e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
OR
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o |
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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)
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OREGON
(State or other jurisdiction of
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93-0945232
(I.R.S. Employer |
Incorporation or Organization)
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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 a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer þ Non-accelerated filero
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 August 1, 2006: 21,416,590
RADISYS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues |
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$ |
84,539 |
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$ |
65,956 |
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$ |
150,350 |
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$ |
123,473 |
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Cost of sales |
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60,946 |
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46,557 |
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109,023 |
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85,532 |
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Gross margin |
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23,593 |
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19,399 |
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41,327 |
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37,941 |
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Research and development |
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10,717 |
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7,292 |
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19,841 |
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14,823 |
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Selling, general and administrative |
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9,484 |
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7,708 |
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17,689 |
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14,962 |
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Intangible assets amortization |
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136 |
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513 |
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461 |
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1,026 |
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Restructuring and other charges (reversals) |
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(233 |
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1,146 |
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(174 |
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1,128 |
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Income from operations |
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3,489 |
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2,740 |
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3,510 |
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6,002 |
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Loss on repurchase of convertible subordinated notes |
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(1 |
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(4 |
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Interest expense |
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(433 |
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(527 |
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(869 |
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(1,069 |
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Interest income |
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2,635 |
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1,399 |
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4,871 |
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2,570 |
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Other (expense) income, net |
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464 |
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(113 |
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475 |
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(462 |
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Income before income tax provision |
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6,155 |
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3,498 |
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7,987 |
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7,037 |
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Income tax provision |
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1,796 |
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933 |
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2,202 |
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1,886 |
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Net income |
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$ |
4,359 |
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$ |
2,565 |
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$ |
5,785 |
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$ |
5,151 |
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Net income per share: |
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Basic |
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$ |
0.21 |
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$ |
0.13 |
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$ |
0.28 |
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$ |
0.26 |
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Diluted |
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$ |
0.18 |
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$ |
0.11 |
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$ |
0.24 |
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$ |
0.23 |
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Weighted average shares outstanding: |
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Basic |
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21,015 |
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19,982 |
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20,858 |
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19,882 |
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Diluted |
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25,915 |
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24,620 |
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25,731 |
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24,548 |
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The accompanying notes are an integral part of these financial statements.
3
RADISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
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June 30, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
130,769 |
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$ |
90,055 |
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Short-term investments, net |
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112,150 |
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135,800 |
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Accounts receivable, net |
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57,538 |
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39,055 |
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Other receivables |
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2,103 |
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3,886 |
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Inventories, net |
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15,669 |
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21,629 |
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Assets held for sale |
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2,105 |
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Other current assets |
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3,000 |
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2,426 |
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Deferred tax assets |
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7,399 |
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7,399 |
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Total current assets |
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330,733 |
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300,250 |
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Property and equipment, net |
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11,710 |
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13,576 |
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Goodwill |
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27,463 |
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27,463 |
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Intangible assets, net |
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1,699 |
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2,159 |
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Long-term deferred tax assets |
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19,748 |
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21,634 |
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Other assets |
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4,092 |
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3,629 |
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Total assets |
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$ |
395,445 |
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$ |
368,711 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
46,467 |
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$ |
36,903 |
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Accrued wages and bonuses |
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6,294 |
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4,829 |
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Accrued interest payable |
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224 |
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224 |
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Accrued restructuring |
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26 |
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856 |
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Other accrued liabilities |
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9,862 |
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8,279 |
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Total current liabilities |
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62,873 |
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51,091 |
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Long-term liabilities: |
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Convertible senior notes, net |
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97,345 |
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97,279 |
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Convertible subordinated notes, net |
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2,504 |
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2,498 |
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Total long-term liabilities |
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99,849 |
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99,777 |
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Total liabilities |
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162,722 |
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150,868 |
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Shareholders equity: |
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Preferred stock $.01 par value, 10,000 shares authorized; none issued or outstanding |
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Common stock no par value, 100,000 shares authorized; 21,376 and 20,703 shares
issued and outstanding at June 30, 2006 and December 31, 2005 |
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202,703 |
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193,839 |
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Retained earnings |
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26,060 |
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20,275 |
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Accumulated other comprehensive income: |
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Cumulative translation adjustments |
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3,960 |
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3,729 |
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Total shareholders equity |
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232,723 |
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217,843 |
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Total liabilities and shareholders equity |
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$ |
395,445 |
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$ |
368,711 |
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The accompanying notes are an integral part of these financial statements.
4
RADISYS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands, unaudited)
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Accumulated |
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other |
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Total |
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Common stock |
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comprehensive |
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Retained |
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comprehensive |
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Shares |
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Amount |
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income (1) |
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earnings |
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Total |
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income (2) |
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Balances, December 31, 2005 |
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20,703 |
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$ |
193,839 |
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$ |
3,729 |
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$ |
20,275 |
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$ |
217,843 |
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Shares issued pursuant to benefit plans |
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560 |
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6,172 |
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6,172 |
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$ |
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Stock-based compensation associated
with employee benefit plans |
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2,692 |
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2,692 |
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Restricted stock granted, net |
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113 |
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Translation adjustments |
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231 |
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231 |
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231 |
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Net income for the period |
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5,785 |
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5,785 |
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5,785 |
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Balances, June 30, 2006 |
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21,376 |
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$ |
202,703 |
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$ |
3,960 |
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$ |
26,060 |
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$ |
232,723 |
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Comprehensive income, for the six
months ended June 30, 2006 |
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$ |
6,016 |
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(1) |
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Income taxes are not provided for foreign currency translation adjustments. |
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(2) |
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For the three months ended June 30, 2006, other comprehensive income amounted to $4.5 million
and consisted of the net income for the period of $4.4 million and net gains from translation
adjustments of $176 thousand. For the three months ended June 30, 2005, other comprehensive
income amounted to $2.4 million and consisted of the net income for the period of $2.6 million
and net losses from translation adjustments of $214 thousand For the six months ended June 30,
2005, other comprehensive income amounted to $5.0 million and consisted of net income for the
period of $5.2 million and net losses from translation adjustments of $230 thousand. |
The accompanying notes are an integral part of these financial statements.
5
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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For the Six Months Ended |
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June 30, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income |
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$ |
5,785 |
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$ |
5,151 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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3,085 |
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4,022 |
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Inventory valuation allowance |
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2,275 |
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1,475 |
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Deferred income taxes |
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1,886 |
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|
444 |
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Stock-based compensation expense |
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2,692 |
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31 |
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Tax benefit of stock-based benefit plans |
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1,096 |
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Other |
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(68 |
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(121 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(18,542 |
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(498 |
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Other receivables |
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1,783 |
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(2,183 |
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Inventories |
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3,684 |
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530 |
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Other current assets |
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(575 |
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1,086 |
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Accounts payable |
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9,549 |
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4,609 |
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Accrued restructuring |
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(851 |
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(268 |
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Accrued interest payable |
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(23 |
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Accrued wages and bonuses |
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1,443 |
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(784 |
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Other accrued liabilities |
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1,536 |
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(355 |
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Net cash provided by operating activities |
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13,682 |
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|
14,212 |
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Cash flows from investing activities: |
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Proceeds from sale or maturity of held-to-maturity investments |
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25,750 |
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41,500 |
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Purchase of held-to-maturity investments |
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(36,499 |
) |
Proceeds from sale of maturity of auction rate securities |
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72,000 |
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27,400 |
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Purchase of auction rate securities |
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(74,100 |
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(56,950 |
) |
Capital expenditures |
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(2,750 |
) |
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(3,083 |
) |
Other |
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(362 |
) |
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(29 |
) |
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Net cash provided by (used in) investing activities |
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20,538 |
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(27,661 |
) |
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Cash flows from financing activities: |
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Early extinguishments of convertible subordinated notes |
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(1,115 |
) |
Proceeds from issuance of common stock |
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|
6,172 |
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4,092 |
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Net cash provided by financing activities |
|
|
6,172 |
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|
2,977 |
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Effects of exchange rate changes on cash |
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|
322 |
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(910 |
) |
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Net increase (decrease) in cash and cash equivalents |
|
|
40,714 |
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(11,382 |
) |
Cash and cash equivalents, beginning of period |
|
|
90,055 |
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|
80,566 |
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Cash and cash equivalents, end of period |
|
$ |
130,769 |
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|
$ |
69,184 |
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|
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 or RadiSys) has adhered to the accounting policies set
forth in its Annual Report on Form 10-K for the year ended December 31, 2005 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. Additionally, the accompanying financial data as
of June 30, 2006 and for the three and six months ended June 30, 2006 and 2005 has been prepared by
the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles have been
omitted pursuant to such rules and regulations. However, the Company believes that the disclosures
are adequate to make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial statements and the notes
thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
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 six month periods ended June 30, 2006, other than the adoption of Statement
of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS
123R), 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, cash flows
or shareholders equity.
Inventory Reserves
The Company records the inventory valuation allowance for estimated obsolete or unmarketable
inventories as the difference between the cost of inventories and the estimated net realizable
value based upon assumptions about future demand and market conditions. Factors influencing the
provision include: changes in demand, rapid technological changes, product life cycle and
development plans, component cost trends, product pricing, regulatory requirements affecting
components, and physical deterioration. If actual market conditions are less favorable than those
projected by management additional provisions for inventory reserves may be required. The Companys
estimate for the allowance 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 its 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. 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
valuation allowance. This liability, referred to as adverse purchase commitments, is provided for
in other accrued liabilities in the accompanying balance sheets. Adverse purchase commitments
amounted to $1.4 million and $828 thousand at June 30, 2006 and December 31, 2005, respectively.
For the six months ended June 30, 2006 and 2005 the Company recorded a net provision for adverse
purchase commitments of $815 thousand and $166 thousand, respectively.
7
Accrued Restructuring and Other Charges
Financial Accounting Standard Board (FASB) Statement of Financial Accounting Standard (SFAS)
No. 146 Accounting for Costs Associated with Exit or Disposal Activities, 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 six months
ended June 30, 2006 and 2005 the Company recorded non-severance related restructuring and 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.
Guarantees and Indemnification Obligations
FASB 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 requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee and
requires additional disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees it has issued. The following is a summary
of the agreements that the Company has determined are within the scope of FIN No. 45.
As permitted under Oregon law, the Company has agreements whereby it indemnifies its officers,
directors and certain finance employees for certain events or occurrences while the officer,
director or employee is or was serving in such capacity at the request of the Company. The term of
the indemnification period is for the officers, directors or employees lifetime. The maximum
potential amount of future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has a Director and Officer insurance
policy that limits its exposure and enables the Company to recover a portion of any future amounts
paid. 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 June 30, 2006.
The Company enters into standard indemnification agreements in its ordinary course of
business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to
reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally
our business partners or customers, in connection with patent, copyright or other intellectual
property infringement claims by any third party with respect to our current products, as well as
claims relating to property damage or personal injury resulting from the performance of services by
us or our subcontractors. The maximum potential amount of future payments we could be required to
make under these indemnification agreements is generally limited. Historically, our costs to defend
lawsuits or settle claims relating to such indemnity agreements have been minimal and accordingly
management believes the estimated fair value of these agreements is immaterial.
The Company provides for the estimated cost of product warranties at the time it recognizes
revenue. Products are generally sold with warranty coverage for a period of 24 months after
shipment. Parts and labor are covered under the terms of the warranty agreement. The workmanship of
our products produced by contract manufacturers is covered under warranties provided by the
contract manufacturer for a 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 component suppliers; however, ongoing failure rates, material usage and service delivery costs
incurred in correcting product failure, as well as specific product class failures out of the
Companys baseline experience affect the estimated warranty obligation. If actual product failure
rates, material usage or service delivery costs differ from estimates, revisions to the estimated
warranty liability would be required.
The following is a summary of the change in the Companys warranty liability for the six
months ended June 30, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
Warranty liability balance, beginning of the period |
|
$ |
2,124 |
|
|
$ |
1,719 |
|
Product warranty accruals |
|
|
1,832 |
|
|
|
1,678 |
|
Utilization of accrual |
|
|
(1,890 |
) |
|
|
(1,560 |
) |
|
|
|
|
|
|
|
Warranty liability balance, end of the period |
|
$ |
2,066 |
|
|
$ |
1,837 |
|
|
|
|
|
|
|
|
8
The warranty liability balance is included in other accrued liabilities in the accompanying
Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005. 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
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), using the modified prospective transition method and therefore has not restated
results for prior periods. Under this transition method, stock-based compensation expense for the
first two quarters of fiscal 2006 includes compensation expense for all stock-based compensation
awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provision of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Stock-based compensation expense for all stock-based
compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs on
a straight-line basis over the requisite service period of the award. Prior to the adoption of SFAS
123R, the Company recognized stock-based compensation expense in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SECs
interpretation of SFAS 123R and the valuation of share-based payments for public companies. The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 2 to the
Consolidated Financial Statements for a further discussion on stock-based compensation.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109.
This Interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected to be taken in a tax
return, and provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently assessing the impact, if any, that the
adoption of this Interpretation will have on its financial statements.
Note 2 Stock-based Compensation
Stock-Based Employee Benefit Plans
Equity instruments are granted to employees, directors and consultants in certain instances,
as defined in the respective plan agreements. Beginning in the second quarter of 2005, the Company
issued equity instruments in the form of stock options, restricted shares and shares issued to
employees as a result of the employee stock purchase plan (ESPP). Prior to the second quarter of
2005, the Company issued equity instruments in the form of stock options and ESPP shares, only.
Stock Options and Restricted Shares
The Companys 1995 Stock Incentive Plan (1995 Plan) and 2001 Nonqualified Stock Option Plan
(2001 Plan) provide the Board of Directors broad discretion in creating employee equity
incentives. Unless otherwise stipulated in the plan document, the Board of Directors, at their
discretion, determines stock option exercise prices, which may not be less than the fair market
value of RadiSys common stock at the date of grant, vesting periods and the expiration periods
which are a maximum of 10 years from the date of grant. Under the 1995 Plan, as amended, 5,425,000
shares of common stock have been reserved and authorized for issuance to any non-employee directors
and employees, with a maximum of 450,000 shares in connection with the hiring of an employee and
100,000 shares in any calendar year to one participant. Under the 2001 Plan, as amended, 2,250,000
shares of common stock have been reserved and authorized for issuance to selected employees, who
are not executive officers or directors of the Company. Currently, all non-director stock option
grants are issued under an option agreement that provides, among other things, that the option
grant vests over a 3 year period; specifically, 33% of the options vest one year after the grant
date and approximately 2.75% of the options vest monthly for 24 months after the first year.
On March 1, 2005, the Compensation and Development Committee of the Board of Directors
approved the form of the restricted share agreement to be used in connection with restricted stock
awards to be granted to employees of the Company under the terms of
9
the Companys 1995 Stock Incentive Plan. The agreement provides, among other things, that 33%
of the shares vest each year following the date of the grant.
The table below summarizes the activities related to the Companys stock plans (in thousands,
except weighted average exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Shares |
|
|
Stock Options |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Available for |
|
|
Outstanding |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Grant |
|
|
Number |
|
|
Average Price |
|
|
Life (Years) |
|
|
Value |
|
Balance, December 31, 2005 |
|
|
1,545 |
|
|
|
3,376 |
|
|
$ |
16.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(430 |
) |
|
|
430 |
|
|
$ |
20.60 |
|
|
|
|
|
|
|
|
|
Restricted shares granted |
|
|
(119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
34 |
|
|
|
(34 |
) |
|
$ |
16.68 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
159 |
|
|
|
(159 |
) |
|
$ |
20.47 |
|
|
|
|
|
|
|
|
|
Restricted shares canceled |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares repurchased |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(398 |
) |
|
$ |
10.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2006 |
|
|
1,195 |
|
|
|
3,215 |
|
|
$ |
17.72 |
|
|
|
4.77 |
|
|
$ |
16,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest, June 30, 2006 |
|
|
|
|
|
|
3,139 |
|
|
$ |
17.71 |
|
|
|
4.73 |
|
|
$ |
16,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2006 |
|
|
|
|
|
|
2,278 |
|
|
$ |
17.74 |
|
|
|
4.05 |
|
|
$ |
12,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value
(the difference between the closing price of RadiSys shares as quoted on the Nasdaq Global Select
Market for June 30, 2006 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders exercised their options
on June 30, 2006. The intrinsic value changes based on the fair market value of RadiSys stock.
Total intrinsic value of options exercised for the three and six months ended June 30, 2006 was
$3.0 million and $3.8 million, respectively.
Employee Stock Purchase Plan
In December 1995, the Company established an Employee Stock Purchase Plan (ESPP). All
employees of RadiSys and its subsidiaries, who customarily work 20 or more hours per week,
including all officers, are eligible to participate in the ESPP. Separate offerings of common stock
to eligible employees under the ESPP (an Offering) commence on February 15, May 15, August 15 and
November 15 of each calendar year (the Enrollment Dates) and continue for a period of 18 months.
Multiple separate Offerings are in operation under the ESPP at any given time. An employee may
participate in only one Offering at a time and may purchase shares only through payroll deductions
permitted under the provisions stipulated by the ESPP. The purchase price is the lesser of 85% of
the fair market value of the common stock on date of grant or that of the purchase date (look-back
feature). Pursuant to the provisions of the ESPP, as amended, the Company is authorized to issue
up to 4,150,000 shares of common stock under the ESPP. For the six months ended June 30, 2006 the
Company issued 162,099 shares under the ESPP. At June 30 2006, 1,415,107 shares are available for
issuance under the ESPP.
Stock-Based Compensation associated with Stock-Based Employee Benefit Plans
Prior to January 1, 2006, the Company accounted for stock-based compensation associated with
its stock-based employee benefit plans using the intrinsic value method in accordance with the
provisions of APB 25 and, in accordance with the provisions of SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure, An Amendment of SFAS No. 123, the Company
provided pro forma disclosures of net income (loss) and net income (loss) per common share for
periods prior to January 1, 2006 as if the fair value method had been applied in measuring
compensation expense in accordance with SFAS 123.
In December 2004, the FASB issued SFAS 123R, which replaces SFAS 123 and supersedes APB 25.
SFAS 123R requires companies to account for stock-based compensation based on the fair value
method, which replaces the intrinsic value method. The Company adopted SFAS 123R as of January 1,
2006 using the modified prospective method, which requires that compensation expense be recorded
for all unvested stock options and ESPP shares outstanding as of January 1, 2006. Prior periods
will not be restated. Beginning January 1, 2006, the pro forma disclosures previously permitted are
no longer an alternative to financial statement recognition.
10
In 2004, in an effort to reduce the amount of stock-based compensation expense that the
Company would include in its financial statements after the effective date of SFAS 123R or January
1, 2006, the Compensation and Development Committee of the Board of Directors approved an
acceleration of vesting of those non-director employee stock options with an option price greater
than $15.99, which was greater than the fair market value of the shares on that date ($14.23).
Approximately 1.1 million options with varying remaining vesting schedules were subject to the
acceleration and became immediately exercisable. Historically the Company has not accelerated the
vesting of employee stock options. As a result of the acceleration, the Company reduced the
stock-based compensation expense that it will include in net income after January 1, 2006. Included
in the pro forma stock-based compensation expense for fiscal year 2004 was $6.1 million associated
with the acceleration, net of related tax effects. As a result of the acceleration, the Company
estimates that stock-based compensation expense, net of related tax effects, was reduced by
approximately $492 thousand and $980 thousand in the three and six months ended June 30, 2006,
respectively, and estimates a reduction of approximately $1.8 million for fiscal year 2006 and
approximately $214 thousand for fiscal year 2007.
In an effort to further reduce the impact of SFAS 123R, based on Board of Director approval
received on March 1, 2005, the Company changed its equity instrument compensation structure such
that it has reduced the total number of options granted to employees and the number of employees
who receive stock-based employee benefit plan awards.
As a result of adopting SFAS 123R, income before income taxes for the three and six months
ended June 30, 2006 was $1.4 million and $2.7 million lower, respectively, and net income for the
three and six months ended June 30, 2006 was $1.0 million and $2.0 million lower, respectively,
than if the Company had continued to account for stock-based compensation under APB 25. The impact
on both basic and diluted earnings per share for the three months ended June 30, 2006 was $.05 and
$.04 per share, respectively, and for the six months ended June 30, 2006 was $.09 and $.08,
respectively. In addition, prior to the adoption of SFAS 123R, the Company presented the tax
benefit of stock option exercises as operating cash flows. Upon the adoption of SFAS 123R, tax
benefits resulting from tax deductions in excess of the compensation cost recognized for those
options will be classified as financing cash flows when realized as a reduction of cash taxes owed.
The Company continues to use the Black-Scholes model to measure the grant date fair value of
stock options and ESPP shares. The grant date fair value of stock options that are expected to vest
is recognized on a straight-line basis over the requisite service period, which is equal to the
option vesting period which is, generally, 3 years. The grant date fair value of ESPP shares that
are expected to vest is recognized on a straight-line basis over the requisite service period,
which is generally, 18 months, subject to modification at the date of purchase due to the ESPP
look-back feature. The Company computes the grant date fair value of restricted stock granted as
the closing price of RadiSys shares as quoted on the Nasdaq Global Select Market on the date of
grant. The grant date fair value of restricted shares that are expected to vest is recognized on a
straight-line basis over the requisite service period, which is 3 years. The estimate of the number
of options, ESPP shares and restricted stock expected to vest is determined based on historical
experience.
To determine the fair value of the stock options and ESPP shares using the Black-Scholes
option pricing model, the calculation takes into consideration the effect of the following:
|
|
|
Exercise price of the option or purchase price of the ESPP share; |
|
|
|
|
Price of our common stock on the date of grant; |
|
|
|
|
Expected term of the option or share; |
|
|
|
|
Expected volatility of our common stock over the expected term of the option or share; and |
|
|
|
|
Risk free interest rate during the expected term of the option or share. |
The calculation includes several assumptions that require managements judgment. The expected
term of the option or share is determined based on assumptions about patterns of employee
exercises, and represents a probability-weighted-average time period from grant until exercise of
stock options, subject to information available at time of grant. Determining expected volatility
generally begins with calculating historical volatility for a similar long-term period and then
considering the ways in which the future is reasonably expected to differ from the past.
As part of its SFAS 123R adoption, the Company also examined its historical pattern of option
exercises in an effort to determine if there were any discernable activity patterns based on
certain employee populations. From this analysis, the Company identified
11
three employee populations. The expected term computation is based on historical vested option
exercise and post-vest forfeiture patterns and included an estimate of the expected term for
options that were fully vested and outstanding at June 30, 2006, for each of the three populations
identified. The estimate of the expected term for options that were fully vested and outstanding at
June 30, 2006 was determined as the midpoint of a range of estimated expected terms determined as
follows: the low end of the range assumes the fully vested and outstanding options settle on June
30, 2006 and the high end of the range assumes that these options expire upon contractual term. The
risk free interest rate is based on the U.S. Treasury constant maturities in effect at the time of
grant for the expected term of the option or share.
The Company computed the grant date fair value of options and ESPP shares granted during the
three and six months ended June 30, 2006 and 2005, using the Black-Scholes option pricing model
with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP Shares Granted in the |
|
|
Options Granted in the Three |
|
Three Months |
|
|
Months ended June 30, |
|
Ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Expected term (in years) |
|
|
4.1 |
|
|
|
4.2 |
|
|
|
1.5 |
|
|
|
1.5 |
|
Interest rate |
|
|
5.02 |
% |
|
|
3.79 |
% |
|
|
4.99 |
% |
|
|
3.20 |
% |
Volatility |
|
|
59 |
% |
|
|
66 |
% |
|
|
34 |
% |
|
|
64 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP Shares Granted in the |
|
|
Options Granted in the Six |
|
Six Months |
|
|
Months ended June 30, |
|
Ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Expected term (in years) |
|
|
4.1 |
|
|
|
4.2 |
|
|
|
1.5 |
|
|
|
1.5 |
|
Interest rate |
|
|
5.0 |
% |
|
|
3.76 |
% |
|
|
4.70 |
% |
|
|
3.07 |
% |
Volatility |
|
|
58 |
% |
|
|
64 |
% |
|
|
43 |
% |
|
|
61 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2006 and 2005, the total value of the options granted
was approximately $4.2 million and $5.0 million, respectively. For the six months ended June 30,
2006 and 2005, the total value of the options granted was approximately $4.4 million and $6.3
million, respectively. For the three months ended June 30, 2006 and 2005 the weighted-average
valuation per option granted was $10.44 and $7.73, respectively. For the six months ended June 30,
2006 and 2005 the weighted-average valuation per option granted was $10.31 and $7.67, respectively.
The total estimated value associated with ESPP shares to be granted under enrollment periods
beginning in the three months ended June 30, 2006 and 2005 was $111 thousand and $104 thousand,
respectively. The total estimated value associated with ESPP shares to be granted under enrollment
periods beginning in the six months ended June 30, 2006 and 2005 was $1.6 million and $164
thousand, respectively.
The table below summarizes the activities related to the Companys unvested restricted share
grants (in thousands; except weighted-average grant date fair values):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Restricted |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Balance, December 31, 2005 |
|
|
95 |
|
|
$ |
16.67 |
|
Shares granted |
|
|
119 |
|
|
|
20.75 |
|
Shares vested |
|
|
(13 |
) |
|
|
14.23 |
|
Shares canceled |
|
|
(2 |
) |
|
|
18.34 |
|
|
|
|
|
|
|
|
Balance, June 30, 2006 |
|
|
199 |
|
|
$ |
19.25 |
|
|
|
|
|
|
|
|
The Company expects that approximately 179 thousand of the balance of restricted shares at
June 30, 2006 will vest.
The pro forma table below reflects net income and basic and diluted net income per share for
the three and six months ended June 30, 2005 had RadiSys accounted for these plans in accordance
with SFAS No. 123R, as follows (in thousands, except per share amounts):
12
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Six |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Net income |
|
$ |
2,565 |
|
|
$ |
5,151 |
|
Add: Stock-based
compensation expense
included in reported
net income, net of
related tax effects |
|
|
19 |
|
|
|
19 |
|
Deduct: Stock-based
compensation expense
determined under fair
value method for all
awards, net of related
tax effects |
|
|
(813 |
) |
|
|
(1,446 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
1,771 |
|
|
$ |
3,724 |
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.13 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.11 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
Pro forma basic |
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
Pro forma diluted |
|
$ |
0.08 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2006, stock-based compensation under SFAS 123R was
recognized and allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Six |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2006 |
|
Cost of sales |
|
$ |
198 |
|
|
$ |
416 |
|
Research and development |
|
|
363 |
|
|
|
751 |
|
Selling, general and administrative |
|
|
834 |
|
|
|
1,524 |
|
|
|
|
|
|
|
|
|
|
|
1,395 |
|
|
|
2,691 |
|
Income tax benefit |
|
|
(356 |
) |
|
|
(672 |
) |
|
|
|
|
|
|
|
Total stock-based compensation expense after, income tax benefit |
|
$ |
1,039 |
|
|
$ |
2,019 |
|
|
|
|
|
|
|
|
For the three months ended June 30, 2006, stock-based compensation associated with stock
options, restricted stock and ESPP shares amounted to $854 thousand, $289 thousand and $252
thousand, respectively. For the six months ended June 30, 2006, stock-based compensation
associated with stock options, restricted stock and ESPP shares amounted to $1.6 million, $747
thousand and $384 thousand, respectively.
As of June 30, 2006, $7.0 million of total unrecognized compensation cost related to stock
options is expected to be recognized over a weighted-average period of 2.17 years. As of June 30,
2006, $3.2 million of unrecognized stock-based compensation expense related to unvested restricted
shares is expected to be recognized over a weighted-average period of 2.65 years.
Note 3 Investments
Short-term and long-term investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Short-term held-to-maturity investments |
|
$ |
14,000 |
|
|
$ |
39,750 |
|
|
|
|
|
|
|
|
Short-term available-for-sale investments |
|
$ |
98,150 |
|
|
$ |
96,050 |
|
|
|
|
|
|
|
|
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 and six months ended June 30, 2006 and 2005, the Company did not recognize any gains or
losses on the sale of available-for-sale investments as the fair value of these investments
approximated their carrying value. The Company incurred no unrealized gains or losses on
investments classified as available-for-sale as of June 30, 2006 or December 31, 2005. 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 June 30, 2006, the Company was in
compliance with its investment policy.
Note 4 Accounts Receivable and Other Receivables
Accounts receivable consists of trade accounts receivable. Accounts receivable balances
consisted of the following (in thousands):
13
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Accounts receivable, gross |
|
$ |
58,397 |
|
|
$ |
39,931 |
|
Less: allowance for doubtful accounts |
|
|
(859 |
) |
|
|
(876 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
57,538 |
|
|
$ |
39,055 |
|
|
|
|
|
|
|
|
The Company recorded no provisions for allowance for doubtful accounts during the six months
ended June 30, 2006 and 2005.
As of June 30, 2006 and December 31, 2005 the balance in other receivables was $2.1 million
and $3.9 million, respectively. Other receivables consisted primarily of non-trade receivables
including receivables for inventory sold to our contract manufacturing partners and sub-lease
billings. Sales to the Companys contract manufacturing partners are based on terms and conditions
similar to the terms offered to the Companys regular customers. There is no revenue recorded
associated with non-trade receivables.
Note 5 Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
18,657 |
|
|
$ |
20,790 |
|
Work-in-process |
|
|
1,819 |
|
|
|
2,282 |
|
Finished goods |
|
|
2,962 |
|
|
|
5,829 |
|
|
|
|
|
|
|
|
|
|
|
23,438 |
|
|
|
28,901 |
|
Less: inventory valuation allowance |
|
|
(7,769 |
) |
|
|
(7,272 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
15,669 |
|
|
$ |
21,629 |
|
|
|
|
|
|
|
|
During the three months ended June 30, 2006 and 2005, the Company recorded provisions for
excess and obsolete inventory of $937 thousand and $832 thousand, respectively. During the six
months ended June 30, 2006 and 2005, the Company recorded provisions for excess and obsolete
inventory of $2.3 million and $1.5 million, respectively.
Note 6 Long-Lived Assets Held for Sale
Beginning in 2001, RadiSys made it part of its strategic plan to significantly reduce its
costs. As part of its plan to reduce costs RadiSys began in 2004 to outsource the manufacture of
most of its products. Through various restructuring activities, facilities requirements for
manufacturing and other activities in the Hillsboro, Oregon location have decreased significantly.
As a result, management decided to transfer operations currently located in one of the Companys
buildings in Hillsboro, Oregon (DC3 building) to its other building located in Hillsboro, Oregon
and its contract manufacturing partners.
In January 2006, RadiSys vacated the DC3 building and put it and the surrounding land, which
had previously been held for future expansion, on the market for sale. The assets held for sale had
a recorded value of $2.1 million which included land with value of $0.8 million, building and
building improvements with net value of $1.3 million, and machinery and equipment with net value of
$38 thousand. The Company classified this facility in net assets held for sale as of January 31,
2006.
Note 7 Accrued Restructuring and Other Charges
Accrued restructuring and other charges consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Second quarter 2005 restructuring charge |
|
$ |
26 |
|
|
$ |
803 |
|
Fourth quarter 2001 restructuring charge |
|
|
|
|
|
|
20 |
|
Other |
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
Total |
|
$ |
26 |
|
|
$ |
856 |
|
|
|
|
|
|
|
|
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
14
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.
Second Quarter 2005 Restructuring
In 2005, the Company entered into a restructuring plan that included the elimination of 93
positions primarily within the Companys manufacturing operations. These employee positions were to
be eliminated as a result of continued outsourcing of production to the Companys primary
manufacturing partners, Celestica and Foxconn.
The following table summarizes the changes to the second quarter 2005 restructuring costs (in
thousands):
|
|
|
|
|
|
|
Employee |
|
|
|
Termination and |
|
|
|
Related Costs |
|
Restructuring and other costs |
|
$ |
1,108 |
|
Additions |
|
|
219 |
|
Expenditures |
|
|
(355 |
) |
Reversals |
|
|
(169 |
) |
|
|
|
|
Balance accrued as of December 31, 2005 |
|
|
803 |
|
|
|
|
|
Additions |
|
|
93 |
|
Expenditures |
|
|
(540 |
) |
Reversals |
|
|
(44 |
) |
|
|
|
|
Balance accrued as of March 31, 2006 |
|
|
312 |
|
|
|
|
|
Additions |
|
|
|
|
Expenditures |
|
|
(53 |
) |
Reversals |
|
|
(233 |
) |
|
|
|
|
Balance accrued as of June 30, 2006 |
|
$ |
26 |
|
|
|
|
|
Employee termination and related costs include severance and other related separation costs.
Additions to the original accrual were primarily attributable to the additional retention bonuses
and related expenses for employment terminations that were expected to occur later in 2006. During
the second quarter of 2006, the Company announced that it was discontinuing its relationship with
one of its contract manufacturers. The Company has also experienced delays in outsourcing its
additional manufacturing operations. As a result, the Company determined that all future employment
terminations that were originally included in the second quarter 2005 restructuring event would not
occur in the near term and the associated liability was reversed in the second quarter of 2006.
The balance of the accrual relates to two employment terminations that will still occur according
to the plan. The Company anticipates payment against the remainder of the liability to be complete
in January 2007.
Fourth Quarter 2001 Restructuring
The accrual amount remaining as of December 31, 2005 represents lease obligations relating to
the facilities in Boca Raton, Florida which were paid in January 2006.
Note 8 Short-Term Borrowings
During the quarter ended March 31, 2006, the Company transferred its line of credit facility
from its commercial bank to an investment bank, for $20.0 million at an interest rate based on the
30-day London Inter-Bank Offered Rate (LIBOR) plus 0.75%. The line of credit is collateralized by
the Companys non-equity investments. At June 30, 2006, the Company had a standby letter of credit
outstanding related to one of its medical insurance carriers for $105 thousand. The market value of
non-equity investments must exceed 125.0% of the borrowed facility amount, and the investments must
meet specified investment grade ratings.
As of June 30, 2006 and December 31, 2005, 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
15
During November 2003, the Company completed a private offering of $100 million aggregate
principal amount of 1.375% convertible senior notes due November 15, 2023 to qualified
institutional buyers. The discount on the convertible senior notes amounted to $3 million.
Convertible senior notes are unsecured obligations convertible into the Companys common stock
and rank equally in right of payment with all existing and future obligations that are unsecured
and unsubordinated. Interest on the senior notes accrues at 1.375% per year and is payable
semi-annually on May 15 and November 15. The convertible senior notes are payable in full in
November 2023. The notes are convertible, at the option of the holder, at any time on or prior to
maturity under certain circumstances, unless previously redeemed or repurchased, into shares of the
Companys common stock at a conversion price of $23.57 per share, which is equal to a conversion
rate of 42.4247 shares per $1,000 principal amount of notes. The notes are convertible prior to
maturity into shares of the Companys common stock under certain circumstances that include but are
not limited to (i) conversion due to the closing price of the Companys common stock on the trading
day prior to the conversion date reaching 120% or more of the conversion price of the notes on such
trading date and (ii) conversion due to the trading price of the notes falling below 98% of the
conversion value. Upon conversion the Company will have the right to deliver, in lieu of common
stock, cash or a combination of cash and common stock. The Company may redeem all or a portion of
the notes at its option on or after November 15, 2006 but before 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 June 30, 2006 and December 31, 2005 the Company had outstanding convertible senior notes
with a face value of $100 million and $100 million, respectively. As of June 30, 2006 and December
31, 2005 the book value of the convertible senior notes was $97.3 million and $97.3 million,
respectively, net of unamortized discount of $2.7 million and $2.7 million, respectively.
Amortization of the discount on the convertible senior notes was $33 thousand and $33 thousand for
the three months ended June 30, 2006 and 2005, respectively. Amortization of the discount on the
convertible senior notes was $66 thousand and $66 thousand for the six months ended June 30, 2006
and 2005, respectively. The estimated fair value of the convertible senior notes was $106.3
million and $93.5 million at June 30, 2006 and December 31, 2005, 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.
For the year ended December 31, 2005, the Company repurchased $7.5 million principal amount of
the convertible subordinated notes with an associated discount of $69 thousand. The Company
repurchased the notes in the open market for $7.4 million and recorded a loss of $50 thousand.
As of June 30, 2006 and December 31, 2005 the Company had outstanding convertible subordinated
notes with a face value of $2.5 million and $2.5 million, respectively. As of June 30, 2006 and
December 31, 2005 the book value of the convertible subordinated notes was $2.5 million and $2.5
million, respectively, net of amortized discount of $14 thousand and $20 thousand, respectively.
Amortization of the discount on the convertible subordinated notes was $3 thousand and $10 thousand
for the three months ended June 30, 2006 and 2005, respectively and $6 thousand and $21 thousand
for the six months ended June 30, 2006 and 2005, respectively. The estimated fair value of the
convertible subordinated notes was $2.5 million and $2.5 million at June 30, 2006 and December 31,
2005, respectively.
16
On April 26, 2005 the Board of Directors approved the repurchase of the remaining 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.
The aggregate maturities of long-term liabilities for each of the years in the five year
period ending December 31, 2010 and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Convertible |
|
|
Convertible |
|
|
|
Senior |
|
|
Subordinated |
|
For the Years Ending December 31, |
|
Notes |
|
|
Notes |
|
2006 (remaining six months) |
|
$ |
|
|
|
$ |
|
|
2007 |
|
|
|
|
|
|
2,518 |
|
2008 (A) |
|
|
100,000 |
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
2,518 |
|
Less: unamortized discount |
|
|
(2,655 |
) |
|
|
(14 |
) |
Less: current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
|
$ |
97,345 |
|
|
$ |
2,504 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
On or after November 15, 2008, the Company may redeem the Convertible Senior Notes at any
time. On November 15, 2008, November 15, 2013, and November 15, 2018, holders of the
convertible senior notes will have the right to require the Company to purchase, in cash, all
or any part of the notes held by such holder at a purchase price equal to 100% of the
principal amount of the notes being purchased, together with accrued and unpaid interest and
additional interest, if any, up to but excluding the purchase date. |
Note 10 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 |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic |
|
$ |
4,359 |
|
|
$ |
2,565 |
|
|
$ |
5,785 |
|
|
$ |
5,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic |
|
|
4,359 |
|
|
|
2,565 |
|
|
|
5,785 |
|
|
|
5,151 |
|
Interest on convertible notes, net of tax benefit (A) |
|
|
243 |
|
|
|
242 |
|
|
|
488 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, diluted |
|
$ |
4,602 |
|
|
$ |
2,807 |
|
|
$ |
6,273 |
|
|
$ |
5,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income per share , basic |
|
|
21,015 |
|
|
|
19,982 |
|
|
|
20,858 |
|
|
|
19,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income per share , basic |
|
|
21,015 |
|
|
|
19,982 |
|
|
|
20,858 |
|
|
|
19,882 |
|
Effect of convertible notes (A) |
|
|
4,243 |
|
|
|
4,243 |
|
|
|
4,243 |
|
|
|
4,243 |
|
Effect of dilutive stock options, ESPP, and unvested restricted stock (B) |
|
|
657 |
|
|
|
395 |
|
|
|
630 |
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate income per share , diluted |
|
|
25,915 |
|
|
|
24,620 |
|
|
|
25,731 |
|
|
|
24,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.21 |
|
|
$ |
0.13 |
|
|
$ |
0.28 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (A) |
|
$ |
0.18 |
|
|
$ |
0.11 |
|
|
$ |
0.24 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
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 June 30,
2006 and 2005, the total number of as-if converted shares excluded from the calculation
associated with the convertible subordinated notes was 37 thousand and 132 thousand. For the
six months ended June 30, 2006 and 2005, the total number of as-if converted shares excluded
from the calculation associated with the convertible subordinated notes was 37 thousand and
138 thousand. |
17
|
|
|
(B) |
|
For the three months ended June 30, 2006 and 2005, options amounting to 1.4 million and 2.4
million were excluded from the calculation as the effect would be anti-dilutive. For the six
months ended June 30, 2006 and 2005, options amounting to 1.7 million and 2.3 million were
excluded from the calculation as the effect would be anti-dilutive. |
Note 11 Income Taxes
The Companys effective tax rate for the three and six months ended June 30, 2006 and 2005,
respectively, differs from the statutory rate primarily due to the benefits of lower tax rates on
earnings of foreign subsidiaries, the adoption of SFAS 123R, the amortization of goodwill for tax
purposes, and the discrete item related to certain state tax refunds. Our effective tax rate for
the year ended December 31, 2005 included the tax impact of a decrease in valuation allowance of
$9.1 million primarily attributable to a projected increase in future utilization of general
business tax credits and certain net operating loss carryforwards.
The adoption of SFAS 123R related to the expensing of stock options will create differences in
book and taxable income on both a permanent and temporary basis. We are projecting a permanent
difference of approximately $2.1 million attributable to statutory options and stock option expense
related to all non U.S. employees for the year ending 2006. The annual effective tax rate impact
for this permanent difference is projected to be approximately 4.5%.
Note 12 Segment Information
The Company has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the reporting by public business enterprises
of information about operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based upon the way that
management organizes the segments within the Company for making operating decisions and assessing
financial performance.
The Company is one operating segment according to the provisions of SFAS No. 131.
Revenues on a product and services basis are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Hardware |
|
$ |
81,785 |
|
|
$ |
64,079 |
|
|
$ |
145,496 |
|
|
$ |
119,650 |
|
Software royalties and licenses |
|
|
1,088 |
|
|
|
1,114 |
|
|
|
2,210 |
|
|
|
2,239 |
|
Software maintenance |
|
|
399 |
|
|
|
409 |
|
|
|
939 |
|
|
|
804 |
|
Engineering and other services |
|
|
1,267 |
|
|
|
354 |
|
|
|
1,705 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
84,539 |
|
|
$ |
65,956 |
|
|
$ |
150,350 |
|
|
$ |
123,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Communications Networking |
|
$ |
65,409 |
|
|
$ |
50,544 |
|
|
$ |
114,245 |
|
|
$ |
89,745 |
|
Commercial Systems |
|
|
19,130 |
|
|
|
15,412 |
|
|
|
36,105 |
|
|
|
33,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
84,539 |
|
|
$ |
65,956 |
|
|
$ |
150,350 |
|
|
$ |
123,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about the Companys geographic revenues and long-lived assets by geographical area is
as follows (in thousands):
Geographic Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
United States |
|
$ |
23,072 |
|
|
$ |
21,469 |
|
|
$ |
41,285 |
|
|
$ |
42,594 |
|
Other North America |
|
|
3,108 |
|
|
|
3,922 |
|
|
|
5,714 |
|
|
|
7,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
26,180 |
|
|
|
25,391 |
|
|
|
46,999 |
|
|
|
49,851 |
|
Europe, the Middle East and Africa (EMEA) |
|
|
36,831 |
|
|
|
33,976 |
|
|
|
71,236 |
|
|
|
61,825 |
|
Asia Pacific |
|
|
21,528 |
|
|
|
6,589 |
|
|
|
32,115 |
|
|
|
11,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
84,539 |
|
|
$ |
65,956 |
|
|
$ |
150,350 |
|
|
$ |
123,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Long-lived assets by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Property and equipment, net |
|
|
|
|
|
|
|
|
United States |
|
$ |
9,529 |
|
|
$ |
11,372 |
|
EMEA |
|
|
184 |
|
|
|
170 |
|
Asia Pacific |
|
|
1,997 |
|
|
|
2,034 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,710 |
|
|
$ |
13,576 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
United States |
|
$ |
27,463 |
|
|
$ |
27,463 |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
United States |
|
$ |
1,699 |
|
|
$ |
2,159 |
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2006 and 2005 the following customers accounted
for more than 10% of total revenues. These customers accounted for the following percentages of
total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Nokia |
|
|
49.2 |
% |
|
|
35.5 |
% |
|
|
45.8 |
% |
|
|
25.9 |
% |
Nortel |
|
|
* |
|
|
|
18.5 |
% |
|
|
* |
|
|
|
17.2 |
% |
|
|
|
* |
|
Accounted for less than 10% of total revenue for the period. |
As of June 30, 2006 and December 31, 2005 the following customers accounted for more than 10%
of accounts receivable. These customers accounted for the following percentages of accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2006 |
|
2005 |
Nokia |
|
|
48.9 |
% |
|
|
32.3 |
% |
Nortel |
|
|
* |
|
|
|
12.9 |
% |
|
|
|
* |
|
Accounted for less than 10% of accounts receivable. |
Note 13 Legal Proceedings
In the normal course of business, the Company periodically becomes involved in litigation. As
of June 30, 2006, in the opinion of management, RadiSys had no pending litigation that would have a
material adverse effect on the Companys financial position, results of operations or cash flows.
Note 14 Subsequent Events
Effective as of July 26, 2006, RadiSys entered into an Arrangement Agreement (the Arrangement
Agreement) with Convedia Corporation (Convedia), a corporation incorporated under the laws of
Canada, pursuant to which RadiSys will acquire all of the capital stock of Convedia (the
Arrangement).
Under the terms of the Arrangement Agreement, RadiSys will acquire Convedia for a total
consideration of up to $115 million consisting of: (a) $105 million in cash payable at closing,
subject to adjustments, and (b) up to $10 million in additional cash proceeds based on a contingent
payment formula tied to achieving certain profitability goals during the twelve-month period
beginning October 1, 2006. The Arrangement is subject to the approval of the Supreme Court of
British Columbia, the approval of the shareholders and option holders of Convedia and customary
closing conditions for transactions of this nature and is expected to close during the later part
of the third quarter of 2006.
19
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 innovative product planning, intimate customer
collaboration, and combining leading edge technologies and system architecture, we help original
equipment manufacturers (OEMs) accelerate new product deployments by allowing the customer to
redirect their product development resources to their core competencies. Our products include
embedded boards, software, platforms and systems, which are used in todays complex computing,
processing and network intensive applications.
Our Strategy
Our strategy is to provide customers with advanced embedded solutions in our target markets.
We believe this strategy enables our customers to focus their resources and development efforts on
their key areas of competency allowing them to provide higher value systems with a time-to-market
advantage and a lower total cost of ownership. Historically, system makers had been largely
vertically integrated, developing most, if not all, of the functional building blocks of their
systems. System makers are now more focused on their core expertise, such as specific application
software, and are looking for partners like RadiSys to provide them with merchant-supplied building
blocks for a growing number of processing and networking functions.
Our Markets
We provide advanced embedded solutions to the following two distinct markets:
|
|
|
Communications Networking The communications networking market primarily includes two
sub markets: Wireless infrastructure, IMS infrastructure, VoIP networks and messaging. The
wireless infrastructure, IMS and VoIP sub markets include voice, video and data systems
deployed into public networks. The wireless sub-market includes a variety of
telecommunications focused applications, including 2, 2.5 and 3G wireless infrastructure
products, packet-based switches and unified messaging products for wireless networks. The IP
networking and messaging sub-market includes embedded compute, processing and networking
systems used in private enterprise IT infrastructure. The IP networking and messaging
sub-market consists of a variety of applications including voice messaging, data centers,
IP-based Private Branch Exchange (PBX) systems, network access and security and switching
applications. |
|
|
|
|
Commercial Systems The commercial systems market includes the following sub-markets:
medical systems, test and measurement equipment, transaction terminals and industrial
automation equipment. Examples of products which incorporate our commercial embedded
solutions include ultrasound equipment, immunodiagnostics and hematology systems, CAT Scan
(CT) imaging equipment, ATMs, point of sale terminals, semiconductor manufacturing
equipment, electronics assembly equipment and high-end test equipment. |
Our Market Drivers
We believe there are a number of fundamental drivers for growth in the embedded solutions
market, including:
|
|
|
Increasing desire by OEMs to utilize outsourced modular building blocks to develop new
systems. We believe OEMs are combining their internal development efforts with
merchant-supplied platforms from partners like RadiSys to deliver more new products to
market faster at a 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-Module Express (COM Express) that motivates system
makers to take advantage of proven and validated standards-based products. |
|
|
|
|
Increasing demand for new technologies utilizing network processors, such as security and
high-volume networking applications. |
20
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 six months ended June 30, 2006
compared to the same period in 2005 and for the period ended June 30, 2006 compared to December 31,
2005, 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, 2005.
Certain statements made in this section of the report may be deemed to be forward-looking
statements. Please see the information contained herein under the sections entitled
FORWARD-LOOKING STATEMENTS and RISK FACTORS.
Overview
Total revenue was $84.5 million and $66.0 million for the three months ended June 30, 2006 and
2005, respectively. Total revenue was $150.4 million and $123.5 million for the six months ended
June 30, 2006 and 2005, respectively. As of June 30, 2006 and December 31, 2005, backlog was
approximately $43.6 million and $25.1 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 revenues for the three and six months ended
June 30, 2006 compared to the same periods in 2005 was due to increased demand within the wireless
submarket as our product content is more substantial in 2.5 and 3G deployments as well as design
wins in the medical market that ramped into production during 2005. Revenues were also higher due
to deployments of new products by one of our major customers.
In 2004 and 2005 we shifted our product development investment from predominantly one-off
custom-designed products (perfect fit solutions) to standards-based, re-usable platforms and
systems (standards-based solutions). We believe standards-based solutions provide our customers a
number of fundamental benefits. First, by using ready-made platform solutions rather than
ground-start custom-designs, our customers can achieve significantly shorter product development
intervals and faster time-to-market. Second, we believe our customers can achieve a lower total
cost by using solutions that are leveraged across multiple applications rather than a single-use
proprietary solution. By offering standards-based solutions, we believe we have the opportunity to
address a wider range of new market opportunities with the potential for faster time to revenue
than with ground-start, custom-designs. We believe this ability to reuse designs makes our business
and investment model more scalable. Finally, we believe this standards-based model will allow us to
provide more integrated higher value solutions to our customers than we have typically delivered
under a custom-design model. We believe that these higher value solutions provide more product
content and drive higher average selling prices and therefore more total revenue opportunity for
our products.
We announced our Promentum family of ATCA products plans in 2005. This family of products
includes universal carrier cards, switch and control modules, disk storage modules, compute
modules, and a 14-slot shelf or chassis. These products are offered individually or integrated
together as part of a blade server system known as the Promentum SYS-6000. We believe the
Promentum SYS-6000 system provides customers a highly reliable managed platform on which to build
their new voice and data offerings. We have significant experience in the design, delivery and
deployment of carrier-grade, modular platforms. We believe the ATCA standard increases our
opportunity to implement reusable platforms, enabling the deployment of more flexible solutions
based on cost-effective 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,
which we expect to reduce development time and costs and enhance application portability.
During the second quarter of 2005, we announced another product in our ATCA family of
products, the Promentum ATCA-7010. The 7010 is a high-speed packet processing module that provides
the highest bandwidth throughput available in a single ATCA slot. We believe that this product will
significantly increase the packet-processing power of our customers systems, while at the same
time reducing costs and speeding time to market. The 7010 features Intel® IXP28xx network
processors which are designed to address 10 Gbps wirespeed packet processing in network
applications that demand high bandwidth throughput, such as security gateways, GGSNs,
Broadband-Remote Access Servers, edge routers and session controllers.
During the first quarter of 2006, we announced seven new products in our Promentum family of
ATCA solutions. Specifically, we announced our new Promentum SYS-6010, the industrys first
10-gigabit managed ATCA platform that will provide the highest traffic capacity throughput and
processing densities available today. Our SYS-6010 is targeted at data plane applications such as
IMS, Radio Network and Base Station Controllers, Media Gateways, Call Servers, IPTV among a number
of applications.
21
In addition to our new ATCA offerings, we announced our new Procelerant series of
modular computing solutions (COM Express), for customers in our commercial systems market for
medical, transaction terminals and test and measurement and other commercial applications. These
new modular products are now available, and we believe this family of high density, flexible
solutions will enable commercial systems customers to achieve more rapid time to market with cost
effective designs.
In the first quarter of 2006 we announced another new Procelerant product for our commercial
markets including medical imaging. Our new Procelerant 945-GM will be the industrys first COM
Express product that supports low voltage mobile technology. We believe it will provide our
customers with greater processing power in a smaller footprint with lower power consumption.
In the second quarter of 2006, we announced that we will be the first to market with our new
Promentum SYS-6010, which is the first and only working 10 Gigabit common managed platform for
high-bandwidth network element and data plane applications. This product has already been selected
by telecom equipment manufacturers to be used in applications for implementing IMS network
elements, Radio and Base Station Controllers, Media Gateways, Call Servers and IPTV network
elements. This product is expected to be shipping to customers this fall. Also during the quarter
we announced the introduction of the high performance RMS420-5000XI embedded server featuring two
Dual-Core Intel® Xeon® 5140 processors. This new server will be used in many demanding data and
graphics processing applications such as medical image processing and display, military, industrial
machine vision, test and measurement, signal processing, and 3D and 4D image display.
Net income was $4.4 million and $2.6 million for the three months ended June 30, 2006 and
2005, respectively. Net income per share was $0.21 and $0.18, basic and diluted, respectively, for
the three months ended June 30, 2006 compared to net income per share of $0.13 and $0.11, basic and
diluted, respectively, for the three months ended June 30, 2005. Net income for the three months
ended June 30, 2006 includes a charge for stock-based compensation of $1.4 million. Net income was
$5.8 million and $5.2 million for the six months ended June 30, 2006 and 2005, respectively. Net
income per share was $0.28 and $0.24, basic and diluted, respectively, for the six months ended
June 30, 2006 compared to net income per share of $0.26 and $0.23, basic and diluted, respectively,
for the six months ended June 30, 2005. Net income for the six months ended June 30, 2006 includes
a charge for stock-based compensation of $2.7 million. As a result of adopting SFAS 123R, income
before income taxes for the three and six months ended June 30, 2006 was $1.4 million and $2.7
million lower, respectively, and net income for the three and six months ended June 30, 2006 was
$1.0 million and $2.0 million lower, respectively, than if we had continued to account for
stock-based compensation under APB 25. The impact on both basic and diluted earnings per share for
the three months ended June 30, 2006 was $.05 and $.04 per share, respectively, and for the six
months ended June 30, 2006 was $.09 and $.08, respectively.
Despite the increase in revenues for the three and six months ended June 30, 2006 compared to
the same periods in 2005, gross margins decreased. 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 a cost of $691 thousand associated with the write down of raw material inventory that
was sold to our contract manufacturing partners during the first quarter of 2006. We also continue
to incur some redundant manufacturing costs during transition periods with our outsourced
manufacturing partners. Finally, we incurred additional manufacturing-related costs in 2006 due to
making our products compliant with the restriction of the use of certain hazardous substances
(RoHS).
We continue to invest in our research and development activities as we increase our spending
on development of standards-based solutions; however, we expect our research and development
expenditures to level off on an absolute dollar basis in the second half of 2006.
Our interest income continues to increase as we continue to generate cash 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.
Cash and cash equivalents and investments amounted to $242.9 million and $225.9 million at
June 30, 2006 and December 31, 2005, respectively. The increase in cash and cash equivalents and
investments during the six months ended June 30, 2006, was primarily due to cash provided from
operating activities as well as $6.2 million generated from the issuance of common stock. We
generated net cash from operations in excess of net income in the six months ended June 30, 2006.
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.
The Board of Directors has approved the repurchase of the remaining $2.5 million principal
amount of the convertible subordinated notes. We will consider the repurchase of the notes on the
open market or through privately negotiated transactions from
22
time to time subject to market conditions. Additionally, we intend to use our working capital
to expand our product offerings through research and development, as discussed previously, and for
potential acquisitions.
Recent Developments
On July 26, 2006 the Company entered into an Arrangement Agreement with Convedia Corporation
to acquire all of its capital stock for a total consideration of up to $115 million. See Note 14 to
the Consolidated Financial Statements, contained herein under Item 1. Financial Statements, for a
further discussion on the acquisition.
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, 2005. Management believes that
other than the adoption of Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment (SFAS 123R), there have been no significant changes during the six
months ended June 30, 2006 to the items that we disclosed as our critical accounting policies and
estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R,
using the modified prospective transition method, and therefore have not restated prior periods
results. Under this method we recognize compensation expense for all stock-based employee benefit
plan equity awards granted after January 1, 2006 and prior to but not yet vested as of January 1,
2006, in accordance with SFAS 123R. Under the fair value recognition provisions of SFAS 123R, we
recognize stock-based compensation on a straight-line basis over the requisite service period of
the award for those shares expected to vest as described below. Prior to SFAS 123R adoption, we
accounted for share-based payments under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25).
We continue to use the Black-Scholes model to measure the grant date fair value of stock
options and ESPP shares. The grant date fair value of stock options that are expected to vest is
recognized on a straight-line basis over the requisite service period, which is equal to the option
vesting period which is generally 3 years. The grant date fair value of ESPP shares that are
expected to vest is recognized on a straight-line basis over the requisite service period, which is
generally 18 months, subject to modification at the date of purchase due to the ESPP look-back
feature. The grant date fair value of restricted stock is equal to the closing price of RadiSys
shares as quoted on the Nasdaq Global Select Market on the date of grant. The grant date fair value
of restricted shares that are expected to vest is recognized on a straight-line basis over the
requisite service period, which is 3 years. The estimate of the number of options, ESPP shares and
restricted stock expected to vest is determined based on historical experience.
To determine the fair value of the stock options and ESPP shares, using the Black-Scholes
option pricing model, the calculation takes into consideration the effect of the following:
|
|
|
Exercise price of the option or purchase price of the ESPP share; |
|
|
|
|
Price of our common stock on the date of grant; |
|
|
|
|
Expected term of the option or share; |
|
|
|
|
Expected volatility of our common stock over the expected term of the option or share; and |
|
|
|
|
Risk free interest rate during the expected term of the option or share. |
The calculation includes several assumptions that require managements judgment. The expected
term of the option or share is determined based on assumptions about patterns of employee exercises
and represents a probability-weighted average time-period from grant until exercise of stock
options, subject to information available at time of grant. Determining expected volatility
generally begins with calculating historical volatility for a similar long-term period and then
considers the ways in which the future is reasonably expected to differ from the past.
As part of our SFAS 123R adoption, we also examined our historical pattern of option exercises
in an effort to determine if there were any discernable activity patterns based on certain employee
populations. From this analysis, we identified three employee
23
populations. The expected term computation is based on historical vested option exercises and
post-vest forfeiture patterns and includes an estimate of the expected term for options that were
fully vested and outstanding at June 30, 2006 for each of the three populations identified. The
estimate of the expected term for options that were fully vested and outstanding at June 30, 2006
was determined as the midpoint of a range of estimated expected terms determined as follows: the
low end of the range assumes the fully vested and outstanding options settle on June 30, 2006 and
the high end of the range assumes that these options expire upon contractual term. The risk free
interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for
the expected term of the option or share.
Determining the appropriate fair value model and, as noted above, calculating the fair value
of equity instruments associated with our employee benefit plans require the input of highly
subjective assumptions. The assumptions used in calculating the fair value of these equity
instruments represent managements best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if factors change and we use
different assumptions, our stock-based compensation expense could be materially different in the
future. In addition, we are required to estimate the expected forfeiture rate and only recognize
expense for those shares expected to vest. If our actual forfeiture rate is materially different
from our estimate the stock-based compensation expense could be significantly different from what
we have recorded in the current period. See Note 2 to the Consolidated Financial Statements for a
further discussion on stock-based compensation.
As a result of adopting SFAS 123R, income before income taxes for the three and six months
ended June 30, 2006 was $1.4 million and $2.7 million lower, respectively, and net income for the
three and six months ended June 30, 2006 was $1.0 million and $2.0 million lower, respectively,
than if we had continued to account for stock-based compensation under APB 25. The impact on both
basic and diluted earnings per share for the three months ended June 30, 2006 was $.05 and $.04 per
share, respectively, and for the six months ended June 30, 2006 was $.09 and $.08, respectively.
We estimate income from operations will be reduced by stock-based compensation expense of
approximately $6.1 million for the year ended December 31, 2006. However, the actual stock-based
compensation expense for 2006 could materially differ from this estimate. Our assessment, which
includes an estimate of the timing and number of future options grants and share issuances, is
based on the Black-Scholes option pricing model and is affected by our stock price as well as
managements assumptions as described previously.
Results of Operations
The following table sets forth certain operating data as a percentage of revenues for the
three months ended June 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
72.1 |
|
|
|
70.6 |
|
|
|
72.5 |
|
|
|
69.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
27.9 |
|
|
|
29.4 |
|
|
|
27.5 |
|
|
|
30.7 |
|
Research and development |
|
|
12.7 |
|
|
|
11.1 |
|
|
|
13.2 |
|
|
|
12.0 |
|
Selling, general, and administrative |
|
|
11.2 |
|
|
|
11.7 |
|
|
|
11.8 |
|
|
|
12.1 |
|
Intangible assets amortization |
|
|
0.2 |
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
0.8 |
|
Restructuring and other charges (reversals) |
|
|
(0.3 |
) |
|
|
1.7 |
|
|
|
(0.1 |
) |
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
4.1 |
|
|
|
4.1 |
|
|
|
2.3 |
|
|
|
4.9 |
|
Interest expense |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
|
(0.6 |
) |
|
|
(0.9 |
) |
Interest income |
|
|
3.1 |
|
|
|
2.1 |
|
|
|
3.3 |
|
|
|
2.1 |
|
Other (expense) income, net |
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
0.3 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
7.3 |
|
|
|
5.2 |
|
|
|
5.3 |
|
|
|
5.7 |
|
Income tax provision |
|
|
2.1 |
|
|
|
1.4 |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
5.2 |
% |
|
|
3.8 |
% |
|
|
3.8 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Three and Six Months Ended June 30, 2006 and 2005
Revenues. Revenues increased by $18.5 million or 28.2%, from $66.0 million in the three months
ended June 30, 2005 to $84.5 million in the three months ended June 30, 2006. Revenues increased
by $26.9 million or 21.8%, from $123.5 million in the six months ended June 30, 2005 to $150.4
million in the six months ended June 30, 2006.
24
The increase in revenues for the three months ended June 30, 2006 compared to the same period
in 2005 is due to an increase in revenues in the communications networking market of $14.8 million
and an increase in revenues from the commercial systems market of $3.7 million. The increase in
revenues for the six months ended June 30, 2006 compared to the same period in 2005 is due to an
increase in revenues in the communications networking market of $24.5 million and an increase in
revenues from the commercial systems market of $2.4 million.
Revenues in the communications networking market increased in the three and six months ended
June 30, 2006 compared to the same periods in 2005 due to increased demand within the wireless
submarket as our product content is more substantial in 2.5 and 3G deployments. Revenues were also
higher due to deployments of new products by one of our major customers.
Revenues in the commercial systems market increased in the three and six months ended June 30,
2006 compared to the same period in 2005, primarily due to increases within the medical submarket
partially offset by declines in the transaction terminal and industrial automation submarkets. The
increase in revenues from the medical market was attributable to design wins that ramped into
production during 2005. The decrease in revenues attributable to the transaction terminal submarket
was primarily due to design wins nearing the end of their life cycle.
Given the dynamics of these markets, we may experience general fluctuations in the percentage
of revenue attributable to each market and, as a result, the quarter to quarter 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 six months ended June 30, 2006 compared to
the same period in 2005, the overall increase in revenues was split between customers shipping into
the EMEA and Asia Pacific regions, partially offset by a decrease in revenues for customers
shipping into the North American region. For the six months ended June 30, 2006 compared to the
same period in 2005, revenues as measured by destination in the EMEA region increased by $9.4
million while Asia Pacific revenues increased by $20.3 million. The increase in the EMEA and Asia
Pacific regions is mainly attributable to strong demand within the wireless submarket as our
product content is more substantial in 2.5 and 3G deployments. Existing multinational customers
are experiencing growth in emerging markets and are increasing shipments directly to those regions.
For the three months ended June 30, 2006, revenues from North America increased by $789 thousand,
compared to the same period in 2005. For the six months ended June 30, 2006 revenues from North
America decreased $2.9 million compared to the same period in 2005. The decline in this region is
attributable to a decrease in sales volumes as a result of the product nearing its end of life. We
currently expect continued fluctuations in the percentage of revenue from each geographic region.
Additionally, we expect revenues outside of the U.S. to remain a significant portion of our
revenues.
Gross Margin. Gross margin for the three months ended June 30, 2006 was 27.9% compared to
29.4% for the same period in 2005. For the three months ended June 30, 2006, cost of sales includes
$198 thousand of stock-based compensation expense which is discussed in Stock-based Compensation
Expense below. Gross margin for the six months ended June 30, 2006 was 27.5% compared to 30.7%
for the same period in 2005. For the six months ended June 30, 2006, cost of sales includes $416
thousand of stock-based compensation expense which is discussed in Stock-based Compensation
Expense below.
Approximately half of the decrease in gross margin as a percentage of revenues for the three
and six months ended June 30, 2006 compared to the same periods in 2005 was attributable to product
mix as more of our revenue is coming from higher volume products with competitive pricing.
Additionally, the decrease was associated with a cost of $691 thousand associated with the write
down of raw material inventory that was sold to our contract manufacturing partners during the
first quarter of 2006. We also continued to incur some redundant manufacturing costs as we moved
forward with outsourcing our internal manufacturing to our contract manufacturing partners. The
decrease was also associated with additional manufacturing-related costs in 2006 due to making our
products RoHS compliant. Finally, we incurred stock-based compensation expense as noted above.
Based on current forecasted revenue mix, we currently anticipate that gross margins will be in
the high 20s range for the foreseeable future.
Research and Development. Research and development expenses consist primarily of salary,
bonuses and benefits for product development staff, and costs of design and development supplies
and equipment, net of reimbursements for non-recurring engineering services. Research and
development expenses increased $3.4 million, or 47.0%, from $7.3 million for the three months ended
June 30, 2005 to $10.7 million for the three months ended June 30, 2006. For the three months ended
June 30, 2006, research and development expenses include $363 thousand of stock-based compensation
expense which is discussed in Stock-based Compensation
25
Expense below and $824 thousand of incentive compensation expense up $402 thousand from the
same period in 2005 due to improved results. Research and development expenses increased $5.0
million, or 33.9%, from $14.8 million for the six months ended June 30, 2005 to $19.8 million for
the six months ended June 30, 2006. For the six months ended June 30, 2006, research and
development expenses include $751 thousand of stock-based compensation expense which is discussed
in Stock-based Compensation Expense below.
In addition to the increased noted above, the increase for the three and six months ended June
30, 2006 compared to the same periods in 2005 is also associated with the increased engineering
headcount related to our continued investment in the development of standards-based products, such
as ATCA. We have continued to increase headcount at our Shanghai development center and incurred
other additional expenses in connection with the development of the infrastructure to support this
location. We currently anticipate decreasing spending on research and development during the third
quarter of 2006 by approximately $200 thousand compared to spending in the second quarter of 2006.
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 other general corporate
activities. SG&A expenses increased by $1.8 million or 23.0%, from $7.7 million for the three
months ended June 30, 2005 to $9.5 million for the three months ended June 30, 2006. For the three
months ended June 30, 2006, SG&A expenses include $834 thousand of stock-based compensation expense
which is discussed in Stock-based Compensation Expense below and $716 thousand of incentive
compensation expense up $317 thousand from the same period in 2005 due to improved results. SG&A
expenses increased by $2.7 million or 18.2%, from $15.0 million for the six months ended June 30,
2005 to $17.7 million for the six months ended June 30, 2006. For the three and six months ended
June 30, 2006, SG&A expenses include $834 thousand and $1.5 million, respectively, of stock-based
compensation expense which is discussed in Stock-based Compensation Expense below. We currently
anticipate increasing spending on SG&A during the third quarter of 2006 by approximately $200
thousand compared to spending in the second quarter of 2006.
Stock-based Compensation Expense. Stock-based compensation expense for the three months ended
June 30, 2006 consists of amortization of stock-based compensation associated with stock options
and ESPP shares unvested and outstanding on January 1, 2006, new stock options and ESPP shares
granted in the six months ended June 30, 2006 and unvested restricted shares. During the three and
six months ended June 30, 2006, the Company incurred $1.4 million and $2.7 million in stock-based
compensation, respectively. During the three and six months ended June 30, 2005, we incurred no
stock-based compensation expense.
We recognized stock-based compensation expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Cost of sales |
|
$ |
198 |
|
|
$ |
|
|
|
$ |
416 |
|
|
$ |
|
|
Research and development |
|
|
363 |
|
|
|
|
|
|
|
751 |
|
|
|
|
|
Selling, general, and administrative |
|
|
834 |
|
|
|
|
|
|
|
1,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,395 |
|
|
$ |
|
|
|
$ |
2,691 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets Amortization. Intangible assets consist of purchased technology, patents and
other identifiable intangible assets. Intangible assets amortization expense was $136 thousand and
$513 thousand for the three months ended June 30, 2006 and 2005, respectively. Intangible assets
amortization expense was $461 thousand and $1.0 million for the six months ended June 30, 2006 and
2005, respectively. Intangible assets amortization decreased due to certain intangible assets
becoming fully amortized during 2005 and early 2006. We perform reviews for impairment of the
purchased intangible assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Restructuring and Other Charges (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.
Interest Expense. Interest expense includes interest incurred on convertible senior and
subordinated notes. Interest expense decreased $94 thousand, or 17.8%, from $527 thousand for the
three months ended June 30, 2005 to $433 thousand for the three
26
months ended June 30, 2006. Interest expense decreased $200 thousand, or 18.7%, from $1.1
million for the six months ended June 30, 2005 to $869 thousand for the six months ended June 30,
2006. The decrease in the interest expense for the three and six months ended June 30, 2006
compared to the same period in 2005 is due to the decrease in interest expense associated with the
convertible subordinated notes as a result of the repurchase of $7.5 million of the subordinated
convertible notes during 2005.
Interest Income. Interest income increased $1.2 million, or 88.3%, from $1.4 million for the
three months ended June 30, 2005 to $2.6 million for the three months ended June 30, 2006.
Interest income increased $2.3 million, or 89.5%, from $2.6 million for the six months ended June
30, 2005 to $4.9 million for the six months ended June 30, 2006. Interest income increased as a
result of a higher average balance of cash, cash equivalents and investments for the three and six
months ended June 30, 2006 compared to the same period in 2005. Increasing interest rates and a
shift in our investment portfolio towards higher yielding auction rate securities has also
contributed to the increase in interest income.
Other Income (Expense), Net. Other income (expense), net, primarily includes foreign currency
exchange gains and losses. Other income, net, was $464 thousand for the three months ended June 30,
2006 compared to other expense, net of ($113) thousand for the three months ended June 30, 2005.
Other income, net, was $475 thousand for the six months ended June 30, 2006 compared to other
expense, net of ($462) thousand for the six months ended June 30, 2005. During the three months
ended June 30, 2006 RadiSys received a net amount of $362 thousand associated with an insurance
gain.
Foreign currency exchange rate fluctuations resulted in a net gain of $66 thousand for the
three months ended June 30, 2006 compared to a net loss of $127 thousand for the three months ended
June 30, 2005. Foreign currency exchange rate fluctuations resulted in a net gain of $77 thousand
for the six months ended June 30, 2006 compared to a net loss of $425 thousand for the six months
ended June 30, 2005. The change in the foreign currency exchange rate fluctuations is relatively
flat for the quarter due to small changes in the Japanese Yen with offsetting changes in the Euro
and GBP relative to the U.S. Dollar.
Income Tax Provision (Benefit). We recorded a tax provision of $1.8 million and a tax
provision of $933 thousand for the three months ended June 30, 2006 and 2005, respectively. We
recorded a tax provision of $2.2 million and a tax provision of $1.9 million for the six months
ended June 30, 2006 and 2005, respectively. We expect the effective tax rate for the year ending
December 31, 2006 to be in the mid to high 20%s compared to 6.9% for the year ended December 31,
2005. The increase in the effective tax rate between the years ended December 31, 2006 and 2005,
respectively, is primarily due to the tax impact of a decrease in the valuation allowance at
December 31, 2005 attributable to a projected increase in future utilization of general business
tax credits and certain net operating loss carryforwards and the adoption of SFAS 123R.
The Companys effective tax rate for the three and six months ended June 30, 2006 and 2005,
respectively, differs from the statutory rate primarily due to the benefits of lower tax rates on
earnings of foreign subsidiaries, the adoption of SFAS 123R, the amortization of goodwill for tax
purposes, and the discrete item related to certain state tax refunds. Our effective tax rate for
the year ended December 31, 2005 included the tax impact of a decrease in valuation allowance of
$9.1 million primarily attributable to a projected increase in future utilization of general
business tax credits and certain net operating loss carryforwards.
The adoption of SFAS 123R related to the expensing of stock options will create differences in
book and taxable income on both a permanent and temporary basis. We are projecting a permanent
difference of approximately $2.1 million attributable to statutory options and stock option expense
related to all non U.S. employees for the year ending 2006. The annual effective tax rate impact
for this permanent difference is projected to be approximately 4.5%.
The Working Families Tax Relief Act of 2004 extended the research and development tax credit
through December 31, 2005. As it was done in the past, we expect that Congress will reinstate the
tax credit retroactive to January 1st. However, there can be no certainty as to what action
Congress may take. We cannot record any benefit of this credit until the legislation becomes
enacted law.
The adoption of SFAS 123R related to the expensing of stock options will create differences in
book and taxable income on both a permanent and temporary basis. We are projecting a permanent
difference of approximately $2.1 million attributable to statutory options and stock option expense
related to all non U.S. employees for the year ending 2006. The annual effective tax rate impact
for this permanent difference is projected to be approximately 4.5%.
The 2006 estimated effective tax rate is based on current tax law and the current expected
income and assumes that we will continue to receive the tax benefits associated with certain income
associated with foreign jurisdictions. The tax rate may be affected by potential acquisitions,
restructuring events or divestitures, the jurisdictions in which profits are determined to be
earned and taxed and the ability to realize deferred tax assets.
27
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2005 |
|
|
(Dollar amounts in thousands) |
Working capital |
|
$ |
267,860 |
|
|
$ |
249,159 |
|
|
$ |
210,683 |
|
Cash and cash equivalents and investments |
|
$ |
242,919 |
|
|
$ |
225,855 |
|
|
$ |
211,778 |
|
Cash and cash equivalents |
|
$ |
130,769 |
|
|
$ |
90,055 |
|
|
$ |
69,184 |
|
Short-term investments |
|
$ |
112,150 |
|
|
$ |
135,800 |
|
|
$ |
117,094 |
|
Accounts receivable, net |
|
$ |
57,538 |
|
|
$ |
39,055 |
|
|
$ |
43,366 |
|
Inventories, net |
|
$ |
15,669 |
|
|
$ |
21,629 |
|
|
$ |
20,149 |
|
Long-term investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
25,500 |
|
Accounts payable |
|
$ |
46,467 |
|
|
$ |
36,903 |
|
|
$ |
36,172 |
|
Convertible senior notes |
|
$ |
97,345 |
|
|
$ |
97,279 |
|
|
$ |
97,213 |
|
Convertible subordinated notes |
|
$ |
2,504 |
|
|
$ |
2,498 |
|
|
$ |
8,776 |
|
Days sales outstanding (A) |
|
|
62 |
|
|
|
55 |
|
|
|
60 |
|
Days to pay (B) |
|
|
70 |
|
|
|
73 |
|
|
|
71 |
|
Inventory turns (C) |
|
|
16 |
|
|
|
8.4 |
|
|
|
9.2 |
|
Inventory turns days (D) |
|
|
23 |
|
|
|
44 |
|
|
|
39 |
|
Cash cycle time days (E) |
|
|
15 |
|
|
|
26 |
|
|
|
29 |
|
|
|
|
(A) |
|
Based on ending net trade receivables divided by daily revenue (quarterly revenue, annualized
and divided by 365 days). |
|
(B) |
|
Based on ending accounts payable divided by daily cost of sales (quarterly cost of sales,
annualized and divided by 365 days). |
|
(C) |
|
Based on quarterly cost of sales, annualized divided by ending inventory. |
|
(D) |
|
Based on ending inventory divided by quarterly cost of sales (annualized and divided by 365
days). |
|
(E) |
|
Days sales outstanding plus inventory turns days, less days to pay. |
Cash and cash equivalents increased by $40.7 million from $90.1 million at December 31, 2005
to $130.8 million at June 30, 2006. Activities impacting cash and cash equivalents are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Cash provided by operating activities |
|
$ |
13,682 |
|
|
$ |
14,212 |
|
Cash (used in) investing activities |
|
|
20,538 |
|
|
|
(27,661 |
) |
Cash provided by financing activities |
|
|
6,172 |
|
|
|
2,977 |
|
Effects of exchange rate changes |
|
|
322 |
|
|
|
(910 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
40,714 |
|
|
$ |
(11,382 |
) |
|
|
|
|
|
|
|
We have generated cash from operating activities in amounts greater than net income in the six
months ended June 30, 2006 and 2005, 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 short-term and long-term operating liquidity needs.
During the six months ended June 30, 2006 and 2005, we used net cash provided by operating
activities for capital expenditures amounting to $2.8 million and $3.1 million, respectively.
During the six months ended June 30, 2006, capital expenditures were primarily associated with our
increased investment in our R&D and marketing efforts as we continue to develop and begin to sell
standards-based solutions. During the six months ended June 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. During the six months ended June 30, 2006, we used net cash provided by operating
activities for severance payments amounting to approximately $565 thousand associated with our 2005
restructuring activities.
During the six months ended June 30, 2006 and 2005, we received $6.2 million and $4.1 million,
respectively, in proceeds from the issuance of common stock through the Companys stock
compensation plans.
28
Also during the six months ended June 30, 2005, we used $1.1 million to repurchase our 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. We will consider the
repurchase of the notes on the open market or through privately negotiated transactions from time
to time subject to market conditions. Additionally, we intend to use our working capital to expand
our product offerings through research and development and potential acquisitions.
Changes in foreign currency rates impacted beginning cash balances during the six months ended
June 30, 2006 by $322 thousand. Due to the Companys international operations where transactions
are recorded in functional currencies other than the U.S. Dollar, the effects of changes in foreign
currency exchange rates on existing cash balances during any given periods results in amounts on
the consolidated statements of cash flows that may not reflect the changes in the corresponding
accounts on the consolidated balance sheets.
As of June 30, 2006 and December 31, 2005 working capital was $267.9 million and $249.2
million, respectively. Working capital increased by $18.7 million due primarily to our net positive
cash flow from operating and financing activities generated during the first two quarters of 2006.
Management believes that cash flows from operations, available cash balances and short-term
borrowings will be sufficient to fund our operating liquidity needs for the short-term and
long-term future.
Investments
Investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Short-term held-to-maturity investments |
|
$ |
14,000 |
|
|
$ |
39,750 |
|
|
|
|
|
|
|
|
Short-term available-for-sale investments |
|
$ |
98,150 |
|
|
$ |
96,050 |
|
|
|
|
|
|
|
|
We invest excess cash in debt instruments of the U.S. Government and its agencies,
high-quality corporate issuers and municipalities. Our 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
their 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. Our
investment policy requires that the total investment portfolio, including cash and investments, not
exceed a maximum weighted-average maturity of 18 months. In addition, the policy mandates that an
individual investment must have a maturity of less than 36 months, with no more than 20% of the
total portfolio exceeding 24 months. As of June 30, 2006, we were in compliance with our investment
policy.
Line of Credit
During the quarter ended March 31, 2006, we transferred our line of credit facility from our
commercial bank to an investment bank for $20.0 million at an interest rate based on the 30-day
London Inter-Bank Offered Rate (LIBOR) plus 0.75%. The line of credit is collateralized by our
non-equity investments. At June 30, 2006, we had a standby letter of credit outstanding related to
one of our medical insurance carriers for $105 thousand. The market value of non-equity investments
must exceed 125.0% of the borrowed facility amount, and the investments must meet specified
investment grade ratings.
As of June 30, 2006 and December 31, 2005, there were no outstanding balances on the line of
credit or any draws under the standby letter 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.
29
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 June 30, 2006 and December 31, 2005 we had outstanding convertible senior notes with a
face value of $100 and $100 million, respectively. As of June 30, 2006 and December 31, 2005 the
book value of the convertible senior notes was $97.3 million and $97.3 million respectively, net of
unamortized discount of $2.7 million and $2.7 million, respectively. The estimated fair value of
the convertible senior notes was $106.3 million and $93.5 million at June 30, 2006 and December 31,
2005, respectively.
Convertible Subordinated Notes
During August 2000, we completed a private offering of $120 million aggregate principal amount
of 5.5% convertible subordinated notes due August 15, 2007 to qualified institutional buyers. The
discount on the convertible subordinated notes amounted to $3.6 million.
Convertible subordinated notes are unsecured obligations convertible into our common stock and
are subordinated to all present and future senior indebtedness of RadiSys. Interest on the
subordinated notes accrues at 5.5% per year and is payable semi-annually on February 15 and August
15. The convertible subordinated notes are payable in full in August 2007. The notes are
convertible, at the option of the holder, at any time on or before maturity, unless previously
redeemed or repurchased, into shares of our common stock at a conversion price of $67.80 per share,
which is equal to a conversion rate of 14.7484 shares per $1,000 principal amount of notes. If the
closing price of our common stock equals or exceeds 140% of the conversion price for at least 20
trading days within a period of 30 consecutive trading days ending on the trading day before the
date on which a notice of redemption is mailed, then we may redeem all or a portion of the notes at
our option at a redemption price equal to the principal amount of the notes plus a premium (which
declines annually on August 15 of each year), together with accrued and unpaid interest to, but
excluding, the redemption date.
In 2005 we repurchased $7.5 million principal amount of the convertible subordinated notes,
with an associated discount of $69 thousand. We repurchased the notes in the open market for $7.4
million and, as a result, recorded a loss of $50 thousand.
In 2004, we repurchased $58.8 million principal amount of the convertible subordinated notes,
with an associated discount of $897 thousand. We repurchased the notes in the open market for $58.2
million and, as a result, recorded a loss of $387 thousand.
In 2003, we repurchased $10.3 million principal amount of the convertible subordinated notes,
with an associated discount of $212 thousand. We repurchased the notes in the open market for $9.2
million and, as a result, recorded a gain of $825 thousand. In 2002, we repurchased $21.0 million
principal amount of the convertible subordinated notes, with an associated discount of $587
thousand for $17.5 million in cash as part of negotiated transactions with third parties. The early
extinguishments of the notes resulted in a gain of $3.0 million. In 2000, we repurchased $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.
On April 26, 2005 the Board of Directors approved the repurchase of the remaining principal
amount of the convertible subordinated notes. As of June 30, 2006 and December 31, 2005 we had
outstanding convertible subordinated notes with a face value of $2.5 million and $2.5 million,
respectively. As of June 30, 2006 and December 31, 2005, the book value of the convertible
subordinated notes was $2.5 million and $2.5 million, respectively, net of amortized discount of
$14 thousand and $20 thousand,
30
respectively. The estimated fair value of the convertible subordinated notes was $2.5 million
and $2.5 million at June 30, 2006 and December 31, 2005, respectively.
Contractual Obligations
The following summarizes the Companys contractual obligations at June 30, 2006 and the effect
of such on its liquidity and cash flows in future periods (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006* |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
Future minimum lease payments |
|
$ |
1,470 |
|
|
$ |
2,929 |
|
|
$ |
2,905 |
|
|
$ |
2,847 |
|
|
$ |
2,658 |
|
|
$ |
1,707 |
|
Purchase obligations (A) |
|
|
29,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible notes |
|
|
757 |
|
|
|
1,513 |
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
17,875 |
|
Convertible senior notes (B) |
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes (B) |
|
|
|
|
|
|
2,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,343 |
|
|
$ |
6,960 |
|
|
$ |
104,280 |
|
|
$ |
4,222 |
|
|
$ |
4,033 |
|
|
$ |
19,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Remaining six months |
|
(A) |
|
Purchase obligations include agreements or purchase orders to purchase goods or services that
are enforceable and legally binding and specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price provisions and the
approximate timing of the transaction. Purchase obligations exclude agreements that are
cancelable without penalty. |
|
(B) |
|
The convertible senior notes and the convertible subordinated notes are shown at their face
values, gross of unamortized discount amounting to $2.7 million and $14 thousand, respectively
at June 30, 2006. 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 amounting to $242.9
million at June 30, 2006 and cash generated from operations will satisfy our short and long-term
expected working capital needs, capital expenditures, debt repurchases, payments related to our
acquisition of Convedia 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.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. Some of the
forward-looking statements contained in this Quarterly Report on Form 10-Q include:
|
|
|
Our statements concerning our beliefs about the success of our shift in business strategy
from perfect fit solutions to standards-based solutions; |
|
|
|
|
The adoption by our customers of standards-based solutions and ATCA; |
|
|
|
|
The size of the addressable market for ATCA; |
|
|
|
|
Expectations and goals for revenues, gross margin, research and development expenses,
selling, general, administrative expenses and profits; |
31
|
|
|
Estimates and impact of stock-based compensation expense; |
|
|
|
|
The impact of our restructuring events on future revenues; and |
|
|
|
|
Our projected liquidity. |
All statements that relate to future events or to our future performance are forward-looking
statements. In some cases, forward-looking statements can be identified by terms such as may,
will, should, expect, plans, seeks, anticipate, believe, estimate, predict,
potential, continue, seek to continue, intends, or other comparable terminology. These
forward-looking statements are made pursuant to safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results or our industries actual
results, levels of activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or implied by these
forward-looking statements.
Forward-looking statements in this 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 additional information about us, investors
should keep in mind that forward-looking statements are only predictions, at a point in time, and
are inherently less reliable than historical information. In evaluating these statements, you
should specifically consider the risks outlined above and those listed under Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2005 and as updated in our quarterly
reports on Form 10-Q. 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 made and based on
information as of the date of this report. We assume no obligation to update any of these
statements based on information after the date of this report.
Item 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 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 believe that we would not expect our operating results or cash flows to be
affected, to any materially 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 June 30, 2006 and December 31, 2005 was $221.1 million and $202.6 million,
respectively. We believe that 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, Israeli 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 gain of $66 thousand for the three months ended June 30, 2006
and a net loss of
32
$127 thousand for the three months ended June 30, 2005. Foreign currency exchange rate
fluctuations resulted in a net gain of $77 thousand for the six months ended June 30, 2006 and a
net loss of $425 thousand for the six months ended June 30, 2005.
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 $106.3 million
and $93.5 million at June 30, 2006 and December 31, 2005, 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 to the principal amount of the notes plus a
premium (which declines annually on August 15 of each year), together with accrued and unpaid
interest to, but excluding, the redemption date.
The fair value of the convertible subordinated notes is sensitive to interest rate changes.
Interest rate changes would result in increases or decreases in the fair value of the convertible
subordinated notes, due to differences between market interest rates and rates in effect at the
inception of the obligation. Unless we elect to repurchase our convertible subordinated notes in
the open market, changes in the fair value of convertible subordinated notes have no impact on our
cash flows or consolidated financial statements. The estimated fair value of the convertible
subordinated notes was $2.5 million and $2.5 million at June 30, 2006 and December 31, 2005,
respectively.
As of June 30, 2006, we have cumulatively repurchased convertible subordinated notes in the
amount of $117.5 million, face value, for $106.9 million. The Board of Directors has authorized the
repurchase of 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 June 30, 2006, our aggregate cash and cash equivalents and investments
were $242.9 million.
Item 4. Controls and Procedures
33
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.
In connection with the evaluation described above, we identified no change in our internal
control over financial reporting that occurred during the three months ended June 30, 2006, that
has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART II
Item 1A. Risk Factors
In addition to the other information set forth in this quarterly report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2005, which could materially affect our business, financial
condition or future results. Except as set forth below and in our Form 10-Q for the quarterly
period ended March 31, 2006, there have been no significant changes to the risk factors discussed
in our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC,
included in Part I, Item 1A. Risk Factors. The risks described in our Annual Report on Form 10-K
for the year ended December 31, 2005, as updated in our Quarterly Reports on Form 10-Q, are not the
only risks facing our Company. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Because of our dependence and our contract manufacturers dependence on a few suppliers, or in
some cases one supplier, for some of the components we use, as well as our dependence on a few
contract manufacturers to supply a majority of our products, a loss of a supplier, a decline in
the quality of these components, a shortage of any of these components, or a loss or degradation
in performance of a contract manufacturer could have a material adverse effect on our business or
our financial performance.
We depend on a few suppliers, or in some cases one supplier, for a continuing supply of the
components we use in the manufacture of our products and any disruption in supply could adversely
impact our financial performance. For example, we currently rely on Intel for the supply of some
microprocessors and other components, and we rely on LSI, Epson Electronic America, Broadcom, NEC,
Chen Ming, Triax and Texas Instruments as the sole source suppliers for other components such as
integrated circuits and mechanical assemblies. Alternative sources of components that are procured
from one supplier or a limited number of suppliers would be difficult to locate and/or it would
require a significant amount of time and resources to establish. We also rely on contract
manufacturers with sole sourcing for certain RadiSys products. Alternative sources of manufacturing
services for the RadiSys products could require significant time and resources to establish,
including transitioning the products to be internally produced. In addition, any decline in the
quality of components supplied by our vendors or products produced by our contracting manufacturing
partners could adversely impact our reputation and business performance. We have been experiencing
less than optimal service from one of our contract manufacturers. As a result, we are discontinuing
our relationship with this contract manufacturer. We are currently working with our contract
manufacturer partners to transition these products to alternate sites. However, we may incur
additional and unanticipated expenses or delays which may have a material adverse effect on our
business or our financial performance.
We
have shifted the majority of our manufacturing to third party contract manufacturers and our
inability to properly transfer our manufacturing or any failed or less than optimal execution on
their behalf could adversely affect our revenues and profitability.
34
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 have shifted a significant amount of our manufacturing to third
party contract manufacturers. At the end of 2005, our contract manufacturing partners were
manufacturing approximately 80% of all of our unit volume. If we do not properly transfer our manufacturing
expertise to these third party manufacturers or they fail to adequately perform, our revenues and
profitability could be adversely affected. Among other things, inadequate performance from our
contract manufacturers could include the production of products that do not meet our high quality
standards or unanticipated scheduling delays in production and delivery or cause us to invest in
additional internal resources as we lose productivity on other important projects. Additionally,
inadequate performance by our contract manufacturers may result in higher than anticipated costs.
We also rely on contract manufacturers as the sole suppliers of certain RadiSys products. For
example, FoxConn produces certain products that we do not produce internally and that no other
contract manufacturer produces for us. Alternative sources of supply for the RadiSys products that
our contract manufacturers produce could 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. We have been experiencing less than
optimal service from one of our contract manufacturers. As a result, we are discontinuing our
relationship with this contract manufacturer. We are currently working with our contract
manufacturer partners to transition these products to alternate sites. However, we may incur
additional and unanticipated expenses or delays which may have a material adverse effect on our
business or financial performance.
Other Risk Factors Related to Our Business
Other risk factors include, but are not limited to, changes in the mix of products sold,
regulatory and tax legislation, changes in effective tax rates, inventory risks due to changes in
market demand or our business strategies, potential litigation and claims arising in the normal
course of business, credit risk of customers and other risk factors. Additionally, proposed changes
to accounting rules could materially affect what we report under generally accepted accounting
principles and adversely affect our operating results.
35
Item 4. Submission of Matters to a Vote of Security Holders
At the Companys Annual Meeting on May 16, 2006, the holders of the Companys outstanding
Common Stock took the actions described below. As of the record date for the Annual Meeting,
20,885,314 shares of Common Stock were issued and outstanding and entitled to vote.
1. |
|
The shareholders elected each of C. Scott Gibson, Scott C. Grout, Ken J. Bradley, Richard J.
Faubert, Dr. William W. Lattin, Kevin C. Melia, Carl W. Neun, and Lorene K Steffes to the
Companys Board of Directors, by the votes indicated below, to serve for the ensuing year. |
|
|
|
|
|
|
|
Nominees |
|
Votes Cast |
|
|
|
C. Scott Gibson |
|
|
19,545,815 |
|
|
Shares in favor |
|
|
|
121,874 |
|
|
Shares against or withheld |
|
|
|
|
|
|
Abstentions |
|
|
|
|
|
|
Broker nonvotes |
|
|
|
|
|
|
|
Scott C. Grout |
|
|
19,597,465 |
|
|
Shares in favor |
|
|
|
70,224 |
|
|
Shares against or withheld |
|
|
|
|
|
|
Abstentions |
|
|
|
|
|
|
Broker nonvotes |
|
|
|
|
|
|
|
Ken J. Bradley |
|
|
19,330,661 |
|
|
Shares in favor |
|
|
|
337,028 |
|
|
Shares against or withheld |
|
|
|
|
|
|
Abstentions |
|
|
|
|
|
|
Broker nonvotes |
|
|
|
|
|
|
|
Richard J. Faubert |
|
|
19,573,630 |
|
|
Shares in favor |
|
|
|
94,059 |
|
|
Shares against or withheld |
|
|
|
|
|
|
Abstentions |
|
|
|
|
|
|
Broker nonvotes |
|
|
|
|
|
|
|
Dr. William W. Lattin |
|
|
19,601,099 |
|
|
Shares in favor |
|
|
|
66,590 |
|
|
Shares against or withheld |
|
|
|
|
|
|
Abstentions |
|
|
|
|
|
|
Broker nonvotes |
|
|
|
|
|
|
|
Kevin C. Melia |
|
|
18,940,277 |
|
|
Shares in favor |
|
|
|
727,412 |
|
|
Shares against or withheld |
|
|
|
|
|
|
Abstentions |
|
|
|
|
|
|
Broker nonvotes |
|
|
|
|
|
|
|
Carl W. Neun |
|
|
18,935,976 |
|
|
Shares in favor |
|
|
|
731,713 |
|
|
Shares against or withheld |
|
|
|
|
|
|
Abstentions |
|
|
|
|
|
|
Broker nonvotes |
|
|
|
|
|
|
|
Lorene K. Steffes |
|
|
19,598,160 |
|
|
Shares in favor |
|
|
|
69,529 |
|
|
Shares against or withheld |
|
|
|
|
|
|
Abstentions |
|
|
|
|
|
|
Broker nonvotes |
2. |
|
The shareholders approved the ratification of the Audit Committees appointment of KPMG LLP
as the Companys independent registered public accounting firm for the fiscal year ending
December 31, 2006. |
|
|
|
19,493,069 |
|
Shares in favor |
145,131 |
|
Shares against or withheld |
29,489 |
|
Abstentions |
|
|
Broker non-votes |
36
Item 6. Exhibits
(a) Exhibits
|
|
|
Exhibit |
|
|
No |
|
Description |
2.1
|
|
Arrangement Agreement among RadiSys Corporation, Convedia Corporation and RadiSys
Canada Inc., effective as of July 26, 2006. Incorporated by reference from Exhibit
2.1 to the Companys Current Report on Form 8-K filed on July 28, 2006, SEC File No.
0-26844. |
|
|
|
10.1
|
|
Summary of Performance Goals and Business Criteria for Payment of Awards.
Incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form
8-K filed on July 28, 2006, SEC File No. 0-26844. |
|
|
|
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. |
37
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: August 4, 2006
|
|
By:
|
|
/s/ SCOTT C. GROUT |
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott C. Grout |
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
Dated: August 4, 2006
|
|
By:
|
|
/s/ JULIA A. HARPER |
|
|
|
|
|
|
|
|
|
|
|
|
|
Julia A. Harper |
|
|
|
|
|
|
Vice President of Finance and |
|
|
|
|
|
|
Administration |
|
|
|
|
|
|
and Chief Financial Officer |
|
|
38
EXHIBIT INDEX
|
|
|
Exhibit No |
|
Description |
2.1
|
|
Arrangement Agreement among RadiSys Corporation, Convedia Corporation and RadiSys
Canada Inc., effective as of July 26, 2006. Incorporated by reference from Exhibit
2.1 to the Companys Current Report on Form 8-K filed on July 28, 2006, SEC File No.
0-26844. |
|
|
|
10.1
|
|
Summary of Performance Goals and Business Criteria for Payment of Awards.
Incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form
8-K filed on July 28, 2006, SEC File No. 0-26844. |
|
|
|
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. |
39