RADISYS CORP - RSYS Quarterly Report (10-Q) MANAGEMENT'S DISCUSSION AND ANALYSIS OF

The following is an excerpt from a 10-Q SEC Filing, filed by RADISYS CORP on 11/14/1996.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Total revenue was $22.5 million for the three months ended September 30, 1996 compared to $9.5 million for the three months ended September 30, 1995, and $53.6 million for the nine months ended September 30, 1996 compared to $24.4 million for the nine months ended September 30, 1995. Net income was $3.4 million for the three months ended September 30, 1996 compared to $0.5 million for the three months ended September 30, 1995, and $5.9 million for the nine months ended September 30, 1996 compared to $0.9 million for the nine months ended September 30, 1995.

From time to time the Company may issue 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 from the forward looking statements: business conditions and growth in the electronics industry and general economies, both domestic and international; uncertainty of market development; dependence on a limited number of OEM customers; dependence on limited or sole source suppliers; dependence on the relationship with Intel Corporation ("Intel"); dependence on Intel's support of the embedded computer market; lower than expected customer orders; competitive factors, including increased competition, new product offerings by competitors and price pressures; the availability of parts and components at reasonable prices; changes in product mix; dependence on proprietary technology; technological difficulties and resource constraints encountered in developing new products; and product shipment interruptions due to manufacturing difficulties. The forward looking statements contained in this document regarding industry trends, product development and introductions, and liquidity and future business activities should be considered in light of these factors.

On April 29, 1996, the Company purchased substantially all of the assets of Intel Corporation ("Intel") that were dedicated to the design, manufacture and sale of all standard and custom Multibus I and Multibus II products ("Multibus") (collectively the "Acquisition"). In addition, pursuant to the terms of the Acquisition, Intel licensed certain Intel software to the Company. The Acquisition was accounted for using the purchase method. The results of operations for Multibus have been included in the financial statements since the date of acquisition.

REVENUES

Three Months Ended Nine Months Ended ------------------------------ ----------------------------- (in thousands except % amounts) (in thousands except % amounts) Sept 30, % Sept 30, Sept 30, % Sept 30, 1996 Change 1995 1996 Change 1995 ------- ------ ------- ------- ------ ------- Revenues $22,459 135 $ 9,540 $53,558 120 $24,382

The increases in revenues for the three and nine months ended September 30, 1996 compared to the three and nine months ended September 30, 1995, respectively, resulted primarily from the acquisition of Multibus from Intel on April 29, 1996 and from volume increases in OEM sales. Additionally, included within revenues for the three and nine months ended September 30, 1996 is $0.7 million and $1.4 million of royalty payments, respectively, from Intel in connection with

10 backlog retained by Intel in connection with the Acquisition. At the end of the third quarter RadiSys was unable to ship approximately $2 million of product due to component delays.

COST OF GOODS SOLD

As a percentage of revenues total cost of goods sold decreased for the three and nine months ended September 30, 1996 compared to the three and nine months ended September 30, 1995, respectively, primarily as a result of unshipped lower margin product, component pricing decreasing faster than price changes to the Company's customers, the mix of products sold through distributors versus direct sales, and product mix consisting of a larger portion of higher margin product relative to lower margin product shipped during the second quarter of 1996. Cost of goods sold as a percentage of revenues is expected to return to targeted levels in future periods, which are lower than those achieved in second and third quarters of 1996.

Additionally, included within cost of goods sold for the nine months ended September 30, 1996 is $1.3 million of inventory valuation adjustments recorded in the second quarter that resulted from purchase accounting in connection with the Multibus acquisition.

RESEARCH AND DEVELOPMENT

Three Months Ended Nine Months Ended ------------------------------ ----------------------------- (in thousands except % amounts) (in thousands except % amounts) Sept 30, Sept 30, Sept 30, Sept 30, 1996 1995 1996 1995 ------- ------- ------- ------- Research and Development $ 2,030 $ 867 $ 5,666 $ 2,405 As a % of total revenue 9% 9% 11% 10%

The dollar increases in research and development expenses were primarily the 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 steady increases in the number of employees working in research and development.

Additionally, included within research and development for the nine months ended September 30, 1996 is $225,000 recorded in the second quarter to expense in-process research and development acquired in connection with the Multibus acquisition.

11 SELLING, GENERAL AND ADMINISTRATIVE

Three Months Ended Nine Months Ended ------------------------------ ----------------------------- (in thousands except % amounts) (in thousands except % amounts) Sept 30, Sept 30, Sept 30, Sept 30, 1996 1995 1996 1995 ------- ------- ------- ------- Selling, General & Admin. $ 3,513 $ 1,714 $ 8,180 $ 4,903 As a % of total revenue 16% 18% 15% 20%

Selling, general and administrative expenses have increased in dollar amount in the three and nine months ended September 30, 1996 compared to the three and nine months ended September 30, 1995, respectively, primarily as a result of increased personnel, facilities and travel cost to support higher levels of sales and to support the acquired Multibus operations. The decreases as a percentage of revenues were primarily the result of operating efficiencies achieved by spreading fixed costs over a larger revenue base, offset partially by increases in costs required to expand international operations.

INTEREST INCOME, NET AND INCOME TAX PROVISION

Three Months Ended Nine Months Ended ------------------------------ ----------------------------- (in thousands except % amounts) (in thousands except % amounts) Sept 30, Sept 30, Sept 30, Sept 30, 1996 1995 1996 1995 ------- ------- ------- ------- Interest Income, net $ 288 $ (30) $ 812 $ (2) Income Tax Provision 1,819 197 3,228 379

Interest income, net includes interest income, interest expense, bank charges and foreign currency transaction gains or losses. The increases in interest income, net for the three and nine months ended September 30, 1996 compared to the three and nine months ended September 30, 1995, respectively, were primarily the result of cash invested from the Company's initial public offering in October of 1995.

The income tax provision reflects effective income tax rates of 35 percent and 30 percent for 1996 and 1995, respectively. The increase in the income tax provision is primarily attributable to the depletion of tax credits in 1995.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1996, the Company had $26.4 million in cash and short term investment grade securities, which represents the Company's principal source of liquidity. The Company had working capital of approximately $44.0 million. Commencing September 30, 1996, the Company entered into a $10.0 million line of credit with a bank. The Company has not drawn any funds under this line of credit. Net cash provided by operating activities for the nine months ended September 30, 1996 was $10.0 million as compared with net cash used by operations of $2.6 million for the nine months ended September 30, 1995.

12 Capital expenditures were $5.1 million in the nine months ended September 30, 1996 and $2.6 million for the nine months ended September 30, 1995. Capital expenditures for the nine months ended September 30, 1996 were primarily for the purchase of two parcels of land for future expansion and construction in progress for a new headquarters and manufacturing facility which the Company occupied beginning in October of 1996.

On April 29, 1996, the Company purchased substantially all of the assets of Intel Corporation that are dedicated to the design, manufacture and sale of all standard and custom Multibus I and Multibus II products . In addition, pursuant to the terms of the Acquisition, Intel licensed certain Intel software to the Company. The purchase price consisted of 1,300,000 shares of the Company's Common Stock and warrants to purchase an additional 300,000 shares of Common Stock exercisable within 24 months at prices per share ranging from $13.50 to $15.00, plus an aggregate of $1.2 million in cash to be paid in 1997. The Company will fund the acquired operations from existing cash and cash equivalents.

The Company believes that existing cash and cash equivalents and cash from operations will be sufficient to fund its operations for at least the next 12 months.

13 PART II OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1 Revolving line of credit

27 Financial Data Schedule

14 SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

RADISYS CORPORATION

BRIAN V. TURNER
Date: November 11, 1996 Brian V. Turner Vice President of Finance and Administration and Chief Financial Officer
(Principal Financial Officer)