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 March 31, 2001 or
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_____________.
Commission file number: 0-26844
RADISYS CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0945232
(State or other jurisdiction (I.R.S. Employer
of organization or incorporation) Identification Number)
5445 NE Dawson Creek Drive
Hillsboro, OR 97124
(Address of principal executive offices, including zip code)
(503) 615-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Number of shares of common stock outstanding as of May 10, 2001 was 17,192,029
RADISYS CORPORATION
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet - March 31, 2001 and December 31, 2000 3
Consolidated Statement of Operations - Three months ended March 31, 2001
and 2000 4
Consolidated Statement of Changes in Shareholders' Equity - December 31,
2000 through March 31, 2001 5
Consolidated Statement of Cash Flows - Three months ended March 31,
2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
RadiSys Corporation
Consolidated Balance Sheet
(in thousands)
March 31, December 31,
2001 2000
(Unaudited)
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 75,990 $ 124,086
Short term investments 50,317 9,799
Accounts receivable, net 53,711 68,241
Inventories, net 56,214 53,247
Other current assets 6,229 2,783
Deferred income taxes 6,137 4,682
---------- ----------
Total current assets 248,598 262,838
Property and equipment, net 25,345 28,128
Goodwill and intangible assets, net 29,297 30,444
Other assets 14,257 12,593
---------- ----------
Total assets $ 317,497 $ 334,003
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 24,982 $ 32,602
Accrued restructuring 6,157 -
Accrued interest payable 688 2,185
Income taxes payable 283 5,642
Accrued wages and bonuses 5,469 7,876
Other accrued liabilities 9,741 9,176
---------- ----------
Total current liabilities 47,320 57,481
Convertible subordinated notes 97,248 97,191
---------- ----------
Total liabilities 144,568 154,672
---------- ----------
Shareholders' equity
Common stock, 100,000 shares authorized,
17,180 and 17,070 shares issued and
outstanding 155,600 153,482
Retained earnings 19,288 27,766
Accumulated other comprehensive loss:
Cumulative translation adjustment (1,959) (1,917)
---------- ----------
Total shareholders' equity 172,929 179,331
---------- ----------
Total liabilities and shareholders' $ 317,497 $ 334,003
equity ========== ==========
The accompanying notes are an integral part of this statement.
3
RadiSys Corporation
Consolidated Statement of Operations
(in thousands, except per share amounts)
Three Months Ended
(unaudited)
March 31, March 31,
2001 2000
-------- --------
Revenues $ 56,159 $ 81,293
Cost of sales 46,411 52,435
-------- --------
Gross profit 9,748 28,858
Research and development 9,284 8,981
Selling, general and administrative 9,406 9,542
Goodwill and intangibles amortization 1,556 1,724
Restructuring charges 9,843 -
-------- --------
Income (loss) from operations (20,341) 8,611
Interest income (expense), net 524 (56)
Other income (expense), net (707) 838
-------- --------
Income (loss) before income tax provision (benefit) (20,524) 9,393
Income tax provision (benefit) (12,046) 2,762
-------- --------
Net income (loss) $ (8,478) $ 6,631
========= ========
Net income (loss) per share (basic) $ (0.49) $ 0.40
======== ========
Net income (loss) per share (diluted) $ (0.49) $ 0.36
======== ========
The accompanying notes are an integral part of this statement.
4
RadiSys Corporation
Consolidated Statement of Changes in Shareholders' Equity
(in thousands)
(unaudited)
Cumulative Total other
Common Stock translation Retained comprehensive
Shares Amount adjustment earnings Total loss
-------- ---------- ----------- --------- --------- -------------
Balances, December 31, 2000 17,070 $ 153,482 $ (1,917) $ 27,766 $ 179,331
Shares issued pursuant to
benefit plans 110 1,846 1,846
Tax benefit of options exercised 272 272
Translation adjustment (42) (42) $ (42)
Net loss for the period (8,478) (8,478) (8,478)
-------- ---------- ----------- --------- --------- -------------
Balances, March 31, 2001 17,180 $ 155,600 $ (1,959) $ 19,288 $ 172,929
======== ========== =========== ========= =========
Total other comprehensive
loss, three months ended
March 31, 2001 $ (8,520)
=============
The accompanying notes are an integral part of this statement
5
RadiSys Corporation
Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
--------------------------------
March 31, March 31,
2001 2000
-------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (8,478) $ 6,631
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 4,549 4,339
Non-cash interest expense 57 -
Recognized loss on writedown of marketable equity securities 390 -
Gain on sale of marketable equity securities - (856)
Impairment of fixed assets 2,460 -
Writeoff of capitalized software 1,237 -
Deferred income taxes (4,529) 1,090
Tax benefit of options exercised 272 2,005
Net changes in current assets and current liabilities:
Decrease (increase) in accounts receivable 14,756 (2,432)
Decrease (increase) in interest receivable (226) -
Decrease (increase) in inventories (2,967) (650)
Decrease (increase) in other current assets (3,446) (2,457)
Increase (decrease) in accounts payable (7,620) 10,476
Increase (decrease) in interest payable (1,497) -
Increase (decrease) in income taxes payable (5,359) 2,446
Increase (decrease) in accrued wages and bonuses (2,407) (452)
Increase (decrease) in accrued restructuring 6,157 -
Increase (decrease) in other accrued liabilities 565 (377)
-------------- ---------------
Net cash provided by (used for) operating activities (6,086) 19,763
-------------- ---------------
Cash flows from investing activities:
Purchase of short-term investments (50,215) -
Sales of short-term investments 9,697 -
Business acquisitions (415) (962)
Capital expenditures (1,772) (1,597)
Purchase of long-term asset (228) -
Sale of assets - 350
Capitalized software production costs and other assets (881) (825)
-------------- ---------------
Net cash used for investing activities (43,814) (3,034)
-------------- ---------------
Cash flows from financing activities:
Issuance of common stock, net 1,846 3,272
Payments on capital lease obligation - (47)
-------------- ---------------
Net cash provided by financing activities 1,846 3,225
-------------- ---------------
Effect of exchange rate changes on cash (42) 351
-------------- ---------------
Net increase (decrease) in cash and cash equivalents (48,096) 20,305
Cash and cash equivalents, beginning of period 124,086 15,708
-------------- ---------------
Cash and cash equivalents, end of period $ 75,990 $ 36,013
============== ===============
The accompanying notes are an integral part of this statement
6
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
March 31, 2001
1. Significant Accounting Policies
Basis of Presentation
RadiSys Corporation (the Company) was incorporated in March 1987 under
the laws of the State of Oregon for the purpose of developing, producing and
marketing computer system (hardware and software) products for embedded computer
applications in manufacturing automation, medical, transportation,
telecommunications and test equipment marketplaces. The accompanying
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements are unaudited and
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission and in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of results for the interim periods. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2000. The results of operations for interim periods are
not necessarily indicative of the results for the entire year.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates and judgments made by management of the Company include matters such
as collectibility of accounts receivable, realizability of inventories,
recoverability of capitalized software and deferred tax assets and adequacy of
accrued restructuring costs.
Reclassifications
Reclassifications have been made to amounts in prior years to conform
to current year presentation. These changes had no impact on previously reported
results of operations or shareholders' equity.
Cash flows
Non-cash investing and financing activities for the quarter ended March
31, 2001 included a recognized loss of $.4 on the market value of the Company's
available for sale investment in GA eXpress (GA) common stock. Non-cash
investing and financing activities for the quarter ended March 31, 2000 included
the effect of an increase in the market value of the GA common stock. The
increase of $2.4 million, net of tax, impacted other long term assets and
unrealized gain/loss on securities available for sale.
7
Long-lived Assets
The Company accounts for long-lived assets in accordance with Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires the Company to review the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If this review indicates that the carrying
amounts of long-lived assets will not be recoverable, as determined based on the
estimated undiscounted cash flows of the Company over the remaining amortization
period, the carrying amounts of the long-lived assets are reduced by the
estimated shortfall of cash flows. During the quarter ended March 31, 2001 the
Company wrote off fixed assets totaling $2.5 million as a result of an
impairment analysis of its Houston manufacturing plant associated with its
restructuring plan. See footnote 7 "Accrued Restructuring."
New Pronouncements
In 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. FAS 137 delayed adoption of FAS 133 to fiscal years commencing
after June 30, 2000. The adoption of FAS 133 did not snd has not had a material
effect on the Company's financial position or results of operations, due to its
limited use of derivative instruments.
2. Accounts Receivable
Trade accounts receivable are net of an allowance for doubtful accounts
of $650 and $655 at March 31, 2001 and December 31, 2000, respectively. The
Company's customers are concentrated in the technology industry.
3. Inventories
Mar 31, Dec 31,
2001 2000
------------- ------------
Raw materials $46,136 $ 44,572
Work-in-progress 3,248 4,518
Finished goods 6,830 4,157
------------- ------------
$56,214 $53,247
============= ============
During the quarter ended March 31, 2001, the Company wrote down
inventory by $3.9 million 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 identification of excess materials resulting from
reduced demand. This write-down was charged to cost of sales.
8
4. Property and Equipment
Mar 31, Dec 31,
2001 2000
------------ ------------
Land and building $ 3,919 $ 3,919
Manufacturing equipment 20,173 20,907
Office equipment and software 26,587 25,170
Leasehold improvements 5,798 7,278
------------ ------------
56,477 57,274
Less: accumulated depreciation 31,132 29,146
------------ ------------
$25,345 $28,128
============ ============
As a result of the Company's decision to close its Houston, Texas
manufacturing plant the Company wrote off $2.5 million of impaired fixed assets.
See description of the fixed assets written off at footnote 7 "Accrued
Restructuring." This write off was recorded as restructuring charges.
5. Goodwill and Intangible Assets
Goodwill and intangible assets decreased by $1.1 million, net from
$30.4 million at December 31, 2000 to $29.3 million at March 31, 2001. Goodwill
and intangibles increased by $415 resulting from increased purchase price
recorded for the Open Computing Platform ("OCP") acquisition based upon a
formula tied to certain OCP revenues pursuant to the acquisition agreement. This
increase was offset by $1.5 million of amortization for the three months ended
March 31, 2001. Amortization periods range from five to fifteen years.
6. Other Assets
Other assets include capitalized software, deferred tax assets,
investments in marketable securities, and unamortized debt issuance costs.
During the quarter ended March 31, 2001 the Company wrote off $1.1 million of
capitalized software associated with its end-of-life strategy on certain
products as part of its restructuring activities. This write off was included in
restructuring charges. See footnote 7 "Accrued Restructuring."
The Company's long-term deferred tax assets increased by $3.1 million
since December 31, 2000 as a result of the recognition of federal and state net
operating losses and research and development tax credit carry-forwards.
During the first quarter of 2001, the Company wrote down its investment
in GA common stock to market value as of March 31, 2001, recognizing a loss of
$.4 million. The Company owned 2.2 million shares of GA stock as of March 31,
2001.
7. Accrued Restructuring
During March 2001, the Company recorded restructuring charges of $9.8
million, primarily the result of management's decision to close its Houston,
Texas manufacturing plant and consolidate internal manufacturing operations into
the Company's Hillsboro, Oregon plant. Additionally, certain sales offices will
be consolidated and end-of-life programs were accelerated on non-strategic
products. Costs included in the charges were: (i) employee termination and other
related costs; (ii) facility and leasehold improvement charges related to
vacating the manufacturing plant and two international sales offices; (iii)
write-downs of property and equipment impaired as a result of the restructuring;
(iv) capitalized software write-downs associated with end-of-life product
strategies; (v) and other charges including legal and
9
accounting fees. The Company anticipates that substantially all of the personnel
charges will be paid and all of the property and equipment disposals will be
completed by the end of September 2001. Facility charges will continue to be
paid and will be taken against the accrual once the premises are vacated and
until the leases have expired or the buildings have been sub-leased. Of the $9.8
million in restructuring charges, approximately $5.4 million will consist of
cash expenditures and $4.4 million will represent non-cash charges.
The following table summarizes the restructuring charges, write-offs,
and expenditures relating to these initiatives:
Employee
termination Leasehold
and related improvements Property Capitalized Other
costs and facilities and equipment software charges Total
------------ -------------- ------------- ------------- ---------- -----------
Restructuring costs $ 2,777 $ 3,434 $ 2,460 $ 1,067 $ 105 $ 9,843
Expenditures (159) (159)
Writeoffs (2,460) (1,067) (3,527)
------------ -------------- -------------- ------------- ---------- -----------
Balance of accrued
restructuring, March 31, 2001 $ 2,618 $ 3,434 $ - $ - $ 105 $ 6,157
============ ============== ============== ============ ========== ============
Employee termination costs consist of severance and insurance benefits
and related costs associated with the elimination of approximately 150
manufacturing positions in Houston, Texas along with approximately 50 other
positions in supporting functions (procurement, information systems, general and
administrative) and sales as announced by the Company on March 30, 2001.
Approximately 50 percent of these terminations will be completed by June 30,
2001 with the remainder by September 30, 2001.
Included in the facilities charge is $2.5 million related to the future
abandonment of leased space at the Company's Houston plant and vacant sales
offices in France and Germany. Lease costs and amortization of leasehold
improvements for these facilities will be charged against the restructuring
accrual on a monthly basis upon vacation of the premises, until the lease
contracts expire or the facilities are sub-leased. Leasehold improvements
totaling $966 relate to the Houston site, which is expected to be occupied
through September 2001.
As a result of the decision to close the Houston manufacturing plant,
an analysis was conducted and the property and equipment at the site was deemed
to be impaired. Accordingly, all furniture, fixtures, manufacturing and office
equipment expected to be sold or scrapped were written down to estimated
recovery values as of March 31, 2001. No adjustments were made for assets
expected to be transferred for use at the Company's Hillsboro location. Most of
the impaired assets will continue to be utilized until the September 30, 2001
plant closure date, at which time they will be removed and sold or scrapped. A
smaller portion of the assets relating to SMT production will be removed from
use and disposed of during the second quarter of 2001. The $2.5 million charge
to write down the impaired assets is included in Restructuring charges in the
Consolidated Statement of Operations.
During the quarter ended March 31, 2001, 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.
8. Earnings Per Share
Net income per share is based on the weighted average number of shares
of common stock and common stock equivalents (stock options) outstanding during
the periods, computed using the treasury stock method. This calculation does not
include the effects of the convertible debt as it was anti-dilutive nor the
effect of stock options in the first quarter of 2001 because of the net loss.
10
Weighted average shares consist of the following:
Three months ended
---------------------
Mar 31, Mar 31,
2001 2000
---- ----
Weighted average shares (basic) 17,130 16,670
Effect of dilutive stock options - 1,534
------ ------
Weighted average shares (diluted) 17,130 18,204
====== ======
9. Segment Information
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
reporting by public business enterprises of information about operating
segments, products and services, geographic areas and major customers. The
method for determining what information to report is based on the way that
management organizes the segments within the Company for making operating
decisions and assessing financial performance.
The Company's chief operating decision maker is considered to be the
President and Chief Executive Officer (CEO). The Company's CEO evaluates both
consolidated and disaggregated financial information in deciding how to allocate
resources and assess performance. The CEO receives certain disaggregated
information for four operating divisions within the Company.
The Company has aggregated divisional results of operations into a
single reportable segment as allowed under SFAS 131 because divisional results
of operations reflect similar long-term economic characteristics, including
average gross margins. Additionally, the divisional operations are similar with
respect to the nature of products sold, types of customers, production processes
employed and distribution methods used. Accordingly, the Company describes its
reportable segment as designing and manufacturing embedded computing solutions.
All of the Company's revenues result from sales within this segment.
Information about the Company's geographic sales and long-lived asset
information by geographic area is as follows:
Revenues
Three months ended Long-lived Assets
-------------------- ---------------------
Mar 31, Mar 31, Mar 31, Dec 31,
Country 2001 2000 2001 2000
- ------- ---- ---- ---- ----
United States $ 25,702 $ 46,301 $ 24,307 $ 26,929
Europe 25,246 32,702 985 1,138
Asia Pacific - Japan 3,111 1,818 53 61
Other foreign 2,100 472 - -
--------- --------- --------- ---------
Total $ 56,159 $ 81,293 $ 25,345 $ 28,128
========= ========= ========= =========
Two customers accounted for $17.1 million, or 30.5% of the total
revenue for the quarter ended March 31, 2001. One customer accounted for $11.7
million, or 14.4% of the total revenue for the quarter ended March 31, 2000.
11
10. Subsequent Events
The Company announced in April 2001 that it had signed an agreement to
acquire privately-held S-Link Corporation in a cash transaction valued at
approximately $4.5 million. The acquisition of S-Link will be accounted for
using the purchase method.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
OVERVIEW
Total revenue was $56.2 million for the three months ended March 31,
2001 compared to $81.3 million for the three months ended March 31, 2000. The
Company had a net loss of $8.5 million for the three months ended March 31, 2001
compared to net income of $6.6 million for the three months ended March 31,
2000.
The net loss includes restructuring charges of $9.8 million and other
adjustments of $5.1 million before income taxes. The restructuring charges are
primarily the result of the decision to consolidate all internal manufacturing
operations out of the Houston, Texas manufacturing plant into the Company's
Hillsboro, Oregon plant, and also includes the closure of certain sales offices
in France and Germany. The Company expects that this decision will result in
lower manufacturing costs and improve operating performance by approximately
$8.0 million per year once the plan has been fully implemented. Other
adjustments include: $3.9 million of inventory writedowns related to the
Company's consolidation of manufacturing operations, acceleration of the
Company's end-of-life strategy on non-strategic products and for excess
materials resulting from reduced demand; $.8 million charge to consolidate other
Company facilities, and a $.4 million permanent writedown of an investment
received in connection with a prior divestiture.
In April 2001, the Company announced that it had signed an agreement to
acquire privately-held S-Link Corporation in a cash transaction valued at
approximately $4.5 million. The Company anticipates that the acquisition will
enhance RadiSys' technology and building blocks for signaling applications
within packet networks. The acquisition of S-Link will be accounted for using
the purchase method.
REVENUES
Three months ended
Mar 31, Percentage Mar 31,
2001 Change 2000
---- ------ ----
Revenues $ 56,159 (31%) $ 81,293
Revenues decreased by $25.1 million or 31% for the three months ended
March 31, 2001 compared to the three months ended March 31, 2000. The decrease
in revenues in the three months ended March 31, 2001 was primarily attributable
to lower customer sales as a result of the 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 53% of total revenue
for the three months ended March 31, 2001.
12
COST OF SALES
Three Months Ended
------------------
Mar 31, Percentage Mar 31,
2001 Change 2000
---- ------ ----
Cost of sales $46,411 (11%) $52,435
As a % of revenues 83% 65%
Cost of sales decreased by $6.0 million or 11% for the three months
ended March 31, 2001 compared to the three months ended March 31, 2000. The cost
of sales decrease was a result of the decrease in revenue during the quarter
ended March 31, 2001. The increase in cost of sales as a percentage of revenues
for the three months ended March 31, 2001 was due to reduced utilization of
manufacturing capacity relating to the decrease in revenues and also due to
inventory writedowns of $3.9 million. As revenue volume increases, the Company
will experience decreases in cost of sales as percentage of revenues as a result
of manufacturing efficiencies and the effects of cost savings from the
restructuring activities, which are expected to be realized beginning in the
second quarter of 2001 and will be fully realized by the fourth quarter of 2001.
RESEARCH AND DEVELOPMENT
Three Months Ended
------------------
Mar 31, Percentage Mar 31,
2001 Change 2000
---- ------ ----
Research and development $ 9,284 3% $ 8,981
As a % of revenues 17% 11%
Research and development expenses increased by $.3 million or 3% for
the three months ended March 31, 2001 compared to the three months ended March
31, 2000. This increase in amount was primarily attributable to an increase in
engineering headcount since March 31, 2000 partially offset by lower spending as
a result of cost control measures implemented during the quarter ended March 31,
2001. The increase of 6% as a percentage of revenue was associated with the
decline in revenue during the quarter. The Company expects an increase in
research and development costs going forward as a result of the April 2001
acquisition of S-Link Corporation.
SELLING, GENERAL AND ADMINISTRATIVE
Three Months Ended
------------------
Mar 31, Percentage Mar 31,
2001 Change 2000
---- ------ ----
Selling, general and administrative $ 9,406 (1%) $ 9,542
As a % of revenues 17% 12%
Selling, general and administrative (SG&A) expenses decreased by $.1
million or 1% for the three months ended March 31, 2001 compared to the three
months ended March 31, 2000. The decrease is due to lower spending as a result
of cost control measures and a reduction in sales commission expense related to
lower sales. This decrease was partially offset by investments made in the
Company's infrastructure, including the implementation of SAP during the last
nine months. The increase of 5% as a percentage of revenue is associated with
decreased revenue volume during the quarter ended March 31, 2001.
13
GOODWILL AND INTANGIBLES AMORTIZATION
Three Months Ended
------------------
Mar 31, Percentage Mar 31,
2001 Change 2000
---- ------ ----
Goodwill and intangibles
amortization $ 1,556 (10%) $ 1,724
As a % of revenues 3% 2%
Goodwill amortization expense decreased by $.2 million or 10% for the
three months ended March 31, 2001, compared to the three months ended March 31,
2000. During the third quarter of 2000 management revised its estimate of total
goodwill associated with the 1999 acquisition of IBM's Open Computing Platform
division (OCP), based upon the future expected obligation to IBM as defined in
the acquisition agreement. As a result, this change in estimate reduced the
amortization recorded for OCP during the quarter ended March 31, 2001 compared
to the quarter ended March 31, 2000. Amortization periods for goodwill and
intangibles range from five to fifteen years.
RESTRUCTURING CHARGES
Three Months Ended
------------------
Mar 31, Percentage Mar 31,
2001 Change 2000
---- ------ ----
Restructuring charges $ 9,843 $ -
As a % of revenues 18%
In March 2001, the Company recorded restructuring charges of $9.8
million, primarily the result of management's decision to close its Houston,
Texas manufacturing plant and consolidate all internal manufacturing operations
into the Company's Hillsboro, Oregon plant. Additionally, certain sales offices
will be consolidated and end-of-life programs were accelerated on non-strategic
products. These decisions were made in light of overall market conditions and
economic downturns experienced in the latter part of the fourth quarter of 2000
and, more significantly, during the first quarter of 2001. In 2000, the Company
began migrating board assembly work to its Oregon plant, and in January 2001,
announced its plan to complete board assembly consolidation. As the quarter
progressed, management recognized the need for even greater operating efficiency
and decided to completely eliminate manufacturing operations in Texas by
September 30, 2001. The Company will continue to operate a major design center
in Houston as well as a product repair center. The Company expects that this
decision will result in lower manufacturing costs and improve operating
performance by approximately $8.0 million per year once the plan has been fully
implemented.
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 writedowns associated with
end-of-life product strategies; (v) and other charges including legal and
accounting fees. The Company anticipates that substantially all of the personnel
charges will be paid and all of the property and equipment disposals will be
completed by the end of September 2001. Facility charges will continue to be
paid and will be taken against the accrual once premises are vacated and until
the leases have expired or the buildings have been sub-leased. Of the $9.8
million in restructuring charges, approximately $5.4 million will consist of
cash expenditures funded from the Company's operating cash and $4.4 million will
represent non-cash charges.
14
The following table summarizes the restructuring charges, write-offs,
and expenditures relating to these initiatives:
Employee
termination Leasehold
and related improvements Property Capitalized Other
costs and facilities and equipment software charges Total
------------ -------------- ------------- ------------ ---------- ----------
Restructuring costs $ 2,777 $ 3,434 $ 2,460 $ 1,067 $ 105 $ 9,843
Expenditures (159) (159)
Writeoffs (2,460) (1,067) (3,527)
------------ -------------- ------------- ------------- ---------- ---------
Balance of Accrued
restructuring, March 31, 2001 $ 2,618 $ 3,434 $ - $ - $ 105 $ 6,157
============ ============== ============= ============= ========== =========
Employee termination costs consist of severance and insurance benefits
and related costs associated with the elimination of approximately 150
manufacturing positions in Houston, Texas along with approximately 50 other
positions in supporting functions (procurement, information systems, general and
administrative) and sales as announced by the Company on March 30, 2001.
Approximately 50 percent of these terminations will be completed by June 30,
2001 with the remainder by September 30, 2001.
Included in the facilities charge is $2.5 million related to the future
abandonment of leased space at the Company's Houston plant and vacant sales
offices in France and Germany. Lease costs and amortization of leasehold
improvements for these facilities will be charged against the restructuring
accrual on a monthly basis upon vacation of the premises, until the lease
contracts expire or the facilities are sub-leased. Leasehold improvements
totaling $966 relate to the Houston site, which is expected to be occupied
through September 2001.
As a result of the decision to close the Houston manufacturing plant,
an analysis was conducted and the property and equipment at the site was deemed
to be impaired. Accordingly, all furniture, fixtures, manufacturing and office
equipment expected to be sold or scrapped were written down to estimated
recovery values as of March 31, 2001. No adjustments were made for assets
expected to be transferred for use at the Company's Hillsboro location. Most of
the impaired assets will continue to be utilized until the September 30, 2001
plant closure date, at which time they will be removed and sold or scrapped. A
smaller portion of the assets relating to SMT production will be removed from
use and disposed of during the second quarter of 2001. The $2.5 million charge
to write down the impaired assets is included in Restructuring charges in the
Consolidated Statement of Operations.
During the quarter ended March 31, 2001, 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.
INTEREST INCOME, OTHER INCOME AND INCOME TAX PROVISION
Three Months Ended
------------------
Mar 31, Percentage Mar 31,
2001 Change 2000
---- ------ ----
Interest income (expense), net $ 524 1036% $ (56)
Other income (expense), net $ (707) (184%) $ 838
Income tax provision (benefit) $(12,046) (536%) $ 2,762
15
Net interest income (expense) increased $580 for the three months
ended March 31, 2001 compared to the three months ended March 31, 2000. This
increase relates to the interest earned on short-term investments, net of
interest expense on the convertible notes, during the quarter ended March 31,
2001. During the quarter ended March 31, 2000 the Company did not hold any
short-term investments. The Company's increased supply of cash for investing
during the quarter ended March 31, 2001 came from the Company's $100 million
convertible debt issuance in the third quarter of 2000. In addition the Company
had $13.9 million outstanding on its $20 million line of credit with a bank at
an interest rate of 8.5% during the quarter ended March 31, 2000. There were no
amounts outstanding on the line of credit at March 31, 2001.
Net other income decreased by $1.5 million for the three months ended
March 31, 2001 compared to the three months ended March 31, 2000. The Company
wrote down its GA stock investment to market value, recognizing a loss of $.4
million for the three months ended March 31, 2001. The impact of foreign
exchange rate fluctuations to the Company for the three months ended March 31,
2001 was an expense of approximately $.3 million. Adding to the fluctuation
quarter over quarter the Company sold 367 shares of GA common stock during the
first quarter of 2000, resulting in a gain of $.9 million.
The effective income tax rate for the first quarter of 2001 was a 58.7%
benefit compared to 29.4% tax provision rate for the three months ended March
31, 2000. The change in effective rate from March 31, 2000 is primarily due to
expected research and development tax credit benefits for 2001, anticipated tax
benefits associated with the Company's offshore operations and foreign sales
corporation, and lower estimated pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, the Company had $76.0 million in cash and cash
equivalents, $50.3 million in short-term investments, and working capital of
approximately $201.3 million.
Cash and cash equivalents decreased by $48.1 million during the three
months ended March 31, 2001 from $124.1 million at December 31, 2000. Activities
impacting cash and cash equivalents are as follows:
Three months ended
------------------
Mar 31, Mar 31,
2001 2000
---- ----
Cash provided by (used for) operating activities $ (6.1) $ 19.8
Cash used for investing activities (43.8) (3.0)
Cash provided by financing activities 1.9 3.2
Effect of exchange rate changes on cash (0.1) .3
------- -------
Net increase (decrease) $(48.1) $ 20.3
======= =======
The decrease in operating cash from the quarter ended March 31, 2000 as
compared to the quarter ended March 31, 2001 is a primarily due to the Company's
net loss of $8.5 million as of March 31, 2001. Additional decreases include $7.6
million in accounts payable, $5.4 million in income taxes payable, and
$4.5 million IN deferred income taxes. The Company also paid $2.8 million of
interest owed to convertible note holders during the quarter ended March 31,
2001. These decreases in operating cash were partially offset by the Company's
decrease in accounts receivable of $14.8 million and the Company's decision to
write off $2.5 million of fixed assets, $1.2 million of capitalized software and
$3.9 million of inventory.
16
Significant investing activities affecting cash for the three months
ended March 31, 2001 included $50.2 million in purchases of short-term
investments partially offset by $9.7 million in sales of short-term investments,
$1.8 million in capital expenditures, and $.9 million in capital software
additions. Capital expenditures primarily consisted of the SAP implementation
and network upgrades.
The Company's financing activities included $1.8 million in net
proceeds from common stock issuances in connection with the exercise of options
under the Stock Incentive Plan and the purchase of shares under the Employee
Stock Purchase Plan.
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.
Subsequent investing activity:
The Company announced in April 2001 that it had signed an agreement to
acquire privately-held S-Link Corporation in a cash transaction valued at
approximately $4.5 million. The purchase of S-Link was funded in April 2001, out
of operating cash.
17
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and statements the Company's
management may make from time to time contain forward-looking statements. All
statements, other than statements of historical fact, that relate to future
events or to the Company's future performance are forward-looking statements.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the Company's or the Company's industry's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
risks and other factors include, among other things,
o dependence on the relationship with Intel Corporation and its
products;
o lower than expected or delayed sales by the Company's customers;
o lower than expected or delayed or cancelled design wins with key
OEMs;
o deliveries of products containing errors, defects or bugs;
o dependence on a limited number of suppliers or, in some cases, one
supplier for components and equipment used to manufacture products;
o competition in the building block markets for internet and
communications, electronics assembly and medical equipment, which
may lead to lower than expected sales prices for the Company's
products or reduced sales volume;
o availability of qualified personnel;
o business conditions in the general economy and in the markets the
Company serves, particularly the communications markets;
o political, economic and regulatory risks associated with
international operations;
o difficulty or inability to meet the Company's obligations to repay
indebtedness;
o difficulty implementing the restructuring plan; and
o those listed under "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 and subsequently
filed reports.
In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," "continue," "our future success
depends," "seek to continue," "its intent," "intends," or the negative of these
terms or other comparable terminology. In particular, these statements include,
among other things, statements relating to the Company's business strategy,
including the Company's acquisition strategy; the development of the Company's
products; the Company's ability to identify new products and services; the
Company's ability to achieve market acceptance of the Company's products; and
the Company's projected financial performance, including revenues, earnings,
gross margins, capital expenditures and liquidity.
These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider the risks outlined above and those listed under "Risk Factors" in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000 and
subsequently filed reports. These risk factors may cause the Company's actual
results to differ materially from any forward-looking statement.
18
The Company does not guarantee future results, levels of activity,
performance or achievements and does not assume responsibility for the accuracy
and completeness of these statements. The Company is under no duty to update any
of the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates,
foreign currency exchange rates, and equity trading prices, which could impact
its results of operations and financial condition.
Interest Rate Risk. The Company invests its excess cash in debt instruments of
the U.S. Government and its agencies, and in high-quality corporate issuers. The
Company attempts to protect and preserve its invested funds by limiting default,
market and reinvestment risk. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely affected due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due to the short duration of the Company's
investment portfolio, an immediate 10% change in interest rates would not have a
material effect on the fair market value of the portfolio. Therefore, the
Company would not expect 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. 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
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 effect of foreign exchange rate fluctuations
on the Company for the three months ended March 31, 2001 was approximately $.3
million. The effect of foreign exchange rate fluctuations on the Company for the
three months ended March 31, 2000 was not material.
Equity Price Risk. The Company is exposed to equity price risk due to the equity
investments held by the Company. The Company typically does not attempt to
reduce or eliminate its market exposure on these securities. Neither a 10%
increase nor a 10% decrease in equity prices would have a material effect on the
Company's financial position, results of operations, or cash flow, as such
investments are recorded on the Company's balance sheet at less than $1 million.
19
PART II
OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
10.1 Deferred Compensation Plan.
10.2 2001 Nonqualified Stock Option Plan.
(b) Reports on Form 8-K.
None.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2001 RADISYS CORPORATION
By:/s/ STEPHEN LOUGHLIN
----------------------------
Stephen F. Loughlin
Vice President of Finance and Administration and
Chief Financial Officer
(Authorized officer and Principal Financial Officer)
21
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Deferred Compensation Plan.
10.2 2001 Nonqualified Stock Option Plan.
22