-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FdjjWUllgUnxkI3Kyfhtp9Rkdi/eP0LfMs78HyNspdjTXeD0c/tgC3mlkHRZ0NwE xWNA5K9h0L3nr3VIknayKQ== 0001025894-01-500359.txt : 20020410 0001025894-01-500359.hdr.sgml : 20020410 ACCESSION NUMBER: 0001025894-01-500359 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADISYS CORP CENTRAL INDEX KEY: 0000873044 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 930945232 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26844 FILM NUMBER: 1782564 BUSINESS ADDRESS: STREET 1: 5445 NE DAWSON CREEK DR CITY: HILLSBORO STATE: OR ZIP: 97124 BUSINESS PHONE: 5036461800 MAIL ADDRESS: STREET 1: 5445 NE DAWSON CREEK DRIVE CITY: HILLSBORO STATE: OR ZIP: 97124 10-Q 1 r_q109.txt FORM 10-Q, 9-30-2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 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 No. 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 ______ The number of shares of the registrant's common stock outstanding on November 8, 2001 was 17,360,560 shares.
RADISYS CORPORATION PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations - Three months ended September 30, 2001 and 2000, and nine months ended September 30, 2001 and 2000 4 Consolidated Statement of Changes in Shareholders' Equity - December 31, 2000 through September 30, 2001 5 Consolidated Statements of Cash Flows - Nine months ended September 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 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 2 RadiSys Corporation Consolidated Balance Sheets (In thousands) September 30, December 31, 2001 2000 --------------- --------------- (Unaudited) ASSETS Current assets Cash and cash equivalents $ 47,495 $ 124,086 Short term investments 62,344 9,799 Accounts receivable, net 42,448 68,241 Inventories, net 42,835 53,247 Other current assets 3,556 2,783 Deferred income taxes 6,185 4,682 --------------- ---------------- Total current assets 204,863 262,838 Property and equipment, net 33,644 28,128 Goodwill and intangible assets, net 46,957 30,444 Other assets 21,055 12,593 --------------- ---------------- Total assets $ 306,519 $ 334,003 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 15,620 $ 32,602 Accrued restructuring 4,759 - Accrued interest payable 691 2,185 Income taxes payable - 5,642 Accrued wages and bonuses 5,729 7,876 Other accrued liabilities 12,344 9,176 --------------- ---------------- Total current liabilities 39,143 57,481 Convertible subordinated notes 97,429 97,191 Mortgage payable 6,690 - --------------- ---------------- Total liabilities 143,262 154,672 --------------- ---------------- Shareholders' equity: Common stock - 100,000 shares authorized; 17,287 and 17,070 shares outstanding at September 30, 2001 and December 31, 2000 157,912 153,482 Retained earnings 6,652 27,766 Accumulated other comprehensive loss: Cumulative translation adjustment (1,262) (1,917) Unrealized loss on securities available for sale (45) - --------------- ---------------- Total shareholders' equity 163,257 179,331 --------------- ---------------- Total liabilities and shareholders' equity $ 306,519 $ 334,003 =============== ================
The accompanying notes are an integral part of this statement. 3
RadiSys Corporation Consolidated Statements of Operations (In thousands, except per share amounts, unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 ------------- -------------- ------------- -------------- Revenues $ 53,902 $ 90,719 $ 171,864 $ 258,183 Cost of sales 40,356 59,338 138,280 167,409 ------------- -------------- ------------- -------------- Gross profit 13,546 31,381 33,584 90,774 Research and development 8,395 9,542 26,846 27,828 Selling, general and administrative expense 8,398 9,716 26,512 28,965 Goodwill and intangibles amortization 2,025 1,557 5,237 5,008 Restructuring charges - - 13,062 - ------------- -------------- ------------- -------------- Income (loss) from operations (5,272) 10,566 (38,073) 28,973 Interest income (expense), net (132) 403 462 606 Other income (expense), net (360) 333 (1,084) 939 ------------- -------------- ------------- -------------- Income (loss) before income tax provision (benefit) (5,764) 11,302 (38,695) 30,518 Income tax provision (benefit) (2,590) 2,115 (17,581) 7,854 ------------- -------------- ------------- -------------- Net income (loss) $ (3,174) $ 9,187 $ (21,114) $ 22,664 ============= ============== ============= ============== Net income (loss) per share (basic) $ (0.18) $ .54 $ (1.23) $ 1.34 ============= ============== ============= ============== Net income (loss) per share (diluted) $ (0.18) $ .50 $ (1.23) $ 1.24 ============= ============== ============= ============== Weighted average shares outstanding (basic) 17,308 17,144 17,219 16,907 ============= ============== ============= ============== Weighted average shares outstanding (diluted) 17,308 18,475 17,219 18,291 ============= ============== ============= ==============
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 loss on Retained comprehensive Shares Amount adjustment securities earnings Total loss ---------- ----------- ------------- ----------- ------------ ----------- ---------------- Balances, December 31, 2000 17,070 $153,482 $ (1,917) $ - $ 27,766 $179,331 Shares issued pursuant to benefit plans 4,851 4,851 Tax benefit of options exercised 289 575 575 Shares repurchased (72) (996) (996) Translation adjustment 655 655 $ 655 Unrealized loss on securities (45) (45) $ (45) Net loss for the period (21,114) (21,114) $(21,114) ---------- ----------- ------------- ----------- ------------ ----------- ---------------- Balances, September 30, 2001 17,287 $157,912 $ (1,262) $ (45) $ 6,652 $163,257 ========== =========== ============= =========== ============ =========== Total other comprehensive loss, nine months ended September 30, 2001 $(20,504) ================
The accompanying notes are an integral part of this statement. 5
RadiSys Corporation Consolidated Statements of Cash Flows (In thousands, unaudited) Nine Months Ended September 30, ---------------------------------- 2001 2000 --------------- -------------- Cash flows from operating activities: Net income (loss) $ (21,114) $ 22,664 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 13,454 12,582 Non-cash convertible debt interest expense 238 75 Recognized loss on write-down of marketable equity securities 390 - Gain on sale of marketable equity securities - (856) Impairment of fixed assets 2,620 - Write-off of capitalized software 2,687 - Write-off of inventories 10,714 - Deferred income taxes (12,217) (2,392) Tax benefit of options exercised 575 6,591 Decrease (increase) in assets, net of effects of business combinations: Accounts receivable 27,923 (9,092) Inventories (302) (9,356) Other current assets (1,589) (931) Increase (decrease) in liabilities, net of effects of business combinations: Accounts payable (18,356) 13,230 Accrued restructuring 4,759 - Interest payable (1,494) - Income taxes payable (4,592) 2,472 Accrued wages and bonuses (2,147) 1,570 Other accrued liabilities (4,448) (6) --------------- --------------- Net cash (used in) provided by operating activities (2,899) 36,551 --------------- --------------- Cash flows from investing activities: Purchase of short-term investments (62,242) (66,481) Sales of short-term investments 9,697 - Business acquisitions and intangibles, net of cash acquired (18,986) (2,366) Capital expenditures (4,008) (9,737) Purchase of long-term assets (544) - Sales of marketable securities - 350 Capitalized software production costs and other assets (2,119) (2,841) --------------- --------------- Net cash used in investing activities (78,202) (81,075) --------------- --------------- Cash flows from financing activities: Issuance of common stock, net 4,851 12,889 Issuance of convertible subordinated notes, net - 116,090 Buyback of common stock (996) - Payments on short-term borrowings - (13,931) Payments on capital lease obligation - (73) --------------- --------------- Net cash provided by financing activities 3,855 114,975 --------------- --------------- Effect of exchange rate changes on cash 655 (12) --------------- --------------- Net increase (decrease) in cash and cash equivalents (76,591) 70,439 Cash and cash equivalents, beginning of period 124,086 15,708 --------------- --------------- Cash and cash equivalents, end of period $ 47,495 $ 86,147 =============== ===============
The accompanying notes are an integral part of this statement. 6 RadiSys Corporation Notes to Consolidated Financial Statements (Unaudited) Note 1 - Significant Accounting Policies Basis of Presentation RadiSys Corporation ("RadiSys" or 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 as of September 30, 2001 and for the three and nine months ended September 30, 2001 and 2000 have been prepared without audit and reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the financial position and operating results for the periods indicated. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2001. These financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the consolidated financial statements contained in RadiSys' Annual Report on Form 10-K for the year ended December 31, 2000. Management estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. This includes, among other things, collectibility of accounts receivable, realizability of inventories, evaluation of the remaining life and recoverability of long-lived assets, realizability of deferred tax assets, and adequacy of accrued restructuring costs. Actual results could differ from those estimates. Cash flows Non-cash investing and financing activities for the nine months ended September 30, 2001 include the effect of an unrealized loss in the market value of the shares of common stock of GA eXpress ("GA") held by the Company. The decrease of $0.05 million, net of tax, impacted other non-current assets and unrealized loss on securities available for sale. Non-cash investing and financing activities for the nine months ended September 30, 2000 include the effect of an unrealized gain in the market value of the Company's shares of GA stock. The increase of $0.5 million, net of tax, impacted other non-current assets and unrealized loss on securities available for sale. Long-lived Assets The Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", ("SFAS 121"), 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 amount of an asset 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. 7 During the nine months ended September 30, 2001 the Company wrote offfixed assets totaling $2.5 million and capitalized software of $1.1 million as a result of an impairment analysis of its Houston, Texas manufacturing plant associated with the first quarter restructuring plan and fixed assets of $0.1 million and capitalized software of $1.5 million as a result of an impairment analysis of its Boston, Massuchusetts DSP design center related to the second quarter restructuring plan. See "Restructuring Charges" in Management's Discussion and Analysis of Financial Condition and Results of Operations under Item 2 of this filing. New Pronouncements In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 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. The adoption of SFAS 133 did not and has not had a material effect on the Company's financial position or results of operations due to limited use of derivative instruments. In July 2001, the FASB issued SFAS No. 141, "Business Combinations", ("SFAS 141"). 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 is prohibited. The Company adopted this statement during the three months ended September 30, 2001. The Company's acquisition of Microware Systems Corporation ("Microware") was accounted for using the purchase method. In July 2001, the FASB issued Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The Company will adopt this standard on January 1, 2002. SFAS 142 requires the Company to perform an impairment test on goodwill and other intangible assets as of the adoption date. Thereafter, impairment tests will be performed annually and whenever events or circumstances indicate that the value of goodwill or other intangible assets might be impaired. Amortization of goodwill and certain other intangible assets, including those recorded in past business combinations, will cease. Goodwill and intangibles amortization amounted to $2 million and $5.2 million for the three and nine month periods ended September 30, 2001 and $6.6 million for the year ended December 31, 2000. The Company has not yet determined the impact of SFAS 142's impairment provisions on the results of its operations or financial position. The Company complied with SFAS No. 142 in accounting for its acquisition of Microware in August 2001, whereby the recorded goodwill is not being amortized. In October 2001, the FASB issued Statement of Financial Accounting Standard No. 144, "Accounting for the Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". The Company will adopt this standard on January 1, 2002. SFAS 144 retains the fundamental provisions of SFAS 121 regarding the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed by sale, but provides additional definition and measurement criteria for determining when an impairment has occurred. Goodwill and financial assets are excluded from the scope of SFAS 144, however amortizable intangible assets fall within its scope. The Company does not expect this pronouncement to have a material effect on the Company's financial position or results of operations. Note 2 - Accounts Receivable Trade accounts receivable are net of an allowance for doubtful accounts of $1.9 million and $0.7 million at September 30, 2001 and December 31, 2000, respectively. The allowance for doubtful accounts increased by $1.2 million from December 31, 2000 to September 30, 2001 primarily as a result of the acquisition of Microware during the quarter ended September 30, 2001. Included in the acquisition of Microware, the Company acquired accounts receivable of $2.1 million, net of an allowance for doubtful accounts of $1.1 million. RadiSys' customers are primarily concentrated in the communication infrastructure industry. Note 3 - Inventories 8 (In thousands) September 30, December 31, 2001 2000 --------------- ---------------- Raw materials $ 33,293 $ 44,572 Work-in-process 1,715 4,518 Finished goods 7,827 4,157 --------------- ---------------- $ 42,835 $ 53,247 =============== ================ During the nine months ended September 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). These write-downs were 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. Note 4 - Property and Equipment (In thousands) September 30, December 31, 2001 2000 --------------- ---------------- Land and building $ 14,348 $ 3,919 Manufacturing equipment 23,706 20,907 Office equipment and software 30,981 25,170 Leasehold improvements 5,741 7,278 --------------- ---------------- 74,776 57,274 Less: accumulated depreciation (41,132) (29,146) --------------- ---------------- $ 33,644 $ 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 first quarter of 2001. The Company wrote off an additional $0.1 million of impaired fixed assets during the second quarter of 2001 due to the closure of its Boston DSP design center. See description of the fixed assets written off under "Restructuring Charges" in the MD&A under Item 2 of this filing. These write-offs were recorded as restructuring charges. The Company acquired $9.9 million in net assets related to the Microware acquisition during the quarter ended September 30, 2001. The majority of the net assets acquired ($9.3 million) relate to land and a building. Note 5 - Goodwill and Intangible Assets Goodwill and intangible assets increased by $16.5 million, net, from $30.4 million at December 31, 2000 to $46.9 million at September 30, 2001. During the quarter ended September 30, 2001, the Company acquired $11.2 million of intangible assets and $5.1 million of goodwill as a result of the purchase of Microware (see Note 10). Goodwill and intangibles also increased by $4.5 million as a result of the S-Link acquisition (see Note 10) and by $0.9 million as a result of the 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 $5.2 million of amortization for the nine months ended September 30, 2001. Amortization periods range from four to fifteen years. Note 6 - Other Assets Other assets include capitalized software, deferred tax assets, investments in marketable securities, unamortized debt issuance costs, and unamortized debt issuance costs. During the nine months ended September 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. See description of the write-off of capitalized software under "Restructuring Charges" in the MD&A under Item 2 of this filing. 9 The Company's non-current deferred tax asset increased by $10.7 million since December 31, 2000 as a result of the recognition of federal and state net operating losses and research and development tax credit carryforwards. During the first quarter of 2001, the Company wrote-down its investment in GA common stock to market value as of March 31, 2001, recognizing a loss of $0.4 million, net of tax. During the nine months ended September 30, 2001, the Company had an unrealized loss on its investment in GA common stock of $0.05 million, net of tax, as a result of a decrease in the market price of GA stock from March 31, 2001 to September 30, 2001. Note 7 - Accrued Restructuring The following tables summarize the charges, write-offs, and expenditures related to first quarter 2001 restructuring charge and the second quarter 2001 restructuring charge. For further details see "Restructuring Charges" in the MD&A under Item 2 of this filing.
First Quarter 2001 Restructuring Charge (In thousands) Employee termination Leasehold and related improvements Property and Capitalized Other costs and facilities equipment software charges Total ------------ -------------- ------------ ----------- ---------- ------------- Restructuring costs $ 2,777 $ 3,434 $ 2,460 $ 1,067 $ 105 $ 9,843 Expenditures (1,868) (238) - - (50) (2,156) Write-offs - - (2,460) (1,067) - (3,527) ------------ -------------- ------------ ----------- ---------- ------------- Balance accrued as of September 30, 2001 $ 909 $ 3,196 $ - $ - $ 55 $ 4,160 ============ ============== ============ =========== ========== ============= Second Quarter 2001 Restructuring Charge (In thousands) Employee termination Leasehold and related improvements Property and Capitalized Other costs and facilities equipment software charges Total ------------ -------------- ------------ ----------- ---------- ------------- Restructuring costs $ 1,298 $ 249 $ 51 $ 1,521 $ 100 $ 3,219 Expenditures (838) (152) - - (58) (1,048) Write-offs - - (51) (1,521) - (1,572) ------------ -------------- ------------ ----------- ---------- ------------- Balance accrued as of September 30, 2001 $ 460 $ 97 $ - $ - $ 42 $ 599 ============ ============== ============ =========== ========== =============
Note 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 period, computed using the treasury stock method. The 2001 calculations do not include the effects of the convertible debt or stock options as they were anti-dilutive for the three and nine months ended September 30, 2001. 10
(In thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 ------------- -------------- ------------- -------------- Weighted average shares (basic) 17,308 17,144 17,219 16,907 Effect of dilutive stock options - 1,331 - 1,384 ------------- -------------- ------------- -------------- Weighted average shares (diluted) 17,308 18,475 17,219 18,291 ============= ============== ============= ==============
During the third quarter of 2001, the Company's board of directors authorized the repurchase of up to 500,000 of its outstanding shares. During the quarter ended September 30, 2001 the Company repurchased 72,000 outstanding shares in the open market for approximately $1.0 million. Note 9 - Segment Information The Company has adopted SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 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 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 revenues and long-lived asset information by geographic area is as follows:
(In thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------ ------------------------------------ 2001 2000 2001 2000 ---------------- ---------------- ---------------- ----------------- Revenue: United States $ 30,493 $ 54,010 $ 87,153 $ 149,770 Europe 19,740 28,305 71,303 95,306 Asia Pacific - Japan 1,275 5,730 7,421 9,960 Other foreign 2,394 2,674 5,987 3,147 ---------------- ---------------- ---------------- ----------------- Total $ 53,902 $ 90,719 $ 171,864 $ 258,183 ================ ================ ================ ================= (In thousands) September 30, December 31, 2001 2000 --------------- ---------------- Property and equipment, net United States $ 32,546 $ 26,929 Europe 939 1,138 Asia Pacific - Japan 159 61 --------------- ---------------- $ 33,644 $ 28,128 =============== ================
11 Two customers accounted for $12.8 million, or 24%, of the total revenue for the three months ended September 30, 2001, and $43.0 million, or 25%, of the total revenue for the nine months ended September 30, 2001. Two customers accounted for $21.9 million, or 24% of the total revenue for the three months ended September 30, 2000, and one customer accounted for $30.4 million, or 12%, of total revenue for the nine months ended September 30, 2000. Note 10 - Acquisitions S-Link Acquisition On April 20, 2001 the Company acquired privately-held S-Link Corporation ("S-Link") in a cash transaction totaling 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. 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 of $0.2 million, goodwill of $2.8 million, and other intangible assets relating to acquired technology of $1.7 million. Microware Acquisition On August 10, 2001, the Company acquired 83% of Microware's stock and as of August 27, 2001, the Company acquired the remaining shares of Microware, which became a wholly owned subsidiary of RadiSys. The Company anticipates that the acquisition of Microware will provide RadiSys with a highly differentiated leadership position for solutions using Intel's IXP1200 network processor. The purchase price aggregated approximately $15.0 million in cash consideration. The acquisition of Microware was accounted for using the purchase method. The results of operations for Microware have been included in the financial statements since the date of acquisition. The aggregate purchase price of $15.0 was preliminarily allocated to current assets of $3.5 million, fixed assets of $9.9 million, other assets of $0.6 million, intangibles relating to acquired technology, patents, and license agreements of $11.2 million, goodwill of $5.1 million, current liabilities of ($6.9) million and long-term debt of ($8.4) 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 the beginning of the periods presented, after giving effect to adjustments for amortization of goodwill as it relates to S-Link and identifiable intangible assets and the estimated impact on the income tax provision. The unaudited pro forma information is not necessarily indicative of the consolidated results of operations for future periods or that would actually have been realized had S-Link and Microware been a consolidated entity during the periods presented.
(In thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------ ------------------------------------ 2001 2000 2001 2000 ---------------- ---------------- ---------------- ----------------- Revenues $ 54,492 $ 94,228 $ 179,405 $ 268,354 Net income (loss) $ (5,871) $ 6,677 $ (26,937) $ 14,948 Net income (loss) per share (basic) $ (.34) $ .39 $ (1.56) $ .88 Net income (loss) per share (diluted) $ (.34) $ .36 $ (1.56) $ .82
12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Total revenue was $53.9 million for the three months ended September 30, 2001 compared to $90.7 million for the three months ended September 30, 2000 and $171.9 million for the nine months ended September 30, 2001 compared to $258.2 million for the nine months ended September 30, 2000. The Company had a net loss of $3.2 million for the three months ended September 30, 2001 compared to net income of $9.2 million for the three months ended September 30, 2000 and a net loss of $21.1 million for the nine months ended September 30, 2001 compared to net income of $22.7 million for the nine months ended September 30, 2000. The net loss for the nine months ended September 30, 2001 includes, before income tax benefit, the first and second quarter restructuring charges of $9.8 million and $3.2 million, respectively and other adjustments totaling $12.3 million. The first quarter restructuring charge was a result of the decision to consolidate all internal manufacturing operations from the Houston, Texas 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 throughout the Company. The second quarter restructuring charge related to the closure of the Company's Boston design center and severance of approximately 40 other employees. The Company expects that these restructuring decisions will result in improved operating performance by approximately $3.5 million per quarter once the plan has been fully implemented. Other adjustments for the nine months ended September 30, 2001 include: a $6.8 million inventory write-down related to the Company's reduced demand and decreasing component prices in the marketplace, $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; $0.8 million in charges to consolidate other Company facilities; a $0.4 million permanent write-down of an investment received in connection with a prior divestiture; and $0.4 million of severance costs not related to the restructuring. On April 20, 2001, the Company acquired privately-held S-Link Corporation ("S-Link) in a cash transaction totaling 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 August 27, 2001, the Company completed the acquisition of Microware Systems Corporation ("Microware"), which became a wholly owned subsidiary of RadiSys. The Company anticipates that the acquisition of Microware will provide RadiSys with a highly differentiated leadership position for solutions using Intel's IXP1200 network processor. The purchase price aggregated approximately $15.0 million in cash consideration. The acquisition of Microware was accounted for using the purchase method.
REVENUES (In thousands, except percents) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------- 2001 2000 % change 2001 2000 % change ---------- -------- ----------- ---------- -------- ----------- Revenues $ 53,902 $ 90,719 (41%) $ 171,864 $258,183 (33%)
Revenues decreased by $36.8 million or 41% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 and decreased by $86.3 million, or 33%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. 13 The decrease in revenues for the three and nine months ended September 30, 2001 was primarily attributable to lower customer sales as a result ofthe 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 September 30, 2001, and 46% of total revenues for the nine months ended September 30, 2001. The Company does not expect its restructuring events to impact future revenues.
COST OF SALES (In thousands, except percents) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------- 2001 2000 % change 2001 2000 % change ---------- -------- ----------- ---------- -------- ----------- Cost of sales $ 40,356 $ 59,338 (32%) $ 138,280 $167,409 (17%) As a % of revenues 75% 65% 80% 65%
Cost of sales decreased by $19.0 million or 32% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 and decreased $29.1 million or 17% for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The decrease in cost of sales was a result of the decrease in revenue during the nine months ended September 30, 2001. The increase in cost of sales as a percentage of revenues for the three months ended September 30, 2001 was primarily attributable to unfavorable absorption and reduced utilization of manufacturing capacity as a result of decreased revenues. The increase in cost of sales as a percentage of revenues for the nine months ended September 30, 2001 was due to the two explanations listed above as well as the inventory write-downs of $3.9 million and $6.8 million in the first and second quarters of 2001, respectively. If revenue volume increases, the Company should 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 fully realized during the fourth quarter of 2001.
RESEARCH AND DEVELOPMENT (In thousands, except percents) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------- 2001 2000 % change 2001 2000 % change ---------- -------- ----------- ---------- -------- ----------- Research and development $ 8,395 $ 9,542 (12%) $ 26,846 $ 27,828 (4%) As a % of revenues 16% 11% 16% 11%
Research and development expenses decreased by $1.1 million or 12% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 and decreased $1.0 million or 4% for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The decrease for the three and nine months ended September 30, 2001 is a result of lower spending due to additional cost control measures originally implemented during the first quarter of 2001 and fully in effect for the second and third quarters. These cost savings were offset by increases in engineering headcount of 59 people since September 30, 2000. Most of the increase in engineering headcount resulted from the S-Link acquisition in April 2001 and the Microware acquisition in August 2001. The increase in research and development spending as a percentage of revenue for the three and nine months ended September 30, 2001 was associated with the decline in revenue during the quarter. The Company expects savings in research and development expense as a result of 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 acquisitions of S-Link and Microware. 14
SELLING, GENERAL AND ADMINISTRATIVE (In thousands, except percents) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------- 2001 2000 % change 2001 2000 % change ---------- -------- ----------- ---------- -------- ----------- Selling, general and administrative $ 8,398 $ 9,716 (14%) $ 26,512 $ 28,965 (8%) As a % of revenues 16% 11% 15% 11%
Selling, general and administrative ("SG&A") expenses decreased by $1.3 million or 14% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 and decreased $2.5 million or 8% for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The decrease for the three and nine months ended September 30, 2001 is primarily due to lower spending as a result of cost control measures and a reduction in sales commission expense related to lower sales. This decrease is also, a result of 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 for the three and nine months ended September 30, 2001 is associated with decreased revenue volume and the higher percentage of SG&A expense associated with Microware.
GOODWILL AND INTANGIBLES AMORTIZATION (In thousands, except percents) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------- 2001 2000 % change 2001 2000 % change ---------- -------- ----------- ---------- -------- ----------- Goodwill and intangibles amortization $ 2,025 $ 1,557 30% $ 5,237 $ 5,008 5% As a % of revenues 4% 2% 3% 2%
Goodwill and intangible amortization expense increased by $0.5 million, or 30%, for the three months ended September 30, 2001, compared to the three months ended September 30, 2000 and increased by $0.2 million or 5% for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The increase in goodwill and intangible amortization for the three months ended September 30, 2001 is due to $0.3 million in amortization of the purchased intangibles related to the Microware acquisition and $0.2 million in amortization of goodwill related to the purchase of S-Link. The increase in goodwill and intangible amortization for the nine months ended September 30, 2001 is due to the increases in amortization as a result of the Microware and S-Link acquisitions, offset by the Company's decision to decrease the estimate of total goodwill associated with the 1999 acquisition of Open Computing Platform ("OCP"), which is based upon a reduction in the expected future obligation to be owed to IBM as defined in the acquisition agreement. Amortization periods for goodwill and intangibles range from four to fifteen years. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets, which supersedes APB Opinion No. 17, "Intangible Assets." The Company complied with SFAS No. 142 as it related to the Microware acquisition and has only amortized the purchased intangibles. The goodwill acquired through the purchase of Microware and all of the Company's other intangible assets will periodically be evaluated for impairment. 15 RESTRUCTURING CHARGES During the nine months ended September 30, 2001 the Company recorded restructuring charges of $9.8 million and $3.2 million during the first and second quarters of 2001, respectively, as described below. First Quarter 2001 Restructuring Charge In March 2001, the Company recorded restructuring charges of $9.8 million, primarily as a result of management's decision to close the Company's 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 Houston, Texas by September 30, 2001. The Company continues to operate a major design center in Houston, Texas as well as a product repair center. The Company expects that the decision to consolidate manufacturing in its Oregon plant 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 the acceleration of end-of-life product strategies; 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 November 2001. 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:
(In thousands) Employee termination Leasehold and related improvements Property and Capitalized Other costs and facilities equipment software charges Total ------------ -------------- ------------ ----------- ---------- ------------ Restructuring costs $ 2,777 $ 3,434 $ 2,460 $ 1,067 $ 105 $ 9,843 Expenditures (1,868) (238) - - (50) (2,156) Write-offs - - (2,460) (1,067) - (3,527) ------------ -------------- ------------ ----------- ---------- ------------ Balance accrued as of September 30, 2001 $ 909 $ 3,196 $ - $ - $ 55 $ 4,160 ============ ============== ============= =========== ========== ============
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 sales and other supporting functions as announced by the Company on March 30, 2001. All affected employees were terminated prior to September 30, 2001; however, the costs associated with these terminations will continue to be paid through the end of the year. As of September 30, 2001, the Company has paid $1.9 million of severance costs related to this restructuring charge. 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, Texas 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. 16 Leasehold improvements approximating $1.0 million relate to the Houston, Texas site. During the three months ended September 30, 2001 the Company charged $0.2 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 were utilized until the September 30, 2001 plant closure date. The Company will completely remove, sell, or scrap these impaired assets by the end of 2001. A smaller portion of the assets relating to Surface Mount Technology ("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, Massachusetts 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. All of the affected employees were terminated by September 30, 2001; however, the costs associated with these terminations will continue to be paid through the end of the year. 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:
(In thousands) Employee termination Leasehold and related improvements Property and Capitalized Other costs and facilities equipment software charges Total ------------ -------------- ------------ ----------- ---------- ------------ Restructuring costs $ 1,298 $ 249 $ 51 $ 1,521 $ 100 $ 3,219 Expenditures (838) (152) - - (58) (1,048) Write-offs - - (51) (1,521) - (1,572) ------------ -------------- ------------ ----------- ---------- ------------ Balance accrued as of September 30, 2001 $ 460 $ 97 $ - $ - $ 42 $ 599 ============ ============== ============ =========== ========== ============
Employee termination costs consist of severance, insurance benefits and related costs associated with the elimination of 18 positions at the Boston, Massachusetts DSP design center and approximately 40 other positions, as announced by the Company on June 27, 2001. The Company expects that this decision will result in improved operating performance by approximately $1.5 million per quarter once the plan has been fully implemented. 17 Included in the leasehold improvements and facilities charge is $0.1 million related to the future abandonment of leased space at the Company's Boston design center. Leasehold improvements totaling $0.1 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, Massachusetts DSP 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 $0.1 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 (In thousands, except percents) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------- 2001 2000 % change 2001 2000 % change ------------ ------------- ----------- ------------ ------------- ----------- Interest income (expense) $ (132) $ 403 (133%) $ 462 $ 606 (24%) Other income (expense) $ (360) $ 333 (208%) $ (1,084) $ 939 (215%)
Net interest income decreased $0.5 million for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 and decreased $0.1 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. During the three and nine months ended September 30, 2001, the Company earned interest on short-term investments, which was offset by interest expense incurred on the $100.0 million of convertible notes. During the second and third quarters of 2001, the Company received less interest income than during the first quarter of 2001 because of continued decreases in market interest rates offered on short-term investments. During the three and nine months ended September 30, 2000 the Company did not hold any short-term investments. The Company's increased supply of cash for investing during the three and nine months ended September 30, 2001 originated primarily from the Company's $100.0 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 nine months ended September 30, 2000. There were no amounts outstanding on the line of credit at any time during the nine months ended September 30, 2001. Net other income decreased by $0.7 million for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 and decreased by $2.0 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The impact of foreign exchange rate fluctuations for the three and nine months ended September 30, 2001 resulted in expense of approximately $0.4 million and $0.7 million, respectively. Adding to the fluctuation in Other income for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000, was the sale of 367,000 shares of GA common stock during the first quarter of 2000, resulting in a gain of $0.9 million.
INCOME TAX PROVISION (BENEFIT) (In thousands, except percents) 18 Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------- 2001 2000 % change 2001 2000 % change ---------- -------- ----------- ---------- -------- ----------- Income tax provision (benefit) $ (2,590) $ 2,115 (222%) $ (17,581) $ 7,854 (324%)
The effective income tax rate for the nine months ended September 30, 2001 was a benefit of 45% compared to a 26% tax provision rate for the nine months ended September 30, 2000. The change in the effective rate from September 30, 2000 to September 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 September 30, 2001, the Company had $47.5 million in cash and cash equivalents, $62.3 million in short-term investments, and working capital of approximately $165.7 million. Cash and cash equivalents decreased by $76.6 million during the nine months ended September 30, 2001 from $124.1 million at December 31, 2000. Activities impacting cash and cash equivalents are as follows: (In thousands) Nine months ended September 30, ----------------------------- 2001 2000 ------------ ----------- Cash (used in) provided by operating activities $ (2,899) $ 36,551 Cash used in investing activities (78,202) (81,075) Cash provided by financing activities 3,855 114,975 Effect of exchange rate changes on cash 655 (12) ------------ ----------- Net (decrease) increase $ (76,591) $ 70,439 ============ =========== The fluctuation in operating cash affecting cash for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000 is primarily due to the Company's net loss of $21.1 million for the nine months ended September 30, 2001. Also impacting the decrease was an $18.4 million decrease in accounts payable, a $4.4 million decrease in other accrued liabilities, a $4.6 million decrease in income tax payable, and a $12.2 million increase in deferred income taxes. This decrease in operating cash was partially offset by the Company's decrease in accounts receivable of $27.9 million and the Company's decision to write-off $2.6 million of fixed assets, $2.7 million of capitalized software and $10.7 million of inventory. Significant investing activities affecting cash for the nine months ended September 30, 2001 included $52.5 million in purchases of short-term investments, net of sales, business acquisition expenditures of $19.0 million, $4.0 million in capital expenditures, and $2.1 million in capital software additions. Business acquisitions consisted of the purchase of S-Link for approximately $4.7 million, the purchase of Microware for approximately $15.0 million and the increased purchase price recorded for the OCP acquisition of $0.9 million based upon a formula tied to certain OCP revenues pursuant to the acquisition agreement. Capital expenditures primarily consisted of the SAP implementation costs and network upgrades. The Company's financing activities for the nine months ended September 30, 2001 included $4.9 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 and $1.0 million in the buyback of common stock. 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. 19 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. The Company's statements concerning anticipated results of the S-Link and Microware acquisitions, the impact of the Company's restructuring events on future revenues, the anticipated cost savings effects of the Company's restructuring activities, and the Company's projected liquidity are some of the forward-looking statements contained in this Quarterly Report on Form 10-Q. 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 industries' 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 business conditions in the general economy and in the markets RadiSys serves, particularly the communications markets; o changes in customer order patterns or inventory levels; o excess or obsolete inventory and variations in inventory valuation; o dependence on the relationship with Intel Corporation and its products; o lower than expected or delayed sales by RadiSys' customers in the communications market; o lower than expected design wins with key OEMs; o failure of leading OEMs to incorporate RadiSys' solutions in successful products; o schedule delays or cancellations in design wins; o excess manufacturing capacity; o execution of the development or production ramp for design wins; o inability to successfully integrate acquired businesses and assets, including S-Link and Microware; o deliveries of products containing errors, defects and 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 RadiSys' products or reduced sales volume; o political, economic and regulatory risks associated with international operations, including interest rate and currency exchange rate fluctuations; o the impact of rapid technological and market change; o the inability to protect RadiSys' intellectual property or successfully to defend against infringement claims by others; o availability of qualified personnel, including at the most senior management levels; 20 o technological difficulties and resource constraints encountered in developing new products; o difficulty or inability to meet RadiSys' obligations to repay indebtedness; o political unrest or instability; o disruptions in the general economy and in the Company's business, including disruptions of cash flow and the Company's normal operations, that may result from terrorist attacks or armed conflict; and o other risk factors listed from time to time in RadiSys' SEC reports, including but not limited to those listed under "Risk Factors" in RadiSys' 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. Although forward-looking statements help provide complete information about RadiSys, investors should keep in mind that forward-looking statements are only predictions and are inherently less reliable than historical information. 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, 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. 21 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 nine months ended September 30, 2001 and 2000 was $.7 million and $.5 million, respectively. 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 $.5 million. 22 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RADISYS CORPORATION Date: November 13, 2001 By: /s/ Julia Harper ------------------ ---------------------------------- Julia Harper Vice President of Finance and Administration and Chief Financial Officer (Authorized officer and Principal Financial Officer) 24 -----END PRIVACY-ENHANCED MESSAGE-----