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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-26844
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RADISYS CORPORATION
(Exact name of registrant as specified in its charter)
OREGON 93-0945232
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
5445 N.E. DAWSON CREEK DRIVE
HILLSBORO, OR 97124
(Address of principal executive offices, including zip code)
(503) 615-1100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
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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 the
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K. / /
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 24, 2000: $778,614,968. For purposes of the calculation
executive officers, directors and holders of 10% or more of the outstanding
Common Stock are considered affiliates.
Number of shares of Common Stock outstanding as of March 24, 2000:
16,849,989.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K INTO WHICH INCORPORATED
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Proxy Statement for 2000 Annual Meeting of
Shareholders Part III
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RADISYS CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 8
Item 3 Legal Proceedings........................................... 8
Item 4 Submission of Matters to a Vote of Security Holders......... 8
Item 4(a) Executive Officers of the Registrant........................ 9
PART II
Item 5 Market for the Registrant's Common Equity and Related 11
Shareholder Matters.......................................
Item 6 Selected Financial Data..................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 8 Financial Statements and Supplementary Data................. 17
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 34
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 34
Item 11 Executive Compensation...................................... 34
Item 12 Security Ownership of Certain Beneficial Owners and 34
Management................................................
Item 13 Certain Relationships and Related Transactions.............. 34
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on 35
Form 8-K..................................................
Signatures.......................................................................... 37
2
PART I
ITEM 1. BUSINESS
RadiSys Corporation ("RadiSys" or the "Company"), incorporated in 1987, is a
leader in computer based building blocks used by original equipment
manufacturers ("OEMs") for products in the telecommunications and networked
equipment markets (including industrial automation, medical devices, and
transaction terminals). Unlike general purpose computers, embedded computer
solutions are incorporated into systems and equipment to provide a single or a
limited number of critical system control functions and are generally integrated
into larger automated systems. RadiSys' embedded computers are based upon the
Intel x86, Intel IXP Architecture, and/or the Texas Instruments C6x DSP
architectures and are capable of running PC-compatible operating systems and
application software.
EMBEDDED COMPUTER MARKET
Embedded computer systems are a key segment of the broad electronics market
and form the backbone and control system for many types of today's electronic
systems requiring advanced capabilities for human interface, data analysis and
system communications and control. Embedded computers differ from
general-purpose computers, such as personal computers (PCs), in several key
respects. First, embedded computers or building blocks, both board level and
chassis systems, are closely integrated into larger systems, perform a single or
limited number of complex applications and adhere to specific requirements
regarding size, reliability and ability to withstand the demands of extreme
environmental conditions. Additionally, embedded computers are design-intensive
solutions that require substantial engineering know-how and a comprehensive
understanding of the specific end product into which they are to be
incorporated.
Embedded computer solutions are incorporated into a broad range of products,
including voice message systems, local area network routers, cellular base
stations, semiconductor manufacturing equipment, electronics assembly equipment,
blood analyzers, patient monitors, ultrasound machines, gaming equipment, point
of sale terminals and banking automation machines. Unlike PC products, which
have experienced and will likely continue to experience short product cycles, a
typical embedded computer solution has a relatively long product life, with most
designs lasting through the life cycles of the products into which they are
integrated, often three years or more. Life cycles can differ significantly
among industries and applications.
In recent years, the increasing complexity of electronic subsystems and
components, faster time-to-market requirements, together with a widespread trend
in many industries to rationalize internal manufacturing resources, has led to a
significant growth in the outsourcing of the design and manufacture of
electronics subsystems and components by major OEMs. As a result, the Company
believes there is a significant opportunity for independent manufacturers to
provide OEMs with cost-effective, reliable and high value-added embedded
computer system solutions.
STRATEGY
The Company's objective is to be the leader in embedded computer solutions
utilizing key technology building blocks for major OEM's in the
telecommunications and networked equipment industry. The key elements of the
Company's highly differentiated strategy are:
FOCUS ON PROVIDING A WIDE BREADTH OF BEST-IN-CLASS TECHNOLOGY BUILDING
BLOCKS. There are four key sets of building blocks in a generic
telecommunications system. The first building block is the Central Processing
Unit (CPU), which has been the heritage of RadiSys since incorporation in 1987.
The second building block is DSP (Digital Signal Processing). RadiSys acquired a
DSP company in 1997, Sonitech, which exclusively focuses on providing hardware,
software, and algorithms to support Texas Instruments' C6X DSP architecture. The
third building block is WAN (Wide Area Network) connectivity. RadiSys purchased
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a division of International Business Machines Corporation ("IBM") in March of
1999 that enabled the company to garner technology and expertise in T1/E1, X.25,
SS7, ATM, and Frame Relay. The fourth building block is systems packaging and
platform integration. Up until the Company's acquisition of Texas Micro, Inc. in
August of 1999, RadiSys was considered a custom Intel CPU board-level provider
solution. Texas Micro, Inc. brought subsystem integration capabilities, strong
telecommunications customer base and expertise in PCI bus architecture. In
December of 1999, RadiSys augmented the fourth building block by acquiring
another division of IBM called the Open Computing Platform (OCP) division. With
the acquisition of OCP, RadiSys now delivers highly integrated customized
systems with the OEM's logo and when requested, drop ships directly to the OEM's
customer. RadiSys believes that having all four building blocks and the ability
to integrate and test them is a key differentiation between the Company and the
competition in garnering additional design wins and sales, and also gaining
increased opportunities with current and new customers.
LEVERAGE INTEL ARCHITECTURE EXPERTISE. RadiSys combines the technical
expertise of hundreds of man-years of Intel architecture experience with a close
working relationship with Intel to design and manufacture innovative Intel-based
building blocks that can be sold individually or bundled into a variety of
levels of integrated solutions for its OEM customers. The Company intends to
continue to capitalize on the growing acceptance of the Intel X86 architecture
and the Intel IXA architecture as the preferred solution of OEMs, especially in
the telecommunications market. Additionally, the Company and Intel's Embedded
Architecture Division are working together to develop and market chip-level,
board-level, and system-level products for the embedded computer market in order
to facilitate the implementation of IA and IXA designs into a broadening array
of new OEM products.
PROVIDE BROAD SET OF TECHNICAL SOLUTIONS TO MEET CUSTOMER-SPECIFIC
NEEDS. The Company provides a high degree of design, product, and manufacturing
flexibility to address the needs of its customers for customized solutions in a
wide range of applications. The Company provides building blocks with a variety
of physical form factors and levels of integration, from fully integrated
systems, to application ready platforms, to CPU boards, to chip-level products.
The Company also offers a broad range of custom solutions and maintains a large
and expanding library of designs, containing specifications, logic designs,
firmware, device driver software, test and integration specifications, DSP
algorithms, WAN (Wide Area Network) connectivity, and manufacturing rules. The
Company believes that its extensive design expertise and large library of
solutions is critical to its ability to find the solution that best fits its
customers' technical and business needs.
PRODUCTS
RadiSys designs and manufactures a broad array of computer-based technology
building blocks based on the Intel architecture--from standard products to
products designed to address the specific requirements of its OEM customers.
These "perfect fit" solutions typically combine the level of integration, degree
of customization and specified form factors and standards required to meet the
customer's needs.
STANDARD PRODUCTS AND ARCHITECTURES. RadiSys provides a highly
differentiated set of horizontal and vertical technology building blocks.
RadiSys can deliver Intel CPU platforms, system platforms, wide-area networking
(WAN) and digital signal processing (DSP) technologies on two key architectures,
PCI and CompactPCI. The Company provides state-of-the-art Pentium, PII, PIII,
IXP and StrongArm Solutions. The Company provides both enterprise and carrier
class CompactPCI and PCI system enclosures and backplanes. In addition, the
Company has expertise in field-proven frame relay, SS7, ATM, E1/T1, X.25, IP and
other protocols and interfaces. The Company provides advanced Texas Instrument
(TI) C6x voice processing solutions hardware and algorithms.
TESTING AND INTEGRATION. The level of integration required by some OEMs in
the telecom industry has provided an opportunity for RadiSys to deliver its
broad range of solutions. RadiSys has the ability to test and integrate all of
its building blocks with other third party cards and software to provide a fully
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integrated system to the specifications of the OEM. This allows OEMs to source
all of these functions to RadiSys so they may focus on the key differentiation
they deliver to their marketplace. Fully integrated computer subsystems and
systems generally range in price from $1,000 to $15,000.
CUSTOMIZATION. The degree of customization of the Company's products ranges
from modifications of standard products to custom solutions comprised solely of
newly developed modules. The Company uses its extensive design experience and
large design library to create products with varying degrees of customization.
The Company believes that the degree of customization will tend to increase in
the future and provide a time-to-market advantage for our customers.
SALES AND MARKETING
RadiSys views the design process as an opportunity to build long-term OEM
customer relationships. The Company typically experiences long life cycles for
products designed for its OEM customers. RadiSys' objective of providing
embedded computer solutions utilizing key technology building blocks focuses the
Company's direct sales force on solving the OEM customer's needs. A typical
sales team consists of an account manager along with supporting engineering
expertise interacting with the OEM customer's technical staff to solve specific
requirements of application; form, fit and function; environment and mechanics.
The Company's value proposition to the customer is a faster time-to-market.
The Company markets its products primarily in North America, Western Europe,
Israel and Japan. In 1999, the Company had no customer whose sales were more
than 10% of total revenues; the top 25 customers accounted for approximately 65%
of 1999 sales. In North America, products are sold principally through a direct
sales force. The Company has U.S. sales offices in Oregon, Texas, California,
North Carolina, Nevada and Delaware. The direct sales force is supported by
approximately 60 factory-based application engineers, product marketing
personnel and sales support personnel. In addition, the Company's management
plays a key role in the Company's marketing and selling efforts.
In Europe, the Company sells its products through wholly owned subsidiaries
in the United Kingdom, RadiSys UK Ltd., and RadiSys International, Inc. and
through distributors in Europe. RadiSys has international regional sales offices
in The Netherlands, United Kingdom, Germany, Israel and France. In Japan, the
Company sells its products through a wholly-owned Japanese subsidiary, RadiSys
K.K., that markets the Company's products directly and through several
distributors in Japan. In 1999, 1998 and 1997, international sales represented
approximately 37%, 29% and 30%, respectively, of revenues. Much of the Company's
international sales are denominated in U.S. dollars.
The Company has established distributor relationships with Arrow/Schweber
Electronics, Pioneer-Standard Electronics, Inc., and Wyle Electronics in North
America and several distributors in Europe to market the Company's chip-level,
board-level and system-level products.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company believes its research, development and engineering expertise
represents an important competitive advantage. The Company's research,
development and engineering staff at December 31, 1999 consisted of
approximately 235 engineers and technicians.
Most of the Company's research, development and engineering efforts are
focused on joint projects with its OEM customers resulting in the development of
custom board-level and system-level products. For these projects, the Company's
engineering staff works closely with the customer and the customers often pay
the Company non-recurring engineering fees as certain milestones are attained.
From time to time, the Company also engages in joint research and development of
other products with certain of its customers and other parties. The Company's
research and development staffs are located in Hillsboro, Oregon; Houston,
Texas; Boca Raton, Florida; Newton, Massachusetts and Birmingham, United
Kingdom.
5
In the initial phases of the relationship, considerable attention is given
to the establishment of communications links, such as electronic mail, to enable
the customer's and the Company's sales and engineering staffs to interact on a
real-time or rapid response basis. The Company believes that close and frequent
communication during the design process allows RadiSys to operate as a "virtual
division" within the customer's internal organization. RadiSys' in-depth
understanding of embedded computer technology and applications assists the
customer in resolving its overall product design issues while regular customer
feedback enables RadiSys to increase and continually refresh its understanding
of its customer's specific design requirements.
The Company typically retains the rights to any technology developed as a
part of the design process. In some cases, the Company agrees to share
technology rights, including manufacturing rights, with the customer, but
generally retains nonexclusive rights to use the technology.
The embedded computer market is subject to rapid technological development,
product innovation and competitive pressures. Consequently, the Company has
invested and will continue to invest resources in the research and development
of (i) technology building blocks such as embedded modules, platforms, chips and
low-level firmware, (ii) application-specific embedded computers for specific
customers and (iii) design processes and tools. In 1999, 1998 and 1997, the
Company invested $30.5 million, $22.2 million and $19.4 million, respectively,
on research and development.
MANUFACTURING
The Company currently manufactures the majority of the board-level and
system-level products it sells. Also, due to the addition of ARTIC and OCP from
IBM in 1999, the Company also employs several outside subcontractors to produce
board-level and system-level products including system integration services. The
Company builds its products in highly automated ISO9001 certified manufacturing
plants in Hillsboro, Oregon and Houston, Texas. These plants encompass
surface-mount technology ("SMT") board assembly, test, mechanical assembly and
system assembly and test. ISO9001 certification is the international
designation, developed by the International Organization of Standardization, a
pan-governmental agency, for demonstrating that the Company's systems support
the design and production of products of consistently high quality.
The Company's Hillsboro, Oregon plant has three automated lines for SMT
board assembly, which are based on equipment purchased primarily from Universal
Instruments. The Company's Houston, Texas plant has two automated lines for SMT
board assembly, which are based on Fuji equipment. The Company estimates that,
as currently configured, the plants have sufficient capacity on multiple-shift
operation to handle planned demand well into 2000. Each line is modular and thus
readily expandable by adding additional inline equipment. The Company plans to
transfer products between the two facilities in 2000 to optimize build and
configuration capability across the Company's products. The Company also has
relationships with outside subcontractors to perform additional production
capabilities.
Because the products into which embedded computers are integrated typically
have long life cycles, dynamic stress testing of embedded computer products must
be particularly exacting to ensure the reliability of such products. The Company
believes its test processes represent a significant competitive advantage in
this area. The Company uses a variety of commercial and proprietary test
processes including highly accelerated life testing, highly accelerated stress
screening, bed-of-nails, in-circuit and functional test equipment. The highly
accelerated stress screening process detects early lifetime failures by
subjecting products to a series of cycles of rapid temperature change, and
random mechanical vibration while the products are running a self-test program
and are being monitored. The Company has equipment to perform temperature,
humidity, and vibration analysis of products.
The Company relies on external suppliers for bare printed-circuit board
fabrication, machine-inserted through-hole circuit boards, semiconductor
components, mechanical assemblies, and semiconductor foundry services. Although
many of the raw materials and much of the equipment used in the Company's
6
manufacturing operation are available from a number of alternate sources,
certain of these components are obtained from a single supplier or a limited
number of suppliers.
The Company is dependent on third parties for a continuing supply of the
components it uses in the manufacture of its products. For example, the Company
is dependent solely on Intel for the supply of microprocessors and other
components and depends on Toshiba America Inc., Epson Electronic America, Lucent
Technologies and Maxim Integrated Products, Inc. as sole source suppliers for
other components. For some of these components the Company would encounter
difficulty in locating alternative sources of supply.
The Company relies on a third party foundry to produce its core logic chip
product offerings. There is no assurance that the third party will be willing or
able to supply the Company with sufficient core logic chips to meet its needs in
the future or, if the party were not to meet the Company's needs, that the
Company could obtain satisfactory core logic chips from alternative sources in
sufficient quantities and at acceptable prices.
COMPETITION
The embedded computer industry is highly competitive and fragmented, and the
Company's competitors differ depending on product type, geographic market and
application type. The Company believes that, from a customer's perspective, the
main competitive factors in the embedded computer industry are time-to-market,
product cost, product quality, breadth of solution, and long-term stability of
both the product and the supplier.
Because many OEM customers view their embedded computer requirements from a
"make versus buy" perspective, RadiSys often competes against its OEM customers'
ability to design and manufacture satisfactory embedded computer products
in-house. However, the start of the sales cycle begins after the OEM has made a
conscious decision to outsource their building block needs. Establishing a
relationship with a set of key accounts and growing the number of RadiSys design
wins from existing customers, are the pieces of RadiSys' future strategy.
Off-the-shelf product manufacturers comprise a second set of competitors,
although this product segment is highly fragmented by physical and electrical
form factors. Electronics contract manufacturers form a third set of potential
competitors, although most have no specific product or application design
expertise and simply manufacture to a third party's design.
Finally, RadiSys competes against companies that provide individual pieces
of embedded system solutions, such as central processing units, digital signal
processors, and wide area networks. The competitors are different depending on
what building blocks are present in the competitive sales cycle. RadiSys
maintains a competitive advantage in being able to provide all four sets of
building blocks in both PCI and Compact PCI architectures.
BACKLOG
As of December 31, 1999, the Company's backlog was approximately
$59.7 million, as compared to $41.8 million as of December 31, 1998. The Company
includes in its backlog all purchase orders scheduled for delivery within
twelve months, although a majority of the backlog is typically scheduled for
delivery within 90 days.
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INTELLECTUAL PROPERTY
Seventeen U.S. patents have been issued to the Company. The Company has
pending one additional U.S. patent application and one foreign application
covering technology incorporated into its products; however, the Company relies
principally on trade secrets for protection of its intellectual property. The
Company believes, however, that its financial performance will depend much more
on the pace of its product development and its relationships with its customers
than upon such protection. The Company has from time to time been made aware of
others in the industry who assert exclusive rights to certain technologies,
usually in the form of an offer to license certain rights for a fee or
royalties. The Company's policy is to evaluate such claims on a case-by-case
basis. The Company may seek to enter into licensing agreements with companies
having or asserting rights to technologies if the Company concludes that such
licensing arrangements are necessary or desirable.
EMPLOYEES
As of December 31, 1999, the Company had 1,041 employees, of which 886 were
regular employees and 155 were agency temporary employees or contractors. The
Company is not subject to any collective bargaining agreement, has never been
subject to a work stoppage, and believes that its relations with employees are
good.
ITEM 2. PROPERTIES
In the U.S. the Company leases the following facilities, (all numbers
approximate): 137,000 square feet of office and manufacturing space in three
buildings in Hillsboro, Oregon; 19,000 square feet of office space in Beaverton,
Oregon; 13,000 square feet of office space in Newton, Massachusetts; 144,000
square feet of office and manufacturing space in Houston, Texas; and 24,000
square feet of office space in Delray Beach, Florida. The Company owns two
parcels of land adjacent to its Hillsboro facility, which are being held for
future expansion. The Company also leases four small sales offices in the U.S.
located in Ann Arbor, Michigan; Dallas, Texas; Newark, California; and Raleigh,
North Carolina. Internationally, the Company leases office space in the
following cities; Almere and Eindhoven, The Netherlands; Birmingham and Swindon,
United Kingdom; Cedex and Versailles, France; Neu-Isenburg, Munich and Stemwede,
Germany; Rehovot, Israel; and Tokyo, Japan. Total lease costs of all these
facilities are approximately $4.5 million per year, plus certain building
operating expenses.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material litigation currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM 4(A) EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 27, 2000, the names, ages and positions held by executive
officers of the Company were as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- -------- -------------------------
Dr. Glenford J. Myers....... 53 Chairman of the Board, President and Chief Executive
Officer
Stuart F. Cohen............. 40 Vice President of Marketing and Sales
Ronald A. Dilbeck........... 46 Vice President and General Manager, Computer Platform
Division
Douglas D. Goodyear......... 45 Vice President of Sales
Arif Kareem................. 47 Vice President and General Manager, Telecommunications
Division
Stephen Loughlin............ 49 Vice President of Finance and Administration and Chief
Financial Officer
John Sonneborn.............. 42 Vice President of Manufacturing & Chief Quality Officer
Diane M. Williams........... 46 Vice President of Human Resources
Dr. Glenford J. Myers co-founded the Company in March 1987 and has served as
the Company's Chairman of the Board, President and Chief Executive Officer since
that time. From 1981 to 1987, he held various management positions with Intel,
including Manager of Microprocessor Product Line Architecture and Manager of the
Microprocessor Strategic Business Segment. While at Intel, Dr. Myers had primary
management responsibility for the feasibility and design of Intel's 386 and
80960 microprocessor chips, both of which became industry standards in their
respective application areas. From 1968 to 1981, Dr. Myers held various
engineering and management positions with IBM. Dr. Myers holds a Ph.D. from the
Polytechnic Institute of New York, an M.S. from Syracuse University and a
B.S.E.E. from Clarkson College.
Stuart F. Cohen joined the Company in January 1999 as its Vice President of
Marketing. From 1997 to 1998, Mr. Cohen was Vice President, Worldwide Marketing
for InFocus Systems, Inc., a company that develops and manufactures data/video
projectors. From 1981 to 1997, Mr. Cohen held various sales and marketing
management positions for IBM, an information technology company, the most recent
being Director of Worldwide Marketing, Networking Division. Mr. Cohen holds a
B.S. in Business Administration from the Arizona State University.
Ronald A. Dilbeck joined the Company in May 1996 as its Vice President and
General Manager, Automation and Control Division. In October 1998, Mr. Dilbeck
was given joint responsibility of the merged Automation Equipment Division. From
1994 to 1996, Mr. Dilbeck was President and Chief Executive Officer of nCUBE,
Inc., a company that builds interactive multimedia servers. From 1983 to 1994,
he held various engineering management positions with Sequent Computer Systems,
a manufacturer and provider of information technology solutions, the most recent
being Director of Integration Services. Mr. Dilbeck holds an M.S.E.E. from
Washington State University and a B.S.E.E. and a B.S. in Mathematics from Oregon
State University.
Douglas D. Goodyear joined the Company in October 1998 as its Senior Vice
President of Sales. From 1995 to 1998, Mr. Goodyear was Vice President,
Worldwide Sales of Actel Corporation, a semiconductor development company. From
1990 to 1995, Mr. Goodyear served as Vice President of North American Sales for
the Microelectronics Group of Sharp Electronics. Additionally, he has held
various sales and sales management positions with Hitachi, Advanced Micro
Devices, and Signetics Corp., a Philips company. Mr. Goodyear holds a B.S. in
both Computer Science and Industrial Management from the University of Nebraska.
Arif Kareem joined the Company in July 1997 as Vice President, Telecom
Business Unit, and was appointed Vice President and General Manager,
Telecommunications Division in October 1997. From
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1980 to 1997 Mr. Kareem held various engineering and marketing management roles
at Tektronix, Inc., an electronics manufacturing company, before serving as
General Manager of Tektronix's Telecom Product Line, and subsequently General
Manager of the Communications Test Business Unit. His most recent role at
Tektronix was as Director of Strategic Marketing for the Measurement Division.
Mr. Kareem holds a B.S.E.E. and an M.S.E.E. from Lehigh Universtiy, and an
M.B.A. from the University of Oregon.
Stephen Loughlin joined the Company in April 1999 as Vice President of
Finance and Administration and Chief Financial Officer. He spent the previous
nine years at Sequent Computer Systems, a manufacturer and provider of
information technology solutions, as Vice President and Controller. Prior to
that, he was with Wang Laboratories, Inc. as Director of Finance for
logistics/manufacturing and system manufacturing/distribution. Mr. Loughlin
earned a B.S. in accounting from Boston College.
John Sonneborn joined the Company in August 1996 as its Vice President of
Manufacturing. From 1981 to 1996, Mr. Sonneborn held various operations and
engineering positions at Tektronix, Inc., lastly as the Director of Quality for
the Measurement Business Division. Mr. Sonneborn holds a B.S. in Applied and
Engineering Physics from Cornell University.
Diane M. Williams joined the company in August 1998 as its Vice President of
Human Resources. From 1990 to 1998 Ms. Williams held various roles at Sequent
Computer Systems, Inc., most recently Vice President of Human Resources. Ms.
Williams also spent time at Compaq Computer Corporation where she was Manager of
Enterprise Sales Development. Prior to Compaq and Sequent, Ms. Williams held
various human resources management positions at Amdahl Computer Corporation and
First City Bancorporation of Texas. She holds a B.A. Degree from State
University of New York at Stony Brook and an M.Ed. from the University of
Houston.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's Common Stock has been traded on the Nasdaq National Market
since the Company's initial public offering in 1995 under the symbol "RSYS". The
following table sets forth, for the periods indicated, the highest and lowest
closing sale prices for the Common Stock, as reported by the Nasdaq National
Market. The table gives effect to a three-for-two split of the shares of common
stock of the Company effective November 29, 1999 to shareholders of record at
the close of business on November 8, 1999.
HIGH LOW
-------- --------
1999
First Quarter............................................. $20.71 $14.89
Second Quarter............................................ $25.92 $13.92
Third Quarter............................................. $30.67 $24.42
Fourth Quarter............................................ $54.13 $26.00
1998
First Quarter............................................. $25.75 $14.42
Second Quarter............................................ $19.83 $11.83
Third Quarter............................................. $15.00 $ 7.58
Fourth Quarter............................................ $21.09 $ 8.00
On March 24, 2000, the last reported sale price of the Common Stock on the
Nasdaq National Market was $60.25.
The Company has never paid any cash dividends on its Common Stock and does
not expect to declare cash dividends on the Common Stock in the foreseeable
future. The Company's current policy is to retain all of its earnings to finance
future growth.
As of March 24, 2000, there were approximately 613 holders of record of the
Company's Common Stock. The Company believes that the number of beneficial
owners is substantially greater than the number of record holders because a
large portion of the Company's outstanding Common Stock is held of record in
broker "street names" for the benefit of individual investors.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of Operations Data:
Revenues................................ $251,090 $186,548 $191,814 $161,431 $147,945
Gross profit............................ 92,297 62,684 70,549 58,105 59,430
Income from operations.................. 16,604 8,569 21,165 6,399 7,816
Net income (loss)....................... 18,997 7,818 14,272 (141) 7,231
Net income (loss) per share (diluted)
*..................................... 1.11 0.48 0.88 (0.01) 0.64
Weighted average shares outstanding
(diluted) *........................... 17,110 16,129 16,212 15,712 11,311
Consolidated Balance Sheet Data:
Working capital......................... $ 68,863 $ 83,083 $ 78,744 $ 69,524 $ 65,503
Total assets............................ 187,563 131,727 130,200 116,677 96,578
Long term obligations, excluding current
portion............................... -- 88 399 648 884
Total shareholders' equity.............. 134,255 106,827 99,422 84,060 73,921
Note: The selected financial data for the four years ended December 31, 1998 has
been restated to reflect the merger with Texas Micro, which was accounted
for as a pooling of interests.
* Reflects the three-for-two stock split on November 29, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS)
ACQUISITIONS AND MERGERS
On December 28, 1999, the Company purchased certain assets of International
Business Machines Corporation's ("IBM") Open Computing Platform (OCP) operation
that focuses on providing highly-customized embedded system solutions to OEM's
primarily in the telecommunications market. The purchase price, including direct
acquisition costs and contingent consideration, was $14.1 million. Pursuant to
the terms of the agreement, the Company may be required to make additional
future payments in March of 2001, 2002, and 2003 based upon a formula tied to
the future OCP revenues. These potential additional future payments will be
accounted for as additional purchase price. The total consideration for the
Acquisition will not exceed $30.0 million. The acquisition was accounted for
using the purchase method. The results of operations for this acquisition have
been included in the financial statements since the date of acquisition.
On August 13, 1999, the Company completed its merger with Texas Micro, a
formerly publicly-traded embedded computer company headquartered in Houston,
Texas, by issuing approximately 2.8 million shares of the Company's stock for
all the outstanding common stock of Texas Micro. The merger was accounted for as
a pooling-of-interests under Accounting Principles Board Opinion No. 16, and
accordingly, the financial statements have been restated for all periods prior
to the merger to reflect the combined results of operations, financial position
and cash flows. In connection with the merger, the Company recorded a charge to
operating expenses of approximately $6.0 million for merger-related costs in the
third quarter of 1999.
On March 1, 1999, the Company purchased certain assets of IBM dedicated to
the design, manufacture and sale of IBM's ARTIC communications coprocessor
adapter hardware and software for wide area network and other telephony
applications. The purchase price, including direct acquisition costs, was
12
$27.5 million. The acquisition was accounted for using the purchase method. The
results of operations for this acquisition have been included in the financial
statements since the date of acquisition.
On February 18, 1997, the Company purchased substantially all the assets of
Sonitech International, Inc., a provider of digital signal processing hardware
and software solutions for embedded applications. The purchase price included
the issuance of 84 shares of common stock and $1.0 million in cash
consideration. The acquisition was accounted for using the purchase method. The
results of operations for this acquisition have been included in the financial
statements since the date of acquisition.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenues for the years ended December 31, 1999, 1998 and 1997.
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 63.2 66.4 63.2
------ ------ ------
Gross margin................................................ 36.8 33.6 36.8
Research and development.................................... 12.1 11.9 10.1
Selling, general and administrative......................... 14.7 16.9 15.6
Goodwill and intangibles amortization....................... 1.0 .2 .1
Combination costs........................................... 2.4 -- --
------ ------ ------
Income from operations...................................... 6.6 4.6 11.0
Interest income, net........................................ .5 1.0 .8
Other income................................................ .7 .3 --
------ ------ ------
Income before income tax provision.......................... 7.8 5.9 11.8
Income tax provision........................................ .3 1.7 4.4
------ ------ ------
Net income.................................................. 7.5% 4.2% 7.4%
====== ====== ======
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
REVENUES. Revenues increased 34.6% to $251.1 million for 1999 from $186.5
million for 1998. The increase in revenues in 1999 was due to growth within
existing product lines and movement into higher growth markets, primarily
telecommunications. In addition, the acquisition of ARTIC in March of 1999
resulted in increased revenues and the merger with Texas Micro in August of 1999
enhanced the Company's ability to grow.
Revenues decreased 2.7% to $186.5 million for 1998 from $191.8 million for
1997. The decrease in revenues in 1998 was primarily caused by customers
reducing orders precipitated by the effects of negative global economic
conditions in the electronics market.
GROSS MARGIN. Gross margin increased to 36.8% for 1999 from 33.6% for 1998
primarily as a result of the product mix consisting of a larger portion of
higher margin product relative to lower margin product shipped, which includes
products added as a result of the ARTIC acquisition on March 1, 1999.
Additionally, fixed manufacturing costs were lower relative to higher revenue
levels during 1998. The Company's strategic business model is to price its
products for new design wins at roughly 30-35% gross margins, because the
Company believes this gross margin level represents the best elasticity point to
maximize design wins and thus long term growth and profitability. As such, the
Company expects gross margins to decline gradually over time as new design wins
ramp into production. Typically, products ramp into production 6 to 12 months
after the design win.
13
Gross margin decreased to 33.6% for 1998 from 36.8% for 1997 because of an
unfavorable mix of product compared to the prior year. In addition,
manufacturing costs stayed flat despite a drop in production.
The Company's gross margins are heavily influenced by its OEM sales
relationships. OEM sales are characterized by longer product life cycles and
generally lower gross margins that can vary throughout the product life cycle.
Gross margins are typically lower in the early stages of production for OEM
sales and have the potential to improve over time. The Company establishes gross
margin targets based on the nature of the sales it is pursuing and the desire to
establish new OEM relationships by pricing aggressively to achieve key sales.
However, many of the factors affecting gross margins, such as variances in unit
volumes and timing of orders and component cost, are difficult or impossible to
predict and can cause the Company to be subject to unplanned margin variances.
Gross margins on OEM sales are also particularly sensitive to changes in
customer mix because of both margin variances among individual products and the
relative importance of a single large sale on overall operating results. To
mitigate the effect of short-term margin variances, the Company may employ "step
pricing" techniques in which unit prices decline over the life of the product to
reflect anticipated production efficiencies and/or component cost reductions, or
various "cost sharing" or "cost plus" pricing techniques that serve to reduce
the margin risk to the Company.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 37.3%
to $30.5 million for 1999 from $22.2 million for 1998, primarily as a result of
increased investment in new product development and costs of enhancements to
existing products. The Company continues to invest in new design wins for OEM
customers and the dollar increases reflect increases in the number of employees
working in research and development including additions resulting from
acquisitions. Research and development expenses as a percentage of total revenue
remained relatively flat from 1998 to 1999.
Research and development expenses increased 14.7% to $22.2 million for 1998
from $19.4 million for 1997 as a result of investment in new products. Research
and development expenses increased as a percentage of total revenue by 1.8%
primarily as the result of lower revenue levels in 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, exclusive of goodwill amortization, increased 16.7% to $36.8 million
for 1999 from $31.5 million for 1998. Selling, general and administrative
expenses decreased in 1999 as a percentage of revenues to 14.7%. The dollar
increase of $5.3 million is due to the selling effort to maintain high design
win activity. The 2.2% decrease as a percentage of total revenue is due to
increased efficiencies in managing expenses combined with higher revenue levels,
compared to 1998.
Selling, general and administrative expense increased 5.3% to $31.5 million
for 1998 from $29.9 million for 1997 primarily as a result of continued focus on
design win success despite a decrease in revenues.
GOODWILL AND INTANGIBLE AMORTIZATION. Amortization expense relates to
goodwill and intangibles recorded in connection with the Sonitech acquisition
(Q1 97 - $3.0 million) and the ARTIC acquisition (Q1 99 - $20.6 million).
Amortization periods range from five to fifteen years. Amortization expense
increased by $2.1 million over 1998 primarily as a result of the ARTIC
acquisition. Goodwill recorded for the OCP acquisition in late December 1999,
totals $13.0 million and will be amortized over five years beginning
January 2000.
COMBINATION COSTS. Combination costs for the year ended December 31, 1999
resulted from the Texas Micro merger on August 13, 1999. The Company recorded a
charge to operating expenses of approximately $6.0 million for merger-related
costs during the third quarter of 1999. Merger and related costs include
professional and filing fees of $3.3 million, human resource related expenses of
$1.5 million, contract termination costs of $.8 million and other miscellaneous
expenses totaling $.4 million.
14
INTEREST INCOME, NET. Interest income, net decreased 37.8% to $1.2 million
for 1999 from $1.9 million in 1998 due to lower cash and cash equivalents levels
primarily a result of the funding of the ARTIC Business Unit acquisition on
March 1, 1999 and capital expenditures.
Interest income, net increased 28.8% to $1.9 million for 1998 from
$1.5 million for 1997, due to a higher cash equivalent balance held in 1998.
OTHER INCOME, NET. Other income increased by $1.4 million from 1998 due to
the recovery of amounts owed from a prior divestiture with General Automation.
The Company received the final consideration owed in connection with the prior
(1996) sale of Texas Micro's Sequoia Enterprise Systems business unit to General
Automation. Final consideration consisted of $1.5 million in cash, $750 in
notes, and 1,133 shares of General Automation common stock. The receipt of this
consideration resulted in a gain to the Company of $2.2 million in the third
quarter of 1999 and is reflected in other income.
INCOME TAX PROVISION. The income tax provision for 1999, 1998 and 1997
reflect effective income tax rates of 3.5%, 28.6% and 37.0%. The decrease in the
effective income tax rates for 1999 is attributed to the Texas Micro net
operating loss carryforwards recognized in the year. The Company has accounted
for certain changes in the federal income tax laws that were effective on June
25, 1999. The tax law change eliminated some restrictions on the utilization of
certain Texas Micro net operating loss carryforwards. Some of the Texas Micro
net operating loss carryforwards are now available to offset RadiSys taxable
income. The adjustment relating to this tax law change resulted in a decrease to
the tax provision for the quarter ended June 30, 1999 and an increase to net
income after tax of $5.2 million. The decrease in the effective tax rate for
1998 compared to 1997 is directly attributable to lower net income.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $15.7 million in cash and
equivalents. As of December 31, 1999, the Company had working capital of
approximately $68.9 million. The Company has a $20.0 million line of credit with
a bank which expires September, 2000. As of December 31, 1999, $13.9 million was
outstanding under this arrangement at an interest rate of 8.5%. Amounts
outstanding under the line of credit accrue interest at an annual rate equal to
the lower of the LIBOR plus 1.25% to 2.0% or lender's prime rate (8.5% at
December 31, 1999). There was no balance outstanding as of December 31, 1998.
Net cash provided by operating activities was $2.1 million, $20.6 million
and $5.5 million for 1999, 1998 and 1997, respectively. The decrease in net cash
provided by operating activities in 1999 was largely attributable to an increase
in accounts receivable over prior years. Cash and cash equivalents decreased
$28.1 million during the year ended December 31, 1999 primarily as a result of
the cash paid and assets purchased for the ARTIC and OCP acquisitions ($41.6
million), increases in accounts receivable ($25.0 million), inventories ($6.6
million), deferred income taxes ($8.1 million), capital expenditures
($8.5 million) and capitalized software production costs and other assets ($3.6
million), and gain on sale of assets ($2.2 million). These cash uses were offset
by cash and cash equivalent increases from short term borrowings ($13.9
million), net income ($19.0 million), depreciation and amortization
($9.6 million), accounts payable ($7.3 million), accrued income taxes
($2.5 million), accrued wages and bonuses ($2.4 million), and other accrued
liabilities ($2.0 million).
Capital expenditures were $8.5 million, $4.7 million and $4.3 million in
1999, 1998 and 1997, respectively. These capital expenditures were primarily for
the purchase of leasehold improvements, manufacturing equipment, plant
modernization, and the purchase and implementation of SAP financial
applications. Capital expenditures for 2000 are expected to range from
$8.0 million to $10.0 million, resulting in part from the Company's plan to
continue increasing its manufacturing capacities and investments in information
systems.
15
The Company believes its existing cash and cash equivalents and cash from
operations will be sufficient to fund its 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 12 months.
YEAR 2000 ISSUES
The Company recognizes the importance to its operations of Year 2000 issues
and has worked to maintain the availability and integrity of its financial
systems and the reliability of its operational systems. Within the last
three years the Company has evaluated and upgraded or replaced the software
packages underlying the Company's financial systems, major manufacturing
systems, internal and external communication systems, and desktop systems, as
appropriate, to address Year 2000 readiness issues. The Company has also
performed an in-depth analysis of all of its products. In addition, the Company
has been in contact with all major external third party providers to assess
their Year 2000 readiness; this includes third parties who provide financial,
payroll, communications, component, and integration services to the Company.
The Company has completed its assessment of any Year 2000 difficulties to
date. Any difficulties as a result of Year 2000 have been corrected through
modifications of software and are considered to be insignificant in nature. The
Company has not experienced any significant Year 2000 issues arising from its
third party vendors to date and does not anticipate any such problems arising in
the future. In the event that problems do arise, the Company continues to
maintain a Year 2000 contingency plan.
The total cost associated with required modifications to become Year 2000
compliant has not been and is not expected to be material to the Company's
results of operations, liquidity and financial condition. The Company estimates
that it has incurred, and will incur, a total of approximately $0.5 million for
its Year 2000 readiness programs. These costs are a portion of ongoing Company
resources and are not separately identifiable.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company invests its excess cash in debt instruments
of the U.S. Government and its agencies, and in high-quality corporate issuers.
The Company attempts to protect and preserve its invested funds by limiting
default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates and the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.
FOREIGN CURRENCY RISK. The Company pays the expenses of its international
operations in local currencies. The Company's international operations are
subject to risks typical of an international business, including, but not
limited to: differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility. Accordingly, the Company's future results could be
materially adversely impacted by changes in these or other factors.
The Company is also exposed to foreign exchange rate fluctuations as they
relate to operating expenses as the financial results of foreign subsidiaries
are translated into U.S. dollars in consolidation. As exchange rates vary, these
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The effect of foreign exchange rate fluctuations
on the Company in 1999 was not material.
16
FORWARD-LOOKING STATEMENTS
Statements and information in this Annual Report on Form 10-K and the
statements the Company's management may make, from time to time, regarding
future industry trends, the Company's expected revenues, earnings and
anticipated gross margins, the Company's future development and introduction of
products, and the Company's future liquidity, development, and business
activities, constitute forward looking statements that involve a number of risks
and uncertainties. The following are among the factors that could cause actual
results to differ materially: business conditions and growth in the
telecommunications and electronics industry and general economy, both domestic
and international; dependence on a limited number of OEM customers; dependence
on the relationship with Intel; lower than expected customer orders or
variations in customer order patterns due to changes in demand for customers'
products and customer and channel inventory levels; competitive factors,
including pricing pressures, technological developments and products offered by
competitors; availability of components and qualified personnel; technological
difficulties and resource constraints encountered in developing new products;
the timely flow of competitive new products and market acceptance of those
products; difficulties in successfully combining the operations of the Company
and Texas Micro. Inc., dependence on a limited number of suppliers; and risks
associated with foreign currency rate fluctuations and other international
operational risks. The forward-looking statements should be considered in light
of these factors. The forward looking statements contained in this Annual Report
on Form 10-K regarding industry trends, product development and introductions,
and liquidity and future business activities should be considered in light of
these factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues........................... $52,698 $61,351 $64,096 $72,945 $50,370 $43,390 $44,934 $47,854
Gross profit....................... 18,839 22,911 23,372 27,175 17,263 13,704 15,013 16,704
Income (loss) from operations...... 3,373 5,225 (144) 8,150 4,294 534 1,254 2,487
Net income......................... 2,917 9,342 945 5,793 3,238 717 1,443 2,420
Net income per share (basic)*...... 0.18 0.58 0.06 0.35 0.20 0.05 0.09 0.15
Net income per share (diluted)*.... 0.18 0.55 0.06 0.32 0.20 0.04 0.09 0.15
Note: The selected financial data for the six quarters ended June 30, 1999 has
been restated to reflect the merger with Texas Micro, which was accounted
for as a pooling of interests.
* Reflects the three-for-two stock split on November 29, 1999.
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
RadiSys Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity, and
of cash flows present fairly, in all material respects, the financial position
of RadiSys Corporation and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
January 26, 2000
18
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- ---------- ----------
(RESTATED) (RESTATED)
Revenues.................................................... $251,090 $186,548 $191,814
Cost of sales............................................... 158,793 123,864 121,265
-------- -------- --------
Gross profit................................................ 92,297 62,684 70,549
Research and development.................................... 30,464 22,190 19,354
Selling, general and administrative......................... 36,798 31,526 29,949
Goodwill and intangibles amortization....................... 2,460 399 81
Combination costs........................................... 5,971 -- --
-------- -------- --------
Income from operations...................................... 16,604 8,569 21,165
Interest income, net........................................ 1,200 1,930 1,498
Other income................................................ 1,873 458 --
-------- -------- --------
Income before income tax provision.......................... 19,677 10,957 22,663
Income tax provision........................................ 680 3,139 8,391
-------- -------- --------
Net income.................................................. $ 18,997 $ 7,818 $ 14,272
======== ======== ========
Net income per share (basic)................................ $ 1.18 $ 0.49 $ 0.91
======== ======== ========
Net income per share (diluted).............................. $ 1.11 $ 0.48 $ 0.88
======== ======== ========
The accompanying notes are an integral part of this statement.
19
RADISYS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
---------------------
1999 1998
-------- ----------
(RESTATED)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 15,708 $ 43,792
Accounts receivable, net................................ 58,619 33,661
Inventories, net........................................ 41,374 27,382
Other current assets.................................... 1,747 2,255
Deferred income taxes................................... 4,723 805
-------- --------
Total current assets................................ 122,171 107,895
Property and equipment, net............................... 21,211 17,011
Goodwill and intangible assets, net....................... 34,177 3,188
Other assets.............................................. 10,004 3,633
-------- --------
Total assets........................................ $187,563 $131,727
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 19,878 $ 12,553
Short term borrowings................................... 13,931 --
Income taxes payable.................................... 3,527 1,052
Accrued wages and bonuses............................... 6,706 4,272
Accrued sales discounts................................. 1,258 748
Other accrued liabilities............................... 7,935 5,910
Current portion of capital lease obligation............. 73 277
-------- --------
Total current liabilities........................... 53,308 24,812
Non-current portion of capital lease obligation........... -- 88
-------- --------
Total liabilities................................... 53,308 24,900
-------- --------
Commitments and contingencies (Notes 6 and 12)
Shareholders' equity:
Common stock, no par value, 50,000 shares authorized,
16,489 and 15,839 shares issued and outstanding....... 141,030 132,368
Accumulated deficit..................................... (4,880) (23,877)
Accumulated other comprehensive loss:
Unrealized loss on securities available for sale...... (349) (568)
Cumulative translation adjustment..................... (1,546) (1,096)
-------- --------
Total shareholders' equity.......................... 134,255 106,827
-------- --------
Total liabilities and shareholders' equity.......... $187,563 $131,727
======== ========
The accompanying notes are an integral part of this statement.
20
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK CUMULATIVE UNREALIZED
------------------- TRANSLATION GAIN/LOSS ON ACCUMULATED
SHARES AMOUNT WARRANTS ADJUSTMENT SECURITIES DEFICIT TOTAL
-------- -------- --------- ------------ ------------ ------------ --------
Balances, December 31, 1996
(restated).................. 15,492 $129,037 $ 1,200 $ (210) $ -- $(45,967) $ 84,060
Exercise of warrants.......... 250 1,200 (1,200) -- -- -- --
Shares issued pursuant to
benefit plans............... 270 1,755 -- -- -- -- 1,755
Shares repurchased............ (330) (2,456) -- -- -- -- (2,456)
Tax effect of options
exercised................... -- 513 -- -- -- -- 513
Stock issued for
acquisition................. 126 2,409 -- -- -- -- 2,409
Translation adjustment........ -- -- -- (1,131) -- -- (1,131)
Net income for the year....... -- -- -- -- -- 14,272 14,272
------ -------- ------- ------- ----- -------- --------
Balances, December 31, 1997
(restated).................. 15,808 132,458 -- (1,341) -- (31,695) 99,422
Comprehensive income, year
ended 1997..................
Shares issued pursuant to
benefit plans............... 264 2,210 -- -- -- -- 2,210
Shares repurchased............ (233) (2,457) -- -- -- -- (2,457)
Tax effect of options
exercised................... -- 157 -- -- -- -- 157
Translation adjustment........ -- -- -- 245 -- -- 245
Unrealized loss on
securities.................. -- -- -- -- (568) -- (568)
Net income for the year....... -- -- -- -- -- 7,818 7,818
------ -------- ------- ------- ----- -------- --------
Balances, December 31, 1998
(restated).................. 15,839 132,368 -- (1,096) (568) (23,877) 106,827
Comprehensive income, year
ended 1998..................
Shares issued pursuant to
benefit plans............... 651 5,911 -- -- -- -- 5,911
Shares repurchased............ (1) (4) -- -- -- -- (4)
Tax effect of options
exercised................... -- 2,755 -- -- -- -- 2,755
Translation adjustment........ -- -- -- (450) -- -- (450)
Unrealized gain on
securities.................. -- -- -- -- 219 -- 219
Net income for the year....... -- -- -- -- -- 18,997 18,997
------ -------- ------- ------- ----- -------- --------
Balances, December 31, 1999... 16,489 $141,030 $ -- $(1,546) $(349) $ (4,880) $134,255
====== ======== ======= ======= ===== ======== ========
Comprehensive income, year
ended 1999..................
TOTAL
COMPREHENSIVE
INCOME
--------------
Balances, December 31, 1996
(restated).................. $ --
Exercise of warrants..........
Shares issued pursuant to
benefit plans...............
Shares repurchased............
Tax effect of options
exercised...................
Stock issued for
acquisition.................
Translation adjustment........ (1,131)
Net income for the year....... 14,272
-------
Balances, December 31, 1997
(restated)..................
Comprehensive income, year
ended 1997.................. $13,141
=======
Shares issued pursuant to
benefit plans...............
Shares repurchased............
Tax effect of options
exercised...................
Translation adjustment........ 245
Unrealized loss on
securities.................. (568)
Net income for the year....... 7,818
-------
Balances, December 31, 1998
(restated)..................
Comprehensive income, year
ended 1998.................. $ 7,495
=======
Shares issued pursuant to
benefit plans...............
Shares repurchased............
Tax effect of options
exercised...................
Translation adjustment........ (450)
Unrealized gain on
securities.................. 219
Net income for the year....... 18,997
-------
Balances, December 31, 1999...
Comprehensive income, year
ended 1999.................. $18,766
=======
The accompanying notes are an integral part of this statement.
21
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- ---------- ----------
(RESTATED) (RESTATED)
Cash flows from operating activities:
Net income................................................ $ 18,997 $ 7,818 $ 14,272
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 9,635 4,257 4,347
Gain on sale of assets.................................. (2,157) -- --
Deferred income taxes................................... (8,111) (441) 1,543
Net changes in current assets and current liabilities:
Decrease (increase) in accounts receivable............ (24,958) 6,721 (7,683)
Decrease (increase) in inventories.................... (6,605) 6,063 (6,343)
Decrease (increase) in other current assets........... 508 1,830 265
Increase (decrease) in accounts payable............... 7,325 (3,246) 229
Increase (decrease) in income taxes payable........... 2,475 (1,558) (1,438)
Increase (decrease) in accrued wages and bonuses...... 2,434 (1,841) 569
Increase (decrease) in accrued sales discounts........ 510 3,061 (149)
Increase (decrease) in other accrued liabilities...... 2,025 (2,046) (154)
-------- -------- --------
Net cash provided by operating activities............... 2,078 20,618 5,458
-------- -------- --------
Cash flows from investing activities:
Business acquisitions..................................... (41,609) -- (1,060)
Capital expenditures...................................... (8,541) (4,696) (4,297)
Capitalized software production costs and other assets.... (3,582) (3,556) (1,539)
Collection of amounts owed from divestiture............... 1,500 1,240 --
-------- -------- --------
Net cash used for investing activities.................. (52,232) (7,012) (6,896)
-------- -------- --------
Cash flows from financing activities:
Short term borrowings..................................... 13,931 -- (2,532)
Issuance of common stock, net............................. 8,662 (90) (188)
Payments on capital lease obligation...................... (292) (248) (249)
Unrealized gain (loss) on securities available for sale... 219 (568) --
-------- -------- --------
Net cash provided by (used for) financing activities.... 22,520 (906) (2,969)
-------- -------- --------
Effect of exchange rate changes on cash..................... (450) 245 (1,131)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (28,084) 12,945 (5,538)
Cash and cash equivalents, beginning of year................ 43,792 30,847 36,385
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 15,708 $ 43,792 $ 30,847
======== ======== ========
The accompanying notes are an integral part of this statement.
22
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
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. See Note 11 regarding the merger with Texas Micro
Inc., and the restatement of the Company's financial statements.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates and judgements made by management of the Company include matters such
as collectibility of accounts receivable, realizability of inventories, rate of
product returns from customers and recoverability of capitalized software and
deferred tax assets.
RECLASSIFICATIONS
Certain 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 AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
maturities of less than three months.
REVENUE RECOGNITION
The Company generally recognizes revenue from product sales upon shipment.
For sales through distributors, the Company estimates potential returns based
upon contractual limitations and historical return rates and defers revenue
recognition accordingly. The Company may grant certain sales discounts to
distributors. Such sales discounts are reflected as a reduction in the
associated revenue for distributor sales.
ACCOUNTS RECEIVABLE
Trade accounts receivable are net of an allowance for doubtful accounts of
$933 and $1,481 at December 31, 1999 and 1998, respectively. The Company's
customers are concentrated in the technology industry. Therefore, the Company's
operations and collection of its accounts receivable are directly associated
with the results of the technology industry.
23
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out (FIFO) method to determine cost. The Company periodically
evaluates its inventory in terms of obsolete or slow-moving items. Inventories
are net of a reserve for obsolete and slow-moving items of $5,925 and $4,759 at
December 31, 1999, and 1998, respectively.
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.
INTANGIBLE ASSETS
The Company reviews certain identifiable intangible assets for impairment
whenever events or changes in circumstances indicate that the total amount of an
asset may not be recoverable. An impairment loss is recognized when estimated
discounted future cash flows expected to result from use of the asset and its
eventual disposition are less than its carrying amount.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated for financial
reporting purposes using the straight-line basis over estimated useful lives of
three to five years. Equipment under capital leases is amortized using the
straight-line basis over the shorter of the lease term or the economic life of
the underlying asset. Ordinary maintenance and repair expenditures are charged
to expense when incurred. Equipment recorded under capital leases at
December 31, 1999 totaled $1,268 with accumulated amortization of $1,163.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are expensed as incurred.
COMPUTER SOFTWARE PRODUCTION COSTS
Software production costs incurred subsequent to establishment of
technological feasibility, but before release to customers, are capitalized.
Upon general release of the product, cost capitalization is terminated and the
accumulated costs are amortized based on the greater of the proportion of
current revenues to total revenue estimates for the related product, or
straight-line amortization over the remaining estimated economic life of the
product not to exceed two years. Unamortized software production costs of $4,800
and $3,733 are included in Other assets at December 31, 1999 and 1998,
respectively. Amortization of software production costs in 1999, 1998 and 1997
aggregated $2,193, $1,020 and $722, respectively.
24
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company's general practice is to reinvest the earnings of its foreign
subsidiaries in those operations, unless it would be advantageous to the Company
to repatriate the foreign subsidiaries' retained earnings. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to "more likely than not" be realized in future tax returns. Tax law
and rate changes are reflected in income in the period such changes are enacted.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The Company estimates the fair value of its monetary assets and liabilities
based upon comparative market values of instruments of a similar nature and
degree of risk. The Company estimates that the carrying amount of all of its
monetary assets and liabilities approximate fair value as of December 31, 1999
and 1998.
COMPREHENSIVE INCOME
The Company has adopted Financial Accounting Standards Board (FASB)
Statement No. 130, "Reporting Comprehensive Income" as of January 1, 1998. The
cumulative translation adjustment and unrealized loss on securities available
for sale represent the Company's Other Comprehensive Income items. The
cumulative translation adjustment consists of unrealized gains/losses recorded
in accordance with SFAS No. 52, "Foreign Currency Translation". The Company has
no intention of liquidating the assets of the foreign subsidiaries in the
foreseeable future.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and net earnings per common share as if the fair value
method had been applied in measuring compensation expense. Equity instruments
are not issued to non-employees.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of international operations are translated into U.S.
dollars at current exchange rates. Income and expense accounts are translated
into U.S. dollars at average rates of exchange prevailing during the period.
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are recorded as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are included
in income.
CASH FLOWS
The Company made cash payments for income taxes of $3,196, $3,711 and $7,815
for the years ended December 31, 1999, 1998 and 1997, respectively.
25
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW STANDARD
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. Management of
the Company anticipates that, due to its limited use of derivative instruments,
the adoption of FAS 133 will not have a significant effect on the Company's
results of operations or its financial position. FAS 137 delayed adoption of FAS
133 to fiscal years commencing after June 30, 2000.
2. INVENTORIES
DECEMBER 31,
-------------------
1999 1998
-------- --------
Raw materials............................................. $30,986 $17,520
Work-in-progress.......................................... 2,465 3,728
Finished goods............................................ 7,923 6,134
------- -------
$41,374 $27,382
======= =======
3. PROPERTY AND EQUIPMENT
DECEMBER 31,
-------------------
1999 1998
-------- --------
Land...................................................... $ 1,391 $ 1,391
Manufacturing equipment................................... 17,950 14,591
Office equipment.......................................... 19,746 12,917
Leasehold improvements.................................... 4,835 5,835
------- -------
43,922 34,734
Less: accumulated depreciation............................ 22,711 17,723
------- -------
$21,211 $17,011
======= =======
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets increased by $31.0 million, from
$3.2 million at December 31, 1998 to $34.2 million at December 31, 1999. This
increase is due to goodwill and intangibles recorded from the ARTIC and OCP
acquisitions (see Note 11) of $31.5 million (net of amortization), offset by
$.5 million of increases in other intangibles and amortization from the Sonitech
acquisition and other intangibles. Amortization periods range from five to
fifteen years.
26
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. SHORT TERM BORROWINGS
In September 1999, the Company renewed its unsecured line of credit and
increased the borrowing amount from $10 million to $20 million, with an interest
rate based upon the lower of the LIBOR plus 1.25% to 2.0% or the bank's prime
rate. The line of credit expires in September 2000. As of December 31, 1999,
$13,931 was outstanding under this arrangement at an interest rate of 8.5%.
There was no balance outstanding as of December 31, 1998.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities and certain office equipment and
automobiles under non-cancelable operating leases which require minimum lease
payments as follows at December 31, 1999:
YEAR ENDING
DECEMBER 31,
- ------------
2000............................................... $ 4,437
2001............................................... 4,232
2002............................................... 3,918
2003............................................... 3,478
2004............................................... 3,548
Thereafter......................................... 14,264
-------
$33,877
=======
Rent expense related to these operating leases aggregated $4,545, $3,677 and
$2,404 in 1999, 1998 and 1997, respectively.
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Currently payable:
Federal.......................................... $ 6,460 $1,679 $5,834
State............................................ 1,722 423 927
Foreign.......................................... 609 596 87
------- ------ ------
8,791 2,698 6,848
------- ------ ------
Deferred:
Federal.......................................... (2,553) 386 1,351
State............................................ (365) 55 192
------- ------ ------
(2,918) 441 1,543
------- ------ ------
Decrease in valuation allowance.................... (5,193) -- --
------- ------ ------
Total provision.................................. $ 680 $3,139 $8,391
======= ====== ======
27
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory federal income tax rate to pretax income as a result of
the following differences:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Statutory federal tax rate...................... 35.0% 35.0% 35.0%
Increase (decrease) in rates resulting from:
State taxes................................... 4.0 4.0 3.3
Goodwill benefit from acquisition............. (2.2) (5.1) (2.2)
Deferred tax asset valuation allowance........ (30.9) (6.0) 1.6
Other......................................... (2.4) 0.7 (0.7)
------- ------- -------
Effective tax rate.............................. 3.5% 28.6% 37.0%
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following components:
DECEMBER 31,
-------------------
1999 1998
-------- --------
Capitalized software.................................... $ (1,664) $ (1,451)
Depreciation............................................ (711) (352)
-------- --------
Gross deferred tax liability............................ (2,375) (1,803)
Deferred revenue........................................ 98 219
Accrued warranty........................................ 636 198
Inventory differences................................... 3,208 1,681
Distributor price adjustments........................... 284 66
Merger costs............................................ 273 --
Allowance for doubtful accounts......................... 487 250
NOL carryforwards....................................... 16,049 15,761
Other................................................... 824 194
-------- --------
19,484 16,566
Less: valuation allowance............................... (10,568) (15,761)
-------- --------
Net deferred tax asset.................................. $ 8,916 $ 805
======== ========
The Company's net deferred tax asset of $8,916 includes $4,723 classified as
current, with the remaining balance of $4,193 classified non-current. The
non-current portion is included in Other assets on the Consolidated Balance
Sheet and is a result of certain Texas Micro net operating loss carryforwards.
The Company's entire 1998 net deferred tax asset balance of $805 is current.
The Company accounted for certain changes in the federal income tax laws
that took effect on June 25, 1999. The tax law change made certain Texas Micro
net operating loss carryforwards available to offset RadiSys taxable income.
This portion of the pooling restatement increased net income of the Company by
$5.2 million for the year ended December 31, 1999.
28
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
8. SHAREHOLDERS' EQUITY
STOCK SPLIT
During the fourth quarter of 1999, the Company's Board of Directors approved
a three-for-two common stock split. Shareholders of record on November 8, 1999
(the record date) received three additional shares for every two shares held on
that date. The shares were distributed on November 29, 1999. All share numbers
in these consolidated financial statements and notes thereto for all periods
presented have been adjusted to reflect the three-for-two common stock split.
EPS RECONCILIATION
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Weighted average shares (basic).................. 16,158 15,854 15,667
Effect of dilutive stock options................. 952 275 545
------- ------- -------
Weighted average shares (diluted)................ 17,110 16,129 16,212
======= ======= =======
Options to purchase 269, 1,247, and 321 shares of common stock were
outstanding in 1999, 1998, and 1997, respectively, but were excluded in the
computation of diluted EPS as the options' exercise price was greater than the
average market price of the Company's common stock.
STOCK OPTION PLAN
During 1988 and 1995, the Company's shareholders approved stock option
plans. The 1988 plan expired in 1998 and no further shares authorized under that
plan are available for grant. In August, 1999 the Company completed its merger
with Texas Micro and, as a result, options outstanding to existing employees
under Texas Micro's option plans were converted into options to purchase RadiSys
shares, at the effective merger conversion rate of approximately 4.96 shares of
Texas Micro common stock to one share of RadiSys common stock. First time
options granted to new employees generally become exercisable one-third
annually, with no options exercisable in the first year following the grant
date. Options granted to existing employees generally have vesting periods
between two and four years. The difference between the fair market value of the
Company's common stock and the option exercise price at the date of grant, if
material, is recorded as compensation expense ratably over the vesting period of
the related options. Compensation expense related to the stock option plan for
the years ended December 31, 1999,
29
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
8. SHAREHOLDERS' EQUITY (CONTINUED)
1998 and 1997 was insignificant. Options available for grant totaled 1,143
shares as of December 31, 1999. The table below summarizes the Company's stock
option activity:
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Beginning balance....................... 2,245 $12.68 1,760 $16.84 1,380 $16.22
Granted............................... 1,450 23.01 1,721 15.25 1,054 25.62
Canceled.............................. (366) 14.96 (1,111) 24.08 (567) 33.98
Exercised............................. (514) 9.44 (125) 5.28 (107) 4.51
----- ------ ------ ------ ----- ------
Ending balance.......................... 2,815 $18.29 2,245 $12.68 1,760 $16.84
===== ====== ====== ====== ===== ======
The following table summarizes the information about stock options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
RANGE OF EXERCISE PRICES 12/31/1999 LIFE PRICE 12/31/1999 PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
$1.32--$10.00.......................... 384 5.08 $ 8.33 238 $ 8.06
$10.08--$12.46......................... 543 4.22 $12.38 138 $12.28
$12.62--$18.92......................... 545 5.26 $16.25 172 $15.02
$19.00--$22.67......................... 510 5.50 $19.81 27 $21.54
$22.75--$26.33......................... 612 4.84 $25.76 156 $25.60
$26.42--$45.92......................... 221 5.41 $31.00 4 $34.07
----- ---- ------ --- ------
$1.32--$45.92.......................... 2,815 5.00 $18.29 735 $14.85
===== ===
EMPLOYEE STOCK PURCHASE PLAN
In December 1995, the Company established an Employee Stock Purchase Plan
(ESPP). Under the plan, the Company is authorized to sell up to 750 shares of
common stock in a series of eighteen month offerings. Substantially all
employees are eligible to receive rights under the plan. The purchase price is
the lesser of 85% of the fair market value of the common stock on date of grant
or on the purchase date. During 1999 and 1998, the Company issued 95 and 114
shares under the plan, respectively.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("FAS 123")
The Company has elected to account for its stock based compensation under
Accounting Principles Board Opinion No. 25; however, as required by FAS 123 the
Company has computed for pro forma disclosure purposes the value of options
granted during 1999, 1998 and 1997 using the Black-Scholes option pricing model.
The weighted average assumptions used for stock option grants for 1999, 1998 and
30
8. SHAREHOLDERS' EQUITY (CONTINUED)
1997 were a risk free interest rate of 5.33%, 5.11%, and 5.4%, respectively, an
expected dividend yield of 0%, an expected life of 4 years, and an expected
volatility of 72%, 65%, and 50%, respectively. The weighted average assumptions
used for ESPP rights for 1999, 1998 and 1997 were a risk free interest rate of
5.17%, 5.0% and 5.3%, respectively, an expected dividend yield of 0%, an
expected life of 1.5 years, and an expected volatility of 65%, 62% and 50%,
respectively. The weighted-average fair value of ESPP rights granted in 1999,
1998 and 1997 were $2,060, $1,377, and $656, respectively.
Options are assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For
the years ended December 31, 1999, 1998 and 1997, the total value of the options
granted was computed to be $19,151, $12,761 and $13,299, respectively, which
would be amortized on a straight line basis over the vesting period of the
options.
If the Company had accounted for these plans in accordance with FAS 123, the
Company's net income and pro forma net income per share would have been reported
as follows:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1997
--------------------------------- --------------------------------- ---------------------------------
EARNINGS PER SHARE EARNINGS PER SHARE EARNINGS PER SHARE
--------------------------------- --------------------------------- ---------------------------------
NET INCOME BASIC DILUTED NET INCOME BASIC DILUTED NET INCOME BASIC DILUTED
----------- -------- -------- ----------- -------- -------- ----------- -------- --------
As Reported............. $18,997 $1.18 $1.11 $ 7,818 $ .49 $ .48 $14,272 $ .91 $ .88
Pro Forma............... $ 9,934 $ .61 $ .58 $ 2,886 $ .18 $ .18 $10,954 $ .70 $ .68
The effects of applying FAS 123 for providing pro forma disclosure for 1999,
1998 and 1997 are not likely to be representative of the effects on reported net
income and earnings per share for future years since options vest over several
years and additional awards are made each year.
9. SEGMENT INFORMATION
The following is disclosure required for SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company is organized
primarily on the basis of embedded single board computers and other related
support operations. The operations not included in embedded single board
computers are immaterial for presentation.
The following reflects revenues and long-lived asset information by
geographic area:
REVENUES LONG-LIVED ASSETS
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------ -------------------
COUNTRY 1999 1998 1997 1999 1998
- ------- -------- -------- -------- -------- --------
United States............... $158,091 $132,029 $134,403 $20,537 $16,374
Europe...................... 87,264 48,703 49,287 591 538
Asia Pacific--Japan......... 3,696 3,281 6,105 83 99
Other foreign............... 2,039 2,535 2,019 -- --
-------- -------- -------- ------- -------
Total..................... $251,090 $186,548 $191,814 $21,211 $17,011
======== ======== ======== ======= =======
No single customer accounted for more than 10% of sales in 1999, 1998, or
1997.
10. GAIN ON SALE OF ASSETS
On September 30, 1999, the Company received the final consideration owed in
connection with the prior (1996) sale (by Texas Micro) of Texas Micro's Sequoia
Enterprise Systems business unit to General Automation, Inc. Final consideration
consisted of $1.5 million in cash, $750 in notes, and 1,133 shares of
31
10. GAIN ON SALE OF ASSETS (CONTINUED)
General Automation common stock. The receipt of this consideration resulted in a
gain of $2.2 million and is reflected in Other income in the Consolidated
Statement of Operations.
11. ACQUISITIONS AND MERGERS
ARTIC BUSINESS UNIT ACQUISITION
On March 1, 1999, the Company purchased certain assets of International
Business Machines Corporation ("IBM") dedicated to the design, manufacture and
sale of IBM's ARTIC communications coprocessor adapter hardware and software for
wide area network and other telephony applications ("ARTIC"). The purchase price
aggregated $27.0 million in cash consideration. The acquisition of ARTIC was
accounted for using the purchase method. The results of operations for ARTIC
have been included in the financial statements since the date of acquisition.
The aggregate purchase price of $27.5 million included $.6 million of direct
costs of acquisition and was allocated to fixed assets ($.4 million),
inventories ($6.5 million), patents ($5.0 million) and the remainder to
goodwill.
OCP BUSINESS UNIT ACQUISITION
On December 28, 1999, the Company purchased certain assets of IBM's Open
Computing Platform (OCP) operation. OCP develops and sells integrated
computer-based solutions based on Intel architecture, primarily to OEM's of
telecommunications equipment. The purchase price consisted of an aggregate of
$13.9 million in cash consideration. Pursuant to the terms of the agreement, the
Company may be required to make additional future payments in March of 2001,
2002, and 2003 based upon a formula tied to the future OCP revenues. These
potential additional future payments will be accounted for as additional
purchase price. The total consideration for the Acquisition will not exceed
$30.0 million. The acquisition of OCP was accounted for using the purchase
method. The results of operations of OCP have been included in the financial
statements since the date of acquisition. The aggregate purchase price of $14.1
million included $.1 million direct costs of acquisition and $.1 million of
contingent consideration and was allocated to fixed assets ($.2 million),
inventories ($.9 million) and the remainder to goodwill.
UNAUDITED PRO FORMA DISCLOSURES OF ACQUISITIONS
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisitions described above had occurred as
of the beginning of 1999 and 1998, after giving effect to adjustments for
amortization of patents and goodwill, estimated reduction of interest income and
the estimated impact on the income tax provision. The unaudited pro forma
financial statements are not necessarily indicative of what actual results would
have been had the ARTIC and OCP acquisitions occurred at the beginning of the
respective periods. The unaudited pro forma information should be read in
conjunction with the Current Report of the Company on Form 8-K dated March 1,
1999 and December 28, 1999 for ARTIC and OCP, respectively, and the Current
Reports of the Company on Form 8-K/A filed April 22, 1999 and March 10, 2000,
respectively.
1999 1998
-------- --------
(UNAUDITED)
Revenues................................................ $309,143 $289,575
Net income.............................................. $ 24,528 $ 17,759
Net income per share (basic)............................ $ 1.52 $ 1.12
Net income per share (diluted).......................... $ 1.43 $ 1.10
32
11. ACQUISITIONS AND MERGERS (CONTINUED)
MERGER WITH TEXAS MICRO AND RELATED CHARGES
On August 13, 1999, the Company completed a merger with Texas Micro Inc.
("Texas Micro"), a formerly publicly-traded embedded computer company
headquartered in Houston, Texas. As a result, the outstanding Texas Micro common
stock was converted into approximately 2.8 million shares of RadiSys common
stock, based on an exchange ratio of approximately 4.96 shares of Texas Micro
common stock for each share of RadiSys common stock. The merger was accounted
for as a pooling-of-interests under Accounting Principles Board Opinion No. 16,
and accordingly, financial statements presented for all periods have been
restated to reflect combined operations and financial position. All intercompany
transactions have been eliminated.
The following reconciles revenue and net income (loss) previously reported
to the restated information presented in the consolidated financial statements:
YEARS ENDED
SIX MONTHS DECEMBER 31,
ENDED -------------------
JUNE 30, 1999 1998 1997
-------------- -------- --------
Revenue:
Previously reported....................................... $ 70,395 $108,198 $125,442
Texas Micro............................................... 43,654 78,350 66,372
-------- -------- --------
Restated................................................ $114,049 $186,548 $191,814
======== ======== ========
Net income (loss):
Previously reported....................................... $ 4,448 $ 5,432 $ 15,425
Texas Micro............................................... 7,811 2,386 (1,153)
-------- -------- --------
Restated................................................ $ 12,259 $ 7,818 $ 14,272
======== ======== ========
In connection with the merger, the Company recorded a charge to operating
expenses of approximately $6.0 million for merger-related costs during the third
quarter of 1999. Merger and related costs are comprised of the following:
COMBINATION COSTS
RECORDED YEAR ENDING BALANCE ACCRUED
DECEMBER 31, 1999 DECEMBER 31, 1999
-------------------- ------------------
Professional and filing fees............................... $3,251 $ 200
Severance, retention, relocation & benefits alignment...... 1,538 875
Contract termination costs................................. 799 164
Marketing, information systems conversion, and other
miscellaneous costs...................................... 383 45
------ ------
Total...................................................... $5,971 $1,284
====== ======
Accrued combination costs totaling $1.3 million at December 31, 1999 are
included in Other accrued liabilities in the Consolidated Balance Sheet.
12. LEGAL PROCEEDINGS
In the normal course of business the Company becomes involved in litigation.
The Company has no material litigation currently pending.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant will file its definitive proxy statement for the Annual Meeting
of Shareholders to be held on May 16, 2000, pursuant to Regulation 14A of the
Securities Exchange Act of 1934 (the "Proxy Statement"), not later than
120 days after the end of the fiscal year covered by this Report, and certain
information included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors of the Company is included under
"Election of Directors" in the Company's Proxy Statement and is incorporated
herein by reference. Information with respect to executive officers of the
Company is included under Item 4(a) of Part I of this Report. Information with
respect to Section 16(a) of the Securities and Exchange Act is included under
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Exchange Act"
in the Company's Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
"Executive Compensation" in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management is included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related
transactions is included under "Certain Relationships and Related Transactions"
in the Company's Proxy Statement and is incorporated herein by reference.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
Index to Financial Statements
PAGE
--------
Independent Accountants' Report........................... 18
Consolidated Statement of Operations for the years ended
December 31, 1999, 1998 and 1997........................ 19
Consolidated Balance Sheet at December 31, 1999 and
1998.................................................... 20
Consolidated Statement of Changes in Shareholders' Equity
for the years ended
December 31, 1999, 1998 and 1997........................ 21
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................ 22
Notes to Consolidated Financial Statements................ 23
Schedule of Valuation and Qualifying Accounts............. 38
PAGE IN
(A)(2) FINANCIAL STATEMENT SCHEDULE FORM 10-K
- --------------------- ---------------------------- --------------
Schedule II--Valuation and Qualifying Accounts 38
Report of Independent Accountants on Financial Statement
Schedule 39
(A)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
+2.1 Asset Purchase Agreement between RadiSys Corporation and
Intel Corporation, dated as of April 29, 1996. Incorporated
by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated April 29, 1996.
2.2 List of omitted schedules to Asset Purchase Agreement
between RadiSys Corporation and Intel Corporation, dated as
of April 29, 1996. Incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K dated April 29,
1996.
2.3 Asset Purchase Agreement between RadiSys Corporation and
International Business Machines Corporation, dated as of
March 1, 1999. Incorporated by reference to Exhibit 2.3 to
the Company's Current Report on Form 8-K dated March 1,
1999.
2.4 Agreement of Reorganization and Merger dated as of May 24,
1999, between the Company, Texas Micro Inc. and Tabor Merger
Corp. Incorporated by reference to Appendix A to the
Company's Joint Proxy Statement/Prospectus dated July 7,
1999, which is part of the Company's Registration Statement
on Form S-4 (No. 333-82401).
2.5 Asset Purchase Agreement between the Company and
International Business Machines Corporation, dated as of
December 17, 1999. Incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K dated
December 28, 1999.
3.1 Second Restated Articles of Incorporation and Amendments
thereto. Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration
No. 33-95892) (the Form "S-1"), and by reference to
Exhibit 3 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997.
3.2 Restated Bylaws and amendments thereto. Incorporated by
reference to Exhibit 3.2 to the Form S-1.
4.1 See Article IV of Exhibit 3.1 and Article VI of
Exhibit 3.2.
*10.1 1988 Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10.1 to the Form S-1.
*10.2 1995 Stock Incentive Plan, as amended.
35
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
*10.3 1996 Employee Stock Purchase Plan, as amended.
*10.4 Form of Incentive Stock Option Agreement. Incorporated by
reference to Exhibit 10.3 to the Form S-1.
*10.5 Form of Non-Statutory Stock Option Agreement. Incorporated
by reference to Exhibit 10.4 to the Form S-1.
10.6 Lease between Registrant and Commercial Real Estate Company,
L.L.C. dated December 15, 1995. Incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.7 Master Equipment Lease No. 10551, dated as of March 2, 1995,
between U.S. Bancorp Leasing & Financial, as Lessor, and the
Registrant, as Lessee, including Schedules 10551.001,
10551.002 and 10551.003, dated March 2, 1995, March 29, 1995
and May 23, 1995, respectively. Incorporated by reference
to Exhibit 10.8 to the Form S-1.
10.8 Office Lease Agreement by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated December 11, 1992, as amended.
Incorporated by reference to Exhibit 10.31 to Sequoia
Systems Inc.'s Annual Report on Form 10-K for the year ended
June 30, 1995 (File no. 0-18238).
10.9 Fourth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro, Inc. dated July 31, 1995.
10.10 Fifth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated October 17, 1995.
10.11 Sixth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated April 28, 1997.
10.12 Seventh amendment to lease by and between Chevron U.S.A.
Inc. and Texas Micro Inc. dated November 12, 1997.
10.13 Eighth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated December 23, 1997. Incorporated
by reference to Exhibit 10.3 to Texas Micro Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
December 28, 1997 (File no. 0-18238).
10.14 Ninth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated February 24, 1998. Incorporated
by reference to Exhibit 10.1 to Texas Micro Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
March 29, 1998 (File no. 01-18238).
*10.15 Form of Indemnity Agreement. Incorporated by reference to
Exhibit 10.9 to the Form S-1.
10.16 Revolving line of credit agreement between the Company and
United States National Bank of Oregon dated September 12,
1996. Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
10.16(a) Renewal of and increase in September 12, 1996 revolving line
of credit agreement between the Company and United States
National Bank of Oregon dated September 30, 1999.
Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999.
10.17 Dawson Creek II lease, dated March 21, 1997, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1997.
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney
27.1 Financial Data Schedule
27.2 Financial Data Schedule, 1998 restated.
- ------------------------
+ Confidential treatment of portions of this document has been granted.
* This Exhibit constitutes a management contract or compensatory plan or
arrangement
(B) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the quarter ended
December 31, 1999.
(C) SEE (A)(3) ABOVE.
(D) SEE (A)(2) ABOVE.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 28, 2000 RADISYS CORPORATION
By: /s/ DR. GLENFORD J. MYERS
-----------------------------------------
Dr. Glenford J. Myers
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 2000.
SIGNATURE TITLE
--------- -----
/s/ DR. GLENFORD J. MYERS Chairman of the Board, President and Chief
------------------------------------------- Executive Officer (Principal Executive
Dr. Glenford J. Myers Officer)
/s/ STEPHEN LOUGHLIN Vice President of Finance and Administration
------------------------------------------- and Chief Financial Officer (Principal
Stephen Loughlin Financial and Accounting Officer)
Directors:
/s/ JAMES F. DALTON*
------------------------------------------- Director
James F. Dalton
/s/ RICHARD J. FAUBERT*
------------------------------------------- Director
Richard J. Faubert
/s/ C. SCOTT GIBSON*
------------------------------------------- Director
C. Scott Gibson
/s/ DR. WILLIAM W. LATTIN*
------------------------------------------- Director
Dr. William W. Lattin
/s/ JEAN-CLAUDE PETERSCHMITT*
------------------------------------------- Director
Jean-Claude Peterschmitt
/s/ JEAN-PIERRE D. PATKAY*
------------------------------------------- Director
Jean-Pierre D. Patkay
*By /s/ DR. GLENFORD J. MYERS
--------------------------------------
Dr. Glenford J. Myers, as attorney-in-fact
37
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS--
Year ended:
December 31, 1999............................. $1,481 $ 1,773 $ (2,321) $ 933
December 31, 1998............................. 1,485 3,065 (3,069) 1,481
December 31, 1997............................. 1,733 2,077 (2,325) 1,485
WARRANTY RESERVE--
Year ended:
December 31, 1999............................. $1,202 $ 2,423 $ (2,034) $1,591
December 31, 1998............................. 732 3,163 (2,693) 1,202
December 31, 1997............................. 1,766 1,913 (2,947) 732
OBSOLESCENCE RESERVE--
Year ended:
December 31, 1999............................. $4,759 $14,314 $(13,148) $5,925
December 31, 1998............................. 3,583 14,511 (13,335) 4,759
December 31, 1997............................. 3,098 12,019 (11,534) 3,583
38
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
RadiSys Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 26, 2000 appearing in the 1999 Annual Report to
Shareholders of RadiSys Corporation and subsidiaries (which report and
consolidated financial statements are incorporated in this Annual Report on
Form 10-K) also included an audit of the financial statement schedule listed in
Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Portland, Oregon
January 26, 2000
39
(A)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
+2.1 Asset Purchase Agreement between RadiSys Corporation and
Intel Corporation, dated as of April 29, 1996. Incorporated
by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated April 29, 1996.
2.2 List of omitted schedules to Asset Purchase Agreement
between RadiSys Corporation and Intel Corporation, dated as
of April 29, 1996. Incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K dated April 29,
1996.
2.3 Asset Purchase Agreement between RadiSys Corporation and
International Business Machines Corporation, dated as of
March 1, 1999. Incorporated by reference to Exhibit 2.3 to
the Company's Current Report on Form 8-K dated March 1,
1999.
2.4 Agreement of Reorganization and Merger dated as of May 24,
1999, between the Company, Texas Micro Inc. and Tabor Merger
Corp. Incorporated by reference to Appendix A to the
Company's Joint Proxy Statement/Prospectus dated July 7,
1999, which is part of the Company's Registration Statement
on Form S-4 (No. 333-82401).
2.5 Asset Purchase Agreement between the Company and
International Business Machines Corporation, dated as of
December 17, 1999. Incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K dated
December 28, 1999.
3.1 Second Restated Articles of Incorporation and Amendments
thereto. Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration
No. 33-95892) (the Form "S-1"), and by reference to
Exhibit 3 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997.
3.2 Restated Bylaws and amendments thereto. Incorporated by
reference to Exhibit 3.2 to the Form S-1.
4.1 See Article IV of Exhibit 3.1 and Article VI of
Exhibit 3.2.
*10.1 1988 Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10.1 to the Form S-1.
*10.2 1995 Stock Incentive Plan, as amended.
*10.3 1996 Employee Stock Purchase Plan, as amended.
*10.4 Form of Incentive Stock Option Agreement. Incorporated by
reference to Exhibit 10.3 to the Form S-1.
*10.5 Form of Non-Statutory Stock Option Agreement. Incorporated
by reference to Exhibit 10.4 to the Form S-1.
10.6 Lease between Registrant and Commercial Real Estate Company,
L.L.C. dated December 15, 1995. Incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.7 Master Equipment Lease No. 10551, dated as of March 2, 1995,
between U.S. Bancorp Leasing & Financial, as Lessor, and the
Registrant, as Lessee, including Schedules 10551.001,
10551.002 and 10551.003, dated March 2, 1995, March 29, 1995
and May 23, 1995, respectively. Incorporated by reference
to Exhibit 10.8 to the Form S-1.
10.8 Office Lease Agreement by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated December 11, 1992, as amended.
Incorporated by reference to Exhibit 10.31 to Sequoia
Systems Inc.'s Annual Report on Form 10-K for the year ended
June 30, 1995 (File no. 0-18238).
10.9 Fourth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro, Inc. dated July 31, 1995.
10.10 Fifth amendment to lease by and between Chevron U.S.A. Inc
and Texax Micro Inc. dated October 17, 1995.
10.11 Sixth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated April 28, 1997.
40
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
10.12 Seventh amendment to lease by and between Chevron U.S.A.
Inc. and Texas Micro Inc. dated November 12, 1997.
10.13 Eighth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated December 23, 1997. Incorporated
by reference to Exhibit 10.3 to Texas Micro Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
December 28, 1997 (File no. 0-18238).
10.14 Ninth amendment to lease by and between Chevron U.S.A. Inc.
and Texas Micro Inc. dated February 24, 1998. Incorporated
by reference to Exhibit 10.1 to Texas Micro Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
March 29, 1998 (File no. 01-18238).
*10.15 Form of Indemnity Agreement. Incorporated by reference to
Exhibit 10.9 to the Form S-1.
10.16 Revolving line of credit agreement between the Company and
United States National Bank of Oregon dated September 12,
1996. Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
10.16(a) Renewal of and increase in September 12, 1996 revolving line
of credit agreement between the Company and United States
National Bank of Oregon dated September 30, 1999.
Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999.
10.17 Dawson Creek II lease, dated March 21, 1997, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1997.
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney
27.1 Financial Data Schedule
27.2 Financial Data Schedule, 1998 restated.
- ------------------------
+ Confidential treatment of portions of this document has been granted.
* This Exhibit constitutes a management contract or compensatory plan or
arrangement
41