenues for the three months ended and the six months ended June 30, 2000 is due to the change in product mix in 2000 compared to 1999. RESEARCH AND DEVELOPMENT
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- -------------------------------- JUNE 30, PERCENTAGE JUNE 30, JUNE 30, PERCENTAGE JUNE 30, 2000 CHANGE 1999 2000 CHANGE 1999 -------- ---------- -------- -------- ---------- -------- Research and development............ $9,306 18% $7,873 $18,286 26% $14,535 As a % of revenues.................. 11% 13% 11% 13%
Although overall research and development expenses have increased, they have declined by almost 2% as a percentage of revenue for the three months ended and six months ended June 30, 2000 compared to the three months ended and six months ended June 30, 1999. This percentage decline can is primarily attributable to increased efficiencies as a result of the integration of Texas Micro. In addition, the impact of the OCP acquisition resulted in lower research and development costs as a percentage of revenues, because OCP's business model incorporated lower R&D expenses as a percentage of revenues. SELLING, GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- -------------------------------- JUNE 30, PERCENTAGE JUNE 30, JUNE 30, PERCENTAGE JUNE 30, 2000 CHANGE 1999 2000 CHANGE 1999 -------- ---------- -------- -------- ---------- -------- Selling, general & administrative... $9,707 7% $9,101 $19,249 9% $17,606 As a % of revenues.................. 11% 15% 11% 15%
Selling, general and administrative (SG&A) expenses as a percentage of revenues have declined by 4% for the three months ended and six months ended June 30, 2000 compared to the three months ended and six months ended June 30, 1999. The decline is largely a result of the integration of Texas Micro into the Company. For example, the Company experienced significant savings by combining the sales organizations and eliminating manufacturing representatives in the Texas Micro model, as well as the impact of significantly greater revenue volumes. In addition, the OCP acquisition resulted in lower SG&A expenses, as OCP's business model incorporated lower SG&A expenses as a percentage of revenues. GOODWILL AND INTANGIBLES AMORTIZATION
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- -------------------------------- JUNE 30, PERCENTAGE JUNE 30, JUNE 30, PERCENTAGE JUNE 30, 2000 CHANGE 1999 2000 CHANGE 1999 -------- ---------- -------- -------- ---------- -------- Goodwill & intangibles amortization... $1,727 143% $712 $3,451 241% $1,011 As a % of revenues.................... 2% 1% 2% 1%
Goodwill amortization expense increased by $1.0 million for the three months ended June 30, 2000, compared to the three months ended June 30, 1999, and increased $2.4 million for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. This is a result of the ARTIC acquisition in March 1999 and the OCP acquisition in December 1999. Amortization of these amounts commenced in the three months ended March 31, 1999 and the three months ended March 31, 2000, respectively. Amortization periods for goodwill and intangibles range from five to fifteen years. 13 INTEREST INCOME, OTHER INCOME AND INCOME TAX PROVISION
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------------- ----------------------------------- JUNE 30, PERCENTAGE JUNE 30, JUNE 30, PERCENTAGE JUNE 30, 2000 CHANGE 1999 2000 CHANGE 1999 -------- ---------- -------- -------- ---------- -------- Interest income, net................. $ 260 (3)% $ 269 $ 203 (71)% $ 707 Other income (expense), net.......... $ (232) 511 % $ (38) $ 606 N/A $ -- Income tax provision (benefit)....... $2,977 177% $(3,886) $5,739 294% $(2,954)
Net interest income, decreased $504 for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. This decrease is primarily due to the lower cash and cash equivalents levels resulting from the funding of the ARTIC Business Unit acquisition on March 1, 1999 and increased interest expense as a result of the $13.9 million line of credit outstanding during the six months ended June 30, 2000 at an interest rate of 8.5%. Other income, net increased by $606 for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. This increase is primarily due to the sale of 367 shares of General Automation common stock, which resulted in a recorded gain of $856. This gain was offset by approximately $200 of foreign exchange currency expense. The increase in the income tax provision is attributable to increased net income before taxes of $9.9 million for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. Additionally, the effective income tax rate for the six months ended June 30, 2000 as 30% compared to (32)% for the six months ended June 30, 1999. The lower rate in 1999 is attributed to the a favorable impact from income tax law changes and a resulting net operating loss benefit. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, the Company had $42.4 million in cash and cash equivalents and working capital of approximately $94.6 million. The Company has a $20.0 million line of credit with a bank which expires September, 2000. As of June 30, 2000, $13.9 million was outstanding under this arrangement at an interest rate of 8.5%. Amounts outstanding under the line of credit accrue interest at an annual rate equal to the lower of the LIBOR plus 1.25% to 2.0% or the lender's prime rate (9.5% at June 30, 2000). Cash and cash equivalents increased by $26.7 million in the six months ended June 30, 2000, and decreased by $21.4 in the six months ended June 30, 1999. Activities impacting cash and cash equivalents are as follows:
SIX MONTHS ENDED ------------------- JUNE 30, JUNE 30, 2000 1999 -------- -------- Cash provided by operating activities...................... $22.1 $ 8.8 Cash used for investing activities......................... (6.8) (32.1) Cash provided by financing activities...................... 11.3 2.2 Effect of exchange rate changes on cash.................... .1 (.3) ----- ------- Net increase (decrease).................................... $26.7 $ (21.4) ===== =======
In addition to net income of $13.5 million plus depreciation and amortization of $8.5 million, significant changes in balance sheet accounts contributed to the increase in cash from operations for the six months ended June 30, 2000 as compared to the six months ended June 30, 1999. The increase in cash included an increase in accounts payable of $13.1 million, partially offset by an increase in accounts receivable of $10.2 million. Significant investing and financing activities impacting cash 14 included $5.4 million in capital expenditures and capital software additions, and $11.4 million in proceeds from common stock issuances. Capital expenditures were primarily for the purchase of furniture and office equipment, computer hardware, manufacturing and engineering equipment, and the implementation of SAP applications. Capital expenditures for 2000 are expected to range from $7.0 million to $9.0 million, resulting in part from the Company's plan to continue increasing its manufacturing capacities and investments in information systems. Investing activities for the quarter ending June 30, 1999, primarily consisted of the ARTIC acquisition of $27.5 million. During August 2000, the Company issued $100 million aggregated principal amount of convertible subordinated notes at a stated interest rate of 5.5% per annum due August 2007. The notes are convertible into the Company's common stock at the option of the holders at a conversion rate of $67.8038 per share. The Company may use a portion of the net proceeds to acquire or invest in complementary businesses, products or technologies when the opportunity arises. The Company has no understandings, commitments or agreements with respect to any acquisition. The Company expects to use the net proceeds from this offering to fund expansion and repay debt and for general corporate purposes, including capital expenditures and working capital. The Company believes its existing cash and cash equivalents and cash from operations will be sufficient to fund its current operations for at least the next 12 months. Because the Company's capital requirements cannot be predicted with certainty, there is no assurance that the Company will not require additional financing before the expiration of 12 months. FORWARD-LOOKING STATEMENTS Statements and information in this Quarterly Report on Form 10-Q and the statements the Company's management may make, from time to time concerning the Company's future liquidity, development, business activities, potential acquisitions and capital expenditures constitute forward-looking statements that involve a number of risks and uncertainties. The following are among the factors that could cause actual results to differ materially: - dependence on the relationship with Intel Corporation and its products; - lower than expected sales in the communications market; - lower than expected design wins with key OEMs; - failure of leading OEMs to incorporate the Company's solutions in successful products; - deliveries of products containing errors, defects and bugs; - dependence on a limited number of suppliers or, in some cases, one supplier for components and equipment used to manufacture products; - difficulties in integrating acquired businesses and assets, including Texas Micro; - competition in the embedded computer market, which may lead to pricing pressures; - political, economic and regulatory risks associated with international operations; - technological developments; - the inability to protect the Company's intellectual property or successfully to defend against infringement claims by others; - availability of qualified personnel; - business conditions in the general economy and in the markets the Company serves; 15 - technological difficulties and resource constraints encountered in developing new products; and - difficulty or inability to meet our obligations to repay indebtedness. The forward-looking statements should be considered in light of these factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers. The Company attempts to protect and preserve its invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates and the Company may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. FOREIGN CURRENCY RISK. The Company pays the expenses of its international operations in local currencies. The Company's international operations are subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The Company is also exposed to foreign exchange rate fluctuations as they relate to operating expenses as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of foreign exchange rate fluctuations on the Company for the six months ended June 30, 2000 or the year ended December 31, 1999 was not material. 16 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting on May 16, 2000, the holders of the Company's outstanding Common Stock took the actions described below. As of the record date for the Annual Meeting, 16,853,421 shares of Common Stock were issued and outstanding and entitled to vote. 1. The shareholders elected each of Dr. Glenford J. Myers, James F. Dalton, Richard J. Faubert, C. Scott Gibson, Jean-Pierre D. Patkay and Jean-Claude Peterschmitt to the Company's Board of Directors, by the votes indicated below, to serve for the ensuing year. DR. GLENFORD J. MYERS
14,522,810 shares in favor 186,174 shares against or withheld 0 abstentions 0 broker nonvotes
JAMES F. DALTON
14,481,006 shares in favor 227,978 shares against or withheld 0 abstentions 0 broker nonvotes
RICHARD J. FAUBERT
14,479,873 shares in favor 229,111 shares against or withheld 0 abstentions 0 broker nonvotes
C. SCOTT GIBSON
14,481,016 shares in favor 227,968 shares against or withheld 0 abstentions 0 broker nonvotes
JEAN-PIERRE D. PATKAY
14,522,697 shares in favor 186,287 shares against or withheld 0 abstentions 0 broker nonvotes
JEAN-CLAUDE PETERSCHMITT
14,520,195 shares in favor 188,789 shares against or withheld 0 abstentions 0 broker nonvotes
17 2. The shareholders adopted, by the vote indicated below, an amendment to the Company's Second Restated Articles of Incorporation to increase the number of authorized shares of Common Stock of the Company from 50,000,000 to 100,000,000. 13,452,482 shares in favor 1,100,138 shares against or withheld 156,364 abstentions 0 broker nonvotes
3. The shareholders adopted, by the vote indicated below, amendments to the Company's 1995 Stock Incentive Plan to (a) increase the number of shares of Common Stock of the Company that may be issued pursuant to the plan from 4,125,000 to 5,425,000, (b) include in the plan a provision that shareholder approval is required before any option or stock appreciation right granted under the plan may be repriced, replaced and regranted through the cancellation and reissuance of the option or stock appreciation right at a lower exercise price, or by lowering the exercise price of a previously granted option or stock appreciation right, and (c) clarify that incentive stock options can be granted to both employees of the Company and employees of the Company's subsidiaries. 6,148,508 shares in favor 5,786,745 shares against or withheld 164,222 abstentions 2,609,509 broker nonvotes
4. The shareholders adopted, by the vote indicated below, an amendment to the Company's 1996 Employee Stock Purchase Plan to increase the number of shares of Common Stock of the Company that may be issued pursuant to the Plan from 750,000 shares to 1,250,000. 11,716,437 shares in favor 218,498 shares against or withheld 164,540 abstentions 2,609,509 broker nonvotes
ITEM 6. EXHIBITS (a) Exhibits 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 Statement No. 33-95892). 3.2 Amendment to Second Restated Articles of Incorporation. 10.1 1995 Stock Incentive Plan, as amended. 10.2 1996 Employee Stock Purchase Plan, as amended. 27 Financial Date Schedule.
(b) Reports on Form 8-K None. 18 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 11, 2000 RADISYS CORPORATION By: /s/ STEPHEN F. LOUGHLIN ----------------------------------------- Stephen F. Loughlin VICE PRESIDENT OF FINANCE AND ADMINISTRATION AND CHIEF FINANCIAL OFFICER (Authorized officer and Principal Financial Officer)
19 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ------------------------------------------------------------ 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 Statement No. 33-95892). 3.2 Amendment to Second Restated Articles of Incorporation. 10.1 1995 Stock Incentive Plan, as amended. 10.2 1996 Employee Stock Purchase Plan, as amended. 27 Financial Data Schedule.
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