Improvements in cash provided by operating activities during the quarter ended March 31, 2002 resulted primarily from a decrease in accounts receivable and inventory. The net decrease in accounts receivable of $6.6 million from December 31, 2001 to March 31, 2002 resulted from an improvement in average days sales outstanding from 68 days for the quarter ended December 31, 2001 to 61 days for the quarter ended March 31, 2002 as well as lower sales volume during the first quarter 2002 compared to the fourth quarter of 2001. The decline in inventory from December 31, 2001 to March 31, 2002 was primarily attributable to the Company’s continuing efforts to manage inventory levels in order to meet future customer demands while attempting to mitigate inventory obsolescence. Inventory turns improved from 4.9 for the quarter ended December 31, 2001 to 5.1 for the quarter ended March 31, 2002. Cash used in operating activities during the quarter ended March 31, 2001 was primarily a result of an increase in inventories of $6.8 million, a decrease in income tax payable of $5.4 million, and a decrease in accounts payable of $7.6 million.
28 Net cash used in investing activities was $1.6 million for the quarter ended March 31, 2002 compared to net cash provided by investing activities of $0.06 million for the quarter ended March 31, 2001. Significant investing activities affecting cash and cash equivalents for the quarter ended March 31, 2002 included $25.4 million in investment purchases and capital expenditures of $1.2 million, offset by proceeds received from maturities of investments of $25.0 million. Capital expenditures of $1.2 million primarily consisted of network upgrades, manufacturing test equipment, and purchases of computers. Significant investing activities affecting cash and cash equivalents for the quarter ended March 31, 2001 consisted of $84.0 million in proceeds from investment maturities offset by $80.6 million of investment purchases, $1.8 million of capital expenditures, including SAP implementation and network upgrades, and $0.9 million of expenditures for capitalized software. Net cash used in financing activities was $5.1 million for the quarter ended March 31, 2002 compared to net cash provided by financing activities of $1.8 million for the quarter ended March 31, 2001. Financing activities for the quarter ended March 31, 2002 consisted of $1.4 million of proceeds from issuance of common stock in connection with exercise of options under the 1995 Stock Incentive Plan and the purchase of shares under the Employee Stock Purchase Plan. This increase was offset by the repurchase of approximately $8.0 million of convertible notes for $6.4 million. Significant financing activities for the quarter ended March 31, 2001 included $1.8 million in proceeds from issuance of common stock in connection with exercise of options under the 1995 Stock Incentive Plan and the purchase of shares under the Employee Stock Purchase Plan. Line of Credit During the quarter ended March 31, 2002, the Company renewed its line of credit facility for $10.0 million at an interest rate based upon the lower of the bank's prime rate or LIBOR plus 1.0%. The line of credit expires on March 31, 2003. The new line of credit is collateralized by the Company's non-equity investments. The market value of these investments must exceed 125.0% of the borrowed facility amount, and the investments must meet specified investment grade ratings. As of March 31, 2002 and December 31, 2001, there was no outstanding balance on the line of credit. Convertible Subordinated Notes During the quarter ended March 31, 2002, RadiSys’ Board of Directors authorized the repurchase of up to $20.0 million of convertible subordinated notes. RadiSys may purchase the notes in the open market or through privately negotiated transactions. During the three months ended March 31, 2002, the Company repurchased approximately $8.0 million principal amount of the 5.5% convertible subordinated notes, with associated net discount of $0.2 million for $6.4 million in negotiated transactions with third parties. The early extinguishments of the notes resulted in an extraordinary gain (net of tax of $0.5 million) of approximately $0.8 million. Outlook The Company believes that its current cash and cash equivalents, short-term investments and cash generated from operations will satisfy its expected working capital needs, capital expenditures, investment requirements, stock repurchases, and other liquidity requirements associated with its existing operations through at least the next 12 months. Capital expenditures are expected to be minimal, ranging from $0.5 million to $1.0 million per quarter. Because capital requirements cannot be predicted with certainty, it is possible that the Company could be compelled to obtain additional financing in the future, and that financing may not be available.
29Subsequent Events In addition to the $8.0 million principal amount of 5.5% convertible subordinated notes repurchased by the Company during the quarter ended March 31, 2002, the Company repurchased approximately $11.7 million in April 2002, with associated net discount of $0.3 million for $10.1 million in negotiated transactions with third parties, which resulted in an extraordinary gain of $0.9 million, net of $0.6 million in taxes. On May 3, 2002, RadiSys announced that Dr. Glenford J. Myers stepped down as President, Chief Executive Officer and Chairman of the Board of Directors of the Company, and that Ronald A. Dilbeck, the Company’s Senior Vice President and General Manager of Telecommunications Division, has been appointed as acting President and Chief Executive Officer. Carl W. Neun has been appointed as acting Chairman of the Board of Directors of the Company.
30FORWARD-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 Company’s expectations and goals for revenues, gross margin, research and development expenses, selling, general, and administrative expenses, 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 it’s industries’ actual results, levels of acti vity, 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, - dependence on the relationship with Intel Corporation and its products;
- lower than expected or delayed sales by the Company’s customers;
- changes in customer order patterns or inventory levels;
- excess or obsolete inventory and variations in inventory valuation;
- lower than expected or delayed or cancelled design wins with key OEMs;
- failure of leading OEMs to incorporate the Company’s solutions in successful products;
- schedule delays or cancellations in design wins;
- excess manufacturing capacity;
- execution of the development or production ramp for design wins;
- inability to successfully integrate acquired businesses and assets, including S-Link Corporation and Microware Systems Corporation, including the consolidation of redundant offices and service operations;
- deliveries of products containing errors, defects, or bugs;
- dependence on a limited number of suppliers or, in some cases, one supplier for components and equipment used to manufacture products;
- competition in the building block markets for communications equipment, which may lead to lower than expected sales prices for the Company’s products or reduced sales volume;
- political, economic and regulatory risks associated with international operations, including interest rate and currency exchange rate fluctuations;
- political unrest or instability;
- 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;
- ability to attract and retain qualified personnel, including at the most senior management levels;
31- technological difficulties and resource constraints encountered in developing new products;
- the impact of rapid technological and market changes;
- the inability to protect the Company’s intellectual property or successfully to defend against infringement claims by others;
- business conditions in the general economy and in the markets the Company serves, particularly the communications markets;
- difficulty or inability to meet the Company’s obligations to repay indebtedness; and
- other risk factors listed from time to time in the Company’s SEC reports, including but not limited to those listed under the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and subsequently filed reports.
In some cases, forward-looking statements can be identified by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," "the Company’s future success depends," "seek to continue," "its intent," "intends," the negative of these terms, or other comparable terminology. 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" below 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 obligation to update any of the forward-looking statements. RISK FACTORS The Company’s period-to-period revenue and operating results fluctuate significantly, which may result in volatility in the price of RadiSys’ common stock. The Company’s period-to-period revenue and operating results have varied in the past and management expects they will continue to vary in the future, and any such fluctuations may cause RadiSys’ stock price to fluctuate. Accordingly, you should not rely on the results of any past quarterly or annual periods as an indication of RadiSys’ future performance. In future periods, the Company’s operating results may fall below the expectations of public market analysts and investors, which could cause the price of RadiSys’ common stock to decline, perhaps significantly. A number of factors may contribute to fluctuations in revenues and operating results. The Company may have difficulty predicting the volume and timing of orders for products, and delays in closing orders can cause the Company’s operating results to fall substantially short of anticipated levels for any period. Delays by RadiSys’ OEM customers in producing products that incorporate RadiSys’ products also could cause its operating results to fall short of anticipated levels. Other factors that may particularly contribute to fluctuations in the Company’s revenue and operating results include:
32- success in achieving design wins in which the Company’s products are designed into those of the Company’s customers;
- market acceptance of the OEM products that incorporate the Company’s products;
- rate of adoption of new products;
- excess or obsolete inventory and variations in inventory valuation;
- competition from new technologies and other companies; and
- unpredictability of the life cycles of RadiSys’ customers’ products.
Because of the Company’s dependence on its relationship with Intel and its products, any disruption of its relationship with Intel, or any downturn in Intel’s business, could have an adverse impact on business. The Company’s success is significantly dependent on Intel’s continued commitment to the embedded computer market. Most of RadiSys’ products are based on Intel’s architecture. Intel’s decision to de-emphasize or withdraw support of the embedded computer segment of the computer market would have a materially adverse effect on the Company’s business, financial condition and results of operations. In addition, the Company has designed and manufactured embedded computer solutions for Intel, received research and development funding from Intel for the development of various embedded computer systems, engaged in joint planning and marketing programs with Intel and relied in part on Intel’s distributors to market RadiSys’ products. Any adverse development in the Company’s relationships with Intel could have a materially adverse effect on its business, financial condition and results of operations. Finally, RadiSys’ reliance on Intel’s architecture renders the Company vulnerable to changes in microprocessor technology. For example, if the architectures used in the microprocessors of Intel’s competitors, such as Advanced Micro Devices and Motorola, Inc., become standard in the embedded computer industry, demand for the Company’s embedded computer solutions may decline. Failure on the Company’s part to use the most current technology in its products could have a materially adverse effect on its business, results of operations, and financial condition. RadiSys depends on the communications market and any inability to sell RadiSys’ products to this market could have a substantially negative impact on its revenues. The Company derives a substantial portion of product revenues from sales of products for communications applications. The communications market is characterized by intense competition, rapid technological change, and short-term economic uncertainty. Products for communications applications are often based on industry standards, which are continually evolving. RadiSys’ future success will depend, in part, upon its ability to successfully develop and introduce new products based on emerging industry standards. The Company’s failure to conform to these standards could render its existing products unmarketable or obsolete. If the communications market develops new standards, the Company may be unable to successfully design and manufacture new products that address the needs of RadiSys’ customers or achieve substantial market acceptance.
33The Company’s ability to reduce costs is limited by its ongoing need to invest in research and development. The Company’s industry is characterized by the need for continued investment in research and development. If the Company failed to invest sufficiently in research and development, the Company’s products could become less attractive to potential customers, and its business and financial condition could be materially adversely affected. As a result of the Company’s need to maintain or increase its spending levels in this area and the difficulty in reducing costs associated with research and development, the Company’s operating results could be materially harmed if its net sales fall below expectations. In addition, as a result of RadiSys’ emphasis on research and development and technological innovation, its operating costs may temporarily increase further in the future. If the Company does not achieve design wins with key OEMs, the Company may be unable to secure future design wins from, and therefore make sales of its products to, these customers in the future. Once an OEM has designed building blocks into its products, the OEM may be reluctant to change its solution source due to the significant costs associated with qualifying a new supplier. Accordingly, the failure to achieve design wins with key OEMs who have chosen a competitor’s solution could create barriers to future sales opportunities with such OEMs and could limit the Company’s growth. If leading OEMs do not incorporate building blocks in successful products, sales of RadiSys’ products will decline significantly. The Company relies on OEMs, such as Nokia and Nortel, to include its building blocks in their products. RadiSys further relies on the OEM’s products to be successful. If these products are not successful, the Company will not sell building blocks in large quantities to these OEMs. Accordingly, the Company must correctly anticipate the price, performance and functionality requirements of the OEMs. The Company also must successfully develop products that meet these requirements and make these products available on a timely basis and in sufficient quantities. Moreover, if there is consolidation in any of the Company’s target markets, especially communications, or if a small number of OEMs otherwise dominate any of these markets, then the Company’s success will depend on its ability to establish and maintain relationships with these market leaders. If RadiSys does not anticipate trends in any of its markets or fails to meet the requirements of OEMs, or if the Company does not success fully establish and maintain relationships with leading OEMs, then its business, financial condition and results of operations could be seriously harmed. If RadiSys delivers products with defects, the Company’s credibility could be harmed, and market acceptance and sales of its products could decrease. RadiSys’ products are complex and have contained errors, defects and bugs when introduced. If the Company delivers products with errors, defects or bugs, its credibility and market acceptance and sales of its products could be harmed. Further, if the Company’s products contain errors, defects and bugs, then it may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against the Company or against RadiSys’ customers. The Company has agreed to indemnify its customers in some circumstances against liability from defects in its products. Product liability litigation arising from errors, defects or problems, even if it resulted in an outcome favorable to RadiSys, could be time consuming and costly to defend. Existing or future laws or unfavorable judicial decisions could negate any limitation of liability provisions that are included in the Company’s license agreements ... A successful product liability claim could seriously harm RadiSys’ business, financial condition and results of operations. RadiSys maintains insurance coverage for product liability claims. Although RadiSys believes this coverage is adequate, the Company does not guarantee that coverage under insurance policies will be adequate to cover product liability claims against RadiSys. In addition, product liability insurance could become more expensive and difficult to maintain and may not be available in the future on commercially reasonable terms or at all. The amount and scope of any insurance coverage may be inadequate if a product liability claim is successfully asserted against RadiSys.
34Because the Company depends on a few suppliers or, in some cases, one supplier for some of the components RadiSys uses in the manufacture of its products, a loss of that supplier or a shortage of any of those components could have a materially adverse effect on its business. RadiSys depends on third parties for a continuous supply of the components the Company uses in the manufacture of its products. Some of these components are obtained from a single supplier, or a limited number of suppliers. RadiSys would encounter difficulty in locating alternative sources of supply for some of these components. Moreover, suppliers may discontinue or upgrade products, some of which are incorporated into its products. Any limitation, discontinuance or upgrade could require the Company to redesign a product to incorporate newer or alternative technology. If the Company were to change any of its sole or limited source vendors, it would be required to requalify each new vendor. Requalification could prevent or delay product shipments that could negatively affect the Company’s results of operations. RadiSys has no long-term contracts with any suppliers of components. The electronics industry has experienced product shortages, some of which have been both prolonged and severe. Because of capacity constraints in the electronic component industry, RadiSys has at times experienced supply shortages of its components. These shortages have adversely affected component prices and have resulted in the delay of shipments of products incorporating these components. Failure to obtain adequate supplies of components or increases in the cost of components could have a materially adverse effect on the Company’s business, financial condition and results of operations. Acquisitions may be costly and difficult to integrate, divert management resources or dilute shareholder value. RadiSys has considered and completed strategic acquisitions in the past, including the acquisitions in 2001 of S-Link Corporation and Microware Systems Corporation. In addition, in the future the Company may acquire or make investments in complementary companies, products or technologies. RadiSys may not be able to integrate any acquired companies, products or technologies successfully. In connection with any acquisitions or investments it could: - issue stock that would dilute RadiSys’ existing shareholders’ percentage ownership;
- incur debt and assume liabilities;
- obtain financing on unfavorable terms;
- incur amortization expenses related to acquired intangible assets or incur large and immediate write-offs;
- incur large and immediate write-offs related to office closures of the acquired companies, including costs relating to termination of employees and facility and leasehold improvement charges relating to vacating the acquired companies' premises; and
- reduce the cash that would otherwise be available to fund the Company’s operations or to use for other purposes.
35RadiSys’ recent acquisitions and future potential acquisitions may pose additional risks to RadiSys’ operations, including: - problems and increased costs in connection with integration of the personnel, operations, technologies or products of the acquired companies;
- unanticipated costs;
- diversion of management’s attention from its core business;
- adverse effects on business relationships with the Company’s suppliers and customers and those of the acquired company;
- acquired assets becoming impaired as a result of technical advancements or worse-than-expected performance by the acquired company;
- entering markets in which RadiSys has no, or limited, prior experience; and
- potential loss of key employees, particularly those of the acquired organization.
Failure to successfully integrate any future acquisition may harm the Company’s business. Competition in the market for building blocks, platforms, application subsystems and private label full system solutions is intense, and could reduce the Company’s sales and prevent the Company from maintaining profitability. The market for building blocks, platforms, application subsystems and full system solutions is intensely competitive, highly fragmented, and rapidly changing. The Company expects competition to persist and intensify, which could result in price reductions, reduced gross margins, and loss of market share for its products. RadiSys competes with a number of companies providing building blocks. Some of RadiSys’ competitors and potential competitors have a number of significant advantages over RadiSys, including: - longer operating history;
- more extensive name recognition and marketing power;
- preferred vendor status with RadiSys’ existing and potential customers; and
- significantly greater financial, technical, marketing and other resources, giving them the ability to respond more quickly to new or changing opportunities, technologies and customer requirements.
In addition, existing or potential competitors may establish cooperative relationships with each other or with third parties, or adopt aggressive pricing policies to gain market share. As a result of increased competition, the Company could encounter significant pricing pressures. These pricing pressures could result in significantly lower average selling prices for RadiSys’ products. RadiSys may not be able to offset the effects of any price reductions with an increase in the number of RadiSys’ customers, cost reductions or otherwise. In addition, many of the industries the Company serves, such as the communications industry, are encountering consolidation, or are likely to encounter consolidation in the near future, which could result in increased price and other competition.
36The Company’s international operations expose the Company to additional political, economic and regulatory risks not faced by businesses that operate only in the United States. The Company conducts international operations in Europe and Asia. RadiSys’ international operations are subject to risks similar to those affecting RadiSys’ U.S. operations, as well as a number of other risks, including: - longer accounts receivable collection cycles;
- expenses associated with localizing products for foreign markets;
- difficulties in managing operations across disparate geographic areas;
- difficulties in hiring qualified local personnel;
- foreign currency exchange rate fluctuations;
- difficulties associated with enforcing agreements and collecting receivables through foreign legal systems;
- unexpected changes in regulatory requirements that impose multiple conflicting tax laws and regulations; and
- periodic economic down turns and unstable political environments in these foreign markets, including disruptions of cash flow and RadiSys’ normal operations that may result from terrorist attacks or armed conflict.
In addition, various jurisdictions outside the United States have laws limiting the right and ability of non-United States subsidiaries and affiliates to pay dividends and remit earnings to affiliated companies unless specified conditions exist. The Company’s ability to expand the sale of its products internationally is also limited by the necessity of obtaining regulatory approval in new countries. The Company sells products to customers in transactions denominated primarily in U.S. dollars. Some of RadiSys’ international sales, however, are denominated in currencies other than U.S. dollars, and thus the Company is exposed to risks associated with exchange rate fluctuations. An increase in the value of the U.S. dollar relative to foreign currencies could adversely affect the Company’s financial position, results of operations, and cash flows. New technologies could render RadiSys’ products obsolete. The market for building blocks, platforms, application subsystems, and full system solutions is characterized by rapid technological change, evolving industry standards, changes in consumer demands, and frequent new product introductions. If the Company is unable to adapt to its rapidly changing market on a cost-effective and timely basis, the Company’s business, financial condition and results of operations will be materially and adversely affected. Advances in embedded computer technology could lead to new competitive technologies and products that have better performance or lower prices than RadiSys’ products, and could render its products obsolete and unmarketable.
37If the Company is unable to protect its intellectual property, the Company may lose a valuable competitive advantage or be forced to incur costly litigation to protect its rights. The Company’s future success and ability to compete depends in part upon its proprietary technology, but its protective measures may prove inadequate to protect its proprietary rights. RadiSys relies principally on trade secrets for protection of its intellectual property. The Company also relies on a combination of copyright, trademark and trade secret laws and contractual provisions to establish and protect the Company’s proprietary rights. Despite RadiSys’ efforts to protect its intellectual property, a third party could copy or otherwise obtain proprietary information without authorization, or could develop technology competitive to the Company. The Company’s competitors may independently develop similar technology, duplicate the Company’s products or design around the Company’s intellectual property rights. In addition, the laws of some foreign countries do not protect RadiSys’ proprietary rights to as great an extent as do the laws of the United States. The Company expects that the use of its intellectual property will become more difficult to monitor if RadiSys increases its international presence. RadiSys may have to litigate to enforce its intellectual property rights, to protect its trade secrets or know-how or to determine their scope, validity or enforceability. Enforcing or defending its intellectual property rights is expensive, could cause the diversion of the Company’s resources and may not prove successful. If RadiSys is unable to protect its intellectual property, the Company may lose a valuable competitive advantage. If RadiSys becomes subject to intellectual property infringement claims, these claims could be costly and time consuming to defend, divert management attention or cause product delays. Any intellectual property infringement claims against the Company, with or without merit, could be costly and time consuming to defend, divert management’s attention or cause product delays. The Company expects that building block manufacturers will be increasingly subject to infringement claims as the number of products and competitors in RadiSys’ industry grows and the functionality of products overlaps. In addition, from time to time RadiSys has received correspondence claiming that some of RadiSys’ products may be infringing one or more patents. None of these allegations has resulted in litigation. RadiSys believes it has credible arguments that these patents are either invalid, not infringed or would not be enforced by a court. If, however, the Company’s products were found to infringe a third party’s proprietary rights, RadiSys could be required to enter into royalty or licensing agreements to be able to sell its products and be subject to claims for damages. Royalty and li censing agreements, if required, may not be available on terms acceptable to RadiSys or at all. Management cannot guarantee that any of the foregoing actions, if successful, would not have a materially adverse effect on RadiSys’ financial condition and results of operations. The loss of key management or the Company’s inability to attract and retain sufficient numbers of managerial, engineering and other technical personnel could have a material adverse effect upon RadiSys’ results of operations. RadiSys’ continued success depends, in part, upon key managerial, engineering and technical personnel as well as its ability to continue to attract and retain additional personnel. In the past, key personnel have left RadiSys to pursue other opportunities, and Dr. Glenford J. Myers recently stepped down as the Company’s President, Chief Executive Officer and Chairman of the Board. The loss of key personnel, including Dr. Myers, could have a material adverse effect on the Company’s business or results of its operations. RadiSys may not be able to retain its key managerial, engineering and technical employees. The Company’s growth may be dependent on its ability to attract new highly skilled and qualified technical personnel, in addition to personnel that can implement and monitor its financial and managerial controls and reporting systems. RadiSys does not guarantee that its recruiting efforts to attract and retain these personnel will be successful.
38New Pronouncement In May 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," ("SFAS 145"). SFAS 145 rescinds the automatic treatment of gains or losses from extinguishment of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." In addition, SFAS 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and makes various technical corrections to existing pronouncements. SFAS 145 is effective for the Company for all financia l statements issued in fiscal 2003. Management is currently assessing the potential impact of SFAS 145 on the Company’s financial statements.
39Item 3. Quantitative and Qualitative Disclosures about Market Risk RadiSys is exposed to market risk from changes in interest rates, foreign currency exchange rates, and equity trading prices, which could impact results of its operations and financial condition. Interest Rate Risk. RadiSys 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 value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due to the short duration of most of the investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair value of the portfolio. Therefore, the Company would not expect the 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. RadiSys pays the expenses of its international operations in local currencies, namely, the Japanese Yen, British Pound, and Euro. The 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, future results could be materially and adversely affected by changes in these or other factors. RadiSys is also exposed to foreign exchange rate fluctuations as they relate to revenues and operating expenses 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 Company implemented a hedging policy in the fourth quarter of 2000 to mitigate exposures on certain transactions and balances that are not denominated in U.S. dollars. The Company entered into several 30-day forward contracts to hedge its receivables in Yen, of which no forward contracts were outstanding at March 31, 2002 or December 31, 2001. Foreign exchange rate transaction losses, net of gains for the quarters ended March 31, 2002 and 2001 were approximately $0.4 million and $0.3 million, respectively. Equity Price Risk. RadiSys is exposed to equity price risk due to one available-for-sale investment it holds in GA Stock. The Company typically does not attempt to reduce or eliminate its market exposure on this security. 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 flows, because the carrying value of this investment in the financial statements is less than $0.5 million.
40PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K The Company filed a Form 8-K dated January 25, 2002 reporting Item 5.
41SIGNATURES 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. |
