10-Q 1 r_q106.txt QUARTERLY REPORT, 6-30-2001 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, 2001 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 9, 2001 was 17,294,447. RADISYS CORPORATION PART I. FINANCIAL INFORMATION
Page No. -------- Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheet - June 30, 2001 and December 31, 2000 3 Consolidated Statement of Operations - Three months ended June 30, 2001 and 2000, and six months ended June 30, 2001 and 2000 4 Consolidated Statement of Changes in Shareholders' Equity - December 31, 2000 through June 30, 2001 5 Consolidated Statement of Cash Flows - Six months ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 25 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27
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RadiSys Corporation Consolidated Balance Sheet (in thousands) June 30, December 31, 2001 2000 (Unaudited) --------------- --------------- ASSETS Current assets Cash and cash equivalents $ 60,862 $ 124,086 Short term investments 63,978 9,799 Accounts receivable, net 44,898 68,241 Inventories, net 50,480 53,247 Other current assets 6,321 2,783 Deferred income taxes 6,680 4,682 --------------- --------------- Total current assets 233,219 262,838 Property and equipment, net 24,478 28,128 Goodwill and intangible assets, net 32,388 30,444 Other assets 16,770 12,593 --------------- --------------- Total assets $ 306,855 $ 334,003 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 21,424 $ 32,602 Accrued restructuring 6,197 - Accrued interest payable 2,062 2,185 Income taxes payable 235 5,642 Accrued wages and bonuses 5,610 7,876 Other accrued liabilities 9,006 9,176 --------------- --------------- Total current liabilities 44,534 57,481 Convertible subordinated notes 97,338 97,191 --------------- --------------- Total liabilities 141,872 154,672 --------------- --------------- Shareholders' equity Common stock, 100,000 shares authorized, 17,255 and 17,070 shares issued and outstanding 156,997 153,482 Retained earnings 9,826 27,766 Accumulated other comprehensive income (loss): Cumulative translation adjustment (1,867) (1,917) Unrealized gain on securities available for sale 27 - --------------- -------------- Total shareholders' equity 164,983 179,331 --------------- --------------- Total liabilities and shareholders' equity $ 306,855 $ 334,003 =============== ===============
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, 2001 2000 2001 2000 ------------- --------------- ------------ ------------ Revenues $ 61,803 $ 86,170 $ 117,962 $ 167,464 Cost of sales 51,513 55,635 97,924 108,071 ------------- --------------- ------------- ------------ Gross profit 10,290 30,535 20,038 59,393 Research and development 9,167 9,306 18,451 18,286 Selling, general and administrative 8,708 9,707 18,114 19,249 Goodwill and intangibles amortization 1,656 1,727 3,212 3,451 Restructuring charges 3,219 - 13,062 - ------------- --------------- ------------- ------------ Income (loss) from operations (12,460) 9,795 (32,801) 18,407 Interest income, net 70 260 594 203 Other income (expense), net (17) (232) (724) 606 -------------- ---------------- -------------- ------------ Income (loss) before income tax provision (benefit) (12,407) 9,823 (32,931) 19,216 Income tax provision (benefit) (2,945) 2,977 (14,991) 5,739 -------------- ----------- -------------- ------------ Net income (loss) $ (9,462) $ 6,846 $ (17,940) $ 13,477 ============== =============== ============== ============ Net income (loss) per share (basic) $ (0.55) $ 0.40 $ (1.04) $ 0.80 ============== =============== ============== ============ Net income (loss) per share (diluted) $ (0.55) $ 0.38 $ (1.04) $ 0.74 ============= =============== ============ ============
The accompanying notes are an integral part of this statement. 4
RadiSys Corporation Consolidated Statement of Changes in Shareholders' Equity (in thousands) (unaudited) Cumulative Unrealized Total other Common Stock translation gain Retained comprehensive Shares Amount adjustment on securities earnings Total loss ------- --------- ---------- ------------- -------- --------- ------------- Balances, December 31, 2000 17,070 $ 153,482 $ (1,917) $ - $ 27,766 $ 179,331 Shares issued pursuant to benefit plans 185 3,053 3,053 Tax benefit of options exercised 462 462 Translation adjustment 50 50 $ 50 Unrealized gain on securities 27 27 $ 27 Net loss for the period (17,940) (17,940) (17,940) ------- --------- ---------- ------------- -------- --------- ------------- Balances, June 30, 2001 17,255 $ 156,997 $ (1,867) $ 27 $ 9,826 $ 164,983 ======= ========= ========== ============= ======== ========= Total other comprehensive loss, six months ended June 30, 2001 $ (17,863) =============
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, June 30, 2001 2000 -------------- --------------- Cash flows from operating activities: Net income (loss) $ (17,940) $ 13,477 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 8,856 8,496 Non-cash interest expense 147 - Recognized loss on writedown of marketable equity securities 390 - Gain on sale of marketable equity securities - (856) Impairment of fixed assets 2,620 - Write-off of capitalized software 2,530 - Write-off of inventories 10,714 - Deferred income taxes (8,627) 909 Tax benefit of options exercised 462 4,332 Net changes in current assets and current liabilities: Decrease (increase) in accounts receivable 23,343 (10,239) Decrease (increase) in interest receivable (1,216) - Decrease (increase) in inventories (7,947) (4,860) Decrease (increase) in other current assets 241 (375) Increase (decrease) in accounts payable (11,178) 13,101 Increase (decrease) in interest payable (123) - Increase (decrease) in income taxes payable (7,970) 902 Increase (decrease) in accrued wages and bonuses (2,266) 2,065 Increase (decrease) in accrued restructuring 6,197 - Increase (decrease) in other accrued liabilities (170) (505) -------------- --------------- Net cash provided by (used for) operating activities (1,937) 26,447 -------------- --------------- Cash flows from investing activities: Purchase of short-term investments (63,876) - Sales of short-term investments 9,697 - Business acquisitions and intangibles (5,165) (1,761) Capital expenditures (2,912) (3,712) Purchase of long-term asset (387) - Sale of assets - 350 Capitalized software production costs and other assets (1,747) (1,645) -------------- --------------- Net cash used for investing activities (64,390) (6,768) -------------- --------------- Cash flows from financing activities: Issuance of common stock, net 3,053 7,069 Payments on capital lease obligation - (73) -------------- --------------- Net cash provided by financing activities 3,053 6,996 -------------- --------------- Effect of exchange rate changes on cash 50 8 -------------- --------------- Net increase (decrease) in cash and cash equivalents (63,224) 26,683 Cash and cash equivalents, beginning of period 124,086 15,708 -------------- --------------- Cash and cash equivalents, end of period $ 60,862 $ 42,391 ============== ===============
The accompanying notes are an integral part of this statement 6 RADISYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) (unaudited) June 30, 2001 1. Significant Accounting Policies 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. All intercompany accounts and transactions have been eliminated in consolidation. 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, 2000. 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 judgments made by management of the Company include matters such as collectibility of accounts receivable, realizability of inventories, recoverability of capitalized software and deferred tax assets and adequacy of accrued restructuring costs. Reclassifications 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. Cash flows Non-cash investing and financing activities for the three months ended June 30, 2001 included the effect of an increase in the market value of the shares of common stock of GA eXpress (GA) held by the Company. The increase of $.03 million, net of tax, impacted Other non-current assets and Unrealized gain on securities available for sale. Non-cash investing and financing activities for the six months ended June 30, 2001 included an impairment write-down of $.4 million on the Company's available for sale investment in GA common stock. 7 Non-cash investing and financing activities for the three month period ended June 30, 2000 included a decrease of $1.7 million, net of tax, to Unrealized gain on securities available for sale and Other assets. Non-cash investing and financing activities for the six months ended June 30, 2000 included the effect of an increase of $0.8 million, net of tax, to Unrealized gain on securities available for sales and Other assets. Long-lived Assets The Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires the Company to review the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If this review indicates that the carrying amounts of long-lived assets will not be recoverable, as determined based on the estimated undiscounted cash flows of the Company over the remaining amortization period, the carrying amounts of the long-lived assets are reduced by the estimated shortfall of cash flows. During the six months ended June 30, 2001 the Company wrote off fixed assets totaling $2.5 million as a result of an impairment analysis of its Houston manufacturing plant associated with the first quarter restructuring plan and $.1 million as a result of an impairment analysis of its Boston DSP design center related to the second quarter restructuring plan. See footnote 7 "Accrued Restructuring." New Pronouncements In 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. FAS 137 delayed adoption of FAS 133 to fiscal years commencing after June 30, 2000. The adoption of FAS 133 did not and has not had a material effect on the Company's financial position or results of operations due to its limited use of derivative instruments. In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141 establishes new standards for accounting and reporting requirements for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. The Company expects to adopt this statement during the third quarter of 2001. Management does not believe that the adoption of SFAS 141 will have a material impact on the Company's consolidated financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets, which supersedes APB Opinion No. 17, "Intangible Assets." Under its proposed changes, SFAS 142 establishes new standards for goodwill acquired in a business combination and eliminates amortization of goodwill and instead sets forth methods to periodically evaluate goodwill for impairment. The Company expects to adopt this statement during the first quarter of 2002. Goodwill amortization totaled $5.4 million for the year ended December 31, 2000. 2. Accounts Receivable Trade accounts receivable are net of an allowance for doubtful accounts of $811 and $655 at June 30, 2001 and December 31, 2000, respectively. The Company's customers are concentrated in the technology industry. 3. Inventories 8 June 30, Dec 31, 2001 2000 ------------- ------------ Raw materials $ 38,802 $ 44,572 Work-in-progress 3,315 4,518 Finished goods 8,363 4,157 ------------- ------------ $ 50,480 $ 53,247 ============= ============ During the six months ended June 30, 2001, the Company wrote down inventory by $10.7 million ($3.9 million and $6.8 million in the first and second quarters of 2001, respectively) due to the Company's decision to consolidate its manufacturing operations, acceleration of the Company's end-of-life strategy on non-strategic products and reduced demand and decreasing component prices in the marketplace. 4. Property and Equipment June 30, Dec 31, 2001 2000 ------------- ------------ Land and building $ 3,919 $ 3,919 Manufacturing equipment 20,407 20,907 Office equipment and software 27,260 25,170 Leasehold improvements 5,715 7,278 ------------- ------------ 57,301 57,274 Less: accumulated depreciation 32,823 29,146 ------------- ------------ $24,478 $28,128 ============= ============ As a result of the decision to close its Houston, Texas manufacturing plant, the Company wrote off $2.5 million of impaired fixed assets during the three months ended March 31, 2001. The Company wrote off an additional $0.1 million of impaired fixed assets during the three months ended June 30, 2001 due to the closure of the Boston DSP design center. See description of the fixed assets written off at footnote 7 "Accrued Restructuring." These write-offs were recorded as restructuring charges. 5. Goodwill and Intangible Assets Goodwill and intangible assets increased by $1.9 million, net from $30.4 million at December 31, 2000 to $32.4 million at June 30, 2001. Goodwill and intangibles increased by $4.5 million as a result of the S-Link acquisition and $.7 million resulting from increased purchase price recorded for the Open Computing Platform (OCP) acquisition based upon a formula tied to certain OCP revenues pursuant to the acquisition agreement. These increases were offset by $3.3 million of amortization for the six months ended June 30, 2001. Amortization periods range from five to fifteen years. 6. Other Assets Other assets include capitalized software, deferred tax assets, investments in marketable securities, and unamortized debt issuance costs. During the six months ended June 30, 2001 the Company wrote off $2.6 million of capitalized software associated with its end-of-life strategy on certain products as part of its restructuring activities. This write off was included in restructuring charges. See footnote 7 "Accrued Restructuring." 9 The Company's non-current deferred tax assets increased by $6.6 million since December 31, 2000 as a result of the recognition of federal and state net operating losses and research and development tax credit carry-forwards. During the first quarter of 2001, the Company wrote down its investment in GA common stock to market value as of March 31, 2001, recording a realized loss of $.4 million. During the three months ended June 30, 2001, the Company recorded an unrealized gain on its investment in GA common stock of $.03 million, net of tax, as a result of an increase in the market price of GA stock as of the end of the quarter. 7. Accrued Restructuring First Quarter 2001 Restructuring Charge During the quarter ended March 31, 2001, the Company recorded restructuring charges of $9.8 million, primarily the result of management's decision to close its Houston, Texas manufacturing plant and consolidate all internal manufacturing operations into the Company's Hillsboro, Oregon plant. Additionally, certain sales offices were consolidated and end-of-life programs were accelerated on non-strategic products. Costs included in the charges were: (i) employee termination and other related costs; (ii) facility and leasehold improvement charges related to vacating the manufacturing plant and two international sales offices; (iii) write-downs of property and equipment impaired as a result of the restructuring; (iv) capitalized software write-downs associated with end-of-life product strategies as a result of the restructuring; and (v) other charges including legal and accounting fees. The Company anticipates that substantially all of the personnel charges will be paid and all of the property and equipment disposals will be completed by the end of September 2001. Facility charges will continue to be paid and will be taken against the accrual once the premises are vacated and until the leases have expired or the buildings have been sub-leased. Of the $9.8 million in restructuring charges, approximately $5.4 million will consist of cash expenditures, of which $1.6 million have been made as of June 30, 2001. The following table summarizes the restructuring charges, write-offs, and expenditures relating to these initiatives, which commenced during the quarter ended March 31, 2001:
Employee termination Leasehold and related improvements Property Capitalized Other costs and facilities and equipment software charges Total ------------ -------------- -------------- ------------ ---------- ------------ Restructuring costs $ 2,777 $ 3,434 $ 2,460 $ 1,067 $ 105 $ 9,843 Expenditures (159) (159) Write-offs (2,460) (1,067) (3,527) ------------ -------------- -------------- ------------ ---------- ------------ Balance of accrued restructuring, March 31, 2001 $ 2,618 $ 3,434 $ - $ - $ 105 $ 6,157 ------------ -------------- -------------- ------------ ---------- ------------ Expenditures (1,395) (60) (43) (1,498) ------------ -------------- -------------- ------------ ---------- ------------ Balance accrued as of June 30, 2001 $ 1,223 $ 3,374 $ - $ - $ 62 $ 4,659 ============ ============== ============== ============ ========== ============
Employee termination costs consist of severance and insurance benefits and related costs associated with the elimination of approximately 150 manufacturing positions in Houston, Texas along with approximately 50 other positions in supporting functions (procurement, information systems, general and administrative) and sales as announced by the Company on March 30, 2001. Approximately 60 percent of these terminations were completed by June 30, 2001 with the remainder to be completed by September 30, 2001. The Company paid $1.4 million of severance costs during the three months ended June 30, 2001. 10 Included in the leasehold improvements and facilities charge is $2.5 million related to the future abandonment of leased space at the Company's Houston plant and vacant sales offices in France and Germany. Lease costs and amortization of leasehold improvements for these facilities will be charged against the restructuring accrual on a monthly basis upon vacation of the premises, until the lease contracts expire or the facilities are sub-leased. Leasehold improvements approximating $1.0 million relate to the Houston site, which is expected to be occupied through September 2001. During the three months ended June 30, 2001 the Company charged $.06 million of lease costs and amortization of leasehold improvements against the restructuring accrual. As a result of the decision to close the Houston manufacturing plant, an analysis was conducted and the majority of property and equipment at the site was deemed to be impaired. Accordingly, all furniture, fixtures, manufacturing and office equipment expected to be sold or scrapped were written down to estimated recovery values as of March 31, 2001. No adjustments were made for assets expected to be transferred for use at the Company's Hillsboro location. The $2.5 million charge to write down the impaired assets is included in Restructuring charges in the Consolidated Statement of Operations during the quarter ended March 31, 2001. Most of the impaired assets will continue to be utilized until the September 30, 2001 plant closure date, at which time they will be removed and sold or scrapped. A smaller portion of the assets relating to SMT production were removed from use and disposed of during the second quarter of 2001. During the quarter ended March 31, 2001, management discontinued all non-strategic in-process capitalized software efforts. As a result of these decisions, the Company wrote off $1.1 million relating to these capitalized software projects as there will be no future revenue associated with them. This write off is included in Restructuring charges in the Consolidated Statement of Operations. Second Quarter 2001 Restructuring Charge During the three months ended June 30, 2001, management recorded a restructuring provision of $3.2 million, primarily relating to the closure of the Boston DSP design center and severance of approximately 40 other employees. Costs included in the charges were: (i) employee termination and other related costs; (ii) facility and leasehold improvement charges related to vacating the design center; (iii) write-downs of property and equipment impaired as a result of the restructuring; (iv) capitalized software write-downs associated with the discontinuance of the DSP design center; and (v) other charges including legal and accounting fees. The Company anticipates that substantially all of the personnel charges will be paid and all of the property and equipment disposals will be completed by the end of September 2001. Facility charges will continue to be paid and will be taken against the accrual once the premises are vacated and until the lease has expired or the building has been sub-leased. Of the $3.2 million in restructuring charges, approximately $1.5 million will consist of cash expenditures. The following table summarizes the restructuring charges, write-offs, and expenditures relating to the second quarter restructuring charge:
Employee termination Leasehold and related improvements Property Capitalized Other costs and facilitiesand equipment software charges Total ------------ ------------ -------------- ------------ ------------ ------------ Restructuring costs $ 1,298 $ 249 $ 51 $ 1,521 $ 100 $ 3,219 Expenditures - Write-offs (109) (51) (1,521) (1,681) ------------ ------------ -------------- ------------ ------------ ------------ Balance accrued as of June 30, 2001 $ 1,298 $ 140 $ - $ - $ 100 $ 1,538 ============ ============ ============== ============ ============ ============
11 Employee termination costs consist of severance and insurance benefits and related costs associated with the elimination of 18 positions at of the Boston DSP design center along with approximately 40 other positions, as announced by the Company on June 27, 2001. Approximately 80 percent of these terminations were completed by June 30, 2001 with the remainder to be completed by September 30, 2001. Included in the facilities charge is $.1 million related to the future abandonment of leased space at the Company's Boston Design Center. Lease costs for these facilities will be charged against the restructuring accrual on a monthly basis upon vacation of the premises, until the lease contracts expire or the facilities are sub-leased. Leasehold improvements totaling $.1 million which relate to the Boston Design Center were written off as of June 30, 2001 when normal business activities in the Boston office ceased. As a result of the decision to close the Boston Design Center, an analysis was conducted and certain property and equipment at the site was deemed to be impaired. Accordingly, all furniture, fixtures, office equipment, and engineering test equipment expected to be sold or scrapped were written down to estimated recovery values as of June 30, 2001. No adjustments were made for assets expected to be transferred for use at one of the Company's other locations. The $.1 million charge to write down the impaired assets is included in Restructuring charges in the Consolidated Statement of Operations. During the three months ended June 30, 2001, management discontinued all capitalized software efforts at the Boston design center. As a result, the Company wrote off $1.5 million relating to these capitalized software projects as there will be no future revenue associated with them. This write-off is included in Restructuring charges in the Consolidated Statement of Operations. 8. Earnings Per Share Net income (loss) per share is based on the weighted average number of shares of common stock and common stock equivalents (stock options) outstanding during the periods, computed using the treasury stock method. This calculation does not include the effects of the convertible debt or stock options as they were anti-dilutive, nor the effect of stock options in the first six months of 2001 because of the net loss. Weighed average shares consisted of the following:
Three Six months ended months ended -------------------------- ------------------------- June 30, June 30, June 30, June 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Weighted average shares (basic) 17,218 16,905 17,174 16,788 Effect of dilutive stock options - 1,288 - 1,411 ------------ ------------ ------------ ------------ Weighted average shares (diluted) 17,218 18,193 17,174 18,199 ============ ============ ============ ============
9. Segment Information The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way that management 12 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 sales and long-lived asset information by geographic area is as follows:
Revenues -------------------------------------------------------------- Three months ended Six months ended ------------------------------- ------------------------------ June 30, June 30, June 30, June 30, Country 2001 2000 2001 2000 ------- ---- ---- ---- ---- United States $ 30,958 $ 49,459 $ 56,660 $ 95,761 Europe 26,317 34,299 51,563 67,001 Asia Pacific - Japan 3,035 2,412 6,146 4,230 Other foreign 1,493 - 3,593 472 --------------- -------------- --------------- ------------ Total $ 61,803 $ 86,170 $ 117,962 $167,464 =============== ============== =============== ============
Long Lived Assets ------------------------------- June 30, Dec 31, Country 2001 2000 ------- ---- ---- United States $ 23,537 $ 26,929 Europe 892 1,138 Asia Pacific - Japan 49 61 -------------- -------------- $ 24,478 $ 28,128 ============== ============== Two customers accounted for $13.0 million, or 21.0% of the total revenue for the three months ended June 30, 2001, and $30.2 million, or 25.6% of total revenue for the six months ended June 30, 2001. 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. 10. Acquisitions S-Link Acquisition On April 20, 2001 the Company acquired privately-held S-Link Corporation in a cash transaction valued at approximately $4.7 million. The Company anticipates that the acquisition will enhance its 13 technology and building blocks for signaling applications within packet networks. The acquisition of S-Link was accounted for using the purchase method. The results of operations for S-Link have been included in the financial statements since the date of acquisition. The aggregate purchase price of $4.7 million was allocated to fixed assets ($.2 million), goodwill ($2.8 million), and other intangible assets relating to acquired technology ($1.7 million). Unaudited Pro Forma Disclosure 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 beginning of the period presented, after giving effect to adjustments of amortization of goodwill and the estimated impact on the income tax provision. The unaudited pro forma information is not necessarily indicative of what the consolidated results of operations for future periods or that actually would have been realized had RadiSys and S-Link been a consolidated entity during the periods presented. Six Months Ended Six Months Ended June 30, 2001 June 30, 2000 (unaudited) (unaudited) ---------------- ------------------- Revenues $118,137 $167,839 Net income (loss) (18,575) 12,454 Net income (loss) per share (basic) (1.08) 0.74 Net income(loss) per share (diluted) (1.08) 0.68 11. Subsequent Events Subsequent to the quarter ended June 30, 2001, RadiSys Corporation and Microware Systems Corporation announced that they had entered into a definitive agreement under which a wholly owned subsidiary of the Company would commence a cash tender offer to purchase all outstanding shares of common stock of Microware at $0.68 per share. The tender offer expired on August 10, 2001, and the Company accepted all of the tendered shares for payment. The Company expects to consummate the Microware acquisition in late August. At that time, the Company's wholly owned subsidiary would be merged with and into Microware, with Microware surviving the merger as a wholly owned subsidiary of the Company. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands) OVERVIEW Total revenue was $61.8 million for the three months ended June 30, 2001 compared to $86.2 million for the three months ended June 30, 2000 and $118.0 million for the six months ended June 30, 2001 compared to $167.5 million for the six months ended June 30, 2000. The Company had a net loss of $9.5 million for the three months ended June 30, 2001 compared to net income of $6.8 million for the three months ended June 30, 2000 and a net loss of $17.9 million for the six months ended June 30, 2001 compared to net income of $13.5 million for the six months ended June 30, 2000. 14 The net loss for the three months ended June 30, 2001 includes, before income tax, restructuring charges of $3.2 million and other adjustments of $7.2 million. The restructuring charges are related to the closure of the Company's Boston design center and severance of approximately 40 other employees. The Company expects that this restructuring decision will result in improved operating performance by approximately $1.5 million per quarter once the plan has been fully implemented. Other adjustments for the three months ended June 30, 2001 include a $6.8 million inventory write-down related to the Company's reduced demand and decreasing component prices in the marketplace and $.4 million of severance costs not related to the restructuring. The net loss for the six months ended June 30, 2001 also includes the Company's first quarter restructuring charges of $9.8 million and other adjustments during the first quarter of $5.1 million before income taxes. The first quarter restructuring charges are primarily the result of the decision to consolidate all internal manufacturing operations out of the Houston, Texas manufacturing plant into the Company's Hillsboro, Oregon plant, the closure of certain sales offices in France and Germany, and the elimination of approximately 200 positions from throughout the Company. The Company expects that the first quarter restructuring decision will result in lower manufacturing costs and improve operating performance by approximately $8.0 million per year once the plan has been fully implemented. Other adjustments for the three months ended March 31, 2001 include: $3.9 million of inventory write-downs related to the Company's consolidation of manufacturing operations, acceleration of the Company's end-of-life strategy on non-strategic products and for excess materials resulting from reduced demand; $.8 million in charges to consolidate other Company facilities, and a $.4 million permanent write-down of an investment received in connection with a prior divestiture. On April 20, 2001 the Company acquired privately-held S-Link Corporation in a cash transaction valued at approximately $4.7 million. The Company anticipates that the acquisition will enhance its technology and building blocks for signaling applications within packet networks. The acquisition of S-Link was accounted for using the purchase method. On July 2, 2001, the Company and Microware Systems Corporation announced that they had entered into a definitive agreement under which a wholly owned subsidiary of the Company would commence a cash tender offer to purchase all outstanding shares of common stock of Microware at $0.68 per share. The tender offer expired on August 10, 2001, and the Company accepted all of the tendered shares for payment. The Company expects to consummate the Microware acquisition in late August. At that time, the Company's wholly owned subsidiary would be merged with and into Microware, with Microware surviving the merger as a wholly owned subsidiary of the Company. The Company will pay approximately $13.1 million to acquire all of the outstanding shares of Microware's common stock. In addition, the Company has paid $2.2 million on Microware's behalf to retire certain equity and debt securities of Microware. The Company anticipates that the Microware acquisition will provide a network processor family and will offer customers complete faster-to-market solutions for certain applications. REVENUES Three months ended Six months ended ------------------ ---------------- June 30, Percentage June 30, June 30, Percentage June 30, 2001 Change 2000 2001 Change 2000 ---- ---- ------- ---- ---- ---- Revenues $61,803 (28%) $86,170 $117,962 (30%) $167,464 Revenues decreased by $24.4 million or 28% for the three months ended June 30, 2001 compared to the three months ended June 30, 2000 and decreased by $49.5 million or 30% for the six months ended June 30, 2001 compared to the six months ended June 30, 2000. The decrease in revenues for the three and six months ended June 30, 2001 was primarily attributable to lower customer sales as a result of the continued downturn in the business of most of the Company's customers and generally poor economic conditions. The Company's top five customers collectively represented approximately 42% of total revenues for the three months ended June 30, 2001, and 48% of total revenues for the six months ended June 30, 2001. The Company does not expect its restructuring events to impact future revenues. 15
COST OF SALES Three months ended Six months ended ------------------ ---------------- June 30, Percentage June 30, June 30, Percentage June 30, 2001 Change 2000 2001 Change 2000 ---- ------- ---- ---- ------ ---- Cost of sales $51,513 (7%) $55,635 $97,924 (9%) $108,071 As a % of revenues 83% 65% 83% 65%
Cost of sales decreased by $4.1 million or 7% for the three months ended June 30, 2001 compared to the three months ended June 30, 2000 and decreased $10.1 million or 9% for the six months ended June 30, 2001 compared to the six months ended June 30, 2000 . The cost of sales decrease was a result of the decrease in revenue during the six months ended June 30, 2001. The increase in cost of sales as a percentage of revenues for the three months and six months ended June 30, 2001 was due to inventory write-downs of $3.9 million and $6.8 million in the first and second quarters of 2001, respectively, and due to reduced utilization of manufacturing capacity relating to the decrease in revenues. As revenue volume increases, the Company will experience decreases in cost of sales as a percentage of revenues as a result of manufacturing efficiencies and the effects of cost savings from the restructuring activities, which are expected to be partially realized beginning in the third quarter of 2001 and fully realized by the fourth quarter of 2001. RESEARCH AND DEVELOPMENT
Three Months Ended Six Months Ended ------------------ ---------------- June 30, Percentage June 30, June 30, Percentage June 30, 2001 Change 2000 2001 Change 2000 ---- ------ ---- ---- ------ ---- Research and development $9,167 (2%) $9,306 $18,451 1% $18,286 As a % of revenues 15% 11% 16% 11%
Research and development expenses decreased by $.1 million or 2% for the three months ended June 30, 2001 compared to the three months ended June 30, 2000 and increased $.2 million or 1% for the six months ended June 30, 2001 compared to the six months ended June 30, 2000. The decrease for the three months ended June 30, 2001 is a result of lower spending as a result of additional cost control measures originally implemented during the first quarter of 2001 and fully in effect for the second quarter. These cost savings were offset by increases in engineering headcount since June 30, 2000. The increase for the six months ended June 30, 2001 was primarily attributable to the increase in engineering headcount since June 30, 2000 of approximately 15 people, but was only partially offset by lower spending as a result of cost control measures implemented during the quarter ended March 31, 2001. The increase as a percentage of revenue for the three and six months ended June 30, 2001 was associated with the decline in revenue during the quarter. The Company expects savings in research and development expense resulting from the Boston design center closure, but anticipates these savings will be offset by an increase in research and development costs going forward as a result of the April 2001 acquisition of S-Link Corporation. SELLING, GENERAL AND ADMINISTRATIVE
Three Months Ended Six Months Ended ------------------ ---------------- June 30, Percentage June 30, June 30, Percentage June 30, 2001 Change 2000 2001 Change 2000 ---- ------ ---- ---- ------ ---- Selling, general and administrative $8,708 (10%) $9,707 $18,114 (6%) $19,249 16 As a % of revenues 14% 11% 15% 11%
Selling, general and administrative (SG&A) expenses decreased by $1.0 million or 10% for the three months ended June 30, 2001 compared to the three months ended June 30, 2000 and decreased $1.1 million or 6% for the six months ended June 30, 2001 compared to the six months ended June 30, 2000. The decrease is due to lower spending as a result of cost control measures and a reduction in sales commission expense related to lower sales. This decrease was partially offset by investments made in the Company's infrastructure during the latter half of 2000, including the implementation of SAP. The increase as a percentage of revenue is associated with decreased revenue volume during the three months and six months ended June 30, 2001. GOODWILL AND INTANGIBLES AMORTIZATION
Three Months Ended Six Months Ended ------------------ ---------------- June 30, Percentage June 30, June 30, Percentage June 30, 2001 Change 2000 2001 Change 2000 ---- ------ ---- ---- ------ ---- Goodwill and intangibles amortization $1,656 (4%) $1,727 $3,212 (7%) $3,451 As a % of revenues 3% 2% 3% 2%
Goodwill amortization expense decreased by $.07 million or 4% for the three months ended June 30, 2001, compared to the three months ended June 30, 2000 and $.2 million or 7% for the six months ended June 30, 2001 compared to the six months ended June 30, 2000. During the third quarter of 2000 management revised its estimate of total goodwill associated with the 1999 acquisition of Open Computing Platform (OCP), based upon the future expected obligation to IBM as defined in the acquisition agreement. As a result, this change in estimate reduced the amortization recorded for OCP during the three months and six months ended June 30, 2001 compared to the three and six months ended June 30, 2000. This decrease was partially offset by amortization of $.1 million related to the S-Link acquisition, of which $2.8 million was recorded as goodwill. Amortization periods for goodwill and intangibles range from five to fifteen years. RESTRUCTURING CHARGES
First Quarter 2001 Restructuring Charge Three Months Ended Six Months Ended ------------------ ---------------- June 30, Percentage June 30, June 30, Percentage June 30, 2001 Change 2000 2001 Change 2000 ---- ------ ---- ---- ------ ---- Restructuring charges $3,219 $ - $13,062 $ - As a % of revenues 5% 11%
In March 2001, the Company recorded restructuring charges of $9.8 million, primarily the result of management's decision to close its Houston, Texas manufacturing plant and consolidate all internal manufacturing operations into the Company's Hillsboro, Oregon plant. Additionally, certain sales offices were consolidated and end-of-life programs were accelerated on non-strategic products. These decisions were made in light of overall market conditions and economic downturns experienced in the latter part of the fourth quarter of 2000 and, more significantly, during the first quarter of 2001. In 2000, the Company began migrating board assembly work to its Oregon plant, and in January 2001, announced its plan to complete board assembly consolidation. As the quarter progressed, management recognized the need for even greater operating efficiency and decided to completely eliminate manufacturing operations in Texas by September 30, 2001. The Company will continue to operate a major design center in Houston as well 17 as a product repair center. The Company expects that this decision will result in lower manufacturing costs and will improve operating performance by approximately $8.0 million per year once the plan has been fully implemented. Costs included in the charges were: (i) employee termination and other related costs; (ii) facility and leasehold improvement charges related to vacating the manufacturing plant and two international sales offices; (iii) write-downs of property and equipment impaired as a result of the restructuring; (iv) capitalized software write-downs associated with end-of-life product strategies as a result of the restructuring; and (v) other charges including legal and accounting fees. The Company anticipates that substantially all of the personnel charges will be paid and all of the property and equipment disposals will be completed by the end of September 2001. Facility charges will continue to be paid and will be taken against the accrual once premises are vacated and until the leases have expired or the buildings have been sub-leased. Of the $9.8 million in restructuring charges, approximately $5.4 million will consist of cash expenditures. The following table summarizes the restructuring charges, write-offs, and expenditures relating to these initiatives, which commenced during the quarter ended March 31, 2001:
Employee termination Leasehold and related improvements Property Capitalized Other costs and facilities and equipment software charges Total ------------ -------------- ------------- ----------- -------- ------------ Restructuring costs $ 2,777 $ 3,434 $ 2,460 $ 1,067 $ 105 $ 9,843 Expenditures (159) (159) Write-offs (2,460) (1,067) (3,527) ------------ -------------- ------------- ----------- -------- ------------ Balance of accrued restructuring, March 31, 2001 $ 2,618 $ 3,434 $ - $ - $ 105 $ 6,157 ------------ -------------- ------------- ----------- -------- ------------ Expenditures (1,395) (60) (43) (1,498) ------------ -------------- ------------- ----------- -------- ------------ Balance accrued as of June 30, 2001 $ 1,223 $ 3,374 $ - $ - $ 62 $ 4,659 ============ ============== ============= =========== ======== ============
Employee termination costs consist of severance and insurance benefits and related costs associated with the elimination of approximately 150 manufacturing positions in Houston, Texas along with approximately 50 other positions in supporting functions (procurement, information systems, general and administrative) and sales as announced by the Company on March 30, 2001. Approximately 60 percent of these terminations were completed by June 30, 2001 with the remainder expected to be completed by September 30, 2001. The Company paid $1.4 million of severance costs during the three months ended June 30, 2001. Included in the leasehold improvements and facilities charge is $2.4 million related to the future abandonment of leased space at the Company's Houston plant and vacant sales offices in France and Germany. Lease costs and amortization of leasehold improvements for these facilities will be charged against the restructuring accrual on a monthly basis upon vacation of the premises, until the lease contracts expire or the facilities are sub-leased. Leasehold improvements approximating $1.0 million relate to the Houston site, which is expected to be occupied through September 2001. During the three months ended June 30, 2001 the Company charged $.06 million of lease costs and amortization of leasehold improvements against the restructuring accrual. As a result of the decision to close the Houston manufacturing plant, an analysis was conducted and the majority of property and equipment at the site was deemed to be impaired. Accordingly, all furniture, fixtures, manufacturing and office equipment expected to be sold or scrapped were written down to estimated recovery values as of March 31, 2001. No adjustments were made for assets expected to be transferred for use at the Company's Hillsboro location. Most of the impaired assets will continue to be 18 utilized until the September 30, 2001 plant closure date, at which time they will be removed and sold or scrapped. A smaller portion of the assets relating to SMT production were removed from use and disposed of during the second quarter of 2001. During the quarter ended March 31, 2001, management discontinued all non-strategic in-process capitalized software efforts. As a result of these decisions, the Company wrote off $1.1 million relating to these capitalized software projects as there will be no future revenue associated with them. This write-off is included in Restructuring charges in the Consolidated Statement of Operations. Second Quarter 2001 Restructuring Charge In June 2001, management recorded a restructuring provision of $3.2 million, primarily relating to the closure of the Boston DSP design center and severance of approximately 40 other employees. The decision to close the design center and eliminate positions was a result of a thorough review of the Company's infrastructure with the goal of achieving profitability and reducing its break-even point in subsequent quarters. Costs included in the charges were: (i) employee termination and other related costs; (ii) facility and leasehold improvement charges related to vacating the design center; (iii) write-downs of property and equipment impaired as a result of the restructuring; (iv) capitalized software write-downs associated with end-of-life product strategies as a result of the restructuring; and (v) other charges including legal and accounting fees. The Company anticipates that substantially all of the personnel charges will be paid and all of the property and equipment disposals will be completed by the end of September 2001. Facility charges will continue to be paid and will be taken against the accrual once the premises are vacated and until the lease has expired or the building has been sub-leased. Of the $3.2 million in restructuring charges, approximately $1.5 million will consist of cash expenditures. The following table summarizes the restructuring charges, write-offs, and expenditures relating to the second quarter restructuring charge:
Employee termination Leasehold and related improvements Property Capitalized Other costs and facilities and equipment software charges Total ----------- -------------- -------------- ------------ ------------ ---------- Restructuring costs $ 1,298 $ 249 $ 51 $ 1,521 $ 100 $ 3,219 Expenditures - Write-offs (109) (51) (1,521) (1,681) ----------- -------------- -------------- ------------ ------------ ---------- Balance accrued as of June 30, 2001 $ 1,298 $ 140 $ - $ - $ 100 $ 1,538 =========== ============== ============== ============ ============ ==========
Employee termination costs consist of severance and insurance benefits and related costs associated with the elimination of 18 positions at the Boston DSP design center along with approximately 40 other positions, as announced by the Company on June 27, 2001. Approximately 80 percent of these terminations were completed by June 30, 2001 with the remainder expected to be completed by September 30, 2001. The Company expects that this decision will result in lower manufacturing costs and will improve operating performance by approximately $1.5 million per quarter once the plan has been fully implemented. Included in the leasehold improvements and facilities charge is $.1 million related to the future abandonment of leased space at the Company's Boston design center. Lease costs for this facility will be charged against the restructuring accrual on a monthly basis upon vacation of the premises, until the lease contract expires or the facility is sub-leased. Leasehold improvements totaling $.1 million which relate to 19 the Boston design center were written off as of June 30, 2001 when normal business activities in the Boston office ceased. As a result of the decision to close the Boston design center, an analysis was conducted and certain property and equipment at the site was deemed to be impaired. Accordingly, all furniture, fixtures, office equipment, and engineering test equipment expected to be sold or scrapped were written down to estimated recovery values as of June 30, 2001. No adjustments were made for assets expected to be transferred for use at one of the Company's other locations. The $.1 million charge to write down the impaired assets is included in Restructuring charges in the Consolidated Statement of Operations. During the three months ended June 30, 2001, management discontinued all capitalized software efforts at the design center. As a result of this decision, the Company wrote off $1.5 million relating to these capitalized software projects as there will be no future revenue associated with them. This write-off is included in Restructuring charges in the Consolidated Statement of Operations. INTEREST INCOME AND OTHER INCOME
Three Months Ended Six Months Ended ------------------ ---------------- June 30, Percentage June 30, June 30, Percentage June 30, 2001 Change 2000 2001 Change 2000 ---- ------ ---- ---- ------ ---- Interest income, net $70 (73%) $260 $594 193% $203 Other income (expense), net ($17) (93%) ($232) ($724) (220%) $606
Net interest income decreased $.2 million for the three months ended June 30, 2001 compared to the three months ended June 30, 2000 and increased $.4 million for the six months ended June 30, 2001 compared to the six months ended June 30, 2000. During the three and six months ended June 30, 2001 the Company earned interest on short-term investments, which was offset by interest expense incurred on the $100 million of convertible notes. During the second quarter of 2001, the Company received less interest income on short-term investments than during the first quarter of 2001 because of continued decreases in market interest rates offered on short-term investments. During the three and six months ended June 30, 2000 the Company did not hold any short-term investments. The Company's increased supply of cash for investing during the three and six months ended June 30, 2001 originated primarily from the Company's $100 million convertible debt issuance in the third quarter of 2000. Also contributing to the fluctuation in net interest income was the existence of $13.9 million outstanding on a $20.0 million line of credit with a bank at an interest rate of 8.5% during the three and six months ended June 30, 2000. There were no amounts outstanding on the line of credit at any time during the six months ended June 30, 2001. Net other expense decreased by $.2 million for the three months ended June 30, 2001 compared to the three months ended June 30, 2000 and increased by $1.3 million for the six months ended June 30, 2001 compared to the six months ended June 30, 2000. The Company wrote down its investment in common stock of GA eXpress (GA) to market value, recognizing a loss of $.4 million for the three months ended March 31, 2001. The impact of foreign exchange rate fluctuations for the three months ended March 31, 2001 resulted in expense of approximately $.3 million. Adding to the fluctuation in Other income for the six months ended June 30, 2001 compared to the six months ended June 30, 2000, the Company sold 367 shares of GA common stock during the first quarter of 2000, resulting in a gain of $.9 million. INCOME TAX PROVISION (BENEFIT)
Three Months Ended Six Months Ended ------------------ ---------------- 20 June 30, Percentage June 30, June 30, Percentage June 30, 2001 Change 2000 2001 Change 2000 ---- ------ ---- ---- ------ ---- Income tax provision (benefit) ($2,945) (199%) $2,977 ($14,991) (361%) 5,739
The effective income tax rate for the six months ended June 30, 2001 was a benefit of 45.5% compared to a 30.0% tax provision rate for the six months ended June 30, 2000. The change in the effective rate from June 30, 2000 to June 30, 2001 is primarily due to net losses incurred year-to-date and resulting lower estimated pre-tax income, expected research and development tax credit benefits for 2001, and anticipated tax benefits associated with the Company's offshore operations and foreign sales corporations. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2001, the Company had $60.9 million in cash and cash equivalents, $64.0 million in short-term investments, and working capital of approximately $188.7 million. Cash and cash equivalents decreased by $63.2 million during the six months ended June 30, 2001 from $124.1 million at December 31, 2000. Activities impacting cash and cash equivalents are as follows: Six months ended ------------------ June 30, June 30, 2001 2000 ---- ---- Cash provided by (used for) operating activities $ (1.9) $ 26.5 Cash used for investing activities (64.4) (6.8) Cash provided by financing activities 3.0 7.0 Effect of exchange rate changes on cash 0.1 - ------- ------- Net increase (decrease) $(63.2) $ 26.7 ======= ======= The fluctuation in operating cash generation for the six months ended June 30, 2001 compared to the six months ended June 30, 2000 is primarily due to the Company's net loss of $17.9 million as of June 30, 2001. Also impacting the decrease was an $11.2 million decrease in accounts payable, an $8.0 million decrease in income tax payable, and an $8.6 million increase in deferred income taxes. This decrease in operating cash was partially offset by the Company's decrease in accounts receivable of $23.3 million and the Company's decision to write off $2.6 million of fixed assets, $2.5 million of capitalized software and $10.7 million of inventory. Significant investing activities affecting cash for the six months ended June 30, 2001 included $64.0 million in purchases of short-term investments, business acquisition expenditures of $5.2 million, $2.9 million in capital expenditures, and $1.7 million in capital software additions. Business acquisitions primarily consisted of the purchase of S-Link for $4.7 million ($4.5 million of goodwill and $.2 million of capital expenditures) and the increased purchase price recorded for the OCP acquisition of $.7 million based upon a formula tied to certain OCP revenues pursuant to the acquisition agreement. Capital expenditures primarily consisted of assets acquired from S-Link and network upgrades. The Company's financing activities for the six months ended June 30, 2001 included $3.1 million in net proceeds from common stock issuance in connection with the exercise of options under the 1995 Stock Incentive Plan and the purchase of shares under the 1996 Employee Stock Purchase Plan. 21 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 prior to the expiration of twelve months and that this financing would be available. 22 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q and statements the Company's management may make from time to time contain forward-looking statements. All statements, other than statements of historical fact, that relate to future events or to the Company's future performance are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's or the Company's industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among other things, o dependence on the relationship with Intel Corporation and its products; o lower than expected or delayed sales by the Company's customers; o lower than expected or delayed or cancelled design wins with key OEMs; o deliveries of products containing errors, defects or bugs; o dependence on a limited number of suppliers or, in some cases, one supplier for components and equipment used to manufacture products; o competition in the building block markets for internet and communications, electronics assembly and medical equipment, which may lead to lower than expected sales prices for the Company's products or reduced sales volume; o availability of qualified personnel; o business conditions in the general economy and in the markets the Company serves, particularly the communications markets; o political, economic and regulatory risks associated with international operations; o difficulty or inability to meet the Company's obligations to repay indebtedness; o difficulties in integrating acquired businesses and assets, including S-Link; o difficulty implementing restructuring activities; and o those listed under "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and subsequently filed reports. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," "our future success depends," "seek to continue," "its intent," "intends," or the negative of these terms or other comparable terminology. In particular, these statements include, among other things, statements relating to the Company's business strategy, including the Company's acquisition strategy; the development of the Company's products; the Company's ability to identify new products and services; the Company's ability to achieve market acceptance of the Company's products; and the Company's projected financial performance, including revenues, earnings, gross margins, capital expenditures and liquidity. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the risks outlined above and those listed under "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 23 2000 and subsequently filed reports. These risk factors may cause the Company's actual results to differ materially from any forward-looking statement. The Company does not guarantee future results, levels of activity, performance or achievements and does not assume responsibility for the accuracy and completeness of these statements. The Company is under no duty to update any of the forward-looking statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, and equity trading prices, which could impact its results of operations and financial condition. Interest Rate Risk. The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers. The Company attempts to protect and preserve its invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due to the short duration of the Company's investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair market value of the portfolio. Therefore, the Company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its securities portfolio. 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 affected by changes in these or other factors. The Company is also exposed to foreign exchange rate fluctuations as they relate to revenues, operating expenses, and net assets as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Because exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of foreign exchange rate fluctuations on the Company for the six months ended June 30, 2001 and for the six months ended June 30, 2000 was not material. Equity Price Risk. The Company is exposed to equity price risk due to the equity investments held by the Company. The Company typically does not attempt to reduce or eliminate its market exposure on these securities. Neither a 10% increase nor a 10% decrease in equity prices would have a material effect on the Company's financial position, results of operations, or cash flow, as such investments are recorded on the Company's balance sheet at less than $1 million. 24 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting on May 15, 2001, the holders of the Company's outstanding Common Stock took the actions described below. As of the record date for the Annual Meeting, 17,166,827 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, Jean-Claude Peterschmitt and Carl W. Neun to the Company's Board of Directors, by the votes indicated below, to serve for the ensuing year. Dr. Glenford J. Myers 15,520,888 shares in favor 66,253 shares against or withheld 0 abstentions 0 broker nonvotes James F. Dalton 15,328,144 shares in favor 258,997 shares against or withheld 0 abstentions 0 broker nonvotes Richard J. Faubert 15,477,545 shares in favor 109,596 shares against or withheld 0 abstentions 0 broker nonvotes C. Scott Gibson 15,479,443 shares in favor 107,698 shares against or withheld 0 abstentions 0 broker nonvotes 25 Jean-Pierre D. Patkay 15,519,783 shares in favor 67,358 shares against or withheld 0 abstentions 0 broker nonvotes Jean-Claude Peterschmitt 15,514,777 shares in favor 72,364 shares against or withheld 0 abstentions 0 broker nonvotes Carl W. Neun 15,519,075 shares in favor 68,066 shares against or withheld 0 abstentions 0 broker nonvotes 2. 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 1,250,000 shares to 1,750,000. 15,103,118 shares in favor 447,648 shares against or withheld 36,375 abstentions 0 broker nonvotes Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2.1 Agreement and Plan of Merger, dated as of June 29, 2001, by and among the Company, Drake Merger Sub, Inc. and Microware Systems Corporation. Incorporated by reference to Exhibit (d)(1) to the Tender Offer Statement filed by the Company on Schedule TO dated July 5, 2001, SEC File No. 005-49337. 10.1 1996 Employee Stock Purchase Plan, as amended. 10.2 Executive Severance and Change of Control Agreement dated April 23, 2001 between the Company and Robert Dunne. (b) Reports on Form 8-K None. 26 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 13, 2001 RADISYS CORPORATION By:/s/GLENFORD J. MYERS --------------------------- Glenford J. Myers Chief Executive Officer and President, acting Chief Financial Officer (Authorized officer and Principal Financial Officer) 27 EXHIBIT INDEX Exhibit No. Description 2.1 Agreement and Plan of Merger, dated as of June 29, 2001, by and among the Company, Drake Merger Sub, Inc. and Microware Systems Corporation. Incorporated by reference to Exhibit (d)(1) to the Tender Offer Statement filed by the Company on Schedule TO dated July 5, 2001, SEC File No. 005-49337. 10.1 1996 Employee Stock Purchase Plan, as amended. 10.2 Executive Severance and Change of Control Agreement dated April 23, 2001 between the Company and Robert Dunne. 28