Radisys Corporation
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission file number 0-26844
RADISYS CORPORATION
(Exact name of registrant as specified in its charter)
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Oregon
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93-0945232 |
(State or other jurisdiction of
incorporation or Organization) |
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(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:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock
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 National Market on June 30, 2005 of $16.15) of
the Registrant at that date was approximately $279,907,000. 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 24, 2006: 20,840,009
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys Proxy Statement for the
registrants 2006 Annual Meeting of Shareholders to be held
May 16, 2006 are incorporated by reference into
Part III of this
Form 10-K.
RADISYS CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
General
RadiSys is a leading provider of advanced embedded solutions for
the communications networking and commercial systems markets.
Through innovative product planning, intimate customer
collaboration, and combining leading edge technologies and
system architecture, we help original equipment manufacturers
(OEMs) accelerate new product deployments by
allowing the customer to redirect their product development
resources to their core competencies. Our products include
embedded boards, software, platforms and systems, which are used
in todays complex computing, processing and network
intensive applications.
Our Strategy
Our strategy is to provide customers with 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
merchant-supplied building blocks for a growing number of
processing and networking functions.
Our Markets
We provide advanced embedded solutions to the following two
distinct markets:
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Communications Networking The communications
networking market primarily includes two sub markets: Wireless
infrastructure, and IP networking and messaging. The wireless
infrastructure sub market includes voice, video and data systems
deployed into public networks. The wireless sub market includes
a variety of telecommunications focused applications,
including 2, 2.5 and 3G wireless infrastructure products,
packet-based switches and unified messaging products for
wireless networks. The IP networking and messaging sub-market
includes embedded compute, processing and networking systems
used in private enterprise IT infrastructure. The IP networking
and messaging sub market consists of a variety of applications
including voice messaging, data centers,
IP-based Private Branch
Exchange (PBX) systems, network access and security
and switching applications. |
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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,
immunodiagnostics and hematology systems, CAT Scan
(CT) imaging equipment, ATMs, point of sale
terminals, semiconductor manufacturing equipment, electronics
assembly equipment and high-end network test equipment. |
Our Market Drivers
We believe there are a number of fundamental drivers for growth
in the embedded solutions market, including:
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Increasing desire by OEMs to utilize outsourced modular building
blocks to develop new systems. We believe OEMs are combining
their internal development efforts with merchant-supplied
platforms from partners like RadiSys to deliver more new
products to market, faster at lower total cost of ownership. |
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Increasing levels of programmable, intelligent and networked
functionality embedded in a variety of systems, including
systems for monitoring and control, real-time information
processing and high-bandwidth network connectivity. |
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Increasing demand for standards-based solutions, such as
Advanced Telecommunications Architecture (ATCA), and
Computer-on-Module
Express (COM Express), that motivates system makers
to take advantage of proven and validated standards-based
products. |
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Increasing demand for new technologies utilizing network
processors, such as security and high-volume networking
applications. |
Products
We design and manufacture a broad range of products at different
levels of integration:
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Complete Turn-key Systems for the communications networking
systems markets such as ATCA blade servers; |
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Embedded Subsystems and Functional Platforms using ATCA, COM
Express, CompactPCI, and customer-specific proprietary platforms; |
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Compute, I/ O, Inter-networking and Packet Processing
Blades; and |
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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:
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System Architecture, Design and Integration; |
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Software, Hardware and Platform Development; |
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Embedded Operating Systems; |
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Microprocessor-Based Design; |
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Network Processor-Based Design; |
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Signaling Protocols. |
Our products fall into two different categories: Standards-based
Solutions and Perfect Fit 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)
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 2004 and 2005 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. 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 ground-start,
custom-designs. We believe this ability to reuse designs 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 provide more product
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content and drive higher average selling prices and therefore
more total revenue opportunity for our products.
We announced our
Promentumtm
family of ATCA product plans in 2005. This family of products
includes universal carrier cards, switch and control modules,
disk storage modules, compute modules, and a 14-slot shelf or
chassis. These products are offered individually or integrated
together as part of a blade server system known as the
Promentumtm
SYS-6000. We believe the
Promentumtm
SYS-6000 system provides customers a highly reliable managed
platform on which to build their new voice and data offerings.
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 technologies. We believe our core ATCA
solutions will be applicable across a wide range of customers
and applications and are potentially applicable in all of our
defined markets. These integrated hardware and software
platforms make extensive use of common system architectural and
component designs, including carrier grade operating systems and
middleware. The use of common system architectural and component
designs reduces development time and costs and enhances
application portability.
During the second quarter of 2005, we announced another asset in
our ATCA family of products, the
Promentumtm
ATCA-7010. The 7010 is a high-speed packet processing module
that provides the highest bandwidth throughput available in a
single ATCA slot. This product will significantly increase the
packet-processing power of our customers systems, while at
the same time reducing costs and speeding time to market. The
7010 features dual
Intel®
IXP28xx network processors which are 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.
In addition to our new ATCA offerings, we announced our new
Proceleranttm
series of modular computing solutions (COM Express),
for customers in our commercial systems market for medical,
transaction terminals, 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.
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 functionality and more value for
our customers. We believe that turnkey modular solutions like
ATCA systems will grow to become a large and very attractive
market to RadiSys. In 2005, we recorded our first ATCA revenue
and secured several new projects that are predominately ATCA and
COM Express projects, including applications with 17 new
customers. The success of our new ATCA projects are tied to
future deployment of wireless voice, wireless data and VoIP
applications by our customers. Recent studies done by firms such
as ABI Research, VDC, and others call for the ATCA market to
grow to between $800 million to $1.7 billion in 2007.
These same studies project that the market will grow to between
$2 billion to $4.5 billion by 2009.
We believe that ATCA will become a more prevalent way 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 slower than
projected. So our own estimates call for the size of this market
to be roughly $500 million in 2007 and growing to over
$1 billion by 2009. For RadiSys, this is virtually all new
market opportunity that does not exist in a meaningful way for
us today. Up until this point only a limited number of equipment
makers have used standards-based modular platforms like ATCA.
Based on our interactions with customers, we believe this model
will become widely adopted as network equipment makers strive to
bring more products to market faster and with lower research and
development and product life cycle costs.
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
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model. We believe our customers will require and value
customization of our standards-based platforms for many of their
specific applications.
Segments
RadiSys is one operating segment as determined by the way that
management makes operating decisions and assesses RadiSys
financial performance. See Note 18 of the Notes to the
Consolidated Financial Statements for segment information.
Competition
We have three different types of competitors:
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System Makers 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 sub-systems. However,
we believe system makers are moving away from this propriety
mode of system development and supply. |
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Diversified Conglomerates These competitors
are divisions or business units within large corporations, and
include divisions within Artesyn Technologies, Hewlett Packard,
Intel Corporation, International Business Machines Corporation
(IBM), Motorola ECC and Sun Microsystems. |
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Independent Embedded Solutions Providers
These competitors include Advantech Co., Continuous Computing,
Kontron AG, Mercury Computer Systems, Performance Technologies
and SBS Technologies. |
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, Arrow Electronics, Aspect Medical Systems, Avaya,
Beckman Coulter, Comverse Network Systems
(Comverse)- a division of Comverse Technology,
Diebold, Fluke, Hewlett Packard, IBM, Lucent Technologies,
Mespek Oy, Nokia, Nortel Networks (Nortel), Philips
Medical Systems, Rockwell Automation, Siemens AG, Skystream
Networks, Toshiba Tec Corporation, and Universal Instruments.
Our five largest customers, accounting for approximately 67.5%
of revenues in 2005, are listed below with an example of the
type of application which incorporates RadiSys products:
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Avaya
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Unified messaging products |
Comverse
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Wireless Voice and Multimedia Messaging Systems |
Nokia
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2, 2.5, and 3G Wireless Infrastructure Equipment |
Nortel
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IP-Enabled PBX systems and switches |
Philips Medical Systems
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Cardiovascular, Surgical, and Medical Imaging Equipment |
Nokia and Nortel were our largest customers in 2005 accounting
for 36.2% and 14.3% of total 2005 revenues, respectively.
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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 241
engineers and technicians as of February 17, 2006. We
currently have design centers located in the United States of
America 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 results in significant savings in development
time and investment for our customers and increases 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
integrated 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 79 as of
February 17, 2006. 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 and
Israel (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 2005, global revenues were comprised
geographically of 35.7% from North America, 50.5% from EMEA and
13.8% from Asia Pacific. See Note 18 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 200
as of February 17, 2006. We currently manufacture
approximately 20% of our own products and intend to continue to
outsource more 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 test. This
plant includes an automated line for Surface Mount Technology
(SMT) double-sided board assembly and facilities for
systems integration, configuration and test. Because the
products into which building blocks are integrated typically
have long life reliability requirements, dynamic stress
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testing of our products must be particularly rigorous. We
believe our product testing processes are a competitive
advantage.
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. Certain components are supplied by only one
supplier. For example, we currently rely on Intel for the supply
of some microprocessors and other components, and we rely on
LSI, Epson Electronic America, Broadcom, NEC, Chen Ming, Triax
and Texas Instruments as sole source suppliers for 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 utilize multiple manufacturing services partners, mainly
Celestica Inc., and Hon Hai Precision Industry Co., Ltd. (a.k.a.
FoxConn) for outsourced board and system production. If one of
these contractors failed to perform, this production would have
to be transferred to other contract manufacturers. Such
transfers would require technical and logistical activities,
could cause a material disruption in our ability to deliver
products in a timely fashion to our customers and would require
a significant amount of costs, time and resources to establish.
Backlog
As of December 31, 2005, our backlog was approximately
$25.1 million, compared to $22.6 million as of
December 31, 2004. 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 21 U.S. utility patents and three U.S. design
patents and have five U.S. patent applications pending and
eight 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.
Employees
As of February 17, 2006 we had 598 employees, of which 478
were regular employees and 120 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 year ended December 31, 2005.
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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 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.
FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K may
contain forward-looking statements. Some of the forward-looking
statements contained in this Annual Report on
Form 10-K include:
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Our statements concerning our beliefs about the success of our
shift in business strategy from perfect fit solutions to
standards-based solutions; |
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The adoption by our customers of standards-based solutions and
ATCA; |
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The size of the addressable market for ATCA; |
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Expectations and goals for revenues, gross margin, research and
development expenses, selling, general, administrative expenses
and profits; |
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The impact of our restructuring events on future revenues; |
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The anticipated cost savings effects of our restructuring
activities; and |
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Our projected liquidity. |
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 7. 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 complete
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. 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
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.
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Item 1A. |
Risk Factors Related to Our Business |
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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 2005, we derived 67.5% of our revenues from five
customers. These five customers were Nokia, Nortel, Comverse,
Philips Medical Systems and Avaya. During 2005, revenues
attributable to Nokia and Nortel were 36.2% and 14.3%,
respectively. We believe that sales to these customers will
continue to be a substantial percentage of our revenues. 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 sales and
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. Finally, a financial hardship
experienced by one of our top customers could materially affect
revenues and profitability.
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We are shifting our business from predominately perfect
fit solutions to more standards-based products, such as ATCA and
COM Express. This requires substantial expenditures for research
and development 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 and
COM Express products. There can be no assurance that this
strategy will be successful. This strategy requires us to make
substantial expenditures for research and development 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. Revenues
from some of these investments, such as ATCA and COM Express,
are not expected to result in any significant revenue
opportunities for at least twelve to eighteen months.
Accordingly, these expenditures could adversely 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 research and
development 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.
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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
10
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. 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.
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.
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Not all new product development projects 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. |
If a product development project actually ramps into production,
the average ramp into production begins about 12 to
18 months after the project launch, 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 projects ramp into
production and even if a project is ramped into production, the
volumes derived from such projects may not be as significant as
we had originally estimated. Projects are sometimes canceled or
delayed, or can perform below original expectations, which can
adversely impact anticipated revenues and profitability.
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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 could have a
material adverse effect on our revenues. |
We derive our revenues from a number of diverse end markets,
some of which are subject to significant cyclical changes in
demand. In 2005, we derived 74.6% and 25.4% 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
Avaya, Comverse, Lucent, Nokia and Nortel. Commercial systems
revenues include, but are not limited to, sales to Agilent
Technologies, Beckman Coulter, Diebold, Philips Medical and
Seimens AG. 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.
11
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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 financial performance. |
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 rely
on Intel for the supply of some microprocessors and other
components, and we rely on LSI, Epson Electronic America,
Broadcom, NEC, Chen Ming, Triax and Texas Instruments as the
sole source suppliers for other components such as integrated
circuits and mechanical assemblies. 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 with sole sourcing for
certain RadiSys products. Alternative sources of manufacturing
services for the RadiSys products could require significant time
and resources to establish, including transitioning the products
to be internally produced. 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.
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We are shifting the majority of our manufacturing to third
party contract manufacturers and our inability to properly
transfer our manufacturing or any failed or less than optimal
execution on their behalf could adversely affect our revenues
and profitability. |
We have traditionally manufactured a substantial portion of our
products. To lower our costs and provide better value and more
competitive products for our customers and to achieve higher
levels of global fulfillment, we are shifting a significant
amount of our manufacturing to third party contract
manufacturers. At the end of 2005, our contract manufacturing
partners were manufacturing approximately 80% of all of our unit
volume. We expect to increase our outsourcing to our contract
manufacturers throughout 2006. If we do not properly transfer
our manufacturing expertise to these third party manufacturers
or they 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 unanticipated scheduling delays in
production and delivery or cause us to invest in additional
internal resources as we lose productivity on other important
projects. Additionally, inadequate performance by our contract
manufacturers may result in higher than anticipated costs. We
also rely on contract manufacturers as the sole suppliers of
certain RadiSys products. For example, FoxConn produces certain
products that we do not produce internally and that no other
contract manufacturer produces for us. Alternative sources of
supply for the RadiSys products that our contract manufacturers
produce would be difficult to locate and/or it would require a
significant amount of time and resources to establish an
alternative supply line, including transitioning the products to
be internally produced. We currently utilize several contract
manufacturers for outsourced board and system production;
however, we depend on two primary contract manufacturing
partners, FoxConn, and Celestica, Inc.
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Unexpected changes in customer demand or our inability to
accurately forecast customer demand or unexpected changes in
design could have a material adverse effect on our gross margins
and profitability. |
We typically sell our products pursuant to purchase orders that
customers can cancel or defer delivery on short notice without
incurring a significant penalty. Order cancellations or
deferrals and/or design changes 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
12
from our customers of requiring shorter lead times between
placing orders with us and the shipment date. That typically
necessitates in 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.
Our contract manufacturers as well as our internal manufacturing
department depend on our ability to accurately forecast our
customers demand so that they can procure materials and
manufacture product to meet such demand. Thereby, 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.
If we underestimate customer demand, the contract manufacturers
may not have adequate inventories, which could interrupt
manufacturing of our products and result in delays in shipments
to our customers and revenue recognition.
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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., Artesyn Technologies,
Continuous Computing, Hewlett Packard, divisions within Intel
Corporation and IBM, Kontron AG, Mercury Computer Systems,
Motorola ECC, Performance Technologies, SBS Technologies and
divisions within 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:
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a longer operating history; |
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greater name recognition and marketing power; |
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preferred vendor status with our existing and potential
customers; and |
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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.
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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
13
common stock could be adversely affected. In addition,
acquisitions or strategic investments involve numerous risks,
including:
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difficulties in the assimilation of the operations,
technologies, products and personnel of the acquired company; |
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the diversion of managements attention from other business
concerns; |
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risks of entering markets in which we have no or limited prior
experience; |
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the potential loss of key employees of the acquired
company; and |
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performance below expectations by an acquired business. |
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.
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Our international operations expose us to additional
political, economic and regulatory risks not faced by businesses
that operate only in the United States. |
In 2005, as measured by delivery destination, we derived 4.7% of
our revenues from Canada and Mexico, 50.5% of our revenues from
EMEA and 13.8% from Asia Pacific. In addition, during 2004 we
opened a development center in Shanghai, China and began to
utilize a contract manufacturer in Shenzhen, China. In 2005,
approximately 39% of our total revenues were associated with
products produced at our China contract manufacturer. In 2005 we
began migrating products to a Celestica facility in Mexico. So
far production at this facility does not make up a meaningful
portion of our total revenues. 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.
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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 $29.0 million as of December 31, 2005. 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 $29.6 million on the
Consolidated Balance Sheet as of December 31, 2005, and
therefore, we may incur an impairment charge in the future.
14
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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. |
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.
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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.
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Our
period-to-period
revenues, operating results and earnings per share fluctuate
significantly, which may result in volatility in the price of
our common stock. |
The price of our common stock may be subject to wide, rapid
fluctuations. Our
period-to-period
revenues and operating results have varied in the past and may
continue to vary in the future, and any such fluctuations may
cause our stock price to fluctuate. Fluctuations in the stock
price may also be due to other factors, such as changes in
analysts estimates regarding earnings, or may be due to
factors relating to the commercial systems and communication
networking markets in general. Shareholders should be willing to
incur the risk of such fluctuations.
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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.
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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 U.S. Securities and Exchange
Commissions rules and
15
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.
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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:
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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; |
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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; |
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prohibit cumulative voting in the election of directors, which
would otherwise allow less than a majority of shareholders to
elect director candidates; and |
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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
16
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.
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In recent years, various state, federal and international
laws and regulations governing the collection, treatment,
recycling and disposal of certain materials used in the
manufacturing of electrical and electronic components have been
enacted. In support of these laws and regulations, we will incur
significant additional expenditures and we may incur additional
capital expenditures and asset impairments to ensure that our
products and our vendors products are in compliance with
these regulations, and we may also incur significant penalties
in connection with any violations of these laws. Additionally,
failure to comply with these regulations could have an adverse
effect on our business, financial condition and results of
operations. As a result, our financial condition or operating
results may be negatively impacted. |
The most significant pieces of legislation relate to two
European Union (EU) directives aimed at wastes from
electrical and electronic equipment (WEEE) and the
restriction of the use of certain hazardous substances
(RoHS). Specifically, the RoHS directive prohibits
the use of certain types of materials, such as lead, in the
manufacturing of electronic products. As of July 1, 2006
products sold within the EU, a market in which we sell a
significant amount of our products, must be RoHS compliant.
Failure to comply with such legislation could result in our
customers refusing to purchase our products and subject us to
significant monetary penalties in connection with a violation,
both of which could have a materially adverse effect on our
business, financial condition and results from operations.
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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.
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Item 1B. |
Unresolved Staff Comments |
None.
Information concerning our principal properties at
December 31, 2005 is set forth below:
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Square | |
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Location |
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Principal Use |
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Footage | |
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Ownership | |
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Hillsboro, OR
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Office & Plant |
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Headquarters, Marketing, |
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138,000 |
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Leased |
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Manufacturing, Distribution, Research, and Engineering |
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23,000 |
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Owned |
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Des Moines, Iowa
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Office |
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Marketing, Research, and Engineering |
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12,655 |
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Leased |
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Boca Raton, FL
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Office |
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Marketing, Research, and Engineering |
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36,000 |
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Leased |
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In addition to the above properties, we own two parcels of land
adjacent to our Hillsboro, Oregon facility, which were acquired
for future expansion. We also lease sales offices in the United
States of
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America located in San Diego, California and Marlborough,
Massachusetts. We have international sales offices located in
Munich, Germany, Balbriggan, Ireland 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.
Beginning in the first quarter of 2001, we initiated multiple
restructurings of our operations. As a result, we committed to
vacate properties according to our restructuring plans. We
partially vacated facilities in Boca Raton, Florida and fully
vacated facilities in Campbell, California and Houston, Texas.
At the end of 2005, we were utilizing or subleasing the majority
of space in our facilities that were not vacated as a result of
our restructuring plans.
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Item 3. |
Legal Proceedings |
None.
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Item 4. |
Submission of Matters to a Vote of Security Holders |
Not applicable.
PART II
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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 National Market under
the symbol RSYS. The following table sets forth, for
the periods indicated, the highest and lowest closing sale
prices for the common stock, as reported by the Nasdaq National
Market.
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High | |
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Low | |
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2005
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Fourth Quarter
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$ |
19.48 |
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$ |
15.75 |
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Third Quarter
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19.48 |
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16.17 |
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Second Quarter
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16.58 |
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12.95 |
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First Quarter
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19.55 |
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13.89 |
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2004
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Fourth Quarter
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$ |
19.74 |
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$ |
12.60 |
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Third Quarter
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19.02 |
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9.61 |
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Second Quarter
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24.85 |
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15.13 |
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First Quarter
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24.80 |
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16.70 |
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The closing price as reported on the Nasdaq National Market on
February 24, 2006 was $18.49 per share. As of
February 24, 2006, there were approximately 419 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.
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Item 6. |
Selected Financial Data |
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For the Years Ended December 31, | |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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2001 | |
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(In thousands, except per share data) | |
Consolidated Statements of Operations Data
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|
|
|
|
|
Revenues
|
|
$ |
260,234 |
|
|
$ |
245,824 |
|
|
$ |
202,795 |
|
|
$ |
200,087 |
|
|
$ |
227,713 |
|
Gross margin
|
|
|
76,836 |
|
|
|
79,172 |
|
|
|
65,157 |
|
|
|
59,444 |
|
|
|
35,155 |
|
Income (loss) from operations
|
|
|
13,788 |
|
|
|
17,272 |
|
|
|
8,775 |
|
|
|
(3,740 |
) |
|
|
(57,852 |
) |
Income (loss) from continuing operations
|
|
|
15,958 |
|
|
|
13,011 |
|
|
|
6,010 |
|
|
|
(1,759 |
) |
|
|
(33,117 |
) |
Loss from discontinued operations related to Savvi business, net
of tax benefit
|
|
|
|
|
|
|
|
|
|
|
(4,679 |
) |
|
|
(1,546 |
) |
|
|
(1,369 |
) |
Net income (loss)
|
|
|
15,958 |
|
|
|
13,011 |
|
|
|
1,331 |
|
|
|
(3,305 |
) |
|
|
(34,486 |
) |
Net income (loss) from continuing operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.79 |
|
|
$ |
0.69 |
|
|
$ |
0.34 |
|
|
$ |
(0.10 |
) |
|
$ |
(1.92 |
) |
|
Diluted
|
|
$ |
0.68 |
|
|
$ |
0.59 |
|
|
$ |
0.32 |
|
|
$ |
(0.10 |
) |
|
$ |
(1.92 |
) |
Net loss from discontinued operations related to Savvi business,
net of tax benefit per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.26 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.08 |
) |
|
Diluted
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.25 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.08 |
) |
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.79 |
|
|
$ |
0.69 |
|
|
$ |
0.07 |
|
|
$ |
(0.19 |
) |
|
$ |
(2.00 |
) |
|
Diluted
|
|
$ |
0.68 |
|
|
$ |
0.59 |
|
|
$ |
0.07 |
|
|
$ |
(0.19 |
) |
|
$ |
(2.00 |
) |
Weighted average shares outstanding (basic)
|
|
|
20,146 |
|
|
|
18,913 |
|
|
|
17,902 |
|
|
|
17,495 |
|
|
|
17,249 |
|
Weighted average shares outstanding (diluted)
|
|
|
24,832 |
|
|
|
23,823 |
|
|
|
18,406 |
|
|
|
17,495 |
|
|
|
17,249 |
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
249,159 |
|
|
$ |
186,634 |
|
|
$ |
222,324 |
|
|
$ |
132,474 |
|
|
$ |
141,940 |
|
Total assets
|
|
|
368,711 |
|
|
|
345,238 |
|
|
|
365,562 |
|
|
|
274,299 |
|
|
|
305,201 |
|
Long term obligations, excluding current portion
|
|
|
99,777 |
|
|
|
107,015 |
|
|
|
164,600 |
|
|
|
83,954 |
|
|
|
104,180 |
|
Total shareholders equity
|
|
|
217,843 |
|
|
|
191,233 |
|
|
|
160,990 |
|
|
|
152,801 |
|
|
|
150,711 |
|
|
|
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 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
19
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 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 and in 2005 we recorded our first
revenue associated with these products. The
Promentumtm
family of products includes universal carrier cards, switch and
control modules, disk storage modules, compute modules, and a
14-slot shelf or chassis. 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.
During the second quarter of 2005, we announced the
Promentumtm
ATCA-7010, a packet processing module that allows the highest
bandwidth available in a single
ATCA®
slot. This product is the latest addition to our family of ATCA
compliant products featuring 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
and are potentially applicable in all of our defined markets.
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 addition to our new ATCA offerings, we announced our new
Proceleranttm
series of modular computing solutions for customers in our
commercial systems markets for medical, transaction terminals
and test and measurement applications. During the second quarter
of 2005, we closed our first
Proceleranttm
application. During the third quarter of 2005, we announced
three new
Proceleranttm
motherboards, including the industrys first to support the
new microBTX form factor. We believe these new modular products
will represent a family of high density, flexible solutions that
will enable commercial systems customers to achieve more rapid
time to market with cost effective designs.
Total revenue was $260.2 million, $245.8 million and
$202.8 million in 2005, 2004 and 2003, respectively.
Backlog was approximately $25.1 million, $22.6 million
and $31.8 million at December 31, 2005, 2004 and 2003,
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 from 2003 to 2005 was primarily attributable to sales
volume increases and new product sales in our end markets. 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. The increase in
revenues in 2004 compared to 2003 was due to an increase in
revenues in the communication networking and commercial systems
markets of $31.0 million and $12.0 million,
respectively. Revenues in the communications networking market
increased from 2003 to 2005 primarily due to strong demand
within the wireless submarket as we continued to design and
supply more content within our customers 2.5 and 3G
deployments. 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 decreases in the transaction terminal
revenues was primarily due to design wins nearing the end of
their life cycle. The increase in revenues from the medical
market is attributable to design wins that have ramped into
production during 2005. Revenue in the commercial systems market
increased approximately $12.0 million from 2003 levels to
2004 levels due to new product
20
development projects ramping into production volumes and the
economic recovery early in 2004 which buoyed demand in cyclical
sub-markets.
From a geographic perspective, from 2003 to 2005 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, 2005 revenues
from North America declined by $14.9 million compared to
the same periods in 2004. In 2005, the declines in our North
American revenues was also due to a decrease in the transaction
terminal and industrial automation business. We expect our
non-U.S. revenues
to remain a significant portion of our revenues.
Gross margin as a percentage of revenues were 29.5%, 32.2% and
32.1% for 2005, 2004 and 2003, respectively. We experienced
lower gross margin as a percentage of total revenues primarily
because more of our revenues shifted to higher volume products
which have lower margins due to volume-based pricing. The
decrease in the gross margin as a percentage of revenues was
also associated with an increase in the write-downs of inventory
valuation for estimated excess, obsolete or unmarketable
inventories, an increase in the adverse purchase commitment
liabilities associated with our outsourced manufacturing
operations and higher silicon prices due to industry shortages.
We also incurred some redundant manufacturing costs as we moved
forward with outsourcing our internal manufacturing to our
contract manufacturing partners Celestica and FoxConn. Finally,
we incurred additional manufacturing-related costs in 2005 due
to making our products RoHS compliant and incurring additional
warranty-related costs. Based on current forecasted revenue mix
and higher silicon prices, we currently anticipate that gross
margin as a percentage of revenues will be in the high 20s
for the next few quarters. This margin range excludes any impact
from stock-based compensation expense that would result from the
implementation of a new accounting standard that requires the
recognition of stock-based compensation expense associated with
employee stock options, which became effective January 1,
2006.
Income from continuing operations was $16.0 million in
2005, $13.0 million in 2004 and $6.0 million in 2003.
Income per share from continuing operations was $0.79 and $0.68,
basic and diluted, respectively, for 2005 compared to $0.69 and
$0.59, basic and diluted, respectively, in 2004. Income per
share from continuing operations was $0.34 and $0.32, basic and
diluted, respectively, in 2003. Net income was
$16.0 million, $13.0 million and $1.3 million in
2005, 2004 and 2003 respectively. Net income per share was $0.79
and $0.68, basic and diluted, respectively, in 2005 compared to
$0.69 and $0.59, basic and diluted, respectively, in 2004. Net
income per share was $0.07, basic and diluted, in 2003. During
the first quarter of 2003, we completed the sale of our Savvi
business which allowed us to focus on our core embedded systems
business within our two primary markets. The $4.7 million
loss from discontinued operations recorded in the first quarter
of 2003 includes a $4.3 million loss on the sale of the
Savvi business as well as $393 thousand of net losses incurred
by the business unit during the quarter.
Income from continuing operations has increased from 2003 to
2005, despite the decrease in gross margin as a percentage of
revenues primarily due to an increase in interest income and a
decline in interest expense. Our interest income continues to
increase as we continue to generate cash from operations and
realize the benefit of rising interest rates. We have decreased
our interest expense by repurchasing a significant amount of our
outstanding convertible subordinated notes through various
repurchases throughout 2003 to 2005.
We have increased our investment in research and development
from 2003 to 2005 and, as previously discussed, we currently
plan to continue to increase our spending on development of
standards-based solutions. Our income from continuing operations
from 2003 to 2005 has been negatively impacted by restructuring
charges primarily resulting from our transition to outsourced
manufacturing.
We have also continued to invest in infrastructure in emerging
markets such as China through the hiring of engineers for our
Shanghai R&D center. A significant portion of our products
are currently assembled by, our China-based manufacturing
partner, and we expect to increase this outsourcing activity in
2006. We have hired employees in China to support the
outsourcing initiative, and we have also added
21
sales and marketing support personnel in China to focus on
selling product into this region. In addition we have entered
into a relationship with a Mexico-based manufacturing partner
and expect this outsourcing activity to increase in 2006 as well.
From 2003 through 2005, 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 November 2003, we completed a private offering of
1.375% convertible senior notes due November 15, 2023
to qualified institutional buyers, resulting in net proceeds of
$97 million. We plan to use the proceeds of the offering
for general corporate purposes including working capital,
potential acquisitions, partnership opportunities and targeted
repayment of existing debt obligations. In 2003, we repurchased
$10.3 million principal amount of the 5.5% convertible
subordinated notes for $9.2 million. In 2004, we
repurchased $58.8 million principal amount of the
5.5% convertible subordinated notes for $58.2 million.
On April 26, 2005 the Board of Directors approved the
repurchase of the remaining principal amount of the convertible
subordinated notes. In 2005, we repurchased $7.5 million
principal amount of the 5.5% convertible subordinated notes
for $7.4 million.
In addition, on October 25, 2005 the Board of Directors
authorized an increase in the repurchase of our outstanding
shares of common stock from a previously approved
$5 million to $25 million. We currently intend to
purchase the remaining balance of the 5.5% convertible
subordinated notes and outstanding common stock on the open
market or through privately negotiated transactions from time to
time subject to market conditions.
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, 2004 and 2003 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, which replaces the intrinsic value method. In
Note 1 to the Consolidated Financial Statements, we provide
pro forma disclosures of net income (loss) and net income (loss)
per common share as if the fair value method had been applied in
measuring stock-compensation expense. The pro forma disclosures
previously permitted are no longer an alternative to financial
statement recognition after December 31, 2005. Prior
periods will not be restated. We estimate income from operations
will be reduced by stock-based compensation expense of
approximately $5.5 million to $6.5 million in 2006.
Cash and cash equivalents and investments amounted to
$225.9 million and $198.6 million at December 31,
2005 and December 31, 2004, respectively. The increase in
cash and cash equivalents and investments was primarily due to
cash provided from operating activities. We generated net cash
from operations in excess of net income during 2005. 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.
22
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 Valuation Allowance |
We record the write-downs of inventory valuation for estimated
excess, obsolete or unmarketable inventories
(E&O) 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 write-downs include: changes in demand, rapid
technological changes, product life cycle and development plans,
component cost trends, product pricing, and physical
deterioration. If actual market conditions are less favorable
than those projected by management additional write-downs of the
inventory valuation may be required. Our estimate for the
write-down is based on the assumption that our customers comply
with their current contractual obligations to us. We provide
long-life support to our customers and therefore we have
significant levels of customer specific inventory. If our
customers experience a financial hardship or if we experience
unplanned cancellations of customer contracts, the current
inventory valuation allowance 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.
During the fourth quarter of 2003, we revised our inventory
valuation allowance calculation to more accurately reflect our
true exposure to losses associated with E&O inventories
moving forward. We previously estimated our required inventory
valuation allowance based on a forward projection of excess
material beyond 12 months demand. This resulted in an
allowance estimate that was higher than the actual E&O
losses for products where our demand and orders are more
sporadic. Our revised process combines the historical view of
demand over the prior six months with a prospective view of
demand over 12 months. We tested the revised method against
prior periods and found it to be a more accurate predictor of
excess inventory. This change resulted in a reduction to the
write-downs for inventory valuation of approximately $500
thousand in the fourth quarter of 2003.
|
|
|
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 or
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
23
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, 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.
As we continue to execute our strategy of increasing the level
of outsourced manufacturing the liability for adverse purchase
commitments will become more significant. 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 possession of inventory reserved for in this liability, the
liability is transferred from other liabilities to our 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 $828 thousand and $485 thousand at
December 31, 2005 and December 31, 2004, respectively.
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.
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, 2005 amounted to $27.5 million,
$2.2 million and $13.6 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, 2005 and concluded that as of
September 30, 2005, 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 $10.32 at
September 30, 2005 compared to the closing price of RadiSys
shares as quoted on NASDAQ or the trading price on
September 30, 2005 of $19.40. Management concluded there
was no indication of material changes requiring an updated
goodwill impairment analysis as of December 31, 2005.
24
Intangible assets, net of accumulated amortization, primarily
consist of acquired patents, completed technology, technology
licenses and trade names. Intangible assets are being amortized
on a straight-line basis over estimated useful lives ranging
from 4 to 15 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 changes in circumstances
(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 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.
Historically, we have recognized impairments of long-lived
assets as follows:
|
|
|
|
|
As a result of the sale of the Savvi business in 2003, we
recorded $2.4 million in write-offs of goodwill. This
impairment charge is included in the loss from discontinued
operations related to the Savvi business in 2003. |
|
|
|
During 2003, we reviewed property and equipment and identifiable
intangible assets for impairment due to several events,
including the sale of the Savvi business, the restructuring
event in the first quarter, and the sale of our facility in Des
Moines Iowa. As a result of the sale of the Savvi business, we
recorded an impairment of our intangible assets of
$1.7 million. This impairment charge is included in the
loss from discontinued operations related to the Savvi business
in 2003. |
|
|
|
We disposed of $8.8 million of net book value associated
with the building and other office equipment as a result of the
sale of the Des Moines, Iowa facility. The write off of the net
book value associated with building and office equipment is
included in loss on building sale in 2003. |
|
|
|
Also in 2003, we performed a fixed asset physical inventory
count, during which we evaluated whether the carrying value of
the property and equipment would be recoverable. We recorded
write-offs of $240 thousand as a result of the fixed asset
physical inventory. |
Considerable management judgment is required in determining if
and when an event 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 an
event 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.
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
$29.0 million as of December 31, 2005. As of
December 31, 2005 we estimate utilization of the net
deferred tax assets will 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.
25
We may record a valuation allowance against the deferred tax
assets if our expectations of future taxable income 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. On the other hand, if
we generate taxable income in excess of our future expectations,
the valuation allowance may be reduced accordingly.
|
|
|
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,
2005, 61.6% 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 us the amounts due the current allowance for
doubtful accounts may not be adequate. During the years ended
December 31, 2004 and 2005 there were no significant
account balances reserved for and the allowance for doubtful
accounts decreased by $12 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 at
least 1% of quarterly revenues.
|
|
|
Accrued Restructuring and Other Charges |
For the years ended December 31, 2003, 2004 and 2005
expenses associated with exit or disposal activities are
recognized when probable and estimable. Because we have 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.
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.
We recognize revenue when the earnings process is complete, as
evidenced by the following revenue recognition criteria: an
agreement with the customer, fixed pricing, delivery or transfer
of title and customer acceptance, if applicable, and that the
collectibility of the resulting receivable is reasonably
assured. 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
26
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Hardware
|
|
$ |
252,180 |
|
|
$ |
234,352 |
|
|
$ |
190,621 |
|
Software royalties and licenses
|
|
|
4,394 |
|
|
|
6,304 |
|
|
|
6,499 |
|
Software maintenance
|
|
|
1,919 |
|
|
|
939 |
|
|
|
798 |
|
Engineering and other services
|
|
|
1,738 |
|
|
|
4,220 |
|
|
|
4,877 |
|
Other
|
|
|
3 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
260,234 |
|
|
$ |
245,824 |
|
|
$ |
202,795 |
|
|
|
|
|
|
|
|
|
|
|
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 1.5%, 1.5%
and 1.5% for the years ended December 31, 2005, 2004 and
2003, respectively.
|
|
|
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 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.
Equity instruments are granted to employees, directors and
consultants in certain instances, as defined in the respective
plan agreements. In 2005, we issued equity instruments in the
form of stock options, restricted stock and stock issued to
employees as a result of the employee stock purchase plan
(ESPP). In 2003 and 2004 we issued equity
instruments in the form of stock options and stock issued to
employees as a result of the ESPP, only. We currently account
for the stock-based compensation expense associated with our
equity instruments using the intrinsic value method. We provide
pro forma disclosures of net income (loss) and net income (loss)
per common share as if the fair value method had been applied in
27
measuring compensation expense. In December 2004, the Financial
Accounting Standards Board (FASB) issued its final
determination on the issue of stock-based compensation,
requiring companies to account for stock-based compensation
based on the fair value method, which replaces the intrinsic
value method. For periods prior to the effective date of this
change, the pro forma disclosures mentioned previously were an
alternative to recognition in the financial statements. The pro
forma disclosures previously permitted are no longer an
alternative to financial statement recognition after
December 31, 2005 as the effective date of this change for
us is January 1, 2006.
We currently use the Black-Scholes model to measure our
stock-based compensation expense for the pro forma disclosures.
We will continue to use the Black-Scholes valuation model in
determining the fair value of equity instruments which will then
be amortized on a straight-line basis over the requisite service
period. We will apply the modified prospective method, which
requires that compensation expense be recorded for all unvested
stock options and ESPP shares upon the effective date of this
change or January 1, 2006. Prior periods will not be
restated.
To determine the fair value of our stock-based compensation
plans, we currently take into consideration the following:
|
|
|
|
|
Exercise price of the option or share |
|
|
|
Expected life of the option or share |
|
|
|
Price of our common stock on the date of grant |
|
|
|
Expected volatility of our common stock over the expected life
of the option or share |
|
|
|
Risk free interest rate during the expected term of the option |
The calculation includes several assumptions that require
managements judgment. The expected life 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.
The pro forma disclosure for 2005, 2004 and 2003 included in
Note 1 to the Consolidated Financial Statements are not
likely to be representative of the effects on reported net
income (loss) and net income (loss) per share for future years
primarily due to the following factors:
|
|
|
|
|
We incurred incremental expense associated with options
exchanged as a result of the Stock Option Exchange Program (See
Note 1 to the Consolidated Financial Statements.) The value
of this exchange was $2.8 million and amortized on a
straight-line basis beginning on the date of exchange in August
2003 to the date of the Acceleration (see below), at which time
the remaining entire expense was recognized, net of related tax
effects. |
|
|
|
In 2004, the Compensation and Development Committee of the Board
of Directors approved an acceleration (the
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 we
have not accelerated the vesting of employee stock options. As a
result of the acceleration, we reduced the stock-based
compensation expense that it will include in net income after
January 1, 2006. Included in the pro forma stock-based
compensation expense for 2004 is $6.1 million associated
with the acceleration, net of related tax effects. |
|
|
|
Additional awards are made every year and beginning in 2005, we
changed our equity instrument compensation structure such that
we are issuing more restricted shares and fewer stock options. |
28
We estimate income from operations will be reduced by
stock-based compensation expense of approximately
$5.5 million to $6.5 million in 2006. However, the
actual stock-based compensation expense estimated for 2006 could
materially differ from this estimate. Our assessment, which
includes an estimate of the timing and number of future options
grants and share issuances, is based on the Black-Scholes option
pricing model and is affected by our stock price as well as
managements assumptions regarding a number of complex and
subjective variables, as previously mentioned. As such, our
actual stock option expense may differ materially from this
estimate. Additionally, SFAS 123R also requires the
benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This
requirement may reduce net operating cash flows and increase net
financing cash flows in periods after its adoption.
Results of Operations
The following table sets forth certain operating data as a
percentage of revenues for the years ended December 31,
2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales
|
|
|
70.5 |
|
|
|
67.8 |
|
|
|
67.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
29.5 |
|
|
|
32.2 |
|
|
|
32.1 |
|
Research and development
|
|
|
11.4 |
|
|
|
11.5 |
|
|
|
11.3 |
|
Selling, general, and administrative
|
|
|
11.6 |
|
|
|
12.4 |
|
|
|
13.3 |
|
Intangible assets amortization
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
1.5 |
|
Loss on building sale
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
Restructuring and other charges
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5.3 |
|
|
|
7.0 |
|
|
|
4.3 |
|
Gain (loss) on repurchase of convertible subordinated notes
|
|
|
(0.0 |
) |
|
|
(0.2 |
) |
|
|
0.4 |
|
Interest expense
|
|
|
(0.8 |
) |
|
|
(1.5 |
) |
|
|
(2.4 |
) |
Interest income
|
|
|
2.4 |
|
|
|
1.4 |
|
|
|
1.3 |
|
Other expense, net
|
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax provision
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
3.0 |
|
Income tax provision
|
|
|
0.5 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
6.1 |
|
|
|
5.3 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations related to Savvi business, net
of tax benefit
|
|
|
|
|
|
|
|
|
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6.1 |
% |
|
|
5.3 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
29
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 have 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 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 to the Asia Pacific region was
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
periods 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 Celestica and FoxConn.
Finally, we incurred additional manufacturing-related costs in
2005 due to making our products RoHS compliant and incurring
additional warranty-related costs.
Based on current forecasted revenue mix and higher silicon
prices, we currently anticipate that gross margin as a
percentage of revenues will be in the high 20s for the
next few quarters. This margin range excludes any impact from
stock-based compensation expense that will result from the
implementation of the new accounting standard that requires the
recognition of stock-based compensation expense associated with
employee stock options and ESPP shares, effective
January 1, 2006.
Research and Development. Research and development
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. Research and development expenses
increased $1.6 million, or 5.6%, from $28.2 million in
2004 to $29.8 million in 2005. We plan on additional
increases for the next couple of quarters before leveling off in
the second half of 2006
Our investment in the development of standards-based products,
such as ATCA, increased our research and development 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.
30
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 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 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 our 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 2003 and ended in August 2004. We 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
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
31
contained in Note 9 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 primary manufacturing partners,
Celestica and FoxConn. 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.
|
|
|
Fourth Quarter 2004 Restructuring |
In October 2004, we announced plans to eliminate approximately
55 to 65 positions as a result of the increase in outsourced
manufacturing as well as to continue our shift of skills
required to develop, market, sell, and support more advanced
embedded platforms and solutions. In 2005 and 2004, we incurred
severance and other employee-related separation costs and other
charges of $35 thousand and $1.7 million, respectively, as
a result of this restructuring event. The balance in accrued
restructuring liability related to this charge was zero at
December 31, 2005.
|
|
|
Third Quarter 2004 Restructuring |
In August 2004, we announced plans to close our Birmingham UK
office and eliminate approximately 14 engineering and marketing
positions. In 2005, we completed integrating the work done by
these employees into other RadiSys locations. In conjunction
with this elimination of positions, R&D spending was
re-directed to align our strategy to deliver more integrated
standards-based solutions. In 2005 and 2004, we incurred
severance and other employee-related separation costs and other
charges of $112 thousand and $482 thousand, respectively, as a
result of this restructuring event. The balance in accrued
restructuring liability related to this charge was zero at
December 31, 2005.
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
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 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 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. The repurchase of the remaining outstanding
principal amount of the convertible subordinated notes which
amounted to $2.5 million at December 31, 2005 has been
approved by the board of directors and when and if we repurchase
the remaining convertible subordinated notes, we anticipate
incurring a small loss on the repurchase of the notes. We may
elect to use a portion of our cash, cash equivalents and
investment balances to buy back additional amounts of the
convertible subordinated notes.
32
In 2004, we repurchased $58.8 million principal amount of
the outstanding 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 convertible senior and 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 is
due to the decrease in interest expense associated with the
convertible subordinated notes primarily resulting from the
repurchases of the 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 is 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.
We currently estimate that our effective tax rate for 2006 will
be approximately 22%. The 2006 estimated effective tax rate is
based on current tax law and current projections of income, and
assumes that we continue to receive the tax benefits associated
with certain income associated with foreign jurisdictions. The
tax rate may be affected by potential acquisitions,
restructuring events or divestitures, the jurisdictions in which
profits are determined to be earned and taxed, and the ability
to realize deferred tax assets. Additionally, the estimated
effective rate for 2006 excludes any impact from stock-based
compensation expense that will result from the implementation of
the new accounting standard that requires the recognition of
stock-based compensation expense associated with employee stock
options and ESPP shares, effective January 1, 2006.
On October 22, 2004, the President of the United States of
America signed the American Jobs Creation Act of 2004 (the
Act). One of the key provisions of the Act includes
a repeal of the extraterritorial income exclusion. In its place,
the Act provides a relief provision for domestic manufacturers
by providing a new domestic manufacturing deduction. The 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. We have completed our evaluation of
the impact of the Act and have concluded not to repatriate any
foreign earnings pursuant to the provisions of the 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.
33
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 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 is 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 estimate utilization of
the net deferred tax assets will 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 carryforwards of Microware would be allocated to goodwill.
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.
|
|
|
Comparison of Year 2004 and Year 2003 |
Revenues. Revenues increased by $43.0 million, or
21.2%, from $202.8 million in 2003 to $245.8 million
in 2004. Included in the revenues in the first and fourth
quarter of 2004, were end of life component inventory sales to
two of our major customers amounting to $3.1 million and
$1.4 million, respectively. These inventory sales were
recorded as revenues but did not generate any gross profit since
the inventory was sold at cost. As of December 31, 2004 and
December 31, 2003, backlog was approximately
$22.6 million and $31.8 million, respectively.
Generally, the increase in revenues in 2004 compared to 2003 was
attributable to sales volume increases and new product sales in
the end markets as described below.
The increase in revenues in 2004 compared to 2003 was due to an
increase in revenues in the communication networking and
commercial systems markets of $31.0 million and
$12.0 million, respectively. The end of life component
inventory sales discussed above were included in the
communications networking market revenues in 2004.
Revenues in the communication networking market increased in
2004 compared to the same periods in 2003, primarily because we
continued to design and supply more content within our
customers 2.5G and 3G wireless infrastructure
products. The increase was attributable to improved economic
conditions causing market growth in the wireless infrastructure
sub-market. Additionally, the revenues attributable to the
communications networking market were due to increased sales to
the datacom sub-market.
This was due to the ramp of a new product in this sub-market
into full-production in
mid-2004. Partially
offsetting this growth was a year-over-year decline in the
telephony sub-market.
Revenue in the commercial systems market increased approximately
$12.0 million from 2003 levels to 2004 levels due to new
product development projects ramping into production volumes and
the economic recovery early in 2004 which buoyed demand in
cyclical sub-markets. The test and measurement and industrial
automation sub-markets grew in response to strengthening market
and global economic conditions. Test and measurement and medical
sub-markets also benefited from product development projects
which ramped to production volumes in 2003 and 2004. Increased
revenues from medical, industrial automation and test and
measurement were partially offset by lower revenues from the
transaction terminals sub-market as legacy business in that area
decreased for products reaching or nearing end of life.
34
From a geographic perspective, in 2004 compared to 2003 the
overall increase in revenues was concentrated in EMEA, which
experienced an increase in revenues of $38.6 million. The
increase in the revenues in EMEA in 2004 compared to 2003 was
primarily attributable to higher sales of wireless
infrastructure products to Nokia. Included in EMEA revenues in
2004 was $4.5 million end of life component inventory sales
to two of our major customers.
Gross Margin. Gross margin for 2004 was 32.2% compared to
32.1% for 2003. In 2004, cost of sales includes $235 thousand of
stock-based compensation expense which is discussed in
Stock-based Compensation Expense below.
The following items affected gross margin as a percentage of
revenues for 2004 compared to 2003. The inventory valuation
allowance requirements, including transfers from adverse
purchase commitments, decreased as a percentage of revenues from
2.1% in 2003 to 1.2% in 2004 primarily because during the fourth
quarter of 2003, we revised the inventory valuation allowance
calculation. We previously estimated the required inventory
valuation allowance based on a forward projection of excess
material beyond 12 months demand. The revised process
combines the historical view of demand over the prior six months
with a prospective view of demand over 12 months. We tested
the revised method against prior periods and found it to be a
better indicator of excess inventory. Additionally, the
inventory valuation allowance requirements decreased due to
increasing demand and consumption for some of our older
products. Warranty expenses decreased as a percentage of
revenues from 2.0% in 2003 to 1.1% in 2004 due to a few unique,
specifically-identified warranty-related issues that made up a
large portion of the warranty expense in 2003. The improvement
in our gross margin from 2003 to 2004 which resulted from
decreases in the inventory valuation allowance and warranty
reserves as a percentage of revenues was almost entirely offset
by a shift in sales to higher volume products which have lower
margins. These lower margin products are primarily associated
with sales to our larger customers that receive volume
discounts. Further, during the first and fourth quarters of 2004
we had end of life component inventory sales to two of our major
customers amounting to $3.1 million and $1.4 million,
respectively. These inventory sales did not generate any gross
profit as the inventory was sold at cost.
Research and Development. Research and development
expenses consist primarily of salary, bonuses, and benefits for
product development staff, and cost of design and development
supplies and equipment. Research and development expenses
increased $5.4 million, or 23.5%, from $22.8 million
in 2003 to $28.2 million in 2004. In 2004, research and
development expenses included $343 thousand of stock-based
compensation expense which is discussed in Stock-based
Compensation Expense below. The increase in research and
development expenses in 2004 compared to 2003 was due mainly to
an increase in payroll-related expenses, fees to outside
contractors, and other costs associated with research and
development programs, including materials for prototypes and
beta versions of our products. Payroll-related expenses
increased due to additional personnel focused on research and
development efforts, merit-related salary increases and
profit-dependent compensation expenses. During 2004, we
increased our investment in the development of standards-based
platforms, such as ATCA. Fees to outside contractors increased
as we were working to meet several project deadlines to
capitalize on customer and market opportunities. We completed
the infrastructure and entity establishment work for our
Shanghai research and development design center, and in 2004 we
began hiring additional staff for the design center.
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 the costs of professional services and costs of other
general corporate activities. SG&A expenses increased
$3.4 million, or 12.6%, from $27.0 million in 2003 to
$30.4 million in 2004. In 2004, SG&A expenses included
$263 thousand of stock-based compensation expense which is
discussed in Stock-based Compensation Expense below.
The increase in SG&A expenses in 2004 compared to 2003 was
primarily attributable to an increase in payroll-related
expenses, costs associated with the implementation of the
Sarbanes-Oxley Act, costs associated with establishing our
presence in China and an increase in sales and marketing
expenses. Payroll-related expenses increased due to
merit-related salary increases and profit-dependent compensation
expenses. Costs associated with the implementation of the
Sarbanes-Oxley Act include fees to outside contractors and
service providers. Costs
35
associated with establishing our presence in China include legal
fees and other administrative costs. Sales and marketing
activities increased to support our increasing investment in
standards-based platforms. SG&A expenses in 2004 also
includes $619 thousand associated with a potential acquisition
that was ultimately abandoned.
Stock-based Compensation Expense. In 2004, we incurred
$841 thousand of stock-based compensation expense, associated
with shares issued pursuant to our 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 consummated in February 2003 and ending in August
2004. We 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) triggers 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 shares purchased by participants enrolled in the
February 2003 ESPP offering.
We recognized stock-based compensation expense in reported net
income related to the 2004 ESPP shortfall as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years |
|
|
Ended |
|
|
December 31, |
|
|
|
|
|
2004 | |
|
2003 |
|
|
| |
|
|
Cost of sales
|
|
$ |
235 |
|
|
$ |
|
|
Research and development
|
|
|
343 |
|
|
|
|
|
Selling, general and administrative
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
841 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Intangible Assets Amortization. Intangible assets consist
of purchased technology, patents and other identifiable
intangible assets. Intangible assets amortization expense was
$2.2 million and $3.1 million in 2004 and 2003,
respectively. Intangible assets amortization decreased due to
certain intangible assets becoming fully amortized during the
first and second quarters of 2004.
Restructuring and Other Charges. We evaluate the adequacy
of accrued restructuring and other charges on a quarterly basis.
We record certain reclassifications and reversals to 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 9 of the Notes to the Consolidated
Financial Statements. During 2004 and 2003, we recorded
restructuring and other charges and reversals as described below.
|
|
|
Fourth Quarter 2004 Restructuring |
In October 2004, we announced plans to eliminate approximately
55 to 65 positions as a result of the increase in outsourced
manufacturing as well as to continue our shift of skills
required to develop, market, sell, and support more advanced
embedded platforms and solutions. In 2004, we incurred severance
and other employee-related separation costs and other charges of
$1.7 million, as a result of this restructuring event.
36
|
|
|
Third Quarter 2004 Restructuring |
In August 2004, we announced plans to close our Birmingham UK
office and eliminate approximately 14 engineering and marketing
positions. In conjunction with this elimination of positions,
R&D spending was re-directed to align our strategy to
deliver more integrated standards-based solutions. In 2004, we
incurred severance and other employee-related separation costs
and other charges of $482 thousand, as a result of this
restructuring event.
|
|
|
First Quarter 2003 Restructuring |
In March 2003, we recorded a restructuring charge of
$1.8 million as a result of our continued efforts to
increase profitability and market diversification. The
restructuring charge included a net workforce reduction of 103
employee positions. The 103 employee positions eliminated
included 53 from manufacturing operations, 42 from shifts in
portfolio investments, and eight in support functions.
We recorded reversals amounting to $1.1 million during 2004
related primarily to a buy-out of the remaining lease
obligations on our Houston manufacturing facility, which was
vacated as a result of various restructuring events. The
reversals also include various amounts originally accrued for
certain non-cancelable
leases for facilities vacated as a result of the restructuring
events. We entered into subleasing arrangements for a portion of
these remaining facilities and during 2004 updated our analysis
of the subleasing arrangements. As a result of this analysis we
reversed a portion of restructuring reserves in connection with
increased anticipated sublease income as well as previously
unbilled charges owed from our sublease tenants. We recorded
reversals amounting to $208 thousand during 2003 related
primarily to accruals for certain non-cancelable leases for
facilities vacated as a result of the restructuring events.
During 2002 and 2003, we entered into subleasing arrangements
for a portion of these facilities, and as result, we reduced the
restructuring accruals.
(Loss) Gain on the Repurchase of Convertible Notes. In
the second quarter of 2004, we repurchased $58.8 million
principal amount of the outstanding 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. In the first
quarter of 2003, we repurchased $10.3 million principal
amount of the convertible subordinated notes, with an associated
discount of $212 thousand. We repurchased the notes in the open
market for $9.2 million and, as a result, recorded a gain
of $825 thousand.
Interest Expense. Interest expense includes interest
expense incurred on convertible senior and subordinated notes.
Interest expense decreased $1.3 million, or 26.6%, from
$4.9 million in 2003 to $3.6 million in 2004.
The decrease in interest expense in 2004 compared to 2003 was
due to the $2.2 million decrease in interest expense
associated with the convertible subordinated notes and a
decrease in interest expense associated with a mortgage payable
in the amount of $505 thousand, partially offset by
$1.4 million of additional interest incurred on our
convertible senior notes issued in November 2003. The decrease
in the interest expense associated with our convertible
subordinated notes was due to a decrease in the balance of
outstanding convertible subordinated notes as a result of the
repurchase of the notes during the first quarter of 2003 and the
second quarter of 2004. In December 2003, we sold our Des
Moines, Iowa facility. As a result, we paid the mortgage payable
in full.
Interest Income. Interest income increased $790 thousand,
or 30.1%, from $2.6 million in 2003 to $3.4 million in
2004. Interest income increased primarily because of the
increase in the amount of cash available to invest. The cash
available to invest increased due to the net proceeds from the
offering of our convertible senior notes completed in November
2003 in the amount of $97 million. Additionally, we
experienced an increase in the average yield on investments in
2004 as a result of the increased interest rate environment in
the United States of America.
37
Other Expense, net. Other expense, net, primarily
includes foreign currency exchange gains and losses and unusual
items. Other expense, net, was $472 thousand in 2004 compared to
$1.3 million in 2003.
Foreign currency exchange rate fluctuations resulted in a net
loss of $317 thousand in 2004 compared to a net loss of $787
thousand in 2003. The decrease in the foreign currency exchange
rate net loss was primarily due to strengthening of the US
dollar relative to European currencies in 2004 compared to 2003.
Net of the change in net losses related to foreign currency
exchange rate fluctuations, the change in Other expense, net, in
2004 compared to 2003, was primarily attributable to a loss
related to an other-than-temporary decline in value on the
investment in shares of GA eXpress (GA) common stock
amounting to $358 thousand recorded in 2003. We hold shares in
GA as a result of the 1996 sale of Texas Micros Sequoia
Enterprise Systems business unit to GA in exchange for stock. We
acquired Texas Micro in 1999. Factors we considered when we
determined the decline in value on the investment in GA shares
was other than temporary, include, but are not limited to, the
likelihood that the related company would have insufficient cash
flows to operate for the next 12 months, significant
changes in the operating performance or operating model and/or
changes in market conditions. As of December 31, 2004, the
estimated fair value of this investment is zero. Additionally,
we recorded a loss on the disposal of fixed assets recorded in
the first quarter of 2003 of $240 thousand as a result of a
fixed asset physical inventory count.
Income Tax Provision. We recorded a tax provision of
$3.3 million from continuing operations and no income tax
provision or benefit from discontinued operations for the year
ended December 31, 2004. For the year ended
December 31, 2003, we recorded a tax provision of $22
thousand from continuing operations and no tax provision or
benefit from discontinued operations. Our effective tax rate was
20.0% in 2004 compared to 1.6% in 2003. Our current effective
tax rate differs from the statutory rate due to the tax impact
of income associated with foreign jurisdictions, tax benefits
related to certain foreign sales, tax credits and other
permanent differences.
At December 31, 2004, we had net deferred tax assets of
$27.4 million. Valuation allowances of $15.9 million
and $17.4 million, as of December 31, 2004 and 2003,
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 decrease in
valuation allowance of $1.5 million for the year ended
December 31, 2004 compared to the year ended
December 31, 2003 is primarily attributable to the
expiration of certain foreign net operating loss carryforwards
in 2004.
Discontinued Operations. On March 14, 2003, we
completed the sale of the Savvi business resulting in a loss of
$4.3 million. As a result of this transaction, we recorded
$4.1 million in write-offs of goodwill and intangible
assets. The total $4.7 million loss from discontinued
operations recorded in the first quarter of 2003 includes the
$4.3 million loss on the sale of the Savvi business as well
as $393 thousand of net losses incurred by the business unit
during the quarter, before the business unit was sold.
38
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, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollar amounts in thousands) | |
Cash and cash equivalents
|
|
$ |
90,055 |
|
|
$ |
80,566 |
|
|
$ |
149,925 |
|
Short-term investments
|
|
|
135,800 |
|
|
|
78,303 |
|
|
|
44,456 |
|
Long-term investments
|
|
|
|
|
|
|
39,750 |
|
|
|
30,992 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and investments
|
|
$ |
225,855 |
|
|
$ |
198,619 |
|
|
$ |
225,373 |
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
249,159 |
|
|
$ |
186,634 |
|
|
$ |
222,324 |
|
Accounts receivable, net
|
|
$ |
39,055 |
|
|
$ |
42,902 |
|
|
$ |
30,013 |
|
Inventories, net
|
|
$ |
21,629 |
|
|
$ |
22,154 |
|
|
$ |
26,092 |
|
Accounts payable
|
|
$ |
36,903 |
|
|
$ |
31,585 |
|
|
$ |
21,969 |
|
Convertible senior notes
|
|
$ |
97,279 |
|
|
$ |
97,148 |
|
|
$ |
97,015 |
|
Convertible subordinated notes
|
|
$ |
2,498 |
|
|
$ |
9,867 |
|
|
$ |
67,585 |
|
Days sales outstanding(A)
|
|
|
55 |
|
|
|
54 |
|
|
|
51 |
|
Days to pay(B)
|
|
|
73 |
|
|
|
59 |
|
|
|
54 |
|
Inventory turns(C)
|
|
|
8.4 |
|
|
|
6.9 |
|
|
|
5.4 |
|
Inventory turns days(D)
|
|
|
44 |
|
|
|
48 |
|
|
|
64 |
|
Cash cycle time days(E)
|
|
|
26 |
|
|
|
43 |
|
|
|
61 |
|
|
|
|
(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. |
Cash and cash equivalents increased by $9.5 million from
$80.6 million at December 31, 2004 to
$90.1 million at December 31, 2005. Activities
impacting cash and cash equivalents are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash provided by operating activities
|
|
$ |
32,171 |
|
|
$ |
24,718 |
|
|
$ |
18,316 |
|
Cash provided by (used in) investing activities
|
|
|
(23,302 |
) |
|
|
(49,231 |
) |
|
|
13,170 |
|
Cash provided by (used in) by financing activities
|
|
|
1,224 |
|
|
|
(45,709 |
) |
|
|
84,501 |
|
Effects of exchange rate changes
|
|
|
(604 |
) |
|
|
863 |
|
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$ |
9,489 |
|
|
$ |
(69,359 |
) |
|
$ |
116,787 |
|
|
|
|
|
|
|
|
|
|
|
We have generated annual cash provided by operating activities
in amounts greater than net income in 2005, 2004 and 2003,
driven mainly by improved management of our working capital. We
currently believe that cash flows from operations, available
cash balances, and short-term borrowings will be sufficient to
fund our operating liquidity needs.
39
In 2005 we used net cash provided by operating activities for
capital expenditures amounting to $5.5 million. During
2005, capital expenditures included our continued investment in
equipment to support our China based manufacturing partner as
well as leasehold improvements, office equipment and software to
support our continued growth and productivity. Net cash provided
by operating activities was also used for expenditures amounting
to approximately $1.8 million associated with our
restructuring activities.
During the year ended December 31, 2005 we also used
$7.4 million to repurchase our 5.5% convertible
subordinated notes. The Board of Directors has approved the
repurchase of the remaining principal amount of the convertible
subordinated notes amounting to $2.5 million as of
December 31, 2005 and $25.0 million of our outstanding
shares of common stock. We will consider the repurchase of the
notes and common stock on the open market or through privately
negotiated transactions from time to time subject to market
conditions. In addition to the potential repurchase of our
outstanding common stock and convertible subordinated notes we
intend to use our working capital to expand our product
offerings through research and development and potential
acquisitions.
In 2005 we received $8.7 million in proceeds from the
issuance of common stock through our stock-based compensation
plans.
Changes in foreign currency rates impacted beginning cash
balances during the year ended December 31, 2005, by $604
thousand. Due to our 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.
During the year ended December 31, 2004, we used net cash
provided by operating activities for capital expenditures
amounting to $4.8 million. In 2004, capital expenditures
primarily related to computer hardware, software, and test
equipment to be used to design and test our standards-based
products and equipment purchased to support our investment in
the China operations. Additionally, during the year ended
December 31, 2004, we received $12.5 million in cash
proceeds from the sale of our common stock associated with our
employee stock-based compensation plans.
Working capital increased $62.6 million from
$186.6 million at December 31, 2004 to
$249.2 million at December 31, 2005. Working capital
increased due to a shift in our investments from long term to
short term combined with our net positive cash flow from
operating and financing activities generated during 2005.
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.
Short-term and long-term investments reported as (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Short-term investments, net of unamortized premium of zero and
$103, respectively
|
|
$ |
135,800 |
|
|
$ |
78,303 |
|
|
|
|
|
|
|
|
Long-term investments, net of unamortized premium of zero and
zero, respectively
|
|
$ |
|
|
|
$ |
39,750 |
|
|
|
|
|
|
|
|
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, 2005 we had
$96.0 million investments classified as available-for-sale.
As of December 31, 2005 we had $39.8 million
investments classified as
held-to-maturity. As of
December 31, 2005, we had no long-term
held-to-maturity
investments. During 2005 we shifted our investments to
shorter-term maturities as we plan on actively evaluating
potential acquisitions
40
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, 2005, we were
in compliance with our investment policy.
In 2005, the Board of Directors authorized the repurchase of up
to $25 million of outstanding shares of common stock. We
currently intend to purchase the stock on the open market or
through privately negotiated transactions. The timing and size
of any stock repurchases are subject to market conditions, stock
prices, cash position and other cash requirements.
During the first quarter of 2005, we renewed our line of credit
facility, which expires on March 31, 2006, for
$20.0 million at an interest rate based upon the lower of
the London Inter-Bank Offered Rate (LIBOR) plus 1.0%
or the banks prime rate. The line of credit is
collateralized by our non-equity investments and is reduced by
any standby letters of credit. At December 31, 2005, we had
a standby letter of credit outstanding related to one of our
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. We plan to renew our line of credit in
the first quarter of 2006.
As of December 31, 2005 and December 31, 2004, there
were no outstanding balances on the standby letter of credit or
line of credit and we were in compliance with all debt covenants.
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
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 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 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.
As of December 31, 2005 and December 31, 2004 we had
outstanding convertible senior notes with a face value of
$100 million. As of December 31, 2005 and
December 31, 2004 the book value of the
41
convertible senior notes was $97.3 million and
$97.1 million respectively, net of unamortized discount of
$2.7 million and $2.9 million, respectively. The
estimated fair value of the convertible senior notes was
$93.5 million and $106.8 million at 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
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 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 $8.9 million principal amount
of the convertible subordinated notes. In 2005, we repurchased
$7.5 million principal amount of the 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 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.
In 2003, we repurchased $10.3 million principal amount of
the convertible subordinated notes, with an associated discount
of $212 thousand. We repurchased the notes in the open market
for $9.2 million and, as a result, recorded a gain of $825
thousand.
In 2002, we repurchased $21.0 million principal amount of
the convertible subordinated notes, with an associated discount
of $587 thousand for $17.5 million in cash as part of
negotiated transactions with third parties. The early
extinguishments of the notes resulted in a gain of
$3.0 million.
In 2000, we purchased $20.0 million principal amount of the
convertible subordinated notes, with an associated discount of
$581 thousand for $14.3 million as part of a negotiated
transaction with a third party. The early extinguishment of the
notes resulted in a gain of $5.1 million.
As of December 31, 2005 and December 31, 2004 we had
outstanding convertible subordinated notes with a face value of
$2.5 million and $10.0 million, respectively. As of
December 31, 2005 and December 31, 2004 the book value
of the convertible subordinated notes was $2.5 million and
$9.9 million, respectively, net of amortized discount of
$20 thousand and $126 thousand, respectively. The estimated fair
value of the convertible subordinated notes was
$2.5 million and $10.0 million at December 31,
2005 and December 31, 2004, respectively.
42
The following summarizes our contractual obligations at
December 31, 2005 and the effect of such on its liquidity
and cash flows in future periods (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Future minimum lease payments
|
|
$ |
2,954 |
|
|
$ |
2,926 |
|
|
$ |
2,903 |
|
|
$ |
2,846 |
|
|
$ |
2,658 |
|
|
$ |
1,707 |
|
Purchase obligations(a)
|
|
|
20,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible notes
|
|
|
1,513 |
|
|
|
1,513 |
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
17,875 |
|
Convertible senior notes(b)
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes(b)
|
|
|
|
|
|
|
2,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
25,004 |
|
|
$ |
6,957 |
|
|
$ |
104,278 |
|
|
$ |
4,221 |
|
|
$ |
4,033 |
|
|
$ |
19,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 convertible senior notes and the convertible subordinated
notes are shown at their face values, gross of unamortized
discount amounting to $2.7 million and $20 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 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 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.
We believe that our current cash, cash equivalents and
investments, net, amounting to $225.9 million at
December 31, 2005 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 million to $1.5 million per quarter. 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
43
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, 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, 2005 and December 31, 2004 was
$202.6 million and $168.4 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, 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 loss of $803 thousand, $317 thousand and $787
thousand for the years ended December 31, 2005, 2004, and
2003, 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 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 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 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 convertible senior notes is sensitive to
interest rate changes. Interest rate changes would result in
increases or decreases in the fair value of the 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 convertible senior notes in the open
market, changes in the fair value of convertible senior notes
have no impact on our cash flows or consolidated financial
statements. The estimated fair value of the convertible senior
notes was $93.5 million and $106.8 million at
December 31, 2005 and December 31, 2004, respectively.
44
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 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 accrues at 5.5% per year and is
payable semi-annually on February 15 and August 15. The
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.
The fair value of the convertible subordinated notes is
sensitive to interest rate changes. Interest rate changes would
result in increases or decreases in the fair value of the
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 convertible
subordinated notes in the open market, changes in the fair value
of convertible subordinated notes have no impact on our cash
flows or consolidated financial statements. The estimated fair
value of the convertible subordinated notes was
$2.5 million and $10.0 million at December 31,
2005 and December 31, 2004, respectively.
We have cumulatively repurchased convertible subordinated notes
in the amount of $117.5 million, face value, for
$106.9 million. These repurchases were financed from our
investment portfolio and cash from operations. We have obtained
board authorization to repurchase all remaining convertible
subordinated notes. We may elect to use a portion of our cash
and cash equivalents and investment balances to buy back
additional amounts of the convertible subordinated notes. As of
December 31, 2005, our aggregate cash and cash equivalents
and investments were $225.9 million.
|
|
Part II, Item 8. |
Financial Statements and Supplementary Data |
Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005 | |
|
For the Year Ended December 31, 2004 | |
|
|
| |
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Revenues
|
|
$ |
57,517 |
|
|
$ |
65,956 |
|
|
$ |
74,856 |
|
|
$ |
61,905 |
|
|
$ |
61,115 |
|
|
$ |
60,253 |
|
|
$ |
61,746 |
|
|
$ |
62,710 |
|
Gross margin
|
|
|
18,542 |
|
|
|
19,399 |
|
|
|
21,715 |
|
|
|
17,180 |
|
|
|
18,818 |
|
|
|
20,022 |
|
|
|
20,086 |
|
|
|
20,246 |
|
Income from operations(A)
|
|
|
3,261 |
|
|
|
2,740 |
|
|
|
6,326 |
|
|
|
1,460 |
|
|
|
4,295 |
|
|
|
5,366 |
|
|
|
4,376 |
|
|
|
3,235 |
|
Net income
|
|
|
2,586 |
|
|
|
2,565 |
|
|
|
5,922 |
|
|
|
4,885 |
|
|
|
2,848 |
|
|
|
3,507 |
|
|
|
3,820 |
|
|
|
2,836 |
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.13 |
|
|
|
0.13 |
|
|
|
0.29 |
|
|
|
0.24 |
|
|
|
0.15 |
|
|
|
0.19 |
|
|
|
0.20 |
|
|
|
0.15 |
|
|
Diluted
|
|
|
0.12 |
|
|
|
0.11 |
|
|
|
0.25 |
|
|
|
0.20 |
|
|
|
0.13 |
|
|
|
0.16 |
|
|
|
0.17 |
|
|
|
0.13 |
|
|
|
|
(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 primary
manufacturing partners, Celestica and FoxConn. 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. |
45
|
|
|
|
|
Fourth Quarter 2004 Restructuring. In October 2004, we
announced plans to eliminate approximately 55 to 65 positions as
a result of the increase in outsourced manufacturing as well as
to continue our shift of skills required to develop, market,
sell, and support more advanced embedded platforms and
solutions. In 2005 and 2004, we incurred severance and other
employee-related separation costs and other charges of $35
thousand and $1.7 million, respectively, as a result of
this restructuring event. The balance in accrued restructuring
liability related to this charge was zero at December 31,
2005. |
|
|
|
Third Quarter 2004 Restructuring. In August 2004, we
announced plans to close our Birmingham UK office and eliminate
approximately 14 engineering and marketing positions. In 2005,
we completed integrating the work done by these employees into
other RadiSys locations. In conjunction with this elimination of
positions, R&D spending was re-directed to align our
strategy to deliver more integrated standards-based solutions.
In 2005 and 2004, we incurred severance and other
employee-related separation costs and other charges of $112
thousand and $482 thousand, respectively, as a result of this
restructuring event. The balance in accrued restructuring
liability related to this charge was zero at December 31,
2005. |
46
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, 2005. 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, 2005, 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.
Managements assessment of the effectiveness of internal
control over financial reporting as of December 31, 2005,
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 49 hereof.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
RadiSys Corporation:
We have audited the accompanying consolidated balance sheet of
RadiSys Corporation and subsidiaries as of December 31,
2005 and the related consolidated statements of operations,
changes in shareholders equity, and cash flows for the
year then ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements 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 the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the consolidated 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 audit
provides 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, 2005, and the results of their operations and
their cash flows for the year then ended, in conformity with
U.S. generally accepted accounting principles.
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, 2005, 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, 2006 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
Portland, Oregon
March 1, 2006
48
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, 2005, 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.
49
In our opinion, managements assessment that RadiSys
Corporation maintained effective internal control over financial
reporting as of December 31, 2005, 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, 2005, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of RadiSys Corporation and
subsidiaries as of December 31, 2005, and the related
consolidated statements of operations, changes in
shareholders equity, and cash flows for the year then
ended, and our report dated March 1, 2006 expressed an
unqualified opinion on those consolidated financial statements.
Portland, Oregon
March 1, 2006
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
RadiSys Corporation:
In our opinion, the consolidated financial statements listed in
the index appearing 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 each of
the two years in the period 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 appearing 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 and 2003 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 audits. We conducted our audits 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
audits provide a reasonable basis for our opinion.
|
|
|
PRICEWATERHOUSECOOPERS LLP
|
Portland, Oregon
March 7, 2005
51
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share | |
|
|
amounts) | |
Revenues
|
|
$ |
260,234 |
|
|
$ |
245,824 |
|
|
$ |
202,795 |
|
Cost of sales
|
|
|
183,398 |
|
|
|
166,652 |
|
|
|
137,638 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
76,836 |
|
|
|
79,172 |
|
|
|
65,157 |
|
Research and development
|
|
|
29,784 |
|
|
|
28,214 |
|
|
|
22,843 |
|
Selling, general and administrative
|
|
|
30,084 |
|
|
|
30,448 |
|
|
|
27,029 |
|
Intangible assets amortization
|
|
|
2,052 |
|
|
|
2,226 |
|
|
|
3,060 |
|
Loss on building sale
|
|
|
|
|
|
|
|
|
|
|
1,829 |
|
Restructuring and other charges
|
|
|
1,128 |
|
|
|
1,012 |
|
|
|
1,621 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
13,788 |
|
|
|
17,272 |
|
|
|
8,775 |
|
(Loss) gain on repurchase of convertible subordinated notes
|
|
|
(50 |
) |
|
|
(387 |
) |
|
|
825 |
|
Interest expense
|
|
|
(2,053 |
) |
|
|
(3,565 |
) |
|
|
(4,851 |
) |
Interest income
|
|
|
6,337 |
|
|
|
3,416 |
|
|
|
2,626 |
|
Other expense, net
|
|
|
(879 |
) |
|
|
(472 |
) |
|
|
(1,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax provision
|
|
|
17,143 |
|
|
|
16,264 |
|
|
|
6,032 |
|
Income tax provision
|
|
|
1,185 |
|
|
|
3,253 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
15,958 |
|
|
|
13,011 |
|
|
|
6,010 |
|
Discontinued operations related to Savvi business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(4,679 |
) |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
15,958 |
|
|
$ |
13,011 |
|
|
$ |
1,331 |
|
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.79 |
|
|
$ |
0.69 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.68 |
|
|
$ |
0.59 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.79 |
|
|
$ |
0.69 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.68 |
|
|
$ |
0.59 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,146 |
|
|
|
18,913 |
|
|
|
17,902 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
24,832 |
|
|
|
23,823 |
|
|
|
18,406 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
52
RADISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 2)
|
|
$ |
90,055 |
|
|
$ |
80,566 |
|
|
Short term investments, net (Note 2)
|
|
|
135,800 |
|
|
|
78,303 |
|
|
Accounts receivable, net (Notes 3 and 18)
|
|
|
39,055 |
|
|
|
42,902 |
|
|
Other receivables (Note 3)
|
|
|
3,886 |
|
|
|
2,808 |
|
|
Inventories, net (Note 4)
|
|
|
21,629 |
|
|
|
22,154 |
|
|
Other current assets (Note 8)
|
|
|
2,426 |
|
|
|
2,675 |
|
|
Deferred tax assets (Note 15)
|
|
|
7,399 |
|
|
|
4,216 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
300,250 |
|
|
|
233,624 |
|
|
Property and equipment, net (Note 5)
|
|
|
13,576 |
|
|
|
14,002 |
|
|
Goodwill (Notes 6, 18 and 21)
|
|
|
27,463 |
|
|
|
27,521 |
|
|
Intangible assets, net (Notes 7, 18 and 21)
|
|
|
2,159 |
|
|
|
4,211 |
|
|
Long-term investments (Note 2)
|
|
|
|
|
|
|
39,750 |
|
|
Long-term deferred tax assets (Note 15)
|
|
|
21,634 |
|
|
|
23,224 |
|
|
Other assets (Note 8)
|
|
|
3,629 |
|
|
|
2,906 |
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
368,711 |
|
|
$ |
345,238 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
36,903 |
|
|
$ |
31,585 |
|
|
Accrued wages and bonuses
|
|
|
4,829 |
|
|
|
5,626 |
|
|
Accrued interest payable (Note 12)
|
|
|
224 |
|
|
|
378 |
|
|
Accrued restructuring (Note 9)
|
|
|
856 |
|
|
|
1,569 |
|
|
Other accrued liabilities (Notes 10 and 13)
|
|
|
8,279 |
|
|
|
7,832 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
51,091 |
|
|
|
46,990 |
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes, net (Note 12)
|
|
|
97,279 |
|
|
|
97,148 |
|
|
|
Convertible subordinated notes, net (Note 12)
|
|
|
2,498 |
|
|
|
9,867 |
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
99,777 |
|
|
|
107,015 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
150,868 |
|
|
|
154,005 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Shareholders equity (Notes 16 and 17):
|
|
|
|
|
|
|
|
|
|
|
Preferred stock $.01 par value,
10,000 shares authorized; none issued or outstanding
|
|
|
|
|
|
|
|
|
|
|
Common stock no par value, 100,000 shares
authorized; 20,703 and 19,655 shares issued and outstanding
at December 31, 2005 and December 31, 2004
|
|
|
193,839 |
|
|
|
182,705 |
|
|
|
Retained earnings
|
|
|
20,275 |
|
|
|
4,317 |
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments
|
|
|
3,729 |
|
|
|
4,211 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
217,843 |
|
|
|
191,233 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
368,711 |
|
|
$ |
345,238 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
53
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained | |
|
|
|
|
|
|
Common Stock | |
|
Cumulative | |
|
Gain (Loss) | |
|
Earnings | |
|
|
|
Total | |
|
|
| |
|
Translation | |
|
on Equity | |
|
(Accumulated | |
|
|
|
Comprehensive | |
|
|
Shares | |
|
Amount | |
|
Adjustments(1) | |
|
Securities(2) | |
|
Deficit) | |
|
Total | |
|
Income (Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balances, December 31, 2002
|
|
|
17,605 |
|
|
$ |
161,485 |
|
|
$ |
1,230 |
|
|
$ |
111 |
|
|
$ |
(10,025 |
) |
|
$ |
152,801 |
|
|
|
|
|
|
Comprehensive loss, for the year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued pursuant to benefit plans
|
|
|
669 |
|
|
|
4,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,960 |
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
1,612 |
|
|
|
|
|
|
|
|
|
|
|
1,612 |
|
|
|
1,612 |
|
|
Recognition of accumulated foreign currency translation
adjustment due to liquidation of subsidiary
|
|
|
|
|
|
|
|
|
|
|
397 |
|
|
|
|
|
|
|
|
|
|
|
397 |
|
|
|
397 |
|
|
Loss on equity securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111 |
) |
|
|
|
|
|
|
(111 |
) |
|
|
(111 |
) |
|
Net income for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,331 |
|
|
|
1,331 |
|
|
|
1,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,048 |
|
|
|
8,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,673 |
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Income taxes are not provided for foreign currency translation
adjustments. |
|
(2) |
Deferred income tax benefit on losses incurred on equity
securities was approximately $39 thousand for the year ended
December 31, 2003. |
The accompanying notes are an integral part of these financial
statements.
54
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
15,958 |
|
|
$ |
13,011 |
|
|
$ |
1,331 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of Savvi business
|
|
|
|
|
|
|
|
|
|
|
4,286 |
|
|
|
Depreciation and amortization
|
|
|
8,099 |
|
|
|
7,677 |
|
|
|
9,553 |
|
|
|
Inventory valuation allowance
|
|
|
4,505 |
|
|
|
2,778 |
|
|
|
4,297 |
|
|
|
Non-cash restructuring charges (adjustments)
|
|
|
(188 |
) |
|
|
(858 |
) |
|
|
(208 |
) |
|
|
Non-cash interest expense
|
|
|
236 |
|
|
|
339 |
|
|
|
304 |
|
|
|
Non-cash amortization of (discount) premium on investments
|
|
|
(86 |
) |
|
|
1,193 |
|
|
|
2,318 |
|
|
|
Loss on sale of building
|
|
|
|
|
|
|
|
|
|
|
1,829 |
|
|
|
Loss (gain) on disposal of property and equipment
|
|
|
4 |
|
|
|
(100 |
) |
|
|
492 |
|
|
|
Loss (gain) on early extinguishments of convertible
subordinated notes
|
|
|
50 |
|
|
|
387 |
|
|
|
(825 |
) |
|
|
Deferred income taxes
|
|
|
(1,535 |
) |
|
|
1,369 |
|
|
|
265 |
|
|
|
Stock-based compensation expense
|
|
|
199 |
|
|
|
841 |
|
|
|
|
|
|
|
Tax benefit of stock-based compensation plans
|
|
|
2,262 |
|
|
|
2,960 |
|
|
|
|
|
|
|
Other
|
|
|
(603 |
) |
|
|
139 |
|
|
|
(185 |
) |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,785 |
|
|
|
(12,837 |
) |
|
|
(3,006 |
) |
|
|
|
Other receivables
|
|
|
(1,078 |
) |
|
|
(671 |
) |
|
|
(1,368 |
) |
|
|
|
Inventories
|
|
|
(3,980 |
) |
|
|
1,165 |
|
|
|
(5,483 |
) |
|
|
|
Other current assets
|
|
|
(1,142 |
) |
|
|
111 |
|
|
|
1,688 |
|
|
|
|
Accounts payable
|
|
|
5,355 |
|
|
|
9,655 |
|
|
|
3,322 |
|
|
|
|
Accrued restructuring
|
|
|
(467 |
) |
|
|
(391 |
) |
|
|
(2,014 |
) |
|
|
|
Accrued interest payable
|
|
|
(154 |
) |
|
|
(1,199 |
) |
|
|
(67 |
) |
|
|
|
Accrued wages and bonuses
|
|
|
(749 |
) |
|
|
761 |
|
|
|
(10 |
) |
|
|
|
Other accrued liabilities
|
|
|
1,700 |
|
|
|
(1,612 |
) |
|
|
1,797 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
32,171 |
|
|
$ |
24,718 |
|
|
$ |
18,316 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
55
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from held-to-maturity investments
|
|
$ |
62,056 |
|
|
$ |
70,981 |
|
|
$ |
82,274 |
|
|
Purchase of held-to-maturity investments
|
|
|
(44,667 |
) |
|
|
(53,779 |
) |
|
|
(74,164 |
) |
|
Proceeds from sale of auction rate securities
|
|
|
83,950 |
|
|
|
9,000 |
|
|
|
|
|
|
Purchase of auction rate securities
|
|
|
(119,000 |
) |
|
|
(70,000 |
) |
|
|
|
|
|
Capital expenditures
|
|
|
(5,527 |
) |
|
|
(4,821 |
) |
|
|
(3,800 |
) |
|
Purchase of long-term assets
|
|
|
(124 |
) |
|
|
(740 |
) |
|
|
|
|
|
Proceeds from the sale of Savvi business
|
|
|
|
|
|
|
|
|
|
|
360 |
|
|
Proceeds from building sale
|
|
|
|
|
|
|
|
|
|
|
8,500 |
|
|
Proceeds from the sale of property and equipment
|
|
|
10 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(23,302 |
) |
|
|
(49,231 |
) |
|
|
13,170 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of convertible senior notes, net of
discount
|
|
|
|
|
|
|
|
|
|
|
97,000 |
|
|
Early extinguishments of convertible subordinated notes
|
|
|
(7,449 |
) |
|
|
(58,168 |
) |
|
|
(9,238 |
) |
|
Borrowings under revolving line of credit
|
|
|
|
|
|
|
13,000 |
|
|
|
|
|
|
Repayments on revolving line of credit
|
|
|
|
|
|
|
(13,000 |
) |
|
|
|
|
|
Principal payments on mortgage payable
|
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
Payments of mortgage payable as a result of building sale
|
|
|
|
|
|
|
|
|
|
|
(6,595 |
) |
|
Prepayment penalty on early settlement on mortgage and other
fees associated with the building sale
|
|
|
|
|
|
|
|
|
|
|
(1,545 |
) |
|
Proceeds from issuance of common stock
|
|
|
8,673 |
|
|
|
12,459 |
|
|
|
4,960 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,224 |
|
|
|
(45,709 |
) |
|
|
84,501 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(604 |
) |
|
|
863 |
|
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,489 |
|
|
|
(69,359 |
) |
|
|
116,787 |
|
|
Cash and cash equivalents, beginning of period
|
|
|
80,566 |
|
|
|
149,925 |
|
|
|
33,138 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
90,055 |
|
|
$ |
80,566 |
|
|
$ |
149,925 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
1,966 |
|
|
$ |
4,417 |
|
|
$ |
4,059 |
|
|
Income taxes paid (refunded)
|
|
|
199 |
|
|
|
130 |
|
|
|
(3,547 |
) |
The accompanying notes are an integral part of these financial
statements.
56
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1 |
Significant Accounting Policies |
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.
|
|
|
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.
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.
Certain reclassifications have been made to amounts in prior
years to conform to current year presentation. These changes had
no effect on previously reported results of operations, cash
flows or shareholders equity.
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,
delivery or transfer of title and customer acceptance, if
applicable, and that the collectibility of the resulting
receivable is reasonably assured.
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 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 1.5%,
1.5% and 1.5% for the years ended December 31, 2005, 2004,
and 2003, respectively. The Company accrues the estimated cost
of post-sale obligations for product warranties, based on
historical experience at the time the Company recognizes revenue.
57
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
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
vendor-specific objective evidence exists to allocate the total
fee to all delivered and undelivered elements of the arrangement.
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.
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, 2005, 2004 and 2003 shipping
and handling costs represented less than 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 Statement of Financial Accounting Standard
(SFAS) No. 95 Statement of Cash
Flows.
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 separate component of accumulated
other comprehensive income. 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
maturities more than a year are classified as long-term
investments in the consolidated financial statements.
The Companys investments primarily consist of commercial
paper, corporate notes and bonds, U.S. government notes and
bonds, and auction rate municipal securities. 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 commercial paper, corporate notes and
bonds and 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
58
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 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.
During the fourth quarter of 2003, the Company revised the
inventory valuation allowance calculation to more accurately
reflect its true exposure to losses associated with excess and
obsolete (E&O) inventory moving forward. The
Company previously estimated the required inventory valuation
allowance based on a forward projection of excess material
beyond 12 months demand. This resulted in a reserve
estimate that was higher than the actual E&O losses for
products where the demand and orders are more sporadic. The
revised process combines the historical view of demand over the
prior six months with a prospective view of demand over
12 months. The Company tested the revised method against
prior periods and found it to be a more accurate predictor of
excess inventory. This change resulted in a reduction to
write-downs for inventory to the inventory valuation allowance
of approximately $500 thousand in the fourth quarter of 2003.
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 are 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 future cash flows may differ from
actual cash flow due to, among other things, technological
changes, economic conditions or changes to our business
operations.
59
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 written down when impaired, rather than amortized
as previous standards required.
As a result of the sale of the Savvi business in 2003, the
Company recorded $2.4 million in write-offs of goodwill.
This impairment charge is included in the loss from discontinued
operations related to the Savvi business in 2003. See
Note 21. The Company has not recognized any additional
impairment losses defined under the provisions of
SFAS No. 142.
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.
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 Statement of
Financial Accounting Standards, (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, 2005 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.
In June 2005, the FASB issued FSP
143-1, Accounting
for Electronic Equipment Waste Obligations (FSP
143-1), which
provides guidance on the accounting for certain obligations
associated with the Waste Electrical and Electronic Equipment
Directive (the Directive), adopted by the European
Union (EU). Under the Directive, the waste
management obligation for historical equipment (products
60
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
put on the market on or prior to August 13, 2005) remains
with the commercial user until the customer replaces the
equipment. FSP 143-1 is
required to be applied to the later of the first reporting
period ending after June 8, 2005 or the date of the
Directives adoption into law by the applicable EU member
countries in which the manufacturers have significant
operations. The Company adopted FSP
143-1 in the fourth
quarter of fiscal 2005 and has determined that its effect did
not have a material impact on its consolidated results of
operations and financial condition for fiscal 2005.
|
|
|
Accrued Restructuring and Other Charges |
For the years ended December 31, 2003, 2004 and 2005
expenses associated with exit or disposal activities are
recognized when probable and estimable. 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.
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.
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, 2005 and December 31, 2004. See also
Note 13.
Research and development costs are expensed as incurred.
Research and development expenses consist primarily of salary,
bonuses and benefits for product development staff, and cost of
design and development supplies and equipment.
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, convertible senior notes and the convertible
subordinated notes is based on quoted market prices as of the
balance sheet date. See Note 12.
61
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In November 2005, the FASB issued FSP 115-1 and FSP 124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments (FSP
115-1), which provides guidance on determining when
investments in certain debt and equity securities are considered
impaired, whether that impairment is other-than-temporary, and
on measuring such impairment loss. FSP 115-1 also includes
accounting considerations subsequent to the recognition of an
other-than temporary impairment and requires certain disclosures
about unrealized losses that have not been recognized as
other-than-temporary impairments. FSP 115-1 is required to be
applied to reporting periods beginning after December 15,
2005 and was required to be adopted by the Company in the fourth
quarter of fiscal 2005. The adoption of FSP 115-1 did not have a
material impact on the Consolidated Financial Statements.
In accordance with SFAS No. 130, Reporting
Comprehensive Income, the Company reports Accumulated
other comprehensive income in its Consolidated Balance Sheets.
Comprehensive income includes net income, translation
adjustments and unrealized gains (losses) on securities
available-for-sale represent. The Cumulative translation
adjustments consist of unrealized gains (losses) in accordance
with SFAS No. 52, Foreign Currency
Translation. In 2004 and 2003, the Company liquidated the
assets of two separate redundant foreign subsidiaries. As a
result, in 2004 and 2003, the Company realized a net gain of
approximately $146 thousand and a net loss of approximately $397
thousand, respectively, previously classified as translation
adjustments and included such amounts in Other expenses, net in
the consolidated financial statements. The Company has no
intention of liquidating the assets of its non-redundant foreign
subsidiaries in the foreseeable future.
Equity instruments are granted to employees, directors and
consultants in certain instances, as defined in the respective
plan agreements. In 2005, the Company issued equity instruments
in the form of stock options and restricted stock. In 2003 and
2004 the Company issued stock options only. The Company accounts
for its stock-based compensation plans using the intrinsic value
method in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and
provides pro forma disclosures of net income (loss) and net
income (loss) per common share as if the fair value method had
been applied in measuring compensation expense in accordance
with SFAS No. 123, Accounting for Stock-Based
Compensation. In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, An Amendment
of SFAS No. 123. SFAS No. 148 amends
certain provisions of SFAS No. 123 and provides
alternative methods of transition in voluntary adoption of
SFAS No. 123. The Company adopted the disclosure
requirements of SFAS No. 148 in 2002.
In 2005, the Compensation and Development Committee of the Board
of Directors approved the form of the restricted stock 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 will vest
each year following the date of the grant. In 2005, 97 thousand
shares of restricted stock were granted. The Company computed
the stock-based compensation per share of the restricted stock
granted as the closing price of RadiSys shares as quoted on
NASDAQ on the date of grant. The weighted average grant price of
restricted stock per share in 2005 was $16.62. The total value
of restricted stock granted in 2005 was approximately
$1.6 million, which would be amortized on a straight-line
basis over the vesting period of the restricted stock. 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 years ended
December 31, 2004 and 2003.
62
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As required by SFAS No. 123, the Company computed the
value of options granted and ESPP shares issued during 2005,
2004 and 2003 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase | |
|
|
Options | |
|
Plan | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Expected life (in years)
|
|
|
4.2 |
|
|
|
3.9 |
|
|
|
3.2 |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
1.5 |
|
Interest rate
|
|
|
3.80% |
|
|
|
2.39% |
|
|
|
2.31% |
|
|
|
1.95% |
|
|
|
1.43% |
|
|
|
1.33% |
|
Volatility
|
|
|
64% |
|
|
|
82% |
|
|
|
85% |
|
|
|
84% |
|
|
|
85% |
|
|
|
85% |
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2004 and 2003, for
purposes of the pro forma disclosure, the total value of the
options granted was approximately $7.4 million,
$9.5 million and $5.2 million, respectively, which
would be amortized on a straight-line basis over the vesting
periods of the options. For the years ended December 31,
2005, 2004 and 2003 the weighted-average valuation per options
granted was $7.87, $11.08 and $6.20 respectively. In addition,
according to the provisions of SFAS No. 123, options
granted in 2004 associated with the Stock Option Exchange
Program (see Note 17) completed in August 2003 are to be
considered granted in 2003 for purposes of calculating
stock-compensation expense. For purposes of the pro forma
disclosure, the value of the options issued in 2004 related to
the Stock Option Exchange Program amounted to $2.8 million,
which represents the incremental value of the new shares over
the value of the shares exchanged. This amount is amortized on a
straight-line basis beginning on the date of exchange in August
2003 to the end of the new shares vesting period. For
purposes of the pro forma disclosure, the total expense
associated with the Employee Stock Purchase Program
(ESPP) in 2005, 2004 and 2003 was $1.8 million,
$2.1 million, and $1.4 million, respectively. The
estimated fair value of the ESPP is amortized over the purchase
period, subject to modification at the date of purchase.
Adjustments are made for options forfeited as they occur. Had
RadiSys accounted for these plans in accordance with
SFAS No. 123, the Companys net income and pro
forma net income (loss) per share would have been reported as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income
|
|
$ |
15,958 |
|
|
$ |
13,011 |
|
|
$ |
1,331 |
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects(A)
|
|
|
123 |
|
|
|
520 |
|
|
|
|
|
|
Deduct: Stock-based employee compensation expense determined
under fair value method for all awards, net of related tax
effects(B)
|
|
|
(3,128 |
) |
|
|
(12,048 |
) |
|
|
(5,288 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
12,953 |
|
|
$ |
1,483 |
|
|
$ |
(3,957 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.79 |
|
|
$ |
0.69 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.68 |
|
|
$ |
0.59 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic
|
|
$ |
0.64 |
|
|
$ |
0.08 |
|
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted
|
|
$ |
0.56 |
|
|
$ |
0.10 |
|
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
63
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(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 years ended
December 31, 2004 and 2003. |
|
|
|
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 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. |
|
|
|
The Company 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 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cost of sales
|
|
$ |
23 |
|
|
$ |
235 |
|
|
$ |
|
|
Research and development
|
|
|
55 |
|
|
|
343 |
|
|
|
|
|
Selling, general and administrative
|
|
|
121 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
199 |
|
|
$ |
841 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) |
|
In 2004, the Compensation and Development 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
will include in net income after January 1, 2006, the
effective date of SFAS No. 123R.
SFAS No. 123R requires companies to recognize
stock-based compensation expense associated with stock options
based on the fair value method. SFAS No. 123R is
effective January 1, 2006. Included in the pro forma
stock-based compensation expense for 2004 is $6.1 million
associated with the acceleration, net of related tax effects. |
|
|
|
The effects of applying SFAS 123 for providing pro forma
disclosure for 2005, 2004 and 2003 are not likely to be
representative of the effects on reported net (loss) income and
net (loss) income per share for future years since options vest
over several years and additional awards are made each year. |
The Company computes earnings per share in accordance with
SFAS No. 128, Earnings per Share,
(SFAS 128). Accordingly, basic earnings per
share amounts are computed based on the weighted-
64
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
average number of common shares outstanding. Diluted earnings
per share amounts incorporate 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 14.
|
|
|
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, 2005 and 2004. 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 transaction losses,
net of gains, amounted to $803 thousand, $317 thousand and $787
thousand, respectively, for the years ended December 31,
2005, 2004 and 2003.
|
|
|
Recent Accounting Pronouncements |
FASB Staff Position (FSP) No. 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004 (FSP 109-2), provides
guidance under FASB Statement No. 109, Accounting for
Income Taxes, with respect to recording the potential
impact of the repatriation provisions of the American Jobs
Creation Act of 2004 (the Jobs Act) on
enterprises income tax expense and deferred tax liability.
The Jobs Act was enacted on October 22, 2004. FSP
109-2 states that an enterprise is allowed time beyond the
financial reporting period of enactment to evaluate the effect
of the Jobs Act on its plan for reinvestment or repatriation of
foreign earnings for purposes of applying FASB Statement No.
109. The Company has completed its evaluation of the impact of
the Act and has concluded not to repatriate any earnings
pursuant to the provisions of the Act and has determined that
due to the reduction of the Companys domestic
manufacturing operations, the impact of domestic manufacturing
deduction was minimal.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), which replaces
SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and supersedes
APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their grant date fair values beginning with the first annual
period after June 15, 2005, with early adoption encouraged.
The pro forma disclosures previously permitted under
SFAS 123 are no longer an alternative to financial
statement recognition. The Company is required to adopt
SFAS 123R in the first quarter of fiscal 2006.
Under SFAS 123R, the Company will apply the Black-Scholes
valuation model in determining the fair value of share-based
payments which will then be amortized on a straight-line basis
over the requisite service period. The Company will apply the
modified prospective method, which requires that compensation
expense be recorded for all unvested stock options and ESPP
shares upon adoption of SFAS 123R.
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 is evaluating the requirements of SFAS 123R and
SAB 107 and expects that the adoption of
65
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS 123R on January 1, 2006 will have a material
impact on the Consolidated Financial Statements. The Company
estimates income from operations will be reduced by stock-based
compensation expense of approximately $5.5 million to
$6.5 million in 2006. However, the actual stock-based
compensation expense estimated for 2006 could materially differ
from this estimate. The estimate for 2006 stock-based
compensation expense, which includes an estimate of the timing
and number of future options grants and share issuances, is
based on the Black-Scholes option pricing model and is affected
by the fair market value of the Companys stock as well as
managements assumptions regarding a number of complex and
subjective variables. As such, the actual stock option expense
may differ materially from this estimate. Additionally,
SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement may reduce
net operating cash flows and increase net financing cash flows
in periods after its adoption.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs An Amendment of ARB
No. 43, Chapter 4 (SFAS 151).
SFAS 151 amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Among
other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight, and
re-handling costs be recognized as current-period charges
regardless of whether they meet the criterion of so
abnormal as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS 151 is
effective for fiscal years beginning after June 15, 2005
and is required to be adopted by RadiSys in the first quarter of
fiscal 2006. RadiSys does not expect the adoption of
SFAS 151 to have a material impact on the Consolidated
Financial Statements.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS 154), which replaces APB Opinion
No. 20 Accounting Changes and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements An Amendment of APB
Opinion No. 28. SFAS 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the
latest practicable date, as the required method for reporting a
change in accounting principle and the reporting of a correction
of an error. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005 and is required to be adopted by
the Company in the first quarter of fiscal 2007. The Company is
currently evaluating the effect that the adoption of
SFAS 154 will have on its consolidated results of
operations and financial condition but does not expect it to
have a material impact.
The following recent accounting pronouncements either did not
have a material impact on RadiSys results of operations
and financial condition upon adoption or in the case of
pronouncements not yet effective it is anticipated that adoption
will not have a material impact on RadiSys results of
operations and financial condition:
|
|
|
|
|
SFAS No. 153, Exchanges of Nonmonetary
Assets An Amendment of APB Opinion
No. 29 and |
|
|
|
FSP No. 106-2 (FSP 106-2), Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 |
66
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, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$ |
598 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
598 |
|
Certificate of deposit
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
250 |
|
Commercial paper
|
|
|
50,725 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
50,726 |
|
Corporate notes and bonds
|
|
|
14,803 |
|
|
|
1 |
|
|
|
(32 |
) |
|
|
14,772 |
|
Auction Rate Securities
|
|
|
61,000 |
|
|
|
|
|
|
|
|
|
|
|
61,000 |
|
U.S. government notes and bonds
|
|
|
42,250 |
|
|
|
|
|
|
|
(302 |
) |
|
|
41,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
169,626 |
|
|
$ |
3 |
|
|
$ |
(335 |
) |
|
$ |
169,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less investments classified as cash equivalents
|
|
|
(51,573 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term investments
|
|
$ |
118,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2005
and 2004 the Company did not recognize any gains or losses on
the sales of available-for-sale investments. For the years ended
December 31, 2005 and 2004, there were no unrealized gains
or losses on available-for-sale investments. At
December 31, 2005 and 2004, 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, 2005 had there been
an unusual or unplanned liquidation of the underlying
investments. As of December 31, 2005, the Company had no
investments classified as long-term
held-to-maturity. 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, 2005, the Company was in compliance with its
investment policy.
67
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,
2005 (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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$ |
58,284 |
|
|
$ |
(17 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
58,284 |
|
|
$ |
(17 |
) |
US government notes and bonds
|
|
|
47,646 |
|
|
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
47,646 |
|
|
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
105,930 |
|
|
$ |
(356 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
105,930 |
|
|
$ |
(356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses of these investments represented less than
1% of the cost of our investment portfolio at December 31,
2005.
The Company reviewed all investments with unrealized losses at
December 31, 2005 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, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Short-term held-to-maturity investments, net of unamortized
premium of zero and $103, respectively
|
|
$ |
39,750 |
|
|
$ |
17,303 |
|
Short-term investments, classified as available for sale
|
|
|
96,050 |
|
|
|
61,000 |
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$ |
135,800 |
|
|
$ |
78,303 |
|
|
|
|
|
|
|
|
Long-term held-to-maturity investments, net of unamortized
premium of zero
|
|
$ |
|
|
|
$ |
39,750 |
|
|
|
|
|
|
|
|
|
|
Note 3 |
Accounts Receivable and Other Receivables |
Accounts receivable balances as of December 31, 2005 and
2004 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accounts receivable, gross
|
|
$ |
39,931 |
|
|
$ |
43,790 |
|
Less: allowance for doubtful accounts
|
|
|
(876 |
) |
|
|
(888 |
) |
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$ |
39,055 |
|
|
$ |
42,902 |
|
|
|
|
|
|
|
|
Accounts receivable at December 31, 2005 and 2004 primarily
consists of sales to the Companys customers which are
generally based on standard terms and conditions. Accounts
receivable at December 31, 2004 includes receivables
associated with sales of last-time buy inventory to customers.
The receivables associated with last-time buy inventory sales to
customers contain the standard terms and conditions customary to
the Companys trade receivables. At December 31, 2004
approximately $1.4 million receivables were associated with
last-time buy inventory sales to customers.
68
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2005, 2004 and 2003,
the Company did not record a provision for allowance for
doubtful accounts.
As of December 31, 2005 and 2004 other receivables was
$3,886 thousand and $2,808 thousand, respectively. Other
receivables consisted primarily of non-trade receivables
including receivables for inventory sold to our contract
manufacturing partners, sub-lease billings and receivables from
employees for stock option exercises. 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.
Inventories as of December 31, 2005 and 2004 consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
20,790 |
|
|
$ |
24,044 |
|
Work-in-process
|
|
|
2,282 |
|
|
|
1,505 |
|
Finished goods
|
|
|
5,829 |
|
|
|
3,958 |
|
|
|
|
|
|
|
|
|
|
|
28,901 |
|
|
|
29,507 |
|
Less: inventory valuation allowance
|
|
|
(7,272 |
) |
|
|
(7,353 |
) |
|
|
|
|
|
|
|
Inventories, net
|
|
$ |
21,629 |
|
|
$ |
22,154 |
|
|
|
|
|
|
|
|
During the years ended December 31, 2005, 2004 and 2003 the
Company recorded provision for excess and obsolete inventory of
$4.5 million, $2.8 million and $4.3 million,
respectively.
The following is a summary of the change in the Companys
inventory valuation allowance for the years ended
December 31, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Inventory valuation allowance, beginning of the year
|
|
$ |
7,353 |
|
|
$ |
9,491 |
|
Usage:
|
|
|
|
|
|
|
|
|
|
Inventory scrapped
|
|
|
(2,241 |
) |
|
|
(1,987 |
) |
|
Inventory utilized
|
|
|
(2,487 |
) |
|
|
(3,197 |
) |
|
|
|
|
|
|
|
|
|
Subtotal usage
|
|
|
(4,728 |
) |
|
|
(5,184 |
) |
Write-downs of inventory valuation
|
|
|
4,505 |
|
|
|
2,778 |
|
Transfer from other liabilities(A)
|
|
|
142 |
|
|
|
268 |
|
|
|
|
|
|
|
|
Remaining valuation allowance, end of the year
|
|
$ |
7,272 |
|
|
$ |
7,353 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Transfer from other liabilities is related to obsolete inventory
purchased from contract manufacturers during the quarter which
was previously reserved for as an adverse purchase commitment.
(Notes 10 and 13) |
As of December 31, 1005 the Company was in compliance with
SFAS No. 151 as the Company is only applying the
amount of overhead to inventory associated with normal
production levels. As production levels have dropped off due to
outsourcing, the Company has not increased overhead rates and
has charged excess capacity costs directly to cost of sales as
they are incurred.
69
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5 |
Property and Equipment |
Property and equipment as of December 31, 2005 and 2004
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
2,162 |
|
|
$ |
2,162 |
|
Building
|
|
|
1,756 |
|
|
|
1,756 |
|
Manufacturing equipment
|
|
|
16,803 |
|
|
|
15,113 |
|
Office equipment and software
|
|
|
22,413 |
|
|
|
19,482 |
|
Leasehold improvements
|
|
|
4,103 |
|
|
|
3,898 |
|
|
|
|
|
|
|
|
|
|
|
47,237 |
|
|
|
42,411 |
|
Less: accumulated depreciation and amortization
|
|
|
(33,661 |
) |
|
|
(28,409 |
) |
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
13,576 |
|
|
$ |
14,002 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense for property and equipment
for the years ended December 31, 2005, 2004 and 2003 was
$5.9 million, $5.4 million and $5.7 million,
respectively.
In 2003 the Company recorded goodwill write-offs of
$2.4 million associated with the sale of its Savvi business
line. The goodwill write-off associated with the sale of the
Savvi business line is included in loss from discontinued
operations in the accompanying Consolidated Statements of
Operations for the year ended December 31, 2003. See
Note 21.
The Company tests goodwill for impairment at least annually.
Additionally, the Company assesses goodwill for impairment if
any adverse conditions exist that would indicate an 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,
2005 and concluded that as of September 30, 2005, there was
no goodwill impairment.
70
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7 |
Intangible Assets |
The following tables summarize details of the Companys
total purchased intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Gross | |
|
Amortization | |
|
Net | |
|
|
| |
|
| |
|
| |
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 |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing technology
|
|
$ |
2,415 |
|
|
$ |
(1,457 |
) |
|
$ |
958 |
|
Technology licenses
|
|
|
6,790 |
|
|
|
(5,093 |
) |
|
|
1,697 |
|
Patents
|
|
|
6,647 |
|
|
|
(5,590 |
) |
|
|
1,057 |
|
Trade names
|
|
|
736 |
|
|
|
(237 |
) |
|
|
499 |
|
Other
|
|
|
237 |
|
|
|
(237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
16,825 |
|
|
$ |
(12,614 |
) |
|
$ |
4,211 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $2.1 million,
$2.2 million and $3.1 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
The Companys purchased intangible assets have lives
ranging from 4 to 15 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,
2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
Estimated | |
|
|
Intangible | |
|
|
Amortization | |
For the Years Ending December 31, |
|
Amount | |
|
|
| |
|
2006
|
|
|
726 |
|
|
2007
|
|
|
526 |
|
|
2008
|
|
|
250 |
|
|
2009
|
|
|
210 |
|
|
2010
|
|
|
210 |
|
Thereafter
|
|
|
237 |
|
|
|
|
|
|
Total
|
|
$ |
2,159 |
|
|
|
|
|
71
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other current assets as of December 31, 2005 and 2004
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Prepaid maintenance, rent and other
|
|
$ |
2,074 |
|
|
$ |
2,065 |
|
Interest receivable on investments
|
|
|
352 |
|
|
|
610 |
|
|
|
|
|
|
|
|
Other current assets
|
|
$ |
2,426 |
|
|
$ |
2,675 |
|
|
|
|
|
|
|
|
Other assets as of December 31, 2005 and 2004 consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Employee deferred compensation arrangement
|
|
$ |
2,509 |
|
|
$ |
1,875 |
|
Other
|
|
|
1,120 |
|
|
|
1,031 |
|
|
|
|
|
|
|
|
Other assets
|
|
$ |
3,629 |
|
|
$ |
2,906 |
|
|
|
|
|
|
|
|
During the year ended December 31, 2003, the Company wrote
off $38 thousand of capitalized software as a result of the sale
of the Savvi business unit (see Note 21). The Company
generally discontinued capitalizing software development costs
as of January 1, 2002, 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. Amortization expense for capitalized software for
the year ended December 31, 2003 was $839 thousand. There
was no amortization expense for capitalized software for the
years ended December 31, 2004 and 2005.
Employee deferred compensation arrangement represents the net
cash surrender value of insurance contracts purchased by the
Company as part of its deferred compensation plan established in
January 2001 (see Note 17). Any elective deferrals by the
eligible employees are invested in insurance contracts.
|
|
Note 9 |
Accrued Restructuring and Other Charges |
Accrued restructuring as of December 31, 2005 and
December 31, 2004 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Second quarter 2005 restructuring charge
|
|
$ |
803 |
|
|
$ |
|
|
Fourth quarter 2004 restructuring charge
|
|
|
|
|
|
|
1,282 |
|
Third quarter 2004 restructuring charge
|
|
|
|
|
|
|
86 |
|
Fourth quarter 2001 restructuring charge
|
|
|
20 |
|
|
|
201 |
|
Other
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
856 |
|
|
$ |
1,569 |
|
|
|
|
|
|
|
|
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.
72
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
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 primary
manufacturing partners, Celestica and FoxConn.
The following table summarizes the changes to the second quarter
2005 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 |
|
|
|
|
|
Employee termination and related costs include severance and
other related separation costs. Additions to the original
accrual are primarily related to increased estimates of employee
severance costs. Expenditures for 2005 consisted of severance
payments made to employees whose employment terminated during
the year. The reversal of $169 thousand is due to the voluntary
departure of three employees prior to their termination date as
well as three employees who have been retained by the Company to
fill open positions. The Company expects this workforce
reduction to be substantially completed by June 30, 2006.
|
|
|
Fourth Quarter 2004 Restructuring |
In 2004, the Company eliminated 58 positions. These reductions
resulted from an increase in outsourced manufacturing as well as
to continue the Companys shift of skills required to
develop, market, sell and support more advanced embedded
platforms and solutions.
The following table summarizes the changes to the fourth quarter
2004 restructuring costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee | |
|
|
|
|
|
|
Termination and | |
|
Other | |
|
|
|
|
Related Costs | |
|
Charges | |
|
Total | |
|
|
| |
|
| |
|
| |
Restructuring and other costs
|
|
$ |
1,630 |
|
|
$ |
20 |
|
|
$ |
1,650 |
|
|
Expenditures
|
|
|
(358 |
) |
|
|
(10 |
) |
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2004
|
|
|
1,272 |
|
|
|
10 |
|
|
|
1,282 |
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
16 |
|
|
|
19 |
|
|
|
35 |
|
|
Expenditures
|
|
|
(1,244 |
) |
|
|
(29 |
) |
|
|
(1,273 |
) |
|
Reversals
|
|
|
(44 |
) |
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2005
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring accrual has been reduced to zero during 2005.
$33 thousand of reversal was due to the retention of an employee
who filled a new position within the Company. Expenditures
included severance and other employee-related separation costs.
73
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Third Quarter 2004 Restructuring |
In August 2004, the Company initiated plans to eliminate
approximately 14 engineering and marketing positions in its
Birmingham, UK office during the fourth quarter of 2004. The
Company has integrated the work done by these employees into
other RadiSys locations. In conjunction with the elimination of
positions, some R&D spending has been re-directed to align
with the Companys strategy to deliver more integrated
standards-based solutions.
The following table summarizes the changes to the third quarter
2004 restructuring costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee | |
|
|
|
|
|
|
Termination and | |
|
Other | |
|
|
|
|
Related Costs | |
|
Charges | |
|
Total | |
|
|
| |
|
| |
|
| |
Restructuring and other costs
|
|
$ |
410 |
|
|
$ |
18 |
|
|
$ |
428 |
|
|
Additions
|
|
|
24 |
|
|
|
30 |
|
|
|
54 |
|
|
Expenditures
|
|
|
(254 |
) |
|
|
(48 |
) |
|
|
(302 |
) |
|
Reversals
|
|
|
(94 |
) |
|
|
|
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2004
|
|
|
86 |
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
112 |
|
|
|
112 |
|
|
Expenditures
|
|
|
|
|
|
|
(82 |
) |
|
|
(82 |
) |
|
Write-offs
|
|
|
|
|
|
|
(30 |
) |
|
|
(30 |
) |
|
Reversals
|
|
|
(86 |
) |
|
|
|
|
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2005
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, $86 thousand in severance and related costs was
reversed as one of the effected employees was retained to fill a
new position within the Company. Additions to the restructuring
accrual were primarily due to relocation costs and write-offs
that resulted from losses incurred on the disposal of property
and equipment. During the first quarter of 2005, the Redditch,
U.K. office was vacated and property and equipment that was not
transferred to other locations was either disposed or sold. The
disposal or sale of this property and equipment resulted in a
net loss of $30 thousand. Additions to the reserve include $12
thousand in relocation expenses and $26 thousand paid for
repairs associated with the vacated Redditch office building.
74
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Fourth Quarter 2001 Restructuring |
The following table summarizes the changes to the fourth quarter
2001 restructuring costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee | |
|
|
|
|
|
|
|
|
|
|
Termination and | |
|
|
|
Property and | |
|
Other | |
|
|
|
|
Related Costs | |
|
Facilities | |
|
Equipment | |
|
Charges | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Restructuring costs
|
|
$ |
914 |
|
|
$ |
2,417 |
|
|
$ |
463 |
|
|
$ |
132 |
|
|
$ |
3,926 |
|
|
Expenditures
|
|
|
(452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(452 |
) |
|
Write-offs
|
|
|
|
|
|
|
|
|
|
|
(463 |
) |
|
|
|
|
|
|
(463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2001
|
|
|
462 |
|
|
|
2,417 |
|
|
|
|
|
|
|
132 |
|
|
|
3,011 |
|
|
Expenditures
|
|
|
(395 |
) |
|
|
(931 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
(1,353 |
) |
|
Reversals
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2002
|
|
|
|
|
|
|
1,486 |
|
|
|
|
|
|
|
105 |
|
|
|
1,591 |
|
|
Expenditures
|
|
|
|
|
|
|
(576 |
) |
|
|
|
|
|
|
(14 |
) |
|
|
(590 |
) |
|
Reversals
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2003
|
|
|
|
|
|
|
909 |
|
|
|
|
|
|
|
90 |
|
|
|
999 |
|
|
Expenditures
|
|
|
|
|
|
|
(428 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
(518 |
) |
|
Expenditures lease buy-out
|
|
|
|
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
Recoveries
|
|
|
|
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
141 |
|
|
Reversals
|
|
|
|
|
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2004
|
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
|
(131 |
) |
|
Recoveries
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
Reversals
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance accrued as of December 31, 2005
|
|
$ |
|
|
|
$ |
20 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005 the Company reviewed prior lease payments associated
with our Boca Raton, Florida leased facilities. As a result of
this review $30 thousand in overcharges were identified and this
is represented in recoveries. The $79 thousand reversal includes
the $30 thousand recovery as well as an adjustment for accrued
common area maintenance charges. The accrual amount remaining as
of December 31, 2005 represents lease obligations relating
to the facilities in Boca Raton, Florida expected to be paid in
January 2006.
The other restructuring liability represents a tentative lease
buy out agreement for the Birmingham, UK office that was vacated
primarily due to the third quarter 2004 restructuring event. In
the fourth quarter of 2005, the Company 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
75
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 10 |
Other accrued liabilities |
Other accrued liabilities as of December 31, 2005 and 2004,
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued tax liability
|
|
$ |
1,569 |
|
|
$ |
1,308 |
|
Accrued warranty reserve
|
|
|
2,124 |
|
|
|
1,719 |
|
Deferred compensation plan liability
|
|
|
2,014 |
|
|
|
1,810 |
|
Deferred revenues
|
|
|
539 |
|
|
|
483 |
|
Adverse purchase commitments
|
|
|
828 |
|
|
|
485 |
|
Accrued royalties
|
|
|
75 |
|
|
|
43 |
|
Other
|
|
|
1,130 |
|
|
|
1,984 |
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$ |
8,279 |
|
|
$ |
7,832 |
|
|
|
|
|
|
|
|
|
|
Note 11 |
Short-Term Borrowings |
During the quarter ended March 31, 2005, the Company
renewed its line of credit facility, which expires on
March 31, 2006, for $20.0 million at an interest rate
based upon the lower of the London
Inter-Bank Offered Rate
(LIBOR) plus 1.0% or the banks prime rate. The
line of credit is collateralized by the Companys
non-equity investments and is reduced by any standby letters of
credit. At December 31, 2005, 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. The Company plans to renew the line of
credit in the first quarter of 2006.
As of December 31, 2005 and December 31, 2004, there
were no outstanding balances on the standby letter of credit or
line of credit and the Company was in compliance with all debt
covenants.
|
|
Note 12 |
Long-Term Liabilities |
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
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 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
76
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 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, 2005 and December 31, 2004 the
Company had outstanding convertible senior notes with a face
value of $100 million. As of December 31, 2005 and
December 31, 2004 the book value of the convertible senior
notes was $97.3 million and $97.1 million
respectively, net of unamortized discount of $2.7 million
and $2.9 million, respectively. Amortization of the
discount on the convertible senior notes was $131 thousand and
$133 thousand for the years ended December 31, 2005 and
2004, respectively. The estimated fair value of the convertible
senior notes was $93.5 million and $106.8 million at
December 31, 2005 and December 31, 2004, respectively.
|
|
|
Convertible Subordinated Notes |
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 subordinated notes accrues at
5.5% per year and is payable semi-annually on February 15
and August 15. The 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 its 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 $8.9 million principal amount of the convertible
subordinated notes. For the year ended December 31, 2005,
the Company repurchased $7.5 million principal amount of
the 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. For the year ended December 31, 2004, the Company
repurchased $58.8 million principal amount of the
convertible subordinated notes, with an associated discount of
$897 thousand. The Company repurchased the notes in the
open market for $58.2 million and, as a result, recorded a
loss of $387 thousand.
As of December 31, 2005 and 2004, the Company had
outstanding convertible subordinated notes with a face value of
$2.5 million and $10.0 million, respectively. As of
December 31, 2005 and 2004, the book value of the
convertible subordinated notes was $2.5 million and
$9.9 million, respectively, net of unamortized discount of
$20 thousand and $126 thousand, respectively. Amortization of
the discount on the convertible subordinated notes was $106
thousand and $140 thousand for the year ended December 31,
2005 and 2004, respectively. The estimated fair value of the
convertible subordinated notes was $2.5 million and
$10.0 million December 31, 2005 and 2004, respectively.
77
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company will consider the purchase of the notes on the open
market or through privately negotiated transactions from time to
time subject to market conditions.
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 | |
|
|
| |
|
| |
2006
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
2,518 |
|
2008(A)
|
|
|
100,000 |
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
2,518 |
|
Less: unamortized discount
|
|
|
(2,721 |
) |
|
|
(20 |
) |
Less: current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
$ |
97,279 |
|
|
$ |
2,498 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
On or after November 15, 2008, the Company may redeem the
Convertible Senior Notes at any time. On November 15, 2008,
November 15, 2013, and November 15, 2018, holders of
the 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 13 |
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 6 years after
December 31, 2005. Amounts of future minimum lease
commitments in each of the five years ending December 31,
2006 through 2010 and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
Future Minimum | |
For the Years Ending December 31, |
|
Lease Payments | |
|
|
| |
|
2006
|
|
|
2,954 |
|
|
2007
|
|
|
2,926 |
|
|
2008
|
|
|
2,903 |
|
|
2009
|
|
|
2,846 |
|
|
2010
|
|
|
2,658 |
|
Thereafter
|
|
|
1,707 |
|
|
|
|
|
|
|
$ |
15,994 |
|
|
|
|
|
Rent expense totaled $3.2 million, $3.6 million and
$3.0 million for the years ended December 31, 2005,
2004, and 2003, respectively.
78
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Adverse Purchase Commitments |
The Company is contractually obligated to purchase certain
excess inventory, for which there is no alternative use, from
our contract manufacturers. This liability, referred to as
adverse purchase commitments, is provided for in other accrued
liabilities (Note 10). The basis for estimated adverse
purchase commitments are reports received on a quarterly basis
from our 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 liabilities to our 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 adoption of
FIN No. 45 did not have a material effect on the
Companys financial position or results of operations. 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, 2005.
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 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 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. 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
79
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Warranty liability balance, beginning of the year
|
|
$ |
1,719 |
|
|
$ |
2,276 |
|
|
Product warranty accruals
|
|
|
3,244 |
|
|
|
2,731 |
|
|
Adjustments for payments made
|
|
|
(2,839 |
) |
|
|
(3,288 |
) |
|
|
|
|
|
|
|
Warranty liability balance, end of the year
|
|
$ |
2,124 |
|
|
$ |
1,719 |
|
|
|
|
|
|
|
|
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 of approximately
$2.2 million. Although the Company disputes the validity of
the claim it has determined that any likely settlement of this
claim will range from zero to $2.2 million and has
accordingly recorded its current best estimate of the probable
settlement of the matter as an accrual.
|
|
Note 14 |
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Numerator Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, basic
|
|
$ |
15,958 |
|
|
$ |
13,011 |
|
|
$ |
6,010 |
|
Discontinued operations related to Savvi business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(4,679 |
) |
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic
|
|
$ |
15,958 |
|
|
$ |
13,011 |
|
|
$ |
1,331 |
|
|
|
|
|
|
|
|
|
|
|
Numerator Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, basic
|
|
|
15,958 |
|
|
|
13,011 |
|
|
|
6,010 |
|
|
Interest on convertible senior notes, net of tax
benefit(A)
|
|
|
969 |
|
|
|
964 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, diluted
|
|
$ |
16,927 |
|
|
$ |
13,975 |
|
|
$ |
6,126 |
|
|
|
|
|
|
|
|
|
|
|
Net income, basic
|
|
|
15,958 |
|
|
|
13,011 |
|
|
|
1,331 |
|
|
Interest on convertible senior notes, net of tax
benefit(C)
|
|
|
969 |
|
|
|
964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, diluted
|
|
$ |
16,927 |
|
|
$ |
13,975 |
|
|
$ |
1,331 |
|
|
|
|
|
|
|
|
|
|
|
80
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Denominator Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income per share from
continuing operations and net income per share, basic
|
|
|
20,146 |
|
|
|
18,913 |
|
|
|
17,902 |
|
|
|
|
|
|
|
|
|
|
|
Denominator Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income per share from
continuing operations, basic
|
|
|
20,146 |
|
|
|
18,913 |
|
|
|
17,902 |
|
|
Effect of dilutive restricted stock
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options(B)
|
|
|
438 |
|
|
|
667 |
|
|
|
504 |
|
|
Effect of convertible senior notes(A)
|
|
|
4,243 |
|
|
|
4,243 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income from continuing
operations, diluted
|
|
|
24,832 |
|
|
|
23,823 |
|
|
|
18,894 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate net income per share,
basic
|
|
|
20,146 |
|
|
|
18,913 |
|
|
|
17,902 |
|
|
Effect of dilutive restricted stock
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options(B)
|
|
|
438 |
|
|
|
667 |
|
|
|
504 |
|
|
Effect of convertible senior notes(C)
|
|
|
4,243 |
|
|
|
4,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate net income per share,
diluted
|
|
|
24,832 |
|
|
|
23,823 |
|
|
|
18,406 |
|
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.79 |
|
|
$ |
0.69 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.68 |
|
|
$ |
0.59 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.79 |
|
|
$ |
0.69 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.68 |
|
|
$ |
0.59 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
For the years ended December 31, 2005, 2004 and 2003,
interest on the convertible subordinated notes and related
if-converted shares were excluded from the income per share from
continuing operations calculation as the effect would be
anti-dilutive. As of December 31, 2005, 2004 and 2003, the
total number of if-converted shares excluded from the income per
share from continuing operations calculation associated with the
convertible subordinated notes was 117 thousand,
485 thousand and 1.0 million, respectively. The
Company issued 1.375% Senior Convertible Notes with a face
value or principal amount of $100 million in November 2003. |
|
(B) |
For the years ended December 31, 2005, 2004 and 2003,
options amounting to 1.8 million, 2.0 million and
2.3 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. |
|
(C) |
For the years ended December 31, 2005, 2004 and 2003,
interest on the 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, 2005, 2004 and 2003, the total number of
if-converted shares excluded from the net income per share
calculation associated with the convertible subordinated notes
was 117 thousand, 485 thousand and 1.0 million,
respectively. The Company |
81
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
issued 1.375% Senior Convertible Notes with a face value or
principal amount of $100 million in November 2003. For the
year ended December 31, 2003, interest on the convertible
senior notes and related if-converted shares amounting to $116
thousand and 488 thousand shares respectively were excluded from
the net income per share calculation as the effect would be
anti-dilutive. |
Note 15 Income Taxes
The income tax provision consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current payable from continuing operations (refundable):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
2,064 |
|
|
$ |
1,556 |
|
|
$ |
|
|
|
State
|
|
|
198 |
|
|
|
258 |
|
|
|
|
|
|
Foreign
|
|
|
457 |
|
|
|
70 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total current payable
|
|
|
2,719 |
|
|
|
1,884 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred (from continuing operations):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,975 |
) |
|
|
(228 |
) |
|
|
1,701 |
|
|
State
|
|
|
313 |
|
|
|
67 |
|
|
|
(1,701 |
) |
|
Foreign
|
|
|
128 |
|
|
|
1,530 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision from continuing operations
|
|
$ |
1,185 |
|
|
$ |
3,253 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Statutory federal tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) in rates resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
3.4 |
|
|
|
3.4 |
|
|
|
3.4 |
|
|
Goodwill benefit from acquisitions
|
|
|
(1.4 |
) |
|
|
(0.6 |
) |
|
|
(28.5 |
) |
|
Valuation allowance
|
|
|
(11.1 |
) |
|
|
1.8 |
|
|
|
110.5 |
|
|
Taxes on foreign income that differ from U.S. tax rate
|
|
|
(14.3 |
) |
|
|
(12.1 |
) |
|
|
(111.0 |
) |
|
Tax credits
|
|
|
(2.2 |
) |
|
|
(3.9 |
) |
|
|
(12.4 |
) |
|
Loss on disposition of foreign subsidiary
|
|
|
|
|
|
|
|
|
|
|
(31.8 |
) |
|
Foreign base company income
|
|
|
|
|
|
|
|
|
|
|
28.8 |
|
|
Export sale benefit
|
|
|
(2.6 |
) |
|
|
(2.6 |
) |
|
|
3.9 |
|
|
Other
|
|
|
0.1 |
|
|
|
(1.0 |
) |
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
6.9 |
% |
|
|
20.0 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
82
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of deferred taxes consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Accrued warranty
|
|
$ |
815 |
|
|
$ |
659 |
|
|
Inventory
|
|
|
2,986 |
|
|
|
2,761 |
|
|
Restructuring accrual
|
|
|
229 |
|
|
|
519 |
|
|
Net operating loss carryforwards
|
|
|
17,348 |
|
|
|
23,840 |
|
|
Tax credit carryforwards
|
|
|
11,422 |
|
|
|
12,256 |
|
|
Goodwill
|
|
|
|
|
|
|
177 |
|
|
Capitalized research and development
|
|
|
2,301 |
|
|
|
2,416 |
|
|
Other
|
|
|
2,980 |
|
|
|
2,292 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
38,081 |
|
|
|
44,920 |
|
Less: valuation allowance
|
|
|
(6,812 |
) |
|
|
(15,886 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
31,269 |
|
|
|
29,034 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets Microware
|
|
|
(816 |
) |
|
|
(1,594 |
) |
|
Goodwill
|
|
|
(653 |
) |
|
|
|
|
|
Foreign dividend
|
|
|
(767 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,236 |
) |
|
|
(1,594 |
) |
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$ |
29,033 |
|
|
$ |
27,440 |
|
|
|
|
|
|
|
|
The Company has recorded valuation allowances of
$6.8 million and $15.9 million at December 31,
2005 and December 31, 2004, respectively, due to
uncertainty involving utilization of certain net operating loss
and tax credit carryforwards. The decrease in valuation
allowance of $9.1 million for the year ended
December 31, 2005 compared to the year ended
December 31, 2004 is primarily attributable to a projected
increase in future utilization of general business tax credits
and certain net operating loss carryforwards based on estimates
of future taxable income and the implementation of tax planning
strategies.
At December 31, 2005 and 2004, the Company had total
available federal net operating loss carryforwards of
approximately $38.8 million and $54.7 million,
respectively, before valuation allowance. The federal net
operating loss carryforwards expire between 2006 and 2023 and
consist of approximately $14.4 million of consolidated
taxable loss remaining after loss carrybacks to prior years,
$10.3 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 $48.4 million and
$49.9 million at December 31, 2005 and 2004,
respectively, before valuation allowance. The state net
operating loss carryforwards expire between 2006 and 2023. The
Company also had net operating loss carryforwards of
approximately $2.7 million from certain non
U.S. jurisdictions. The non U.S. net operating loss
carryforwards are primarily attributable to Japan, U.K., Germany
and Netherlands, and amount to approximately $327 thousand,
$1.5 million, $823 thousand, and $43 thousand,
respectively. The Japan tax losses expire between 2006 and 2007.
The
83
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Netherlands, 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 $11.8 million at December 31, 2005, to
reduce future income tax liabilities. The federal and state tax
credits expire between 2006 and 2025. The federal tax credit
carryforwards include research and development tax credits of
$2.2 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 October 4, 2004 the Working Families Tax
Relief Act of 2004 was enacted which extended several expired
business related tax breaks, including the research and
development tax credit. Under the Act the research and
development tax credit was retroactively reinstated to
June 30, 2004 and is available through December 31,
2005.
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, 2005 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, 2005 we estimate utilization of the net
deferred tax assets will require that we generate
$67.2 million in taxable income prior to the expiration of
the net operating loss carryforwards.
Pretax book income from domestic operations for the fiscal years
2005, 2004 and 2003 was $9.2 million, $9.7 million,
and ($3.4) million, respectively. Pretax book income from
foreign operations for fiscal years 2005, 2004 and 2003 was
$7.9 million, $6.6 million, and $4.7 million,
respectively.
The Company has indefinitely reinvested approximately
$2.6 million of the undistributed earnings of certain
foreign subsidiaries at December 31, 2005. 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, has declared a total 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 was fully subject to
U.S. taxation. At December 31, 2005, the Company has
provided for a deferred tax liability of $767 thousand on the
remaining $2.0 million of the declared dividend that is to
be paid in 2006.
On October 22, 2004, the President of the United States of
America signed the American Jobs Creation Act of 2004 (the
Act). One of the key provisions of the Act includes
a repeal of the extraterritorial income exclusion. In its place,
the Act provides a relief provision for domestic manufacturers
by providing a new domestic manufacturing deduction. The 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. The Company has completed its
evaluation of the impact of the Act and has concluded not to
repatriate any foreign earnings pursuant to the provisions of
the Act and has determined that due to the reduction of the
Companys domestic manufacturing operations, the impact of
domestic manufacturing deduction was minimal.
The Joint Committee of Taxation has issued a tax clearance
letter to the Company on December 1, 2005 concurring with
the IRS audit results for the tax years 1996 through 2002.
84
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 16 |
Shareholders Equity |
In 2005, the Board of Directors authorized the repurchase of up
to $25 million of outstanding shares of common stock. The
Company currently intends to purchase the stock on the open
market or through privately negotiated transactions. The timing
and size of any stock repurchases are subject to market
conditions, stock prices, cash position and other cash
requirements.
|
|
Note 17 |
Employee Benefit Plans |
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.
On March 1, 2005, the Compensation and Development
Committee of the Board of Directors approved the form of the
restricted stock 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.
The Company recorded no compensation expense related to options
issued under the 1995 Plan and the 2001 Plan for the years ended
December 31, 2005, 2004 and 2003. The Company incurred $199
thousand of stock-based compensation related to the issuance of
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 years ended
December 31, 2004 and 2003. See Note 1
Stock-Based Compensation.
85
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options | |
|
|
Shares | |
|
Outstanding | |
|
|
Available for | |
|
| |
|
|
Grant | |
|
Number | |
|
Average Price | |
|
|
| |
|
| |
|
| |
Balance, December 31, 2002
|
|
|
1,275 |
|
|
|
4,538 |
|
|
$ |
19.59 |
|
|
Authorized
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(838 |
) |
|
|
838 |
|
|
$ |
10.66 |
|
|
Options canceled
|
|
|
1,493 |
|
|
|
(1,493 |
) |
|
$ |
27.12 |
|
|
Options expired
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(177 |
) |
|
$ |
12.61 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the information about stock
options outstanding at December 31, 2005 (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
| |
|
Options Exercisable | |
|
|
|
|
Weighted | |
|
|
|
| |
|
|
Number | |
|
Average | |
|
Weighted | |
|
Number | |
|
Weighted | |
|
|
Outstanding | |
|
Remaining | |
|
Average | |
|
Exercisable | |
|
Average | |
|
|
As of | |
|
Contractual | |
|
Exercise | |
|
As of | |
|
Exercise | |
Range of Exercise Prices |
|
12/31/2005 | |
|
Life | |
|
Price | |
|
12/31/2005 | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 3.79-$ 9.29
|
|
|
542 |
|
|
|
3.96 |
|
|
$ |
5.93 |
|
|
|
532 |
|
|
$ |
5.91 |
|
$ 9.90-$14.05
|
|
|
236 |
|
|
|
3.65 |
|
|
$ |
12.27 |
|
|
|
212 |
|
|
$ |
12.28 |
|
$14.06-$14.23
|
|
|
497 |
|
|
|
6.36 |
|
|
$ |
14.22 |
|
|
|
18 |
|
|
$ |
14.09 |
|
$14.24-$16.87
|
|
|
502 |
|
|
|
5.13 |
|
|
$ |
16.10 |
|
|
|
323 |
|
|
$ |
16.52 |
|
$16.90-$19.12
|
|
|
833 |
|
|
|
5.04 |
|
|
$ |
18.47 |
|
|
|
704 |
|
|
$ |
18.58 |
|
$19.27-$21.36
|
|
|
487 |
|
|
|
3.68 |
|
|
$ |
20.75 |
|
|
|
473 |
|
|
$ |
20.78 |
|
$21.85-$49.91
|
|
|
279 |
|
|
|
2.32 |
|
|
$ |
34.07 |
|
|
|
279 |
|
|
$ |
34.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.79-$49.01
|
|
|
3,376 |
|
|
|
4.56 |
|
|
$ |
16.66 |
|
|
|
2,541 |
|
|
$ |
17.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below summarizes the activities related to the
Companys restricted stock grants (in thousands):
|
|
|
|
|
|
|
|
Restricted | |
|
|
Shares | |
|
|
| |
Balance, December 31, 2004
|
|
|
|
|
|
Shares granted
|
|
|
97 |
|
|
Shares vested
|
|
|
|
|
|
Shares canceled
|
|
|
(2 |
) |
|
|
|
|
Balance, December 31, 2005
|
|
|
95 |
|
|
|
|
|
The Company expects that approximately 32 thousand of the
balance of restricted shares at December 31, 2005 will vest
in each of the years ending December 31, 2006, 2007 and
2008.
|
|
|
Stock Option Exchange Program |
In 2003, the Company completed a shareholder approved stock
option exchange program. Under the exchange offer, eligible
employees had the opportunity to tender for cancellation certain
stock options in exchange for new options to be granted at least
six months and one day after the cancellation of the tendered
options. The Company accepted for cancellation options to
purchase an aggregate of 649,604 shares of its common stock
under the RadiSys Corporation 1995 Stock Incentive Plan and
options to purchase an aggregate of 1,083 shares of its
common stock under the RadiSys Corporation 2001 Nonqualified
Stock Option Plan. Subject to the terms and conditions of the
exchange offer, RadiSys granted new options under its 2001
Nonqualified Stock Option Plan to purchase up to an aggregate of
397,531 shares of its common stock in exchange for the
options surrendered and cancelled in the exchange offer. The
exercise price per share of the new options was $21.28. See
Note 1 Stock-Based Compensation.
In 2004, the Compensation and Development 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. The Company took this action to reduce
the stock-based compensation expense that it will include in net
income after January 1, 2006, the effective date of
SFAS No. 123R. SFAS No. 123R requires
companies to recognize stock-based compensation expense
associated with stock options based on the fair value method.
SFAS No. 123R is effective January 1, 2006.
Included in the pro forma stock-based compensation expense for
2004 is $6.1 million associated with the acceleration, net
of related tax effects. See Note 1
Stock-Based Compensation.
|
|
|
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 (also an Offering) commence on
February 15, May 15, August 15 and November 15 of each
calendar year (also 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
87
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. 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, 2005, 2004 and 2003
the Company issued 391,819, 579,773 and 489,659 shares
under the plan, respectively. At December 31, 2005,
1,577,206 shares are available for issuance under the plan.
See Note 1 Stock-Based Compensation.
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 $792 thousand, $812 thousand and
$752 thousand in 2005, 2004 and 2003, 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 8). Deferred amounts may be
withdrawn by the participant in case of financial hardship as
defined in the plan agreement.
|
|
Note 18 |
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.
88
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Hardware
|
|
$ |
252,180 |
|
|
$ |
234,352 |
|
|
$ |
190,621 |
|
Software royalties and licenses
|
|
|
4,394 |
|
|
|
6,304 |
|
|
|
6,499 |
|
Software maintenance
|
|
|
1,919 |
|
|
|
939 |
|
|
|
798 |
|
Engineering and other services
|
|
|
1,738 |
|
|
|
4,220 |
|
|
|
4,877 |
|
Other
|
|
|
3 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
260,234 |
|
|
$ |
245,824 |
|
|
$ |
202,795 |
|
|
|
|
|
|
|
|
|
|
|
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Communication Networking
|
|
$ |
194,146 |
|
|
$ |
167,458 |
|
|
$ |
136,490 |
|
Commercial Systems
|
|
|
66,088 |
|
|
|
78,366 |
|
|
|
66,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
260,234 |
|
|
$ |
245,824 |
|
|
$ |
202,795 |
|
|
|
|
|
|
|
|
|
|
|
Information about the Companys geographic revenues and
long-lived assets by geographical area is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
80,739 |
|
|
$ |
95,429 |
|
|
$ |
99,300 |
|
Other North America
|
|
|
12,115 |
|
|
|
12,343 |
|
|
|
9,635 |
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
92,854 |
|
|
|
107,772 |
|
|
|
108,935 |
|
Europe, the Middle East and Africa (EMEA)
|
|
|
131,403 |
|
|
|
123,197 |
|
|
|
84,636 |
|
Asia Pacific
|
|
|
35,977 |
|
|
|
14,855 |
|
|
|
9,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
260,234 |
|
|
$ |
245,824 |
|
|
$ |
202,795 |
|
|
|
|
|
|
|
|
|
|
|
89
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Long-lived assets by Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
11,372 |
|
|
$ |
11,630 |
|
|
$ |
14,083 |
|
|
EMEA
|
|
|
170 |
|
|
|
752 |
|
|
|
191 |
|
|
Asia Pacific
|
|
|
2,034 |
|
|
|
1,620 |
|
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
13,576 |
|
|
$ |
14,002 |
|
|
$ |
14,584 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
27,463 |
|
|
$ |
27,521 |
|
|
$ |
27,521 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
2,159 |
|
|
$ |
4,211 |
|
|
$ |
6,437 |
|
|
|
|
|
|
|
|
|
|
|
Two customers accounted for more than 10% of total revenues in
2005, 2004 and 2003. These two customers accounted for the
following percentages of total revenue for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Nokia
|
|
|
36.2% |
|
|
|
28.5% |
|
|
|
19.9% |
|
Nortel
|
|
|
14.3% |
|
|
|
13.7% |
|
|
|
19.4% |
|
As of December 31, 2005 and 2004 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, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Nokia
|
|
|
32.3 |
% |
|
|
32.3 |
% |
Diebold
|
|
|
* |
|
|
|
12.9 |
% |
Nortel
|
|
|
12.9 |
% |
|
|
* |
|
|
|
* |
Accounted for less than 10% of accounts receivable. |
|
|
Note 19 |
Loss on Building Sale |
In 2003, the Company sold the Des Moines, Iowa facility to a
third party for $8.5 million. As a result, the Company
disposed of $8.8 million of net book value associated with
building and other office equipment and paid the mortgage
payable in full. In addition, the Company incurred a prepayment
penalty on the mortgage payable amounting to $1.1 million
and incurred additional fees associated with the sale of
approximately $353 thousand. The sale resulted in a loss of
$1.8 million recorded in Income from operations in the
Consolidated Statement of Operations for the year ended
December 31, 2003.
|
|
Note 20 |
Legal Proceedings |
In the normal course of business, the Company becomes involved
in litigation. As of December 31, 2005, 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.
90
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 21 |
Discontinued Operations |
On March 14, 2003, the Company completed the sale of its
Savvi business resulting in a loss of $4.3 million. As a
result of this transaction, the Company recorded
$4.1 million in write-offs of goodwill and intangible
assets. The total $4.7 million loss from discontinued
operations recorded in the three months ended March 31,
2003 includes the $4.3 million loss on the sale of the
Savvi business as well as $393 thousand of net losses incurred
by the business unit during the quarter, before the business
unit was sold. Savvi net revenues are included in the loss from
discontinued operations and amounted to $9 thousand for the year
ended December 31, 2003. For the year ended
December 31, 2003, a total of $4.7 million, or
$0.26 per weighted average share outstanding-basic or
$0.25 per weighted average share outstanding-diluted, was
reclassified from continuing operations to loss from
discontinued operations, net of tax benefit.
|
|
Note 22 |
Related Parties |
Ken J. Bradley is a member of our Board of Directors and from
January 2003 through January 2005 was the Chief Executive
Officer of CoreSim, Inc., a company specializing in advanced
systems design analysis and product lifecycle management.
RadiSys incurred expenses of approximately $206 thousand and
$329 thousand, respectively, for 2005 and 2004 from CoreSim,
Inc. Amounts payable to CoreSim, Inc. at December 31, 2005
and 2004, were zero and $96 thousand, respectively.
|
|
Note 23 |
Subsequent Events |
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 their buildings in Hillsboro, Oregon
(DC3 building) to its other building located in
Hillsboro, Oregon and other foreign facilities.
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 value of $2.1 million which included land with
value of $0.8 million, building and building improvements
with net value of $1.3 million, and machinery and equipment
with net value of $38 thousand. The Company classified this
facility in net assets held for sale as of January 31, 2006.
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
Securities Exchange Act of 1934 (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,
2005, 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.
Managements Report on Internal Control Over Financial
reporting appears on page 43 hereof. KPMG LLPs
attestation report on managements assessment of the
Companys internal control over financial reporting appears
on page 44 hereof.
|
|
Item 9B. |
Other Information |
None.
92
PART III
The Registrant will file its definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 16, 2006,
pursuant to Regulation 14A of the Securities Exchange Act
of 1934 (the Proxy Statement), not later than
120 days after the end of the fiscal year covered by this
Report. This Report incorporates by reference specified
information included in the Proxy Statement.
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The information with respect to our directors and officers is
included in our Proxy Statement and is incorporated herein by
reference.
|
|
|
Audit Committee Financial Expert |
Our Board of Directors has determined that each of C. Scott
Gibson, Kevin C. Melia and Carl W. Neun are audit committee
financial experts as defined by Item 401(h) of
Regulation S-K of
the Securities Exchange Act of 1934, as amended (the
Exchange Act) and are independent within the meaning
of Item 7(d)(3)(iv) of Schedule 14A of the Exchange
Act. C. Scott Gibson qualifies as an audit committee financial
expert by virtue of his service on our audit committee since
1992, the audit committee of Pixelworks, Inc. since 2002, and
past service on the audit committees of Inference Corp. and
Integrated Measurement Systems. Additionally, Mr. Gibson
received an M.B.A. in Finance from the University of Illinois in
1976 and served as CFO and Senior VP Operations for Sequent
Computer Systems from 1983 to 1984. Further, from 1985 to March
1992, the CFO of Sequent Computer Systems reported to
Mr. Gibson.
We have a separately designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the
Exchange Act. The members of the Audit Committee are C. Scott
Gibson, Kevin C. Melia, and Carl W. Neun.
We have adopted a code of business conduct and ethics for
directors, officers (including the principal executive officer,
principal financial officer and controller) and employees, known
as the Code of Conduct. The Code of Conduct is available on our
website at http://www.radisys.com or by request from:
|
|
|
RadiSys Investor Relations |
|
5445 NE Dawson Creek Drive |
|
Hillsboro, OR 97124 |
|
Phone: (503) 615-RSYS |
|
Email: investor.relations@radisys.com |
We intend to disclose any amendments to, or waivers from, any
provisions of our code of conduct by posting such information on
our website or by filing a
form 8-K within
four business days following the date of such amendment or
waiver.
|
|
|
Corporate Governance Guidelines |
We adopted Corporate Governance Guidelines, which are available
on our website at http://www.radisys.com. Shareholders may
request a free copy of the Corporate Governance Guidelines from
the address and phone numbers set forth above under
Code of Ethics.
93
|
|
|
Section 16(a) Beneficial Ownership Reporting
Compliance |
Information with respect to Section 16 (a) of the
Securities Exchange Act is included under Section 16
(a) Beneficial Ownership Reporting Compliance in the
Companys 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.
On February 28, 2006, the Company entered into an Executive
Change of Control Agreement with Christian Lepiane providing for
severance pay in a cash amount equal to nine months of
Mr. Lepianes annual base pay at the rate in effect
immediately before the date of termination. Mr. Lepiane is
entitled to receive the severance pay if his employment with the
Company is terminated by the Company (other than for cause,
death or disability), or a requirement to accept a position
greater than 25 miles from his current work location,
within three months before, or within 12 months after, a
change in control of the Company.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
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,
2005. All outstanding awards relate to the Companys common
stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of | |
|
|
|
|
|
|
Common Stock to | |
|
|
|
Number of Shares of | |
|
|
be Issued Upon | |
|
Weighted Average | |
|
Common Stock | |
|
|
Exercise of | |
|
Exercise Price of | |
|
Remaining Available | |
|
|
Outstanding Options | |
|
Outstanding Options | |
|
for Future Issuance | |
|
|
| |
|
| |
|
| |
Equity compensation plan approved by security holders
|
|
|
1,799,149 |
(A) |
|
$ |
17.10 |
|
|
|
3,077,061 |
(B) |
Equity compensation plan not approved by security holders
|
|
|
1,577,023 |
|
|
|
16.15 |
|
|
|
45,074 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,376,172 |
|
|
$ |
16.66 |
|
|
|
3,122,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes 4,888 shares subject to employee stock options
assumed in the merger with Texas Micro Inc. with weighted
average exercise prices of $11.26. |
|
(B) |
|
Includes 1,577,206 of securities authorized and available for
issuance in connection with the RadiSys Corporation 1996
Employee Stock Purchase Plan. |
Description of Equity Compensation Plans Not Adopted by
Shareholders
2001 Nonqualified Stock Option Plan
In February 2001, we established the 2001 Nonqualified Stock
Option Plan, under which 2,250,000 shares of our common
stock were reserved as of December 31, 2005. 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 us to
94
attract and retain the services of selected employees. 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 our 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.
Additional information required by this item is included in our
Proxy Statement for the Annual Meeting of Shareholders to be
held May 16, 2006 and is incorporated herein by reference.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information with respect to certain relationships and
related transactions is included under Certain
Relationships and Related Transactions in the
Companys Proxy Statement and is incorporated herein by
reference.
|
|
Item 14. |
Principal Accountant 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. | |
|
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
48 |
|
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
|
|
|
52 |
|
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
|
|
53 |
|
Consolidated Statements of Changes in Shareholders Equity
for the years ended December 31, 2005, 2004 and 2003
|
|
|
54 |
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
|
|
55 |
|
Notes to the Consolidated Financial Statements
|
|
|
57 |
|
(a)(2) Financial Statement Schedule
|
|
|
|
|
|
|
Form 10-K | |
|
|
Page No. | |
|
|
| |
Schedule II Valuation and Qualifying Accounts
|
|
|
98 |
|
(a)(3) Exhibits
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
3 |
.1 |
|
Second Restated Articles of Incorporation and amendments
thereto. Incorporated by reference from Exhibit 3.1 to the
Companys Registration Statement on Form S-1
(Registration No. 33-95892) (S-1), and by
reference from Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 2000, SEC File No. 0-26844. |
|
3 |
.2 |
|
Restated Bylaws. Incorporated by reference from Exhibit 4.3
to the Companys Registration Statement on Form S-8
(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 (No. 333-49092). |
|
4 |
.2 |
|
Form of Note. Incorporated by reference from Exhibit 4.5 to
the Companys Registration Statement on Form S-3
(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 (No. 333-111547) filed
on December 24, 2003. |
|
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, dated July 31, 2003, SEC file
No. 005-49160. |
|
*10 |
.2 |
|
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, dated July 31, 2003, SEC file
No. 005-49160. |
|
*10 |
.3 |
|
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, SEC File
No. 0-26844. |
|
*10 |
.4 |
|
Form of Incentive Stock Option Agreement. Incorporated by
reference from Exhibit 10.3 to the Form S-1. |
|
*10 |
.5 |
|
Form of Non-Statutory Stock Option Agreement. Incorporated by
reference from Exhibit 10.4 to the Form S-1. |
96
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
*10 |
.6 |
|
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, SEC File No. 0-26844. |
|
*10 |
.7 |
|
Executive Change of Control Agreement with Julia A. Harper dated
October 3, 2001 between the Company and Julia A. Harper.
Incorporated by reference from Exhibit 10.12 to the
Companys Annual Report on Form 10-K for the year
ended December 31, 2001, SEC File No. 0-26844. |
|
*10 |
.8 |
|
Executive Change of Control Agreement dated October 15,
2002 between the Company and Scott C. Grout. Incorporated by
reference from Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 2002, SEC File No. 0-26844. |
|
10 |
.9 |
|
Revolving line of credit agreement between the Company and
U.S. Bank National Association dated March 19, 2002,
related promissory note dated March 19, 2002, related
interest rate rider dated March 19, 2002 and related
collateral pledge agreement dated March 19, 2002.
Incorporated by reference from Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, SEC File No. 0-26844. |
|
10 |
.10 |
|
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, SEC File
No. 0-26844. |
|
10 |
.11 |
|
Amendment dated March 20, 2003, to the revolving line of
credit agreement between the Company and U.S. Bank National
Association dated March 19, 2002 and related revolving
promissory note. Incorporated by reference from
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q for the quarterly period ended March 31,
2003, SEC File No. 0-26844. |
|
*10 |
.12 |
|
Form of Indemnity Agreement. Incorporated by reference from
Exhibit 10.17 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003, SEC
file No. 0-26844. |
|
10 |
.13 |
|
Amendment dated March 30, 2004 to the revolving line of
credit agreement between the Company and U.S. Bank National
Association dated March 19, 2002 and related promissory
note. Incorporated by reference from Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004, SEC file
No. 0-26844. |
|
*10 |
.14 |
|
Executive Change of Control Agreement dated March 7, 2005
between the Company and Keith Lambert. Incorporated by reference
to the Companys Annual Report on Form 10-K for the
year ended December 31, 2004, SEC file No. 0-26844. |
|
*10 |
.15 |
|
Form of Restricted Stock Agreement. |
|
*10 |
.16 |
|
Executive Change of Control Agreement dated March 1, 2006
between the Company and Christian Lepiane. Incorporated by
reference to the Companys Annual Report on Form 10-K
for the year ended December 31, 2004, SEC file
No. 0-26844. |
|
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 |
(b) See (a)(3) above.
(c) See (a)(2) above.
97
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, 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 |
|
For the year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
2,128 |
|
|
$ |
|
|
|
$ |
(827 |
) |
|
$ |
|
|
|
$ |
1,301 |
|
|
Obsolescence reserve
|
|
|
9,958 |
|
|
|
4,297 |
|
|
|
(4,764 |
) |
|
|
|
|
|
|
9,491 |
|
|
Tax valuation allowance
|
|
|
16,176 |
|
|
|
1,234 |
|
|
|
|
|
|
|
|
|
|
|
17,410 |
|
98
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.
|
|
|
|
|
Scott C. Grout |
|
President and |
|
Chief Executive Officer |
Dated: March 3, 2006
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, 2006.
|
|
|
|
|
Signature |
|
Title |
|
|
|
|
/s/ SCOTT C. GROUT
Scott C. Grout |
|
President, Chief Executive Officer and Director (Principal
Executive Officer) |
|
/s/ JULIA A. HARPER
Julia A. Harper |
|
Vice President of Finance and Administration and 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 |
99
|
|
|
|
|
Signature |
|
Title |
|
|
|
|
/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 |
|
|
|
|
3 |
.1 |
|
Second Restated Articles of Incorporation and amendments
thereto. Incorporated by reference from Exhibit 3.1 to the
Companys Registration Statement on Form S-1
(Registration No. 33-95892) (S-1), and by
reference from Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 2000, SEC File No. 0-26844. |
|
3 |
.2 |
|
Restated Bylaws. Incorporated by reference from Exhibit 4.3
to the Companys Registration Statement on Form S-8
(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 (No. 333-49092). |
|
4 |
.2 |
|
Form of Note. Incorporated by reference from Exhibit 4.5 to
the Companys Registration Statement on Form S-3
(No. 333-49092). |
|
4 |
.3 |
|
Registration Rights Agreement, dated November 13, 2003,
among the Company, Credit Suisse First Boston LLC and Banc of
America Securities LLC. Incorporated by reference from
Exhibit 4.1 to the Companys Current Report on
Form 8-K dated November 19, 2003, SEC File
No. 0-26844. |
|
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 (No. 333-111547) filed
on December 24, 2003. |
|
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, dated July 31, 2003, SEC file
No. 005-49160. |
|
*10 |
.2 |
|
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, dated July 31, 2003, SEC file
No. 005-49160. |
|
*10 |
.3 |
|
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, SEC File
No. 0-26844. |
|
*10 |
.4 |
|
Form of Incentive Stock Option Agreement. Incorporated by
reference from Exhibit 10.3 to the Form S-1. |
|
*10 |
.5 |
|
Form of Non-Statutory Stock Option Agreement. Incorporated by
reference from Exhibit 10.4 to the Form S-1. |
|
*10 |
.6 |
|
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, SEC File No. 0-26844. |
|
*10 |
.7 |
|
Executive Change of Control Agreement with Julia A. Harper dated
October 3, 2001 between the Company and Julia A. Harper.
Incorporated by reference from Exhibit 10.12 to the
Companys Annual Report on Form 10-K for the year
ended December 31, 2001, SEC File No. 0-26844. |
|
*10 |
.8 |
|
Executive Change of Control Agreement dated October 15,
2002 between the Company and Scott C. Grout. Incorporated by
reference from Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 2002, SEC File No. 0-26844. |
|
10 |
.9 |
|
Revolving line of credit agreement between the Company and
U.S. Bank National Association dated March 19, 2002,
related promissory note dated March 19, 2002, related
interest rate rider dated March 19, 2002 and related
collateral pledge agreement dated March 19, 2002.
Incorporated by reference from Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, SEC File No. 0-26844. |
|
10 |
.10 |
|
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, SEC File
No. 0-26844. |
101
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
10 |
.11 |
|
Amendment dated March 20, 2003, to the revolving line of
credit agreement between the Company and U.S. Bank National
Association dated March 19, 2002 and related revolving
promissory note. Incorporated by reference from
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q for the quarterly period ended March 31,
2003, SEC File No. 0-26844. |
|
*10 |
.12 |
|
Form of Indemnity Agreement. Incorporated by reference from
Exhibit 10.17 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003, SEC
file No. 0-26844. |
|
10 |
.13 |
|
Amendment dated March 30, 2004 to the revolving line of
credit agreement between the Company and U.S. Bank National
Association dated March 19, 2002 and related promissory
note. Incorporated by reference from Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004, SEC file
No. 0-26844. |
|
*10 |
.14 |
|
Executive Change of Control Agreement dated March 7, 2005
between the Company and Keith Lambert. Incorporated by reference
to the Companys Annual Report on Form 10-K for the
year ended December 31, 2004, SEC file No. 0-26844. |
|
*10 |
.15 |
|
Form of Restricted Stock Agreement. |
|
*10 |
.16 |
|
Executive Change of Control Agreement dated March 1, 2006
between the Company and Christian Lepiane. Incorporated by
reference to the Companys Annual Report on Form 10-K
for the year ended December 31, 2004, SEC file
No. 0-26844. |
|
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 |
102