UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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, 2002
Commission file number 0-26844
RADISYS
CORPORATION
(Exact name of registrant as specified in its charter)
| OREGON | 93-0945232 | |
| (State
or other jurisdiction of Incorporation or Organization) |
(I.R.S
Employer
Identification 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
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 þ No o
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. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes þ No o
The aggregate market value of the voting stock (based upon the closing price of the Nasdaq National Market on June 28, 2002 of $11.63) of the Registrant held by non-affiliates of the Registrant at that date was approximately $203,804,000. 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 17, 2003: 17,729,296
|
DOCUMENTS INCORPORATED BY REFERENCE |
||
| Document | Part of Form 10-K into which Incorporated | |
| Proxy Statement for 2003 Annual Meeting of Shareholders | Part III | |
Table of Contents
RADISYS
CORPORATION FORM
10-K TABLE
OF CONTENTS 1
Introduction RadiSys
Corporation (“RadiSys” or the “Company”) provides embedded
systems for compute, data processing, and network-intensive applications to
Original Equipment Manufacturers (“OEM”s) within the commercial
systems, service provider systems, and enterprise systems markets. The Company
focuses on industry-leading solutions while working in a close “virtual
division” relationship with its customers. The Company’s value proposition
to its customers is providing leading technology solutions while improving their
time-to-market advantage and reducing total life-cycle costs. Markets
RadiSys
provides embedded technology solutions to three distinct markets: RadiSys
provides system architecture, design, sourcing, configuration, delivery and
full product life-cycle management to systems providers. The growth drivers
for embedded systems include: The
Company believes system makers will progressively look to outside sources for
supply of integrated hardware/software building blocks to achieve better technical
solutions, faster time-to-market, and reduced life-cycle costs. 2
Strategy The
Company’s strategy is to provide its customers with a “virtual division”
where embedded systems, or functional building blocks, are conceived, developed,
supplied, and managed. This allows the Company’s customers to focus their
resources and development on application-specific competencies giving them higher
value systems and a time-to-market advantage with a lower total cost of ownership.
Historically, system makers had been largely vertically integrated, developing
most, if not all, of the functional building blocks of their systems. System
makers are now more focused on their core competencies and are looking for partners
to provide them with building blocks for a growing number of processing and
networking functions. Products
The
Company designs and delivers a broad range of products at different levels of
integration: The
Company has specific technical expertise in the following areas: Perfect
Fit Solutions. The Company’s perfect fit solutions are products tailored
or customized to meet specific customer or application requirements. These solutions
range from modifications of standard or existing Company products to full-up
development and supply of customized solutions. The Company draws on its extensive
experience and large design library to create products with varying degrees
of customization. The development of custom solutions requires close and frequent
communication with customers during the development process as well as deep
technical and supply management capability to assure meeting complex customer
product requirements. Standard
Products. The Company provides a highly differentiated set of standard products.
The Company can deliver CPU platforms, system platforms, voice and image processing
products, network interface modules, network processor products, signaling products,
embedded chipsets, software, and OS-9 operating systems on many key architectures.
3
Competition The
Company has three different types of competitors: Customers
The
Company’s customers include many leading system makers in a variety of
end markets. Examples of these customers include: Agilent Technologies, Applied
Materials, Inc., Avaya, Inc., Beckman Coulter Inc., Comverse Network Systems,
LTD., Diebold, Inc., Hewlett Packard Inc., International Business Machines Corporation
(“IBM”), International Gaming Technology, Lucent Technologies, Inc.,
Nokia Corporation, Nortel Networks Limited, Philips Medical Systems N.E.D. B.V,
Siemens AG and Universal Instruments. The
Company’s five largest customers, which accounted for approximately 48%
of revenues in 2002, are listed below with a representative example of the type
of application into which the customers incorporate RadiSys products: Nortel
and Nokia were the Company’s largest customers in 2002 accounting for
17% and 13% of total 2002 revenues, respectively. Research,
Development and Engineering The
Company believes its research, development and engineering expertise represents
an important competitive advantage. The Company’s research and development
staff consisted of 163 engineers and technicians at March 17, 2003. Much
of the Company’s research, development and engineering efforts are focused
on “perfect-fit” integrated solutions for its customers, where existing
functional building blocks are tailored to meet the customers’ specific
needs. For these programs, the Company’s engineering team works closely
with the customer’s engineering team to architect, develop and deliver
solutions that meet their specific requirements using RadiSys functional building
blocks. In many cases, the customer will pay the Company non-recurring engineering
fees as pre-defined milestones are achieved. The Company engages in close and
frequent communication during the design and supply process, allowing it to
operate as a “virtual division” within a customer’s organization.
The Company’s in-depth understanding of embedded systems provides customers
with competitive solutions enabling it to respond to current and future embedded
system requirements and earning a strong incumbent position for the Company.
RadiSys
typically retains the rights to technology developed during the design process.
In some cases, the Company agrees to share technology rights, manufacturing
rights, or both, with the customer. However, the Company generally retains nonexclusive
rights to use any shared technology. In
addition to custom products, RadiSys develops standard products based on its
expertise in a wide variety of applications and technologies. RadiSys intends
on increasing its investment in standard products. The Company believes this
will allow it to provide a broader set of products and building blocks to take
to market and grow the base of products that can be optimized to specific customer
needs. In addition, the Company is increasingly combining a number of its standard
products to create more integrated hardware and software based systems. The Company’s
research and development is focused on four fundamental functions: 4
In
2002, 2001, and 2000, the Company invested $30.2 million, $35.3 million, and
$37.3 million, respectively, in research and development. Sales and
Marketing The
Company utilizes a direct sales force to engage its largest customers and a
network of distributors for other customers. The total direct sales and marketing
headcount was 71 at March 17, 2003. The Company uses its sales cycle to build
long-term relationships with its OEM customers. RadiSys uses dedicated cross-functional
teams including sales, marketing, program management, supply chain management,
and design to partner with its customers to identify and meet customer requirements.
These team members partner with the customer's staff to identify the form, fit,
function, environmental and mechanical requirements of the products, as well
as product supply and lifecycle requirements. The RadiSys team then takes the
concept through the design phase and into production. RadiSys also manages change
control and product-life issues, providing “Total Life Cycle Management.”
RadiSys
markets its products in North America, Europe, Israel, Japan, and China. In
North America, products are sold principally through a direct sales force. The
Company has major U.S. sales offices in Oregon, Florida, and Iowa, with regional
sales offices located throughout the United States. The Company maintains a
number of regional direct sales resources throughout Europe and Israel and an
indirect distribution model. In Asia, the Company has direct sales resources
in Japan and China as well as an indirect distribution model. In 2002, global
revenues were comprised geographically of 59% from North America, 38% from Europe
and Israel, and 3% from Asia. Financial
information regarding the Company's domestic and foreign operations is presented
in Note 17 of the Notes to Consolidated Financial Statements included in Item
8. Financial Statements and Supplementary Data. Manufacturing
and Supply RadiSys
utilizes a combination of internal and outsourced manufacturing. Total manufacturing
operations headcount was 217 at March 17, 2003. The Company manufactures a majority
of its own products today but intends to trend toward outsourcing more of its
high-volume products to contract manufacturing partners for reduced cost and
increased flexibility. The Company’s strategy is to manufacture lower
volume and/or higher complexity products internally and outsource higher volume
products to its contract manufacturing partners. Based on this strategy, the
Company expects that the relative proportion of volume that is outsourced will
continue to increase in the future. RadiSys
has an automated ISO9001 certified plant in Hillsboro, Oregon that provides
board assembly and test as well as system assembly, configuration and test.
This plant has two automated lines for SMT double-sided board assembly and facilities
for systems integration, configuration and test. Because the products into which
building blocks are integrated typically have long life reliability requirements,
dynamic stress testing of products must be particularly exact. RadiSys believes
its testing processes represent a competitive advantage in this area. Although
many of the raw materials and much of the equipment used in the Company’s
internal and outsourced manufacturing operations are available from a number
of alternative sources, some of these materials and some equipment are obtained
from a single supplier or a limited number of suppliers. The Company utilizes
a few contract manufacturers for outsourced board and system production. This
production could either be moved internally or transferred to other contract
manufacturers. Such transfers would require technical and logistical activities
and would not be instantaneous. The Company is dependent on third parties for
a continuing supply of the components used in the manufacture of its products.
For example, the Company is dependent solely on Intel for the supply of some
microprocessors and other components, and the Company depends on Epson Electronic
America, Lucent Technologies, Inc., Maxim Integrated Products, Inc., Texas Instruments,
Inc., and Toshiba America Inc. as the sole source suppliers for other components.
Alternative sources of supply for some of these components would be difficult
to locate. Backlog
As
of December 31, 2002, the Company’s backlog was approximately $23.8 million,
compared to $26.0 million as of December 31, 2001. The Company includes in its
backlog all purchase orders scheduled for delivery within twelve months. The
general trend within the Company’s addressable markets is for shorter
lead times and supplier managed inventory. 5
Intellectual
Property The
Company owns 27 U.S. utility patents, seven of which have corresponding foreign
patents pending or issued. The Company has pending ten additional U.S. patent
applications related to technology incorporated into its products; however,
the Company relies principally on trade secrets for protection of its intellectual
property. The Company believes that its competitiveness depends much more on
the pace of its product development, trade secrets, and its relationships with
customers. 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 fees 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 March 17, 2003, the Company had 563 employees, of which 518 were regular
employees and 45 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 it has maintained good relationships with
its employees. Corporate
History The
Company was incorporated in March 1987 under the laws of the State of Oregon
for the purpose of developing, producing and marketing embedded computers across
a number of markets. FORWARD-LOOKING
STATEMENTS This
Annual Report on Form 10-K may contain forward-looking statements. The Company’s
statements concerning expectations and goals for revenues, gross margin, research
and development expenses, selling, general, and administrative expenses, the
impact of the Company’s restructuring events on future revenues, the anticipated
cost savings effects of the Company’s restructuring activities, and the
Company’s projected liquidity are some of the forward-looking statements
contained in this Annual Report on Form 10-K. All statements that relate to
future events or to the Company’s future performance are forward-looking
statements. In some cases, forward-looking statements can be identified by terms
such as “may,” “will,” “should,” “expect,”
“plans,” “seeks,” “anticipate,” “believe,”
“estimate,” “predict,” “potential,” “continue,”
“seek to continue,” “intends,” or other comparable terminology.
These forward-looking statements are made pursuant to safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the Company’s or its industries’ actual results,
levels of activity, performance, or achievements to be materially different
from any future results, levels of activity, performance, or achievements expressed
or implied by these forward-looking statements. Forward-looking
statements in this Annual Report on Form 10-K include discussions of the Company’s
goals, including those discussions set forth in Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations. The Company cannot
provide assurance that these goals will be achieved. Although
forward-looking statements help provide complete information about RadiSys,
investors should keep in mind that forward-looking statements are only predictions,
at a point in time, and are inherently less reliable than historical information.
In evaluating these statements, you should specifically consider the risks outlined
above and those listed under “Risk Factors.” These risk factors
may cause the Company’s actual results to differ materially from any forward-looking
statement. The
Company does not guarantee future results, levels of activity, performance or
achievements and does not assume responsibility for the accuracy and completeness
of these statements, and is under no obligation to update any of the forward-looking
statements. RISK FACTORS The
Company depends on the commercial systems, service provider systems and enterprise
systems market in which demand can be cyclical and any inability to sell products
to these markets could have a material adverse effect on its revenues. The
Company derives its revenues from a number of diverse end markets, some of which
are subject to significant cyclical changes in demand. The Company derived approximately
37% of its 2002 revenues from the commercial systems market, 36% of its 2002
revenues from the service provider systems market and 27% of its 2002 revenues
from the enterprise systems market. Some of these markets are characterized
by intense competition, rapid technological change, economic uncertainty and
structural financial problems. A slowing economy in the United States, and a
global slowdown in the service provider market, has created additional uncertainties
for the Company's customers and therefore, the Company's business. The Company's
exposure to economic cyclicality and any related 6
fluctuation
in customer demand could have a material adverse effect on the Company's revenues
and financial condition. Because
of the Company's dependence on certain customers, the loss of a top customer
could have a material adverse effect on the Company's revenues and profitability. During
2002, the Company derived 48% of its revenues from five customers. These five
customers were Nortel, Nokia, Comverse, IBM and Diebold. Nortel and Nokia accounted
for 17% and 13%, respectively, of 2002 revenues. A financial hardship experienced
by, or a substantial decrease in sales to, any one of the Company's top customers
could materially effect revenues and profitability. The
Company derives a majority of its revenue from design wins which may be canceled
or delayed, or could perform below original expectations which could have a
substantial negative impact on the Company's revenues and profitability. The
Company derives a majority of its revenues from design wins for new or next
generation OEM products. The Company announced 46 design wins during 2002. A
design win is a project estimated to produce more than $0.5 million in revenue
per year when in production. Design wins ramp into production volume at varying
rates. Typically, the ramp takes 12 months after the win occurs, although some
more complex wins can take up to 24 months. After that, there is an additional
time lag from the start of production ramp to peak revenue. Design wins are
sometimes canceled or delayed, or can perform below original expectations, which
can adversely impact revenues and profitability. Because
of the Company's dependence on a few suppliers or, in some cases, one supplier
for some of the components it uses in the manufacture of its products, a loss
of a supplier or a shortage of any of these components could have a material
adverse effect on the Company's business or its financial performance. The Company
depends on a few suppliers or, in some cases, one supplier for some of the components
the Company uses in the manufacture of its products. For example, the Company
primarily uses Intel microprocessors for its products and any disruption in
supply could adversely impact the Company’s financial performance. In
addition, the Company depends on two primary contract manufacturing partners,
Manufacturers’ Services Limited and Sanmina-SCI, and failed execution
on their behalf could temporarily effect revenue and profitability. The Company
currently manufactures the majority of its products and relies on its contract
manufacturing partners to manufacture the remaining amount, with a planned migration
toward increasing reliance on contract manufacturing in the future. Competition
in the market for embedded systems is intense, and if the Company loses its
competitive position, its revenues and profitability could decline. Some
of the Company's competitors and potential competitors have a number of significant
advantages over the Company, including: Furthermore,
existing or potential competitors may establish cooperative relationships with
each other or with third parties, or adopt aggressive pricing policies to gain
market share. As
a result of increased competition, the Company could encounter significant pricing
pressures. These pricing pressures could result in significantly lower average
selling prices for the Company's products. The Company may not be able to offset
the effects of any price reductions with an increase in the number of customers,
cost reductions or otherwise. In addition, many of the industries the Company
serves, such as the communications industry, are encountering market consolidation,
or are likely to encounter consolidation in the near future, which could result
in increased pricing pressure and other competition. The
Company competes with a number of companies providing embedded systems including
Advantech Co. LTD., Force Computers, a division of Solectron, Inc., divisions
within Intel Corporation, Kontron AG, Mercury Computer Systems, Motorola Computer
Group, a unit of Motorola Inc., Performance Technologies, and SBS Technologies.
7
The
Company's international operations expose the Company to additional political,
economic, and regulatory risks not faced by businesses that operate only in
the United States. The
Company derived 38% of its 2002 revenue from Europe and Israel and 3% from Asia.
In addition, the Company has a design center located in Birmingham, United Kingdom.
As a result, the Company is subject to worldwide economic and market conditions
risks generally associated with global trade, such as fluctuating exchange rates,
tariff and trade policies, domestic and foreign tax policies, foreign governmental
regulations, political unrest, wars and other acts of terrorism, and changes
in other economic conditions. These risks, among others, could adversely affect
the Company's results of operations or financial position. If the
Company is unable to generate sufficient income in the future, it may not be
able to fully utilize its net deferred tax assets or support its current levels
of goodwill and intangibles on its balance sheet. The
Company cannot provide absolute assurance that sufficient taxable income will
be generated for full utilization of the net deferred tax assets of $29.0 million
as of December 31, 2002. Accordingly, the Company may be required to record
an additional valuation allowance against the deferred tax assets if its future
expectations of taxable income are not achieved. On the other hand, if the Company
generates taxable income in excess of its future expectations, then, the valuation
allowance may be reduced accordingly. The Company also cannot provide absolute
assurance that future taxable income will support the carrying amount of goodwill
and intangibles of $41.1 million on the Consolidated Balance Sheet as of December
31, 2002, and therefore, the Company may incur an impairment charge in the future. Because
the Company has material levels of customer specific inventory, a financial
hardship experienced by the Company's customers could have a material adverse
impact on the Company's profitability. The
Company provides long-life support to its customers and therefore has material
levels of customer specific inventory. A financial hardship experienced by the
Company's customers could materially effect the viability of the dedicated inventory,
and ultimately adversely impact profitability. The
Company’s products for embedded computing applications are based on industry
standards, which are continually evolving, and any failure to conform to these
standards could have a substantial negative impact on the Company’s revenues
and profitability. Products
for embedded computing applications are often based on industry standards, which
are continually evolving. The Company's future success will depend, in part,
upon its ability to successfully develop and introduce new products based on
emerging industry standards. The Company's failure to conform to these standards
could render its products unmarketable or obsolete. As the Company's addressable
markets develop new standards, the Company may be unable to successfully design
and manufacture new products that address the needs of the Company's customers
or achieve substantial market acceptance. If the
Company is unable to protect its intellectual property, the Company may lose
a valuable competitive advantage or be forced to incur costly litigation to
protect its rights. The
Company is a technology dependent company and its success depends on developing
and protecting its intellectual property. The Company relies on patents, copyrights,
trademarks and trade secret laws to protect its intellectual property. At the
same time, the Company's products are complex, and are often not patentable
in their entirety. The Company also licenses intellectual property from third
parties and relies on those parties to maintain and protect their technology.
The Company cannot be certain that its actions will protect proprietary rights.
If the Company is unable to adequately protect its technology, or if the Company
is unable to continue to obtain or maintain licenses for protected techology
from third parties, it could have a material adverse affect on the Company's
results of operations. The
Company's period-to-period revenues and operating results fluctuate significantly,
which may result in volatility in the price of its common stock. The
price of the Company's common stock may be subject to wide, rapid fluctuations.
The Company's period-to-period revenues and operating results have varied in
the past and may continue to vary in the future, and any such fluctuations may
cause the Company's stock price to fluctuate. Fluctuations in the stock price
may also be due to other factors such as changes in analysts' estimates regarding
earnings, or may be due to factors relating to the service provider systems,
enterprise systems and commercial systems markets in general. Shareholders should
be willing to incur the risk of such fluctuations. Other
Risk Factors Other
risk factors include, but are not limited to, changes in the mix of products
sold, regulatory and tax legislation, changes in effective tax rates, inventory
risks due to changes in market demand or the Company's business strategies,
potential litigation and claims arising in the normal course of business, credit
risk of customers and other risk factors. Proposed changes to accounting rules,
including proposals to account for employee stock options as a compensation
expense, could, if mandated, materially increase the 8
expense the
Company reports under generally accepted accounting principles and adversely
affect operating results. INTERNET
INFORMATION Copies
of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 are available free of charge through the Company’s website (www.radisys.com)
as soon as reasonably practicable after the Company electronically files the
information with, or furnishes it to, the Securities and Exchange Commission.
Information
concerning the Company’s principal properties at December 31, 2002 is
set forth below: (1)
Subject to a mortgage (see Note 12 – Long-term Liabilities in the Notes
to Consolidated Financial Statements included in Item 8. Financial Statements
and Supplementary Data). In
addition to the above properties, the Company owns two parcels of land adjacent
to its Hillsboro, Oregon facility, which are being held for future expansion.
The Company also leases offices in the United States located in Dallas and Houston,
Texas; San Diego, and Campbell, California; Charlotte, North Carolina; Marlborough,
Massachusetts and Mt. Laurel, New Jersey. Internationally, the Company leases
office space in the following cities: Almere, The Netherlands; Munich, Germany;
Rehovot, Israel; Tokyo, Japan; and Athlone, Ireland. Total
lease costs of all the facilities for the year ended December 31, 2002 were
approximately $3.6 million. The
Company has no material litigation pending. Item 4.
Submission of Matters to a Vote of Security Holders Not
applicable. 9
Item 4(a).
Executive Officers of the Registrant As
of March 17, 2003, the names, ages and positions held by the executive officers
of the Company were as follows: Scott
C. Grout has served as the Company’s President and Chief Executive Officer
since October 2002. Prior to joining the Company, Mr. Grout was President and
Chief Executive Officer of Chorum Technologies, Inc. (“Chorum”),
a privately held provider of fiber optic products based in Richardson, Texas
from May 1998 to October 2002. Prior to Chorum, Mr.Grout held various positions
at Lucent Technologies, a telecommunications network vendor, including most
recently the Vice President of the Optical Networking Group and a Director of
the Access and Optical Networking Group from June 1984 to May 1998. Mr. Grout
received a B.S. in Engineering from the University of Wisconsin at Madison and
a M.B.A. from the Sloan School of Management at the Massachusetts Institute
of Technology. Ronald
A. Dilbeck joined the Company in May 1996 as Vice President and General Manager
of the Automation and Control Division and was appointed Chief Operating Officer
in October 2000. Mr. Dilbeck has held positions as Interim Chief Executive Officer
and President and Vice President and General Manager of Telecommunications 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. 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. Julia
A. Harper joined the Company in October 2001 as Vice President of Finance and
Administration and Chief Financial Officer, and was appointed Secretary in January
2003. From 1997 to 2001, Ms. Harper was the Vice President of Finance and Controller
at Electro Scientific Industries Inc., a provider of high technology manufacturing
equipment, where she was responsible for overseeing finance and accounting functions
across the company’s headquarters and numerous domestic and foreign subsidiaries.
Ms. Harper held a variety of finance and accounting positions, including Accounting
Manager with Instromedix Inc., from 1995 to 1997. Prior to 1995, she held numerous
finance and accounting positions with Arco Oil and Gas Company. Ms. Harper holds
a B.S. and a M.B.A. in Business Administration from the University of Texas
at Arlington and Southern Methodist University, respectively. Fred
Yentz joined the Company in December 1999 as Vice President and General Manager
of Communication Platforms Division and was appointed Vice President of Marketing
and Business Development in January 2003. Mr. Yentz came to the Company from
IBM’s Open Computing Platforms Group where he served as Business Area
Manager. Mr. Yentz spent 12 years at IBM with responsibilities for Engineering
and New Business Development and Management. He is named as an inventor on two
U.S. patents in system bus architecture and system mechanical packaging and
has several other patents pending. Mr. Yentz is active in several trade associations
and currently sits on the Board of Directors of Telecommunications Industry
Association (“TIA”). He also serves as the Chairman of the Global
Enterprise Market Division of the TIA and is the former Chairman of the Multimedia
Telecommunications Association (“MMTA”). Mr. Yentz holds a B.S.
in electrical engineering from Michigan Technological University, a M.B.A. with
a telecommunications minor from the University of Miami, and an M.S. in computer
information systems from the University of Miami. 10
Item 5. Market for the Registrant’s Common Equity
and Related Shareholder Matters The Company’s Common Stock is traded
on the Nasdaq National Market 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.
On March 17, 2003, the last reported sale price of the Common
Stock on the Nasdaq National Market was $6.46. 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 in compliance with the Company’s policy to retain all
of its earnings to finance future growth. As of March 17, 2003, there were approximately 489 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. 11
Item
6. Selected Financial Data (In thousands,
except per share data) Note: The
selected financial data as of the year ended December 31, 1998 has been restated
to reflect the 1999 merger with Texas Micro Inc. (“Texas Micro”),
which was accounted for as a pooling of interests. * Reflects
the three-for-two stock split on November 29, 1999. 12
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations Overview Total
revenue was $200.1 million for 2002 compared to $227.8 million for 2001. Net
loss was $3.3 million for 2002 compared to net loss of $34.5 million for 2001.
Net loss per share was $0.19, basic and fully diluted for 2002 compared to net
loss per share of $2.00, basic and fully diluted for 2001. The
net loss for the year ended December 31, 2002 includes, before income tax benefit,
second quarter restructuring charge of $4.4 million, $3.0 million gain on early
extinguishments of convertible subordinated notes, $1.2 million gain on sale
of the Company’s Multibus business unit, $1.2 million of severance and
termination related expense associated with the departure of the former President
and CEO, and a reversal of $1.0 million associated with prior restructuring
liabilities. The second quarter restructuring charge was recorded as a result
of the Company’s continued efforts to improve its cost structure and to
consolidate redundant facilities and functions including a net workforce reduction
of 90 positions domestically and internationally. During the year ended December
31, 2002, the Company repurchased approximately $21.0 million principal amount
of its 5.5% convertible subordinated notes resulting in a gain from early extinguishments
of the notes of approximately $3.0 million. In December 2002, the Company recorded
a gain of $1.2 million from the sale of its Multibus business unit upon receipt
of $0.7 million in proceeds and notes receivable of $0.5 million, of which $0.3
million was paid in January 2003 with the remaining balance of $0.2 million
due in December 2003. The reversal of the restructuring liabilities was primarily
attributable to lower than expected severance expenses, reduced future obligations
associated with vacated facilities, and lower than expected settlements reached
during the fourth quarter of 2002 related to the restructuring liabilities assumed
from the Microware acquisition. The
net loss for the year ended December 31, 2001 includes, before income tax benefit,
first quarter, second quarter, and fourth quarter restructuring charges of $9.8
million, $3.2 million, and $3.9 million, respectively, and other charges totaling
$26.7 million. The first quarter restructuring charge was a result of the Company’s
decision to consolidate all internal manufacturing operations into the Company’s
Hillsboro, Oregon plant, the closure of certain sales offices in France and
Germany, and the elimination of approximately 200 positions throughout the Company.
The second quarter restructuring charge related to the closure of the Company’s
Boston, Massachusetts design center and severance of approximately 58 employees.
The fourth quarter restructuring charge was a result of the Company’s
continued efforts to improve its cost structure through consolidation of functions
and facilities. Other charges for the year ended December 31, 2001 include:
$24.6 million in inventory related adjustments resulting from an end-of-life
acceleration for non-strategic products and from reduced demand and decreased
component prices in the marketplace resulting in excess or obsolete inventory,
$0.8 million in charges to consolidate Company facilities, a $0.4 million permanent
write-down of an investment received in connection with a prior divestiture,
$0.4 million of other severance costs, and $0.5 million of fixed asset write-offs
not related to restructuring events. On
April 20, 2001, the Company acquired privately-held S-Link Corporation (“S-Link”)
in a cash transaction valued at approximately $4.7 million. The acquisition
of S-Link was accounted for using the purchase method. On March 14, 2003, the
Company sold S-Link resulting in a loss of approximately $4.3 million. See Subsequent
Events in Note 22 in the Notes to Consolidated Financial Statements included
in Item 8. Financial Statements and Supplementary Data for further information. On
August 27, 2001, the Company completed the acquisition of Microware Systems
Corporation (“Microware”), which became a wholly-owned subsidiary
of the Company. The Company believes that the acquisition of Microware provides
a highly differentiated leadership position for solutions using the network
processor family and offers customers complete faster-to-market solutions for
certain applications. The purchase price aggregated $13.9 million in cash consideration,
net of cash received, which has been paid as of December 31, 2002. The acquisition
of Microware was accounted for using the purchase method. Critical
Accounting Policies and Estimates The
Company’s discussion and analysis of its financial condition and results
of operations are based upon the Company’s Consolidated Financial Statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that may affect the reported
amounts of assets, liabilities, and revenues and expenses. On an on-going basis,
management evaluates its estimates, including those related to realization of
accounts receivable, investments, inventories, intangible assets, deferred income
taxes, warranty obligations, and restructuring provision. The Company bases
its estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. The
Company believes the following critical accounting policies reflect its more
significant judgments and estimates used in the preparation of its Consolidated
Financial Statements. 13
Revenue
Recognition The
Company recognizes revenue from hardware product sales upon shipment to customers,
provided that: For
sales to distributors, potential returns are estimated and reserved, based upon
contractual limitations and historical return rates. The Company recognizes
software product revenue in accordance with Statement of Position (“SOP”)
97-2, “Software Revenue Recognition,” as amended by SOP 98-4, “Deferral
of the Effective Date of Certain Provisions of SOP 97-2,” effective February
1, 1998 and by SOP 98-9, “Modification of SOP 97-2, ‘Software Revenue
Recognition’ with Respect to Certain Transactions.” Software product
revenues are recognized at the time of shipment or upon delivery of the software
master, provided that: Any
post-contract support included in these arrangements are recognized as earned
on a straight-line basis over the terms of the contracts. Stand alone software
product revenues were not significant to the Company’s operations for
the years reported. Service revenues include custom contract engineering work
and custom software development projects and are recognized on a percentage-of-completion
basis. Service revenues were not significant to the Company’s operations
for the years reported. Non-recurring engineering revenue is recognized upon
completion of certain engineering milestones. Allowance
for Doubtful Accounts The
Company maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of the Company’s customers were to deteriorate resulting in
an impairment of their ability to make payments, additional provisions for doubtful
accounts may be required. Inventory
Reserves The
Company records provision for inventory reserves for estimated obsolete or unmarketable
inventories which are equal to the difference between the cost of inventories
and the estimated net realizable value based upon assumptions about future demand
and market conditions. If actual market conditions are less favorable than those
projected by management, additional provisions for inventory reserves may be
required. Long-Lived
Assets Property
and equipment, and identifiable intangible assets are reviewed for impairment
in accordance with Statement of Financial Accounting Standard No. 144, “Accounting
for the Disposal of Long-Lived Assets,” (“SFAS 144”). The
Company assesses impairment of property and equipment and identifiable intangible
assets whenever changes in circumstances indicate that the carrying values of
the assets may not be recoverable. Goodwill
represents the excess of cost over the assigned value of the net assets in connection
with all acquisitions. Goodwill is reviewed for impairment in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS
142”). SFAS 142 requires goodwill to be tested for impairment annually
and under certain circumstances. SFAS 142 also mandates that the assets be written
down when impaired, rather than be amortized as previous standards required. During
the year ended December 31, 2002 and through the date of this report, the Company’s
stock has traded at lower levels compared to previous periods. If the Company’s
stock price does not recover to higher levels within the next few months, the
Company may update its impairment analysis and may incur impairment losses on
goodwill and intangible assets. 14
When
the Company determines that the carrying value of property and equipment, identifiable
intangible assets, or goodwill will not be recoverable, the Company calculates
and records impairment losses based upon a future discounted cash flow method.
The Company estimates future discounted cash flows using assumptions about the
expected future operating performance of the Company. The Company’s estimates
of discounted cash flows may differ from actual cash flow due to, among other
things, technological changes, economic conditions, or changes to its business
operations. Accrued
Restructuring The
Company has recorded restructuring charges in light of economic downturns and
reduced customer demand. These restructuring charges include employee termination
and related costs, costs related to leased facilities that will be vacated and
potentially subleased, losses on impairment of fixed assets and capitalized
software and other accounting and legal fees. Employee termination and related
costs have been recorded in accordance with the provisions of Emerging Issues
Task Force No. 94-3 (“EITF 94-3”), “Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.”
For leased facilities that will be vacated and potentially subleased, the amount
equal to the total future lease obligations from the date of vacating the premises
through the expiration of the lease net of any future sublease income is recorded
as a part of restructuring charges. For property and equipment, and capitalized
software to be written off, the impairment losses are recorded in accordance
with the provisions of SFAS 144. In June 2002, Financial Accounting Standard
Board (“FASB”) issued SFAS No. 146 “Accounting for Costs Associated
with Exit or Disposal Activities,” (“SFAS 146”). SFAS 146
requires that liabilities for costs associated with an exit or disposal activities
be recognized and measured initially at fair value in the period in which the
liabilities are incurred. The Company will record any future restructuring charges
in accordance with the provisions of SFAS 146. See “Recent Accounting
Pronouncements” below. Accrued
Warranty The
Company provides for the estimated costs of product warranties upon recognition
of revenues. The Company engages in extensive product quality programs and processes.
The Company’s warranty obligation is affected by product failure rates,
material usage, and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage, or service delivery
costs differ from the Company’s estimates, additional provisions to the
estimated warranty liability may be required. In November 2002, the FASB issued
FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees and Indebtedness
of Others,” (“FIN 45”), which elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it ha
Page
PART
I
Item 1
Business
2
Item 2
Properties
9
Item 3
Legal Proceedings
9
Item 4
Submission of Matters
to a Vote of Security Holders
9
Item 4(a)
Executive Officers
of the Registrant
10
PART
II
Item 5
Market for the Registrant’s
Common Equity and Related Shareholder Matters
11
Item 6
Selected Financial
Data
12
Item 7
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
13
Item 7A
Quantitative and Qualitative
Disclosures About Market Risks
25
Item 8
Financial Statements
and Supplementary Data
26
Item 9
Changes in and Disagreements
With Accountants on Accounting and Financial Disclosure
56
PART
III
Item 10
Directors and Executive
Officers of the Registrant
56
Item 11
Executive Compensation
56
Item 12
Security Ownership
of Certain Beneficial Owners and Management and Related Shareholder Matters
56
Item 13
Certain Relationships
and Related Transactions
57
Item 14
Controls and Procedures
57
PART
IV
Item 15
Exhibits, Financial
Statement Schedules and Reports on Form 8-K
58
Signatures
63
Certifications
64
Customer
Application
Nortel
IP-Enabled PBX
Nokia
2, 2.5, and 3G Wireless
Infrastructure Equipment
Comverse
Wireless Voice Messaging
System
IBM
Local Area Network
I/O Cards and Storage Systems
Diebold
Transaction Terminals
Location
Type
Principal
Use
Square
Footage
Ownership
Hillsboro,
OR
Office
& Plant
Headquarters,
Marketing, Manufacturing, Distribution, Research, and Engineering
138,000
23,000
Leased
Owned
Des Moines,
IA
Office
Marketing,
Research, and Engineering
89,000
(1)
Owned
Boca
Raton, FL
Office
Marketing,
Research, and Engineering
36,000
Leased
Birmingham,
United Kingdom
Office
Marketing,
Research, and Engineering
3,879
Leased
Name
Age
Position
with the Company
Scott C. Grout
40
President and Chief
Executive Officer
Ronald A. Dilbeck
49
Vice President and
Chief Operating Officer
Julia A. Harper
44
Vice President of
Finance and Administration, Chief Financial Officer, and Secretary
Fred Yentz
38
Vice President of
Marketing and Business Development
High
Low
2002
First
Quarter
$21.54
$16.76
Second
Quarter
$18.41
$11.42
Third
Quarter
$12.40
$3.41
Fourth
Quarter
$10.21
$3.73
2001
First
Quarter
$28.88
$16.63
Second
Quarter
$26.99
$16.19
Third
Quarter
$22.55
$12.00
Fourth
Quarter
$20.00
$11.48
Years
Ended December 31,
2002
2001
2000
1999
1998
Consolidated
Statements of Operations Data
Revenues
$200,139
$227,752
$340,676
$251,090
$186,548
Gross margin
59,272
35,172
116,897
92,297
62,684
(Loss) income
from operations
(7,676
)
(60,332
)
34,005
16,604
8,569
Net (loss)
income
(3,305
)
(34,486
)
32,646
18,997
7,818
Net (loss)
income per common share:
Basic
*
(0.19
)
(2.00
)
1.92
1.18
0.49
Diluted
*
(0.19
)
(2.00
)
1.80
1.11
0.48
Weighted average
shares outstanding (basic)*
17,495
17,249
16,974
16,158
15,854
Weighted average
shares outstanding (diluted)*
17,495
17,249
18,161
17,110
16,129
Consolidated
Balance Sheets Data
Working capital
$132,474
$141,940
$205,357
$
68,863
$
83,083
Total assets
274,086
305,201
334,003
187,563
131,727
Long term obligations,
excluding
current
portion
83,954
104,180
97,191
—
88
Total shareholders’
equity
152,801
150,711
179,331
134,255
106,827