e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2006
|
|
|
Or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to .
|
Commission file number 0-26844
RADISYS CORPORATION
(Exact name of registrant as
specified in its charter)
|
|
|
Oregon
|
|
93-0945232
|
(State or other jurisdiction
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
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Common Stock, Par Value
$0.01 Per Share
|
|
The NASDAQ Stock Market
LLC
|
(Title of each Class)
|
|
(Name of each exchange on which
registered)
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 Registrants 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 a large
accelerated filer, an accelerated filer or a non accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer
þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act) Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates (based upon the closing price of
the Nasdaq Global Select Market on June 30, 2006 of $21.96)
of the Registrant at that date was approximately $403,230,000.
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
February 28, 2007: 21,951,342
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2006
Annual Meeting of Shareholders to be held May 15, 2007 are
incorporated by reference into Part III of this
Form 10-K.
RADISYS
CORPORATION
FORM 10-K
TABLE OF
CONTENTS
PART I
General
RadiSys Corporation is a leading provider of embedded advanced
solutions for the communications networking and commercial
systems markets. Through innovative product planning, intimate
customer collaboration, and combining innovative technologies
and industry leading architecture, we help original equipment
manufacturers (OEMs), systems integrators and
solution providers bring better products to market faster and
more economically. Our products include embedded boards,
application enabling platforms and turn-key systems, which are
used in todays complex computing, processing and network
intensive applications. Unless context otherwise requires, or as
otherwise indicated, we, us,
our and similar terms, as well as references to the
Company and RadiSys refer to RadiSys
Corporation and include all of our consolidated subsidiaries.
Our
Strategy
Our strategy is to provide customers with standards-based
advanced embedded solutions in our target markets. We believe
this strategy enables our customers to focus their resources and
development efforts on their key areas of competency allowing
them to provide higher value systems with a
time-to-market
advantage and 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
expertise, such as specific application software, and are
looking for partners like RadiSys to provide them with
standards-based, merchant-supplied building blocks for a growing
number of processing and networking functions.
Our
Markets
We provide application enabling solutions to the following two
distinct markets:
|
|
|
|
|
Communications Networking The communications
networking market consists primarily of networking
infrastructure and applications for deployment within our
wireless and IP networking and messaging markets. Applications
in these markets include 2, 2.5 and 3G wireless
infrastructure products, IP media server platforms, packet based
switches, unified messaging solutions,
IP-based
Private Branch Exchange (PBX) systems, voice
messaging, multimedia conferencing, data centers, network
access, security and switching applications.
|
|
|
|
Commercial Systems The commercial systems
market includes the following
sub-markets:
medical systems, test and measurement equipment, transaction
terminals and industrial automation equipment. Examples of
products which incorporate our commercial embedded solutions
include ultrasound equipment, X-Ray, MRI, immunodiagnostics and
hematology systems, CAT Scan (CT) imaging equipment,
network and production test equipment, consumer transaction
terminals, semiconductor manufacturing equipment and electronics
assembly equipment.
|
Our
Market Drivers
We believe there are a number of fundamental drivers for growth
in the embedded solutions market, including:
|
|
|
|
|
Increasing desire by OEMs to utilize standards-based,
merchant-supplied modular building blocks and platforms to
develop their new systems. We believe OEMs are combining their
internal development efforts with merchant-supplied building
blocks and platforms from partners like RadiSys to deliver a
larger number of more valuable new products to market faster at
a lower total cost of ownership.
|
|
|
|
Increasing usage levels of widely adopted technologies such as
Ethernet, IP, Linux, media processing and CPU, GPU and NPU
processors to provide programmable, intelligent and networked
functionality
|
3
|
|
|
|
|
to a wide variety of applications, including wireless, wireline
and data communications, network security, image processing,
transaction and monitoring and control.
|
|
|
|
|
|
Increasing demand for standards-based solutions, such as
Advanced Telecommunications Architecture (ATCA),
Session Initiation Protocol (SIP), IP Multimedia
Subsystem (IMS) and
Computer-on-Module
Express (COM Express) that motivates system makers
to take advantage of proven and validated standards-based
products.
|
Products
We design and manufacture a broad range of products at different
levels of integration:
|
|
|
|
|
Complete Turn-key Systems for the communications networking
systems markets such as 10G (Gigabit) ATCA systems and carrier
grade media servers (Media Servers);
|
|
|
|
Embedded Subsystems and Functional Platforms using ATCA, COM
Express and customer-specific proprietary platforms;
|
|
|
|
Compute, Input/Output (I/O), Storage,
Inter-networking
and Packet Processing Blades; and
|
|
|
|
Software, Middleware, and Microcode, including embedded
Operating Systems, Basic Input Output System (BIOS),
Service Availability (SA) Forum, Hardware Platform
Interface (HPI), Intelligent Platform Management
Interface (IPMI), and various protocol stacks
including signaling, management and data plane protocols.
|
We have specific technical expertise in the following areas:
|
|
|
|
|
System Architecture, Design and Integration;
|
|
|
|
Software, Hardware and Platform Development;
|
|
|
|
Embedded Operating Systems;
|
|
|
|
Microprocessor-Based Design;
|
|
|
|
Network Processor-Based Design;
|
|
|
|
Media processing;
|
|
|
|
Digital Signal Processor-Based Design; and
|
|
|
|
Signaling Protocols.
|
Our products fall into two different categories: Standards-based
Solutions and Perfect Fit (custom) Solutions.
Standards-based Solutions. As a Premier Member
of the Intel Communications Alliance, and as a long-time member
of the PCI Industrial Computer Manufacturers Group
(PICMG), SCOPE and the SA Forum standards bodies, we
believe that we continue to play a leading role in the
development and deployment of system architectural standards
that are most relevant to our markets. In the IP communications
market we believe that we continue to play a leading role in the
development and deployment of media server and Multimedia
Resource Function (MRF) standards through our
membership in the Third-Generation Partnership Project
(3GPP) and our long-term contributions to the
Internet Engineering Task Force (IETF).
Beginning in 2004 we shifted our product development investment
from predominantly one-off custom-designed products
(perfect fit solutions) to standards-based,
re-usable platforms and systems (standards-based
solutions). We believe standards-based solutions provide
our customers a number of fundamental benefits. First, by using
ready-made solutions rather than ground-start custom-designs,
our customers can achieve significantly shorter product
development intervals and faster
time-to-market.
Second, we believe our customers can achieve a lower total cost
by using solutions that are leveraged across multiple
applications rather than a single-use proprietary solution. The
benefit to RadiSys is that by offering standards-based
solutions, we believe we have the opportunity to address a wider
range of new market opportunities with the potential for faster
time to revenue than with one-off, custom-designs. We believe
this ability to reuse designs
4
gives us more leverage and makes our business and investment
model more scalable. Finally, we believe this standards-based
model will allow us to provide more integrated and higher value
solutions to our customers than we have typically delivered
under a custom-design model. These higher value solutions should
provide more product content and drive higher average selling
prices and therefore more total revenue opportunity for our
products.
We intend to increasingly focus our development effort on moving
deeper into the data path and further up the software stack,
positioning us to provide more complete application-ready
platforms and more value for our customers. We believe that
turn-key modular solutions such as ATCA platforms and Media
Servers will grow to become a large and very attractive market
to RadiSys. The success of our new ATCA projects is tied to
future deployment of wireless voice, wireless data and VoIP
applications by our customers. Likewise the success of our Media
Servers is tied to the future deployment of IP Multimedia
Subsystems (IMS).
We believe that ATCA and Media Servers will become more
prevalent ways to implement network equipment and that it will
reach multi-billion dollar levels over the next several years.
However, history has shown us that rates of adoption in this
space can be potentially slower than projected. For RadiSys,
this is predominately a new market opportunity that has not
existed in a meaningful way for us until now. Up until this
point only a limited number of equipment makers have used
merchant-supplied, standards-based modular platforms. Based on
our interactions with customers, we believe this model will
become more widely adopted as network equipment makers strive to
bring more products to market faster and with lower design and
product costs. Currently, our standards-based products do not
make up a significant percentage of our total revenues, however,
we believe design wins associated with these products will begin
to ramp into production in 2008.
Perfect Fit Solutions. Our perfect fit
solutions are products tailored or customized to meet specific
customer or application requirements. These solutions range from
modifications of standard or existing products to complete
development and supply of customized solutions. We draw on our
experience and large design library to create products with
varying degrees of customization. We will continue to invest a
portion of our resources in perfect fit solutions as these
opportunities are an integral part of our business model and
leverage our existing know-how. We also believe that our
customers will require and value some degree of customization of
our standards-based platforms for some of their specific
applications.
We have introduced or announced the following standards-based
solutions products:
Promentumtm. Our
Promentumtm
ATCA family includes a fully integrated application ready
platform as well as a set of modular building blocks all
configurable for a wide variety of applications. Going beyond
simple building blocks, our ATCA strategy delivers a common
managed platform for network element and dataplane applications,
which offers a significant benefit to our customers. Utilizing
the same managed platform for a variety of applications, Telecom
Equipment Manufactures (TEMs) can reduce overall
development time by up to 50% and significantly reduce
development, lifecycle and equipment costs.
The Promentum SYS-6010 is the industrys first ATCA
10Gigabit managed platform. The SYS-6010 is a fully integrated
and validated managed platform designed to address high speed
I/O and bandwidth intensive traffic-bearing applications. This
platform is designed to be implemented in a flexible and
reliable architecture complete with comprehensive system
management. The
Promentumtm
ATCA building blocks are implemented in a modular fashion with
seamless interoperability.
Additionally, we include data path and platform management
software integrated into the
Promentumtm
ATCA product line. This enables TEMs to focus on developing the
higher value application layer rather then spending precious
resources developing basic protocols and platform management
solutions.
Proceleranttm. Our
Proceleranttm
CE blades and boards are designed for embedded applications that
require a standard processor and memory subsystem, but also
modular flexibility to retain key design level IP on a
separate carrier board.
Proceleranttm
CE products are based on modular computing solutions. COM
Express is a standard that provides a bridge from legacy
interfaces such as PCI and IDE to new serial differential
signaling technologies such as PCI Express, Serial ATA, USB 2.0,
LVDS, and Serial DVO. Because they are modular and
standards-based, our COM Express products help equipment
manufacturers
5
shorten their time to market and reduce development costs. By
making processor, chipset and memory modular and independent of
the rest of the system design, manufacturers can focus
engineering resources on developing differentiating features and
avoid the design churn that comes with implementing new
processor generations.
Convediatm
Media Servers (CMS). In the third
quarter of 2006 we completed the acquisition of Convedia
Corporation (Convedia) and entered the media server
market with a portfolio of market leading IP media server
products. RadiSys CMS enable service innovation and
differentiation by providing powerful, reusable and highly
scalable multimedia processing platforms for VoIP and IMS
telecommunication service providers and enterprise customers.
Together with our solution partners, the CMS family supports the
next generation of feature rich, turnkey, high-value services
that combine the best of the Internet and telecommunications
worlds.
The CMS family consolidates the functions of traditional
announcement servers, interactive voice response units, audio
and video conference bridges, messaging platforms and speech
platforms into a single, multi-service, open standards-compliant
solution for network and enhanced services media processing. Our
CMS share identical control interfaces, media processing
features and management capabilities. The many features and
benefits of our CMS allow our customers to increase revenues
through delivery of new and innovative services, while reducing
capital and ongoing operational costs. Our
CMS-1000 and
CMS-6000 media servers have been successfully deployed around
the world. Our newest media servers, the
CMS-3000 and
CMS-9000, are optimized for IMS network deployments and are
currently in field trials with customers.
Segments
RadiSys is one operating segment as determined by the way that
management makes operating decisions and assesses RadiSys
financial performance. See Note 19 of the Notes to the
Consolidated Financial Statements for segment information.
Competition
We have three different types of competitors:
|
|
|
|
|
Our target customers Our most significant
competition is from our own customers and potential customers
who choose to remain vertically integrated and continue to fully
design and supply all or most of their own modules and
sub-systems.
However, we believe system makers are moving away from this
propriety mode of system development and supply.
|
|
|
|
Merchant Platform Providers Some of these
competitors include Embedded Communications Computing a division
of Motorola, IP Unity, Mercury Computer Systems and Sun
Microsystems.
|
|
|
|
Merchant Board Providers Some of these
competitors include Advantech Co., a division within Emerson, a
division within General Electric Company, a division within
Intel Corporation, Interphase and Kontron AG.
|
We believe that our system level architecture and design
expertise, coupled with our broad product portfolio and
flexibility in working intimately with system makers, will
enable us to differentiate our products against our competition.
We believe our rapid design cycles and standards-based solutions
will provide customers with a time to market advantage at a
lower total cost.
Customers
Our customers include many leading system makers in a variety of
end markets. Examples of these customers include: Agilent
Technologies, Airvana, Arrow Electronics, Aspect Medical
Systems, Avaya, Comverse Network Systems (Comverse)-
a division of Comverse Technology, Fluke Electronics,
Hewlett Packard, Huawei Technologies Co., IBM, Intel
Corporation, Intercall, a division of West Corporation, Lucent
Technologies, NexTone Communications, Nokia, Nortel Networks
(Nortel), Philips Medical Systems, Siemens AG,
Tektronix, and Universal Instruments.
6
Our five largest customers, accounting for approximately 66.7%
of revenues in 2006 are listed below with an example of the type
of application which incorporates RadiSys products:
|
|
|
Customer
|
|
Application
|
|
Avaya
|
|
Unified messaging products
|
Comverse
|
|
Wireless Voice and Multimedia
Messaging Systems
|
Nokia
|
|
2, 2.5, and 3G Wireless
Infrastructure Equipment
|
Nortel
|
|
IP-Enabled
PBX systems and switches
|
Philips Medical Systems
|
|
Cardiovascular, Surgical, and
Medical Imaging Equipment
|
Nokia and Nortel were our largest customers in 2006 accounting
for 39.4% and 10.3% of total 2006 revenues, respectively.
Research,
Development and Engineering
We believe that our research, development and engineering
(R&D) expertise represents an important
competitive advantage. Our R&D staff consisted of 279
engineers and technicians as of February 2, 2007. We
currently have design centers located in the United States of
America, Canada and China.
A majority of our R&D efforts are currently focused on the
development of standards-based products targeted at a wide
variety of applications. This is an important part of our
strategy to provide a broader set of products and building
blocks, which allows deployment of flexible solutions leveraged
off of reusable designs and commercially available components.
We believe this will result in significant savings in
development time and investment for our customers and will
increase the number of applications into which RadiSys solutions
can be incorporated. In addition, we are increasingly combining
our standards-based products to create more integrated and more
complex hardware and software based systems.
A portion of our R&D efforts are focused on custom solutions
for our customers, where existing functional building blocks are
tailored to meet the customers specific needs. For these
programs, our engineering team works closely with the
customers engineering team to architect, develop and
deliver solutions that meet their specific requirements using
RadiSys functional building blocks. We engage in close and
frequent communication during the design and supply process,
allowing us to operate as a virtual division within
a customers organization. We believe our in-depth
understanding of embedded systems provides customers with
specialized competitive solutions, earning RadiSys a strong
incumbent position for future system development projects.
It is our objective to retain the rights to technology developed
during the design process. In some cases, we agree to share
technology rights, manufacturing rights, or both, with the
customer. However, we generally retain nonexclusive rights to
use any shared technology.
Sales and
Marketing
Our products are sold through a variety of channels, including
direct sales, distributors and sales representatives. The total
direct sales and marketing headcount was 93 as of
February 2, 2007. We use our dedicated cross-functional
teams to develop long-term relationships with our customers,
which is a means by which we achieve collaborative success. Our
cross-functional teams include sales, application engineering,
marketing, program management, supply chain management and
design engineering. Our teams collaborate with our customers to
combine their development efforts in key areas of competency
with our standards-based or perfect-fit solutions to achieve
higher quality, lower development and product cost and faster
time to market for their products.
We market and sell our products in North America, Europe, the
Middle East and Africa (EMEA), and Asia Pacific. In
each of these geographies, products are sold principally through
a direct sales force with our sales resources located in the
United States of America, Canada, Europe, Israel, China and
Japan. In addition, in each of these geographies we make use of
an indirect distribution model and sales representatives to
access additional customers. In 2006, global revenues were
comprised geographically of 34.6% from North America,
7
48.1% from EMEA and 17.3% from Asia Pacific. See Note 19 of
the Notes to the Consolidated Financial Statements for financial
information by geographic area.
Manufacturing
Operations
We utilize a combination of internal and outsourced
manufacturing. Total manufacturing operations headcount was 216
as of February 2, 2007. We currently manufacture
approximately 20% to 30% of our own products and intend to
continue to outsource the majority of our products to
manufacturing services partners for better global customer
fulfillment and reduced cost.
We have an automated ISO9001 certified plant in Hillsboro,
Oregon that provides board and systems assembly and testing.
This plant includes an automated line for Surface Mount
Technology (SMT), double-sided board assembly and
facilities for systems integration, configuration and testing.
Because the products into which building blocks are integrated
typically have long life reliability requirements, dynamic
stress testing of our products must be particularly rigorous. We
believe our product testing processes are a competitive
advantage.
We also have a facility in Vancouver, British Columbia which is
responsible for the final integration, testing and delivery of
Media Server systems. This includes working with our contract
manufacturer to manufacture and functionally test all hardware
components of an end system.
Although many of the raw materials used in our internal and
outsourced manufacturing operations are available from a number
of alternative sources, some of these are obtained from a single
supplier or a limited number of suppliers. We and our outsourced
manufacturing partners contract with third parties for a
continuing supply of the components used in the manufacture of
our products. We currently rely solely on Intel for the supply
of some microprocessors and other components. Alternative
sources of components that are procured from one supplier or a
limited number of suppliers would be difficult to locate
and/or it
would require a significant amount of time and resources to
establish and accommodate.
We also rely on contract manufacturers with for certain RadiSys
products. Alternative sources of manufacturing services for the
RadiSys products, including transitioning the products, could
require significant time and resources to establish. In
addition, any decline in the quality of components supplied by
our vendors or products produced by our contracting
manufacturing partners could adversely impact our reputation and
business performance. We have experienced less than optimal
service from one of our contract manufacturers in North America.
As a result, we have discontinued our relationship with this
contract manufacturer and are transitioning the majority of this
production to our Hillsboro facility.
Backlog
As of December 31, 2006, our backlog was approximately
$21.7 million, compared to $25.1 million as of
December 31, 2005. We include in our backlog statistic all
purchase orders scheduled for delivery within 12 months.
The general trend within our addressable markets continues to be
shorter lead times and supplier managed inventory, which has
been decreasing backlog over time as a percentage of revenue.
Intellectual
Property
We hold 25 U.S. and two foreign utility patents, three
U.S. design patents and have five U.S. and 18 foreign
patent applications pending; however, we rely principally on
trade secrets, know how and rapid time to market for protection
and leverage of our intellectual property. We believe that our
competitiveness depends much more on the pace of our product
development, trade secrets, and our relationships with customers
than in filed and issued patents. We have 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. Our policy is to
evaluate such claims on a
case-by-case
basis. We may seek to enter into licensing agreements with
companies having or asserting rights to technologies if we
conclude that such licensing arrangements are necessary or
desirable in developing specific products.
8
Employees
As of February 2, 2007 we had 699 employees, of which 606
were regular employees and 93 were agency temporary employees or
contractors. We are not subject to any collective bargaining
agreement, have never been subject to a work stoppage, and
believe that we have maintained good relationships with our
employees.
Change of
Auditor
On May 9, 2005 we informed PricewaterhouseCoopers, LLP
(PwC) that PwC had been dismissed as our independent
registered public accounting firm and on May 12, 2005, we
engaged KPMG LLP (KPMG) as our independent
registered public accounting firm to audit our financial
statements for the years ended December 31, 2005 and 2006.
Corporate
History
RadiSys Corporation was incorporated in March 1987 under the
laws of the State of Oregon.
INTERNET
INFORMATION
Copies of our 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 (the Exchange Act) are available free of charge
through our website (www.radisys.com) as soon as reasonably
practicable after we electronically file the information with,
or furnish it to, the Securities and Exchange Commission (the
SEC).
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements. Some of the forward-looking
statements contained in this Annual Report on
Form 10-K
include:
|
|
|
|
|
our statements concerning our beliefs about the success of our
shift in business strategy from perfect fit solutions to
standards-based solutions;
|
|
|
|
the adoption by our customers of standards-based solutions and
ATCA;
|
|
|
|
the size of the addressable market for ATCA;
|
|
|
|
estimates of anticipated revenue from design wins;
|
|
|
|
expectations and goals for revenues, gross margin, R&D
expenses, selling, general, administrative expenses and profits;
|
|
|
|
estimates and impact of stock-based compensation expense;
|
|
|
|
expectations about the benefits from and integration of the
operations, technologies, products or personnel from the
acquisition of Convedia;
|
|
|
|
estimates and impact of the costs of the acquisition of Convedia;
|
|
|
|
the impact of our restructuring events on future revenues;
|
|
|
|
currency exchange rate fluctuations, changes in tariff and trade
policies and other risks associated with foreign operations;
|
|
|
|
our projected liquidity; and
|
|
|
|
matters affecting the computer manufacturing industry including
changes in industry standards, changes in customer requirements
and new product introductions, as well as other risks described
in Item 1a Risk Factors.
|
9
All statements that relate to future events or to our 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 our actual results or our 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 our goals, including those discussions
set forth in Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
We cannot provide assurance that these goals will be achieved.
Although forward-looking statements help provide additional
information about us, 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 in Item 1a. These risk
factors may cause our actual results to differ materially from
any forward-looking statement.
We do not guarantee future results, levels of activity,
performance or achievements and we do not assume responsibility
for the accuracy and completeness of these statements. The
forward-looking statements contained in this Annual Report on
Form 10-K
are made and based on information as of the date of this report.
We assume no obligation to update any of these statements based
on information after the date of this report.
|
|
Item 1A.
|
Risk
Factors Related to Our Business
|
Because
of our dependence on certain customers, the loss of, or a
substantial decline in sales to, a top customer could have a
material adverse effect on our revenues and
profitability.
During 2006, we derived 66.7% of our revenues from five
customers. These five customers were Nokia, Nortel, Comverse,
Philips Medical Systems and Avaya. During 2006, revenues
attributable to Nokia and Nortel were 39.4% and 10.3%,
respectively. A financial hardship experienced by, or a
substantial decrease in sales to any one of our top customers
could materially affect revenues and profitability. Generally,
these customers are not the end-users of our products. If any of
these customers efforts to market the end products we
design and manufacture for them or the end products into which
our products are incorporated are unsuccessful in the
marketplace our design wins, sales
and/or
profitability will be significantly reduced. Furthermore, if
these customers experience adverse economic conditions in the
markets into which they sell our products (end markets), we
would expect a significant reduction in spending by these
customers. Some of the end markets that these customers sell our
products into are characterized by intense competition, rapid
technological change and economic uncertainty. Our exposure to
economic cyclicality and any related fluctuation in demand from
these customers could have a material adverse effect on our
revenues and financial condition.
We are
shifting our business from predominately perfect fit (custom)
solutions to more standards-based products, such as ATCA, COM
Express and Media Servers. This requires substantial
expenditures for R&D that could adversely affect our
short-term earnings and, if this strategy is not successful
could have a material adverse effect on our long-term revenues,
profitability and financial condition.
We are shifting our business from predominately perfect fit
solutions to more standards-based solutions, such as ATCA, COM
Express and Media Server products. There can be no assurance
that this strategy will be successful. This strategy requires us
to make substantial expenditures for R&D in new technologies
that we reflect as a current expense in our financial
statements. We believe that these investments in standards-based
products and new technologies will allow us to provide a broader
set of products and building blocks to take to market and
position us to grow on a long-term basis. Most of these
investments are not expected to result in significant revenues
for at least twelve to twenty-four months. Accordingly, these
expenditures could adversely
10
affect our short-term earnings. In addition, there is no
assurance that these new products and technologies will be
accepted by our customers and, if accepted, how large the market
will be for these products or what the timing will be for any
meaningful revenues. If we are unable to successfully develop
and sell standards-based products to our customers, our
revenues, profitability and financial condition could be
materially adversely affected. Additionally, if we successfully
develop standards-based products we may incur incremental
R&D expenses as we tailor the standards-based products for
our customers. Furthermore, we are building standards-based
products to meet industry standards that define the basis of
compatibility in operation and communication of a system
supported by different vendors. Those standards constantly
change and new competing standards emerge. The development or
adaptation of products and technologies require us to commit
financial resources, personnel and time significantly in advance
of sales. In order to compete, our decisions with respect to
those commitments must accurately anticipate, sometimes two
years or more in advance, both future demand and the
technologies that will win market acceptance to meet that demand.
Our
projections of future revenues and earnings are highly
subjective and may not reflect future results which could cause
volatility in the price of our common stock.
Most of our major customers have contracts but these contracts
do not commit them to purchase a minimum amount of our products.
These contracts generally require our customers to provide us
with forecasts of their anticipated purchases. However, our
experience indicates that customers can change their purchasing
patterns quickly in response to market demands and therefore
these forecasts may not be relied upon to accurately forecast
sales. From time to time we provide projections to our
shareholders and the investment community of our future sales
and earnings. Since we do not have long-term purchase
commitments from our major customers and the customer order
cycle is short, it is difficult for us to accurately predict the
amount of our sales and related earnings in any given period.
Our projections are based on managements best estimate of
sales using historical sales data, information from customers
and other information deemed relevant. These projections are
highly subjective since sales to our customers can fluctuate
substantially based on the demands of their customers and the
relevant markets. Our period to period revenues have varied in
the past and may continue to vary in the future. In addition and
as stated above, we have a high degree of customer
concentration. Any significant change in purchases by any one of
our largest customers can significantly affect our sales and
profitability.
If demand for our products fluctuates, our revenues,
profitability and financial condition could be adversely
affected. Important factors that could cause demand for our
products to fluctuate include:
|
|
|
|
|
changes in customer product needs;
|
|
|
|
changes in the level of customers inventory;
|
|
|
|
changes in business and economic conditions, including a
downturn in the semiconductor industry; and
|
|
|
|
market acceptance of our products.
|
We have recently experienced significant changes in purchases by
one of our large customers which adversely impacted the fiscal
period in which it occurred. If our actual sales or earnings are
less than the projected amounts, the price of our common stock
may be adversely affected and accordingly our shareholders
should not place undue reliance on these projections.
In addition, the price of our common stock may be adversely
affected due to other factors, such as changes in analysts
estimates regarding earnings, or may be due to factors relating
to the commercial systems and communication networking markets
in general. Shareholders should be willing to incur the risk of
such fluctuations.
11
Not
all new design wins ramp into production, and if ramped into
production the volumes derived from such projects may not be as
significant as we had originally estimated, which could have a
substantial negative impact on our anticipated revenues and
profitability.
From time to time we estimate the revenue from design wins,
which represents three years of revenue once product development
has ramped into production. If a design win actually ramps into
production, the average ramp into production begins about 12 to
18 months after the initial design win, although some more
complex projects can take up to 24 months or longer. After
that, there is an additional time lag from the start of
production ramp to peak revenue. Not all design wins ramp into
production and even if a design win ramped into production, the
volumes derived from such projects may be less than we had
originally estimated. Design wins are sometimes canceled or
delayed, or can perform below original expectations, which can
adversely impact anticipated revenues and profitability.
Our
business depends on the communications networking and commercial
systems markets in which demand can be cyclical, and any
inability to sell products to these markets or forecast customer
demand could have a material adverse effect on our revenues and
gross margin.
We derive our revenues from a number of diverse end markets,
some of which are subject to significant cyclical changes in
demand. In 2006, we derived 74.4% and 25.6% of our revenues from
the communications networking and commercial systems markets,
respectively. We believe that our revenues will continue to be
derived primarily from these two markets. Communications
networking revenues include, but are not limited to, sales to
Airvana, Aspect Medical Systems, Avaya, Comverse, Hewlett
Packard, Huawei Technologies Co., IBM, Intel Corporation,
Intercall, a division of West Corporation, Lucent, NexTone
Communications, Nokia, Nortel and Siemens AG. Commercial systems
revenues include, but are not limited to, sales to Agilent
Technologies, Arrow Electronics, Fluke Electronics, Philips
Medical Systems, Tektronix and Universal Instruments. Generally,
our customers are not the end-users of our products. If our
customers experience adverse economic conditions in the markets
into which they sell our products (end markets), we would expect
a significant reduction in spending by our customers. Some of
these end markets are characterized by intense competition,
rapid technological change and economic uncertainty. Our
exposure to economic cyclicality and any related fluctuation in
customer demand in these end markets could have a material
adverse effect on our revenues and financial condition.
Significant reduction in our customers spending, such as
what we experienced in 2001 and 2002, will result in decreased
revenues and earnings. We continue to execute on our strategy of
expanding into new end markets either through new product
development projects with our existing customers or through new
customer relationships, but no assurance can be given that this
strategy will be successful.
We forecast manufacturing needs based on our customer demand
mentioned above. Changes in this demand could cause us or our
contract manufacturers to hold excess or obsolete inventory that
may not be salable to other customers on commercially reasonable
terms, and which could require inventory valuation write downs
that reduce our gross margin and profitability. This risk is
exacerbated by a current trend from our customers of requiring
shorter lead times between placing orders with us and the
shipment date. That typically necessitates an increase in our
inventory or inventory of our products at our contract
manufacturers locations, raising the likelihood that upon
cancellation or deferral, we may be holding greater amounts of
inventory
and/or
incurring additional costs. Additionally, we are contractually
obligated to reimburse our contract manufacturers for the cost
of excess inventory used in the manufacture of our products for
which there is no forecasted or alternative use. Unexpected
decreases in customer demand or our inability to accurately
forecast customer demand could result in increases in our
adverse purchase commitment liability and have a material
adverse effect on our gross margins and profitability.
12
Because
of our dependence and our contract manufacturers
dependence on a few suppliers, or in some cases one supplier,
for some of the components we use, as well as our dependence on
a few contract manufacturers to supply a majority of our
products, a loss of a supplier, a decline in the quality of
these components, a shortage of any of these components, or a
loss or degradation in performance of a contract manufacturer
could have a material adverse effect on our business or our
profitability.
We depend on a few suppliers, or in some cases one supplier, for
a continuing supply of the components we use in the manufacture
of our products and any disruption in supply could adversely
impact our financial performance. For example, we currently
solely rely on Intel for the supply of some microprocessors and
other components. Alternative sources of components that are
procured from one supplier or a limited number of suppliers
would be difficult to locate
and/or it
would require a significant amount of time and resources to
establish.
We also rely on contract manufacturers for the supply of
approximately 80% of all of our unit volume. If these third
party manufacturers fail to adequately perform our revenues and
profitability could be adversely affected. Among other things,
inadequate performance from our contract manufacturers could
include the production of products that do not meet our high
quality standards or schedule and delivery requirements and
could cause us to invest in additional internal resources as we
lose productivity on other important projects. In addition,
alternative internal or external sources of manufacturing for
RadiSys products could require significant time and resources to
establish or transition. We have experienced less than optimal
service from one of our contract manufacturers in North America.
As a result, we have discontinued our relationship with this
contract manufacturer and are currently transitioning the
majority of this production to our Hillsboro facility. However,
we may incur additional and unanticipated expenses or delays
which may have a material adverse effect on our business or our
financial performance. Also, due to the inherent risks
associated with the transfer of production we may incur
additional expenses related to adverse purchase commitments or
excess and obsolete inventory.
The
failure to successfully integrate Convedias business into
our operations in the expected time frame, or at all, may
adversely affect our future results.
We believe that the acquisition of Convedia, completed in
September 2006 will result in certain benefits, including
expanded global reach and increased product offerings. However,
to realize these anticipated benefits, Convedias business
must be successfully integrated into RadiSys operations by
focusing on general and administrative, manufacturing and
marketing and sales cooperation. The success of the Convedia
acquisition will depend on our ability to realize these
anticipated benefits from integrating Convedias business
into our operations. We may fail to realize the anticipated
benefits of the Convedia acquisition on a timely basis, or at
all, for a variety of reasons, including the following:
|
|
|
|
|
failure to effectively coordinate sales and marketing efforts to
communicate the capabilities of the Company;
|
|
|
|
potential difficulties integrating and harmonizing financial
reporting or other critical systems; and
|
|
|
|
the loss of key employees.
|
We
operate in intensely competitive industries, and our failure to
respond quickly to technological developments and incorporate
new features into our products could have an adverse effect on
our ability to compete.
We operate in intensely competitive industries that experience
rapid technological developments, changes in industry standards,
changes in customer requirements, and frequent new product
introductions and improvements. If we are unable to respond
quickly and successfully to these developments, we may lose our
competitive position, and our products or technologies may
become uncompetitive or obsolete. To compete successfully, we
must maintain a successful R&D effort, develop new products
and production processes, and improve our existing products and
processes at the same pace or ahead of our competitors. We may
not be able to successfully develop and market these new
products; the products we invest in and develop may not be
13
well received by customers; and products developed and new
technologies offered by others may affect the demand for our
products. These types of events could have a variety of negative
effects on our competitive position and our profitability and
financial condition, such as reducing our revenue, increasing
our costs, lowering our gross margin percentage, and requiring
us to recognize and record impairments of our assets.
Competition
in the market for embedded systems is intense, and if we lose
our market share, our revenues and profitability could
decline.
We compete with a number of companies providing embedded
systems, including Advantech Co., AudioCodes, Embedded
Communications Computing, a division of Motorola, a division
within Emerson, a division within General Electric Company,
Hewlett Packard, divisions within both Intel Corporation and
IBM, Interphase, IP Unity, Kontron AG, Mercury Computer Systems
and Sun Microsystems. Because the embedded systems market is
growing, it is attracting new non-traditional competitors. These
non-traditional competitors include contract-manufacturers that
provide design services and Asian-based original design
manufacturers. Some of our competitors and potential competitors
have a number of significant advantages over us, including:
|
|
|
|
|
a longer operating history;
|
|
|
|
greater name recognition and marketing power;
|
|
|
|
preferred vendor status with our existing and potential
customers; and
|
|
|
|
significantly greater financial, technical, marketing and other
resources, which allow them to respond more quickly to new or
changing opportunities, technologies and customer requirements.
|
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, we could encounter
significant pricing pressures. These pricing pressures could
result in significantly lower average selling prices for our
products. We 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 we
serve, 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 additional competition thus weakening our position
or causing delays in new design wins and their associated
production.
Potential
acquisitions and partnerships may be more costly or less
profitable than anticipated and may adversely affect the price
of our company stock.
Future acquisitions and partnerships may involve the use of
significant amounts of cash, potentially dilutive issuances of
equity or equity-linked securities, issuance of debt and
amortization of intangible assets with determinable lives. We
may also be required to charge against earnings upon
consummation of the acquisition the value of an acquired
business technology that does not meet the accounting
definition of completed technology. Moreover, to the
extent that any proposed acquisition or strategic investment is
not favorably received by shareholders, analysts and others in
the investment community, the price of our common stock could be
adversely affected. In addition, acquisitions or strategic
investments involve numerous risks, including:
|
|
|
|
|
difficulties in the assimilation of the operations,
technologies, products and personnel of the acquired company;
|
|
|
|
the diversion of managements attention from other business
concerns;
|
|
|
|
risks of entering markets in which we have no or limited prior
experience;
|
|
|
|
the potential loss of key employees of the acquired
company; and
|
|
|
|
performance below expectations by an acquired business.
|
14
In the event that an acquisition or a partnership does occur and
we are unable to successfully integrate operations,
technologies, products or personnel that we acquire, our
business, results of operations and financial condition could be
materially adversely affected. We may expend additional
resources without receiving benefit from strategic alliances
with third parties.
Our
international operations expose us to additional political,
economic and regulatory risks not faced by businesses that
operate only in the United States.
In 2006, as measured by delivery destination, we derived 4.0% of
our revenues from Canada and Mexico, 48.1% of our revenues from
EMEA and 17.3% from Asia Pacific. In 2004 we opened a
development center in Shanghai, China and began to utilize a
contract manufacturer in Shenzhen, China. For the year ended
December 31, 2006, approximately 52% of our total revenues
were associated with products produced at our China contract
manufacturer. Also during 2006 we completed the acquisition of
Convedia which includes significant operations in Vancouver,
British Columbia. As a result of all these activities, we are
subject to worldwide economic and market condition 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 our results of operations or financial position.
Additionally, some of our sales to overseas customers are made
under export licenses that must be obtained from the United
States Department of Commerce. Protectionist trade legislation
in either the United States of America or other countries, such
as a change in the current tariff structures, export compliance
laws, trade restrictions resulting from war or terrorism, or
other trade policies could adversely affect our ability to sell
or to manufacture in international markets. Furthermore,
revenues from outside the United States of America are subject
to inherent risks, including the general economic and political
conditions in each country. These risks, among others, could
adversely affect our results of operations or financial position.
If we
are unable to generate sufficient income in the future, we may
not be able to fully utilize our net deferred tax assets or
support our current levels of goodwill and intangible assets on
our balance sheet.
We cannot provide absolute assurance that we will generate
sufficient taxable income to fully utilize the net deferred tax
assets of $30.3 million as of December 31, 2006. We
may not generate sufficient taxable income due to earning lower
than forecasted net income or incurring charges associated with
unusual events, such as restructurings and acquisitions.
Accordingly, we may record a full valuation allowance against
the deferred tax assets if our expectations of future taxable
income are not achieved. On the other hand, if we generate
taxable income in excess of our expectations, the valuation
allowance may be reduced accordingly. We also cannot provide
absolute assurance that future income will support the carrying
amount of goodwill and intangibles of $110.1 million on the
Consolidated Balance Sheet as of December 31, 2006, and
therefore, we may incur an impairment charge in the future.
Our
products for embedded solutions are based on industry standards,
which are continually evolving, and any failure to conform to
these standards or lack of success of these standards could have
a substantial negative impact on our revenues and profitability.
In addition, these standards could take longer to be deployed or
may not be deployed at all.
We develop and supply a mix of perfect fit and standards-based
products. Standards-based products for embedded computing
applications are often based on industry standards, which are
continually evolving. Our future success in these products will
depend, in part, upon our capacity to invest in, and
successfully develop and introduce new products based on
emerging industry standards. Our inability to invest in or
conform to these standards could render parts of our product
portfolio uncompetitive, unmarketable or obsolete. As new
standards are developed for our addressable markets standards,
we may be unable to successfully invest in, design and
manufacture new products that address the needs of our customers
or achieve substantial market acceptance.
15
If we
are unable to protect our intellectual property, we may lose a
valuable competitive advantage or be forced to incur costly
litigation to protect our rights.
We are a technology dependent company, and our success depends
on developing and protecting our intellectual property. We rely
on patents, copyrights, trademarks and trade secret laws to
protect our intellectual property. At the same time, our
products are complex, and are often not patentable in their
entirety. We also license intellectual property from third
parties and rely on those parties to maintain and protect their
technology. We cannot be certain that our actions will protect
proprietary rights. If we are unable to adequately protect our
technology, or if we are unable to continue to obtain or
maintain licenses for protected technology from third parties,
it could have a material adverse effect on our results of
operations. In addition, some of our products are now designed,
manufactured and sold outside of the United States of America.
Despite our precautions to protect our intellectual property,
this international exposure may reduce or limit protection of
our intellectual property which is more prone to design piracy.
Changes
in stock-based compensation accounting rules have adversely
impacted our operating results and may adversely impact our
stock price.
On December 16, 2004, the Financial Accounting Standards
Board issued a Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS 123R).
SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized as
expense in the financial statements based on their fair values
and does not allow the pro forma disclosure previously used as
an alternative to financial statement recognition.
We were required to adopt SFAS 123R in the first quarter of
2006. Under SFAS 123R, we applied the Black-Scholes
valuation model in determining the fair value of share-based
payments, with adjustments to the methodology as necessary for
reporting under SFAS 123R guidelines. As a result, our
operating results for the year ended December 31, 2006
contain, and our operating results for future periods will
contain, a charge for share-based compensation related to stock
options and shares pursuant to the 1996 Employee Stock Purchase
Plan (ESPP), in addition to the share-based
compensation associated with our restricted share awards and
restricted stock units (restricted stock).
SFAS 123R had a significant impact on our operating results
for the year ended December 31, 2006, with SFAS 123R
charges of $6.6 million increasing operating losses to
$22.2 million, and we expect the adoption of SFAS 123R
will continue to have a significant adverse impact on our
operating results in the future. We anticipate that stock-based
compensation will increase by $3.4 million to approximately
$10 million in 2007 due primarily to the 2004 acceleration
of employee stock options with an option price greater than
$15.99. As a result of the acceleration, we reduced the amount
of stock based compensation expense recognized in 2006; however,
in 2007 stock based compensation expense will increase as the
benefit from the acceleration will have been fully utilized. The
increase is also due to the acquisition of Convedia. We cannot
predict the effect that this adverse impact on our reported
operating results will have on the trading price of our common
stock.
Decreased
effectiveness of share-based payment awards could adversely
affect our ability to attract and retain
employees.
We have historically used stock options and other forms of
share-based payment awards as key components of our total
rewards employee compensation program in order to retain
employees and provide competitive compensation and benefit
packages. In accordance with SFAS 123R, we began recording
charges to earnings for stock-based compensation expense in the
first quarter of fiscal 2006. As a result, we will incur
increased compensation costs associated with our stock-based
compensation programs making it more expensive for us to grant
share-based payment awards to employees in the future. Like
other companies, we have reviewed our equity compensation
strategy in light of the current regulatory and competitive
environment and have decided to reduce the total number of
options granted to employees and the number of employees who
receive share-based payment awards. Due to this change in our
stock-based compensation strategy, we may find it difficult to
attract, retain and motivate employees, and any such difficulty
could materially adversely affect our business.
16
We
depend on the recruitment and retention of qualified personnel,
and our failure to attract and retain such personnel could
seriously harm our business.
Due to the specialized nature of our business, our future
performance is highly dependent upon our ability to attract and
retain qualified engineering, manufacturing, marketing, sales
and management personnel for our operations. Competition for
personnel is intense, and we may not be successful in attracting
and retaining qualified personnel. Our failure to compete for
these personnel could seriously harm our business, results of
operations and financial condition. In addition, if incentive
programs we offer are not considered desirable by current and
prospective employees, we could have difficulty retaining or
recruiting qualified personnel. If we are unable to recruit and
retain key employees, our product development, and marketing and
sales could be harmed.
Our
disclosure controls and internal control over financial
reporting do not guarantee the absence of error or
fraud.
Disclosure controls are procedures designed to ensure that
information required to be disclosed in our reports filed under
the Exchange Act, such as this Annual Report, is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls
are also designed to ensure that the information is accumulated
and communicated to our management, including the CEO and CFO,
as appropriate to allow timely decisions regarding required
disclosure.
Internal control over financial reporting (internal
controls) are procedures which are designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States of America and includes
those policies and procedures that: (1) pertain to the
maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets
of RadiSys; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of
RadiSys are being made only in accordance with authorizations of
management and directors of RadiSys; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of RadiSys
assets that could have a material effect on the financial
statements. To the extent that components of our Internal
Controls are included in our disclosure controls, they are
included in the scope of our quarterly controls evaluation.
Our management, including the CEO and CFO, do not expect that
our disclosure controls or internal controls will prevent all
error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty,
and breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls
is based in part upon certain assumptions about the likelihood
of future events, and we cannot assure that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
17
Oregon
corporate law, our articles of incorporation and our bylaws
contain provisions that could prevent or discourage a third
party from acquiring us even if the change of control would be
beneficial to our shareholders.
Our articles of incorporation and our bylaws contain
anti-takeover provisions that could delay or prevent a change of
control of our company, even if a change of control would be
beneficial to our shareholders. These provisions:
|
|
|
|
|
authorize our board of directors to issue up to
10,000,000 shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without prior
shareholder approval to increase the number of outstanding
shares and deter or prevent a takeover attempt;
|
|
|
|
establish advance notice requirements for nominations for
election to our board of directors or for proposing matters that
can be acted upon by shareholders at shareholder meetings;
|
|
|
|
prohibit cumulative voting in the election of directors, which
would otherwise allow less than a majority of shareholders to
elect director candidates; and
|
|
|
|
limit the ability of shareholders to take action by written
consent, thereby effectively requiring all common shareholder
actions to be taken at a meeting of our common shareholders.
|
In addition, if our common stock is acquired in specified
transactions deemed to constitute control share
acquisitions, provisions of Oregon law condition the
voting rights that would otherwise be associated with those
common shares upon approval by our shareholders (excluding,
among other things, the acquirer in any such transaction).
Provisions of Oregon law also restrict, subject to specified
exceptions, the ability of a person owning 15% or more of our
common stock to enter into any business combination
transaction with us.
The foregoing provisions of Oregon law and our articles of
incorporation and bylaws could limit the price that investors
might be willing to pay in the future for shares of our common
stock.
Other
Risk Factors Related to Our Business
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 our business strategies, potential
litigation and claims arising in the normal course of business,
credit risk of customers and other risk factors. Additionally,
proposed changes to accounting rules could materially affect
what we report under generally accepted accounting principles
and adversely affect our operating results.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Information concerning our principal properties at
December 31, 2006 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
|
Location
|
|
Type
|
|
Principal Use
|
|
Footage
|
|
|
Ownership
|
|
Hillsboro, OR
|
|
Office & Plant
|
|
Headquarters, Marketing,
|
|
|
130,000
|
|
|
Leased
|
|
|
|
|
Manufacturing, Distribution,
Research and Engineering
|
|
|
|
|
|
|
|
|
Plant & Land
|
|
Held For Sale
|
|
|
23,000
|
|
|
Owned
|
Des Moines, Iowa
|
|
Office
|
|
Marketing, Research, and
Engineering
|
|
|
12,655
|
|
|
Leased
|
Boca Raton, FL
|
|
Office
|
|
Marketing, Research, and
Engineering
|
|
|
26,211
|
|
|
Leased
|
Dublin, Ireland
|
|
Office
|
|
Marketing, Distribution
|
|
|
1,658
|
|
|
Leased
|
Burnaby, Canada
|
|
Office
|
|
Marketing, Research, and
Engineering
|
|
|
31,920
|
|
|
Leased
|
18
We also lease sales offices in the United States of America
located in San Diego, California, Marlborough,
Massachusetts and Sea Girt, New Jersey. We have international
sales offices located in Munich, Germany and Tokyo, Japan. We
have two offices to support our contract manufacturing partners
and these offices are located in Charlotte, North Carolina and
in Shenzhen, China. We also lease an office in Shanghai, China
for our China-based Development Center. In addition to the above
properties, we own two parcels of land adjacent to our
Hillsboro, Oregon facility, which were acquired for future
expansion but are currently held for sale.
During the first quarter of 2007, the Company accepted offers to
sell its DC3 building and one of its surrounding lots. The sales
are expected to close in the second quarter and third quarter,
respectively.
|
|
Item 3.
|
Legal
Proceedings
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not applicable.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
|
Our common stock is traded on the Nasdaq Global Select 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
Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
21.78
|
|
|
$
|
15.98
|
|
Third Quarter
|
|
|
24.94
|
|
|
|
19.88
|
|
Second Quarter
|
|
|
21.96
|
|
|
|
19.01
|
|
First Quarter
|
|
|
20.57
|
|
|
|
17.29
|
|
2005
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
19.48
|
|
|
$
|
15.75
|
|
Third Quarter
|
|
|
19.48
|
|
|
|
16.17
|
|
Second Quarter
|
|
|
16.58
|
|
|
|
12.95
|
|
First Quarter
|
|
|
19.55
|
|
|
|
13.89
|
|
The closing price as reported on the Nasdaq Global Select Market
on February 28, 2007 was $15.72 per share. As of
February 28, 2007, there were approximately 380 holders of
record of our common stock. We believe that the number of
beneficial owners is substantially greater than the number of
record holders because a large portion of our outstanding common
stock is held of record in broker street names for
the benefit of individual investors.
Dividend
Policy
We have never paid any cash dividends on our common stock and do
not expect to declare cash dividends on the common stock in the
foreseeable future in compliance with our policy to retain all
of our earnings to finance future growth.
19
Stock
Price Performance Graph
The following graph sets forth our total cumulative shareholder
return as compared to the return of the Standard and Poors
500 Index (S&P 500) and the Nasdaq Computer
Manufacturers Index for the period of December 31, 2001
through December 31, 2006. The graph reflects the
investment of $100 on December 31, 2001 in our stock, the
S&P 500 and in a published industry peer group index.
Total return also assumes reinvestment of dividends. As noted
above, we have never paid dividends on our common stock.
Historical stock price performance should not be relied upon as
indicative of future stock price performance.
Comparison
of 5-year
cumulative total return among RadiSys Corporation,
the S&P 500 index and the Nasdaq Computer Manufacturers
index
Copyright ©
2007, Standard & Poors a division of The McGraw-Hill
Companies, Inc. All rights reserved.
www. researchdatagroup.com/S&P.htm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
12/2001
|
|
12/2002
|
|
12/2003
|
|
12/2004
|
|
12/2005
|
|
12/2006
|
RadiSys
|
|
|
100.00
|
|
|
|
40.59
|
|
|
|
85.81
|
|
|
|
99.39
|
|
|
|
88.20
|
|
|
|
84.79
|
|
S&P 500
|
|
|
100.00
|
|
|
|
77.90
|
|
|
|
100.24
|
|
|
|
111.15
|
|
|
|
116.61
|
|
|
|
135.03
|
|
Nasdaq Computer Manufacturers
|
|
|
100.00
|
|
|
|
67.48
|
|
|
|
109.37
|
|
|
|
115.04
|
|
|
|
107.28
|
|
|
|
134.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of
Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
292,481
|
|
|
$
|
260,234
|
|
|
$
|
245,824
|
|
|
$
|
202,795
|
|
|
$
|
200,087
|
|
Gross margin
|
|
|
78,956
|
|
|
|
76,836
|
|
|
|
79,172
|
|
|
|
65,157
|
|
|
|
59,444
|
|
Income (loss) from operations
|
|
|
(22,229
|
)
|
|
|
13,788
|
|
|
|
17,272
|
|
|
|
8,775
|
|
|
|
(3,740
|
)
|
Income (loss) from continuing
operations
|
|
|
(13,016
|
)
|
|
|
15,958
|
|
|
|
13,011
|
|
|
|
6,010
|
|
|
|
(1,759
|
)
|
Loss from discontinued operations
related to Savvi business, net of tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,679
|
)
|
|
|
(1,546
|
)
|
Net income (loss)
|
|
|
(13,016
|
)
|
|
|
15,958
|
|
|
|
13,011
|
|
|
|
1,331
|
|
|
|
(3,305
|
)
|
Net income (loss) from continuing
operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.62
|
)
|
|
$
|
0.79
|
|
|
$
|
0.69
|
|
|
$
|
0.34
|
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
(0.62
|
)
|
|
$
|
0.68
|
|
|
$
|
0.59
|
|
|
$
|
0.32
|
|
|
$
|
(0.10
|
)
|
Net loss from discontinued
operations related to Savvi business, net of tax benefit per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.09
|
)
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.09
|
)
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.62
|
)
|
|
$
|
0.79
|
|
|
$
|
0.69
|
|
|
$
|
0.07
|
|
|
$
|
(0.19
|
)
|
Diluted
|
|
$
|
(0.62
|
)
|
|
$
|
0.68
|
|
|
$
|
0.59
|
|
|
$
|
0.07
|
|
|
$
|
(0.19
|
)
|
Weighted average shares
outstanding (basic)
|
|
|
21,158
|
|
|
|
20,146
|
|
|
|
18,913
|
|
|
|
17,902
|
|
|
|
17,495
|
|
Weighted average shares
outstanding (diluted)
|
|
|
21,158
|
|
|
|
24,832
|
|
|
|
23,823
|
|
|
|
18,406
|
|
|
|
17,495
|
|
Consolidated Balance Sheet
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
161,575
|
|
|
$
|
249,159
|
|
|
$
|
186,634
|
|
|
$
|
222,324
|
|
|
$
|
132,474
|
|
Total assets
|
|
|
381,654
|
|
|
|
368,711
|
|
|
|
345,238
|
|
|
|
365,562
|
|
|
|
274,299
|
|
Long term obligations, excluding
current portion
|
|
|
98,390
|
|
|
|
99,777
|
|
|
|
107,015
|
|
|
|
164,600
|
|
|
|
83,954
|
|
Total shareholders equity
|
|
|
223,455
|
|
|
|
217,843
|
|
|
|
191,233
|
|
|
|
160,990
|
|
|
|
152,801
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We have shifted more of our investments from predominantly
perfect fit (custom) solutions to standards-based solutions. We
believe standards-based solutions provide our customers a number
of fundamental benefits. First, by using ready-made platform
solutions rather than ground-start custom-designs, our customers
can achieve significantly shorter product intervals and faster
time-to-market.
Second, we believe our customers can achieve a lower total cost
by using solutions that are leveraged across multiple
applications rather than a single-use proprietary solution. By
offering ready-made solutions, we believe we have the
opportunity to address a wider range of new market opportunities
with the potential for faster time to revenue than with
ground-start, custom-designs. We believe this ability to reuse
designs makes our business and investment model more scalable.
Finally, we believe a more standards-based product model will
allow us to provide more
21
integrated higher value solutions to our customers than we have
typically delivered under a custom-design model. These higher
value solutions drive higher price points and therefore more
total revenue opportunities for our products.
In 2005, we announced our plan for the
Promentumtm
family of ATCA products. The
Promentumtm
family of products include turnkey platforms, universal carrier
cards, switch and control modules, disk storage modules, compute
modules, packet processing modules and various chassis models.
The
Promentumtm
SYS-6000 integrates these individual products into a blade
server platform system. We believe the
Promentumtm
SYS-6000 system will provide customers a highly reliable managed
platform on which to build their new voice and data offerings.
The
Promentumtm
ATCA-7010 is a packet processing module that allows the highest
bandwidth available in a single
ATCA®
slot. This product features dual
Intel®
IXP28xx network processors and is designed to address 10 Gbps
wirespeed packet processing in network applications that demand
high bandwidth throughput such as security gateways,
GGSNs, Broadband-Remote Access Servers, edge routers
and session controllers. We have significant experience in the
design, delivery and deployment of carrier-grade, modular
platforms. We believe the ATCA standard increases our
opportunity to implement reusable platforms, enabling the
deployment of more flexible solutions based on cost-effective
commercial technologies. We believe our core ATCA solutions will
be applicable across a wide range of customers and applications.
These integrated hardware and software platforms make extensive
use of common system architectural and component designs, using
carrier grade operating systems and middleware, and will reduce
development time and costs, which enhances application
portability.
In 2006, we announced nine new products in our Promentum family
of ATCA solutions. Specifically, we announced our new Promentum
SYS-6010, the industrys first 10-gigabit managed ATCA
platform that will provide the highest traffic capacity
throughput and processing densities available today. Our
SYS-6010 is targeted at data plane applications such as IMS,
Radio Network and Base Station Controllers, Media Gateways, Call
Servers, IPTV among a number of applications. As of
December 31, 2006 our SYS-6010 became generally available
to our larger customer base. We also introduced two new products
based on the latest OCTEON processors from Cavium Networks. The
new ATCA and AMC solutions provide high density Gigabit Ethernet
interfaces with sophisticated dataplane hardware acceleration.
These products will help equipment manufacturers reduce R&D
costs while accelerating the introduction of high performance
products such as Radio Network Controllers, Session Border
Controllers, Media Gateways, Edge Routers and Security Gateways.
Our new AMC-7211 product provides power efficient packet and
security processing for customers requiring AMC modules for
their ATCA and MicroTCA platforms. The ATCA-7200 is a high
performance modular gigabit line card equipped with up to four
Cavium OCTEON Plus processor AMCs. Both products have been well
received in the market and we expect to begin delivery of
evaluation units in the second quarter of 2007.
In addition to our new ATCA offerings, we announced our new
Proceleranttm
series of modular computing solutions, for customers in our
commercial systems market for medical, transaction terminals and
test and measurement and other commercial applications. These
new modular products are now available, and we believe this
family of high density, flexible solutions will enable
commercial systems customers to achieve more rapid time to
market with cost effective designs. Our new Procelerant 945-GM
will be the industrys first COM Express product that
supports low voltage mobile technology. We believe it will
provide our customers with greater processing power in a smaller
footprint with lower power consumption. We also announced the
introduction of the high performance RMS420-5000XI embedded
server featuring two Dual-Core
Intel®
Xeon®
5140 processors. This new server will be used in many demanding
data and graphics processing applications such as medical image
processing and display, military, industrial machine vision,
test and measurement, signal processing, and 3D and 4D image
display. Finally we announced the Procelerant RMS420, a 4U high
performance embedded server with two dual-core processors and
the Procelerant CE945GM dual-core COM Express module. Both
products are expected to ship in the first quarter of 2007.
In the third quarter of 2006 we completed the acquisition of
Convedia and entered the media server market with a portfolio of
media server products. RadiSys Media Servers enable service
innovation and differentiation by providing powerful, reusable
and highly scalable multimedia processing platforms for VoIP and
IMS telecommunication service providers and enterprise
customers. Together with our solution partners,
22
the Media Server family supports the next generation of feature
rich, turnkey, high-margin services that combine the best of the
Internet and telecommunications worlds.
The Media Server family consolidates the functions of
traditional announcement servers, interactive voice response
units, audio and video conference bridges, messaging platforms
and speech platforms into a single, multi-service, open
standards-compliant solution for network and enhanced services
media processing. Our Media Servers share identical control
interfaces, media processing features and management
capabilities. The many features and benefits of our Media
Servers allow our customers to increase revenues through
delivery of new and innovative services, while reducing capital
and ongoing operational costs. Our
CMS-1000 and
CMS-6000 media servers have been successfully deployed around
the world. Our newest media servers, the
CMS-3000 and
CMS-9000, are optimized for IMS network deployments and are
currently in field trials with customers.
Total revenue was $292.5 million, $260.2 million and
$245.8 million in 2006, 2005 and 2004, respectively.
Backlog was approximately $21.7 million, $25.1 million
and $22.6 million at December 31, 2006, 2005 and 2004,
respectively. Backlog includes all purchase orders scheduled for
delivery within 12 months. The general trend within our
addressable markets is for shorter lead times and
supplier-managed inventory, which will generally decrease
backlog over time as a percentage of revenue. The increase in
revenues during 2006 compared to 2005 was due to increases in
revenues in the communications networking and commercial systems
markets of $23.6 million and $8.6 million,
respectively. The increase in revenues during 2005 compared to
2004 was due to an increase in revenues in the communications
networking market of $26.7 million offset by a
$12.3 million decrease in revenues from the commercial
systems market. Revenues in the communications networking market
increased from 2004 to 2006 primarily due to strong demand
within the wireless submarket as we continue to design and
supply more content within our customers 2.5 and 3G
deployments. For the fourth quarter of 2006 the increase in
communication revenues was offset by reductions in requested
deliveries from a large wireless customer. We believe these
reductions were driven by their efforts to significantly reduce
inventory levels. We expect our wireless market revenues to
increase in the first quarter of 2007. Revenues in the
commercial systems market increased in the 2006 compared to
2005, primarily due to increases in the medical submarket
partially offset by declines in our transaction terminal and
industrial automation submarkets, which is consistent with our
strategies. The increase in revenues from the medical market is
attributable to design wins that have ramped into production
during 2005 and 2006. The decrease in the transaction terminal
revenues was primarily due to design wins nearing the end of
their life cycle. Currently, our standards-based products do not
make up a significant percentage of our total revenues, however,
we believe design wins associated with these products will begin
to ramp into production in 2008.
From a geographic perspective, from 2004 to 2006 the percentage
of
non-U.S. revenues
by delivery destination increased as a percentage of total
revenues. This was primarily due to existing multinational
customers requesting the delivery of products directly into the
Asia Pacific region and increased revenues attributable to our
EMEA region associated with our wireless infrastructure
products. For the year ended December 31, 2006 revenues
from North America increased by $8.4 million compared to
the same periods in 2005. This increase is due to primarily to
the addition of media server business revenues and increased
Nortel shipments in the fourth quarter of 2006. We expect our
non-U.S. revenues
to remain a significant portion of our revenues.
During the third quarter of 2006, we announced our decision to
disengage from one of our contract manufacturers in North
America. We are currently transitioning the majority of this
production to our Hillsboro facility. This has resulted in a net
increase in inventory related to the transition and we expect to
see inventory levels start to decline after the first quarter of
2007 and continue to decline throughout the year to more
traditional levels.
Gross margins as a percentage of revenues were 27.0%, 29.5% and
32.2% for 2006, 2005 and 2004, respectively. Approximately half
of the decrease in gross margin as a percentage of revenues for
the year ended December 31, 2006 compared to the same
period in 2005 was attributable to product mix as more of our
revenue is coming from higher volume products with competitive
pricing. The decrease is also due to
23
$1.4 million associated with purchase accounting charges
attributed to the acquisition of Convedia including $978
thousand for fair value accounting for inventory and the
amortization of the $400 thousand of Convedia backlog identified
as an intangible asset, an increase of $1.3 million
associated with our excess and obsolete accrual and $691
thousand associated with the write down of raw material
inventory that was sold to our contract manufacturing partners
during the first quarter of 2006. The decrease is also due to
increased adverse purchase commitments associated with the
transfer of our production from one of our contract
manufacturers to our Hillsboro facility and to our other
contract manufacturer. For the year ended December 31,
2006, cost of sales included $876 thousand of stock-based
compensation expense which is discussed in Note 18. We also
continued to incur redundant manufacturing costs as we moved
forward with outsourcing our internal manufacturing to our
contract manufacturing partners. The decrease was also
associated with additional manufacturing-related costs in 2006
due to making our products RoHS (Restriction of the Use of
Certain Hazardous Substances in the Electrical and Electronic
Equipment) compliant. We currently expect our gross margin
percent to be higher in 2007 due to our current forecasted
revenue mix.
Net loss was $13.0 million in 2006. Net income was
$16.0 million in 2005 and $13.0 million in 2004. Net
loss per share was $0.62 for 2006. Net income per share was
$0.79 and $0.68, basic and diluted, respectively, in 2005. Net
income per share was $0.69 and $0.59, basic and diluted,
respectively, in 2004. Net income has decreased from 2005 to
2006, due primarily to the purchase accounting charges due to
the acquisition of Convedia including a $14.0 million
in-process research and development charge, $5.9 million of
intangible amortization and $624 thousand of deferred
compensation expenses. See Note 20
Acquisition of Convedia.
From 2004 through 2006, we initiated multiple restructurings of
our operations. These restructurings primarily included
workforce reductions. These workforce reductions were a result
of the increase in outsourced manufacturing and a result of
aligning our workforce to deliver more integrated advanced
embedded platforms and solutions or standards-based solutions.
In 2004, we repurchased $58.8 million principal amount of
the 5.5% convertible subordinated notes for $58.2 million.
In 2005, we repurchased $7.5 million principal amount of
the 5.5% convertible subordinated notes for
$7.4 million. In 2006, we repurchased $100 thousand
principal amount of the 5.5% convertible subordinated notes for
$100 thousand.
In 2005, we began granting restricted stock to our employees. As
a result, in 2005, we incurred $199 thousand of stock-based
compensation expense associated with the vesting of restricted
stock. During 2004, we incurred $841 thousand of stock-based
compensation expense associated with shares to be issued
pursuant to the 1996 Employee Stock Purchase Plan
(ESPP). We incurred stock-based compensation expense
because the original number of ESPP shares approved by the
shareholders was insufficient to meet employee demand for an
ESPP offering which was consummated in February of 2003 and
ended in August of 2004. We subsequently received shareholder
approval for additional ESPP shares in May 2003.
The stock-based compensation expense associated with our equity
instruments issued in 2005 and 2004 was calculated using the
intrinsic value method. As of January 1, 2006, we are
required to account for stock-based compensation based on the
fair value method. As a result, in 2006, we incurred
$6.6 million of stock-based compensation expense associated
with options, restricted stock, and ESPP.
Cash and cash equivalents and investments amounted to
$136.0 million and $225.9 million at December 31,
2006 and December 31, 2005, respectively. The decrease in
cash and cash equivalents and investments was primarily due to
$106.1 million in cash provided from operating activities
used to purchase Convedia. We believe that cash flows from
operations, available cash and investment balances, and
short-term borrowings will be sufficient to fund our operating
liquidity needs for the short-term and long-term.
In the following discussion of our financial condition and
results of operations, we intend to provide information that
will assist in understanding our financial statements, changes
in certain key items in those financial statements from year to
year, and the primary factors that accounted for those changes,
as well as how certain accounting principles, policies and
estimates affect our financial statements.
24
Critical
Accounting Policies and Estimates
Managements discussion and analysis of our financial
condition and results of operations are based upon the
Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires management 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. Management 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.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is
made, and if different estimates that reasonably could have been
used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the
financial statements. Management believes the following critical
accounting policies reflect the more significant estimates and
assumptions used in the preparation of the Consolidated
Financial Statements.
Inventory
Reserves
We record the inventory valuation allowance for estimated
obsolete or unmarketable inventories as the difference between
the cost of inventories and the estimated net realizable value
based upon assumptions about future demand and market
conditions. Factors influencing the provision include: changes
in demand; rapid technological changes; product life cycle and
development plans; component cost trends; product pricing;
regulatory requirements affecting components; and physical
deterioration. If actual market conditions are less favorable
than those projected by management, additional provisions for
inventory reserves may be required. Our estimate for the
allowance is based on the assumption that our customers comply
with their current contractual obligations. We provide long-life
support to our customers and therefore we have material levels
of customer specific inventory. If our customers experience a
financial hardship or if we experience unplanned cancellations
of customer contracts, the current provision for the inventory
reserves may be inadequate. Additionally, we may incur
additional expenses associated with any non-cancelable purchase
obligations to our suppliers if they provide customer-specific
components.
Adverse
Purchase Commitments
We are contractually obligated to reimburse our contract
manufacturers for the cost of excess inventory used in the
manufacture of our products, for which there is no alternative
use. Excess inventory is defined as raw materials or assemblies
(components) used in the manufacture of our products
for which the contract manufacturers on-hand and on-order
quantities are in excess of the requirements derived from our
current product forecast of customer demand. We are liable for
excess inventory only to the extent that the contract
manufacturer procures components to fulfill the manufacturing
requirements as set forth in our current product forecast and
agreed upon lead times and minimum order quantities. Unexpected
decreases in customer demand or our inability to accurately
forecast customer demand could result in increases in our
adverse purchase commitment liability and have a material
adverse effect on our profitability. Factors influencing the
adverse purchase commitments liability include: changes in
demand, rapid technological changes, product life cycle and
development plans, component cost trends, product pricing,
customer liability and physical deterioration. If actual market
conditions are less favorable than those projected by management
we may incur additional expenses due to increases in our adverse
purchase commitment liabilities. Our estimate for the adverse
purchase commitments liabilities is based on the assumption that
our customers comply with their current contractual obligations
to us. If our customers experience a financial hardship or if we
experience unplanned cancellations of customer contracts, the
current adverse purchase commitments liabilities may be
inadequate
Estimates for adverse purchase commitments are derived from
reports received on a quarterly basis from our contract
manufacturers. Increases to this liability are charged to cost
of goods sold. When and if we take
25
possession of inventory reserved for in this liability, the
liability is transferred from other liabilities to our excess
and obsolete inventory valuation allowance. This liability,
referred to as adverse purchase commitments, is provided for in
other accrued liabilities in the accompanying balance sheets.
Adverse purchase commitments amounted to $1.9 million and
$828 thousand at December 31, 2006 and December 31,
2005, respectively.
Accrued
Warranty
We provide for the estimated cost of product warranties at the
time revenue is recognized. Our standard product warranty terms
generally include post-sales support and repairs or replacement
of a product at no additional charge for a specified period of
time, which is generally 24 months after shipment. The
workmanship of our products produced by contract manufacturers
is covered under warranties provided by the contract
manufacturer for a specified period of time ranging from 12 to
15 months. We engage in extensive product quality programs
and processes, including actively monitoring and evaluating the
quality of our component suppliers. Our estimated warranty
obligation is based upon ongoing product failure rates, internal
repair costs, contract manufacturing repair charges for repairs
not covered by the contract manufacturers warranty,
average cost per call and current period product shipments. If
actual product failure rates, repair rates, service delivery
costs, or post-sales support costs differ from our estimates,
revisions to the estimated warranty liability would be required.
Additionally, we accrue warranty costs for specific customer
product repairs that are in excess of our warranty obligation
calculation described above.
Long-Lived
Assets
Our long-lived assets include indefinite-lived intangible assets
or goodwill, definite-lived intangible assets and property and
equipment. The net balance of goodwill, definite-lived
intangible assets and property and equipment at
December 31, 2006 amounted to $67.2 million,
$42.9 million and $11.1 million, respectively.
Goodwill represents the excess of cost over the assigned value
of the net assets in connection with prior acquisitions.
Goodwill will be written down or written off when impaired.
Goodwill is required to be tested for impairment at least
annually and whenever events or changes in circumstances
(conditions) indicate the carrying value of goodwill
may not be recoverable.
We completed our annual goodwill impairment analysis as of
September 30, 2006 and concluded that as of
September 30, 2006, there was no goodwill impairment. Our
annual goodwill impairment analysis consists of comparing our
book value to our market capitalization. If the trading price or
the average trading price of our common stock is below the book
value per share for a sustained period, a goodwill impairment
test will be performed. Our book value per share was $10.41 at
September 30, 2006 compared to the closing price of RadiSys
shares as quoted on the Nasdaq Global Select Market or the
trading price on September 30, 2006 of $21.25. Management
concluded there was no indication of material changes requiring
an updated goodwill impairment analysis as of December 31,
2006.
Intangible assets, net of accumulated amortization, primarily
consist of acquired patents, completed technology, technology
licenses, trade names and customer lists. Intangible assets are
being amortized on a straight-line basis over estimated useful
lives ranging from 1 to 10 years. Property and equipment,
net of accumulated depreciation, primarily consists of office
equipment and software, manufacturing equipment, leasehold
improvements, a building and other physical assets owned by
RadiSys. Property and equipment are being depreciated or
amortized on a straight-line basis over estimated useful lives
ranging from 1 to 40 years. We assess impairment of
intangible assets and property and equipment whenever conditions
indicate that the carrying values of the assets may not be
recoverable.
Conditions that would trigger a long-lived asset impairment
assessment include, but are not limited to, a significant
adverse change in legal factors or in the business climate that
could affect the value of an asset or an adverse action or
assessment by a regulator. If we determine that a long-lived
asset impairment assessment is required, we must determine the
fair value of the asset, which is determined based on the
associated net present value of estimated future cash flows. We
would estimate future cash flows using assumptions about our
expected future operating performance. Our estimates of future
cash flows may differ from actual cash flow due to, among other
things, technological changes, economic conditions or changes to
our business
26
operations. Impairments would be recognized in operating results
to the extent that the carrying value exceeds this calculated
fair value of the long-lived assets.
Considerable management judgment is required in determining if
and when a condition would trigger an impairment assessment of
our long-lived assets and once such a determination has been
made, considerable management judgment is required to determine
the fair market value of the long-lived asset. If the trading
price or the average trading price of our common stock is below
the book value per share for a sustained period or if and when a
condition has triggered an impairment analysis of our long-lived
assets, we may incur substantial impairment losses due to the
write-down or the write-off of our long-lived assets.
Income
Taxes
We account for income taxes using the asset and liability
method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and tax bases
of the assets and liabilities. We record a valuation allowance
to reduce deferred tax assets to the amount expected to
more likely than not be realized in its future tax
returns. Should we determine that we would not be able to
realize all or part of our net deferred tax assets in the
future, adjustments to the valuation allowance for deferred tax
assets may be required. The net deferred tax assets amounted to
$30.3 million as of December 31, 2006. As of
December 31, 2006 we estimate utilization of the net
deferred tax assets will require that we generate approximately
$60.0 million and $30.0 million in taxable income in
the U.S. and Canada, respectively, prior to the expiration of
net operating loss and tax credit carryforwards which will occur
between 2006 (as we have not yet filed our 2006 return) and
2023. We have considered future market growth, forecasted
earnings, future taxable income, the mix of earnings in the
jurisdictions in which we operate and prudent and feasible tax
planning strategies in determining the need for a valuation
allowance. In the event we were to determine that we would not
be able to realize all or part of our net deferred tax assets in
the future, we would increase the valuation allowance and make a
corresponding charge to earnings in the period in which we make
such determination. Likewise, if we later determine that we are
more likely than not to realize the net deferred tax assets, we
would reverse the applicable portion of the previously provided
valuation allowance.
Allowance
for Doubtful Accounts
We have a relatively small set of multinational customers that
typically make up the majority of our accounts receivable
balance. Our allowance for doubtful accounts is determined using
a combination of factors to ensure that our trade receivables
balances are not overstated. We record reserves for individual
accounts when we become aware of a customers inability to
meet its financial obligations to us, such as in the case of
bankruptcy filings or deterioration in the customers
operating results or financial position. If circumstances
related to customers change, our estimates of the recoverability
of receivables would be further adjusted. At December 31,
2006, 50.3% of our accounts receivable was due from our four
largest customers. If one of these large customers or a number
of our smaller customers files for bankruptcy or otherwise is
unable to pay the amounts due to us the current allowance for
doubtful accounts may not be adequate. During the years ended
December 31, 2005 and 2006 there were no significant
account balances reserved for and the allowance for doubtful
accounts decreased by $18 thousand as a result of the write-off
of previously specifically identified account balances.
We maintain a non-specific bad debt reserve for all customers
based on a variety of factors, including the length of time
receivables are past due, trends in overall weighted average
risk rating of the total portfolio, macroeconomic conditions,
significant one-time events and historical experience.
Typically, this non-specific bad debt reserve amounts to
approximately 1% of quarterly revenues.
Accrued
Restructuring and Other Charges
For the years ended December 31, 2004, 2005 and 2006
expenses associated with exit or disposal activities are
recognized when probable and estimable. Because we have a
history of paying severance
27
benefits, the cost of severance benefits associated with a
restructuring charge is recorded when such costs are probable
and the amount can be reasonably estimated.
For leased facilities that were vacated and subleased, an 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, was recorded as a part of
restructuring charges.
We have engaged, and may continue to engage, in restructuring
actions, which require us to make significant estimates in
several areas including: realizable values of assets made
redundant or obsolete; expenses for severance and other employee
separation costs; the ability to generate sublease income, as
well as our ability to terminate lease obligations at the
amounts we have estimated; and other exit costs. Should the
actual amounts differ from our estimates, the amount of the
restructuring charges could be materially impacted. For a
description of our restructuring actions, refer to our
discussion of restructuring charges in the Results of Operations
section.
Revenue
Recognition
We recognize revenue when the earnings process is complete, as
evidenced by the following revenue recognition criteria: an
agreement with the customer; fixed pricing; transfer of title
and risk of loss and customer acceptance, if applicable; and
that the collectibility of the resulting receivable is
reasonably assured. When a sales arrangement contains multiple
elements, such as hardware and software products, licenses
and/or
services, we allocate revenue to each element based on its
relative fair value, or for software, based on vendor specific
objective evidence (VSOE) of fair value. In the
absence of fair value for a delivered element, we first allocate
revenue to the fair value of the undelivered elements and the
residual revenue to the delivered elements. Where the fair value
for an undelivered element cannot be determined, we defer
revenue for the delivered elements until the undelivered
elements are delivered. We limit the amount of revenue
recognition for delivered elements to the amount that is not
contingent on the future delivery of products or services or
subject to customer-specified return or refund privileges. We
enter into contracts to sell our products and services, and,
while the majority of our sales agreements contain standard
terms and conditions under which we recognize revenue upon
shipment of product, infrequently we enter into agreements that
contain non-standard terms and conditions. Non-standard terms
and conditions can include, but are not limited to, customer
acceptance criteria or other post-delivery obligations. As a
result, significant contract interpretation is sometimes
required to determine the appropriate timing of revenue
recognition. The components of total revenues were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Hardware
|
|
$
|
280,720
|
|
|
$
|
252,180
|
|
|
$
|
234,352
|
|
Software royalties and licenses
|
|
|
6,193
|
|
|
|
4,394
|
|
|
|
6,304
|
|
Software maintenance
|
|
|
1,402
|
|
|
|
1,919
|
|
|
|
939
|
|
Engineering and other services
|
|
|
4,166
|
|
|
|
1,738
|
|
|
|
4,220
|
|
Other
|
|
|
|
|
|
|
3
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
292,481
|
|
|
$
|
260,234
|
|
|
$
|
245,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
Under our standard terms and conditions of sale, we transfer
title and risk of loss to the customer at the time product is
shipped to the customer and revenue is recognized accordingly,
unless customer acceptance is uncertain or significant
obligations remain. We reduce revenue for estimated customer
returns for rotation rights according to agreements with our
distributors. The amount of revenues derived from these
distributors as a percentage of total revenues was 3.4% for the
year ended December 31, 2006 and 1.5% for the years ended
December 31, 2005 and 2004.
28
Software
Royalties and Licenses
Revenue from customers for prepaid, non-refundable software
royalties is recorded when the revenue recognition criteria have
been met. Revenue for non-prepaid royalties is recognized at the
time the underlying product is shipped by the customer paying
the royalty. We recognize software license revenue at the time
of shipment or upon delivery of the software master provided
when the revenue recognition criteria have been met and
vendor-specific objective evidence exists to allocate the total
fee to all delivered and undelivered elements of the arrangement.
Software
maintenance
Software maintenance services are recognized as earned on the
straight-line basis over the terms of the contracts.
Engineering
and other services
Engineering services revenue is recognized upon completion of
certain contractual milestones and customer acceptance of the
services rendered. Other services revenues include hardware
repair services and custom software implementation projects.
Hardware repair services revenues are recognized when the
services are complete. Software implementation revenues are
recognized upon completion of certain contractual milestones and
customer acceptance of the services rendered.
Stock-based
Compensation
Equity instruments are granted to employees, directors and
consultants in certain instances, as defined in the respective
plan agreements. In 2006, we issued equity instruments in the
form of stock options, restricted stock, and stock issued to
employees as a result of the ESPP. In 2005, we issued equity
instruments in the form of stock options, restricted shares and
stock issued to employees as a result of ESPP. In 2004 we issued
equity instruments in the form of stock options and stock issued
to employees as a result of the ESPP, only.
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123R, using the modified
prospective transition method, and therefore have not restated
prior periods results. Under this method we recognize
compensation expense for all stock-based employee benefit plan
equity awards granted after January 1, 2006 and prior to
but not yet vested as of January 1, 2006, in accordance
with SFAS 123R. Under the fair value recognition provisions
of SFAS 123R, we recognize stock-based compensation on a
straight-line basis over the requisite service period of the
award for those shares expected to vest as described below.
Prior to SFAS 123R adoption, we accounted for share-based
payments under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25).
We continue to use the Black-Scholes model to measure the grant
date fair value of stock options and ESPP shares. The grant date
fair value of stock options that are expected to vest is
recognized on a straight-line basis over the requisite service
period, which is equal to the option vesting period which is
generally 3 years. The grant date fair value of ESPP shares
that are expected to vest is recognized on a straight-line basis
over the requisite service period, which is generally
18 months, subject to modification at the date of purchase
due to the ESPP look-back feature. The grant date fair value of
restricted stock is equal to the closing price of RadiSys shares
as quoted on the Nasdaq Global Select Market on the date of
grant. The grant date fair value of restricted stock that are
expected to vest is recognized on a straight-line basis over the
requisite service period, which is 3 years. The estimate of
the number of options, ESPP shares and restricted stock expected
to vest is determined based on historical experience.
To determine the fair value of the stock options and ESPP
shares, using the Black-Scholes option pricing model, the
calculation takes into consideration the effect of the following:
|
|
|
|
|
exercise price of the option or purchase price of the ESPP share;
|
|
|
|
price of our common stock on the date of grant;
|
|
|
|
expected term of the option or share;
|
29
|
|
|
|
|
expected volatility of our common stock over the expected term
of the option or share; and
|
|
|
|
risk free interest rate during the expected term of the option
or share.
|
The calculation includes several assumptions that require
managements judgment. The expected term of the option or
share is determined based on assumptions about patterns of
employee exercises and represents a probability-weighted average
time-period from grant until exercise of stock options, subject
to information available at time of grant. Determining expected
volatility generally begins with calculating historical
volatility for a similar long-term period and then considers the
ways in which the future is reasonably expected to differ from
the past.
As part of our SFAS 123R adoption, we also examined our
historical pattern of option exercises in an effort to determine
if there were any discernable activity patterns based on certain
employee populations. From this analysis, we identified three
employee populations. The expected term computation is based on
historical vested option exercises and post-vest forfeiture
patterns and includes an estimate of the expected term for
options that were fully vested and outstanding at
December 31, 2006 for each of the three populations
identified. The estimate of the expected term for options that
were fully vested and outstanding at December 31, 2006 was
determined as the midpoint of a range of estimated expected
terms determined as follows: the low end of the range assumes
the fully vested and outstanding options settle on
December 31, 2006 and the high end of the range assumes
that these options expire upon contractual term. The risk free
interest rate is based on the U.S. Treasury constant
maturities in effect at the time of grant for the expected term
of the option or share.
Determining the appropriate fair value model and, as noted
above, calculating the fair value of equity instruments
associated with our employee benefit plans require the input of
highly subjective assumptions. The assumptions used in
calculating the fair value of these equity instruments represent
managements best estimates, but these estimates involve
inherent uncertainties and the application of management
judgment. As a result, if factors change and we use different
assumptions, our stock-based compensation expense could be
materially different in the future. In addition, we are required
to estimate the expected forfeiture rate and only recognize
expense for those shares expected to vest. If our actual
forfeiture rate is materially different from our estimate the
stock-based compensation expense could be significantly
different from what we have recorded in the current period. See
Note 18 to the Consolidated Financial Statements for a
further discussion on stock-based compensation.
As a result of adopting SFAS 123R, loss before income taxes
for the year ended December 31, 2006 was $6.6 million
higher and net loss for the year ended December 31, 2006
was $6.2 million higher than if we had continued to account
for stock-based compensation under APB 25. The impact on
both basic and diluted loss per share for the year ended
December 31, 2006 was $0.29.
30
Results
of Operations
The following table sets forth certain operating data as a
percentage of revenues for the years ended December 31,
2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
73.0
|
|
|
|
70.5
|
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
27.0
|
|
|
|
29.5
|
|
|
|
32.2
|
|
Research and development
|
|
|
14.2
|
|
|
|
11.4
|
|
|
|
11.5
|
|
Selling, general, and
administrative
|
|
|
13.5
|
|
|
|
11.6
|
|
|
|
12.4
|
|
Intangible assets amortization
|
|
|
2.1
|
|
|
|
0.8
|
|
|
|
0.9
|
|
In-process R&D charge(s)
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges
|
|
|
0.0
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(7.6
|
)
|
|
|
5.3
|
|
|
|
7.0
|
|
Loss on repurchase of convertible
subordinated notes
|
|
|
|
|
|
|
(0.0
|
)
|
|
|
(0.2
|
)
|
Interest expense
|
|
|
(0.6
|
)
|
|
|
(0.8
|
)
|
|
|
(1.5
|
)
|
Interest income
|
|
|
3.2
|
|
|
|
2.4
|
|
|
|
1.4
|
|
Other income (expense), net
|
|
|
0.3
|
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income tax provision
|
|
|
(4.7
|
)
|
|
|
6.6
|
|
|
|
6.6
|
|
Income tax provision (benefit)
|
|
|
(0.3
|
)
|
|
|
0.5
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4.4
|
)%
|
|
|
6.1
|
%
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Year 2006 and Year 2005
Revenues. Revenues increased by
$32.2 million, or 12.4%, from $260.2 million in 2005
to $292.5 million in 2006. The increase in revenue during
2006 compared to 2005 was due to increases in revenues in the
communications networking and commercial systems markets of
$23.6 million and $8.6 million, respectively.
Revenues in the communications networking market increased in
2006 compared to 2005 due to strong demand within the wireless
market as our product content continues to expand with 2.5 and
3G deployments. Revenues were also higher due to deployments of
new products by one of our major customers as well as the
addition of media server business revenues. For the fourth
quarter of 2006 the increase in communication revenues was
offset by reductions in requested deliveries from a large
wireless customer. We believe these reductions were driven by
their efforts to significantly reduce inventory levels. We
expect our wireless market revenues to increase in the first
quarter of 2007 as this customer returns to more traditional
volumes.
Revenues in the commercial systems market increased in the 2006
compared to 2005, primarily due to increases within the medical
submarket partially offset by declines in our transaction
terminal and industrial automation submarkets. The increase in
revenues from the medical market was attributable to design wins
that have ramped into production during 2005 and 2006. The
decrease in revenues attributable to the transaction terminal
market was primarily due to design wins nearing the end of their
life cycle.
Given the dynamics of these markets, we may experience general
fluctuations in the percentage of revenue attributable to each
market and, as a result, the quarter to quarter and year to year
comparisons of our markets often are not indicative of overall
economic trends affecting the long-term performance of our
markets. We currently expect that each of our markets will
continue to represent a significant portion of total revenues.
We currently expect 2007 revenue to grow modestly over 2006.
Currently, our standards-based products do not make up a
significant percentage of our total revenues, however, we
believe design wins
31
associated with these products will begin to ramp into
production in 2008 based on the timing of our customers
next generation system deployments.
From a geographic perspective, for the year ended
December 31, 2006 compared to the same period in 2005 the
percentage of non-US revenues by delivery destination increased
as a percentage of total revenues. Revenues as measured by
destination in the EMEA region increased by $9.3 million
while Asia Pacific revenues increased by $14.5 million.
This was primarily due to existing multinational customers
requesting the delivery of products directly into the Asia
Pacific region and increased revenues attributable to our EMEA
region associated with our wireless infrastructure products. For
the year ended December 31, 2006 revenues from North
America increased by $8.4 million compared to the same
periods in 2005. This increase is due to primarily to the
addition of media server business revenues and increased Nortel
shipments in the fourth quarter of 2006. We currently expect
continued fluctuations in the percentage of revenue from each
geographic region. Additionally, we expect
non-U.S. revenues
to remain a significant portion of our revenues.
Gross Margin. Gross margin as a percentage of
revenues for 2006 was 27.0% compared to 29.5% for 2005.
Approximately half of the decrease in gross margin as a
percentage of revenues for the year ended December 31, 2006
compared to the same period in 2005 was attributable to product
mix, as more of our current revenue is coming from higher volume
products with competitive pricing. The decrease is also due to
$1.4 million associated with purchase accounting charges
attributed to the acquisition of Convedia, including $978
thousand for fair valuing accounting of inventory and the
amortization of the $400 thousand of Convedia backlog identified
as an intangible asset, an increase of $1.3 million
associated with our excess and obsolete accrual and $691
thousand associated with the write down of raw material
inventory that was sold to our contract manufacturing partners
during the first quarter of 2006. The decrease is also due to
increased adverse purchase commitments associated with the
transfer of our production from one of our contract
manufacturers to our Hillsboro facility and to our other
contract manufacturer. For the year ended December 31,
2006, cost of sales included $876 thousand of stock-based
compensation expense which is discussed in Note 18. We also
continued to incur redundant manufacturing costs as we moved
forward with outsourcing our internal manufacturing to our
contract manufacturing partners. The decrease was also
associated with additional manufacturing-related costs in 2006
due to making our products RoHS compliant. We currently expect
our gross margin percent to be higher in 2007 due to our current
forecasted revenue mix.
Research and Development. R&D expenses
consist primarily of salary, bonuses and benefits for product
development staff, and cost of design and development supplies
and equipment, net of reimbursements for non-recurring
engineering services. R&D expenses increased
$11.7 million, or 39.3%, from $29.8 million in 2005 to
$41.5 million in 2006.
The increase for the year ended December 31, 2006 compared
to the same period in 2005 is primarily associated with higher
engineering headcount and increased external project expenses
related to our continued investment in the development of
standards-based products, such as ATCA, COM Express and Media
Servers. The increase was also due to $2.1 million
associated with our media server business as well as
$1.7 million of stock-based compensation expense which is
discussed in Stock-based Compensation Expense below.
We currently anticipate increases in R&D associated with
media server business expenses.
Selling, General, and Administrative. Selling,
general and administrative (SG&A) expenses
consist primarily of salary, commissions, bonuses and benefits
for sales, marketing, executive, and administrative personnel,
as well as professional services and costs of other general
corporate activities. SG&A expenses increased
$9.2 million, or 30.7%, from $30.1 million in 2005 to
$39.3 million in 2006.
The increase for the year ended December 31, 2006 compared
to the same period in 2005 is primarily associated with higher
sales and marketing headcount as we invest in the infrastructure
to sell our standards-based products. The increase is also due
to $2.7 million associated with our media server business
as well as $4.0 million of stock-based compensation expense
which is discussed in Stock-based Compensation
Expense below. We currently anticipate increases in
SG&A associated with media server business expenses.
Stock-based Compensation Expense. Stock-based
compensation expense for the year ended December 31, 2006
consists of amortization of stock-based compensation associated
with stock options and ESPP shares
32
unvested and outstanding on January 1, 2006, new stock
options and ESPP shares granted for the year ended
December 31, 2006 and unvested restricted stock. During the
year ended December 31, 2006, the Company incurred
$6.6 million in stock-based compensation. During the year
ended December 31, 2005, we incurred $199 thousand in
stock-based compensation expense. We anticipate that stock-based
compensation will increase by $3.4 million to approximately
$10 million in 2007 due primarily due to the 2004
acceleration of employee stock options with an option price
greater than $15.99. As a result of the acceleration, we reduced
the amount of stock based compensation expense recognized in
2006; however, in 2007 stock based compensation expense will
increase as the benefit from the 2004 acceleration will have
been fully utilized as we recognize three years of stock grants
as opposed to the two years we recognized in 2006. The increase
is also due to the acquisition of Convedia.
We recognized stock-based compensation expense as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Cost of sales
|
|
$
|
876
|
|
|
$
|
23
|
|
Research and development
|
|
|
1,745
|
|
|
|
55
|
|
Selling, general, and
administrative
|
|
|
3,968
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,589
|
|
|
$
|
199
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Expense. On
September 1, 2006 all outstanding Convedia stock options
vested and were considered exercised immediately. The proceeds
of which were distributed as follows: 75% of the purchase price
per share less the exercise price was paid to the option holder
at closing and the remaining 25% will be paid in full to those
Convedia employees still employed by RadiSys after one year of
service. The 75% paid at the time of the acquisition is included
in the purchase price and is allocated to goodwill. The
remaining 25% is recorded as deferred compensation and amortized
through the Statement of Operations for the life of the asset
(one year). Pursuant to the purchase agreement any forfeitures
are reallocated to the remaining Convedia employees. For the
four months ended December 31, 2006 we recognized $624
thousand in deferred compensation expense.
We recognized deferred compensation expense as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Cost of sales
|
|
$
|
34
|
|
|
$
|
|
|
Research and development
|
|
|
213
|
|
|
|
|
|
Selling, general, and
administrative
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
624
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets Amortization. Intangible
assets consist of purchased technology, patents and other
identifiable intangible assets. Intangible assets amortization
expense was $6.2 million and $2.1 million in 2006 and
2005, respectively. Intangible assets amortization increased
primarily due to intangible assets acquired with the purchase of
Convedia partially offset by certain intangible assets becoming
fully amortized during 2005 and early 2006. We perform reviews
for impairment of the purchased intangible assets whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Restructuring and Other Charges. We evaluate
the adequacy of the accrued restructuring and other charges on a
quarterly basis. As a result, we record certain
reclassifications and reversals to the accrued restructuring and
other charges based on the results of the evaluation. The total
accrued restructuring and other charges for each restructuring
event are not affected by reclassifications. Reversals are
recorded in the period in which we determine that expected
restructuring and other obligations are less than the amounts
accrued. Tables summarizing the activity in the accrued
liability for each restructuring event are contained in
Note 10 of the Notes to the Consolidated Financial
Statements. During 2006 and 2005, we recorded restructuring and
other charges and reversals as described below.
33
Fourth
Quarter 2006 Restructuring
During the fourth quarter of 2006, we initiated a restructuring
plan that included the elimination of 12 positions
primarily supporting our contract manufacturing operations as a
result of the termination of our relationship with one of our
contract manufacturers in North America. The restructuring plan
also includes closing our Charlotte office. In 2006, we incurred
severance and other employee-related separation costs of $329
thousand as a result of this restructuring event. We expect this
workforce reduction and office closure to be completed by
September 30, 2007.
Second
Quarter 2005 Restructuring
In June 2005, we initiated a restructuring plan that included
the elimination of 93 positions primarily within our
manufacturing operations as a result of the continued
outsourcing of production to our manufacturing partners. In
2006, we incurred severance and other employee-related
separation costs of $589 thousand as well as $307 thousand of
restructuring reversals. During the second quarter of 2006, we
announced that we were discontinuing our relationship with one
of our contract manufacturers in North America. As a result, we
determined that all future employment terminations that were
originally included in the second quarter 2005 restructuring
event would not occur in the near term and the associated
liability was reversed.
Fourth
Quarter 2001 Restructuring
The accrual amount remaining as of December 31, 2005
represents lease obligations relating to the facilities in Boca
Raton, Florida which were paid in January 2006.
Loss on the Repurchase of Convertible
Notes. In 2006, we repurchased $100 thousand
principal amount of the outstanding 5.5% convertible
subordinated notes due August 15, 2007 for $100 thousand
and, as a result, recorded a loss of $1 thousand.
In 2005, we repurchased $7.5 million principal amount of
the outstanding 5.5% convertible subordinated notes, with
an associated discount of $69 thousand. We repurchased the notes
in the open market for $7.4 million and, as a result,
recorded a loss of $50 thousand.
Interest Expense. Interest expense includes
interest expense incurred on the 1.375% convertible senior
and the 5.5% convertible subordinated notes. Interest
expense decreased $321 thousand, or 15.6%, from
$2.1 million in 2005 to $1.7 million in 2006. The
decrease in the interest expense for 2006 compared to 2005 is
due to the decrease in interest expense associated with the 5.5%
convertible subordinated notes primarily resulting from the
repurchases of the 5.5% convertible subordinated notes in
the fourth quarter of 2005.
Interest Income. Interest income increased
$3.0 million, or 47.5%, from $6.3 million in 2005 to
$9.3 million in 2006. Interest income increased as a result
of a higher average balance of cash, cash equivalents and
investments in 2006 compared to 2005. Increasing interest rates
and a shift in our investment portfolio towards higher yielding
auction rate securities has also contributed to the increase in
interest income. However we expect interest income to decrease
due to our decreased cash and cash equivalents and investments
balance associated with the purchase of Convedia.
Other Income (Expense), net. Other expense,
net, primarily includes foreign currency exchange gains and
losses. Other income (expense), net, was $851 thousand in 2006
compared to $(879) thousand in 2005. Foreign currency exchange
rate fluctuations resulted in a net gain of $96 thousand in 2006
compared to a net loss of $803 thousand in 2005. The change in
the foreign currency exchange rate fluctuations is relatively
flat for the year due to small changes in the Japanese Yen, Euro
and GBP relative the U.S. Dollar.
Income Tax Provision. We recorded a tax
benefit of $746 thousand for the year ended December 31,
2006 compared to a tax provision of $1.2 million for the
year ended December 31, 2005. Our effective tax rate for
the year ended 2006 was (5.4%) compared to 6.9% for the year
ended December 31, 2005. The Companys current
effective tax rate differs from the statutory rate primarily due
to the impact of stock option expense, in-process R&D
related to the Convedia acquisition, research and development
tax credits generated in 2006 and taxes on foreign income that
differ from U.S. tax rate.
34
On December 20, 2006 President Bush signed the Tax Relief
and Health Care Act of 2006 (the Tax Relief Act)
which extended the research and development tax credit. Under
the Tax Relief Act the research and development tax credit was
retroactively reinstated to January 1, 2006 and is
available through December 31, 2007. We have recorded a
federal research and development credit of approximately $550
thousand for the year ended 2006.
At December 31, 2006, we had net deferred tax assets of
$30.3 million. Valuation allowances of $7.0 million
and $6.8 million, as of December 31, 2006 and 2005,
respectively, have been provided for deferred income tax assets
related primarily to net operating loss and tax credit
carryforwards that may not be realized. The increase in
valuation allowance of $0.2 million for the year ended
December 31, 2006 compared to the year ended
December 31, 2005 is primarily attributable to a projected
decrease in future utilization of general business tax credits
carryforwards. Over the last three years we have generated
cumulative book income. As of December 31, 2006 we estimate
utilization of the net deferred tax assets will require that we
generate $60.0 million and $30.0 million in taxable
income in the U.S. and Canada, respectively, prior to the
expiration of the net operating loss and tax credit
carryforwards which will occur between 2006 and 2023. We cannot
provide absolute assurance that we will generate sufficient
taxable income to fully utilize the net deferred tax assets, and
accordingly, we may record a valuation allowance against the
deferred tax assets if our expectations of future taxable income
change or are not achieved. We have considered future market
growth, forecasted earnings, future taxable income, the mix of
earnings in the jurisdictions in which we operate and prudent
and feasible tax planning strategies in determining the need for
a valuation allowance. In the event we were to determine that we
would not be able to realize all or part of our net deferred tax
assets in the future, we would increase the valuation allowance
and make a corresponding charge to earnings in the period in
which we make such determination. Likewise, if we later
determine that we are more likely than not to realize the net
deferred tax assets, we would reverse the applicable portion of
the previously provided valuation allowance. Finally, any tax
benefit subsequently recognized from the acquired net operating
loss and research and development tax credit associated with our
Microware acquisition, completed in 2001, would be allocated to
goodwill and will not benefit the income statement.
The Company is subject to income taxes in the U.S. and nine
foreign countries, and on occasion, we have been subject to
corporate income tax audits. In determining the value of income
tax liabilities we make estimates of the results of future
examinations of our income tax returns by taxing authorities. We
believe that we have adequately provided our financial
statements for additional taxes that we estimate may result from
these examinations. If these amounts provided prove to be more
than what is necessary, the reversal of the reserves would
result in tax benefits being recognized in the period in which
we determine the liability is no longer necessary. If an
ultimate tax assessment exceeds our estimate of tax liabilities,
an additional charge to expense will result.
Comparison
of Year 2005 and Year 2004
Revenues. Revenues increased by
$14.4 million, or 5.9%, from $245.8 million in 2004 to
$260.2 million in 2005. The increase in revenue during 2005
compared to 2004 was due to an increase in revenues in the
communications networking market of $26.7 million offset by
a $12.3 million decrease in revenues from the commercial
systems market.
Revenues in the communications networking market increased in
2005 compared to 2004 due to strong demand within the wireless
market as our product content continues to expand with 2.5 and
3G deployments. Revenues were also higher due to deployments of
new products by one of our major customers.
Revenues in the commercial systems market decreased in the 2005
compared to 2004, primarily due to declines in our transaction
terminal and industrial automation business, partially offset by
increases within our medical and test and measurement market.
The decrease in revenues attributable to the transaction
terminal market was primarily due to design wins nearing the end
of their life cycle. The increase in revenues from the medical
market was attributable to design wins that ramped into
production during 2005.
Given the dynamics of these markets, we may experience general
fluctuations in the percentage of revenue attributable to each
market and, as a result, the quarter to quarter and year to year
comparisons of our
35
markets often are not indicative of overall economic trends
affecting the long-term performance of our markets. We currently
expect that each of our markets will continue to represent a
significant portion of total revenues.
From a geographic perspective, for the year ended
December 31, 2005 compared to the same period in 2004 the
overall increase in revenues was split between customers located
in the EMEA and Asia Pacific regions. For the year ended
December 31, 2005 compared to the same period in 2004
revenues as measured by destination in the EMEA region increased
by $8.2 million while Asia Pacific revenues increased by
$21.1 million. This increase related to the Asia Pacific
region due to shipments of products to existing multinational
customers receiving products directly into the Asia Pacific
region. For the year ended December 31, 2005 revenues from
North America declined by $14.9 million compared to the
same period in 2004. The decline in this region was a result of
declines in our transaction terminal and industrial automation
business as well as a shift of sales for our multinational
customers requesting delivery of products directly into the Asia
Pacific region. We currently expect continued fluctuations in
the percentage of revenue from each geographic region.
Additionally, we expect
non-U.S. revenues
to remain a significant portion of our revenues.
Gross Margin. Gross margin as a percentage of
revenues for 2005 was 29.5% compared to 32.2% for 2004.
Approximately half of the decrease in gross margin as a
percentage of revenues for the year ended December 31, 2005
compared to the same period in 2004 was attributable to product
mix as more of our revenue came from higher volume products with
volume-based pricing. The remainder of the decrease was
associated with our write-down of inventory valuation for excess
and obsolete E&O inventory, an increase in the adverse
purchase commitment liabilities associated with our outsourced
manufacturing operations and higher silicon prices due to
industry shortages. We also continued to incur some redundant
manufacturing costs as we moved forward with outsourcing our
internal manufacturing to our partners. Finally, we incurred
additional manufacturing-related costs in 2005 due to making our
products RoHS compliant and incurring additional
warranty-related costs.
Research and Development. R&D expenses
consist primarily of salary, bonuses and benefits for product
development staff, and cost of design and development supplies
and equipment, net of reimbursements for non-recurring
engineering services. R&D expenses increased
$1.6 million, or 5.6%, from $28.2 million in 2004 to
$29.8 million in 2005.
Our investment in the development of standards-based products,
such as ATCA, increased our R&D expense for 2005 compared
2004. During 2005, we also continued to increase headcount at
our Shanghai development center and added other expenses in
connection with the development of the infrastructure to support
this location. These increases were partially offset by a
decrease in variable compensation linked to profitability.
Selling, General, and Administrative. SG&A
expenses consist primarily of salary, commissions, bonuses and
benefits for sales, marketing, executive, and administrative
personnel, as well as professional services and costs of other
general corporate activities. SG&A expenses decreased $364
thousand, or 1.2%, from $30.4 million in 2004 to
$30.1 million in 2005. The decrease in SG&A expense for
the year ended December 31, 2005 was primarily associated
with $619 thousand in non-recurring costs that were recognized
in the 2004 associated with a potential acquisition that was
ultimately abandoned. Without these costs we would have seen an
increase in SG&A expense of $255 thousand in 2005 primarily
due to annual merit increases in salaries.
Stock-based Compensation Expense. In 2005, 97
thousand shares of restricted stock were granted. We incurred
$199 thousand of stock-based compensation related to restricted
stock for the year ended December 31, 2005. We did not
incur any stock-based compensation expense associated with
restricted stock for the year ended December 31, 2004.
In 2004, we incurred $841 thousand of stock-based compensation
expense associated with shares issued pursuant to the ESPP. We
incurred stock-based compensation expense because the original
number of ESPP shares approved by the shareholders was
insufficient to meet employee demand for an ESPP offering which
was consummated in February 2003 and ended in August 2004. We
subsequently received shareholder
36
approval for additional ESPP shares in May 2003. The shares
issued in the February 2003 ESPP offering in excess of the
original number of ESPP shares approved at the beginning of the
offering (the shortfall) triggered recognition of
stock- based compensation expense under the intrinsic value
method. The shortfall amounted to 138 thousand and 149 thousand
shares in May 2004 and August 2004, respectively.
The expense per share was calculated as the difference between
85% of the closing price of RadiSys shares as quoted on the
Nasdaq Global Select Market on the date that additional ESPP
shares were approved (May 2003) and the February 2003 ESPP
offering purchase price. Accordingly, the expense per share was
calculated as the difference between $8.42 and $5.48. The
shortfall of shares was dependent on the amount of contributions
from participants enrolled in the February 2003 ESPP offering
We recognized stock-based compensation expense in reported net
income related to 2005 restricted stock grants and the 2004 ESPP
shortfall as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Cost of sales
|
|
$
|
23
|
|
|
$
|
235
|
|
Research and development
|
|
|
55
|
|
|
|
343
|
|
Selling, general and administrative
|
|
|
121
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
199
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets Amortization. Intangible
assets consist of purchased technology, patents and other
identifiable intangible assets. Intangible assets amortization
expense was $2.1 million and $2.2 million in 2005 and
2004, respectively. Intangible assets amortization decreased due
to certain intangible assets becoming fully amortized during the
first and second quarters of 2004. We perform reviews for
impairment of the purchased intangible assets whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
Restructuring and Other Charges. We evaluate
the adequacy of the accrued restructuring and other charges on a
quarterly basis. As a result, we record certain
reclassifications and reversals to the accrued restructuring and
other charges based on the results of the evaluation. The total
accrued restructuring and other charges for each restructuring
event are not affected by reclassifications. Reversals are
recorded in the period in which we determine that expected
restructuring and other obligations are less than the amounts
accrued. Tables summarizing the activity in the accrued
liability for each restructuring event are contained in
Note 10 of the Notes to the Consolidated Financial
Statements. During 2005 and 2004, we recorded restructuring and
other charges and reversals as described below.
Second
Quarter 2005 Restructuring
In June 2005, we initiated a restructuring plan that included
the elimination of 93 positions primarily within our
manufacturing operations as a result of the continued
outsourcing of production to our manufacturing partners. In
2005, we incurred severance and other employee-related
separation costs of approximately $1.3 million as a result
of this restructuring event. We expect the workforce reduction
to be substantially completed by June 30, 2006.
Other
During 2005, we came to agreement in principle with the landlord
of the Birmingham, UK office to pay 5 months rent or $33
thousand as compensation for the termination of the lease
agreement
Reversals
In 2005, we recorded restructuring-related reversals amounting
to $379 thousand. The reversals were primarily associated with
employees who left RadiSys prior to receiving a severance
payment and employees
37
who were retained to fill new positions at RadiSys. In 2004, we
recorded reversals amounting to $1.1 million relating
primarily to a buy-out of the remaining lease obligations on the
Houston facility vacated as a result of previous restructuring
events and various amounts originally accrued for certain
non-cancelable leases for facilities vacated as a result of
previous restructuring events. We entered into subleasing
arrangements for a portion of these facilities and as a result
we reduced the restructuring accruals.
Loss on the Repurchase of Convertible
Notes. In 2005, we repurchased $7.5 million
principal amount of the outstanding 5.5% convertible
subordinated notes, with an associated discount of $69 thousand.
We repurchased the notes in the open market for
$7.4 million and, as a result, recorded a loss of $50
thousand.
In 2004, we repurchased $58.8 million principal amount of
the outstanding 5.5% convertible subordinated notes, with
an associated discount of $897 thousand. We repurchased the
notes in the open market for $58.2 million and, as a
result, recorded a loss of $387 thousand.
Interest Expense. Interest expense includes
interest expense incurred on the 1.375% convertible senior
and the 5.5% subordinated notes. Interest expense decreased
$1.5 million, or 42.4%, from $3.6 million in 2004 to
$2.1 million in 2005. The decrease in the interest expense
for 2005 compared to 2004 was due to the decrease in interest
expense associated with the 5.5% convertible subordinated
notes primarily resulting from the repurchases of the 5.5%
convertible subordinated notes in the fourth quarter of 2005 and
the mid-year 2004 repurchases.
Interest Income. Interest income increased
$2.9 million, or 85.5%, from $3.4 million in 2004 to
$6.3 million in 2005. Interest income increased as a result
of a higher average balance of cash, cash equivalents and
investments in 2005 compared to 2004. Increasing interest rates
and a shift in our investment portfolio towards higher yielding
auction rate securities has also contributed to the increase in
interest income.
Other Expense, net. Other expense, net,
primarily includes foreign currency exchange gains and losses.
Other expense, net, was $879 thousand in 2005 compared to $472
thousand in 2004. Foreign currency exchange rate fluctuations
resulted in a net loss of $803 thousand in 2005 compared to a
net loss of $317 thousand in 2004. The net exchange rate loss
incurred for the year ended December 31, 2005 was primarily
caused by the strengthening of the U.S. dollar relative to
the Japanese Yen throughout 2005.
Income Tax Provision. We recorded a tax
provision of $1.2 million for the year ended
December 31, 2005 compared to $3.3 million for the
year ended December 31, 2004. Our effective tax rate for
the year ended 2005 was 6.9% compared to 20.0% for the year
ended December 31, 2004. The decrease in the tax provision
as well as the effective tax rate in 2005 versus 2004 was
primarily due to a projected increase in future utilization of
deferred tax assets causing the reversal of a portion of the
related valuation allowance and taxes on foreign income that
differs from U.S. tax rate.
On October 22, 2004, the President of the United States of
America signed the American Jobs Creation Act (the Jobs
Act). One of the key provisions of the Jobs Act includes a
repeal of the extraterritorial income exclusion. In its place,
the Jobs Act provides a relief provision for domestic
manufacturers by providing a new domestic manufacturing
deduction. The Jobs Act also includes a temporary incentive for
U.S. multinationals to repatriate foreign earnings and
other international tax reforms designed to improve the global
competitiveness of U.S. multinationals. In 2005 we
completed our evaluation of the impact of the Jobs Act and have
concluded not to repatriate any foreign earnings pursuant to the
provisions of the Jobs Act and have determined that due to the
reduction of our domestic manufacturing operations, the impact
of domestic manufacturing deduction was minimal.
On October 4, 2004 the Working Families Tax Relief Act of
2004 was enacted to extend several tax credits, including the
research and development tax credit. Under the new law the
research and development tax credit was retroactively reinstated
to June 30, 2004 and is available through December 31,
2005. We have recorded a federal research and development credit
of approximately $362 thousand for the year ended 2005.
At December 31, 2005, we had net deferred tax assets of
$29.0 million. Valuation allowances of $6.8 million
and $15.9 million, as of December 31, 2005 and 2004,
respectively, have been provided for deferred income tax assets
related primarily to net operating loss and tax credit
carryforwards that may not be
38
realized. The decrease in valuation allowance of
$9.1 million for the year ended December 31, 2005
compared to the year ended December 31, 2004 was primarily
attributable to a projected increase in future utilization of
general business tax credits and certain net operating loss
carryforwards. Over the last three years we have generated
significant cumulative book income. As of December 31, 2005
we estimated utilization of the net deferred tax assets would
require that we generate $67.2 million in taxable income
prior to the expiration of net operating loss carryforwards
which will occur between 2006 and 2023. We cannot provide
absolute assurance that we will generate sufficient taxable
income to fully utilize the net deferred tax assets, and
accordingly, we may record a valuation allowance against the
deferred tax assets if our expectations of future taxable income
change or are not achieved. If we were to record a valuation
allowance, the allowance could include the entire balance of net
deferred tax assets as any significant departures from expected
future taxable income could suggest uncertainty in our business
and therefore we may determine that there is no reasonable basis
to calculate a partial valuation allowance. Any tax benefit
subsequently recognized from the acquired net operating loss and
research and development tax credit associated with our
Microware acquisition, completed in 2001, would be allocated to
goodwill and will not benefit the income statement.
The Joint Committee of Taxation has issued a tax clearance
letter to RadiSys on December 1, 2005 concurring with the
IRS audit results for the tax years 1996 through 2002.
Liquidity
and Capital Resources
The following table summarizes selected financial information
for each of the years ended on the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
23,734
|
|
|
$
|
90,055
|
|
|
$
|
80,566
|
|
Short-term investments
|
|
|
102,250
|
|
|
|
135,800
|
|
|
|
78,303
|
|
Long-term investments
|
|
|
10,000
|
|
|
|
|
|
|
|
39,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and
investments
|
|
$
|
135,984
|
|
|
$
|
225,855
|
|
|
$
|
198,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
161,575
|
|
|
$
|
249,159
|
|
|
$
|
186,634
|
|
Accounts receivable, net
|
|
$
|
42,549
|
|
|
$
|
39,055
|
|
|
$
|
42,902
|
|
Inventories, net
|
|
$
|
35,184
|
|
|
$
|
21,629
|
|
|
$
|
22,154
|
|
Accounts payable
|
|
$
|
39,699
|
|
|
$
|
36,903
|
|
|
$
|
31,585
|
|
Convertible senior notes
|
|
$
|
97,412
|
|
|
$
|
97,279
|
|
|
$
|
97,148
|
|
Convertible subordinated notes
|
|
$
|
2,410
|
|
|
$
|
2,498
|
|
|
$
|
9,867
|
|
Days sales outstanding(A)
|
|
|
53
|
|
|
|
55
|
|
|
|
54
|
|
Days to pay(B)
|
|
|
68
|
|
|
|
73
|
|
|
|
59
|
|
Inventory turns(C)
|
|
|
7.5
|
|
|
|
8.4
|
|
|
|
6.9
|
|
Inventory turns days(D)
|
|
|
73
|
|
|
|
44
|
|
|
|
48
|
|
Cash cycle time days(E)
|
|
|
58
|
|
|
|
26
|
|
|
|
43
|
|
|
|
|
(A) |
|
Based on ending net trade receivables divided by daily revenue
(based on 365 days in each year presented). |
|
(B) |
|
Based on ending accounts payable divided by daily cost of sales
(based on 365 days in each year presented). |
|
(C) |
|
Based on cost of sales divided by average ending inventory. |
|
(D) |
|
Based on ending inventory divided by quarterly cost of sales
(annualized and divided by 365 days). |
|
(E) |
|
Days sales outstanding plus inventory turns days,
less days to pay. |
39
Cash and cash equivalents decreased by $66.3 million from
$90.1 million at December 31, 2005 to
$23.7 million at December 31, 2006. Activities
impacting cash and cash equivalents are as follows:
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash provided by operating
activities
|
|
$
|
9,062
|
|
|
$
|
32,171
|
|
|
$
|
24,718
|
|
Cash provided by (used in)
investing activities
|
|
|
(88,179
|
)
|
|
|
(23,302
|
)
|
|
|
(49,231
|
)
|
Cash provided by (used in) by
financing activities
|
|
|
12,366
|
|
|
|
1,224
|
|
|
|
(45,709
|
)
|
Effects of exchange rate changes
|
|
|
430
|
|
|
|
(604
|
)
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
$
|
(66,321
|
)
|
|
$
|
9,489
|
|
|
$
|
(69,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 1, 2006 we completed the acquisition of
Convedia, paying net cash of $106.1 million.
During the years ended December 31, 2006 and 2005, we used
$5.2 million and $5.5 million, respectively, for
capital expenditures During the year ended December 31,
2006 capital expenditures were primarily associated with our
increased investment in our R&D and marketing efforts as we
continue to develop and begin to sell standards-based solutions.
During the year ended December 31, 2005, capital
expenditures included our continued investment in equipment to
support the Companys China-based manufacturing partner as
well as leasehold improvements, office equipment and software to
support our continued growth and productivity.
During the years ended December 31, 2006 and 2005, we
received $12.7 million and $8.7 million, respectively,
in proceeds from the issuance of common stock through the
Companys stock compensation plans.
During the third quarter of 2006, we announced our decision to
disengage from one of our contract manufacturers in North
America. We are currently transitioning the majority of this
production to our Hillsboro facility . This has resulted in a
net increase in inventory related to this transition and we
expect to see inventory levels start to decline after the first
quarter of 2007 and continue to decline throughout the year to
more traditional levels. Also, due to the inherent risks
associated with this transfer of production we may incur
additional expenses related to adverse purchase commitments or
excess and obsolete inventory. We may incur additional and
unanticipated expenses or delays which may have a material
adverse effect on our business or our financial performance. Our
manufacturing strategy is to outsource our higher volume
products.
In conjunction with the above announcement we used approximately
$17.6 million net cash provided by operating activities for
the year ended December 31, 2006 to purchase raw materials
and
work-in-process
inventory to transfer to our Hillsboro facility as well as to
our other contract manufacturer. We also purchased component
material from this contract manufacturer in anticipation of
transitioning out of their facilities.
Changes in foreign currency rates impacted beginning cash
balances during 2006 by $430 thousand. Due to the Companys
international operations where transactions are recorded in
functional currencies other than the U.S. Dollar, the
effects of changes in foreign currency exchange rates on
existing cash balances during any given periods results in
amounts on the consolidated statements of cash flows that may
not reflect the changes in the corresponding accounts on the
consolidated balance sheets.
As of December 31, 2006 and 2005 working capital was
$161.6 million and $249.2 million, respectively.
Working capital decreased by $87.6 million due primarily to
the purchase of Convedia during the quarter offset by net
positive cash flow from operating and financing activities
generated during 2006.
Management believes that cash flows from operations, available
cash balances and short-term borrowings will be sufficient to
fund our operating liquidity needs for the short-term and
long-term future.
40
Investments
Short-term and long-term investments reported as (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Short-term investments, net of
unamortized premium of zero and zero, respectively
|
|
$
|
102,250
|
|
|
$
|
135,800
|
|
|
|
|
|
|
|
|
|
|
Long-term investments, net of
unamortized premium of zero and zero, respectively
|
|
$
|
10,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
We invest excess cash in debt instruments of the
U.S. Government and its agencies, and those of high-quality
corporate issuers. As of December 31, 2006 we had
$102.3 million investments classified as
available-for-sale.
As of December 31, 2006, we had $10.0 million
long-term
held-to-maturity
investments. During 2006 we shifted our investments to auction
rate securities as we were actively evaluating potential
acquisitions and partnership opportunities. Our investment
policy requires that the total investment portfolio, including
cash and investments, not exceed a maximum weighted-average
maturity of 18 months. In addition, the policy mandates
that an individual investment must have a maturity of less than
36 months, with no more than 20% of the total portfolio
exceeding 24 months. As of December 31, 2006, we were
in compliance with our investment policy.
Line
of Credit
During the quarter ended March 31, 2006, the Company
transferred its line of credit facility from its commercial bank
to an investment bank, for $20.0 million at an interest
rate based on the
30-day
London Inter-Bank Offered Rate (LIBOR) plus 0.75%.
The line of credit is collateralized by the Companys
non-equity investments. At December 31, 2006, the Company
had a standby letter of credit outstanding related to one of its
medical insurance carriers for $105 thousand. The market value
of non-equity investments must exceed 125% of the borrowed
facility amount, and the investments must meet specified
investment grade ratings.
As of December 31, 2006 and December 31, 2005, there
were no outstanding balances on the standby letter of credit or
line of credit and we were in compliance with all debt covenants.
Convertible
Senior Notes
During November 2003, we completed a private offering of
$100 million aggregate principal amount of
1.375% convertible senior notes due November 15, 2023
to qualified institutional buyers. The discount on the
1.375% convertible senior notes amounted to $3 million.
Convertible senior notes are unsecured obligations convertible
into our common stock and rank equally in right of payment with
all of our existing and future obligations that are unsecured
and unsubordinated. Interest on the senior notes accrues at
1.375% per year and is payable semi-annually on May 15 and
November 15. The 1.375% convertible senior notes are
payable in full in November 2023. The notes are convertible, at
the option of the holder, at any time on or prior to maturity
under certain circumstances, unless previously redeemed or
repurchased, into shares of our common stock at a conversion
price of $23.57 per share, which is equal to a conversion
rate of 42.4247 shares per $1,000 principal amount of
notes. The notes are convertible prior to maturity into shares
of our common stock under certain circumstances that include but
are not limited to (i) conversion due to the closing price
of our common stock on the trading day prior to the conversion
date reaching 120% or more of the conversion price of the notes
on such trading date and (ii) conversion due to the trading
price of the notes falling below 98% of the conversion value. We
may redeem all or a portion of the notes at our option on or
after November 15, 2006 but before November 15, 2008
provided that the closing price of our common stock exceeds 130%
of the conversion price for at least 20 trading days within a
period of 30 consecutive trading days ending on the trading day
before the date of the notice of the provisional redemption. On
or after November 15, 2008, we may redeem the notes at any
time. On November 15, 2008, November 15, 2013, and
November 15, 2018, holders of the 1.375% convertible
senior notes will have the
41
right to require us to purchase, in cash, all or any part of the
notes held by such holder at a purchase price equal to 100% of
the principal amount of the notes being purchased, together with
accrued and unpaid interest and additional interest, if any, up
to but excluding the purchase date.
As of December 31, 2006 and December 31, 2005 we had
outstanding 1.375% convertible senior notes with a face value of
$100 million. As of December 31, 2006 and
December 31, 2005 the book value of the
1.375% convertible senior notes was $97.4 million and
$97.3 million respectively, net of unamortized discount of
$2.6 million and $2.7 million, respectively. The
estimated fair value of the 1.375% convertible senior notes
was $96.6 million and $93.5 million at
December 31, 2006 and December 31, 2005, respectively.
Convertible
Subordinated Notes
During August 2000, we completed a private offering of
$120 million aggregate principal amount of
5.5% convertible subordinated notes due August 15,
2007 to qualified institutional buyers. The discount on the 5.5%
convertible subordinated notes amounted to $3.6 million.
Convertible subordinated notes are unsecured obligations
convertible into our common stock and are subordinated to all of
our present and future senior indebtedness. Interest on the
subordinated notes accrues at 5.5% per year and is payable
semi-annually on February 15 and August 15. The
5.5% convertible subordinated notes are payable in full in
August 2007. The notes are convertible, at the option of the
holder, at any time on or before maturity, unless previously
redeemed or repurchased, into shares of our common stock at a
conversion price of $67.80 per share, which is equal to a
conversion rate of 14.7484 shares per $1,000 principal
amount of notes. If the closing price of our common stock equals
or exceeds 140% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending on
the trading day before the date on which a notice of redemption
is mailed, then we may redeem all or a portion of the notes at
our option at a redemption price equal to the principal amount
of the notes plus a premium (which declines annually on August
15 of each year), together with accrued and unpaid interest to,
but excluding, the redemption date.
On April 26, 2005 the Board of Directors approved the
repurchase of the remaining principal amount of the
5.5% convertible subordinated notes.
In 2006, we repurchased $100 thousand principal amount of the
5.5% convertible subordinated notes. We repurchased the notes
for $100 thousand, with a recorded loss of $1 thousand.
In 2005, we repurchased $7.5 million principal amount of
the 5.5% convertible subordinated notes, with an associated
discount of $69 thousand. We repurchased the notes in the open
market for $7.4 million and, as a result, recorded a loss
of $50 thousand.
In 2004, we repurchased $58.8 million principal amount of
the 5.5% convertible subordinated notes, with an associated
discount of $897 thousand. We repurchased the notes in the open
market for $58.2 million and, as a result, recorded a loss
of $387 thousand.
From 2000 to 2003, we repurchased $51.3 million principal
amount of the 5.5% convertible subordinated notes, with an
associated discount of $1.4 million. We repurchased the
notes for $41.0 million and, as a result, recorded a gain
of $8.9 million.
As of December 31, 2006 and December 31, 2005 we had
outstanding 5.5% convertible subordinated notes with a face
value of $2.4 million and $2.5 million, respectively.
As of December 31, 2006 and December 31, 2005 the book
value of the 5.5% convertible subordinated notes was
$2.4 million and $2.5 million, respectively, net of
amortized discount of $8 thousand and $20 thousand,
respectively. The estimated fair value of the
5.5% convertible subordinated notes was $2.4 million
and $2.5 million at December 31, 2006 and
December 31, 2005, respectively.
Contractual
Obligations
The following summarizes our contractual obligations at
December 31, 2006 and the effect of such on its liquidity
and cash flows in future periods (in thousands).
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Future minimum lease payments
|
|
$
|
3,662
|
|
|
$
|
3,505
|
|
|
$
|
2,991
|
|
|
$
|
2,595
|
|
|
$
|
1,626
|
|
|
$
|
|
|
Purchase obligations(A)
|
|
|
24,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Celestica Charlotte obligations
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible notes
|
|
|
1,508
|
|
|
|
1,375
|
|
|
|
1,375
|
|
|
|
1,375
|
|
|
|
1,375
|
|
|
|
16,500
|
|
Convertible senior notes(B)
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes(B)
|
|
|
2,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,760
|
|
|
$
|
104,880
|
|
|
$
|
4,366
|
|
|
$
|
3,970
|
|
|
$
|
3,001
|
|
|
$
|
16,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Purchase obligations include agreements or purchase orders to
purchase goods or services that are enforceable and legally
binding and specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable
price provisions and the approximate timing of the transaction.
Purchase obligations exclude agreements that are cancelable
without penalty. |
|
(B) |
|
The 1.375% convertible senior notes and the
5.5% convertible subordinated notes are shown at their face
values, gross of unamortized discount amounting to
$2.6 million and $8 thousand, respectively at
December 31, 2005. On or after November 15, 2008, we
may redeem the convertible senior notes at any time. On
November 15, 2008, November 15, 2013, and
November 15, 2018, holders of the 1.375% convertible
senior notes will have the right to require us to purchase, in
cash, all or any part of the notes held by such holder at a
purchase price equal to 100% of the principal amount of the
notes being purchased, together with accrued and unpaid interest
and additional interest, if any, up to but excluding the
purchase date. The 5.5% convertible subordinated notes are
payable in full in August 2007. |
Off-Balance
Sheet Arrangements
We do not engage in any activity involving special purpose
entities or off-balance sheet financing.
Liquidity
Outlook
We believe that our current cash, cash equivalents and
investments, net, amounting to $136.0 million at
December 31, 2006 and the cash generated from operations
will satisfy our short and long-term expected working capital
needs, capital expenditures, stock repurchases, and other
liquidity requirements associated with our existing business
operations. Capital expenditures are expected to range from
$1.5 million to $2.0 million per quarter as we make
additional R&D and IT capital investments. We plan to
actively continue evaluating potential acquisitions and
partnership opportunities which could affect our liquidity.
Recent
Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a
full description of recent accounting pronouncements including
the respective expected dates of adoption and effects on results
of operations and financial condition.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We are exposed to market risk from changes in interest rates,
foreign currency exchange rates, and equity trading prices,
which could affect our financial position and results of
operations.
Interest Rate Risk. We invest excess cash in
debt instruments of the U.S. Government and its agencies,
and those of high-quality corporate issuers. We attempt to
protect and preserve our 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
value adversely affected due to a rise in interest rates while
floating rate securities may produce less income than expected
if interest rates decline. Due to the short duration of most of
the investment portfolio, an immediate 10% change in interest
rates would not have a material effect on the fair value of our
investment portfolio. Additionally,
43
the interest rate changes affect the fair market value but do
not necessarily have a direct impact on our earnings or cash
flows. Therefore, we would not expect our operating results or
cash flows to be affected, to any significant degree, by the
effect of a sudden change in market interest rates on the
securities portfolio. The estimated fair value of our debt
securities that we have invested in at December 31, 2006
and 2005 was $112.5 million and $202.6 million,
respectively. The effect of an immediate 10% change in interest
rates would not have a material effect on our operating results
or cash flows.
Foreign Currency Risk. We pay the expenses of
our international operations in local currencies, namely, the
Euro, British Pound Sterling, New Shekel, Japanese Yen, Chinese
Renminbi and Canadian Dollar. The 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, foreign
exchange rate volatility and other regulations and restrictions.
Accordingly, future results could be materially and adversely
affected by changes in these or other factors. We are also
exposed to foreign exchange rate fluctuations as the balance
sheets and income statements of our foreign subsidiaries are
translated into U.S. Dollars during the consolidation
process. Because exchange rates vary, these results, when
translated, may vary from expectations and adversely affect
overall expected profitability. Foreign currency exchange rate
fluctuations resulted in a net gain of $96 thousand for the year
ended December 31, 2006, and a net loss of $803 thousand
and $317 thousand for the years ended December 31, 2005,
and 2004, respectively.
Convertible Senior Notes. During November
2003, we completed a private offering of $100 million
aggregate principal amount of 1.375% convertible senior
notes due November 15, 2023 to qualified institutional
buyers. The discount on the 1.375% convertible senior notes
amounted to $3 million.
Convertible senior notes are unsecured obligations convertible
into our common stock and rank equally in right of payment with
all of our existing and future obligations that are unsecured
and unsubordinated. Interest on the senior notes accrues at
1.375% per year and is payable semi-annually on May 15 and
November 15. The 1.375% convertible senior notes are
payable in full in November 2023. The notes are convertible, at
the option of the holder, at any time on or prior to maturity
under certain circumstances, unless previously redeemed or
repurchased, into shares of our common stock at a conversion
price of $23.57 per share, which is equal to a conversion
rate of 42.4247 shares per $1,000 principal amount of
notes. The notes are convertible prior to maturity into shares
of our common stock under certain circumstances that include but
are not limited to (i) conversion due to the closing price
of our common stock on the trading day prior to the conversion
date reaching 120% or more of the conversion price of the notes
on such trading date and (ii) conversion due to the trading
price of the notes falling below 98% of the conversion value. We
may redeem all or a portion of the notes at our option on or
after November 15, 2006 but before November 15, 2008
provided that the closing price of our common stock exceeds 130%
of the conversion price for at least 20 trading days within a
period of 30 consecutive trading days ending on the trading day
before the date of the notice of the provisional redemption. On
or after November 15, 2008, we may redeem the notes at any
time. On November 15, 2008, November 15, 2013, and
November 15, 2018, holders of the 1.375% convertible
senior notes will have the right to require us to purchase, in
cash, all or any part of the notes held by such holder at a
purchase price equal to 100% of the principal amount of the
notes being purchased, together with accrued and unpaid interest
and additional interest, if any, up to but excluding the
purchase date.
The fair value of the 1.375% convertible senior notes is
sensitive to interest rate changes. Interest rate changes would
result in increases or decreases in the fair value of the
1.375% convertible senior notes, due to differences between
market interest rates and rates in effect at the inception of
the obligation. Unless we elect to repurchase our
1.375% convertible senior notes in the open market, changes
in the fair value of 1.375% convertible senior notes have
no impact on our cash flows or consolidated financial
statements. The estimated fair value of the
1.375% convertible senior notes was $96.6 million,
$93.5 million and $106.8 million at December 31,
2006, December 31, 2005 and December 31, 2004,
respectively.
Convertible Subordinated Notes. During August
2000, we completed a private offering of $120 million
aggregate principal amount of 5.5% convertible subordinated
notes due August 15, 2007 to qualified institutional
buyers. The discount on the 5.5% convertible subordinated
notes amounted to $3.6 million.
Convertible subordinated notes are unsecured obligations
convertible into our common stock and are subordinated to all
present and future senior indebtedness of RadiSys. Interest on
the subordinated notes
44
accrues at 5.5% per year and is payable semi-annually on
February 15 and August 15. The 5.5% convertible
subordinated notes are payable in full in August 2007. The notes
are convertible, at the option of the holder, at any time on or
before maturity, unless previously redeemed or repurchased, into
shares of our common tock at a conversion price of
$67.80 per share, which is equal to a conversion rate of
14.7484 shares per $1,000 principal amount of notes. If the
closing price of our common stock equals or exceeds 140% of the
conversion price for at least 20 trading days within a period of
30 consecutive trading days ending on the trading day before the
date on which a notice of redemption is mailed, then we may
redeem all or a portion of the notes at our option at a
redemption price equal to the principal amount of the notes plus
a premium (which declines annually on August 15 of each year),
together with accrued and unpaid interest to, but excluding, the
redemption date. The fair value of the 5.5% convertible
subordinated notes is sensitive to interest rate changes.
Interest rate changes would result in increases or decreases in
the fair value of the 5.5% convertible subordinated notes,
due to differences between market interest rates and rates in
effect at the inception of the obligation. Unless we elect to
repurchase our 5.5% convertible subordinated notes in the
open market, changes in the fair value of 5.5% convertible
subordinated notes have no impact on our cash flows or
consolidated financial statements. The estimated fair value of
the 5.5% convertible subordinated notes was
$2.4 million, $2.5 million and $10.0 million at
December 31, 2006, December 31, 2005 and
December 31, 2004, respectively.
We have cumulatively repurchased 5.5% convertible
subordinated notes in the amount of $117.7 million, face
value, for $106.7 million. These repurchases were financed
from our investment portfolio and cash from operations. As of
December 31, 2006, our aggregate cash and cash equivalents
and investments were $136.0 million.
Part II,
Item 8. Financial Statements and
Supplementary Data
Quarterly
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
65,811
|
|
|
$
|
84,539
|
|
|
$
|
81,430
|
|
|
$
|
60,701
|
|
|
$
|
57,517
|
|
|
$
|
65,956
|
|
|
$
|
74,856
|
|
|
$
|
61,905
|
|
Gross margin
|
|
|
17,734
|
|
|
|
23,593
|
|
|
|
20,686
|
|
|
|
16,943
|
|
|
|
18,542
|
|
|
|
19,399
|
|
|
|
21,715
|
|
|
|
17,180
|
|
Income (loss) from operations(A)
|
|
|
21
|
|
|
|
3,489
|
|
|
|
(15,617
|
)
|
|
|
(10,122
|
)
|
|
|
3,261
|
|
|
|
2,740
|
|
|
|
6,326
|
|
|
|
1,460
|
|
Net income (loss)
|
|
|
1,426
|
|
|
|
4,359
|
|
|
|
(13,330
|
)
|
|
|
(5,471
|
)
|
|
|
2,586
|
|
|
|
2,565
|
|
|
|
5,922
|
|
|
|
4,885
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.07
|
|
|
|
0.21
|
|
|
|
(0.62
|
)
|
|
|
(0.25
|
)
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
0.29
|
|
|
|
0.24
|
|
Diluted
|
|
|
0.07
|
|
|
|
0.18
|
|
|
|
(0.62
|
)
|
|
|
(0.25
|
)
|
|
|
0.12
|
|
|
|
0.11
|
|
|
|
0.25
|
|
|
|
0.20
|
|
|
|
|
(A) |
|
Second Quarter 2005 Restructuring. In June
2005, we initiated a restructuring plan that included the
elimination of 93 positions primarily within our manufacturing
operations as a result of the continued outsourcing of
production to our manufacturing partners. In 2005, we incurred
severance and other employee-related separation costs of
approximately $1.3 million as a result of this
restructuring event. |
|
|
|
|
|
Third Quarter 2006 Acquisition of Convedia. On
September 1, 2006, we completed the acquisition of all of
the capital stock of Convedia for approximately
$106.1 million cash and incurred a $14.0 million
in-process research and development charge. |
|
|
|
Fourth Quarter 2006 Restructuring. During the
fourth quarter of 2006, we initiated a restructuring plan that
included the elimination of 12 positions primarily supporting
our contract manufacturing operations as a result of the
termination of our relationship with one of our manufacturing
partners in North America. The restructuring plan also
includes closing our Charlotte, North Carolina manufacturing
support office. In 2006, we incurred severance and other
employee-related separation costs of $329 thousand as a result
of this restructuring event. We expect this workforce reduction
and office closure to be completed by September 30, 2007. |
45
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is a process designed
to provide reasonable assurance regarding reliability of
financial reporting and the preparation and fair presentation of
published financial statements for external purposes in
accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2006. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based
on our assessment, we conclude that, as of December 31,
2006, the Companys internal control over financial
reporting is effective based on those criteria to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles.
Management excluded from its assessment of the effectiveness of
the Companys disclosure controls and procedures and
internal control over financial reporting, the disclosure
controls and procedures and internal controls of Convedia which
was acquired effective September 1, 2006. Convedia
represents approximately 3% and 18% (4% excluding acquired
goodwill and intangibles) of RadiSys consolidated revenues
and consolidated total assets, respectively, for the year ended
December 31, 2006. Management was unable to assess the
effectiveness of the disclosure controls and procedures and
internal control over financial reporting of Convedia because of
the timing of the acquisition. Management expects to update its
assessment of the effectiveness of the disclosure controls and
procedures and internal control over financial reporting to
include Convedia as soon as practicable but in any event, no
later than in the
Form 10-Q
for the quarterly period ended September 30, 2007.
Managements assessment of the effectiveness of internal
control over financial reporting as of December 31, 2006,
has been audited by KPMG, LLP, the independent registered public
accounting firm who also audited the Companys consolidated
financial statements included in this Item 8, as stated in
the report which appears on page 47 hereof.
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
RadiSys Corporation:
We have audited the accompanying consolidated balance sheets of
RadiSys Corporation and subsidiaries as of December 31,
2006 and 2005, and the related consolidated statements of
operations, statement of changes in shareholders equity
and comprehensive income (loss) and cash flows for each of the
years in the two-year period ended December 31, 2006. In
connection with our audits of the consolidated financial
statements, we also have audited financial statement
schedule II. These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of RadiSys Corporation and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the
two-year period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in notes 14 and 18 to the consolidated financial
statements, in the year ended December 31, 2006, RadiSys
Corporation adopted SEC staff Accounting Bulletin (SAB)
No. 108, Considering the Effect of Prior Year
Misstatements When Quantifying Misstatements in the Current Year
Financial Statements and Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based
Payments, respectively.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of RadiSys Corporations internal control
over financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), and our report dated
March 1, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
Portland, Oregon
March 1, 2007
47
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
RadiSys Corporation:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that RadiSys Corporation maintained
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). RadiSys Corporations management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that RadiSys
Corporation maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, RadiSys Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
48
RadiSys Corporation acquired Convedia Corporation during 2006,
and management excluded from its assessment of the effectiveness
of RadiSys Corporations internal control over financial
reporting as of December 31, 2006, Convedia
Corporations internal control over financial reporting
associated with total assets of $11,522,000, exclusive of
acquired goodwill of $39,720,000 and acquired identifiable
intangible assets of $41,501,000, and total revenues of
$5,887,000 included in the consolidated financial statements of
RadiSys Corporation and subsidiaries as of and for the year
ended December 31, 2006. Our audit of internal control over
financial reporting of RadiSys Corporation also excluded an
evaluation of the internal control over financial reporting of
Convedia Corporation.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of RadiSys Corporation as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, statement of changes in
shareholders equity and comprehensive income (loss), and
cash flows for each of the years in the two-year period ended
December 31, 2006, and our report dated March 1, 2007
expressed an unqualified opinion on those consolidated financial
statements.
Portland, Oregon
March 1, 2007
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
RadiSys Corporation:
In our opinion, the consolidated statements listed in the index
under Item 15(a)(1) present fairly, in all material
respects, the financial position of RadiSys Corporation and its
subsidiaries at December 31, 2004, and the results of their
operations and their cash flows for the year ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related December 31, 2004 consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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
audit provides a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS
LLP
Portland, Oregon
March 7, 2005
50
RADISYS
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
292,481
|
|
|
$
|
260,234
|
|
|
$
|
245,824
|
|
Cost of sales
|
|
|
213,525
|
|
|
|
183,398
|
|
|
|
166,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
78,956
|
|
|
|
76,836
|
|
|
|
79,172
|
|
Research and development
|
|
|
41,492
|
|
|
|
29,784
|
|
|
|
28,214
|
|
Selling, general and administrative
|
|
|
39,330
|
|
|
|
30,084
|
|
|
|
30,448
|
|
Intangible assets amortization
|
|
|
6,224
|
|
|
|
2,052
|
|
|
|
2,226
|
|
In-process research and
development charge
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges
|
|
|
139
|
|
|
|
1,128
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(22,229
|
)
|
|
|
13,788
|
|
|
|
17,272
|
|
Loss on repurchase of convertible
subordinated notes
|
|
|
|
|
|
|
(50
|
)
|
|
|
(387
|
)
|
Interest expense
|
|
|
(1,732
|
)
|
|
|
(2,053
|
)
|
|
|
(3,565
|
)
|
Interest income
|
|
|
9,348
|
|
|
|
6,337
|
|
|
|
3,416
|
|
Other income (expense), net
|
|
|
851
|
|
|
|
(879
|
)
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
provision (benefit)
|
|
|
(13,762
|
)
|
|
|
17,143
|
|
|
|
16,264
|
|
Income tax provision (benefit)
|
|
|
(746
|
)
|
|
|
1,185
|
|
|
|
3,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(13,016
|
)
|
|
$
|
15,958
|
|
|
$
|
13,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.62
|
)
|
|
$
|
0.79
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.62
|
)
|
|
$
|
0.68
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,158
|
|
|
|
20,146
|
|
|
|
18,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
21,158
|
|
|
|
24,832
|
|
|
|
23,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
51
RADISYS
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(Note 2)
|
|
$
|
23,734
|
|
|
$
|
90,055
|
|
Short term investments, net
(Note 2)
|
|
|
102,250
|
|
|
|
135,800
|
|
Accounts receivable, net
(Notes 3 and 19)
|
|
|
42,549
|
|
|
|
39,055
|
|
Other receivables (Note 3)
|
|
|
3,782
|
|
|
|
3,886
|
|
Inventories, net (Note 4)
|
|
|
35,184
|
|
|
|
21,629
|
|
Other current assets (Note 9)
|
|
|
4,609
|
|
|
|
2,426
|
|
Assets held for sale (Note 5)
|
|
|
3,497
|
|
|
|
|
|
Deferred tax assets (Note 17)
|
|
|
5,779
|
|
|
|
7,399
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
221,384
|
|
|
|
300,250
|
|
Property and equipment, net
(Note 6 and 19)
|
|
|
11,075
|
|
|
|
13,576
|
|
Goodwill (Notes 7, 19 and 20)
|
|
|
67,183
|
|
|
|
27,463
|
|
Intangible assets, net
(Notes 8, 19 and 20)
|
|
|
42,935
|
|
|
|
2,159
|
|
Long-term investments (Note 2)
|
|
|
10,000
|
|
|
|
|
|
Long-term deferred tax assets
(Note 17)
|
|
|
24,531
|
|
|
|
21,634
|
|
Other assets (Note 9)
|
|
|
4,546
|
|
|
|
3,629
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
381,654
|
|
|
$
|
368,711
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
39,699
|
|
|
$
|
36,903
|
|
Accrued wages and bonuses
|
|
|
5,995
|
|
|
|
4,829
|
|
Accrued interest payable
(Note 13)
|
|
|
222
|
|
|
|
224
|
|
Accrued restructuring (Note 10)
|
|
|
329
|
|
|
|
856
|
|
Convertible subordinated notes, net
(Note 13)
|
|
|
2,410
|
|
|
|
|
|
Other accrued liabilities
(Notes 11 and 15)
|
|
|
11,154
|
|
|
|
8,279
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
59,809
|
|
|
|
51,091
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Convertible senior notes, net
(Note 13)
|
|
|
97,412
|
|
|
|
97,279
|
|
Convertible subordinated notes, net
(Note 13)
|
|
|
|
|
|
|
2,498
|
|
Other long-term liabilities
(Note 14)
|
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
98,390
|
|
|
|
99,777
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
158,199
|
|
|
|
150,868
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 15)
|
|
|
|
|
|
|
|
|
Shareholders equity
(Notes 14, 16 and 18):
|
|
|
|
|
|
|
|
|
Preferred stock
$.01 par value, 10,000 shares authorized; none issued
or outstanding
|
|
|
|
|
|
|
|
|
Common stock no par
value, 100,000 shares authorized; 21,835 and
20,703 shares issued and outstanding at December 31,
2006 and December 31, 2005
|
|
|
212,887
|
|
|
|
193,839
|
|
Retained earnings
|
|
|
6,555
|
|
|
|
20,275
|
|
Accumulated other comprehensive
income:
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments
|
|
|
4,013
|
|
|
|
3,729
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
223,455
|
|
|
|
217,843
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
381,654
|
|
|
$
|
368,711
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
52
RADISYS
CORPORATION
AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
Earnings
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Translation
|
|
|
(Accumulated
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Adjustments
|
|
|
Deficit)
|
|
|
Total
|
|
|
Income (Loss)
|
|
|
|
(In thousands)
|
|
|
Balances, December 31, 2003
|
|
|
18,274
|
|
|
$
|
166,445
|
|
|
$
|
3,239
|
|
|
$
|
(8,694
|
)
|
|
$
|
160,990
|
|
|
|
|
|
Comprehensive income, for the year
ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued pursuant to benefit
plans
|
|
|
1,381
|
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
|
12,459
|
|
|
|
|
|
Tax benefit associated with
employee benefit plans
|
|
|
|
|
|
|
2,960
|
|
|
|
|
|
|
|
|
|
|
|
2,960
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
841
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
1,118
|
|
|
|
|
|
|
|
1,118
|
|
|
|
1,118
|
|
Recognition of accumulated foreign
currency translation adjustment due to liquidation of subsidiary
|
|
|
|
|
|
|
|
|
|
|
(146
|
)
|
|
|
|
|
|
|
(146
|
)
|
|
|
(146
|
)
|
Net income for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,011
|
|
|
|
13,011
|
|
|
|
13,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004
|
|
|
19,655
|
|
|
|
182,705
|
|
|
|
4,211
|
|
|
|
4,317
|
|
|
|
191,233
|
|
|
|
|
|
Comprehensive income, for the year
ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued pursuant to benefit
plans
|
|
|
953
|
|
|
|
8,673
|
|
|
|
|
|
|
|
|
|
|
|
8,673
|
|
|
|
|
|
Restricted shares granted, net
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
Tax benefit associated with
employee benefit plans
|
|
|
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
|
|
2,262
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
(482
|
)
|
|
|
|
|
|
|
(482
|
)
|
|
|
(482
|
)
|
Net income for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,958
|
|
|
|
15,958
|
|
|
|
15,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
20,703
|
|
|
|
193,839
|
|
|
|
3,729
|
|
|
|
20,275
|
|
|
|
217,843
|
|
|
|
|
|
Comprehensive income, for the year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adjustment
resulting from the adoption of SAB 108, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(704
|
)
|
|
|
(704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Balances, January 1,
2006
|
|
|
20,703
|
|
|
|
193,839
|
|
|
|
3,729
|
|
|
|
19,571
|
|
|
|
217,139
|
|
|
|
|
|
Shares issued pursuant to benefit
plans
|
|
|
1,000
|
|
|
|
12,723
|
|
|
|
|
|
|
|
|
|
|
|
12,723
|
|
|
|
|
|
Stock based compensation associated
with employee benefit plans
|
|
|
|
|
|
|
6,589
|
|
|
|
|
|
|
|
|
|
|
|
6,589
|
|
|
|
|
|
Restricted shares granted, net
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net settlement of restricted shares
|
|
|
(12
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
|
|
|
|
Tax deficiency associated with
employee benefit plans
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
350
|
|
|
|
350
|
|
Recognition of accumulated foreign
currency translation adjustment due to liquidation of subsidiary
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
(66
|
)
|
|
|
(66
|
)
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,016
|
)
|
|
|
(13,016
|
)
|
|
|
(13,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
21,835
|
|
|
$
|
212,887
|
|
|
$
|
4,013
|
|
|
$
|
6,555
|
|
|
$
|
223,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss, for the year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
53
RADISYS
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(13,016
|
)
|
|
$
|
15,958
|
|
|
$
|
13,011
|
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
12,015
|
|
|
|
8,099
|
|
|
|
7,677
|
|
Inventory valuation adjustment
|
|
|
5,593
|
|
|
|
4,505
|
|
|
|
2,778
|
|
Non-cash amortization of fair
value adjustments to net tangible assets acquired from Convedia
|
|
|
1,428
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation associated with the acquisition of Convedia
|
|
|
624
|
|
|
|
|
|
|
|
|
|
In-process research and
development charge
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
Non-cash restructuring adjustments
|
|
|
|
|
|
|
(188
|
)
|
|
|
(858
|
)
|
Non-cash interest expense
|
|
|
217
|
|
|
|
236
|
|
|
|
339
|
|
Non-cash amortization of
(discount) premium on investments
|
|
|
|
|
|
|
(86
|
)
|
|
|
1,193
|
|
Loss (gain) on disposal of
property and equipment
|
|
|
27
|
|
|
|
4
|
|
|
|
(100
|
)
|
Loss on early extinguishments of
convertible subordinated notes
|
|
|
|
|
|
|
50
|
|
|
|
387
|
|
Deferred income taxes
|
|
|
(562
|
)
|
|
|
(1,535
|
)
|
|
|
1,369
|
|
Stock-based compensation expense
|
|
|
6,589
|
|
|
|
199
|
|
|
|
841
|
|
Tax benefit of stock-based
compensation plans
|
|
|
|
|
|
|
2,262
|
|
|
|
2,960
|
|
Other
|
|
|
46
|
|
|
|
(603
|
)
|
|
|
139
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,547
|
)
|
|
|
3,785
|
|
|
|
(12,837
|
)
|
Other receivables
|
|
|
156
|
|
|
|
(1,078
|
)
|
|
|
(671
|
)
|
Inventories
|
|
|
(17,563
|
)
|
|
|
(3,980
|
)
|
|
|
1,165
|
|
Other current assets
|
|
|
(238
|
)
|
|
|
(1,142
|
)
|
|
|
111
|
|
Accounts payable
|
|
|
1,556
|
|
|
|
5,355
|
|
|
|
9,655
|
|
Accrued restructuring
|
|
|
(557
|
)
|
|
|
(467
|
)
|
|
|
(391
|
)
|
Accrued interest payable
|
|
|
(2
|
)
|
|
|
(154
|
)
|
|
|
(1,199
|
)
|
Accrued wages and bonuses
|
|
|
211
|
|
|
|
(749
|
)
|
|
|
761
|
|
Other accrued liabilities
|
|
|
85
|
|
|
|
1,700
|
|
|
|
(1,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
9,062
|
|
|
|
32,171
|
|
|
|
24,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
54
RADISYS
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
held-to-maturity
investments
|
|
|
39,750
|
|
|
|
62,056
|
|
|
|
70,981
|
|
Purchase of
held-to-maturity
investments
|
|
|
(10,000
|
)
|
|
|
(44,667
|
)
|
|
|
(53,779
|
)
|
Proceeds from sale of auction rate
securities
|
|
|
136,250
|
|
|
|
83,950
|
|
|
|
9,000
|
|
Purchase of auction rate securities
|
|
|
(142,450
|
)
|
|
|
(119,000
|
)
|
|
|
(70,000
|
)
|
Capital expenditures
|
|
|
(5,185
|
)
|
|
|
(5,527
|
)
|
|
|
(4,821
|
)
|
Purchase of long-term assets
|
|
|
(549
|
)
|
|
|
(124
|
)
|
|
|
(740
|
)
|
Proceeds from the sale of property
and equipment
|
|
|
73
|
|
|
|
10
|
|
|
|
128
|
|
Acquisition of Convedia, net of
cash acquired
|
|
|
(106,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(88,179
|
)
|
|
|
(23,302
|
)
|
|
|
(49,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Early extinguishments of
convertible subordinated notes
|
|
|
(100
|
)
|
|
|
(7,449
|
)
|
|
|
(58,168
|
)
|
Borrowings under revolving line of
credit
|
|
|
|
|
|
|
|
|
|
|
13,000
|
|
Repayments on revolving line of
credit
|
|
|
|
|
|
|
|
|
|
|
(13,000
|
)
|
Net settlement of restricted shares
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
12,723
|
|
|
|
8,673
|
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
12,366
|
|
|
|
1,224
|
|
|
|
(45,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
430
|
|
|
|
(604
|
)
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(66,321
|
)
|
|
|
9,489
|
|
|
|
(69,359
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
90,055
|
|
|
|
80,566
|
|
|
|
149,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
23,734
|
|
|
$
|
90,055
|
|
|
$
|
80,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,514
|
|
|
$
|
1,966
|
|
|
$
|
4,417
|
|
Income taxes paid (refunded)
|
|
|
(154
|
)
|
|
|
199
|
|
|
|
130
|
|
The accompanying notes are an integral part of these financial
statements.
55
RADISYS
CORPORATION
Note 1
Significant Accounting Policies
Basis
of Presentation
RadiSys Corporation (RadiSys or 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 the manufacturing
automation, medical, transportation, telecommunications and test
equipment marketplaces. The Company has evolved into a leading
provider of embedded systems for compute, data processing and
network-intensive applications to original equipment
manufacturers (OEM) within the communications
networking and commercial systems markets.
The Company, in accordance with Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108), adjusted its beginning retained
earnings for fiscal 2006 in the accompanying consolidated
financial statements. See Note 14 for additional
information on the adoption SAB 108.
Principles
of Consolidation
The accompanying Consolidated Financial Statements include the
accounts of the Company and its wholly owned subsidiaries. All
inter-company accounts and transactions have been properly
eliminated in consolidation.
Management
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. This includes, among other things,
collectibility of accounts receivable; valuation of inventories,
intangible assets and deferred income taxes; and the adequacy of
warranty obligations and restructuring liabilities. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to amounts in prior
years to conform to current year presentation.
Revenue
Recognition
The Company recognizes revenue when the earnings process is
complete, as evidenced by the following revenue recognition
criteria: an agreement with the customer, fixed pricing,
transfer of title and risk of loss and customer acceptance, if
applicable, and that the collectibility of the resulting
receivable is reasonably assured. When a sales arrangement
contains multiple elements, such as hardware and software
products, licenses
and/or
services, the Company allocates revenue to each element based on
its relative fair value, or for software, based on vendor
specific objective evidence (VSOE) of fair value. In
the absence of fair value for a delivered element, the Company
first allocates revenue to the fair value of the undelivered
elements and the residual revenue to the delivered elements.
Where the fair value for an undelivered element cannot be
determined, the Company defers revenue for the delivered
elements until the undelivered elements are delivered. The
Company limits the amount of revenue recognition for delivered
elements to the amount that is not contingent on the future
delivery of products or services or subject to
customer-specified return or refund privileges.
Hardware
Under the Companys standard terms and conditions of sale,
the Company transfers title and risk of loss to the customer at
the time product is shipped to the customer and revenue is
recognized accordingly, unless
56
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
customer acceptance is uncertain or significant obligations
remain. The Company reduces revenue for estimated customer
returns for rotation rights according to agreements with its
distributors. The amount of revenues derived from these
distributors as a percentage of revenues was 3.4% for the year
ended December 31, 2006 and 1.5% for the years ended
December 31, 2005 and 2004. The Company accrues the
estimated cost of post-sale obligations for product warranties,
based on historical experience at the time the Company
recognizes revenue.
Software
Royalties and Licenses
Revenue from customers for prepaid, non-refundable software
royalties is recorded when the revenue recognition criteria have
been met. Revenue for non-prepaid royalties is recognized at the
time the underlying product is shipped by the customer paying
the royalty. The Company recognizes software license revenue at
the time of shipment or upon delivery of the software master
provided when the revenue recognition criteria have been met and
VSOE exists to allocate the total fee to all delivered and
undelivered elements of the arrangement.
Software
maintenance
Software maintenance services are recognized as earned on the
straight-line basis over the terms of the contracts.
Engineering
and other services
Engineering services revenue is recognized upon completion of
certain contractual milestones and customer acceptance of the
services rendered. Other services revenues include hardware
repair services and custom software implementation projects.
Hardware repair services revenues are recognized when the
services are complete. Software implementation revenues are
recognized upon completion of certain contractual milestones and
customer acceptance of the services rendered.
Capitalized
Software Development Costs
The Company does not capitalize internal software development
costs incurred in the production of computer software as the
Company concluded it would not incur any material costs between
the point of technological feasibility and general release of
the product to customers in the future. As such software and
development costs are expensed as R&D costs.
Shipping
Costs
The Companys shipping and handling costs for product sales
are included under cost of sales for all periods presented. For
the years ended December 31, 2006, 2005 and 2004 shipping
and handling costs represented approximately 1% of cost of sales.
Cash
and Cash Equivalents
The Company considers all highly liquid investments purchased
with an original or remaining maturity of three months or less
at the date of purchase to be cash equivalents in accordance
with a Statement of Financial Accounting Standards
(SFAS) No. 95 Statement of Cash
Flows.
Investments
Auction rate securities are classified as
available-for-sale
short-term investments.
Available-for-sale
securities are recorded at fair value, and unrealized holding
gains and losses are recorded, net of tax, as a
57
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
separate component of accumulated other comprehensive income,
which has historically been immaterial. Investments classified
as
held-to-maturity
with original maturities of more than three months but less than
a year are classified as short-term investments, and investments
classified as
held-to-maturity
with original maturities more than a year are classified as
long-term investments in the consolidated financial statements.
The Companys investments consist of auction rate municipal
securities and U.S. government notes and bonds. The Company
classifies, at the date of acquisition, its investments into
categories in accordance with the provisions of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The Companys
investments consisting of U.S. government notes and bonds
are classified as
held-to-maturity
as the Company has the positive intent and ability to hold those
securities to maturity and are stated at amortized cost in the
Consolidated Balance Sheets. The Companys investment
policy requires that the held to maturity investments, including
cash and investments, not exceed a maximum weighted-average
maturity of 18 months. In addition, the policy mandates
that an individual investment must have a maturity of less than
36 months, with no more than 20% of the total portfolio
exceeding 24 months. Realized gains and losses, and
interest and dividends on all securities are included in other
expense, net and Interest income, in the Consolidated Statements
of Operations.
Accounts
Receivable
Trade accounts receivable are stated net of an allowance for
doubtful accounts. An allowance for doubtful accounts is
maintained for estimated losses resulting from the inability of
customers to make required payments. Management reviews the
allowance for doubtful accounts quarterly for reasonableness and
adequacy. If the financial condition of the Companys
customers were to deteriorate resulting in an impairment of
their ability to make payments, additional provisions for
uncollectible accounts receivable may be required. In the event
the Company determined that a smaller or larger reserve was
appropriate, it would record a credit or a charge in the period
in which such determination is made. In addition to customer
accounts that are specifically reserved for, the Company
maintains a non-specific bad debt reserve for all customers
based on a variety of factors, including the length of time
receivables are past due, trends in overall weighted average
risk rating of the total portfolio, macroeconomic conditions,
significant one-time events and historical experience.
Typically, this non-specific bad debt reserve amounts to at
least 1% of quarterly revenues. The Companys customers are
concentrated in the technology industry and the collection of
its accounts receivable are directly associated with the
operational results of the industry.
Inventories
Inventories are stated at the lower of cost or market, net of an
inventory valuation allowance. RadiSys uses the
first-in,
first-out (FIFO) method to determine cost. We
evaluate inventory on a quarterly basis for obsolete or
slow-moving items to ascertain if the recorded allowance is
reasonable and adequate. Inventory is written down for estimated
obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated net realizable
value based upon assumptions about future demand and market
conditions.
Long-Lived
Assets
Long-lived assets, such as property and equipment and
definite-life intangible assets are evaluated for impairment
whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable in accordance
with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. The Company assesses the
impairment of the assets based on the undiscounted future cash
flow the assets are expected to generate compared to the
carrying value of the assets. If the carrying amount of the
assets is determined not to be recoverable, a write-down to fair
value is recorded. Management estimates future cash flows using
assumptions about expected future operating performance.
Managements estimates of
58
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
future cash flows may differ from actual cash flow due to, among
other things, technological changes, economic conditions or
changes to our business operations.
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 No. 142 requires goodwill to be
tested for impairment at least annually and under certain
circumstances and will be written down when impaired.
Property
and Equipment
Property and equipment is recorded at historical cost and
depreciated or amortized on a straight-line basis as follows:
|
|
|
Buildings
|
|
40 years
|
Machinery, equipment, furniture
and fixtures
|
|
5 years
|
Software, computer hardware,
vehicles and manufacturing test fixtures
|
|
3 years
|
Engineering equipment and
demonstration products
|
|
1 year
|
Leasehold improvements
|
|
Lesser of the lease term or
estimated useful lives
|
Ordinary maintenance and repair expenses are charged to income
when incurred.
Accounting
for Leases
The Company leases most of its facilities, certain office
equipment and vehicles under non-cancelable operating leases
that expire at various dates through 2011, along with options
that permit renewals for additional periods. Rent escalations
are considered in the determination of straight-line rent
expense for operating leases. Leasehold improvements made at the
inception of or during the lease are amortized over the shorter
of the asset life or the lease term.
Asset
Retirement Obligations
The Company leases most of its facilities under various
operating leases, some of which contain clauses that require the
Company to restore the leased facility to its original state at
the end of the lease term. In accordance with
SFAS No. 143, Accounting for Asset Retirement
Obligations and FIN 47, Accounting for
Conditional Asset Retirement Obligations, the Company has
completed its analysis to identify asset retirement obligations
and to estimate the associated fair value. As of
December 31, 2006 the Company did not identify any material
asset retirement obligations. If the Company had identified and
estimated material asset retirement obligations it would then
initially measure the obligation at fair value and record it as
a liability with a corresponding increase in the carrying amount
of the underlying property. Subsequently, the asset retirement
obligation would accrete until the time the retirement
obligation is expected to settle while the asset retirement cost
is amortized over the useful life of the underlying property.
Accrued
Restructuring and Other Charges
For the years ended December 31, 2004, 2005 and 2006
expenses associated with exit or disposal activities are
recognized when probable and estimable under
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities for everything but
severance. Because the Company has a history of paying severance
benefits, the cost of severance benefits associated with a
restructuring charge is recorded when such costs are probable
and the amount can be reasonably estimated.
59
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For leased facilities that were vacated, an 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, was recorded as a part of restructuring charges.
Warranty
The Company provides for the estimated cost of product
warranties at the time it recognizes revenue. Products are
generally sold with warranty coverage for a period of
24 months after shipment. On a quarterly basis the Company
assesses the reasonableness and adequacy of the warranty
liability and adjusts such amounts as necessary.
Warranty reserves are included in other accrued liabilities in
the accompanying Consolidated Balance Sheets as of
December 31, 2006 and December 31, 2005. See also
Notes 11 and 15.
Research
and Development
Research and development (R&D) costs are
expensed as incurred. R&D expenses consist primarily of
salary, bonuses and benefits for product development staff, and
cost of design and development supplies and equipment, net of
reimbursements for non-recurring engineering services.
Income
Taxes
The Company accounts for income taxes using the asset and
liability method. This approach requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial
statement carrying amounts and tax bases of assets and
liabilities. Valuation allowances are established in accordance
with SFAS No. 109, Accounting for Income
Taxes, 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
the period such changes are enacted.
Fair
Value of Financial Assets and Liabilities
RadiSys estimates the fair value of its monetary assets and
liabilities including cash and cash equivalents, short-term
investments, long-term investments, accounts receivable,
accounts payable, convertible senior notes and convertible
subordinated notes based upon comparative market values of
instruments of a similar nature and degree of risk in accordance
with SFAS No. 107, Disclosures about Fair Value
of Financial Instruments. The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable are a
reasonable estimate of their fair values. The fair value for the
investments, 1.375% convertible senior notes and the
5.5% convertible subordinated notes is based on quoted
market prices as of the balance sheet date. See Note 13.
Comprehensive
Income (Loss)
In accordance with SFAS No. 130, Reporting
Comprehensive Income, the Company reports accumulated
other comprehensive income (loss) in its Consolidated Balance
Sheets. Comprehensive income (loss) includes net income (loss)
and translation adjustments. The cumulative translation
adjustments consist of unrealized gains (losses) in accordance
with SFAS No. 52, Foreign Currency
Translation. In 2004, the Company liquidated the assets of
a redundant foreign subsidiary. As a result, in 2004, the
Company realized a net gain of approximately $146 thousand,
previously classified as a translation adjustment and included
in other expenses, net in the consolidated financial statements.
In 2006, the Company liquidated the assets of two separate
redundant foreign subsidiaries. As a result, the Company
realized a net gain of approximately $66 thousand, previously
classified as translation adjustments and included such amounts
in other expenses, net in the consolidated financial statements.
60
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation
On December 16, 2004, the Financial Accounting Standards
Board issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R).
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS 123R, using the
modified prospective transition method and therefore has not
restated results for prior periods. Under this transition
method, stock-based compensation expense for fiscal 2006
includes compensation expense for all stock-based compensation
awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value
estimated in accordance with the original provision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Stock-based
compensation expense for all stock-based compensation awards
granted after January 1, 2006 is based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123R. The Company recognizes these compensation costs
on a straight-line basis over the requisite service period of
the award. Prior to the adoption of SFAS 123R, the Company
recognized stock-based compensation expense in accordance with
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25). In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107)
regarding the SECs interpretation of SFAS 123R and
the valuation of share-based payments for public companies. The
Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R. See Note 18 to the Consolidated
Financial Statements for a further discussion on stock-based
compensation.
Net
income (loss) per share
For the years ended December 31, 2005 and 2004, the Company
computed earnings per share in accordance with
SFAS No. 128, Earnings per Share,
(SFAS 128). Accordingly, basic earnings per
share amounts were computed based on the weighted-average number
of common shares outstanding. Diluted earnings per share amounts
incorporated the incremental shares issuable upon assumed
exercise of stock options, incremental shares associated with
the assumed vesting of restricted stock and the assumed
conversion of the Companys convertible notes, as if the
conversion to common shares had occurred at the beginning of the
fiscal year and when such conversion would have the effect of
reducing earnings per share. When the conversion of the
Companys convertible notes has the effect of reducing
earnings per share earnings have also been adjusted for the
interest expense on the convertible notes. See also Note 16.
For the year ended December 31, 2006, the Company was in a
loss position, and as a result only computed basic net loss per
share based on the weighted-average number of common shares
outstanding.
Foreign
currency translation
Assets and liabilities of international operations, using a
functional currency other then the U.S. dollar, are
translated into U.S. dollars at exchange rates as of
December 31, 2006 and 2005. Income and expense accounts are
translated into U.S. dollars at the actual daily 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 in shareholders equity in accordance with
SFAS No. 130. Foreign exchange transaction gains and
losses are included in other expense, net, in the Consolidated
Statements of Operations. Foreign currency exchange rate
fluctuations resulted in a net gain of $96 thousand for the year
ended December 31, 2006, and a net loss of $803 thousand
and $317 thousand for the years ended December 31, 2005,
and 2004, respectively.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
(SFAS) No. 109. This Interpretation
clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial
61
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements in accordance with SFAS No. 109,
Accounting for Income Taxes. The interpretation
describes a recognition threshold and measurement attribute for
the financial statement disclosure of tax positions taken or
expected to be taken. It also provides for guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition.
FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company will be required to
adopt this interpretation in the first quarter of fiscal year
2007. We are currently evaluating the impact of adopting
FIN No. 48 on our financial condition, results of
operations and cash flows.
In June 2006, the Emerging Issues Task Force issued EITF
06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)
(EITF
06-3)
to clarify diversity in practice on the presentation of
different types of taxes in the financial statements. The Task
Force concluded that, for taxes within the scope of the issue, a
company may adopt a policy of presenting taxes either gross
within revenue or net. That is, it may include charges to
customers for taxes within revenues and the charge for the taxes
from the taxing authority within cost of sales, or,
alternatively, it may net the charge to the customer and the
charge from the taxing authority. If taxes subject to this Issue
are significant, a company is required to disclose its
accounting policy for presenting taxes and the amounts of such
taxes that are recognized on a gross basis. The guidance in this
consensus is effective for the first interim reporting period
beginning after December 15, 2006. The Company is currently
assessing the impact, if any, that the adoption of this EITF
will have on its financial statements.
In September 2006, the SEC issued SAB 108. SAB 108
provides guidance on how prior year misstatements should be
taken into consideration when quantifying misstatements in
current year financial statements for purposes of determining
whether the current years financial statements are
materially misstated. SAB 108 permits registrants to record
the cumulative effect of initial adoption by recording the
necessary correcting adjustments to the carrying
values of assets and liabilities as of the beginning of that
year with the offsetting adjustment recorded to the opening
balance of retained earnings only if material under the dual
method. SAB 108 is effective for fiscal years ending on or
after November 15, 2006. See Note 14 of the Notes to
the Consolidated Financial Statements for further discussion.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities. It also responds to investors
requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurements on earnings. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair
value in any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently assessing the
impact, if any, that the adoption of SFAS 157 will have on
its financial statements.
62
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 2
Cash Equivalents and Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
251
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
251
|
|
Auction rate securities
|
|
|
102,250
|
|
|
|
|
|
|
|
|
|
|
|
102,250
|
|
U.S. government notes and
bonds
|
|
|
10,000
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
9,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,501
|
|
|
$
|
|
|
|
$
|
(16
|
)
|
|
$
|
112,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less investments classified as
cash equivalents
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term
investments
|
|
$
|
112,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
636
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
636
|
|
Commercial paper
|
|
|
58,301
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
58,284
|
|
Auction Rate Securities
|
|
|
96,050
|
|
|
|
|
|
|
|
|
|
|
|
96,050
|
|
U.S. government notes and
bonds
|
|
|
47,985
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
47,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
202,972
|
|
|
$
|
|
|
|
$
|
(356
|
)
|
|
$
|
202,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less investments classified as
cash equivalents
|
|
|
(67,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term
investments
|
|
$
|
135,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities primarily consist of municipal bonds and
have been classified as
available-for-sale
short-term investments.
Available-for-sale
securities are recorded at fair value, and unrealized holding
gains and losses are recorded, net of tax, as a separate
component of accumulated other comprehensive income. For the
years ended December 31, 2006 and 2005 the Company did not
recognize any gains or losses on the sales of
available-for-sale
investments. For the years ended December 31, 2006 and
2005, there were no unrealized gains or losses on
available-for-sale
investments. At December 31, 2006 and 2005, the Company had
the intent and ability to hold
held-to-maturity
investments to maturity, and the securities are stated at
amortized cost in the Consolidated Balance Sheets. The fair
market value disclosed in this footnote is representative of the
portfolios value at December 31, 2006 had there been
an unusual or unplanned liquidation of the underlying
investments. The Companys investment policy requires that
the total investment portfolio, including cash and investments,
not exceed a maximum weighted-average maturity of
18 months. In addition, the policy mandates that an
individual investment must have a maturity of less than
36 months, with no more than 20% of the total portfolio
exceeding 24 months. As of December 31, 2006, the
Company was in compliance with its investment policy.
63
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the Companys investment gross
unrealized losses and fair values aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position at December 31,
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Description of
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
102,250
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
102,250
|
|
|
$
|
|
|
US government notes and bonds
|
|
|
|
|
|
|
|
|
|
|
9,984
|
|
|
|
(16
|
)
|
|
|
9,984
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
102,250
|
|
|
$
|
|
|
|
$
|
9,984
|
|
|
$
|
(16
|
)
|
|
$
|
112,234
|
|
|
$
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses of these investments represented less than
1% of the cost of our investment portfolio at December 31,
2006.
The Company reviewed all investments with unrealized losses at
December 31, 2006 and based on this evaluation concluded
that these declines in fair value were temporary after
considering:
|
|
|
|
|
That the majority of such losses for securities in an unrealized
loss position for less than 12 months were interest rate
related;
|
|
|
|
Our intent and ability to keep the security until maturity.
|
Short-term and long-term investments reported as (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Short-term
held-to-maturity
investments
|
|
$
|
|
|
|
$
|
39,750
|
|
Short-term investments, classified
as available for sale
|
|
|
102,250
|
|
|
|
96,050
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
102,250
|
|
|
$
|
135,800
|
|
|
|
|
|
|
|
|
|
|
Long-term
held-to-maturity
investments
|
|
$
|
10,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Note 3
Accounts Receivable and Other Receivables
Accounts receivable balances as of December 31, 2006 and
2005 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Accounts receivable, gross
|
|
$
|
43,407
|
|
|
$
|
39,931
|
|
Less: allowance for doubtful
accounts
|
|
|
(858
|
)
|
|
|
(876
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
42,549
|
|
|
$
|
39,055
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable at December 31, 2006 and 2005 primarily
consists of sales to the Companys customers which are
generally based on standard terms and conditions. During the
years ended December 31, 2005 and 2004, the Company did not
record a provision for allowance for doubtful accounts. During
the third quarter of 2006, the Company recorded a $200 thousand
provision for allowance for doubtful accounts which was
collected in the subsequent quarter.
As of December 31, 2006 and 2005 other receivables was
$3,782 thousand and $3,886 thousand, respectively. Other
receivables consisted primarily of non-trade receivables
including receivables for inventory
64
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sold to our contract manufacturing partners. Sales to the
Companys contract manufacturing partners are based on
terms and conditions similar to the terms offered to the
Companys regular customers. There is no revenue recorded
associated with non-trade receivables.
Note 4
Inventories
Inventories as of December 31, 2006 and 2005 consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
32,034
|
|
|
$
|
20,790
|
|
Work-in-process
|
|
|
3,138
|
|
|
|
2,282
|
|
Finished goods
|
|
|
8,624
|
|
|
|
5,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,796
|
|
|
|
28,901
|
|
Less: inventory valuation allowance
|
|
|
(8,612
|
)
|
|
|
(7,272
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
35,184
|
|
|
$
|
21,629
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2006, 2005 and 2004 the
Company recorded provision for excess and obsolete inventory of
$5.6 million, $4.5 million and $2.8 million,
respectively.
The following is a summary of the change in the Companys
inventory valuation allowance for the years ended
December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Inventory valuation allowance,
beginning of the year
|
|
$
|
7,272
|
|
|
$
|
7,353
|
|
Usage:
|
|
|
|
|
|
|
|
|
Inventory scrapped
|
|
|
(1,837
|
)
|
|
|
(2,241
|
)
|
Inventory utilized
|
|
|
(2,943
|
)
|
|
|
(2,487
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal usage
|
|
|
(4,780
|
)
|
|
|
(4,728
|
)
|
Write-downs of inventory valuation
|
|
|
5,593
|
|
|
|
4,505
|
|
Transfer from other liabilities(A)
|
|
|
527
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
Remaining valuation allowance, end
of the year
|
|
$
|
8,612
|
|
|
$
|
7,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Transfer from other liabilities is related to obsolete inventory
purchased from contract manufacturers during the year which was
previously reserved for as an adverse purchase commitment.
(Notes 11 and 15) |
Note 5
Long-Lived Assets Held for Sale
Beginning in 2001, RadiSys made it part of its strategic plan to
significantly reduce its costs. As part of its plan to reduce
costs RadiSys began in 2004 to outsource the manufacture of most
of its products. Through various restructuring activities,
facilities requirements for manufacturing and other activities
in the Hillsboro, Oregon location have decreased significantly.
As a result, management decided to transfer operations currently
located in one of the Companys buildings in Hillsboro,
Oregon (DC3 building) to its other building located
in Hillsboro, Oregon and its contract manufacturing partners.
In January 2006, RadiSys vacated the DC3 building and put it and
the surrounding land, which had previously been held for future
expansion, on the market for sale. The assets held for sale had
a recorded
65
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value of $3.5 million which included land with a value of
$2.2 million, building and building improvements with a net
value of $1.3 million, and machinery and equipment with a
net value of $38 thousand. The Company classified this facility
in net assets held for sale as of January 31, 2006, and as
a result ceased depreciation of these assets. Refer to
Note 22 Subsequent Events for further
information.
Note 6
Property and Equipment
Property and equipment as of December 31, 2006 and 2005
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
|
|
|
$
|
2,162
|
|
Building
|
|
|
|
|
|
|
1,756
|
|
Manufacturing equipment
|
|
|
15,856
|
|
|
|
16,803
|
|
Office equipment and software
|
|
|
25,332
|
|
|
|
22,413
|
|
Leasehold improvements
|
|
|
4,126
|
|
|
|
4,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,314
|
|
|
|
47,237
|
|
Less: accumulated depreciation and
amortization
|
|
|
(34,239
|
)
|
|
|
(33,661
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
11,075
|
|
|
$
|
13,576
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for property and equipment
for the years ended December 31, 2006, 2005 and 2004 was
$5.1 million, $5.9 million and $5.4 million,
respectively.
Note 7
Goodwill
The Company tests goodwill for impairment at least annually.
Additionally, the Company assesses goodwill for impairment if
any adverse conditions exist that would indicate impairment.
Conditions that would trigger an impairment assessment, include,
but are not limited to, a significant adverse change in legal
factors or in the business climate that could affect the value
of an asset or an adverse action or assessment by a regulator.
The Company is considered one reporting unit. As a result, to
determine whether or not goodwill may be impaired, the Company
compares its book value to its market capitalization. If the
trading price of the Companys common stock is below the
book value per share at the date of the annual impairment test
or if the average trading price of the Companys common
stock is below book value per share for a sustained period, a
goodwill impairment test will be performed by comparing book
value to estimated market value. The Company completed its
annual goodwill impairment analysis as of September 30,
2006 and concluded that as of September 30, 2006, there was
no goodwill impairment. See Note 20
Acquisition of Convedia for further information.
66
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 8
Intangible Assets
The following tables summarize details of the Companys
total purchased intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing technology
|
|
$
|
38,315
|
|
|
$
|
(6,231
|
)
|
|
$
|
32,084
|
|
Technology licenses
|
|
|
6,790
|
|
|
|
(6,790
|
)
|
|
|
|
|
Patents
|
|
|
6,647
|
|
|
|
(5,918
|
)
|
|
|
729
|
|
Customer lists
|
|
|
8,200
|
|
|
|
(1,139
|
)
|
|
|
7,061
|
|
Trade names
|
|
|
3,636
|
|
|
|
(575
|
)
|
|
|
3,061
|
|
Other
|
|
|
637
|
|
|
|
(637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
64,225
|
|
|
$
|
(21,290
|
)
|
|
$
|
42,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing technology
|
|
$
|
2,415
|
|
|
$
|
(1,764
|
)
|
|
$
|
651
|
|
Technology licenses
|
|
|
6,790
|
|
|
|
(6,601
|
)
|
|
|
189
|
|
Patents
|
|
|
6,647
|
|
|
|
(5,757
|
)
|
|
|
890
|
|
Trade names
|
|
|
736
|
|
|
|
(307
|
)
|
|
|
429
|
|
Other
|
|
|
237
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,825
|
|
|
$
|
(14,666
|
)
|
|
$
|
2,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $6.6 million,
$2.1 million and $2.2 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
The Companys purchased intangible assets have lives
ranging from 4 to 10 years. In accordance with
SFAS No. 144, the Company reviews for impairment of
all its purchased intangible assets whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. The estimated future amortization
expense of purchased intangible assets as of December 31,
2006 is as follows (in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Intangible
|
|
|
|
Amortization
|
|
For the Years Ending December 31,
|
|
Amount
|
|
|
2007
|
|
|
17,006
|
|
2008
|
|
|
15,650
|
|
2009
|
|
|
8,412
|
|
2010
|
|
|
1,294
|
|
2011
|
|
|
573
|
|
|
|
|
|
|
Total
|
|
$
|
42,935
|
|
|
|
|
|
|
67
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 9
Other Assets
Other current assets as of December 31, 2006 and 2005
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Prepaid maintenance, rent and other
|
|
$
|
2,967
|
|
|
$
|
2,074
|
|
Interest receivable on investments
|
|
|
392
|
|
|
|
352
|
|
Deferred compensation associated
with the acquisition of Convedia (Note 20)
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
4,609
|
|
|
$
|
2,426
|
|
|
|
|
|
|
|
|
|
|
Other assets as of December 31, 2006 and 2005 consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Employee deferred compensation
arrangement
|
|
$
|
3,266
|
|
|
$
|
2,509
|
|
Other
|
|
|
1,280
|
|
|
|
1,120
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
4,546
|
|
|
$
|
3,629
|
|
|
|
|
|
|
|
|
|
|
Employee deferred compensation arrangement represents the cash
surrender value of insurance contracts purchased by the Company
as part of its deferred compensation plan established in January
2001 Any elective deferrals by the eligible employees are
invested in insurance contracts.
Note 10
Accrued Restructuring and Other Charges
Accrued restructuring as of December 31, 2006 and
December 31, 2005 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Fourth quarter 2006 restructuring
charge
|
|
$
|
329
|
|
|
$
|
|
|
Second quarter 2005 restructuring
charge
|
|
|
|
|
|
|
803
|
|
Fourth quarter 2001 restructuring
charge
|
|
|
|
|
|
|
20
|
|
Other
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
329
|
|
|
$
|
856
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates the adequacy of the accrued restructuring
charges on a quarterly basis. The Company records certain
reclassifications between categories and reversals to the
accrued restructuring charges based on the results of the
evaluation. The total accrued restructuring charges for each
restructuring event are not affected by reclassifications.
Reversals are recorded in the period in which the Company
determines that expected restructuring obligations are less than
the amounts accrued.
Fourth
Quarter 2006 Restructuring
During the fourth quarter of 2006, the Company initiated a
restructuring plan that included the elimination of 12 positions
primarily supporting the Companys contract manufacturing
operations as a result of the termination of our relationship
with one of our contract manufacturers in North America. The
restructuring plan also includes closing our Charlotte, North
Carolina manufacturing support office. We expect this workforce
reduction and office closure to be completed by
September 30, 2007.
68
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the changes to the fourth quarter
2006 restructuring costs (in thousands):
|
|
|
|
|
|
|
Employee
|
|
|
|
Termination and
|
|
|
|
Related Costs
|
|
|
Restructuring and other costs
|
|
$
|
329
|
|
Additions
|
|
|
|
|
Expenditures
|
|
|
|
|
Reversals
|
|
|
|
|
|
|
|
|
|
Balance accrued as of
December 31, 2006
|
|
$
|
329
|
|
|
|
|
|
|
Second
Quarter 2005 Restructuring
In 2005, the Company entered into a restructuring plan that
included the elimination of 93 positions primarily within the
Companys manufacturing operations. These employee
positions were to be eliminated as a result of continued
outsourcing of production to the Companys manufacturing
partners.
The following table summarizes the changes to the second quarter
2006 restructuring costs (in thousands):
|
|
|
|
|
|
|
Employee
|
|
|
|
Termination and
|
|
|
|
Related Costs
|
|
|
Restructuring and other costs
|
|
$
|
1,108
|
|
Additions
|
|
|
219
|
|
Expenditures
|
|
|
(355
|
)
|
Reversals
|
|
|
(169
|
)
|
|
|
|
|
|
Balance accrued as of
December 31, 2005
|
|
$
|
803
|
|
|
|
|
|
|
Additions
|
|
|
93
|
|
Expenditures
|
|
|
(589
|
)
|
Reversals
|
|
|
(307
|
)
|
|
|
|
|
|
Balance accrued as of
December 31, 2006
|
|
$
|
|
|
|
|
|
|
|
Employee termination and related costs include severance and
other related separation costs. Additions to the original
accrual were primarily attributable to the additional retention
bonuses and related expenses for employment terminations that
were expected to occur later in 2006. During the second quarter
of 2006, the Company announced that it was discontinuing its
relationship with one of its contract manufacturers in North
America. As a result, the Company determined that all future
employment terminations that were originally included in the
second quarter 2005 restructuring event would not occur in the
near term and the majority of the associated liability was
reversed in the second quarter of 2006. The balance of the
accrual related to two employees who were terminated as of
December 31, 2006.
Fourth
Quarter 2001 Restructuring
The accrual amount remaining as of December 31, 2005
represents lease obligations relating to the facilities in Boca
Raton, Florida which were paid in January 2006.
69
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 11
Other accrued liabilities
Other accrued liabilities as of December 31, 2006 and 2005,
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Accrued tax liability
|
|
$
|
1,882
|
|
|
$
|
1,569
|
|
Accrued warranty reserve
|
|
|
2,000
|
|
|
|
2,124
|
|
Deferred compensation plan
liability
|
|
|
2,458
|
|
|
|
2,014
|
|
Deferred revenues
|
|
|
1,242
|
|
|
|
539
|
|
Adverse purchase commitments
|
|
|
1,911
|
|
|
|
828
|
|
Accrued royalties
|
|
|
287
|
|
|
|
75
|
|
Other
|
|
|
1,374
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$
|
11,154
|
|
|
$
|
8,279
|
|
|
|
|
|
|
|
|
|
|
Note 12
Short-Term Borrowings
During the quarter ended March 31, 2006, the Company
transferred its line of credit facility from its commercial bank
to an investment bank, for $20.0 million at an interest
rate based on the
30-day
London Inter-Bank Offered Rate (LIBOR) plus 0.75%.
The line of credit is collateralized by the Companys
non-equity investments. At December 31, 2006, the Company
had a standby letter of credit outstanding related to one of its
medical insurance carriers for $105 thousand. The market value
of non-equity investments must exceed 125.0% of the borrowed
facility amount, and the investments must meet specified
investment grade ratings.
As of December 31, 2006 and December 31, 2005, there
were no outstanding balances on the standby letter of credit or
line of credit and we were in compliance with all debt covenants.
Note 13
Long-Term Liabilities
Convertible
Senior Notes
During November 2003, the Company completed a private offering
of $100 million aggregate principal amount of
1.375% convertible senior notes due November 15, 2023
to qualified institutional buyers. The discount on the 1.375%
convertible senior notes amounted to $3 million.
Convertible senior notes are unsecured obligations convertible
into the Companys common stock and rank equally in right
of payment with all existing and future obligations that are
unsecured and unsubordinated. Interest on the senior notes
accrues at 1.375% per year and is payable semi-annually on
May 15 and November 15. The 1.375% convertible senior
notes are payable in full in November 2023. The notes are
convertible, at the option of the holder, at any time on or
prior to maturity under certain circumstances, unless previously
redeemed or repurchased, into shares of the Companys
common stock at a conversion price of $23.57 per share,
which is equal to a conversion rate of 42.4247 shares per
$1,000 principal amount of notes. The notes are convertible
prior to maturity into shares of the Companys common stock
under certain circumstances that include but are not limited to
(i) conversion due to the closing price of the
Companys common stock on the trading day prior to the
conversion date reaching 120% or more of the conversion price of
the notes on such trading date and (ii) conversion due to
the trading price of the notes falling below 98% of the
conversion value. Upon conversion the Company will have the
right to deliver, in lieu of common stock, cash or a combination
of cash and common stock. The Company may redeem all or a
portion of the notes at its option on or after November 15,
2006 but before November 15, 2008 provided that the closing
price of the Companys common stock exceeds 130% of the
conversion price for at least 20 trading days within a period
70
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of 30 consecutive trading days ending on the trading day before
the date of the notice of the provisional redemption. On or
after November 15, 2008, the Company may redeem the notes
at any time. On November 15, 2008, November 15, 2013,
and November 15, 2018, holders of the
1.375% convertible senior notes will have the right to
require the Company to purchase, in cash, all or any part of the
notes held by such holder at a purchase price equal to 100% of
the principal amount of the notes being purchased, together with
accrued and unpaid interest and additional interest, if any, up
to but excluding the purchase date. The accretion of the
discount on the notes is calculated using the effective interest
method.
As of December 31, 2006 and December 31, 2005 the
Company had outstanding 1.375% convertible senior notes
with a face value of $100 million. As of December 31,
2006 and December 31, 2005 the book value of the 1.375%
convertible senior notes was $97.4 million and
$97.3 million respectively, net of unamortized discount of
$2.6 million and $2.7 million, respectively.
Amortization of the discount on the 1.375% convertible
senior notes was $133 thousand and $131 thousand for the years
ended December 31, 2006 and 2005, respectively. The
estimated fair value of the 1.375% convertible senior notes
was $96.6 million and $93.5 million at
December 31, 2006 and December 31, 2005, respectively.
Convertible
Subordinated Notes
During August 2000, the Company completed a private offering of
$120 million aggregate principal amount of
5.5% convertible subordinated notes due August 15,
2007 to qualified institutional buyers. The discount on the 5.5%
convertible subordinated notes amounted to $3.6 million.
Convertible subordinated notes are unsecured obligations
convertible into the Companys common stock and are
subordinated to all present and future senior indebtedness of
the Company. Interest on the 5.5% convertible subordinated
notes accrues at 5.5% per year and is payable semi-annually
on February 15 and August 15. The 5.5% convertible
subordinated notes are payable in full in August 2007. The notes
are convertible, at the option of the holder, at any time on or
before maturity, unless previously redeemed or repurchased, into
shares of the Companys common stock at a conversion price
of $67.80 per share, which is equal to a conversion rate of
14.7484 shares per $1,000 principal amount of notes. If the
closing price of the Companys common stock equals or
exceeds 140% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending on
the trading day before the date on which a notice of redemption
is mailed, then the Company may redeem all or a portion of the
notes at our option at a redemption price equal to the principal
amount of the notes plus a premium (which declines annually on
August 15 of each year), together with accrued and unpaid
interest to, but excluding, the redemption date. The accretion
of the discount on the notes is calculated using the effective
interest method.
In 2005 the Board of Directors approved the repurchase of the
remaining principal amount of the 5.5% convertible
subordinated notes. For the year ended December 31, 2006,
the Company repurchased $100 thousand principal amount of the
5.5% convertible subordinated notes for $100 thousand with
a recorded loss of $1 thousand. For the year ended
December 31, 2005, the Company repurchased
$7.5 million principal amount of the 5.5% convertible
subordinated notes with an associated discount of $69 thousand.
The Company repurchased the notes in the open market for
$7.4 million and recorded a loss of $50 thousand.
As of December 31, 2006 and 2005 the Company had
outstanding 5.5% convertible subordinated notes with a face
value of $2.4 million and $2.5 million, respectively. As of
December 31, 2006 and December 31, 2005 the book value
of the 5.5% convertible subordinated notes was
$2.4 million and $2.5 million, respectively, net of
amortized discount of $8 thousand and $20 thousand,
respectively. Amortization of the discount on the
5.5% convertible subordinated notes was $12 thousand and
$106 thousand for the year ended December 31, 2006 and
2005, respectively. The estimated fair value of the
5.5% convertible subordinated notes was $2.4 million
and $2.5 million at December 31, 2006 and
December 31, 2005, respectively.
71
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate maturities of long-term liabilities for each of
the years in the five year period ending December 31, 2010
and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
Senior
|
|
|
Subordinated
|
|
For the Years Ending December 31,
|
|
Notes
|
|
|
Notes
|
|
|
2007
|
|
|
|
|
|
|
2,418
|
|
2008(A)
|
|
|
100,000
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
2,418
|
|
Less: unamortized discount
|
|
|
(2,588
|
)
|
|
|
(8
|
)
|
Less: current portion
|
|
|
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
$
|
97,412
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
On or after November 15, 2008, the Company may redeem the
1.375% Convertible Senior Notes at any time. On
November 15, 2008, November 15, 2013, and
November 15, 2018, holders of the 1.375% convertible
senior notes will have the right to require the Company to
purchase, in cash, all or any part of the notes held by such
holder at a purchase price equal to 100% of the principal amount
of the notes being purchased, together with accrued and unpaid
interest and additional interest, if any, up to but excluding
the purchase date. |
Note 14
Staff Accounting Bulletin No. 108
As discussed under Recent Accounting Pronouncements in
Note 1, in September 2006, the SEC released SAB 108.
The transitional provisions of SAB 108 permit the Company
to adjust for the cumulative effect on retained earnings of
immaterial errors relating to prior years. SAB 108 also
requires the adjustment of any prior quarterly financial
statements within the fiscal year of adoption for the effects of
such errors on the quarters when the information is next
presented. Such adjustments do not require previously filed
reports with the SEC to be amended. In accordance with
SAB 108, the Company has adjusted beginning retained
earnings for fiscal 2006 in the accompanying consolidated
financial statements for the items described below. The Company
considers these adjustments to be immaterial to prior periods.
The Company currently leases two buildings in Hillsboro Oregon,
which serve as the Companys headquarters and primary
in-house manufacturing facilities. The leases were entered into
in October of 1996 and March of 1997 and extend to October of
2011. The terms of each lease include escalating lease payments
over the life of the leases. These leases have been properly
accounted for as operating leases but the expense associated
with these leases was based on actual payments instead of a
straight-line basis in accordance with the SFAS 13,
Accounting for Leases. The cumulative error resulted
in a reduction to 2006 beginning retained earnings, net of tax
of $704 thousand and an increase in current and long-term
liabilities for the deferred rent liability as of
January 1, 2006 of $1.1 million.
72
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 15
Commitments and Contingencies
RadiSys leases most of its facilities, certain office equipment,
and vehicles under non-cancelable operating leases which require
minimum lease payments expiring from one to 5 years after
December 31, 2006. Amounts of future minimum lease
commitments in each of the five years ending December 31,
2007 through 2011 are as follows (in thousands):
|
|
|
|
|
|
|
Future Minimum
|
|
For the Years Ending December 31,
|
|
Lease Payments
|
|
|
2007
|
|
|
3,662
|
|
2008
|
|
|
3,505
|
|
2009
|
|
|
2,991
|
|
2010
|
|
|
2,595
|
|
2011
|
|
|
1,626
|
|
|
|
|
|
|
|
|
$
|
14,379
|
|
|
|
|
|
|
Rent expense totaled $3.6 million, $3.2 million and
$3.6 million for the years ended December 31, 2006,
2005 and 2004, respectively.
Adverse
Purchase Commitments
The Company is contractually obligated to reimburse its contract
manufacturers for the cost of excess inventory used in the
manufacture of the Companys products, for which there is
no alternative use. Estimates for adverse purchase commitments
are derived from reports received on a quarterly basis from the
Companys contract manufacturers. Increases to this
liability are charged to cost of goods sold. When and if the
Company takes possession of inventory reserved for in this
liability, the liability is transferred from other accrued
liabilities (Note 11) to our excess and obsolete
inventory valuation allowance (Note 4).
Guarantees
and Indemnification Obligations
In November 2002, the FASB issued FIN No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of SFAS No. 5, 57, and
107 and rescission of FASB Interpretation No. 34.
FIN No. 45 requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken by issuing the guarantee and requires
additional disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under
certain guarantees it has issued. The following is a summary of
the agreements that the Company has determined are within the
scope of FIN No. 45.
As permitted under Oregon law, the Company has agreements
whereby it indemnifies its officers, directors and certain
finance employees for certain events or occurrences while the
officer, director or employee is or was serving in such capacity
at the request of the Company. The term of the indemnification
period is for the officers, directors or
employees lifetime. The maximum potential amount of future
payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company
has a Director and Officer insurance policy that limits its
exposure and enables the Company to recover a portion of any
future amounts paid. To date, the Company has not incurred any
costs associated with these indemnification agreements and, as a
result, management believes the estimated fair value of these
indemnification agreements is minimal. Accordingly, the Company
has not recorded any liabilities for these agreements as of
December 31, 2006.
The Company enters into standard indemnification agreements in
its ordinary course of business. Pursuant to these agreements,
the Company indemnifies, holds harmless, and agrees to reimburse
the indemnified party
73
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for losses suffered or incurred by the indemnified party,
generally our business partners or customers, in connection with
patent, copyright or other intellectual property infringement
claims by any third party with respect to our current products,
as well as claims relating to property damage or personal injury
resulting from the performance of services by us or our
subcontractors. The maximum potential amount of future payments
we could be required to make under these indemnification
agreements is generally limited. Historically, our costs to
defend lawsuits or settle claims relating to such indemnity
agreements have been minimal and accordingly management believes
the estimated fair value of these agreements is immaterial.
The Company provides for the estimated cost of product
warranties at the time it recognizes revenue. Products are
generally sold with warranty coverage for a period of
24 months after shipment. Parts and labor are covered under
the terms of the warranty agreement. The workmanship of our
products produced by contract manufacturers is covered under
warranties provided by the contract manufacturer for a specified
period of time ranging from 12 to 15 months. The warranty
provision is based on historical experience by product family.
The Company engages in extensive product quality programs and
processes, including actively monitoring and evaluating the
quality of its components suppliers; however ongoing failure
rates, material usage and service delivery costs incurred in
correcting product failure, as well as specific product class
failures out of the Companys baseline experience affect
the estimated warranty obligation. If actual product failure
rates, material usage or service delivery costs differ from
estimates, revisions to the estimated warranty liability would
be required.
The following is a summary of the change in the Companys
warranty accrual reserve for the years ended December 31,
2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Warranty liability balance,
beginning of the year
|
|
$
|
2,124
|
|
|
$
|
1,719
|
|
Product warranty accruals
|
|
|
3,384
|
|
|
|
3,244
|
|
Adjustments for payments made
|
|
|
(3,508
|
)
|
|
|
(2,839
|
)
|
|
|
|
|
|
|
|
|
|
Warranty liability balance, end of
the year
|
|
$
|
2,000
|
|
|
$
|
2,124
|
|
|
|
|
|
|
|
|
|
|
The warranty liability balance is included in other accrued
liabilities in the accompanying Consolidated Balance Sheets as
of December 31, 2006 and 2005. The Company offers fixed
price support or maintenance contracts to its customers however,
revenues from fixed price support or maintenance contracts were
not significant to the Companys operations for the years
reported.
On November 22, 2005, the Company received a notice from a
customer claiming a breach of a software maintenance support
contract and claiming damages. In the fourth quarter of 2006 the
Company received additional notice that the customer intended on
settling their claim, however the amount has not yet been agreed
upon. Although the Company disputes the validity of the claim it
has determined that any likely settlement of this claim will
range from zero to $950 thousand and has accordingly recorded
its current best estimate of the probable settlement of the
matter as an accrual. The Company maintains their original
accrual is still their best estimate of the probable settlement
of the matter.
74
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 16
Basic and Diluted Income per Share
A reconciliation of the numerator and the denominator used to
calculate basic and diluted income per share is as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), basic
|
|
$
|
(13,016
|
)
|
|
$
|
15,958
|
|
|
$
|
13,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), basic
|
|
|
(13,016
|
)
|
|
|
15,958
|
|
|
|
13,011
|
|
Interest on convertible senior
notes, net of tax benefit(A)
|
|
|
|
|
|
|
969
|
|
|
|
964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), diluted
|
|
$
|
(13,016
|
)
|
|
$
|
16,927
|
|
|
$
|
13,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to
calculate income per share from continuing operations and net
income (loss) per share, basic
|
|
|
21,158
|
|
|
|
20,146
|
|
|
|
18,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to
calculate net income per share, basic
|
|
|
21,158
|
|
|
|
20,146
|
|
|
|
18,913
|
|
Effect of dilutive restricted stock
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Effect of dilutive stock options(B)
|
|
|
|
|
|
|
438
|
|
|
|
667
|
|
Effect of convertible senior
notes(A)
|
|
|
|
|
|
|
4,243
|
|
|
|
4,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to
calculate net income per share, diluted
|
|
|
21,158
|
|
|
|
24,832
|
|
|
|
23,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.62
|
)
|
|
$
|
0.79
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.62
|
)
|
|
$
|
0.68
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
For the years ended December 31, 2006, 2005 and 2004,
interest on the 1.375% convertible subordinated notes and
related if-converted shares were excluded from the net income
per share calculation as the effect would be anti-dilutive. As
of December 31, 2006 the if-converted shares associated
with the 5.5% convertible subordinated notes were excluded
from the calculation as the effect would be anti-dilutive. As of
December 31, 2006, 2005 and 2004, the total number of
if-converted shares associated with the 5.5% convertible
subordinated notes excluded from the net income per share
calculation was 36 thousand, 117 thousand and 485 thousand,
respectively. As of December 31, 2006, the total number of
if-converted shares associated with the 1.375% convertible
senior notes was 4.2 million. |
|
(B) |
|
For the year ended December 31, 2006, options amounting to
3.1 million were excluded from the calculation as the
Company was in a loss position. For the years ended
December 31, 2005 and 2004, options amounting to
1.8 million and 2.0 million, respectively, were
excluded from the calculation as the exercise prices were higher
than the average market price of the common shares; therefore,
the effect would be anti-dilutive. |
75
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 17
Income Taxes
The income tax provision consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current payable (receivable):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(133
|
)
|
|
$
|
2,064
|
|
|
$
|
1,556
|
|
State
|
|
|
(178
|
)
|
|
|
198
|
|
|
|
258
|
|
Foreign
|
|
|
135
|
|
|
|
457
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current payable (receivable)
|
|
|
(176
|
)
|
|
|
2,719
|
|
|
|
1,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
824
|
|
|
|
(1,975
|
)
|
|
|
(228
|
)
|
State
|
|
|
(109
|
)
|
|
|
313
|
|
|
|
67
|
|
Foreign
|
|
|
(1,285
|
)
|
|
|
128
|
|
|
|
1,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
(benefit)
|
|
$
|
(746
|
)
|
|
$
|
1,185
|
|
|
$
|
3,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision differs from the amount computed by
applying the statutory federal income tax rate to pretax income
as a result of the following differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory federal tax (benefit)
rate
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase (decrease) in rates
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
(1.5
|
)
|
|
|
3.4
|
|
|
|
3.4
|
|
Goodwill benefit from acquisitions
|
|
|
(1.8
|
)
|
|
|
(1.4
|
)
|
|
|
(0.6
|
)
|
Valuation allowance
|
|
|
(0.4
|
)
|
|
|
(11.1
|
)
|
|
|
1.8
|
|
Taxes on foreign income that
differ from U.S. tax rate
|
|
|
(5.1
|
)
|
|
|
(14.3
|
)
|
|
|
(12.1
|
)
|
Tax credits
|
|
|
(5.5
|
)
|
|
|
(2.2
|
)
|
|
|
(3.9
|
)
|
Export sale benefit
|
|
|
(1.4
|
)
|
|
|
(2.6
|
)
|
|
|
(2.6
|
)
|
Non-deductible stock-based
compensation expense
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
In process research and development
|
|
|
37.1
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2.5
|
|
|
|
0.1
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(5.4
|
)%
|
|
|
6.9
|
%
|
|
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of deferred taxes consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued warranty
|
|
$
|
680
|
|
|
$
|
815
|
|
Inventory
|
|
|
3,707
|
|
|
|
2,986
|
|
Restructuring accrual
|
|
|
120
|
|
|
|
229
|
|
Net operating loss carryforwards
|
|
|
19,415
|
|
|
|
17,348
|
|
Tax credit carryforwards
|
|
|
14,664
|
|
|
|
11,422
|
|
Stock-based compensation
|
|
|
1,264
|
|
|
|
|
|
Capitalized research and
development
|
|
|
1,914
|
|
|
|
2,301
|
|
Fixed assets
|
|
|
2,630
|
|
|
|
749
|
|
Other
|
|
|
1,048
|
|
|
|
2,231
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
45,442
|
|
|
|
38,081
|
|
Less: valuation allowance
|
|
|
(7,039
|
)
|
|
|
(6,812
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
38,403
|
|
|
|
31,269
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
Convedia/Microware
|
|
|
(6,261
|
)
|
|
|
(816
|
)
|
Goodwill
|
|
|
(1,832
|
)
|
|
|
(653
|
)
|
Foreign dividend
|
|
|
|
|
|
|
(767
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(8,093
|
)
|
|
|
(2,236
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
30,310
|
|
|
$
|
29,033
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded valuation allowances of
$7.0 million and $6.8 million at December 31,
2006 and December 31, 2005, respectively, due to
uncertainty involving utilization of certain net operating loss
and tax credit carryforwards. The increase in valuation
allowance of $227 thousand for the year ended December 31,
2006 compared to the year ended December 31, 2005 is
primarily attributable to a projected decrease in future
utilization of general business tax credits carryforwards based
on estimates of future taxable income.
At December 31, 2006 and 2005, the Company had total
available federal net operating loss carryforwards of
approximately $38.1 million and $38.8 million,
respectively, before valuation allowance. The federal net
operating loss carryforwards expire between 2009 and 2023 and
consist of approximately $14.9 million of consolidated
taxable loss remaining after loss carrybacks to prior years,
$9.1 million of loss carryforwards from the Texas Micro
merger in 1999, and $14.1 million of loss carryforwards
from the Microware acquisition in August of 2001. The net
operating losses from Texas Micro and Microware are stated net
of limitations pursuant to Section 382 of the Internal
Revenue Code. The annual utilization limitations are
$5.7 million and approximately $732 thousand for Texas
Micro and Microware, respectively. Any tax benefit recognized
from the acquired Microware net operating loss carryforwards
will be allocated to goodwill and will not benefit the income
statement. The Company had total state net operating loss
carryforwards of approximately $42.3 million and
$48.4 million at December 31, 2006 and 2005,
respectively, before valuation allowance. The state net
operating loss carryforwards expire between 2007 and 2023. The
Company also had net operating loss carryforwards of
approximately $17.2 million from certain non
U.S. jurisdictions. The non U.S. net operating loss
carryforwards are primarily attributable to Canada, Germany and
the U.K., and amount to approximately $14.5 million, $741
thousand, and $2.0 million,
77
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. The Canada tax losses are attributable to the
Convedia acquisition in September of 2006 and they expire
between 2008 and 2014. The U.K. and German tax losses may be
carried forward indefinitely provided certain requirements are
met.
The Company has federal and state research and development tax
credit and other federal tax credit carryforwards of
approximately $12.5 million at December 31, 2006, to
reduce future income tax liabilities. The federal and state tax
credits expire between 2007 and 2026. The federal tax credit
carryforwards include research and development tax credits of
$2.3 million and $268 thousand from the Texas Micro and
Microware acquisitions, respectively. The utilization of these
acquired credits is subject to an annual limitation pursuant to
Section 383 of the Internal Revenue Code. Any tax benefit
recognized from the acquired Microware tax credit carryforwards
will be allocated to goodwill and will not benefit the income
statement. On December 20, 2006 President Bush signed the
Tax Relief and Health Care Act of 2006 which extended the
research and development tax credit. Under the Act the research
and development tax credit was retroactively reinstated to
January 1, 2006 and is available through December 31,
2007. The Company also had approximately $550 thousand in
investment tax credit, $6.1 million in unclaimed scientific
research and experimental expenditures and $6.0 million in
undepreciated capital cost to be carried forward and applied
against future income in Canada related to the Convedia
acquisition.
Realization of the deferred tax assets is dependent on
generating sufficient taxable income prior to the expiration of
the net operating loss and tax credit carryforwards. Although
realization is not assured, management believes that it is more
likely than not that the balance of the deferred tax assets, net
of the valuation allowance, as of December 31, 2006 will be
realized. The amount of the net deferred tax assets that is
considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the
carryforward period are reduced. Should management determine
that the Company would not be able to realize all or part of our
net deferred tax assets in the future, adjustments to the
valuation allowance for deferred tax assets may be required. As
of December 31, 2006 we estimate utilization of the net
deferred tax assets will require that we generate
$60.0 million and $30.0 million in taxable income in
the U.S. and Canada, respectively, prior to the expiration of
the net operating loss and tax credit carryforwards.
Pretax book income from domestic operations for the fiscal years
2006, 2005 and 2004 was $2.4 million, $9.2 million,
and $9.7 million, respectively. Pretax book income (loss)
from foreign operations for fiscal years 2006, 2005 and 2004 was
$(16.2) million, $7.9 million, and $6.6 million,
respectively.
The Company has indefinitely reinvested approximately
$9.2 million of the undistributed earnings of certain
foreign subsidiaries at December 31, 2006. Such earnings
would be subject to U.S. taxation if repatriated to the
U.S. On December 9, 2005, RadiSys Technology (Ireland)
Ltd., a wholly owned foreign subsidiary of the Company, declared
a dividend of $15.5 million under Section 301 of the
Internal Revenue Code. The first dividend payment of
$13.5 million was completed on December 21, 2005 and
the remaining dividend payment of $2.0 million was
completed on June 2, 2006. Both dividend payments were
fully subject to U.S. taxation. The deferred tax liability
of $767 thousand recorded at December 31, 2005 related to
the $2.0 million dividend was fully reversed in 2006.
Note 18
Employee Benefit Plans
Stock-Based
Employee Benefit Plans
Equity instruments are granted to employees, directors and
consultants in certain instances, as defined in the respective
plan agreements. Beginning in the second quarter of 2005, the
Company issued equity instruments in the form of stock options,
restricted shares and shares issued to employees as a result of
the employee stock purchase plan (ESPP). Beginning
in the third quarter of 2006, the Company began issuing
restricted stock units in conjunction with the other equity
instruments. Prior to the second quarter of 2005, the Company
issued equity instruments in the form of stock options and ESPP
shares, only.
78
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options and Restricted Stock Awards
The Companys 1995 Stock Incentive Plan (1995
Plan) and 2001 Nonqualified Stock Option Plan (2001
Plan) provide the Board of Directors broad discretion in
creating employee equity incentives. Unless otherwise stipulated
in the plan document, the Board of Directors, at their
discretion, determines stock option exercise prices, which may
not be less than the fair market value of RadiSys common stock
at the date of grant, vesting periods and the expiration periods
which are a maximum of 10 years from the date of grant.
Under the 1995 Plan, as amended, 5,425,000 shares of common
stock have been reserved and authorized for issuance to any
non-employee directors and employees, with a maximum of
450,000 shares in connection with the hiring of an employee
and 100,000 shares in any calendar year to one participant.
Under the 2001 Plan, as amended, 2,250,000 shares of common
stock have been reserved and authorized for issuance to selected
employees, who are not executive officers or directors of the
Company. Currently, all
non-director
stock option grants are issued under an option agreement that
provides, among other things, that the option grant vests over a
3 year period; specifically, 33% of the options vest one
year after the grant date and approximately 2.75% of the options
vest monthly for 24 months after the first year.
On March 1, 2005, the Compensation and Development
Committee (the Compensation Committee) of the Board of
Directors approved the form of the restricted share agreement to
be used in connection with restricted stock awards to be granted
to employees of the Company under the terms of the
Companys 1995 Stock Incentive Plan. The agreement
provides, among other things, that 33% of the shares vest each
year following the date of the grant.
In connection with the acquisition of Convedia Corporation
described in Note 20, on September 30, 2006, the
Compensation Committee of the Board of Directors adopted the
RadiSys Corporation Stock Plan for Convedia Employees
(Convedia Plan). The Convedia Plan was adopted
without shareholder approval in reliance upon the exception
provided under Nasdaq Marketplace Rule 4350(i)(1)(A)(iv)
relating to awards granted in connection with an acquisition and
in connection with the hiring of new employees. The Plan became
effective as of September 1, 2006 (the Effective
Date). The Convedia Plan permits the granting of stock
options, restricted stock and restricted stock units. The
maximum number of shares of common stock with respect to which
awards may be granted is 365,000 shares (subject to
adjustment in accordance with the Convedia Plan). In order to
comply with Nasdaq Marketplace Rule 4350, the awards may
only be granted to employees transferred from Convedia in
connection with the acquisition of Convedia and in connection
with the future hiring of new employees of Convedia. The
Convedia Plan provides that the Compensation Committee will
determine the option price at which common stock may be
purchased, but the price will not be less than the fair market
value of the common stock on the date the option is granted. The
Compensation Committee will determine the term of each option,
but no option will be exercisable more than 10 years after
the date of grant. The vesting of restricted stock or restricted
stock units may be conditioned upon the completion of a
specified period of employment, upon attainment of specified
performance goals
and/or upon
such other criteria as the Compensation Committee determines.
79
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below summarizes the activities related to the
Companys stock plans (in thousands, except weighted
average exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
Stock Options
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Available for
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Grant
|
|
|
Number
|
|
|
Average Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Balance, December 31, 2003
|
|
|
2,672
|
|
|
|
3,706
|
|
|
$
|
14.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,255
|
)
|
|
|
1,255
|
|
|
$
|
19.32
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
362
|
|
|
|
(362
|
)
|
|
$
|
20.15
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(802
|
)
|
|
$
|
11.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
1,779
|
|
|
|
3,797
|
|
|
$
|
16.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(946
|
)
|
|
|
946
|
|
|
$
|
15.01
|
|
|
|
|
|
|
|
|
|
Restricted shares granted
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
807
|
|
|
|
(807
|
)
|
|
$
|
19.68
|
|
|
|
|
|
|
|
|
|
Restricted shares canceled
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(560
|
)
|
|
$
|
9.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
1,545
|
|
|
|
3,376
|
|
|
$
|
16.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(684
|
)
|
|
|
684
|
|
|
$
|
21.31
|
|
|
|
|
|
|
|
|
|
Restricted shares granted
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
54
|
|
|
|
(54
|
)
|
|
$
|
16.96
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
171
|
|
|
|
(171
|
)
|
|
$
|
20.68
|
|
|
|
|
|
|
|
|
|
Restricted shares canceled
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares repurchased
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(723
|
)
|
|
$
|
12.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
1,188
|
|
|
|
3,112
|
|
|
$
|
18.41
|
|
|
|
4.57
|
|
|
$
|
4,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest,
December 31, 2006
|
|
|
|
|
|
|
3,054
|
|
|
$
|
18.36
|
|
|
|
4.51
|
|
|
$
|
4,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2006
|
|
|
|
|
|
|
2,096
|
|
|
$
|
18.01
|
|
|
|
3.72
|
|
|
$
|
4,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the
total pretax intrinsic value (the difference between the closing
price of RadiSys shares as quoted on the Nasdaq Global Select
Market for December 31, 2006 and the exercise price,
multiplied by the number of
in-the-money
options) that would have been received by the option holders had
all option holders exercised their options on December 31,
2006. The intrinsic value of options changes based on the fair
market value of RadiSys stock. Total intrinsic value of options
exercised for the year ended December 31, 2006 was
$6.4 million.
In 2006, 169,300 stock options, 5,800 restricted stock awards
and 132,035 restricted stock units were granted in connection
with the closing of the acquisition of Convedia. The shares were
granted under the RadiSys Corporation Stock Plan for Convedia
Employees. The Plan is intended to comply with the National
Association of Securities Dealers, Inc.s
(NASD) Marketplace Rule 4350 which provides an
exception to the
80
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NASD stockholder approval requirement for the issuance of
securities with regard to grants to new employees of the
Company, including grants to transferred employees in connection
with a merger or other acquisition.
The following table summarizes the information about stock
options outstanding at December 31, 2006 (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Options Exercisable
|
|
|
|
Number
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercisable
|
|
|
Average
|
|
|
|
As of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
As of
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
12/31/2006
|
|
|
Life
|
|
|
Price
|
|
|
12/31/2006
|
|
|
Price
|
|
|
$ 3.79-$14.09
|
|
|
427
|
|
|
|
3.25
|
|
|
$
|
8.38
|
|
|
|
418
|
|
|
$
|
8.29
|
|
$14.14-$15.27
|
|
|
571
|
|
|
|
5.29
|
|
|
$
|
14.46
|
|
|
|
311
|
|
|
$
|
14.52
|
|
$15.30-$18.54
|
|
|
562
|
|
|
|
4.27
|
|
|
$
|
17.19
|
|
|
|
454
|
|
|
$
|
17.06
|
|
$18.55-$20.65
|
|
|
506
|
|
|
|
4.88
|
|
|
$
|
19.35
|
|
|
|
412
|
|
|
$
|
19.16
|
|
$20.75-$21.28
|
|
|
588
|
|
|
|
5.49
|
|
|
$
|
20.98
|
|
|
|
246
|
|
|
$
|
21.28
|
|
$21.50-$49.91
|
|
|
458
|
|
|
|
3.71
|
|
|
$
|
29.82
|
|
|
|
255
|
|
|
$
|
34.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.79-$49.91
|
|
|
3,112
|
|
|
|
4.57
|
|
|
$
|
18.41
|
|
|
|
2,096
|
|
|
$
|
18.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
In December 1995, the Company established an Employee Stock
Purchase Plan (ESPP). All employees of RadiSys and
its subsidiaries who customarily work 20 or more hours per week,
including all officers, are eligible to participate in the ESPP.
Separate offerings of common stock to eligible employees under
the ESPP (an Offering) commence on February 15,
May 15, August 15 and November 15 of each calendar year
(Enrollment Dates) and continue for a period of
18 months. Multiple separate Offerings are in operation
under the ESPP at any given time. An employee may participate in
only one Offering at a time and may purchase shares only through
payroll deductions permitted under the provisions stipulated by
the ESPP. The purchase price is the lesser of 85% of the fair
market value of the common stock on date of grant or that of the
purchase date (look-back feature). Pursuant to the
provisions of the ESPP, as amended, the Company is authorized to
issue up to 4,150,000 shares of common stock under the
plan. For the years ended December 31, 2006, 2005 and 2004
the Company issued 278,173, 391,819 and 579,773 shares
under the plan, respectively. At December 31, 2006,
1,299,033 shares are available for issuance under the plan.
Stock-Based
Compensation associated with Stock-Based Employee Benefit
Plans
Prior to January 1, 2006, the Company accounted for
stock-based compensation associated with its stock-based
employee benefit plans using the intrinsic value method in
accordance with the provisions of APB 25 and, in accordance
with the provisions of SFAS No. 148, Accounting
for Stock-Based Compensation Transition and
Disclosure, An Amendment of SFAS No. 123, the
Company provided pro forma disclosures of net income (loss) and
net income (loss) per common share for periods prior to
January 1, 2006 as if the fair value method had been
applied in measuring compensation expense in accordance with
SFAS 123.
In December 2004, the FASB issued SFAS 123R, which replaces
SFAS 123 and supersedes APB 25. SFAS 123R
requires companies to account for stock-based compensation based
on the fair value method, which replaces the intrinsic value
method. The Company adopted SFAS 123R as of January 1,
2006 using the modified prospective method, which requires that
compensation expense be recorded for all unvested stock options
and ESPP shares outstanding as of January 1, 2006. Prior
periods will not be restated. Beginning January 1, 2006,
the pro forma disclosures previously permitted are no longer an
alternative to financial statement recognition.
81
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2004, in an effort to reduce the amount of stock-based
compensation expense that the Company would include in its
financial statements after the effective date of SFAS 123R
or January 1, 2006, the Compensation Committee of the Board
of Directors approved an acceleration of vesting of those
non-director
employee stock options with an option price greater than $15.99,
which was greater than the fair market value of the shares on
that date ($14.23). Approximately 1.1 million options with
varying remaining vesting schedules were subject to the
acceleration and became immediately exercisable. Historically
the Company has not accelerated the vesting of employee stock
options. As a result of the acceleration, the Company reduced
the stock-based compensation expense that it would include in
net income after January 1, 2006. Included in the pro forma
stock-based compensation expense for fiscal year 2004 was
$6.1 million associated with the acceleration, net of
related tax effects. As a result of the acceleration, the
Company estimates that stock-based compensation expense, net of
related tax effects, was reduced by approximately
$2.5 million and $1.8 million for the years ended
December 31, 2005 and 2006, respectively, and estimates a
reduction of approximately $213 thousand for fiscal year 2007.
In an effort to further reduce the impact of SFAS 123R,
based on Board of Director approval received on March 1,
2005, the Company changed its equity instrument compensation
structure such that it has reduced the total number of options
granted to employees and the number of employees who receive
stock-based employee benefit plan awards.
As a result of adopting SFAS 123R, loss before income taxes
for the year ended December 31, 2006 was $6.6 million
higher, and net loss for the year ended December 31, 2006
was $6.2 million higher, than if the Company had continued
to account for stock-based compensation under APB 25. The
impact on both basic and diluted loss per share for the year
ended December 31, 2006 was $0.29. In addition, prior to
the adoption of SFAS 123R, the Company presented the tax
benefit of stock option exercises as operating cash flows. Upon
the adoption of SFAS 123R, tax benefits resulting from tax
deductions in excess of the compensation cost recognized for
those options will be classified as financing cash flows when
realized as a reduction of cash taxes owed.
The Company continues to use the Black-Scholes model to measure
the grant date fair value of stock options and ESPP shares. The
grant date fair value of stock options that are expected to vest
is recognized on a straight-line basis over the requisite
service period, which is equal to the option vesting period
which is, generally, 3 years. The grant date fair value of
ESPP shares that are expected to vest is recognized on a
straight-line basis over the requisite service period, which is
generally, 18 months, subject to modification at the date
of purchase due to the ESPP look-back feature. The Company
computes the grant date fair value of restricted stock granted
as the closing price of RadiSys shares as quoted on the Nasdaq
Global Select Market on the earlier of the date of grant or the
first date of the service period. The grant date fair value of
restricted stock that are expected to vest is recognized on a
straight-line basis over the requisite service period, which is
3 years. The estimate of the number of options, ESPP shares
and restricted stock expected to vest is determined based on
historical experience.
To determine the fair value of the stock options and ESPP shares
using the Black-Scholes option pricing model, the calculation
takes into consideration the effect of the following:
|
|
|
|
|
Exercise price of the option or purchase price of the ESPP share;
|
|
|
|
Price of our common stock on the date of grant;
|
|
|
|
Expected term of the option or share;
|
|
|
|
Expected volatility of our common stock over the expected term
of the option or share; and
|
|
|
|
Risk free interest rate during the expected term of the option
or share.
|
82
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The calculation includes several assumptions that require
managements judgment. The expected term of the option or
share is determined based on assumptions about patterns of
employee exercises, and represents a
probability-weighted-average time period from grant until
exercise of stock options, subject to information available at
time of grant. Determining expected volatility generally begins
with calculating historical volatility for a similar long-term
period and then considering the ways in which the future is
reasonably expected to differ from the past.
As part of its SFAS 123R adoption, the Company also
examined its historical pattern of option exercises in an effort
to determine if there were any discernable activity patterns
based on certain employee populations. From this analysis, the
Company identified three employee populations. The expected term
computation is based on historical vested option exercise and
post-vest forfeiture patterns and included an estimate of the
expected term for options that were fully vested and
outstanding, for each of the three populations identified. The
estimate of the expected term for options that were fully vested
and outstanding was determined as the midpoint of a range of
estimated expected terms determined as follows: the low end of
the range assumes the fully vested and outstanding options
settle on the evaluation date and the high end of the range
assumes that these options expire upon contractual term. The
risk free interest rate is based on the U.S. Treasury
constant maturities in effect at the time of grant for the
expected term of the option or share.
As required by SFAS No. 123, the Company computed the
value of options granted and ESPP shares issued during 2006,
2005 and 2004 using the Black-Scholes option pricing model for
pro forma disclosure purposes. The fair value of the following
stock-based awards was estimated using the Black-Scholes model
with the following weighted-average assumptions for the fiscal
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Employee Stock Purchase Plan
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected life (in years)
|
|
|
4.0
|
|
|
|
4.2
|
|
|
|
3.9
|
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
1.5
|
|
Interest rate
|
|
|
4.95
|
%
|
|
|
3.80
|
%
|
|
|
2.39
|
%
|
|
|
4.73
|
%
|
|
|
1.95
|
%
|
|
|
1.43
|
%
|
Volatility
|
|
|
56
|
%
|
|
|
64
|
%
|
|
|
82
|
%
|
|
|
42
|
%
|
|
|
84
|
%
|
|
|
85
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005 and 2004, the
total value of the options granted was approximately
$7.0 million, $7.4 million and $9.5 million,
respectively. For the years ended December 31, 2006, 2005
and 2004 the weighted-average valuation per option granted was
$10.18, $7.87 and $11.08, respectively. The total estimated
value associated with ESPP shares to be granted under enrollment
periods beginning in the years ended December 31, 2006,
2005 and 2004 was $1.9 million, $362 thousand and
$2.8 million, respectively.
83
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below summarizes the activities related to the
Companys unvested restricted stock grants (in thousands;
except weighted-average grant date fair values):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Balance, December 31, 2004
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Shares granted
|
|
|
97
|
|
|
|
16.62
|
|
Shares canceled
|
|
|
(2
|
)
|
|
|
14.23
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
95
|
|
|
$
|
16.67
|
|
|
|
|
|
|
|
|
|
|
Shares granted
|
|
|
150
|
|
|
|
21.14
|
|
Stock units granted
|
|
|
132
|
|
|
|
23.46
|
|
Shares vested
|
|
|
(32
|
)
|
|
|
20.82
|
|
Shares canceled
|
|
|
(6
|
)
|
|
|
18.19
|
|
Stock units canceled
|
|
|
(1
|
)
|
|
|
23.46
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
338
|
|
|
$
|
21.24
|
|
|
|
|
|
|
|
|
|
|
The Company expects that approximately 291 thousand of the
balance of restricted stock at December 31, 2006 will vest.
According to the Restricted Stock Grant Agreement, upon the
vesting dates, the holder of the restricted stock unit grant
shall be issued a number of shares equal to the number of
restricted stock units which have vested.
The pro forma table below reflects net income and basic and
diluted net income per share for the years ended
December 31, 2005 and 2004 had RadiSys accounted for these
plans in accordance with SFAS No. 123, as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
15,958
|
|
|
$
|
13,011
|
|
Add: Stock-based compensation
expense included in reported net income, net of related tax
effects(A)
|
|
|
123
|
|
|
|
520
|
|
Deduct: Stock-based compensation
expense determined under fair value method for all awards, net
of related tax effects(B)
|
|
|
(3,128
|
)
|
|
|
(12,048
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
12,953
|
|
|
$
|
1,483
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.79
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.68
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic
|
|
$
|
0.64
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted
|
|
$
|
0.56
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
In 2005, 97 thousand shares of restricted stock were granted.
The Company incurred $199 thousand of stock-based compensation
related to restricted stock for the year ended December 31,
2005. The Company did not incur any stock-based compensation
expense associated with restricted stock for the year ended
December 31, 2004. |
|
|
|
In 2004, the Company incurred $841 thousand of stock-based
compensation expense associated with shares issued pursuant to
the Companys 1996 Employee Stock Purchase Plan
(ESPP). The Company |
84
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
incurred stock-based compensation expense because the original
number of ESPP shares approved by the shareholders was
insufficient to meet employee demand for an ESPP offering which
was consummated in February 2003 and ended in August 2004. The
Company subsequently received shareholder approval for
additional ESPP shares in May 2003. The shares issued in the
February 2003 ESPP offering in excess of the original number of
ESPP shares approved at the beginning of the offering (the
shortfall) triggered recognition of stock-based
compensation expense under the intrinsic value method. The
shortfall amounted to 138 thousand and 149 thousand shares in
May 2004 and August 2004, respectively. |
|
|
|
|
|
The expense per share was calculated as the difference between
85% of the closing price of RadiSys shares as quoted on NASDAQ
on the date that additional ESPP shares were approved (May
2003) and the February 2003 ESPP offering purchase price.
Accordingly, the expense per share was calculated as the
difference between $8.42 and $5.48. The shortfall of shares was
dependent on the amount of contributions from participants
enrolled in the February 2003 ESPP offering. |
|
(B) |
|
In 2004, in an effort to reduce the amount of stock-based
compensation expense that the Company would include in its
financial statements after the effective date of SFAS 123R
or January 1, 2006, the Compensation Committee of the Board
of Directors approved an acceleration of vesting of those
non-director
employee stock options with an option price greater than $15.99,
which was greater than the fair market value of the shares on
that date ($14.23). Approximately 1.1 million options with
varying remaining vesting schedules were subject to the
acceleration and became immediately exercisable. Historically
the Company has not accelerated the vesting of employee stock
options. As a result of the acceleration, the Company reduced
the stock-based compensation expense that it would include in
net income after January 1, 2006. Included in the pro forma
stock-based compensation expense for fiscal year 2004 was
$6.1 million associated with the acceleration, net of
related tax effects. As a result of the acceleration, the
Company estimates that stock-based compensation expense, net of
related tax effects, was reduced by approximately
$2.5 million and $1.8 million for the years ended
December 31, 2005 and 2006, respectively, and estimates a
reduction of approximately $213 thousand for fiscal year 2007. |
|
|
|
The effects of applying SFAS 123 for providing pro forma
disclosure for 2005 and 2004 are not likely to be representative
of the effects on reported net income and net income per share
for future years since options vest over several years and
additional awards are made each year. |
For the years ended December 31, 2006, 2005 and 2004,
stock-based compensation was recognized and allocated as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost of sales
|
|
$
|
876
|
|
|
$
|
23
|
|
|
$
|
235
|
|
Research and development
|
|
|
1,745
|
|
|
|
55
|
|
|
|
343
|
|
Selling, general and administrative
|
|
|
3,968
|
|
|
|
121
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,589
|
|
|
|
199
|
|
|
|
841
|
|
Income tax benefit
|
|
|
(357
|
)
|
|
|
(76
|
)
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense after, income tax benefit
|
|
$
|
6,232
|
|
|
$
|
123
|
|
|
$
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, stock-based
compensation associated with stock options, restricted stock and
ESPP shares amounted to $3.8 million, $1.4 million and
$1.4 million, respectively.
As of December 31, 2006, $8.1 million of total
unrecognized compensation cost related to stock options is
expected to be recognized over a weighted-average period of
2.04 years. As of December 31, 2006, $5.8 million
of unrecognized stock-based compensation expense related to
unvested restricted stock is expected to be recognized over a
weighted-average period of 2.46 years.
85
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
401(k)
Savings Plan
The Company established a 401(k) Savings Plan (401(k)
Plan), a defined contribution plan, as of January 1,
1989 and amended through January 1, 2001, in compliance
with Section 401(k) and other related sections of the
Internal Revenue Code and corresponding Regulations issued by
the Department of Treasury and Section 404(c) of Employee
Retirement Income Security Act of 1974 (ERISA), to
provide retirement benefits for its United States of America
employees. Under the provisions of the plan, eligible employees
are allowed pre-tax contributions of up to 20% of their annual
compensation or the maximum amount permitted by the applicable
statutes. Additionally, eligible employees can elect after-tax
contributions of up to 5% of their annual compensation, within
the limits set forth by pre-tax contributions, or to the maximum
amount permitted by the applicable statutes. Pursuant to the
provisions of the 401(k) Plan, the Company may contribute 50% of
pre-tax contributions made by eligible employees, adjusted for
loans and withdrawals, up to 6% of annual compensation for each
eligible employee. The Company may elect to make supplemental
contributions as periodically determined by the Board of
Directors at their discretion. The contributions made by the
Company on behalf of eligible employees become 100% vested after
three years of service, or 33% per year after one year of
service. The Companys total contributions to the 401(k)
Plan amounted to $887 thousand, $792 thousand and $812 thousand
in 2006, 2005 and 2004, respectively. In addition, some of the
Companys employees outside the United States of America
are covered by various defined contribution plans, in compliance
with the statutes of respective countries. The participants pay
for the 401(k) Savings Plan administrative expenses.
Deferred
Compensation Plan
Effective January 1, 2001, the Company established a
Deferred Compensation Plan, providing its directors and certain
eligible employees with opportunities to defer a portion of
their compensation as defined by the provisions of the plan. The
Company credits additional amounts to the deferred compensation
plan to make up for reductions of Company contributions under
the 401(k) Plan. The deferred amounts are credited with earnings
and losses under investment options chosen by the participants.
The Company sets aside deferred amounts, which are then invested
in long-term insurance contracts. All deferred amounts and
earnings are 100% vested at all times, but are subject to the
claims of creditors of the Company under a bankruptcy
proceeding. Benefits are payable to a participant upon
retirement, death, and other termination of employment on such
other date as elected by the participant in accordance with the
terms of the plan (see Note 9). Deferred amounts may be
withdrawn by the participant in case of financial hardship as
defined in the plan agreement.
Note 19
Segment Information
The Company has adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards
for the reporting by public business enterprises of information
about operating segments, products and services, geographic
areas, and major customers. The method for determining what
information to report is based upon the way that management
organizes the segments within the Company for making operating
decisions and assessing financial performance.
The Company is one operating segment according to the provisions
of SFAS No. 131.
86
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues on a product and services basis are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Hardware
|
|
$
|
280,720
|
|
|
$
|
252,180
|
|
|
$
|
234,352
|
|
Software royalties and licenses
|
|
|
6,193
|
|
|
|
4,394
|
|
|
|
6,304
|
|
Software maintenance
|
|
|
1,402
|
|
|
|
1,919
|
|
|
|
939
|
|
Engineering and other services
|
|
|
4,166
|
|
|
|
1,738
|
|
|
|
4,220
|
|
Other
|
|
|
|
|
|
|
3
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
292,481
|
|
|
$
|
260,234
|
|
|
$
|
245,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally, the Companys customers are not the end-users of
its products. The Company ultimately derives its revenues from
two end markets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Communication Networking
|
|
$
|
217,744
|
|
|
$
|
194,146
|
|
|
$
|
167,458
|
|
Commercial Systems
|
|
|
74,737
|
|
|
|
66,088
|
|
|
|
78,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
292,481
|
|
|
$
|
260,234
|
|
|
$
|
245,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about the Companys geographic revenues and
long-lived assets by geographical area is as follows (in
thousands):
Geographic
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
United States
|
|
$
|
89,404
|
|
|
$
|
80,739
|
|
|
$
|
95,429
|
|
Other North America
|
|
|
11,836
|
|
|
|
12,115
|
|
|
|
12,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
101,240
|
|
|
|
92,854
|
|
|
|
107,772
|
|
Europe, the Middle East and Africa
(EMEA)
|
|
|
140,719
|
|
|
|
131,403
|
|
|
|
123,197
|
|
Asia Pacific
|
|
|
50,522
|
|
|
|
35,977
|
|
|
|
14,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
292,481
|
|
|
$
|
260,234
|
|
|
$
|
245,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-lived
assets by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Property and equipment,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,881
|
|
|
$
|
11,372
|
|
|
$
|
11,630
|
|
Other North America
|
|
|
1,096
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
143
|
|
|
|
170
|
|
|
|
752
|
|
Asia Pacific
|
|
|
1,955
|
|
|
|
2,034
|
|
|
|
1,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,075
|
|
|
$
|
13,576
|
|
|
$
|
14,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
27,463
|
|
|
$
|
27,463
|
|
|
$
|
27,521
|
|
Other North America
|
|
|
39,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,183
|
|
|
$
|
27,463
|
|
|
$
|
27,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,434
|
|
|
$
|
2,159
|
|
|
$
|
4,211
|
|
Other North America
|
|
|
18,416
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
23,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,935
|
|
|
$
|
2,159
|
|
|
$
|
4,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005 and 2004 the
following customers accounted for more than 10% of total
revenues. These customers accounted for the following
percentages of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Nokia
|
|
|
39.4
|
%
|
|
|
36.2
|
%
|
|
|
28.5
|
%
|
Nortel
|
|
|
10.3
|
%
|
|
|
14.3
|
%
|
|
|
13.7
|
%
|
As of December 31, 2006 and 2005 the following customers
accounted for more than 10% of accounts receivable. These
customers accounted for the following percentages of accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Nokia
|
|
|
24.4
|
%
|
|
|
32.3
|
%
|
Nortel
|
|
|
10.2
|
%
|
|
|
12.9
|
%
|
Note 20
Acquisition of Convedia
On September 1, 2006, RadiSys completed the acquisition
(the Acquisition) of all of the capital stock of
Convedia for approximately $105 million in cash at closing
(Initial Consideration). Up to an additional
$10 million in cash (the Final Consideration)
is payable based on a contingent payment formula tied to
achieving certain profitability goals during the twelve-month
period which began on October 1, 2006 (Contingent
Payment Provision). The total preliminary purchase price
of the acquisition which consists of the Initial Consideration
and the estimated direct acquisition-related expenses
(Preliminary Purchase Price) is currently estimated
to be approximately $110.9 million and has been accounted
for as a purchase business combination under Statement of
Financial Accounting Standards No. 141, Business
Combinations (SFAS 141). The Final
Consideration and any associated direct expenses will be
recorded as additional goodwill when the Contingent Payment
Provision is determinable beyond a reasonable doubt.
88
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preliminary
Purchase Price Allocation
In accordance with the purchase method of accounting as
prescribed by SFAS 141 the Company allocated the
Preliminary Purchase Price to the net tangible and identifiable
intangibles assets, based on their estimated fair values. Until
the Final Consideration and any associated direct expenses are
determinable beyond a reasonable doubt, the purchase price
allocation is preliminary and subject to adjustment.
Additionally, the Company has currently not identified any
material pre-acquisition contingencies where a liability is
probable and the amount of the liability can be reasonably
estimated. If information becomes available to the Company prior
to the end of the purchase price allocation period or one year
from the acquisition date, which would indicate that it is
probable that such contingencies had existed and the amounts can
be reasonably estimated, such items will be included in the
final purchase price allocation. The Preliminary Purchase Price
has been allocated as follows (in thousands):
|
|
|
|
|
|
|
September 1,
|
|
|
|
2006
|
|
|
Fair value of tangible assets
acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,874
|
|
Accounts receivable, net
|
|
|
2,027
|
|
Other receivables
|
|
|
51
|
|
Inventories, net
|
|
|
2,546
|
|
Deferred tax assets, current
|
|
|
3,606
|
|
Other current assets
|
|
|
672
|
|
Property and equipment, net
|
|
|
923
|
|
Long-term deferred tax assets
|
|
|
5,768
|
|
Other assets
|
|
|
531
|
|
Accounts payable
|
|
|
(1,228
|
)
|
Accrued wages and bonuses
|
|
|
(921
|
)
|
Other accrued liabilities
|
|
|
(1,839
|
)
|
Deferred tax liabilities
|
|
|
(3,606
|
)
|
Long-term deferred tax liabilities
|
|
|
(5,456
|
)
|
|
|
|
|
|
|
|
|
7,948
|
|
Deferred compensation
|
|
|
1,874
|
|
Identifiable intangible assets
|
|
|
47,400
|
|
In-process research and
development charges
|
|
|
14,000
|
|
Goodwill
|
|
|
39,720
|
|
|
|
|
|
|
Total preliminary purchase price
|
|
$
|
110,942
|
|
|
|
|
|
|
Deferred
Compensation
According to the terms of the Acquisition Agreement, all
outstanding Convedia stock options vested and were considered
exercised immediately upon closing or September 1, 2006.
The proceeds of which would be distributed as follows: 75% of
the purchase price per share less the exercise price was paid to
the option holder at closing or September 1, 2006 and the
remaining 25% is to be paid in full to those Convedia employees
still employed by RadiSys after one year of service. The 75%
paid at the time of the acquisition is included in the purchase
price and is allocated to goodwill. The remaining 25% is
recorded as deferred
89
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation and amortized through the Statement of Operations
for the life of the asset (one year). Pursuant to the purchase
agreement any forfeitures are reallocated to the remaining
Convedia employees.
Identifiable
intangible assets
The fair value of the acquired identifiable intangible assets,
which are subject to amortization, was determined using the
income approach. The following table sets forth the components
of these intangible assets and their weighted average estimated
useful lives (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Preliminary
|
|
|
Remaining Useful
|
|
|
|
Fair Value
|
|
|
Life (In Years)
|
|
|
Core and developed technology
|
|
|
35,900
|
|
|
|
3.0
|
|
Trademark and tradename
|
|
|
2,900
|
|
|
|
4.9
|
|
Customer-related intangible
|
|
|
8,200
|
|
|
|
2.4
|
|
Backlog
|
|
|
400
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable
intangible assets
|
|
$
|
47,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process
research and development
In-process research and development (IPR&D)
represents Convedia R&D projects that had not reached
technological feasibility and had no alternative future use when
acquired but had been developed to a point where there was value
associated with them in relation to potential future revenue.
Using the income approach to value the IPR&D, RadiSys
determined that $14.0 million of the purchase price
represents purchased in-process technology. Because
technological feasibility was not yet proven and no alternative
future uses were believed to exist for the in-process
technologies, the assigned value was expensed immediately upon
the closing date of the acquisition.
The fair value underlying the $14.0 million assigned to
acquire IPR&D from the Convedia acquisition (recognized in
the third quarter of 2006) was determined by identifying
research projects in areas for which technological feasibility
had not been established and there were no alternative future
uses. The acquired IPR&D consisted of next generation media
server products and was approximately 75% complete as of
September 1, 2006. It was completed as of December 31,
2006. In addition, this technology along with subsequently
developed technology is being integrated into other new products
expected to be completed in 2008. There has been no material
change in the estimated cost of these projects.
The fair value of IPR&D was determined by an income approach
where fair value is the present value of projected net free cash
flows that will be generated by the products incorporating the
acquired technologies under development, assuming they are
successfully completed. The estimated net free cash flows
generated by the products over a 7 year period was
discounted at a rate of 22% which was based on the weighted
average cost capital and reflected the stage of completion and
the technical risks associated with achieving technological
feasibility. Other factors considered were the inherent
uncertainties in future revenue estimates from technology
investments including the uncertainty surrounding the successful
development of the IPR&D, the useful life of the technology
and the profitability levels of the technology. The estimated
net cash flows from these products were based on estimates of
related revenues, cost of sales, R&D costs, SG&A costs,
asset requirements and income taxes. The stage of completion of
the products at the date of the acquisition were estimated based
on R&D costs that had been expended as of the date of
acquisition as compared to total R&D costs expected at
completion. The percentages derived from this calculation were
then applied to the net present value of future cash flows to
determine the IPR&D charge. The nature of the efforts to
develop the in-process technology into commercially viable
products principally related to the completion of all planning,
designing, prototyping, verification and testing activities that
are necessary to establish that the product can be
90
RADISYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
produced to meet its design specification, including function,
features and technical performance requirements. These estimates
are subject to change, given the uncertainties of the
development process, and no assurance can be given that
deviations from these estimates will not occur or that the
Company will realize any anticipated benefits of the
acquisition. The risks associated with IPR&D are considered
high and no assurance can be made that these products will
generate any benefit or meet market expectations.
To the extent that estimated completion dates are not met, the
risk of competitive product introduction is greater and revenue
opportunity may be permanently lost.
Taxes
The Company allocated a portion of the Preliminary Purchase
Price to identifiable intangible assets, which are subject to
amortization. The goodwill and amortization expense associated
with the identifiable intangible assets are not deductible for
tax purposes. As a result, the Company recorded
$9.1 million in deferred tax liabilities.
Pro
forma financial information
The pro forma financial information for the years ended
December 31, 2006 and 2005 combine the historical RadiSys
and Convedia statements of operations as if the Acquisition had
been completed at the beginning of each fiscal year being
presented. The pro forma financial information is presented for
informational purposes only and is not indicative of the results
of operations that would have been achieved if the acquisition
had taken place at the beginning of each of the periods
presented. The pro forma financial information for the year
ended December 31, 2006 includes adjustments to
amortization on acquired intangibles and adjustments to tax
related effects on the acquisition.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Total revenues
|
|
$
|
305,234
|
|
|
$
|
273,959
|
|
Net income (loss)
|
|
$
|
(32,649
|
)
|
|
$
|
(3,965
|
)
|
Basic net income (loss) per share
|
|
$
|
(1.54
|
)
|
|
$
|
(0.20
|
)
|
Diluted net income (loss) per share
|
|
$
|
(1.54
|
)
|
|
$
|
(0.20
|
)
|
Included in the net loss for the year ended December 31,
2006 is $7.2 million of stock-based compensation expense
associated with the acceleration of the Convedia stock options
as of the date of the acquisition. According to the terms of the
Acquisition Agreement, all outstanding Convedia stock options
vested and considered exercised immediately upon closing or
September 1, 2006. Historically Convedia had not
accelerated the vesting of employee stock options.
Note 21
Legal Proceedings
In the normal course of business, the Company becomes involved
in litigation. As of December 31, 2006, in the opinion of
management RadiSys had no pending litigation that would have a
material effect on the Companys financial position,
results of operations or cash flows.
Note 22
Subsequent Events
During the first quarter of 2007, the Company accepted offers to
sell its DC3 building and one of its surrounding lots. The sales
are expected to close in the second quarter and third quarter,
respectively.
91
|
|
Item 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
|
On May 11, 2005, RadiSys Corporation (the
Company) informed PricewaterhouseCoopers LLP
(PwC) that PwC had been dismissed as the
Companys independent registered public accounting firm on
May 9, 2005, the date PwC completed its procedures on the
Companys unaudited interim financial statements as of and
for the quarter ended March 31, 2005 and on the
Form 10-Q
in which such financial statements were included. The dismissal
of PwC on May 9, 2005 was approved by the Companys
Audit Committee.
The reports of PwC on the consolidated financial statements of
the Company as of and for the years ended December 31, 2004
and 2003, and PwCs report on managements assessment
of internal control over financial reporting as of
December 31, 2004 and the effectiveness of internal control
over financial reporting as of December 31, 2004, did not
contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or
accounting principle.
During the years ended December 31, 2004 and 2003, and
through May 9, 2005 (the Relevant Period),
there have been no disagreements with PwC on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of PwC, would have caused
PwC to make reference thereto in their reports on the financial
statements for such years. Also, during the Relevant Period,
there were no reportable events as described in
Item 304(a)(1)(v) (Reportable Events) of
Regulation S-K
issued by the United States of America Securities and Exchange
Commission (the Commission).
The Company has requested that PwC furnish it with a letter
addressed to the Commission stating whether or not PwC agrees
with the statements set forth in this
subsection (a) above. A copy of such letter, dated
May 13, 2005, is filed as Exhibit 16.1 to a
Form 8-K
filed with the Commission on May 13, 2005.
On May 12, 2005, the Company engaged KPMG LLP
(KPMG) as its independent registered public
accounting firm to audit the Companys financial statements
for the year ending December 31, 2005. The engagement of
KPMG was approved by the Companys Audit Committee.
During the Relevant Period, neither the Company nor (to the
Companys knowledge) anyone acting on behalf of the Company
consult with KPMG regarding either (i) the application of
accounting principles to a specified transaction (either
completed or proposed), (ii) the type of audit opinion that
might be rendered on the Companys financial statements, or
(iii) any Reportable Event.
There have been no disagreements with accountants on any matter
of accounting principles or practices or financial statement
disclosure required to be reported under this item.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure Controls and Procedures. Based on
their evaluation as of the end of the period covered by this
Annual Report on
Form 10-K,
the Companys Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) are effective to ensure that information
required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms.
During the Companys fiscal quarter ended December 31,
2006, no change occurred in the Companys internal control
over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Companys
internal control over financial reporting.
Management excluded from its assessment of the effectiveness of
the Companys disclosure controls and procedures and
internal control over financial reporting, the disclosure
controls and procedures and internal controls of Convedia which
was acquired effective September 1, 2006. Convedia
represents approximately 3% and 18% of RadiSys
consolidated revenues and consolidated total assets,
respectively, for the year ended December 31, 2006.
Management was unable to assess the effectiveness of the
disclosure controls and procedures and internal control over
financial reporting of Convedia because of the timing of the
acquisition.
92
Management expects to update its assessment of the effectiveness
of the disclosure controls and procedures and internal control
over financial reporting to include Convedia as soon as
practicable but in any event, no later than in the
Form 10-Q
for the quarterly period ended September 30, 2007.
Managements Report on Internal Control over Financial
reporting appears on page 46 hereof. KPMG LLPs
attestation report on managements assessment of the
Companys internal control over financial reporting appears
on page 48 hereof.
|
|
Item 9B.
|
Other
Information
|
On February 27, 2007, the Company entered into agreements
to amend and update the existing indemnification agreements for
the Board of Directors. The Indemnity Agreements, all in
substantially the same form (the Indemnity
Agreements), were entered into with each of C. Scott
Gibson, Ken J. Bradley, Richard J. Faubert, Scott C. Grout,
William W. Lattin, Kevin C. Melia, Carl W. Neun and Lorene K.
Steffes, being all of the members of the Board of Directors.
Each Indemnity Agreement, among other things, requires the
Company to (1) indemnify a director against certain
liabilities that may arise by reason of his or her status or
service as a director, (2) to advance his or her expenses
incurred as a result of a proceeding as to which he or she may
be indemnified and (3) to cover such person under any
directors and officers liability insurance policy
the Company chooses to maintain. The Indemnity Agreements also
contain other provisions customary for such agreements. The
Indemnity Agreements are intended to provide indemnification
rights to the fullest extent permitted under applicable
indemnification rights statutes in the State of Oregon and are
in addition to any rights the directors may have under the
Companys Second Restated Articles of Incorporation and
Restated Bylaws.
The foregoing description of the Indemnity Agreements does not
purport to be complete and is qualified in its entirety by
reference to the form of Indemnity Agreement which is filed as
Exhibit 10.23 hereto.
On February 27, 2007, the Company and each of Scott C.
Grout, Julia A. Harper, Keith Lambert, Brian Bronson and
Christian Lepiane (collectively, the Executives and
each an Executive) also entered into Amended and
Restated Change of Control Agreements (the Change of
Control Agreements).
The primary purposes of the amendments to the Change of Control
Agreements were to make the Change of Control Agreements
compliant with Section 409A of the Internal Revenue Code of
1986, as amended, and the related proposed regulations and other
guidance, including provisions specifying the timing of payments
and distributions to the Executives, and to include other
technical amendments. The Change of Control Agreements also
contain other changes, including changes to provide more
consistency and uniformity among the agreements. The Change of
Control Agreements define the benefits each Executive would
receive in connection with certain change of control, or
potential change of control, events coupled with their loss of
employment and contain other provisions customary for such
agreements.
The foregoing description of the Change of Control Agreements
does not purport to be complete and is qualified in its entirety
by reference to each Change of Control Agreement, all of which
are filed as Exhibits 10.17 through 10.21 hereto.
In addition, on February 27, 2007, the Company and
Mr. Lambert entered into the Executive Severance Agreement
(the Severance Agreement). Pursuant to the Severance
Agreement, among other things, if Mr. Lamberts
employment is terminated by the Company other than for cause,
death or disability, Mr. Lambert will be entitled to
(1) a payment of nine months base pay, (2) up to nine
months of continued coverage pursuant to COBRA under the
Companys group health plan, and (3) incentive
compensation plan payout, if any, for the first six months of
the calendar year if termination occurs after June 1 of any
year. The Severance Agreement contains other provisions
customary for such agreements.
The foregoing description of the Severance Agreement does not
purport to be complete and is qualified in its entirety by
reference to the Severance Agreement, which is filed as
Exhibit 10.22 hereto.
93
PART III
The Registrant will file its definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 15, 2007,
pursuant to Regulation 14A of the Exchange Act (the
Proxy Statement), not later than 120 days after
the end of the fiscal year covered by this Report. This Report
incorporates by reference specified information included in the
Proxy Statement.
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information with respect to our directors and officers and
corporate governance is included in our Proxy Statement and is
incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation
|
Information with respect to executive compensation is included
under Director Compensation, Executive
Compensation, Compensation Committee Report on
Executive Compensation, Comparison of Cumulative
Total Returns, and Employment Contracts and
Severance Arrangements in the Companys Proxy
Statement and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information with respect to security ownership of certain
beneficial owners and management and equity compensation plan
information is included under Security Ownership of
Certain Beneficial Owners and Management in the
Companys Proxy Statement and is incorporated herein by
reference.
Equity
Compensation Plan Information
The following table summarizes information about the
Companys equity compensation plans as of December 31,
2006. All outstanding awards relate to the Companys common
stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
Number of Securities
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Remaining Available
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
for Future Issuance
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Under Equity
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights ($)
|
|
|
Compensation Plans
|
|
|
Equity compensation plans approved
by security holders
|
|
|
1,751,347
|
(A)
|
|
$
|
19.04
|
|
|
|
2,382,224
|
(B)
|
Equity compensation plans not
approved by security holders(C)
|
|
|
1,492,186
|
(D)
|
|
|
18.12
|
|
|
|
104,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,243,533
|
|
|
$
|
18.61
|
|
|
|
2,487,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes 1,660 shares subject to employee stock options
assumed in the merger with Texas Micro Inc. with weighted
average exercise prices of $17.40. |
|
(B) |
|
Includes 1,299,033 of securities authorized and available for
issuance in connection with the RadiSys Corporation 1996
Employee Stock Purchase Plan. |
|
(C) |
|
Includes 300,935 shares granted and 58,265 shares
available for future issuance under the RadiSys Corporation
Stock Plan For Convedia Employees. The Plan is intended to
comply with the National Association of Securities Dealers,
Inc.s (NASD) Marketplace Rule 4350 which
provides an exception to the NASD stockholder approval
requirement for the issuance of securities with regard to grants
to new employees of the Company, including grants to transferred
employees in connection with a merger or other acquisition. |
|
(D) |
|
Includes 131,635 restricted stock units which will vest only if
specific service measures are met. |
94
Description
of Equity Compensation Plans Not Approved by
Shareholders
2001
Nonqualified Stock Option Plan
In February 2001, the Company established the 2001 Nonqualified
Stock Option Plan, under which 2,250,000 shares of the
Companys common stock were reserved as of
December 31, 2006. Grants under the 2001 Nonqualified Stock
Option Plan may be awarded to selected employees, who are not
executive officers or directors of the Company. The purpose of
the 2001 Nonqualified Stock Option Plan is to enable the Company
to attract and retain the services of selected employees of the
Company or any parent or subsidiary of the Company. Unless
otherwise stipulated in the plan document, the Board of
Directors, at their discretion, determines the exercise prices
(which may not be less than the fair market value of the
Companys common stock at the date of grant), vesting
periods, and the expiration periods, which are a maximum of
10 years from the date of grant.
RadiSys
Corporation Stock Plan for Convedia Employees
On August 31, 2006, the Compensation Committee of the Board
of Directors adopted the RadiSys Corporation Stock Plan for
Convedia Employees (the Plan) for awards to be made
in connection with the acquisition of Convedia Corporation. The
Plan was adopted without shareholder approval in reliance upon
the exception provided under Nasdaq Marketplace
Rule 4350(i)(1)(A)(iv) relating to awards granted in
connection with an acquisition and in connection with the hiring
of new employees. The Plan became effective as of
September 1, 2006 (the Effective Date). The
Plan permits the granting of stock options, restricted stock and
restricted stock units. The maximum number of shares of common
stock with respect to which awards may be granted is
365,000 shares (subject to adjustment in accordance with
the Plan). In order to comply with Nasdaq Marketplace
Rule 4350, the awards may only be granted to employees
transferred from Convedia Corporation in connection with the
acquisition of Convedia Corporation and in connection with the
future hiring of new employees of Convedia Corporation. Unless
sooner terminated by the Board of Directors, the Plan will
terminate on the tenth anniversary of the Effective Date. The
Plan provides that the Compensation Committee will determine the
option price at which common stock may be purchased, but the
price will not be less than the fair market value of the common
stock on the date the option is granted. The Compensation
Committee will determine the term of each option, but no option
will be exercisable more than 10 years after the date of
grant. The Plan provides for certain terms and conditions
pursuant to which restricted stock and restricted stock units
may be granted under the Plan; including the term stating that
all restricted stock units are to be settled in stock. Each
grant of restricted stock and restricted stock units must be
evidenced by an award agreement in a form approved by the
Compensation Committee. The vesting of restricted stock or
restricted stock units may be conditioned upon the completion of
a specified period of employment, upon attainment of specified
performance goals
and/or upon
such other criteria as the Compensation Committee determines.
Additional information required by this item is included in our
Proxy Statement for the Annual Meeting of Shareholders to be
held May 15, 2007 and is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information with respect to certain relationships and
related transactions is included under Certain
Relationships and Related Transactions in the
Companys Proxy Statement and is incorporated herein by
reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information with respect to principal accountant fees and
services is included under Principal Accountant Fees and
Services in the Companys proxy statement and is
incorporated herein by reference.
95
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1) Financial Statements
Index to
Financial Statements
|
|
|
|
|
|
|
Form 10-K
|
|
|
Page No.
|
|
|
|
|
47
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
56
|
|
(a) (2) Financial Statement Schedule
(a) (3) Exhibits
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
2
|
.1
|
|
Arrangement Agreement among
RadiSys Corporation, Convedia Corporation and RadiSys Canada
Inc., effective as of July 26, 2006. Incorporated by
reference from Exhibit 2.1 to the Companys Current
Report on
Form 8-K
filed on July 28, 2006, SEC File No. 000-26844.
|
|
3
|
.1
|
|
Second Restated Articles of
Incorporation and amendments thereto. Incorporated by reference
from Exhibit 4.1 to the Companys Registration
Statement on
Form S-8,
filed on September 1, 2006, SEC File
No. 333-137060.
|
|
3
|
.2
|
|
Restated Bylaws. Incorporated by
reference from Exhibit 4.3 to the Companys
Registration Statement on
Form S-8,
filed on June 9, 2000, SEC Registration
No. 333-38966.
|
|
4
|
.1
|
|
Indenture dated August 9,
2000 between the Company and U.S. Trust Company, National
Association. Incorporated by reference from Exhibit 4.4 to
the Companys Registration Statement of
Form S-3,
filed on November 1, 2000, SEC Registration
No. 333-49092.
|
|
4
|
.2
|
|
Form of Note. Incorporated by
reference from Exhibit 4.5 to the Companys
Registration Statement on
Form S-3,
filed on November 1, 2000, SEC Registration
No. 333-49092.
|
|
4
|
.4
|
|
Indenture, dated as of
November 19, 2003, between the Company and JPMorgan Chase
Bank, as Trustee. Incorporated by reference from
Exhibit 4.7 to the Companys Registration Statement on
Form S-3,
filed December 24, 2003, SEC Registration
No. 333-111547.
|
|
4
|
.5
|
|
Form of Note. See Exhibit 4.4.
|
|
10
|
.1*
|
|
RadiSys Corporation 1995 Employee
Stock Incentive Plan, as amended. Incorporated by reference from
Exhibit (d)(1) to the Tender Offer Statement filed by the
Company on Schedule TO-I, filed July 31, 2003, SEC File No.
005-49160.
|
|
10
|
.2*
|
|
RadiSys Corporation 1996 Employee
Stock Purchase Plan, as amended. Incorporated by reference from
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2004, filed on
August 5, 2004, SEC File No. 0-26844.
|
|
10
|
.3*
|
|
RadiSys Corporation 2001
Nonqualified Stock Option Plan, as amended. Incorporated by
reference from Exhibit (d)(2) to the Tender Offer Statement
filed by the Company on Schedule TO-I, filed July 31, 2003,
SEC File No. 005-49160.
|
96
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.4*
|
|
Form of Restricted Stock
Agreement, as amended. Incorporated by reference from Exhibit
10.1 to the Companys Quarterly Report on
Form 10-Q,
for the quarterly period ended March 31, 2006, filed on
May 9, 2006, SEC File No. 000-26844.
|
|
10
|
.5*
|
|
Form of Notice of Stock Option
Grant for the 1995 Stock Incentive Plan. Incorporated by
reference from Exhibit (d)(3) to the Tender Offer Statement
filed by the Company on TO-I, filed July, 31, 2003, SEC
File No. 005-49160.
|
|
10
|
.6*
|
|
Form of Notice of Stock Option
Grant for the 2001 Nonqualified Stock Option Plan. Incorporated
by reference from Exhibit (d)(4) to the Tender Offer
Statement filed by the Company on TO-I, filed July, 31,
2003, SEC File No. 005-49160.
|
|
10
|
.7*
|
|
Deferred Compensation Plan.
Incorporated by reference from Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2001, filed on
May 15, 2001, SEC File No. 000-26844.
|
|
10
|
.8*
|
|
Summary of Compensation and
Performance Goals and Business Criteria for Payment of Incentive
Awards. Incorporated by reference from Exhibit 10.2 to the
Companys Current Report on
Form 8-K
filed on October 27, 2006, SEC File No. 000-26844.
|
|
10
|
.9*
|
|
Summary of Performance Goals and
Business Criteria for Payment of Awards. Incorporated by
reference from Exhibit 10.1 to the Companys Current
Report on
Form 8-K,
filed on July 28, 2006, SEC File No. 000-26844.
|
|
10
|
.10*
|
|
RadiSys Corporation Stock Plan for
Convedia Employees. Incorporated by reference from
Exhibit 4.4 to the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration
No. 333-137060.
|
|
10
|
.11*
|
|
Form of Notice of Option Grant for
United States employees for RadiSys Corporation Stock Plan for
Convedia Employees. Incorporated by reference from
Exhibit 4.5 to the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.12*
|
|
Form of Notice of Option Grant for
Canada employees for RadiSys Corporation Stock Plan for Convedia
Employees. Incorporated by reference from Exhibit 4.6 to
the Companys Registration Statement on
Form S-8
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.13*
|
|
Form of Notice of Option Grant for
international employees for RadiSys Corporation Stock Plan for
Convedia Employees. Incorporated by reference from
Exhibit 4.7 to the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.14*
|
|
Form of Notice of Option Grant for
China employees for RadiSys Corporation Stock Plan for Convedia
Employees. Incorporated by reference from Exhibit 4.8 to
the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.15*
|
|
Form of Restricted Stock Grant
Agreement for RadiSys Corporation Stock Plan for Convedia
Employees. Incorporated by reference from Exhibit 4.9 to
the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration
No. 333-137060.
|
|
10
|
.16*
|
|
Form of Restricted Stock Unit
Grant Agreement for RadiSys Corporation Stock Plan for Convedia
Employees. Incorporated by reference from Exhibit 4.10 to
the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.17*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Julia A. Harper.
|
|
10
|
.18*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Scott C. Grout.
|
|
10
|
.19*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Keith Lambert.
|
|
10
|
.20*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Christian Lepiane.
|
|
10
|
.21*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Brian Bronson.
|
|
10
|
.22*/**
|
|
Executive Severance Agreement
dated February 27, 2007 between the Company and Keith
Lambert.
|
97
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.23*/**
|
|
Form of Indemnity Agreement for
directors of the Company.
|
|
10
|
.24*/**
|
|
Offer letter dated
September 16, 2002 between the Company and Scott C. Grout.
|
|
10
|
.25*/**
|
|
Offer letter dated August 15,
2003 between the Company and Christian Lepiane.
|
|
10
|
.26
|
|
Dawson Creek II lease, dated
March 21, 1997, incorporated by reference from
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 1997, filed on
August 13, 1997, SEC File No. 000-26844.
|
|
16
|
.1
|
|
Letter from PricewaterhouseCoopers
LLP, dated May 13, 2005. Incorporated by reference from
Exhibit 16.1 to the Companys Current Report on
Form 8-K,
filed on May 13, 2005, SEC File No. 000-26844.
|
|
21
|
.1**
|
|
List of Subsidiaries.
|
|
23
|
.1**
|
|
Consent of KPMG LLP.
|
|
23
|
.2 **
|
|
Consent of PricewaterhouseCoopers
LLP.
|
|
24
|
.1**
|
|
Powers of Attorney.
|
|
31
|
.1**
|
|
Certification of the Chief
Executive Officer required by
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Exchange Act pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2**
|
|
Certification of the Chief
Financial Officer required by
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Exchange Act pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1**
|
|
Certification of the Chief
Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.2**
|
|
Certification of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
* |
|
This Exhibit constitutes a management contract or compensatory
plan or arrangement |
|
** |
|
Filed herewith |
(b) See (a) (3) above.
(c) See (a) (2) above.
98
SCHEDULE II
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Write-Offs
|
|
|
Acquired
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Net of
|
|
|
through
|
|
|
End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Recoveries
|
|
|
Acquisitions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
For the year ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
876
|
|
|
$
|
200
|
|
|
$
|
(218
|
)
|
|
$
|
|
|
|
$
|
858
|
|
Obsolescence reserve
|
|
|
7,272
|
|
|
|
6,084
|
|
|
|
(4,780
|
)
|
|
|
36
|
|
|
|
8,612
|
|
Tax valuation allowance
|
|
|
6,812
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
7,039
|
|
For the year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
888
|
|
|
$
|
|
|
|
$
|
(12
|
)
|
|
$
|
|
|
|
$
|
876
|
|
Obsolescence reserve
|
|
|
7,353
|
|
|
|
4,647
|
|
|
|
(4,728
|
)
|
|
|
|
|
|
|
7,272
|
|
Tax valuation allowance
|
|
|
15,886
|
|
|
|
(9,074
|
)
|
|
|
|
|
|
|
|
|
|
|
6,812
|
|
For the year ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,301
|
|
|
$
|
|
|
|
$
|
(413
|
)
|
|
$
|
|
|
|
$
|
888
|
|
Obsolescence reserve
|
|
|
9,491
|
|
|
|
3,046
|
|
|
|
(5,184
|
)
|
|
|
|
|
|
|
7,353
|
|
Tax valuation allowance
|
|
|
17,410
|
|
|
|
(1,524
|
)
|
|
|
|
|
|
|
|
|
|
|
15,886
|
|
99
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.
RADISYS CORPORATION
Scott C. Grout
President and
Chief Executive Officer
Dated: March 2, 2007
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
February 28, 2007.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ SCOTT
C. GROUT
Scott
C. Grout
|
|
President, Chief Executive Officer
and Director
(Principal Executive Officer)
|
|
|
|
/s/ BRIAN
J. BRONSON
Brian
J. Bronson
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
Directors:
|
|
|
|
|
|
/s/ C.
SCOTT GIBSON*
C.
Scott Gibson
|
|
Chairman of the Board and Director
|
|
|
|
/s/ KEN
BRADLEY*
Ken
Bradley
|
|
Director
|
|
|
|
/s/ RICHARD
J. FAUBERT*
Richard
J. Faubert
|
|
Director
|
|
|
|
/s/ DR.
WILLIAM W. LATTIN*
Dr. William
W. Lattin
|
|
Director
|
|
|
|
/s/ KEVIN
C. MELIA*
Kevin
C. Melia
|
|
Director
|
|
|
|
/s/ CARL
NEUN*
Carl
Neun
|
|
Director
|
|
|
|
/s/ LORENE
K. STEFFES*
Lorene
K. Steffes
|
|
Director
|
|
|
|
*By: /s/ SCOTT
C. GROUT*
Scott
C. Grout, as attorney-in-fact
|
|
|
100
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
2
|
.1
|
|
Arrangement Agreement among
RadiSys Corporation, Convedia Corporation and RadiSys Canada
Inc., effective as of July 26, 2006. Incorporated by
reference from Exhibit 2.1 to the Companys Current
Report on
Form 8-K
filed on July 28, 2006, SEC File No. 000-26844.
|
|
3
|
.1
|
|
Second Restated Articles of
Incorporation and amendments thereto. Incorporated by reference
from Exhibit 4.1 to the Companys Registration
Statement on
Form S-8,
filed on September 1, 2006, SEC File
No. 333-137060.
|
|
3
|
.2
|
|
Restated Bylaws. Incorporated by
reference from Exhibit 4.3 to the Companys
Registration Statement on
Form S-8,
filed on June 9, 2000, SEC Registration
No. 333-38966.
|
|
4
|
.1
|
|
Indenture dated August 9,
2000 between the Company and U.S. Trust Company, National
Association. Incorporated by reference from Exhibit 4.4 to
the Companys Registration Statement of
Form S-3,
filed on November 1, 2000, SEC Registration
No. 333-49092.
|
|
4
|
.2
|
|
Form of Note. Incorporated by
reference from Exhibit 4.5 to the Companys
Registration Statement on
Form S-3,
filed on November 1, 2000, SEC Registration
No. 333-49092.
|
|
4
|
.4
|
|
Indenture, dated as of
November 19, 2003, between the Company and JPMorgan Chase
Bank, as Trustee. Incorporated by reference from
Exhibit 4.7 to the Companys Registration Statement on
Form S-3,
filed December 24, 2003, SEC Registration
No. 333-111547.
|
|
4
|
.5
|
|
Form of Note. See Exhibit 4.4.
|
|
10
|
.1*
|
|
RadiSys Corporation 1995 Employee
Stock Incentive Plan, as amended. Incorporated by reference from
Exhibit (d)(1) to the Tender Offer Statement filed by the
Company on Schedule TO-I, filed July 31, 2003, SEC File No.
005-49160.
|
|
10
|
.2*
|
|
RadiSys Corporation 1996 Employee
Stock Purchase Plan, as amended. Incorporated by reference from
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2004, filed on
August 5, 2004, SEC File No. 0-26844.
|
|
10
|
.3*
|
|
RadiSys Corporation 2001
Nonqualified Stock Option Plan, as amended. Incorporated by
reference from Exhibit (d)(2) to the Tender Offer Statement
filed by the Company on Schedule TO-I, filed July 31, 2003,
SEC File No. 005-49160.
|
|
10
|
.4*
|
|
Form of Restricted Stock
Agreement, as amended. Incorporated by reference from Exhibit
10.1 to the Companys Quarterly Report on
Form 10-Q,
for the quarterly period ended March 31, 2006, filed on
May 9, 2006, SEC File No. 000-26844.
|
|
10
|
.5*
|
|
Form of Notice of Stock Option
Grant for the 1995 Stock Incentive Plan. Incorporated by
reference from Exhibit (d)(3) to the Tender Offer Statement
filed by the Company on TO-I, filed July, 31, 2003, SEC
File No. 005-49160.
|
|
10
|
.6*
|
|
Form of Notice of Stock Option
Grant for the 2001 Nonqualified Stock Option Plan. Incorporated
by reference from Exhibit (d)(4) to the Tender Offer
Statement filed by the Company on TO-I, filed July, 31,
2003, SEC File No. 005-49160.
|
|
10
|
.7*
|
|
Deferred Compensation Plan.
Incorporated by reference from Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2001, filed on
May 15, 2001, SEC File No. 000-26844.
|
|
10
|
.8*
|
|
Summary of Compensation and
Performance Goals and Business Criteria for Payment of Incentive
Awards. Incorporated by reference from Exhibit 10.2 to the
Companys Current Report on
Form 8-K
filed on October 27, 2006, SEC File No. 000-26844.
|
|
10
|
.9*
|
|
Summary of Performance Goals and
Business Criteria for Payment of Awards. Incorporated by
reference from Exhibit 10.1 to the Companys Current
Report on
Form 8-K,
filed on July 28, 2006, SEC File No. 000-26844.
|
|
10
|
.10*
|
|
RadiSys Corporation Stock Plan for
Convedia Employees. Incorporated by reference from
Exhibit 4.4 to the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration
No. 333-137060.
|
|
10
|
.11*
|
|
Form of Notice of Option Grant for
United States employees for RadiSys Corporation Stock Plan for
Convedia Employees. Incorporated by reference from
Exhibit 4.5 to the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration No.
333-137060.
|
101
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10
|
.12*
|
|
Form of Notice of Option Grant for
Canada employees for RadiSys Corporation Stock Plan for Convedia
Employees. Incorporated by reference from Exhibit 4.6 to
the Companys Registration Statement on
Form S-8
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.13*
|
|
Form of Notice of Option Grant for
international employees for RadiSys Corporation Stock Plan for
Convedia Employees. Incorporated by reference from
Exhibit 4.7 to the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.14*
|
|
Form of Notice of Option Grant for
China employees for RadiSys Corporation Stock Plan for Convedia
Employees. Incorporated by reference from Exhibit 4.8 to
the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.15*
|
|
Form of Restricted Stock Grant
Agreement for RadiSys Corporation Stock Plan for Convedia
Employees. Incorporated by reference from Exhibit 4.9 to
the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration
No. 333-137060.
|
|
10
|
.16*
|
|
Form of Restricted Stock Unit
Grant Agreement for RadiSys Corporation Stock Plan for Convedia
Employees. Incorporated by reference from Exhibit 4.10 to
the Companys Registration Statement on
Form S-8,
filed on September 1, 2006, SEC Registration No.
333-137060.
|
|
10
|
.17*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Julia A. Harper.
|
|
10
|
.18*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Scott C. Grout.
|
|
10
|
.19*/ **
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Keith Lambert.
|
|
10
|
.20*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Christian Lepiane.
|
|
10
|
.21*/**
|
|
Amended and Restated Executive
Change of Control Agreement dated February 27, 2007 between
the Company and Brian Bronson.
|
|
10
|
.22*/**
|
|
Executive Severance Agreement
dated February 27, 2007 between the Company and Keith
Lambert.
|
|
10
|
.23*/**
|
|
Form of Indemnity Agreement for
directors of the Company.
|
|
10
|
.24*/**
|
|
Offer letter dated
September 16, 2002 between the Company and Scott C. Grout.
|
|
10
|
.25*/**
|
|
Offer letter dated August 15,
2003 between the Company and Christian Lepiane.
|
|
10
|
.26
|
|
Dawson Creek II lease, dated
March 21, 1997, incorporated by reference from
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 1997, filed on
August 13, 1997, SEC File No. 000-26844.
|
|
16
|
.1
|
|
Letter from PricewaterhouseCoopers
LLP, dated May 13, 2005. Incorporated by reference from
Exhibit 16.1 to the Companys Current Report on
Form 8-K,
filed on May 13, 2005, SEC File No. 000-26844.
|
|
21
|
.1**
|
|
List of Subsidiaries.
|
|
23
|
.1**
|
|
Consent of KPMG LLP.
|
|
23
|
.2**
|
|
Consent of PricewaterhouseCoopers
LLP.
|
|
24
|
.1**
|
|
Powers of Attorney.
|
|
31
|
.1**
|
|
Certification of the Chief
Executive Officer required by
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Exchange Act pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2**
|
|
Certification of the Chief
Financial Officer required by
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Exchange Act pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1**
|
|
Certification of the Chief
Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.2**
|
|
Certification of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
* |
|
This Exhibit constitutes a management contract or compensatory
plan or arrangement |
|
** |
|
Filed herewith |
102