Stock Option Exchange Program Faq.

The Stock Option Exchange Program Frequently Asked Questions


The following frequently asked questions ("FAQs") are designed to provide answers to questions you may have about RadiSys Corporation's Stock Option Exchange Program (the "Exchange Program"). We encourage you to carefully read these FAQs and corresponding answers, as well as the other Exchange Program documents: the Offer to Exchange, the Stock Option Exchange Program Overview, and the announcement from Glenn Splieth sent to you on July 31, 2003. The Exchange Program is made subject to the terms and conditions of these documents, as they may be amended. Additional important information is contained in the other Exchange Program documents, which you should review so that you can make an informed decision regarding participation.


Program Design


Q1. What is the Exchange Program?


A1. The Exchange Program is a voluntary opportunity for employees to exchange eligible RadiSys stock options for a lesser number of new stock options with an exercise price equal to the closing price of shares of our common stock six months and one day after the date of cancellation of the old options. Eligible options are those options granted under our 1995 Stock Incentive Plan or our 2001 Nonqualified Stock Option Plan (collectively, the "Incentive Plans") with an exercise price of $20.00 per share or higher. Unless extended by the Company, the Exchange Program expires at 9:00 p.m. Pacific Time (U.S.), on Wednesday, August 27, 2003. We intend to cancel the surrendered options on Thursday, August 28, 2003, which is the first business day after the Exchange Program expires. The new options will be granted at least six months and one day after we cancel the options you have elected to exchange. We expect to make the new grants no earlier than March 1, 2004. The new options will have an exercise price equal to the closing price of shares of our common stock as reported by the Nasdaq National Market on the new option grant date.


Q2. Why is RadiSys offering this exchange?


A2. Stock options are an important component of RadiSys' Total Compensation strategy for employees. They allow you to share in any appreciation of our stock, facilitate a sense of ownership, and align your interests and those of our stockholders. Stock options help the Company retain and motivate the talent we already have and attract new recruits to RadiSys.


However, due to the sharp decline in our stock price, some of our outstanding options, whether or not they are currently vested, have exercise prices that are higher than the current market price of our common stock. These options are commonly referred to as being "underwater." The Exchange Program is designed to provide our employees the opportunity to replace "underwater" options with options that will have an exercise price equal to the closing price of shares of our common stock on the new option grant date and that may have greater potential to increase in value over time. We hope that this offer will foster retention of our valuable employees and better align the interests of our employees and shareholders to maximize shareholder value.


Q3. Are stock option exchange programs unusual?


A3. No. Given the weak performance of the stock market, a number of companies have conducted or are considering similar programs.


Q4. What option grants can I exchange?


A4. If you choose to participate, all outstanding options granted under the Incentive Plans, whether or not they are vested, with an exercise price greater than $20.00 must be exchanged.


Q5. How many new options will I receive in exchange for the options that I elect to exchange?


A5. The exchange ratio (i.e., the ratio between the number of eligible options surrendered and the number of new options you will receive) depends on the exercise price of your current option grant(s), as follows:


Exchange Ratio
Exercise Price (Eligible Option: New Option)


$20.00-34.99 1.40 : 1


$35.00 or higher 2.00 : 1


The number of options that you receive as a result of your decision to surrender and exchange your eligible options will be rounded up to the nearest whole share, and will be subject to adjustment for any stock splits, subdivisions, combinations, stock dividends and similar events that occur after the cancellation date but before the new option grant date. All new options will be subject to a new option agreement between you and RadiSys, the terms of which are described in this document, the Stock Option Exchange Program Overview, and the Offer to Exchange.


New options will be granted under our 2001 Nonqualified Stock Option Plan. All new options will be nonqualified options for U.S. federal income tax purposes. (See Question 29 for more information).


Q6. How were the exchange ratios determined, and why are they different for options with different exercise prices?


A6. We used an option pricing model used by most companies to estimate the theoretical value of each option. Using this model, we assigned a value to eligible options and to new options. We then determined the ratio of old to new options that would make the exchange approximately equivalent in value.


Q7. Why isn't the exchange ratio simply one-for-one?


A7. The exchange ratio is designed to be "value-neutral," meaning that the number of surrendered options have the same value as the new options you will receive. We feel that the exchange ratios are fair to you and responsible to the shareholders. One of our goals of this offer is to align the interests of employees and shareholders. You have the opportunity to replace your underwater options with options that may have greater value in the future. In turn, the shareholders will benefit because the exchange ratio will decrease the total number of options outstanding, thus decreasing potential shareholder dilution.


Eligibility


Q8. Who is eligible to participate in the Exchange Program?


A8. You are eligible to participate in the Exchange Program if you have eligible options that have been granted under our 1995 Stock Incentive Plan or our 2001 Nonqualified Stock Option Plan with an exercise price of $20.00 or more; you are a current employee of RadiSys or one of our subsidiaries; you reside in Germany, Japan, the United Kingdom (U.K.) or the United States (U.S.) on July 31, 2003; and you remain an employee through the option cancellation date, which we currently anticipate will be Thursday, August 28, 2003.


Members of our Board of Directors and the vice-presidents and executive officers (listed in Schedule A - Information Concerning the Directors, Vice-Presidents and Executive Officers of the Offer to Exchange) are not eligible to participate in the Exchange Program. Also ineligible are employees of RadiSys or one of our subsidiaries who reside in Israel or The Netherlands, due to local tax, securities, and labor restrictions.


Q9. Are employees outside of the U.S. eligible to participate?


A9. Yes. Employees of RadiSys or any of our subsidiaries on July 31, 2003 who are residents of Germany, Japan or the U.K. are eligible to participate, except as noted in Question 8 above.


If you are a tax resident of, or subject to tax laws of, a country other than the U.S., please be sure to read Schedule B - Guide to International Issues of the Offer to Exchange, which deals with the applicable tax consequences of the exchange in certain countries.


Q10. Do I have to satisfy any other eligibility requirements to receive the new options?


A10. Yes. To receive a new option, you must remain an employee of RadiSys or one of our subsidiaries through the new option grant date, which will be at least six months and one day after the cancellation date. If we do not extend the Exchange Program, we expect the new option grant date will be no earlier than March 1, 2004.


This means that if you die, become disabled, resign, are subject to involuntary termination by RadiSys, or otherwise terminate your employment with RadiSys or one of our subsidiaries or a successor entity through the new option grant date, you will not receive any new options or other compensation in exchange for the eligible options that you surrendered. Unless otherwise expressly provided by the applicable laws of a non-U.S. jurisdiction, your employment with RadiSys or one of our subsidiaries remains "at-will" and can be terminated by you or RadiSys or one of our subsidiaries at any time, with or without cause or notice.


Terms of the New Options


Q11. What will the exercise price of my new options be?


A11. The exercise price per share of the new options will be the closing price of shares of our common stock as reported by the Nasdaq National Market on the new option grant date, which is expected to be no earlier than March 1, 2004.


Because we will grant new options no earlier than the first business day that is at least six months and one day after the cancellation date, we cannot predict the exercise price of the new options. The new options may have a higher or lower exercise price than some or all of the eligible options that you surrender.


Q12. When will the options that I surrender actually be cancelled?


A12. The options you surrender for exchange will be cancelled no later than the first business day following the expiration date of the Exchange Program. As the offer expires on Wednesday, August 27, 2003, we expect the cancellation date to be Thursday, August 28, 2003. However, if the Company decides to extend the offer, we currently anticipate that the cancellation date will be the next business day after the extended offer expires.


Q13. When will I receive my new options?


A13. The new option grant date is currently expected to be a date that is at least six months and one day after the cancellation date, or March 1, 2004. We will not grant the new options before the new option grant date.


Approximately one week after the offering period expiration date, RadiSys and Mellon will send you notification to your RadiSys e-mail address that we have accepted your surrendered eligible options for exchange and that we will issue to you the new options in accordance with and subject to the terms and conditions of the Exchange Program. If you reside and are employed in Japan, your notification will be mailed by first-class mail to your work office. If you are on a leave of absence, your notification will be mailed by first-class mail to your home.


Q14. When will the new options vest?


A14. None of the new options will be vested or exercisable during the six-month period after the new option grant date. After this time, approximately 33.33%* of the total number of options granted will become vested and exercisable. From that point on, approximately 2.78%* of the options will vest each month and become exercisable. Your options will be fully vested two and one-half years (30 months) after the new option grant date. This means that all your new options would be completely unvested at the time of the new grant, regardless of whether your surrendered options were partially or fully vested. Once your new options have vested, you may exercise them at any time. Options will only vest if you remain a Company employee, and only you may exercise them. Options that are not vested when your employment ends cannot be exercised and will be forfeited.


To illustrate how vesting works, let's assume you receive a new stock option grant to purchase 1,000 shares in exchange for eligible options you surrendered. Six months after the new option grant date, you would be vested in approximately 33.33% of your new shares, or approximately 333 shares. After that, approximately 2.78%* of the total shares granted, or approximately 28, shares would vest each month until the option grant is fully vested two and one-half years following the grant date.


* Shares do not vest fractionally. EquitEase, RadiSys' stock administrator, applies a rounding factor at the first vesting date (six months following the grant date) and during the subsequent 24-month period. The number of shares that vest each month will vary slightly. However, at the end of the 30-month period, you will be vested in the exact number of shares granted to you (assuming continued employment with RadiSys or one of our subsidiaries).


Q15. What kind of options will the new options be?


A15. All of the new options will be "nonqualified stock options," commonly referred to as "NSOs." Even if you surrender an incentive stock option ("ISO"), you will receive an NSO in exchange for it.


Q16. When will the new opt ...