e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-26844
RADISYS CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
OREGON
|
|
93-0945232 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
Incorporation or Organization)
|
|
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)
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 whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act) Yes þ No 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
Number of shares of Common Stock outstanding as of November 3, 2005: 20,584,810
RADISYS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenues |
|
$ |
74,856 |
|
|
$ |
61,746 |
|
|
$ |
198,329 |
|
|
$ |
183,114 |
|
Cost of sales |
|
|
53,141 |
|
|
|
41,660 |
|
|
|
138,673 |
|
|
|
124,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
21,715 |
|
|
|
20,086 |
|
|
|
59,656 |
|
|
|
58,926 |
|
Research and development |
|
|
7,390 |
|
|
|
7,045 |
|
|
|
22,213 |
|
|
|
20,524 |
|
Selling, general, and administrative |
|
|
7,613 |
|
|
|
7,722 |
|
|
|
22,575 |
|
|
|
23,083 |
|
Intangible assets amortization |
|
|
513 |
|
|
|
515 |
|
|
|
1,539 |
|
|
|
1,712 |
|
Restructuring and other charges (reversals) |
|
|
(127 |
) |
|
|
428 |
|
|
|
1,001 |
|
|
|
(430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
6,326 |
|
|
|
4,376 |
|
|
|
12,328 |
|
|
|
14,037 |
|
Loss on repurchase of convertible subordinated notes |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(387 |
) |
Interest expense |
|
|
(527 |
) |
|
|
(545 |
) |
|
|
(1,596 |
) |
|
|
(3,020 |
) |
Interest income |
|
|
1,750 |
|
|
|
802 |
|
|
|
4,320 |
|
|
|
2,430 |
|
Other expense, net |
|
|
(147 |
) |
|
|
(289 |
) |
|
|
(609 |
) |
|
|
(238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
7,402 |
|
|
|
4,344 |
|
|
|
14,439 |
|
|
|
12,822 |
|
Income tax provision |
|
|
1,480 |
|
|
|
524 |
|
|
|
3,366 |
|
|
|
2,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,922 |
|
|
$ |
3,820 |
|
|
$ |
11,073 |
|
|
$ |
10,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.55 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.25 |
|
|
$ |
0.17 |
|
|
$ |
0.48 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
20,266 |
|
|
|
19,032 |
|
|
|
20,012 |
|
|
|
18,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
25,030 |
|
|
|
23,775 |
|
|
|
24,702 |
|
|
|
23,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
3
RADISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
83,746 |
|
|
$ |
80,566 |
|
Short-term investments, net |
|
|
141,541 |
|
|
|
78,303 |
|
Accounts receivable, net |
|
|
47,840 |
|
|
|
42,902 |
|
Other receivables |
|
|
4,002 |
|
|
|
2,808 |
|
Inventories, net |
|
|
18,755 |
|
|
|
22,154 |
|
Other current assets |
|
|
1,657 |
|
|
|
2,675 |
|
Deferred tax assets |
|
|
4,216 |
|
|
|
4,216 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
301,757 |
|
|
|
233,624 |
|
Property and equipment, net |
|
|
13,725 |
|
|
|
14,002 |
|
Goodwill |
|
|
27,521 |
|
|
|
27,521 |
|
Intangible assets, net |
|
|
2,672 |
|
|
|
4,211 |
|
Long-term investments |
|
|
|
|
|
|
39,750 |
|
Long-term deferred tax assets |
|
|
22,729 |
|
|
|
23,224 |
|
Other assets |
|
|
3,760 |
|
|
|
2,906 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
372,164 |
|
|
$ |
345,238 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
40,494 |
|
|
$ |
31,585 |
|
Accrued wages and bonuses |
|
|
4,251 |
|
|
|
5,626 |
|
Accrued interest payable |
|
|
577 |
|
|
|
378 |
|
Accrued restructuring |
|
|
825 |
|
|
|
1,569 |
|
Other accrued liabilities |
|
|
8,097 |
|
|
|
7,832 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
54,244 |
|
|
|
46,990 |
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Convertible senior notes, net |
|
|
97,246 |
|
|
|
97,148 |
|
Convertible subordinated notes, net |
|
|
8,787 |
|
|
|
9,867 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
106,033 |
|
|
|
107,015 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
160,277 |
|
|
|
154,005 |
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock $.01 par value, 10,000 shares authorized; none issued or outstanding |
|
|
|
|
|
|
|
|
Common stock no par value, 100,000 shares authorized; 20,544 and 19,655 shares issued and outstanding at September 30, 2005 and December 31, 2004 |
|
|
192,486 |
|
|
|
182,705 |
|
Retained earnings |
|
|
15,390 |
|
|
|
4,317 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Cumulative translation adjustments |
|
|
4,011 |
|
|
|
4,211 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
211,887 |
|
|
|
191,233 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
372,164 |
|
|
$ |
345,238 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
4
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
Total other |
|
|
|
Common Stock |
|
|
translation |
|
|
Retained |
|
|
|
|
|
|
comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
adjustments(1) |
|
|
earnings |
|
|
Total |
|
|
income (2) |
|
Balances, December 31, 2004 |
|
|
19,655 |
|
|
$ |
182,705 |
|
|
$ |
4,211 |
|
|
$ |
4,317 |
|
|
$ |
191,233 |
|
|
|
|
|
Shares issued pursuant to
benefit plans |
|
|
824 |
|
|
|
7,453 |
|
|
|
|
|
|
|
|
|
|
|
7,453 |
|
|
$ |
|
|
Stock-based compensation
associated with restricted
stock |
|
|
65 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
|
|
Stock-based compensation
associated with the issuance
of stock options to a
consultant |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
Tax benefit associated with
stock-based benefit plans |
|
|
|
|
|
|
2,196 |
|
|
|
|
|
|
|
|
|
|
|
2,196 |
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
(200 |
) |
|
|
(200 |
) |
Net income for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,073 |
|
|
|
11,073 |
|
|
|
11,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2005 |
|
|
20,544 |
|
|
$ |
192,486 |
|
|
$ |
4,011 |
|
|
$ |
15,390 |
|
|
$ |
211,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, for
the nine months ended
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income taxes are not provided for foreign currency translation adjustments. |
|
(2) |
|
For the three months ended September 30, 2005, comprehensive income amounted to $6.0 million
and consisted of the net income for the period of $5.9 million and net gains from translation
adjustments of $30 thousand. For the three months ended September 30, 2004, comprehensive
income amounted to $4.1 million and consisted of the net income for the period of $3.8 million
and net gains from translation adjustments of $270 thousand. For the nine months ended
September 30, 2005, comprehensive income amounted to $10.9 million and consisted of the net
income for the period of $11.1 million and net losses from translation adjustments of $200
thousand. For the nine months ended September 30, 2004, comprehensive income amounted to
$10.1 million and consisted of net income for the period of $10.2 million and net losses from
translation adjustments of $97 thousand. |
The accompanying notes are an integral part of these financial statements.
5
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,073 |
|
|
$ |
10,175 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,087 |
|
|
|
5,746 |
|
Provision for inventory reserves |
|
|
2,847 |
|
|
|
2,106 |
|
Non-cash restructuring charges (adjustments) |
|
|
(188 |
) |
|
|
(858 |
) |
Non-cash interest expense |
|
|
183 |
|
|
|
277 |
|
Non-cash amortization of (discount) premium on investments |
|
|
(39 |
) |
|
|
1,074 |
|
Loss (Gain) on disposal of property and equipment |
|
|
1 |
|
|
|
(20 |
) |
Loss on early extinguishments of convertible subordinated notes |
|
|
4 |
|
|
|
387 |
|
Deferred income taxes |
|
|
495 |
|
|
|
927 |
|
Stock-based compensation expense |
|
|
131 |
|
|
|
788 |
|
Tax benefit of stock-based benefit plans |
|
|
2,196 |
|
|
|
1,890 |
|
Other |
|
|
(509 |
) |
|
|
37 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(4,991 |
) |
|
|
(8,760 |
) |
Other receivables |
|
|
(1,194 |
) |
|
|
(1,773 |
) |
Inventories |
|
|
552 |
|
|
|
2,885 |
|
Other current assets |
|
|
1,174 |
|
|
|
540 |
|
Accounts payable |
|
|
8,934 |
|
|
|
7,177 |
|
Accrued restructuring |
|
|
(507 |
) |
|
|
(1,268 |
) |
Accrued interest payable |
|
|
199 |
|
|
|
(993 |
) |
Accrued wages and bonuses |
|
|
(1,329 |
) |
|
|
(364 |
) |
Other accrued liabilities |
|
|
292 |
|
|
|
(984 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
25,411 |
|
|
|
18,989 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from held-to-maturity investments |
|
|
45,600 |
|
|
|
43,695 |
|
Purchase of held-to-maturity investments |
|
|
(36,499 |
) |
|
|
(43,779 |
) |
Proceeds from sale of maturity of auction rate securities |
|
|
29,400 |
|
|
|
|
|
Purchase of auction rate securities |
|
|
(61,950 |
) |
|
|
|
|
Capital expenditures |
|
|
(4,218 |
) |
|
|
(3,379 |
) |
Other |
|
|
(29 |
) |
|
|
(556 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(27,696 |
) |
|
|
(4,019 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Early extinguishments of convertible subordinated notes |
|
|
(1,115 |
) |
|
|
(58,168 |
) |
Borrowings under revolving line of credit |
|
|
|
|
|
|
13,000 |
|
Repayments on revolving line of credit |
|
|
|
|
|
|
(13,000 |
) |
Proceeds from issuance of Common Stock |
|
|
7,453 |
|
|
|
7,804 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
6,338 |
|
|
|
(50,364 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(873 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,180 |
|
|
|
(35,501 |
) |
Cash and cash equivalents, beginning of period |
|
|
80,566 |
|
|
|
149,925 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
83,746 |
|
|
$ |
114,424 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
6
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Significant Accounting Policies
RadiSys Corporation (the Company) has adhered to the accounting policies set forth in its
Annual Report on Form 10-K for the year ended December 31, 2004 in preparing the accompanying
interim Consolidated Financial Statements. The preparation of these statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
The financial information included herein reflects all normal recurring adjustments that are,
in the opinion of management, necessary for a fair presentation of the results for interim periods.
For the three and nine month periods ended September 30, 2005, there have been no changes to
these accounting policies.
Reclassifications
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 or
shareholders equity.
Inventory Reserves
The Company records the provision for inventory reserves for estimated obsolete or
unmarketable inventories as the difference between the cost of inventories and the estimated net
realizable value based upon assumptions about future demand and market conditions. Factors
influencing the provision include: changes in demand, rapid technological changes, product life
cycle and development plans, component cost trends, product pricing, regulatory requirements
effecting components, and physical deterioration. If actual market conditions are less favorable
than those projected by management additional provisions for inventory reserves may be required.
The Companys estimate for the provision is based on the assumption that the Companys customers
comply with their current contractual obligations. The Company provides long-life support to its
customers and therefore the Company has material levels of customer specific inventory. If the
Companys customers experience a financial hardship or if the Company experiences unplanned
cancellations of customer contracts, the current provision for the inventory reserves may be
inadequate. Additionally, the Company may incur additional expenses associated with any
non-cancelable purchase obligations to our suppliers if they provide customer-specific components.
Adverse Purchase Commitments
The Company is contractually obligated to reimburse its contract manufacturers for the cost of
excess inventory used in the manufacture of the Companys products, for which there is no
alternative use. As the Company continues to execute its 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 the Companys contract manufacturers. Increases to this liability are charged
to cost of goods sold. When and if the Company takes possession of inventory reserved for in this
liability, the liability is transferred from other liabilities to our excess and obsolete inventory
reserve. 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
$842 thousand and $485 thousand at September 30, 2005 and December 31, 2004, respectively. For the
nine months ended September 30, 2005 and 2004 the Company recorded a net provision for adverse
purchase commitments of $555 thousand and $289 thousand, respectively.
Accrued Restructuring and Other Charges
In July 2002, the Financial Accounting Standard Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 146 Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires that liabilities for costs associated with exit or disposal
activities be recognized and measured initially at fair value in the period in which the
liabilities are incurred. For the nine months ended September 30, 2005 and 2004 the Company
recorded non-severance related restructuring and
7
other charges in accordance with the provisions of SFAS No. 146. 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.
Prior to the year ended December 31, 2003, the Company recorded restructuring charges
including employee termination and related costs, costs related to leased facilities, losses on
impairment of fixed assets and capitalized software and other accounting and legal fees. Employee
termination and related costs were previously recorded in accordance with the provisions of
Emerging Issues Task Force No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. 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.
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. As a result of the Companys insurance policy coverage, 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 September 30, 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 specific period of time ranging from 12 to 15 months. The warranty
provision is based on historical experience by product family. The Company engages in extensive
product quality programs and processes, including actively monitoring and evaluating the quality of
its components suppliers; however, ongoing failure rates, material usage and service delivery costs
incurred in correcting product failure, as well as specific product class failures out of the
Companys baseline experience affect the estimated warranty obligation. If actual product failure
rates, material usage or service delivery costs differ from estimates, revisions to the estimated
warranty liability would be required.
8
The following is a summary of the change in the Companys warranty liability for the nine
months ended September 30, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
Warranty liability balance, beginning of the period |
|
$ |
1,719 |
|
|
$ |
2,276 |
|
Product warranty accruals |
|
|
2,360 |
|
|
|
1,899 |
|
Utilization of accrual |
|
|
(2,188 |
) |
|
|
(2,490 |
) |
|
|
|
|
|
|
|
Warranty liability balance, end of the period |
|
$ |
1,891 |
|
|
$ |
1,685 |
|
|
|
|
|
|
|
|
The warranty liability balance is included in other accrued liabilities in the accompanying
Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004. The Company offers
fixed price support or maintenance contracts to some customers. Revenues from fixed price support
or maintenance contracts were not significant to the Companys operations for the periods reported.
Stock-based Compensation
The Company accounts for its stock-based compensation plans using the intrinsic value method
and provides pro forma disclosures of net income and net income per common share as if the fair
value method had been applied in measuring compensation expense. Equity instruments are granted to
employees, directors, and consultants in certain instances, as defined in the respective plan
agreements.
Had the Company accounted for these plans under the fair value method, net income and pro
forma net income per share would have been reported as follows (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
5,922 |
|
|
$ |
3,820 |
|
|
$ |
11,073 |
|
|
$ |
10,175 |
|
Add: Stock-based
compensation
expense included
in reported net
income, net of
related tax
effects |
|
|
62 |
|
|
|
157 |
|
|
|
81 |
|
|
|
486 |
|
Deduct: Stock-based
compensation
expense
determined under
fair value method
for all awards,
net of related
tax effects |
|
|
(904 |
) |
|
|
(1,414 |
) |
|
|
(2,350 |
) |
|
|
(4,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
5,080 |
|
|
$ |
2,563 |
|
|
$ |
8,804 |
|
|
$ |
5,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.55 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.25 |
|
|
$ |
0.17 |
|
|
$ |
0.48 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic |
|
$ |
0.25 |
|
|
$ |
0.13 |
|
|
$ |
0.44 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted |
|
$ |
0.21 |
|
|
$ |
0.13 |
|
|
$ |
0.39 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine month periods ended September 30, 2005, the Company incurred $100
thousand and $131 thousand of stock-based compensation, respectively, associated with the issuance
of stock options to a consultant and restricted stock. See note 10. During the three and nine
month periods ended September 30, 2004, the Company incurred $255 thousand and $788 thousand of
stock-based compensation expense, respectively. The stock-based compensation expense in 2004 was
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 were 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) 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 is 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 is calculated as the difference between $8.42 and $5.48.
9
The Company recognized stock-based compensation expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Cost of sales |
|
$ |
6 |
|
|
$ |
101 |
|
|
$ |
10 |
|
|
$ |
182 |
|
Research and development |
|
|
67 |
|
|
|
92 |
|
|
|
80 |
|
|
|
343 |
|
Selling, general and administrative |
|
|
27 |
|
|
|
62 |
|
|
|
41 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100 |
|
|
$ |
255 |
|
|
$ |
131 |
|
|
$ |
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 SFAS 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 income tax expense and deferred tax liabilities. 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 SFAS No. 109. the Company expects to make its
repatriation determination by the end of fiscal 2005. Accordingly, as provided for in FSP 109-2,
the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation
provisions of the Jobs Act.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised
2004), Share-Based Payment (SFAS 123R). SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values. The effective date for the Company is the beginning of the first fiscal
quarter of 2006. Effective November 12, 2004, RadiSys accelerated the vesting of outstanding stock
options with an option price greater than $15.99 in anticipation of implementation of Statement No.
123R. On November 12, 2004 the closing price of the Companys Common Stock was $14.23. The
vesting of stock options held by Board of Directors of the Company were not accelerated. The
acceleration of vesting was done for the purpose of avoiding future expense associated with any
unvested stock options granted prior to the effective date of Statement No. 123R. If we were to
continue to use the fair value method currently used for reporting pro forma disclosures of net
income (loss) and net income (loss) per common share, we estimate a reduction in stock-based
compensation expense associated with the acceleration of approximately $3.7 million for the year
ended December 31, 2006.
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 SFAS 123R on January 1, 2006 will have a material impact on RadiSys consolidated results of
operations and earnings per share. The Company has not yet determined the method of adoption or the
effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts
that are similar to the current pro forma disclosures under SFAS 123.
The following recent accounting pronouncements either did not have a material impact on the
Company 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 AssetsAn Amendment of APB Opinion No. 29, Accounting
for Nonmonetary Transactions. |
|
|
|
|
FSP No. 106-2 (FSP 106-2), Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Act) |
|
|
|
|
FSP No. 46(R)-5, Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities
|
|
|
|
|
FASB Interpretation No. 47 . Accounting for
Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143 |
10
In November 2004, the FASB issued SFAS No. 151, Inventory CostsAn 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 the Company in the first quarter of fiscal 2006. The Company adopted SFAS 151 during the third
of 2005 and currently costs all inventory based on the Companys normal production capacity. The
adoption of SFAS 151 in the third quarter of 2005 resulted in a slightly lower inventory valuation
than had the Company valued inventory based on past practices.
Note 2 Investments
Short-term and long-term investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Short-term held-to-maturity
investments, including unamortized
discount of $9 and premium of $103,
respectively |
|
$ |
47,991 |
|
|
$ |
17,303 |
|
|
|
|
|
|
|
|
Short-term available-for-sale investments |
|
$ |
93,550 |
|
|
$ |
61,000 |
|
|
|
|
|
|
|
|
Long-term held-to-maturity investments* |
|
$ |
|
|
|
$ |
39,750 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Long term investments were purchased at par value and therefore there is no discount or
premium associated with these investments. |
The Company invests excess cash in debt instruments of the U.S. Government and its agencies,
those of high-quality corporate issuers and municipalities. The Companys investments in the debt
instruments of municipalities primarily consist of investments in auction rate securities. Auction
rate securities 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 three months ended September 30, 2005 and 2004, the Company did not recognize any gains or
losses on the sales of available-for-sale investments as the fair value of these investments
approximated there carrying value. The Company incurred no unrealized gains or losses on
investments classified as available-for-sale as of September 30, 2005 or December 31, 2004. 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 September 30, 2005, the Company was in
compliance with its investment policy.
Note 3 Accounts Receivable and Other Receivables
Accounts receivable consists of trade accounts receivable. Accounts receivable balances
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Accounts receivable, gross |
|
$ |
48,740 |
|
|
$ |
43,790 |
|
Less: allowance for doubtful accounts |
|
|
(900 |
) |
|
|
(888 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
47,840 |
|
|
$ |
42,902 |
|
|
|
|
|
|
|
|
The Company recorded no provisions for allowance for doubtful accounts during the nine months
ended September 30, 2005 and 2004.
As of September 30, 2005 and December 31, 2004 the balance in other receivables was $4,002
thousand and $2,808 thousand, respectively. Other receivables consists of non-trade receivables and
therefore there is no associated revenue. At September 30, 2005 and December 31, 2004 other
receivables primarily consisted of receivables for the sale of inventory to the Companys contract
manufacturing partners. Sales to the Companys contract manufacturing partners are based on terms
and conditions similar to the terms offered to the Companys regular customers.
11
Note 4 Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Raw materials |
|
$ |
20,633 |
|
|
$ |
24,044 |
|
Work-in-process |
|
|
1,941 |
|
|
|
1,505 |
|
Finished goods |
|
|
2,843 |
|
|
|
3,958 |
|
|
|
|
|
|
|
|
|
|
|
25,417 |
|
|
|
29,507 |
|
Less: inventory reserves |
|
|
(6,662 |
) |
|
|
(7,353 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
18,755 |
|
|
$ |
22,154 |
|
|
|
|
|
|
|
|
During the three months ended September 30, 2005 and 2004, the Company recorded provision for
excess and obsolete inventory of $1.4 million and $605 thousand, respectively. During the nine
months ended September 30, 2005 and 2004, the Company recorded provision for excess and obsolete
inventory of $2.8 million and $2.1 million, respectively.
The following is a summary of the change in the Companys excess and obsolete inventory
reserve for the nine months ended September 30 , 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Inventory reserve balance, beginning of the year |
|
$ |
7,353 |
|
|
$ |
9,491 |
|
Usage: |
|
|
|
|
|
|
|
|
Inventory scrapped |
|
|
(2,050 |
) |
|
|
(1,433 |
) |
Inventory consumed through sales |
|
|
(1,513 |
) |
|
|
(2,625 |
) |
|
|
|
|
|
|
|
Subtotal usage |
|
|
(3,563 |
) |
|
|
(4,058 |
) |
Reserve provision |
|
|
2,847 |
|
|
|
2,106 |
|
Transfer from other liabilities (A) |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
Remaining reserve balance, end of the quarter |
|
$ |
6,662 |
|
|
$ |
7,539 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
The $25 thousand transfer from other liabilities is related to obsolete inventory purchased
from contract manufacturers during the quarter which was previously reserved for in an adverse
purchase commitment liability. |
Note 5 Goodwill
The Company tests goodwill for impairment at least annually. Additionally, the Company
assesses goodwill for impairment if any adverse conditions exist that would indicate 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 or the average trading
price of the Companys Common Stock is below the book value per share for a sustained period, a
goodwill impairment test will be performed by comparing book value to estimated market value. The
Companys book value per share was $10.32 at September 30, 2005 which was lower then the trading
value of the Companys Common Stock during the nine month period ended September 30, 2005. The
Company completed its most recent annual goodwill impairment analysis as of September 30, 2005 and
concluded that as of September 30, 2005, there was no goodwill impairment.
12
Note 6 Intangible Assets
The following tables summarize details of the Companys total purchased intangible assets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Existing technology |
|
$ |
2,415 |
|
|
$ |
(1,686 |
) |
|
$ |
729 |
|
Technology licenses |
|
|
6,790 |
|
|
|
(6,223 |
) |
|
|
567 |
|
Patents |
|
|
6,647 |
|
|
|
(5,717 |
) |
|
|
930 |
|
Trade names |
|
|
736 |
|
|
|
(290 |
) |
|
|
446 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,588 |
|
|
$ |
(13,916 |
) |
|
$ |
2,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
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 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,588 |
|
|
$ |
(12,377 |
) |
|
$ |
4,211 |
|
|
|
|
|
|
|
|
|
|
|
The Companys purchased intangible assets have remaining lives ranging from 4 to 11 years. The
Company performs 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. As
of September 30, 2005, management concluded there was no indication of events or changes in
circumstances indicating that the carrying amount of purchased intangible assets may not be
recoverable. The estimated future amortization expense of purchased intangible assets as of
September 30, 2005 is as follows (in thousands):
|
|
|
|
|
|
|
Estimated |
|
|
|
Intangible |
|
|
|
Amortization |
|
For the years ending December 31, |
|
Amount |
|
2005(remaining three months) |
|
$ |
513 |
|
2006 |
|
|
726 |
|
2007 |
|
|
526 |
|
2008 |
|
|
250 |
|
2009 |
|
|
210 |
|
Thereafter |
|
|
447 |
|
|
|
|
|
Total |
|
$ |
2,672 |
|
|
|
|
|
Note 7 Accrued Restructuring and Other Charges
Accrued restructuring and other charges consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Second quarter 2005 restructuring charge |
|
$ |
764 |
|
|
$ |
|
|
Fourth quarter 2004 restructuring charge |
|
|
|
|
|
|
1,282 |
|
Third quarter 2004 restructuring charge |
|
|
|
|
|
|
86 |
|
Fourth quarter 2001 restructuring charge |
|
|
61 |
|
|
|
201 |
|
|
|
|
|
|
|
|
Total |
|
$ |
825 |
|
|
$ |
1,569 |
|
|
|
|
|
|
|
|
The Company evaluates the adequacy of the accrued restructuring and other charges on a
quarterly basis. As a result, the Company records 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 the Company determines that expected restructuring
and other obligations are less than the amounts accrued.
13
Second Quarter 2005 Restructuring
During the second quarter of 2005 the Company entered into a restructuring plan that included
the elimination of 93 positions primarily within the Companys manufacturing operations. These
employee positions will be eliminated over the next four quarters in conjunction with continued
outsourcing of production to the Companys primary manufacturing partners, Celestica and Foxconn.
The restructuring charge included severance and other employee-related separation costs of
approximately $1.1 million.
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 |
|
Expenditures |
|
|
(25 |
) |
|
|
|
|
Balance accrued as of June 30, 2005 |
|
$ |
1,083 |
|
|
|
|
|
Additions |
|
|
91 |
|
Expenditures |
|
|
(282 |
) |
Reversals |
|
|
(128 |
) |
|
|
|
|
Balance accrued as of September 30, 2005 |
|
$ |
764 |
|
|
|
|
|
Expenditures for the nine months ended September 30, 2005 consisted of severance payments made
to employees whose employment terminated during the year. The reversal of $128 thousand is due to
the voluntary departure of three employees prior to their termination date as well as one employee
who has been retained by the Company to fill an open position. The remaining accrual balance
includes severance and other employee-related separation costs which will be paid over the next
three quarters.
Fourth Quarter 2004 Restructuring
During the fourth quarter of 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 |
|
|
|
13 |
|
|
|
29 |
|
Expenditures |
|
|
(952 |
) |
|
|
(23 |
) |
|
|
(975 |
) |
Reversals |
|
|
(33 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of March 31, 2005 |
|
$ |
303 |
|
|
$ |
|
|
|
$ |
303 |
|
|
|
|
|
|
|
|
|
|
|
Expenditures |
|
|
(249 |
) |
|
|
|
|
|
|
(249 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of June 30, 2005 |
|
$ |
54 |
|
|
$ |
|
|
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
|
Expenditures |
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
Reversals |
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of September 30, 2005 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring accrual has been reduced to zero during the nine months ended September 30,
2005. The $33 thousand reversal recorded in the first quarter of 2005 was due to the retention of
an employee who filled a new position within the Company. Expenditures for the nine months ended
September 30, 2005 included severance and other employee-related separation costs.
14
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 |
|
|
|
|
|
|
72 |
|
|
|
72 |
|
Expenditures |
|
|
|
|
|
|
(17 |
) |
|
|
(17 |
) |
write-offs |
|
|
|
|
|
|
(30 |
) |
|
|
(30 |
) |
Reversals |
|
|
(86 |
) |
|
|
|
|
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of March 31, 2005 |
|
$ |
|
|
|
$ |
25 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
38 |
|
|
|
38 |
|
Expenditures |
|
|
|
|
|
|
(63 |
) |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
Balance accrued as of September 30, 2005 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 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 during second
quarter of 2005 include $12 thousand in relocation expenses and $26 thousand paid for repairs
associated with the vacated Redditch office building.
15
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 |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance accrued as of March 31, 2005 |
|
$ |
|
|
|
$ |
168 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures |
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance accrued as of June 30, 2005 |
|
$ |
|
|
|
$ |
144 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
(34 |
) |
Recoveries |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
Reversals |
|
|
|
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance accrued as of September 30, 2005 |
|
$ |
|
|
|
$ |
61 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2005 the Company reviewed prior lease payments associated with our
Boca Raton, Florida leased facilities. As a result of the this review $30 thousand in overcharges
were identified and this is represented in recoveries for the three months ended September 30,
2005. The $79 thousand reversal for the third quarter includes the $30 thousand recovery as well
as an adjustment for accrued common area maintenance charges. The accrual amount remaining as of
September 30, 2005 represents lease obligations relating to the facilities in Boca Raton, Florida
expected to be paid monthly for the next 4 months.
Note 8 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 September 30, 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.
As of September 30, 2005 and December 31, 2004, there were no outstanding balances on the line
of credit or any draws under the standby letter of credit and the Company was in compliance with
all debt covenants.
Note 9 Long-Term Liabilities
Convertible Senior Notes
During November 2003, the Company completed a private offering of $100 million aggregate
principal amount of 1.375% convertible senior notes due November 15, 2023 to qualified
institutional buyers. The discount on the 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%
16
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 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 September 30, 2005 and December 31, 2004 the Company had outstanding convertible senior
notes with a face value of $100 million. As of September 30, 2005 and December 31, 2004 the book
value of the convertible senior notes was $97.2 million and $97.1 million, respectively, net of
unamortized discount of $2.8 million and $2.9 million, respectively. Amortization of the discount
on the convertible senior notes was $33 thousand and $32 thousand for the three months ended
September 30, 2005 and 2004, respectively. Amortization of the discount on the convertible senior
notes was $98 thousand and $100 thousand for the nine months ended September 30, 2005 and 2004,
respectively. The estimated fair value of the convertible senior notes was $99.3 million and $106.8
million at September 30, 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 the three months ended June 30, 2005, the Company repurchased $125 thousand principal
amount of the convertible subordinated notes at face value for a loss of $1 thousand. In the three
months ended March 31, 2005, the Company repurchased $1.0 million principal amount of the
convertible subordinated notes, with an associated discount of $12 thousand. The Company
repurchased the notes in the open market for $990 thousand and, as a result, recorded a loss of $3
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 September 30, 2005 and December 31, 2004 the Company had outstanding convertible
subordinated notes with a face value of $8.9 million and $10.0 million, respectively. As of
September 30, 2005 and December 31, 2004 the book value of the convertible subordinated notes was
$8.8 million and $9.9 million, respectively, net of amortized discount of $81 thousand and $126
thousand, respectively. Amortization of the discount on the convertible subordinated notes was $10
thousand and $11 thousand for the three ended September 30, 2005 and 2004, respectively and $31
thousand and $129 thousand for the nine months ended September 30, 2005 and 2004, respectively. The
estimated fair value of the convertible subordinated notes was $8.9 million and $10.0 million at
September 30, 2005 and December 31, 2004, respectively.
17
On April 26, 2005 the Board of Directors approved the repurchase of the remaining $8.9 million
principal amount of the convertible subordinated notes. On October 19, 2005 the Company repurchased
$6.4 million principal amount of the convertible subordinated notes, with an associated discount of
$57 thousand. We repurchased the notes in the open market for $6.4 million and, as a result, we
will record a loss of $46 thousand in the fourth quarter of 2005. 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, 2009 and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Convertible |
|
|
Convertible |
|
|
|
Senior |
|
|
Subordinated |
|
For the Years Ending December 31, |
|
Notes |
|
|
Notes |
|
2005 (remaining three months) |
|
$ |
|
|
|
$ |
|
|
2006 |
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
8,868 |
|
2008(1) |
|
|
100,000 |
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
8,868 |
|
Less: unamortized discount |
|
|
(2,754 |
) |
|
|
(81 |
) |
Less: current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
|
$ |
97,246 |
|
|
$ |
8,787 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 10 Restricted Stock
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 will vest each
year following the date of the grant. During the second quarter employees that have historically
been awarded compensation in the form of stock options were allowed to elect to receive restricted
stock that approximated the value of stock options that otherwise would have been awarded. Any
employee selecting restricted stock received 1 share of restricted stock for every 3 stock options
they would have otherwise received. Effective May 2, 2005 the Compensation and Development
Committee approved the grant of restricted stock awards to certain employees totaling 40,502
shares. Effective September 16, 2005 the Compensation and Development Committee approved the grant
of 25,000 shares of restricted to Scott Grout, Chief Executive Officer. The Company recorded $52
thousand and $83 thousand of stock-based compensation related to the issuance of restricted stock
for the three and nine months ended September 30, 2005, respectively. The Company did not incur any
stock-based compensation expense associated with restricted stock for the three and nine months
ended September 30, 2004. Effective October 25, 2005 the Compensation and Development Committee
approved the grant of 31 thousand shares of restricted stock to certain executive officers.
18
Note 11 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic |
|
$ |
5,922 |
|
|
$ |
3,820 |
|
|
$ |
11,073 |
|
|
$ |
10,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic |
|
|
5,922 |
|
|
|
3,820 |
|
|
|
11,073 |
|
|
|
10,175 |
|
Interest on convertible notes, net of tax benefit(1) |
|
|
242 |
|
|
|
243 |
|
|
|
727 |
|
|
|
732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, diluted |
|
$ |
6,164 |
|
|
$ |
4,063 |
|
|
$ |
11,800 |
|
|
$ |
10,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income per share , basic |
|
|
20,266 |
|
|
|
19,032 |
|
|
|
20,012 |
|
|
|
18,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income per share , basic |
|
|
20,266 |
|
|
|
19,032 |
|
|
|
20,012 |
|
|
|
18,784 |
|
Effect of convertible notes(1) |
|
|
4,243 |
|
|
|
4,243 |
|
|
|
4,243 |
|
|
|
4,243 |
|
Effect of dilutive stock options(2) |
|
|
513 |
|
|
|
500 |
|
|
|
444 |
|
|
|
715 |
|
Effect of dilutive unvested restricted stock |
|
|
8 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income per share , diluted |
|
|
25,030 |
|
|
|
23,775 |
|
|
|
24,702 |
|
|
|
23,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.55 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted(1) |
|
$ |
0.25 |
|
|
$ |
0.17 |
|
|
$ |
0.48 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on convertible subordinated notes and related as-if converted shares were excluded
from the calculation as the effect would be anti-dilutive. For the three months ended
September 30, 2005 and 2004, the total number of as-if converted shares excluded from the
calculation associated with the convertible subordinated notes was 131 thousand and 147
thousand. For the nine months ended September 30, 2005 and 2004, the total number of as-if
converted shares excluded from the calculation associated with the convertible subordinated
notes was 135 thousand and 597 thousand. |
|
(2) |
|
For the three months ended September 30, 2005 and 2004, options amounting to 1.4 million and
2.7 million 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. For
the nine months ended September 30, 2005 and 2004, options amounting to 2.1 million and 1.7
million 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. |
Note 12 Income Taxes
The Companys effective tax rate for the three month ended September 30, 2005 and 2004 differs
from the statutory rate primarily due to tax benefits related to certain foreign sales, the
amortization of goodwill for tax purposes, and tax benefits associated with research and
development credits. The Companys effective tax rate for the nine months ended September 30, 2005
and 2004 differed from the statutory rate due to tax benefits related to certain foreign sales and
other permanent differences.
On October 22, 2004, the President of the United States 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 with certain transitional rules. 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 is currently evaluating the impact of the Act on its effective tax rate, cash flows and
financial statements and expects to complete the evaluation by the end of 2005.
Note 13 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.
19
The Company is one operating segment according to the provisions of SFAS No. 131.
Revenues on a product and services basis are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Hardware |
|
$ |
72,877 |
|
|
$ |
58,403 |
|
|
$ |
192,527 |
|
|
$ |
174,146 |
|
Software royalties and licenses |
|
|
1,050 |
|
|
|
1,734 |
|
|
|
3,289 |
|
|
|
4,801 |
|
Software maintenance |
|
|
592 |
|
|
|
470 |
|
|
|
1,396 |
|
|
|
1,090 |
|
Engineering and other services |
|
|
336 |
|
|
|
1,136 |
|
|
|
1,116 |
|
|
|
3,070 |
|
Other |
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
74,856 |
|
|
$ |
61,746 |
|
|
$ |
198,329 |
|
|
$ |
183,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Communications Networking |
|
$ |
57,851 |
|
|
$ |
41,914 |
|
|
$ |
147,596 |
|
|
$ |
125,377 |
|
Commercial Systems |
|
|
17,005 |
|
|
|
19,832 |
|
|
|
50,733 |
|
|
|
57,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
74,856 |
|
|
$ |
61,746 |
|
|
$ |
198,329 |
|
|
$ |
183,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about the Companys geographic revenues and long-lived assets by geographical area is
as follows (in thousands):
Geographic Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
19,330 |
|
|
$ |
24,394 |
|
|
$ |
61,925 |
|
|
$ |
71,998 |
|
Other North America |
|
|
2,932 |
|
|
|
2,471 |
|
|
|
10,189 |
|
|
|
9,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
22,262 |
|
|
|
26,865 |
|
|
|
72,114 |
|
|
|
81,717 |
|
Europe, the Middle East and Africa (EMEA) |
|
|
39,645 |
|
|
|
30,607 |
|
|
|
101,469 |
|
|
|
90,242 |
|
Asia Pacific |
|
|
12,949 |
|
|
|
4,274 |
|
|
|
24,746 |
|
|
|
11,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,856 |
|
|
$ |
61,746 |
|
|
$ |
198,329 |
|
|
$ |
183,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Property and equipment, net |
|
|
|
|
|
|
|
|
United States |
|
$ |
11,482 |
|
|
$ |
12,031 |
|
EMEA |
|
|
163 |
|
|
|
351 |
|
Asia Pacific |
|
|
2,080 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,725 |
|
|
$ |
14,002 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
United States |
|
$ |
27,521 |
|
|
$ |
27,521 |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
United States |
|
$ |
2,672 |
|
|
$ |
4,211 |
|
|
|
|
|
|
|
|
20
Two customers accounted for more than 10% of total revenues in the three and nine months ended
September 30, 2005 and 2004. These customers accounted for the following percentages of total
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Nokia |
|
|
44.0 |
% |
|
|
29.8 |
% |
|
|
36.6 |
% |
|
|
27.2 |
% |
Nortel |
|
|
13.0 |
% |
|
|
11.3 |
% |
|
|
15.1 |
% |
|
|
15.2 |
% |
As of September 30, 2005 and December 31, 2004 the following customers accounted for more than
10% of accounts receivable. These customers accounted for the following percentages of accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Nokia |
|
|
44.0 |
% |
|
|
32.3 |
% |
Nortel |
|
|
11.4 |
% |
|
|
* |
|
Diebold |
|
|
* |
|
|
|
12.9 |
% |
|
|
|
* |
|
Accounted for less than 10% of accounts receivable. |
Note 14 Legal Proceedings
In the normal course of business, the Company periodically becomes involved in litigation. As
of September 30, 2005, management believes that the Company has no pending litigation that would
have a material adverse effect on the Companys financial position, results of operations or cash
flows.
Note 15 Subsequent Events
On October 19, 2005 the Company repurchased $6.4 million principal amount of the convertible
subordinated notes, with an associated discount of $57 thousand. We repurchased the notes in the
open market for $6.4 million and, as a result, we will record a loss of $46 thousand the fourth
quarter of 2005.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction and Overview
RadiSys is a leading provider of advanced embedded solutions for the communications networking
and commercial systems markets. Through intimate customer collaboration, and combining innovative
technologies and industry leading architecture, we help original equipment manufacturers (OEMs)
bring better products to market faster and more economically. 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 limited 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 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
In prior periods we have segregated our revenues into three distinct markets. Based on
increased commonality and a convergence of our technology and products between our current Service
Provider and Enterprise markets we have combined these two markets and will now report the
underlying revenue associated with these markets as Communications Networking. Our Commercial
Systems market has remained unchanged. We now define our markets in the following two categories:
21
|
|
Communications Networking The communications networking market includes the wireless and IP networking and messaging sub-markets. The wireless sub market includes a variety of telecommunications focused applications,
including 2, 2.5 and 3G wireless infrastructure products, wireline infrastructure products, packet-based switches and unified messaging products. The IP networking and messaging sub-market includes voice messaging, storage, data
centers, Private Branch Exchange (PBX) systems, network access and security and switching applications. |
|
|
|
Commercial Systems The commercial systems market includes the following sub-markets: medical systems, test and measurement equipment, transaction terminals and industrial automation equipment. Examples of products into which
our commercial systems embedded solutions are incorporated 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 test equipment. |
Our Market Drivers
We believe there are a number of fundamental drivers for growth in the embedded solutions market, including:
|
|
|
Increasing focus 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 systems to market, faster at lower total cost of ownership. |
|
|
|
|
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. |
|
|
|
|
Increasing demand for standards-based solutions, such as Advanced Telecommunications Architecture (ATCA), and Computer-on-Modules (COM) Express that motivates system makers to take advantage of proven and validated standards-based products. |
|
|
|
|
Increasing demand for new technologies that utilize network processors, such as security and high-volume networking applications. |
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, the changes in
certain key items in those financial statements for the three and nine months ended September 30,
2005 compared to same periods in 2004 and for the period ended September 30, 2005 compared to
December 31, 2004, and the primary factors that accounted for those changes. This discussion should
be read in conjunction with our consolidated financial statements and the related notes included
elsewhere in this filing, and in our annual report on Form 10-K for the year ended December 31,
2004.
Certain statements made in this section of the report may be deemed to be forward-looking
statements. Please see the information contained in the section entitled FORWARD-LOOKING
STATEMENTS and the RISK FACTORS.
Overview
Total revenue was $74.9 million and $61.7 million for the three months ended September 30,
2005 and 2004, respectively. Total revenue was $198.3 million and $183.1 million for the nine
months ended September 30, 2005 and 2004, respectively. As of September 30, 2005 and 2004, backlog
was approximately $22.6 million and $26.2 million, respectively. We include all purchase orders
scheduled for delivery within 12 months in backlog. The general trend within our addressable
markets is for shorter lead times and supplier managed inventory, which will generally decrease
backlog as a percentage of revenue. The increase in revenue for the three months ended September
30, 2005 compared to the same period in 2004 was primarily driven by strong demand within the
wireless market as our product content continues to expand with 2.5 and 3G deployments. We also saw
an increase in our third quarter revenues from an initial deployment of a new networking product by
one of our customers.
During 2004 and 2005 we have shifted more of our investments from predominantly one-off
custom-designed products to standards-based, re-usable platforms and solutions. We believe
standards-based platforms provide our customers a number of
22
fundamental benefits. First, by using ready-made platform solutions rather than ground-start
custom-designs, our customers can achieve significantly shorter 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 platforms, we believe we have the opportunity to address a wider range of new
market opportunities with the potential for faster time to revenue than with ground-start,
custom-designs. We believe this ability to reuse designs makes our business and investment model
more scalable. Finally, we believe a more standard product focused model will allow us to provide
more integrated higher value solutions to our customers than we have typically delivered under a
custom-design model.
In 2004 we announced our Promentum family of ATCA products and in June 2005 we recorded
our first revenue associated with these products. The Promentum family of products includes
universal carrier cards, switch and control modules, disk storage modules, compute modules, and a
14-slot shelf or chassis. The Promentum SYS-6000 integrates these individual products into a
blade server platform system. We believe the Promentum 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 the Company announced the Promentum ATCA-7010, a packet processing
module that allows the highest bandwidth available in a single ATCA(R) slot. This product is the
latest addition to the Companys family of ATCA-compliant products featuring dual Intel(R) 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 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 Procelerant 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 Procelerant application. During the third quarter of 2005 we announced three new
Procelerant 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.
Net income was $5.9 million and $3.8 million for the three months ended September 30, 2005 and
2004, respectively. Net income per share was $0.29 and $0.25, basic and diluted, respectively, for
the three months ended September 30, 2005 compared to net income per share of $0.20 and $0.17,
basic and diluted, respectively, for the three months ended September 30, 2004. Net income was
$11.1 million for the nine months ended September 30, 2005 compared to net income of $10.2 million
for the nine months ended September 30, 2004. Net income per share was $0.55 and $0.48, basic and
diluted, respectively, for the nine months ended September 30, 2005 compared to net income per
share of $0.54 and $0.46, basic and diluted, respectively, for the nine months ended September 30,
2004. Net income for the nine months ended September 30, 2005 includes a charge for restructuring
of approximately $1.0 million for severance and related expenses for employees primarily within the
Companys manufacturing operations, where positions will be eliminated through the end of the
second quarter of 2006 in conjunction with continued outsourcing of production to the Companys
manufacturing partners. The restructuring is necessary to balance our production capacity with our
level of outsourced manufacturing and the Company currently expects to incur additional
restructuring charges over the three quarters totaling approximately $120 thousand.
Due to an increase in revenue, combined with a decline in interest expense and an increase in
interest income, our profitability has increased for the three and nine months ended September 30,
2005 compared to the same periods in 2004. Our interest income continues to increase as we
continue to generate income from operations and see the benefit of rising interest rates. Interest
expense has decreased over the prior year due to a lower outstanding debt balance in the first nine
months of 2005. We have increased our investment in research and development over the prior year
and we currently plan to continue to increase our spending on development of new standards based
products. Our profitability has been negatively impacted by restructuring charges primarily
resulting from our transition to outsourced manufacturing as well as lower average gross margin as
a percentage of revenue. Gross margins as a percentage of revenue have declined largely due to our
product mix, with more revenues coming from higher volume products sold at more competitive prices.
Our gross margin as a percentage of revenue has also been negatively impacted by increases in our
excess and obsolete inventory provision and purchase commitment liabilities associated with our
manufacturing transfers to our contract manufacturing partners, as well as higher silicon prices
due to industry shortages. We also continue to incur some redundant manufacturing costs as we
move forward with outsourcing our internal manufacturing to our partners Celestica and Foxconn.
23
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. The Company currently intends to purchase the notes and stock on the open market or
through privately negotiated transactions from time to time subject to market conditions.
During the three and nine months ended September 30, 2005, we incurred $100 thousand and $131
thousand of stock-based compensation expense associated with the vesting of restricted stock as
well as the issuance of stock options to a consultant. For the nine months ended September 30,
2005 we have issued 65 thousand shares of restricted stock and anticipate incurring approximately
$900 thousand in compensation expense over the next three years associated with the unvested shares
included in these grants. During the three and nine months ended September 30, 2004, we incurred
$255 and $788 thousand of stock-based compensation expense associated with shares to be issued
pursuant to the Companys 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. The Company subsequently received shareholder approval for additional
ESPP shares in May 2003.
Cash and cash equivalents and investments amounted to $225.3 million and $198.6 million at
September 30, 2005 and December 31, 2004, respectively. The increase in cash and cash equivalents
and investments during the nine months ended September 30, 2005, was primarily due to cash provided
from operating activities. We generated net cash from operations in excess of net income in the
nine months ended September 30, 2005. Management believes 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.
Critical Accounting Policies and Estimates
The Company reaffirms its critical accounting policies and use of estimates as reported in the
Companys Annual Report on Form 10-K for the year ended December 31, 2004. As a result of our
continued execution on our strategy of increasing the level of outsourced manufacturing the Company
now considers our policies and estimates associated with our adverse purchase commitments reserve
to be critical.
Adverse Purchase Commitments
We are contractually obligated to reimburse our contract manufacturers for the cost or
liability for excess inventory used in the manufacture of our products, for which there is no
alternative use. As we continue to execute on our strategy of increasing the level of outsourced
manufacturing the liability for adverse purchase commitments will become more significant. This
will be offset, however, by lower required reserves for excess and obsolete exposure on lower
amount of Company-owned inventory. Estimates for adverse purchase commitments are derived from
reports received 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 excess and obsolete inventory
reserve. This liability, referred to as adverse purchase commitments, is provided for in other
accrued liabilities. Adverse purchase commitments amounted to $842 thousand and $485 thousand at
September 30, 2005 and December 31, 2004, respectively.
24
Results of Operations
The following table sets forth certain operating data as a percentage of revenues for the
three and nine months ended September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of sales |
|
|
71.0 |
|
|
|
67.5 |
|
|
|
69.9 |
|
|
|
67.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
29.0 |
|
|
|
32.5 |
|
|
|
30.1 |
|
|
|
32.2 |
|
Research and development |
|
|
9.9 |
|
|
|
11.4 |
|
|
|
11.2 |
|
|
|
11.2 |
|
Selling, general, and administrative |
|
|
10.2 |
|
|
|
12.5 |
|
|
|
11.4 |
|
|
|
12.6 |
|
Intangible assets amortization |
|
|
0.7 |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.9 |
|
Restructuring and other charges (reversals) |
|
|
(0.1 |
) |
|
|
0.7 |
|
|
|
0.5 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
8.5 |
|
|
|
7.1 |
|
|
|
6.2 |
|
|
|
7.7 |
|
Loss on repurchase of convertible
subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
Interest expense |
|
|
(0.7 |
) |
|
|
(0.9 |
) |
|
|
(0.8 |
) |
|
|
(1.6 |
) |
Interest income |
|
|
2.3 |
|
|
|
1.3 |
|
|
|
2.2 |
|
|
|
1.3 |
|
Other (expense) income, net |
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
9.9 |
|
|
|
7.0 |
|
|
|
7.3 |
|
|
|
7.0 |
|
Income tax provision |
|
|
2.0 |
|
|
|
0.8 |
|
|
|
1.7 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
7.9 |
% |
|
|
6.2 |
% |
|
|
5.6 |
% |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Three and Nine Months Ended September 30, 2005 and 2004
Revenues. Revenues increased by $13.1 million or 21.2%, from $61.7 million in the three months
ended September 30, 2004 to $74.9 million in the three months ended September 30, 2005. Revenues
increased by $15.2 million or 8.3%, from $183.1 million in the nine months ended September 30, 2004
to $198.3 million in the nine months ended September 30, 2005.
The increase in revenues for the three months ended September 30, 2005 compared to the same
period in 2004, is due to an increase in revenues in the communications networking market of $15.9
million offset by a decrease in revenues from the commercial systems market of $2.8 million. The
increase in revenue for the nine months ended September 30, 2005 compared to the same period in
2004, is due to an increase in revenues in the communications networking market of $22.2 million
offset by a $7.0 million decrease in revenues from the commercial systems market.
Revenues in the communications networking market increased in the three and nine months ended
September 30, 2005 compared to the same periods in 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 in the third quarter due to an initial deployment of new products by one of our customers.
We currently expect revenues to decline by 4% to 9% for the three months ended December 31, 2005
compared to the three months ended September 30, 2005.
Revenues in the commercial systems market decreased in the three and nine months ended
September 30, 2005 compared to the same period in 2004, primarily due to declines in our industrial
automation and transaction terminal business, partially offset by increases within our medical and
test and measurement market. The increase in revenues from the medical market is 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 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 three and nine months ended September 30, 2005 compared
to the same period in 2004 the overall increase in revenues was split between customers located in
the EMEA and Asia Pacific region. For the nine month period ended September 30, 2005 compared to
the same period in 2004 revenues in the EMEA region increased by $11.2 million while Asia
25
Pacific revenues increased by $13.6 million. This increase to the Asia Pacific region is due
to existing multinational customers receiving products directly into the Asia Pacific region. For
the three and nine months ended September 30, 2005 revenues from North America declined by $4.6
million and $9.6 million, respectively, compared to the same periods in 2004. The decline in this
region has been a result of declines in our industrial automation and transaction terminal business
as well as a shift of sales for our multinational customers receiving directly into the Asia
Pacific region. We currently expect continued quarterly fluctuations in the percentage of revenue
from each geographic region.
Gross Margin. Gross margin for the three months ended September 30, 2005 was 29.0% compared to
32.5% for the same period in 2004. Gross margin for the nine months ended September 30, 2005 was
30.1% compared to 32.2% for the same period in 2004.
Approximately half of the decrease in gross margin as a percentage of revenues for the three
and nine months ended September 30, 2005 compared to the same periods in 2004 was attributable to
product mix as more of our revenue is coming from higher volume products with competitive pricing.
The remainder of the decrease is associated with our provision for excess and obsolete inventory
and purchase commitment liabilities associated with our outsourced manufacturing operations and
higher silicon prices due to industry shortages. We also continue to incur some redundant
manufacturing costs as we move forward with outsourcing our internal manufacturing to our partners
Celestica and Foxconn.
Based on current forecasted revenue mix and higher silicon prices, we currently anticipate
that gross margins will be in the high 20s range 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 will be effective in 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 $372 thousand, or 5.3%, from $7.0
million for the three months ended September 30, 2004 to $7.4 million for the three months ended
September 30, 2005. Research and development expenses increased $1.7 million, or 8.4% from $20.5
million for the nine months ended September 30, 2004 to $22.2 million for the nine months ended
September 30, 2005. Our investment in the development of standards-based products, such as ATCA,
has increased our research and development expense for the three and nine months ended September
30, 2005 compared to the same periods in 2004. During the third quarter of 2005 we 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. Another factor increasing research
and development expenses is an increase in variable compensation that is linked to our
profitability. We currently anticipate increasing spending on research and development during the
fourth quarter of 2005 by approximately $1 million compared to spending in the third quarter of
2005.
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 decreased by $109 thousand or 1.4%, from $7.7 million for the
three months ended September 30, 2004 to $7.6 million for the three months ended September 30,
2004. SG&A expenses decreased $508 thousand, or 2.2%, from $23.1 million for the nine months ended
September 30, 2004 to $22.6 million for the nine months ended September 30, 2005. The decrease in
SG&A expense in the nine months ended September 30, 2005 is primarily associated with $614 thousand
in non-reoccurring costs that were recognized in the first quarter of 2004 associated with a
potential acquisition that was ultimately abandoned. Without these costs we would have seen a
slight increase in SG&A expense due to annual merit increases and increased variable sales and
marketing expenses.
Stock-based Compensation Expense. During the three and nine month periods ended September 30,
2005, the Company incurred $100 thousand and $131 thousand, respectively, of stock-based
compensation. Stock based on compensation incurred in 2005 is associated with the issuance of
restricted stock and the issuance of stock option to a consultant. During the three and nine
months ended September 30, 2004, we incurred $255 thousand and $788 thousand of stock-based
compensation expense, respectively. The stock-based compensation expense was associated with shares
to be 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.
26
We recognized stock-based compensation expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Cost of sales |
|
$ |
6 |
|
|
$ |
101 |
|
|
$ |
10 |
|
|
$ |
182 |
|
Research and development |
|
|
67 |
|
|
|
92 |
|
|
|
80 |
|
|
|
343 |
|
Selling, general, and administrative |
|
|
27 |
|
|
|
62 |
|
|
|
41 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100 |
|
|
$ |
255 |
|
|
$ |
131 |
|
|
$ |
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets Amortization. Intangible assets consist of purchased technology, patents and
other identifiable intangible assets. Intangible assets amortization expense was $513 thousand and
$515 thousand for the three months ended September 30, 2005 and 2004, respectively. Intangible
assets amortization expense was $1.5 million and $1.7 million for the nine months ended September
30, 2005 and 2004, respectively. Intangible assets amortization decreased due to certain intangible
assets becoming fully amortized during the first and second quarters of 2004. Goodwill and all
other intangible assets have been and will periodically be evaluated for impairment. We perform
reviews for impairment of goodwill and all purchased intangible assets whenever events or changes
in circumstances indicate that the carrying amount of an asset 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 or intangible assets impairment. We are required under certain
circumstances, to update our impairment analysis, which may result in losses on acquired goodwill
and intangible assets.
Restructuring and Other Charges (Reversals). We evaluate the adequacy of the accrued
restructuring and other charges on a quarterly basis. As a result, we record certain
reclassifications and reversals to the accrued restructuring and other charges based on the results
of the evaluation. The total accrued restructuring and other charges for each restructuring event
are not affected by
reclassifications. Reversals are recorded in the period in which we determine that expected
restructuring and other obligations are less than the amounts accrued. Tables summarizing the
activity in the accrued liability for each restructuring event are contained in Note 7 of the Notes
to the Unaudited Consolidated Financial Statements. During the first nine months of 2005 and 2004,
we recorded restructuring and other charges and reversals as described below.
During the second quarter of 2005 the Company initiated a plan to eliminate 93 positions over
the next four quarters and incurred a $1.1 million charge associated with this plan. The
elimination of these positions is the result of the increase in outsourced manufacturing. The
restructuring charge incurred included severance and other employee-related separation costs for 93
employees. We expect the workforce reduction to be substantially completed by June 30, 2006.
Additions. In addition to the severance and other employee-related separation costs associated
with the second quarter 2005 restructuring, during the three and nine months ending September 30,
2005 we recorded additions to our restructuring reserves of $91 thousand and $230 thousand,
respectively. The additions included higher then anticipated severance payments, retention
bonuses, relocation costs, fixed asset impairments and building repair costs.
Reversals. During the three and nine months ended September 30, 2005 we recorded total
reversals amounting to $218 thousand and $337 thousand. The reversals were primarily associated
with three employees who left the company prior to receiving a severance payment and three
employees who were retained to fill new positions within the Company. We recorded reversals
amounting to $858 thousand during the nine months ended September 30, 2004 relating primarily to a
buy-out of the remaining lease obligations on our Houston facility vacated as a result of the
restructuring events and 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 facilities and as a result we reduced the restructuring accruals.
Loss on the Repurchase of Convertible Notes. In the first quarter of 2005, we repurchased $1.0
million principal amount of the convertible subordinated notes, with an associated discount of $12
thousand. We repurchased the notes in the open market for $990 thousand and, as a result, recorded
a loss of $3 thousand. In the second quarter of 2005, the Company repurchased $125 thousand
principal amount of the convertible subordinated notes at face value for a loss of $1 thousand. In
the three months ended June 30, 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. On
October 19, 2005 we repurchased $6.4 million principal amount of the convertible subordinated
notes, with an associated discount of $57 thousand. We repurchased the notes in the open market
for $6.4 million and, as a result, we will record a loss of $46 thousand in the fourth quarter of
2005. The repurchase of the remaining $2.5 million principal amount of the convertible
subordinated notes has
27
been approved by the board of directors and when and if we repurchase the remaining
convertible subordinated notes, we anticipate incurring a loss on the repurchase of the notes.
Interest Expense. Interest expense includes interest incurred on convertible senior and
subordinated notes. Interest expense decreased $18 thousand, or 3.3%, from $545 thousand million
for the three months ended September 30, 2004 to $527 thousand for the three months ended September
30, 2005. Interest expense decreased $1.4 million, or 47.2%, from $3.0 million for the nine months
ended September 30, 2004 to $1.6 million for the nine months ended September 30, 2005. The decrease
in the interest expense for the three and nine months ended September 30, 2005 compared to the same
period in 2004 is due to the decrease in interest expense associated with the convertible
subordinated notes as a result of the repurchase of $58.8 million principal amount of subordinated
convertible notes during 2004.
Interest Income. Interest income increased $948 thousand, or 118.2%, from $802 thousand for
the three months ended September 30, 2004 to $1.8 million for the three months ended September 30,
2005. Interest income increased $1.9 million, or 77.8%, from $2.4 million for the nine months ended
September 30, 2004 to $4.3 million for the nine months ended September 30, 2005. Interest income
increased as a result of a higher average balance of cash, cash equivalents and investments for the
three and nine months ended September 30, 2005 compared to the same period in 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) Income, net. Other (expense) income, net, primarily includes foreign currency
exchange gains and losses. Other (expense) income, net, was ($147) thousand for the three months
ended September 30, 2005 compared to ($289) thousand for the three months ended September 30, 2004.
Other (expense) income, net, was ($609) thousand for the nine months ended September 30, 2005
compared to ($238) thousand for the nine months ended September 30, 2004.
Foreign currency exchange rate fluctuations resulted in a net loss of $133 thousand for the
three months ended September 30, 2005 compared to a net loss of $236 thousand for the three months
ended September 30, 2004. Foreign currency exchange rate fluctuations resulted in a net loss of
$558 thousand for the nine months ended September 30, 2005 compared to a net loss of $105 thousand
for the nine months ended September 30, 2004. Due to certain events in late 2004, we changed the
functional currency of our Irish subsidiaries from the Euro to the U.S. Dollar effective January 1,
2005, as required by U.S. generally accepted accounting principles. As a result, our Irish
subsidiaries incurred no exchange rate gains or losses on transactions denominated in U.S. dollar
for the three or nine months ended September 30, 2005. The remainder of the change in the foreign
currency exchange rate fluctuations is primarily associated with the strengthening of the U.S.
dollar relative to Euro and the Japanese Yen.
Net of the change in net losses related to foreign currency exchange rate fluctuations, the
change in Other expense, net, for the three months ended September 30, 2005 compared to the same
period in 2004, is primarily attributable to losses associated with the cash surrender value of
life insurance policies included in our executive deferred compensation plan.
Income Tax Provision (Benefit). We recorded a tax provision of $1.5 million and a tax
provision of $524 thousand for the three months ended September 30, 2005 and 2004, respectively. We
recorded a tax provision of $3.4 million and a tax provision of $2.6 million for the nine months
ended September 30, 2005 and 2004, respectively. The increase in the income tax provision for the
nine months ended September 30, 2005 as compared to the same period in 2004 is due to generating
more pre-tax income. The Companys expected effective tax rate for the year ended 2005 is 23.3%
compared to 20.0% for the year ended December 31, 2004. The increase in the effective tax rate
between the first nine months of 2005 and the year ended December 31, 2004 is primarily due to a
decrease in tax benefit related to certain qualified export sales and a decrease in tax credits.
The 2005 estimated effective tax rate is based on current tax law and the current expected income,
and assumes that the Company continues 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.
On October 22, 2004, the President of the United States 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 with certain transitional rules. 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
are currently evaluating the impact of the Act on our effective tax rate, cash flows and financial
statements. 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 new law the research and development tax credit was retroactively reinstated to
June 30, 2004 and is available through December 31, 2005. For the year ended December 31, 2004 we
recorded a research and development tax credit in the amount of $407 thousand, a portion of which
would not
28
have been recorded had the Working Families Tax Relief Act of 2004 not been enacted. We expect
to record a federal research and development credit of approximately $331 thousand for the year
ended 2005.
FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the Act (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 Act on enterprises income tax expense and deferred tax
liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting
period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation
of foreign earnings for purposes of applying FASB Statement No. 109. The Company is in the process
of evaluating the impact of the repatriation provisions and expects to complete the evaluation by
the end of 2005.
Given the preliminary stage of our evaluation, it is not possible at this time to determine
what impact the repatriation provisions will have on our consolidated tax accruals or our effective
tax rate. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense
or deferred tax liability to reflect the repatriation provisions of the Act as of September 30,
2005.
The IRS has completed its examination of our federal income tax returns for the years 1996
through 2002. The final audit report resulted in no negative consequences and was issued during the
first quarter of 2004. The final results of the examination are subject to review and approval by
the Joint Committee of Taxation. Although the Company has not received final approval from the
Joint Committee of Taxation, the statute of limitations on assessment and collection of income
taxes for all tax years 2002 and prior expired on April 1, 2005.
29
Liquidity and Capital Resources
The following table summarizes selected financial information as of the dates indicated and
for each of the three months ended on the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
|
|
2005 |
|
2004 |
|
2004 |
|
|
(Dollar amounts in thousands) |
Working capital |
|
$ |
247,513 |
|
|
$ |
186,634 |
|
|
$ |
182,237 |
|
Cash and cash equivalents and investments |
|
$ |
225,287 |
|
|
$ |
198,619 |
|
|
$ |
188,882 |
|
Cash and cash equivalents |
|
$ |
83,746 |
|
|
$ |
80,566 |
|
|
$ |
114,424 |
|
Short-term investments |
|
$ |
141,541 |
|
|
$ |
78,303 |
|
|
$ |
38,608 |
|
Accounts receivable, net |
|
$ |
47,840 |
|
|
$ |
42,902 |
|
|
$ |
40,862 |
|
Inventories, net |
|
$ |
18,755 |
|
|
$ |
22,154 |
|
|
$ |
21,155 |
|
Long-term investments |
|
$ |
|
|
|
$ |
39,750 |
|
|
$ |
35,850 |
|
Accounts payable |
|
$ |
40,494 |
|
|
$ |
31,585 |
|
|
$ |
29,143 |
|
Convertible senior notes |
|
$ |
97,246 |
|
|
$ |
97,148 |
|
|
$ |
97,115 |
|
Convertible subordinated notes |
|
$ |
8,787 |
|
|
$ |
9,867 |
|
|
$ |
9,856 |
|
Days sales outstanding (1) |
|
|
58 |
|
|
|
54 |
|
|
|
60 |
|
Days to pay (2) |
|
|
70 |
|
|
|
59 |
|
|
|
64 |
|
Inventory turns (3) |
|
|
11.3 |
|
|
|
6.9 |
|
|
|
7.9 |
|
Inventory turns days (4) |
|
|
32 |
|
|
|
48 |
|
|
|
46 |
|
Cash cycle time days (5) |
|
|
20 |
|
|
|
43 |
|
|
|
43 |
|
|
|
|
(1) |
|
Based on ending net trade receivables divided by (quarterly revenue, annualized and divided
by 365 days). |
|
(2) |
|
Based on ending accounts payable divided by (quarterly cost of sales, annualized and divided
by 365 days). |
|
(3) |
|
Based on quarterly cost of sales, annualized divided by ending inventory. |
|
(4) |
|
Based on ending inventory divided by (quarterly cost of sales, annualized and divided by 365
days). |
|
(5) |
|
Days sales outstanding plus inventory turns days, less days to pay. |
Cash and cash equivalents increased by $3.2 million from $80.6 million at December 31, 2004 to
$83.7 million at September 30, 2005. Activities impacting cash and cash equivalents are as
follows:
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Cash provided by operating activities |
|
$ |
25,411 |
|
|
$ |
18,989 |
|
Cash used in provided by investing activities |
|
|
(27,696 |
) |
|
|
(4,019 |
) |
Cash provided (used in ) by financing activities |
|
|
6,338 |
|
|
|
(50,364 |
) |
Effects of exchange rate changes |
|
|
(873 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
3,180 |
|
|
$ |
(35,501 |
) |
|
|
|
|
|
|
|
We have generated cash from operating activities in amounts greater than net income in the
nine months ended September 30, 2005 and 2004, 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.
During the nine months ended September 30, 2005 we used net cash provided by operating
activities for capital expenditures amounting to $4.2 million. During the nine months ended
September 30, 2005, capital expenditures included our continued investment in equipment to support
the Companys China based manufacturing partner as well as leasehold improvements, office equipment
and software to support our continued growth and productivity.
30
Net cash provided by operating activities was also used for severance payments amounting to
approximately $1.5 million associated with our 2004 restructuring activities. During the second
quarter of 2005 the Company entered a restructuring plan that included the elimination of 93
employees. As these employee positions are eliminated over the next three quarters we will be
required to make severance payments totaling approximately $764 thousand.
During the nine months ended September 30, 2005 we also used $1.1 million to repurchase our
5.5% convertible subordinated notes. Subsequent to the third quarter of 2005 we purchased an
additional $6.4 million principle amount of the 5.5% convertible subordinated notes. The Board of
Directors has approved the repurchase of the remaining $2.5 million principal amount of the
convertible subordinated notes and $25.0 million of our outstanding shares of Common Stock. We will
consider the purchase 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.
During the nine months ended September 30, 2005 we received $7.5 million in proceeds from the
issuance of Common Stock through the Companys stock compensation plans.
Changes in foreign currency rates impacted beginning cash balances during the nine months
ended September 30, 2005, by $873 thousand. Due to the Companys international operations where
transactions are recorded in functional currencies other than the U.S. Dollar, the effects of
changes in foreign currency exchange rates on existing cash balances during any given periods
results in amounts on the consolidated statements of cash flows that may not reflect the changes in
the corresponding accounts on the consolidated balance sheets.
During the nine months ended September 30, 2004, we used net cash provided by operating
activities for capital expenditures amounting to $3.4 million. During the nine months ended
September 30, 2004, capital expenditures primarily related to computer hardware, software, and test
equipment to be used to design and test our standard products and equipment purchased to support
our investment in the China operations. Additionally, during the nine months ended September 30,
2004, we received $7.8 million in cash proceeds from the sale of our Common Stock associated with
our employee stock-based benefit plans.
As of September 30, 2005 and December 31, 2004 working capital was $247.5 million and $186.6
million, respectively. Working capital increased by $60.9 million 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 the first three quarters of 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.
Investments
Investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Short-term held-to-maturity investments, including unamortized premium of $9 and $103, respectively |
|
$ |
47,991 |
|
|
$ |
17,303 |
|
|
|
|
|
|
|
|
Short-term available-for-sale investments |
|
$ |
93,550 |
|
|
$ |
61,000 |
|
|
|
|
|
|
|
|
Long-term held-to-maturity investments* |
|
$ |
|
|
|
$ |
39,750 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Long term investments were purchased at par value and therefore there is no discount or
premium associated with these investments. |
We invest excess cash in debt instruments of the U.S. Government and its agencies, those of
high-quality corporate issuers and municipalities. The Companys investments in the debt
instruments of municipalities primarily consist of investments in auction rate securities. Auction
rate securities generally have maturity dates far into the future but due to a resetting interest
rate feature associated with these instruments they are readily tradable and rarely have
differences between there par value and fair market value. As we do not intend to hold these
investments until maturity they are classified as available-for-sale and any unrealized holding
gains and losses are recorded, net of tax, as a separate component of accumulated other
comprehensive income. The Companys investment policy
31
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 September 30, 2005, the Company was in compliance with its
investment policy.
Line of Credit
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 September 30, 2005,
we had a standby letter of credit outstanding related to one of our medical insurance carriers for
$105 thousand. The par value of non-equity investments must exceed 125.0% of the borrowed facility
amount, and the investments must meet specified investment grade ratings.
As of September 30, 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.
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 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.
As of September 30, 2005 and December 31, 2004 the Company had outstanding convertible senior
notes with a face value of $100 million. As of September 30, 2005 and December 31, 2004 the book
value of the convertible senior notes was $97.2 million and $97.1 million respectively, net of
unamortized discount of $2.8 million and $2.9 million, respectively. The estimated fair value of
the convertible senior notes was $99.3 million and $106.8 million at September 30, 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 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
32
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.
In the second quarter of 2005, the Company repurchased $125 thousand principal amount of the
convertible subordinated notes at face value, with an associated discount of $1 thousand. The
Company recognized a loss of $1 thousand associated with this buy back.
In the first quarter of 2005, the Company repurchased $1.0 million principal amount of the
convertible subordinated notes, with an associated discount of $12 thousand. The Company
repurchased the notes in the open market for $990 thousand and, as a result, recorded a loss of $3
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 September 30, 2005 and December 31, 2004 we had outstanding convertible subordinated
notes with a face value of $8.9 million and $10.0 million, respectively. As of September 30, 2005
and December 31, 2004 the book value of the convertible subordinated notes was $8.8 million and
$9.9 million, respectively, net of amortized discount of $81 thousand and $126 thousand,
respectively. The estimated fair value of the convertible subordinated notes was $8.9 million and
$10.0 million at September 30, 2005 and December 31, 2004, respectively.
On October 19, 2005 we repurchased $6.4 million principal amount of the convertible
subordinated notes, with an associated discount of $57 thousand. We repurchased the notes in the
open market for $6.4 million and, as a result, we will record a loss of $46 thousand in the fourth
quarter of 2005.
On April 26, 2005 the Board of Directors approved the repurchase of the remaining $2.5 million
principal amount of the convertible subordinated notes. 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.
Stock Repurchase Program
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. The
Company will consider the purchase of Common Stock on the open market or through privately
negotiated transactions from time to time subject to market conditions.
33
Contractual Obligations
The following summarizes the Companys contractual obligations at September 30, 2005 and the
effect of such on its liquidity and cash flows in future periods (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005* |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Thereafter |
|
Future minimum lease payments |
|
$ |
828 |
|
|
$ |
2,322 |
|
|
$ |
1,975 |
|
|
$ |
1,940 |
|
|
$ |
1,883 |
|
|
$ |
3,452 |
|
Purchase obligations(1) |
|
|
21,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible notes |
|
|
688 |
|
|
|
1,863 |
|
|
|
1,863 |
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
19,250 |
|
Convertible senior notes(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
Convertible subordinated notes(2) |
|
|
|
|
|
|
|
|
|
|
8,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,325 |
|
|
$ |
4,185 |
|
|
$ |
12,706 |
|
|
$ |
103,315 |
|
|
$ |
3,258 |
|
|
$ |
22,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
|
(2) |
|
The convertible
senior notes and
the convertible
subordinated notes
are shown at their
face values, gross
of unamortized
discount amounting
to $2.8 million and
$81 thousand,
respectively at
September 30, 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 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 convertible subordinated notes are payable in full in August 2007. |
Off-Balance Sheet Arrangements
We do not engage in any activity involving special purpose entities or off-balance sheet
financing.
Liquidity Outlook
We believe that our current cash and cash equivalents and investments, net, amounting to
$225.3 million at September 30, 2005 and cash generated from operations will satisfy our short and
long-term expected working capital needs, capital expenditures, stock and debt 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.
34
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements. Our statements
concerning our beliefs about the success of our shift in business strategy from perfect-fit
solutions to standards-based solutions, expectations and goals for revenues, gross margin, research
and development expenses, selling, general, and administrative expenses, effective tax rates, the
impact of our restructuring events on future revenues, the anticipated cost savings effects of our
restructuring activities, and our projected liquidity are some of the forward-looking statements
contained in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q include discussions of our
goals, including those discussions set forth in Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations. We cannot provide assurance that these goals will be
achieved.
Although forward-looking statements help provide 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 Quarterly Report on Form 10-Q 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.
35
RISK FACTORS
Risk Factors Related to Our Business
Because of our dependence on certain customers, the loss of, or a substantial decline in sales to,
a top customer could have a material adverse effect on our revenues and profitability.
During 2004, we derived 58.2% of our revenues from five customers. These five customers were
Nokia, Nortel, IBM, Comverse and Diebold. During 2004, revenues attributable to Nokia and Nortel
were 28.5% and 13.7%, respectively. For the nine months ended September 30, 2005, we derived 67.6%
of our revenue from five customers. These five customers were Nokia, Nortel, Comverse, Philips and
Avaya. For the nine months ended September 30, 2005, revenues attributable to Nokia and Nortel were
36.6% and 15.1%, 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 adversely affect revenues and
profitability.
We are shifting our business from predominately perfect fit solutions to more standards-based
products, such as ATCA products, which requires substantial expenditures for research and
development which could adversely affect our short-term earnings and, if the strategy is not
accepted by our customers or properly executed by the Company, it 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 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. In support of this
long-term strategy, over the last four quarters we have shifted our new product research and
development investments from 80% custom, single-use designs to today where have now over 80% of new
product investment directed toward multi-use standards-based products. 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 allow us to grow on a long-term basis.
Revenues from some of these investments, such as ATCA, are not expected to result in any
significant revenues 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.
Our projections of future revenues and earnings are highly subjective and may not reflect future
results that may result in 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 recent experience indicates that
customers can change their purchasing patterns quickly in response to market demands and therefore
these forecasts may not be relied upon to accurately forecast sales. From time to time we provide
projections to our shareholders and the investment community of our future sales and earnings.
Since we do not have long-term purchase commitments from our major customers and the customer order
cycle is short, it is difficult for us to accurately predict the amount of our sales and related
earnings in any given period. Our projections are based on managements best estimate of sales
using historical sales data, information from customers and other information deemed relevant.
These projections are highly subjective since sales to our customers can fluctuate substantially
based on the demands of their customers and the relevant markets. If our actual sales or earnings
are less than the projected amounts, the price of our Common Stock may be adversely affected.
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 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.
36
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 2004, we derived 68.1% and 31.9% of our revenues from
the communications networking and commercial systems markets, respectively. For the nine months
ended September 30, 2005, we derived 74.4% and 24.4% 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, IBM, 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.
Because of our 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 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 or decline in
quality of components supplied could adversely impact our financial performance. For example, we
are dependent solely on Intel for the supply of some microprocessors and other components, and we
depend 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 supply for some of these components would be difficult to locate
and/or it would require a significant amount of time and resources to establish an alternative
supply line. We also rely on contract manufacturers as the suppliers of certain RadiSys products.
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. In addition, any decline in the quality of components supplied by our vendors or products
produced by our contract manufacturing partners could adversely impact our reputation.
We are shifting a significant portion 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. As of September 30, 2005, our contract manufacturing partners were
manufacturing approximately 75% of total unit volumes. We expect to increase our outsourcing to our
contract manufacturers to 80% or more of our unit volume by the end of 2005. 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. We
also rely on contract manufacturers as the suppliers of certain RadiSys products. 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.
37
Competition in the market for embedded systems is intense, and if we lose our position, our
revenues and profitability could decline.
We compete with a number of companies providing embedded systems, including Advantech Co.,
Artesyn Technologies, Continuous Computing, Embedded Communications Computing Group , a unit of
Motorola, divisions within Intel Corporation, Kontron AG, and SBS Technologies. Because the
embedded systems market is growing, it is attracting new non-traditional competitors. These
non-traditional competitors include contract-manufacturers that provide design services and
Asian-based original design manufacturers. Some of our competitors and potential competitors have a
number of significant advantages over us, including:
|
|
|
a longer operating history; |
|
|
|
|
greater name recognition and marketing power; |
|
|
|
|
preferred vendor status with our existing and potential customers; and |
|
|
|
|
significantly greater financial, technical, marketing and other resources, which allow
them to respond more quickly to new or changing opportunities, technologies and customer
requirements. |
Furthermore, existing or potential competitors may establish cooperative relationships with
each other or with third parties or adopt aggressive pricing policies to gain market share.
As a result of increased competition, we could encounter significant pricing pressures. These
pricing pressures could result in significantly lower average selling prices for our products. We
may not be able to offset the effects of any price reductions with an increase in the number of
customers, cost reductions or otherwise. In addition, many of the industries we serve, such as the
communications industry, are encountering market consolidation, or are likely to encounter
consolidation in the near future, which could result in increased pricing pressure and additional
competition.
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. Moreover, to the extent that any
proposed acquisition or strategic investment is not favorably received by shareholders, analysts
and others in the investment community, the price of our Common Stock could be adversely affected.
In addition, acquisitions or strategic investments involve numerous risks, including:
|
|
|
difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company; |
|
|
|
|
the diversion of managements attention from other business concerns; |
|
|
|
|
risks of entering markets in which we have no or limited prior experience; and |
|
|
|
|
the potential loss of key employees of the acquired company. |
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.
Our international operations expose us to additional political, economic and regulatory risks not
faced by businesses that operate only in the United States.
In 2004, we derived 5.0% of our revenues from Canada and Mexico, 50.1% of our revenues from
EMEA and 6.1% from Asia Pacific. For the nine months ended September 30, 2005, we derived 5.1% of
our revenues from Canada and Mexico, 50.1% of our revenues from EMEA and 6.1% from Asia Pacific. In
addition, during 2004 we opened a design center in Shanghai, China and began to utilize a contract
manufacturer in Shenzhen, China. For the nine months ended September 30, 2005 approximately 50% of
our total
38
revenues were associated with products produced at our new China contract manufacturer. As a
result, 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 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 are
subject to inherent risks, including the general economic and political conditions in each country.
These risks, among others, could adversely affect our results of operations or financial position.
If we are unable to generate sufficient income in the future, we may not be able to fully utilize
our net deferred tax assets or support our current levels of goodwill and intangible assets on our
balance sheet.
We cannot provide absolute assurance that we will generate sufficient taxable income in the
future to fully utilize the net deferred tax assets of $27.3 million as of September 30, 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 $30.2 million on the Consolidated Balance Sheet as of September 30, 2005, and
therefore, we may incur an impairment charge in the future.
Our products for embedded computing applications are based on industry standards, which are
continually evolving, and any failure to conform to these standards could have a substantial
negative impact on 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 our addressable markets develop new
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.
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.
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 communications networking and commercial systems markets in general.
Shareholders should be willing to incur the risk of such fluctuations.
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.
39
Our articles of incorporation and our bylaws contain anti-takeover provisions that could delay
or prevent a change of control of our company, even if a change of control would be beneficial to
our shareholders. These provisions:
|
|
|
authorize our board of directors to issue up to 10,000,000 shares of preferred stock and
to determine the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without prior shareholder approval to increase the number of
outstanding shares and deter or prevent a takeover attempt; |
|
|
|
|
establish advance notice requirements for nominations for election to our board of
directors or for proposing matters that can be acted upon by shareholders at shareholder
meetings; |
|
|
|
|
prohibit cumulative voting in the election of directors, which would otherwise allow less
than a majority of shareholders to elect director candidates; and |
|
|
|
|
limit the ability of shareholders to take action by written consent, thereby effectively
requiring all common shareholder actions to be taken at a meeting of our common
shareholders. |
In addition, if our Common Stock is acquired in specified transactions deemed to constitute
control share acquisitions, provisions of Oregon law condition the voting rights that would
otherwise be associated with those common shares upon approval by our shareholders (excluding,
among other things, the acquirer in any such transaction). Provisions of Oregon law also restrict,
subject to specified exceptions, the ability of a person owning 15% or more of our Common Stock to
enter into any business combination transaction with us.
The foregoing provisions of Oregon law and our articles of incorporation and bylaws could
limit the price that investors might be willing to pay in the future for shares of our Common
Stock.
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. In addition, poor execution of the transition RoHS compliant
inventory could result in large balances of excess or obsolete inventory. If these risks are not
addressed the impact could have a materially adverse affect on our business, financial condition
and results from operations.
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. Proposed changes to accounting
rules, including proposals to account for employee stock options as a compensation expense, could
materially increase the expense that we report under generally accepted accounting principles and
adversely affect our operating results.
Item 3. 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, those of high-quality corporate issuers and municipalities. The Companys investments in
the debt instruments of municipalities primarily consist of
40
investments in auction rate securities. We attempt to protect and preserve our invested funds
by limiting default, market, and reinvestment risk. Investments in both fixed rate and floating
rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair value adversely affected due to a rise in interest rates while floating rate
securities may produce less income than expected if interest rates decline. Due to the short
duration of most of the investment portfolio, an immediate 10% change in interest rates would not
have a material effect on the fair value of our investment portfolio. 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 September 30, 2005 and December 31, 2004 was
$186.9 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 Japanese Yen, Canadian Dollar, British Pound, New Shekel, Chinese Yuan and
Euro. 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, other regulations and restrictions, and foreign exchange rate volatility.
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 $133 thousand for the three months ended September 30, 2005 and a net
loss of $236 thousand for the three months ended September 30, 2004. Foreign currency exchange rate
fluctuations resulted in a net loss of $558 thousand in the nine months ended September 30, 2005
and a net loss of $105 thousand for the nine months ended September 30, 2004.
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, 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 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 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 $99.3 million
and $106.8 million at September 30, 2005 and December 31, 2004, respectively.
Convertible Subordinated Notes. 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
41
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 $8.9 million and $10.0 million at September 30, 2005 and December 31, 2004,
respectively.
As of September 30, 2005 we have cumulatively repurchased convertible subordinated notes in
the amount of $112 million, face value, for $100.6 million. On October 19, 2005 the Company
repurchased $6.4 million principal amount of the convertible subordinated notes. These repurchases
were financed from our investment portfolio. We received 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 September 30, 2005, our aggregate cash and cash equivalents and investments were
$225.3 million.
Item 4. Controls and Procedures
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, 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.
In connection with the evaluation described above, we identified no change in our internal
control over financial reporting that occurred during the nine months ended September 30, 2005, and
that has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
42
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
|
|
|
|
|
Exhibit |
|
|
No |
|
Description |
|
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. |
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
RADISYS CORPORATION |
|
|
|
|
|
|
|
|
|
|
Dated: November 7, 2005
|
|
By: |
/s/ SCOTT C. GROUT
|
|
|
|
|
|
|
|
Scott C. Grout |
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
Dated: November 7, 2005
|
|
By: |
/s/ JULIA A. HARPER |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julia A. Harper |
|
|
|
|
|
|
|
Vice President of Finance and Administration
|
|
|
|
|
|
|
|
and Chief Financial Officer |
|
|
44
EXHIBIT INDEX
|
|
|
|
|
Exhibit No |
|
Description |
|
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. |
45