Exhibit 99.1
Annual Report on Form 10-K for the year ended December 31, 2002
Part II, Item 6. Selected Financial Data
(In thousands, except per share data)
Years Ended December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
Consolidated Statements of Operations Data
Revenues ............................................. $ 200,087 $ 227,713 $ 340,676 $ 251,090 $ 186,548
Gross margin ......................................... 59,444 35,155 116,897 92,297 62,684
(Loss) income from operations ........................ (3,740) (57,852) 34,005 16,604 8,569
(Loss) income from continuing operations ............. (1,759) (33,117) 32,646 18,997 7,818
Loss from discontinued operations related to Savvi . -- --
business, net of tax benefit ....................... (1,546) (1,369) --
Net (loss) income .................................... (3,305) (34,486) 32,646 18,997 7,818
Net (loss) income from continuing operations per
common share:
Basic * .......................................... (0.10) (1.92) 1.92 1.18 0.49
Diluted * ........................................ (0.10) (1.92) 1.80 1.11 0.48
Net (loss) income from discontinued operations
related to Savvi business, net of tax benefit per
common share:
Basic * .......................................... (0.09) (0.08) 1.92 1.18 0.49
Diluted * ........................................ (0.09) (0.08) 1.80 1.11 0.48
Net (loss) income per common share:
Basic * ............................................ (0.19) (2.00) 1.92 1.18 0.49
Diluted * .......................................... (0.19) (2.00) 1.80 1.11 0.48
Weighted average shares outstanding (basic)* ......... 17,495 17,249 16,974 16,158 15,854
Weighted average shares outstanding (diluted)* ....... 17,495 17,249 18,161 17,110 16,129
Consolidated Balance Sheets Data
Working capital ................................... $ 132,474 $ 141,940 $ 205,357 $ 68,863 $ 83,083
Total assets ...................................... 274,086 305,201 334,003 187,563 131,727
Long term obligations, excluding
current portion ................................. 83,954 104,180 97,191 -- 88
Total shareholders' equity ........................ 152,801 150,711 179,331 134,255 106,827
Note: The selected financial data as of the year ended December 31, 1998 has
been restated to reflect the 1999 merger with Texas Micro Inc. ("Texas Micro"),
which was accounted for as a pooling of interests.
* Reflects the three-for-two stock split on November 29, 1999.
Part II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Total revenue was $200.1 million for 2002 compared to $227.7 million for
2001. Net loss was $3.3 million for 2002 compared to net loss of $34.5 million
for 2001. Net loss per share was $0.19, basic and fully diluted for 2002
compared to net loss per share of $2.00, basic and fully diluted for 2001.
The net loss for the year ended December 31, 2002 includes, before income
tax benefit, second quarter restructuring charge of $4.4 million, $3.0 million
gain on early extinguishments of convertible subordinated notes, $1.5 million
loss related to the discontinued operations associated with the Savvi business,
$1.2 million gain on sale of the Company's Multibus business unit, and $1.2
million of severance and termination related expense associated with the
departure of the former President and CEO. During the year ended December 31,
2002 the Company reversed $1.0 million of restructuring liabilities. The
reversal of the restructuring liabilities was primarily attributable to lower
than expected severance expenses, reduced future obligations associated with
vacated facilities, and lower than expected settlements reached during the
fourth quarter of 2002 related to the restructuring liabilities assumed
resulting from the Microware acquisition (see Note 20). The second quarter
restructuring charge was recorded as a result of the Company's continued efforts
to improve its cost structure and to consolidate redundant facilities and
functions including a net workforce reduction of 90 positions domestically and
internationally. During the year ended December 31, 2002, the Company
repurchased approximately $21.0 million principal amount of its 5.5% convertible
subordinated notes for a gain from early extinguishments of the notes of
approximately $3.0 million. During the first quarter of fiscal 2003, the Company
completed the sale of its Savvi business. As a result of this sale the Company
reported the financial results of its Savvi business as discontinued operations
in its results of operations for the year ended December 31, 2002. In December
2002, the Company recorded a gain of $1.2 million from the sale of its Multibus
business unit upon receipt of $0.7 million in proceeds and notes receivable of
$0.5 million, of which $0.3 million was paid in January 2003 with the remaining
balance of $0.2 million due in December 2003.
The net loss for the year ended December 31, 2001 includes, before income
tax benefit, first quarter, second quarter, and fourth quarter restructuring
charges of $9.8 million, $3.2 million, and $3.9 million, respectively, and other
charges totaling $26.7 million. The first quarter restructuring charge was a
result of the Company's decision to consolidate all internal manufacturing
operations into the Company's Hillsboro, Oregon plant, the closure of certain
sales offices in France and Germany, and the elimination of approximately 200
positions throughout the Company. The second quarter restructuring charge
related to the closure of the Company's Boston, Massachusetts design center and
severance of approximately 58 employees. The fourth quarter restructuring charge
was a result of the Company's continued efforts to improve its cost structure
through consolidation of functions and facilities. Other charges for the year
ended December 31, 2001 include: $24.6 million in inventory related adjustments
resulting from an end-of-life acceleration for non-strategic products and from
reduced demand and decreased component prices in the marketplace resulting in
excess or obsolete inventory, $1.4 million loss related to the discontinued
operations associated with the Savvi business, $0.8 million in charges to
consolidate Company facilities, a $0.4 million permanent write-down of an
investment received in connection with a prior divestiture, $0.4 million of
other severance costs, and $0.5 million of fixed asset write-offs not related to
restructuring events. During the first quarter of fiscal 2003, the Company
completed the sale of its Savvi business. As a result of this sale the Company
reported the financial results of its Savvi business as discontinued operations
in its results of operations for the year ended December 31, 2001.
On April 20, 2001, the Company acquired privately-held S-Link Corporation
("S-Link") in a cash transaction valued at approximately $4.7 million. The
acquisition of S-Link was accounted for using the purchase method. On March 14,
2003, the Company sold S-Link (also referred to as Savvi) for a loss of
approximately $4.3 million. See Subsequent Events in Note 22 in the Notes to
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data for further information.
On August 27, 2001, the Company completed the acquisition of Microware
Systems Corporation ("Microware"), which became a wholly-owned subsidiary of the
Company. The Company believes that the acquisition of Microware provides a
highly differentiated leadership position for solutions using the network
processor family and offers customers complete faster-to-market solutions for
certain applications. The purchase price aggregated $13.9 million in cash
consideration, net of cash received, which has been paid as of December 31,
2002. The acquisition of Microware was accounted for using the purchase method.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's Consolidated Financial
Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that may affect
the reported amounts of assets, liabilities, and revenues and expenses. On an
on-going basis, management evaluates its estimates, including those related to
realization of accounts receivable, investments, inventories, intangible assets,
deferred income taxes, warranty obligations, and restructuring provision. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies reflect
its more significant judgments and estimates used in the preparation of its
Consolidated Financial Statements.
Revenue Recognition
The Company recognizes revenue from hardware product sales upon shipment
to customers, provided that:
o an authorized purchase order has been received;
o the price is fixed;
o title has transferred;
o collection of the resulting receivable is probable;
o product returns are reasonably estimable;
o there are no customer acceptance requirements; and
o there are no significant obligations remaining on the part of the
Company.
For sales to distributors, potential returns are estimated and reserved,
based upon contractual limitations and historical return rates. The Company
recognizes software product revenue in accordance with Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral
of the Effective Date of Certain Provisions of SOP 97-2," effective February 1,
1998 and by SOP 98-9, "Modification of SOP 97-2, `Software Revenue Recognition'
with Respect to Certain Transactions." Software product revenues are recognized
at the time of shipment or upon delivery of the software master, provided that:
o collection of the resulting receivable is probable;
o the fee is fixed or determinable; and
o vendor-specific objective evidence exists to allocate the total fee
to all delivered and undelivered elements of the arrangement.
Any post-contract support included in these arrangements are recognized as
earned on a straight-line basis over the terms of the contracts. Stand alone
software product revenues were not significant to the Company's operations for
the years reported. Service revenues include custom contract engineering work
and custom software development projects and are recognized on a
percentage-of-completion basis. Service revenues were not significant to the
Company's operations for the years reported. Non-recurring engineering revenue
is recognized upon completion of certain engineering milestones.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate
resulting in an impairment of their ability to make payments, additional
provisions for doubtful accounts may be required.
Inventory Reserves
The Company records provision for inventory reserves for estimated
obsolete or unmarketable inventories which are equal to the difference between
the cost of inventories and the estimated net realizable value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
provisions for inventory reserves may be required.
Long-Lived Assets
Property and equipment, and identifiable intangible assets are reviewed
for impairment in accordance with Statement of Financial Accounting Standard No.
144, "Accounting for the Disposal of Long-Lived Assets," ("SFAS 144"). The
Company assesses impairment of property and equipment and identifiable
intangible assets whenever changes in circumstances indicate that the carrying
values of the assets may not be recoverable.
Goodwill represents the excess of cost over the assigned value of the net
assets in connection with all acquisitions. Goodwill is reviewed for impairment
in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS
142"). SFAS 142 requires goodwill to be tested for impairment annually and under
certain circumstances. SFAS 142 also mandates that the assets be written down
when impaired, rather than be amortized as previous standards required.
During the year ended December 31, 2002 and through the date of this
report, the Company's stock has traded at lower levels compared to previous
periods. If the Company's stock price does not recover to higher levels within
the next few months, the Company may update its impairment analysis and may
incur impairment losses on goodwill and intangible assets.
When the Company determines that the carrying value of property and
equipment, identifiable intangible assets, or goodwill will not be recoverable,
the Company calculates and records impairment losses based upon a future
discounted cash flow method. The Company estimates future discounted cash flows
using assumptions about the expected future operating performance of the
Company. The Company's estimates of discounted cash flows may differ from actual
cash flow due to, among other things, technological changes, economic
conditions, or changes to its business operations.
Accrued Restructuring
The Company has recorded restructuring charges in light of economic
downturns and reduced customer demand. These restructuring charges include
employee termination and related costs, costs related to leased facilities that
will be vacated and potentially subleased, losses on impairment of fixed assets
and capitalized software and other accounting and legal fees. Employee
termination and related costs have been recorded in accordance with the
provisions of Emerging Issues Task Force No. 94-3 ("EITF 94-3"), "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." For leased facilities that will be vacated and potentially subleased,
the amount equal to the total future lease obligations from the date of vacating
the premises through the expiration of the lease net of any future sublease
income is recorded as a part of restructuring charges. For property and
equipment, and capitalized software to be written off, the impairment losses are
recorded in accordance with the provisions of SFAS 144. In June 2002, Financial
Accounting Standard Board ("FASB") issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," ("SFAS 146"). SFAS 146 requires
that liabilities for costs associated with an exit or disposal activities be
recognized and measured initially at fair value in the period in which the
liabilities are incurred. The Company will record any future restructuring
charges in accordance with the provisions of SFAS 146. See "Recent Accounting
Pronouncements" below.
Accrued Warranty
The Company provides for the estimated costs of product warranties upon
recognition of revenues. The Company engages in extensive product quality
programs and processes. The Company's warranty obligation is affected by product
failure rates, material usage, and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material usage, or
service delivery costs differ from the Company's estimates, additional
provisions to the estimated warranty liability may be required. In November
2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," ("FIN 45"), which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. FIN 45 also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company has adopted the disclosure requirements of FIN 45 as of
December 31, 2002 and expects the financial impact of the recognition provisions
of FIN 45 to have an immaterial effect on the Company's financial position and
results of operations. See "Recent Accounting Pronouncements" below.
Income Taxes
The Company accounts for income taxes using the asset and liability
method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts and tax bases of the assets and liabilities. In accordance with
the provisions of SFAS No. 109, "Accounting for Income Taxes," ("SFAS 109"), the
Company records a valuation allowance to reduce deferred tax assets to the
amount expected to "more likely than not" be realized in its future tax returns.
Should the Company determine that it would not be able to realize all or part of
its net deferred tax assets in the future, adjustments to the valuation
allowance for deferred tax assets may be required.
Results of Operations
The following table sets forth certain operating data as a percentage of
revenues for the years ended December 31, 2002, 2001, and 2000.
Years Ended December 31,
---------------------------
2002 2001 2000
----- ----- -----
Revenues ......................................................... 100.0% 100.0% 100.0%
Cost of sales .................................................... 70.3 84.6 65.7
----- ----- -----
Gross margin ..................................................... 29.7 15.4 34.3
Research and development ......................................... 13.9 14.5 10.9
Selling, general, and administrative ............................. 15.0 15.5 11.5
Goodwill amortization ............................................ -- 2.4 1.6
Intangible assets amortization ................................... 1.5 0.9 .3
Gain on sale of Multibus, net of expenses ........................ (0.6) -- --
Restructuring charges ............................................ 1.7 7.5 --
----- ----- -----
(Loss) income from operations .................................... (1.8) (25.4) 10.0
Interest (expense) income, net ................................... (1.3) (0.1) 0.4
Other income (expense), net ...................................... 0.9 (0.8) 1.5
----- ----- -----
(Loss) income from continuing operations before income tax benefit
(provision) ................................................... (2.2) (26.3) 11.9
Income tax benefit (provision) ................................... 1.3 11.8 (2.3)
----- ----- -----
(Loss) income from continuing operations ......................... (0.9) (14.5) 9.6
----- ----- -----
Loss on discontinued operations related to Savvi business, net
of tax benefit ................................................ (0.7) (0.6) --
----- ----- -----
Net (loss) income ................................................ (1.6)% (15.1)% 9.6%
===== ===== =====
Comparison of Year 2002 and Year 2001
Revenues. Revenues decreased $27.6 million or 12.1% from $227.7 million in
2001 to $200.1 million in 2002. The decrease in revenues was principally
attributable to lower customer sales as a result of the overall poor economic
conditions and the related downturn within the Company's three primary markets:
commercial systems, service provider systems, and enterprise systems. As of
December 31, 2002, the Company's backlog was approximately $23.8 million
compared to backlog of approximately $26.0 million as of December 31, 2001.
Gross Margin. Gross margin increased to 29.7% of revenues in 2002 compared
to 15.4% for the year ended December 31, 2001. The increase in gross margin as a
percentage of revenues for the year ended December 31, 2002 was primarily
attributable to favorable absorption due to increased utilization of
manufacturing capacity from the prior year, lower excess and obsolete inventory
provisions, and material cost reductions throughout 2002. Gross margin for the
year ended December 31, 2001 factored in charges for excess and obsolete
inventory of $3.9 million, $6.8 million, and $13.9 million recorded in first,
second, and fourth quarters, respectively, of 2001. Gross margin for 2001
excluding the inventory write-downs throughout the year was 26.2%. The Company
seeks to price its products for new design wins to achieve an average gross
margin of approximately 32% to 35%.
Research and Development. Research and development expenses decreased by
$5.4 million or 16.4% from $33.2 million in 2001 to $27.7 million in 2002. The
decrease for the year ended December 31, 2002 resulted from lower spending
attributable to additional cost control measures initiated and implemented
during the year. The Company's long-term goal is for research and development
funding to be between 10% to 12% of total revenues as the Company believes in
the significant role its research and development activities play in its quest
for technological innovations and continued growth.
Selling, General, and Administrative Expenses. Selling, general, and
administrative ("SG&A") expenses decreased by $5.1 million or 14.6% from $35.2
million for the year ended December 31, 2001 to $30.1 million the year ended
December 31, 2002. The decrease in 2002 was primarily due to lower spending as a
result of cost control measures taken throughout the year. SG&A expenses, at
15.0% of revenues for 2002 compared to 15.5% for 2001, decreased slightly due to
the aforementioned expense reductions and a decline in revenues for the year
ended December 31, 2002. Overall, the Company's long-term goal is for SG&A
expenses to range from 9% to 10% of total revenues in order to achieve optimum
efficiency and effectiveness.
Goodwill Amortization. There was no goodwill amortization expense for the
year ended December 31, 2002 compared to $5.5 million for the year ended
December 31, 2001. The Company ceased the amortization of goodwill effective
January 1, 2002 in order to comply with the provisions of SFAS 142. SFAS 142
requires goodwill to be tested for impairment annually, and under certain
circumstances, written down when impaired, rather than being amortized as
previous standards required. To comply with this provision of SFAS 142, the
Company conducted and completed a goodwill impairment analysis during the six
months ended June 30, 2002. Based upon the analysis, the Company has concluded
that as of January 1 and June 30, 2002, there was no goodwill impairment. The
Company updated its goodwill impairment analysis through September 30, 2002 and
concluded that as of September 30, 2002, there was no goodwill impairment.
Management concluded there was no indication of material changes requiring an
updated goodwill impairment analysis as of December 31, 2002. The Company may be
required, under certain circumstances, to update its impairment analysis and may
incur losses on its acquired goodwill and intangible assets.
Intangible Assets Amortization. Intangible assets amortization expense
increased by $1.0 million or 47.6% from $2.1 million for the year ended December
31, 2001 to $3.1 million for the year ended December 31, 2002. The increase in
intangible assets amortization is principally attributable to a full year of
amortization on $11.2 million of intangible assets resulting from the
acquisition of Microware completed in August 2001. Amortization periods for
intangible assets range from 4 to 15 years.
In July 2001, the FASB issued SFAS 142, which supersedes Accounting
Principles Board ("APB") Opinion No. 17, "Intangible Assets." The Company
complied with SFAS 142 as it related to the Microware acquisition, amortizing
purchased intangibles since the date of acquisition and not amortizing the
associated goodwill. The goodwill acquired through the purchase of Microware and
all other intangible assets have been and will periodically be evaluated for
impairment as required under SFAS 142 and 144.
Gain on Multibus Sale. On November 5, 2002, the Company completed the sale
of its Multibus business unit recording a gain of $1.2 million, net of expenses
arising from the disposal. The gain was recorded as a part of income from
operations in accordance with the provisions of SFAS 144.
Restructuring. Beginning in the first quarter of 2001, the Company
initiated a restructuring of its operations in light of overall market
conditions and the economic downturn. The Company recorded additional
restructuring charges during the second quarter of 2001, the fourth quarter of
2001, and the second quarter of 2002. These measures, which included workforce
reductions, consolidation of certain facilities, fixed asset and capitalized
software write-downs, and other costs, were largely intended to align the
Company's capacity and infrastructure to anticipated demands for the Company's
products.
Second Quarter 2002 Restructuring Charge
In June 2002, the Company recorded a restructuring provision of $4.4
million as a result of its continued efforts to improve its cost structure and
consolidate redundant functions and facilities. The restructuring charge
included a net workforce reduction of approximately 90 employees, the closure of
the Houston, Texas Design Center, and the consolidation of certain domestic and
international sales and service offices.
Costs included in the charges were: (i) employee termination and related
costs, (ii) facility charges related to vacating various locations both
domestically and internationally, (iii) write-downs of property and equipment
impaired as a result of the restructuring, and (iv) other charges including
legal and accounting fees. Of the $4.4 million in restructuring charges,
approximately $3.3 million consisted of cash expenditures. The Company realized
reduced quarterly operating expenses of approximately $2.2 million as a result
of these actions.
The following table summarizes the write-offs and expenditures related to
the second quarter 2002 restructuring charge:
(In thousands)
Employee
termination and Property and Other
related costs Facilities equipment charges Total
--------------- ---------- ------------ ------- -------
Restructuring costs .. $ 2,606 $ 750 $ 530 $ 465 $ 4,351
Expenditures ......... (1,827) (205) 10 (46) (2,068)
Write-offs/adjustments (182) 19 (366) 6 (523)
------- ------- ------- ------- -------
Balance accrued as of
December 31, 2002 . $ 597 $ 564 $ 174 $ 425 $ 1,760
======= ======= ======= ======= =======
Employee termination and related costs consist of severance, insurance
benefits, and related costs associated with the elimination of 70 domestic
positions and 20 international positions. All affected employees were notified
prior to June 30, 2002; however, the costs associated with these terminations
will continue to be paid through the quarter ending June 30, 2003. As of
December 31, 2002, the Company had paid $1.8 million of severance costs and
recorded adjustments of $0.2 million for the over-accrual of severance costs
related to this restructuring charge.
Included in the facilities charge is $0.8 million related to the decision
to vacate leased spaces at two of the Company's domestic locations and four
international locations. Lease costs for these facilities are charged against
the restructuring accrual on a monthly basis upon vacation of the premises until
the lease contracts expire or the facilities are sub-leased. If the facilities
are not sub-leased, the outstanding facilities accrual may need to be increased.
As of December 31, 2002, the Company had paid $0.2 million, net of sub-lease
income, to satisfy the lease obligation.
The property and equipment charge of $0.5 million is comprised of the net
book value of the remaining computer hardware, manufacturing test equipment, and
furniture and fixtures at the Houston, Texas facility and the net book value of
furniture and fixtures, computer hardware, and computer software at Netherlands,
Germany, and one of the United Kingdom facilities. The Company's decision to
completely vacate the Texas, Netherlands, Germany, and one of the United Kingdom
facilities during the second quarter prompted the need to write-off the net book
value of part or all of the remaining assets at these locations. As of December
31, 2002, the Company had recorded $0.4 million to write-off the net book value
of the assets.
Other charges include legal and accounting fees related to the
restructuring plan. As of December 31, 2002, the Company had paid $0.05 million
in legal fees.
2001 Restructuring Charges
During 2001, RadiSys recorded three restructuring charges for a total of
$17.0 million, of which $9.8 million are expected to require cash expenditures
and $7.2 million for non-cash charges. These restructuring charges occurred in
the first, second, and fourth quarters. The following table summarizes the
write-offs and expenditures related to the 2001 restructuring charges:
(In thousands)
Employee
termination Leasehold
and related improvements and Property and Capitalized Other
costs facilities equipment software charges Total
----------- ---------------- ------------ ----------- -------- --------
Restructuring costs .. $ 4,989 $ 6,100 $ 2,974 $ 2,588 $ 337 $ 16,988
Expenditures ......... (4,037) (495) -- -- (102) (4,634)
Write-offs/adjustments -- (219) (2,974) (2,588) -- (5,781)
-------- -------- -------- -------- -------- --------
Balances accrued as of
December 31, 2001 952 5,386 -- -- 235 6,573
Expenditures ......... (390) (1,595) -- -- (37) (2,022)
Write-offs/adjustments (562) (668) -- -- (93) (1,323)
-------- -------- -------- -------- -------- --------
Balances accrued as of
December 31, 2002 $ -- $ 3,123 $ -- $ -- $ 105 $ 3,228
======== ======== ======== ======== ======== ========
The employee termination and related costs pertaining to the 2001
restructuring charges included the elimination of approximately 300 domestic and
25 international positions. The employment reductions primarily affected
employees in manufacturing, sales, and office support functions. The leasehold
improvements, facilities, and equipment charges related to the decision to
completely eliminate manufacturing operations in Houston, Texas and vacate
several domestic and international sales offices and design centers. The
impairment of capitalized software was associated with the acceleration of
end-of-life product strategies at one of the restructured design centers and the
cancellation of all non-strategic in-process capitalized software efforts. Other
charges included legal and accounting fees associated with the restructuring
activities.
These restructuring charges included employee termination and related
costs of $5.0 million of which $4.0 million and $0.4 million were paid during
the years ended December 31, 2001 and 2002, respectively, along with adjustments
of $0.6 million recorded during the year ended December 31, 2002. Of the
facility and leasehold improvement charges relating the vacated leased
facilities of $6.1 million, $0.5 million and $1.6 million were paid along with
adjustments of $0.2 million and $0.7 million recorded during the years ended
December 31, 2001 and 2002, respectively. Impairment losses on property and
equipment of $3.0 million and on capitalized software of $2.6 million were
recorded during the year ended December 31, 2001. Of the other charges of $0.3
million, $0.1 million and $0.04 million were paid during the years ended
December 31, 2001 and 2002, respectively, along with adjustments of $0.1 million
recorded during the year ended December 31, 2002.
Interest Expense, net. Net interest expense increased $2.4 million from
$0.2 million for the year ended December 31, 2001 to $2.6 million for the year
ended December 31, 2002. The primary reason for the increase in net interest
expense of $2.4 million was due to the average interest rate yields on
short-term and long-term investments falling from average interest rates of 5%
for 2001 to average interest rates of 3% for 2002, partially offset by lower
interest expense from the repurchase of approximately $21.0 million subordinated
notes. The Company used $17.5 million of cash in the repurchase of the
convertible subordinated notes and $1.1 million of cash to repurchase 147,000
shares of the Company's common stock during the year ended December 31, 2002.
The Company incurred interest expense of $0.5 million and $0.2 million for the
years ended December 31, 2002 and 2001, respectively, related to the mortgage of
the building acquired through the purchase of Microware completed in August
2001.
Other Income (Expense), net. Net other income increased by $3.8 million
from ($1.9) million of expense for the year ended December 31, 2001 to $1.9
million of income for the year ended December 31, 2002. This increase was
primarily attributable to the $3.0 million gain on early extinguishments of
convertible subordinated notes recorded during the year ended December 31, 2002
(see "Gain on early extinguishments of convertible subordinated notes" below),
offset by an increase in foreign exchange losses of ($0.5) million from ($0.8)
million to ($1.3) million for the years ended December 31, 2001 and 2002,
respectively. The foreign exchange losses are primarily a result of a weak US
dollar relative to European currencies. Additionally, the Company wrote off $0.5
million of fixed assets not related to restructuring activities during the year
ended December 31, 2001. Furthermore, during the quarter ended March 31, 2001,
the Company recorded a ($0.4) million realized loss on the investment in GA
eXpress ("GA") stock. The Company holds shares in GA as a result of the 1996
sale of Texas Micro's Sequoia Enterprise Systems business unit to GA in exchange
for stock.
Gain on early extinguishments of convertible subordinated notes. During
the year ended December 31, 2002, the Company repurchased approximately $21.0
million principal amount of its 5.5% convertible subordinated notes, with
associated net discount of $0.6 million for $17.5 million cash in negotiated
transactions with third parties. The early extinguishments of the notes resulted
in a gain of approximately $3.0 million for the year ended December 31, 2002, of
which $1.3 million was reclassified during the quarter ended June 30, 2002 in
accordance with SFAS 145. The Company elected early adoption of SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," ("SFAS 145") and, accordingly, reclassified
the extraordinary gain of $0.8 million and its income tax effect of $0.5 million
to a gain from early extinguishments of convertible subordinated notes of $1.3
million during the quarter ended June 30, 2002.
Income Taxes. The Company recorded a tax benefit from continuing and
discontinued operations combined of $5.1 million and $28.0 million for the years
ended December 31, 2002 and 2001, respectively. The Company's effective tax rate
was (60.7%) in 2002 compared to (44.8%) in 2001. The Company's current effective
tax rate differs from the statutory rate primarily due to the impact of research
and development tax credits generated in 2002, the tax impact of certain foreign
tax planning strategies, and the amortization of goodwill associated with past
acquisitions.
At December 31, 2002, the Company had net deferred tax assets of $29.0
million. Valuation allowances of $16.2 million and $19.3 million, as of December
31, 2002 and 2001, respectively, have been provided for deferred income tax
assets related primarily to net operating loss and tax credit carryforwards that
may not be realized. The decrease in valuation allowance of $3.1 million for the
year ended December 31, 2002 compared to the year ended December 31, 2001 is
primarily attributable to $0.9 million and $2.2 million of expired net operating
losses arising from the acquisitions of Microware and Texas Micro, respectively,
partially offset by foreign tax credit carryforwards. Any tax benefits
subsequently recognized from the acquired Microware net operating loss
carryforwards would be allocated to goodwill. The utilization of the net
deferred tax assets will require that the Company generate at least $97.0
million in future taxable income over a five-year time frame. Management expects
the Company to return to past levels of profitability, and therefore believes
that it is more likely than not to be able to utilize the net deferred tax
assets.
The Company's future effective tax rate could be lower than the statutory
rate if future taxable income is higher than what is currently anticipated
through the release of some or all of the recorded valuation allowance. In
contrast, the Company's effective tax rate could be adversely affected if future
taxable income is lower than anticipated or by unfavorable changes in tax laws
and regulations.
The Company is under audit by the Internal Revenue Service ("IRS") for
years 1999 through 2001. The federal income tax return for fiscal 2002 will be
audited once it is filed. The IRS also has the option to review the years 1996
through 1998 with respect to the net operating losses carried back to those
years. If the outcome of the audit is unfavorable and is upheld, the Company may
be required to record additional liability, lose deferred tax assets, and/or
make cash payments for additional taxes, penalties and/or interest. Such amounts
could be material, and could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. While management
believes at this time that no such adverse result is forthcoming, it is not
possible to predict the outcome of the audit with certainty.
Discontinued Operations. On March 14, 2003, the Company completed the sale
of its Savvi business resulting in a loss of $4.3 million. As a result of this
transaction, the Company recorded $4.1 million in write-offs of goodwill and
intangible assets in the first quarter of 2003. The total $4.7 million loss from
discontinued operations recorded for the three months ended March 31, 2003
includes the $4.3 million loss on the sale of the Savvi business as well as $393
thousand of net losses incurred by the business unit during the quarter, before
the business unit was sold. For the year ended December 31, 2002 $3.9 million of
revenues and expenses and $2.4 million of tax benefit were reclassified from
continuing operations to loss from discontinued operations as a result of the
sale of the Savvi business in the first quarter of 2003.
Comparison of Year 2001 and Year 2000
Revenues. Revenues decreased $113.0million or 33.2% from $340.7 million in
2000 to $227.7 million in 2001. The decrease in revenues was principally
attributable to lower customer sales as a result of the overall poor economic
conditions and the related downturn within the Company's three primary markets:
communications infrastructure equipment, medical equipment, and electronics
assembly equipment. As of December 31, 2001, the Company's backlog was
approximately $26.0 million compared to backlog of approximately $60.1 million
as of December 31, 2000.
Gross Margin. Gross margin decreased to 15.4% of revenues in 2001 compared
to 34.3% for the year ended December 31, 2000. The decrease in gross margin as a
percentage of revenues for the year ended December 31, 2001 was primarily
attributable to unfavorable absorption due to reduced utilization of
manufacturing capacity resulting from decreased revenues and inventory related
adjustments of $3.9 million, $6.8 million, and $13.9 million in the first,
second, and fourth quarters, respectively. Gross margin for 2001 excluding the
inventory write-downs throughout the year was 26.2%.
Research and Development. Research and development expenses decreased by
$4.1 million or 11.0% from $37.3 million in 2000 to $33.2 million in 2001. The
decrease for the year ended December 31, 2001 was a result of lower spending as
a result of additional cost control measures, initiated and completed during the
year ended December 31, 2001, and reduced incentive compensation. These cost
savings were partially offset by increases in engineering headcount of 31
employees since December 31, 2000. Most of the increase in engineering headcount
resulted from the Microware acquisition in August 2001. The increase in research
and development spending as a percentage of revenue for the year ended December
31, 2001 was associated with the decline in revenues during 2001.
Selling, General, and Administrative Expenses. SG&A expenses decreased by
$3.8 million or 9.7% for the year ended December 31, 2001 compared to the year
ended December 31, 2000. The decrease in 2001 was primarily due to lower
spending, as a result of cost control measures including a reduction in sales
commission expense and other incentive expenses resulting from lower sales. The
increase as a percentage of revenues for 2001 resulted from a decline in
revenues.
Goodwill Amortization. Goodwill amortization remained at $5.5 million for
the years ended December 31, 2001 and 2000 despite the increase of $0.4 million
in amortization of goodwill arising from the purchase of S-Link offset by the
decision to decrease the estimate of the total goodwill associated with the 1999
acquisition of Open Computing Platform ("OCP"). This reduction was based upon a
decline in the expected future obligation to be owed to IBM as defined in the
acquisition agreement. The decision to decrease the OCP estimate in the fourth
quarter of 2000 reduced the annual amortization expense by $0.4 million for 2001
compared to 2000.
Intangible Assets Amortization. Intangible assets amortization expense
increased by $1.0 million or 90.9% from $1.1 million for the year ended December
31, 2000 to $2.1 million for the year ended December 31, 2001. The increase in
intangible assets amortization is principally attributable to $1.0 million in
amortization on the $11.2 million intangible assets purchased through the
acquisition of Microware completed in August 2001. Amortization periods for
intangible assets range from four to 15 years.
Restructuring Charges. Beginning in the first quarter of 2001, the Company
initiated a restructuring of its operations in light of overall market
conditions and the economic downturn. The Company recorded additional
restructuring charges during the second quarter of 2001 and the fourth quarter
of 2001. These measures, which included workforce reductions, consolidation of
certain facilities, fixed asset and capitalized software write-downs, and other
costs, were largely intended to align the Company's capacity and infrastructure
to anticipated demands for the Company's products.
During 2001, the Company recorded three restructuring charges for a total
of $17.0 million. These restructuring charges included employee termination and
related costs of $5.0 million, facility and leasehold improvement charges
relating to the leased facilities that were vacated of $6.1 million, impairment
of property and equipment of $3.0 million, impairment of capitalized software of
$2.6 million, and other charges of $0.3 million.
The employee termination and related costs pertaining to the 2001
restructuring charges included the elimination of approximately 300 domestic and
25 international positions. The employment reductions primarily affected
employees in manufacturing, sales, and office support functions. The facility
and leasehold improvements charges and the equipment charges related to the
decision to completely eliminate manufacturing operations in Houston, Texas and
vacate several domestic and international sales offices and design centers. The
impairment of capitalized software was associated with the acceleration of
end-of-life product strategies at one of the restructured design centers and the
discontinuance of all non-strategic in-process capitalized software efforts.
Other charges included legal and accounting fees associated with the
restructuring activities.
Interest (Expense) Income, net. Net interest expense increased $1.4
million for the year ended December 31, 2001 compared to the year ended December
31, 2000. The primary reason for the decrease in net interest expense was due to
the payment of interest expense at 5.5% on $100.0 million convertible
subordinated notes for the full year of 2001 offset by interest income on
short-term and long-term investments with average interest rates of 5% 2001.
During the first three quarters of 2000, the Company did not hold any short-term
investments or debt, but did receive interest income on its overnight cash
investment account, net of interest expense on $13.9 million borrowed against
its $20.0 million line of credit with a bank at an interest rate of 8.5%. At the
end of the third quarter of 2000, the Company increased its amount of cash for
investment by issuing $120.0 million convertible subordinated notes with an
interest rate of 5.5%, of which $20.0 million was repurchased during the fourth
quarter of 2000.
Other (Expense) Income, net. Net other expense increased by $7.1 million
for the year ended December 31, 2001 compared to the year ended December 31,
2000. The impact of foreign exchange rate fluctuations for the year ended
December 31, 2001 resulted in expense of approximately $0.8 million compared to
$0.5 million in 2000. Additionally, the Company wrote off $0.5 million of fixed
assets not related to restructuring activities during the year ended December
31, 2001. Further, the Company sold 367,000 shares of GA common stock during the
first quarter of 2000, for a gain of $0.9 million. The Company holds shares in
GA as a result of the 1996 sale of Texas Micro's Sequoia Enterprise Systems
business unit to GA in exchange for stock. The Company reclassified its gain on
early extinguishment of convertible subordinated notes of $5.1 million including
related income tax effects to Other (Expense) Income from extraordinary gain on
early extinguishment of convertible subordinated notes for the year ended
December 31, 2000 in accordance with the provisions of SFAS 145.
Income Taxes. The Company recorded a tax benefit from continuing and
discontinued operations of $28.0 million for 2001 and a tax provision of $7.8
million for 2000. The Company's effective tax rate was (44.8%) in 2001, compared
to 19.2% in 2000. The Company's effective tax rate in 2001 differed from the
statutory rate primarily due to the impact of research and development tax
credits generated in 2001, the application of additional tax credits to prior
year returns, and the U.S. income tax benefits on foreign export sales.
At December 31, 2001, the Company recorded net deferred tax assets of
$33.8 million after providing a valuation allowance of $19.3 million due to the
uncertainty of realization of certain net operating loss and tax credit
carryforwards.
Valuation allowances of $19.3 million and $13.5 million, as of December
31, 2001 and 2000, respectively, have been provided for deferred income tax
assets related primarily to net operating loss carryforwards that may not be
realized. The increase in valuation allowance in the year ended December 31,
2001 compared to the year ended December 31, 2000 primarily relates to net
operating loss carryforwards arising from the acquisitions of Microware and
Texas Micro. Any tax benefits subsequently recognized for the acquired Microware
net operating loss carryforwards would be allocated to goodwill.
Discontinued Operations. On March 14, 2003, the Company completed the sale
of its Savvi business resulting in a loss of $4.3 million. As a result of this
transaction, the Company recorded $4.1 million in write-offs of goodwill and
intangible assets in the first quarter of 2003. The total $4.7 million loss from
discontinued operations recorded for the three months ended March 31, 2003
includes the $4.3 million loss on the sale of the Savvi business as well as $393
thousand of net losses incurred by the business unit during the quarter, before
the business unit was sold. For the year ended December 31, 2001 $2.5 million of
revenues and expenses and $1.1 million of tax benefit were reclassified from
continuing operations to loss from discontinued operations as a result of the
sale of the Savvi business in the first quarter of 2003.
Liquidity and Capital Resources
As of December 31, 2002, RadiSys had $33.1 million in cash and cash
equivalents, $72.7 million in short-term investments, and working capital of
$132.5 million.
The following table summarizes selected financial information for each of
the years ended on the dates indicated:
(In thousands)
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Working capital ............................... $132,474 $141,940 $205,357
Cash and cash equivalents ..................... $ 33,138 $ 29,036 $ 40,621
Short-term investments, net ................... $ 72,661 $ 71,117 $ 93,264
Accounts receivable, net ...................... $ 27,473 $ 41,694 $ 68,241
Inventories, net .............................. $ 24,864 $ 32,651 $ 53,247
Long-term investments, net .................... $ 13,128 $ 13,197 $ --
Accounts payable .............................. $ 18,933 $ 24,512 $ 32,602
Convertible subordinated notes, net of discount $ 77,366 $ 97,521 $ 97,191
Cash and cash equivalents increased by $4.1 million from $29.0 million at
December 31, 2001 to $33.1 million at December 31, 2002. Activities impacting
cash and cash equivalents are as follows:
Cash Flows
(In thousands)
Years Ended December 31,
---------------------------------------------
2002 2001 2000
--------- --------- ---------
Cash provided by operating activities .............. $ 23,230 $ 5,353 $ 41,752
Cash used in investing activities .................. (6,568) (19,887) (109,950)
Cash (used in) provided by financing activities .... (15,075) 2,317 93,482
Effects of exchange rate changes on cash ........... 2,515 632 (371)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents $ 4,102 $ (11,585) $ 24,913
========= ========= =========
Working capital decreased $9.4 million from $141.9 million in 2001 to
$132.5 million in 2002. The net decrease in working capital year-over-year was
related to the net decrease in accounts receivable of $14.2 million, the net
decrease of inventories of $7.8 million, the decease in accounts payable of $5.6
million, and the decrease in accrued restructuring of $2.3 million, which were
partially offset by the net decrease in current deferred tax assets of $6.0
million.
The net decrease in accounts receivable of $14.2 million from 2001 to 2002
resulted from lower sales volume in 2002 as well as an improvement in average
days sales outstanding ("DSO") from 68 days at the end of 2001 to 52 days
exiting 2002. The decline in inventory of $0.7 million was primarily a result of
the Company's efforts to carefully manage inventory levels in order to meet
future customer demands while attempting to mitigate high levels of inventory
obsolescence throughout 2002.
Net cash used in investing activities was $6.6 million, $19.9 million, and
$110.0 million for 2002, 2001, and 2000, respectively. Significant investing
activities affecting cash and cash equivalents for the year ended December 31,
2002 include $91.4 million in purchases of held-to-maturity investments offset
by $88.0 million in proceeds from maturities of held-to-maturity investments,
and $3.4 million of capital expenditures. Cash expenditures for business
acquisitions during 2001 consisted of the purchase of S-Link for approximately
$4.5 million (and $0.2 million for equipment), the purchase of Microware for
approximately $13.6 million (an additional $0.3 million has been accrued) and
$2.8 million for the increased purchase price for the OCP acquisition based upon
a formula tied to certain OCP revenues pursuant to the acquisition agreement.
This $2.8 million payment was recorded in 2000, but paid in 2001. The Company
accrued a $1.1 million increase in the purchase price for the OCP acquisition in
2001 that was paid during the first quarter of 2002. Capital expenditures for
2002 of $3.4 million primarily consisted of improvements in information
technology infrastructure. Capital expenditures for 2001 of $4.6 million
primarily consisted of SAP implementation costs and network upgrades. Capital
expenditures for 2000 of $14.1 million primarily consisted of purchases of a
building and land adjacent to the Hillsboro facility, SAP implementations and
network upgrades.
Net cash (used in) provided by financing activities was ($15.1) million,
$2.3 million, and $93.5 million for 2002, 2001, and 2000, respectively.
Financing activities for the year ended December 31, 2002 consisted of $3.6
million of proceeds from issuance of common stock in connection with the
purchase of shares under the Employee Stock Purchase Plan. This increase was
offset by the early extinguishments of convertible subordinated notes of $17.5
million and the repurchase of 147,000 shares of RadiSys stock for $1.1 million.
Financing activities for the year ended December 31, 2001 consisted of $5.6
million of proceeds from issuance of common stock in connection with exercise of
options under the 1995 Stock Incentive Plan and the purchase of shares under the
Employee Stock Purchase Plan. This increase was offset by the repurchase of
74,000 shares of RadiSys stock for $1.0 million. Subsequent to the purchase of
Microware, the Company paid off Microware's 8% Convertible Debenture with Elder
Court for $2.2 million, of which $0.5 million represented a payment on early
settlement of the debenture. Significant financing activities for the year ended
December 31, 2000 included $116.1 million in net proceeds from the original
issuance of $120.0 million convertible subordinated notes, less the repurchase
of $20.0 million principal amount of convertible subordinated notes for $14.6
million, and $14.1 million in proceeds from issuance of common stock. These
activities were offset by the repayment of the line of credit of $13.9 million
and the repurchase of 297,000 shares of stock for $8.1 million.
Sale of Held-to-Maturity Investment
Short-term investments with an original maturity date greater than three
months are classified as investments held-to-maturity and are stated at
amortized cost in the Consolidated Balance Sheets. These investments are
classified as held-to-maturity because the Company has the intent and ability to
hold these securities to maturity. In 2001, however, RadiSys sold one of its
long-term held-to-maturity investments in order to comply with its investment
policy, when it was determined that it held investments totaling more than $10.0
million with two different issuers which became affiliated with each other, via
a merger. RadiSys' investment policy stipulates that the Company limit its
investment to $10.0 million in any financial instrument with any one issuer,
except with those backed by the U.S. Government. RadiSys sold one of the
affiliated investments with a par value of $5.0 million and cost basis of $5.1
million for approximately $5.2 million, of which $0.1 million related to accrued
interest and $0.02 million related to a gain on sale of investment. This sale
does not represent a material contradiction to the Company's stated intent to
hold the securities to maturity and does not establish a pattern of such sales.
Stock Repurchase Program
During the fourth quarter of 2001, the Company's Board of Directors
authorized the repurchase of up to 500,000 of its outstanding shares of common
stock. The 2001 stock repurchase program expired during the third quarter of
2002, at which time the Board of Directors authorized a new stock repurchase
program for the repurchase of up to 500,000 of its outstanding shares of common
stock. During the years ended December 31, 2002, 2001 and 2000, the Company
repurchased 147,000, 74,000 and 297,000 of outstanding shares, respectively, in
the open market or through privately negotiated transactions for $1.1 million,
$1.0 million, and $8.1 million, respectively. The timing and size of any future
stock repurchases are subject to market conditions, stock prices, cash position,
and other cash requirements.
Line of Credit
Subsequent to December 31, 2002, the Company renewed its line of credit
facility for $20.0 million at an interest rate based upon the lower of the
bank's prime rate or London Inter-Bank Offered Rate ("LIBOR") plus 1%, which
expires on March 31, 2004. The line of credit is secured by the Company's
non-equity investments. Pursuant to the provisions of the security agreement,
the market value of these investments must exceed 125% of the facility amount,
and the investments must meet specified investment grade ratings.
As of December 31, 2002 and 2001, there was no outstanding balance on the
line of credit.
Convertible Subordinated Notes
During the quarter ended September 30, 2000, RadiSys received $116.1
million in net proceeds, after discount and net issuance costs, from a private
placement of $120.0 million aggregate principal amount, of 5.5% convertible
subordinated notes due August 2007. The notes are unsecured obligations
convertible into RadiSys Common Stock at a conversion price of $67.80 per share
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. Payments commenced on
February 15, 2001. In October 2000, RadiSys repurchased $20.0 million principal
amount of the 5.5% convertible subordinated notes for $14.6 million in a
negotiated transaction with a third party. The early extinguishment of the notes
resulted in gain of approximately $5.1 million.
During the year ended December 31, 2002, RadiSys' Board of Directors
authorized the repurchase, in the open market or through privately negotiated
transactions, of up to $30.0 million of the Company's 5.5% convertible
subordinated notes. This authorization expired on February 21, 2003.
For the year ended December 31, 2002, the Company repurchased
approximately $21.0 million principal amount of the 5.5% convertible
subordinated notes, with an associated net discount of $0.6 million 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.
Mortgage Payable
Through the acquisition of Microware, RadiSys assumed a long-term mortgage
payable to GMAC Commercial Mortgage Company in the amount of $6.7 million. The
mortgage payable is secured by Microware's facility and by the associated real
estate in Des Moines, Iowa. In accordance with the provisions of the mortgage
agreement, the Company issued an irrevocable standby letter of credit in the
amount of $0.8 million, which is used as a part of collateral. The Company also
has $0.8 million of restricted cash at December 31, 2002 and 2001 related to the
standby letter of credit. Monthly payments are $0.05 million, including interest
at 7.46%, with the unpaid balance due January 1, 2008.
During the year ended December 31, 2002, the Company paid $0.07 million of
principal on its mortgage payable, along with interest at 7.46% of $0.5 million.
During the year ended December 31, 2002, the Company reinvested $0.8 million of
restricted cash in a restricted short-term investment account as a part of
collateral for its mortgage. The current portion of the mortgage payable of
$0.08 million is included in accounts payable in the Consolidated Balance Sheets
as of December 31, 2002 and 2001.
Contractual Obligations
The following summarizes RadiSys' contractual obligations at December 31,
2002 and the effect of such on its liquidity and cash flows in future periods.
(In thousands)
Convertible Future
Years Ending Subordinated Mortgage Minimum Lease
December 31, Notes Payable Payments Total
------------ ------------ --------- ------------- ---------
2003 $ -- $ 83 $ 4,079 $ 4,162
2004 -- 89 3,827 3,916
2005 -- 97 3,109 3,206
2006 -- 104 1,810 1,914
2007 79,024 113 1,772 80,909
Thereafter -- 6,185 7,194 13,379
--------- --------- --------- ---------
79,024 6,671 21,791 107,486
Less: current portion -- (83) (4,079) (4,162)
--------- --------- --------- ---------
Long-term obligations $ 79,024 $ 6,588 $ 17,712 103,324
========= ========= ========= =========
The Company does not engage in any activity involving special purpose
entities or off-balance sheet financing.
Outlook
The Company believes its existing cash and cash equivalents and cash
provided by operations are sufficient to sustain its short and long-term
liquidity requirements. Working capital requirements over the next year are
expected to be satisfied from existing cash, marketable securities balances, and
cash flows from operations. Capital expenditures are expected to be minimal,
ranging from $0.5 million to $1.0 million per quarter. Because capital
requirements cannot be predicted with certainty, it is possible that the Company
could be compelled to obtain additional financing in the future, and that
financing may not be available.
Recent Accounting Pronouncements
In May 2002, the FASB issued SFAS 145 which rescinds the automatic
treatment of gains or losses from extinguishment of debt as extraordinary as
outlined in SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," ("SFAS 4") unless they meet the criteria for extraordinary items as
outlined in APB Opinion No. 30, "Reporting the Results of Operations, Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." In addition, SFAS 145 also
requires sale-leaseback accounting for certain lease modifications, as defined
in SFAS No. 13, "Accounting for Leases," ("SFAS 13"), that have economic effects
similar to sale-leaseback transactions, and makes various technical corrections
to existing pronouncements. SFAS 145 pertaining to the provisions of SFAS 4 is
effective for the fiscal years beginning after May 15, 2002, and the SFAS 145
provisions related to SFAS 13 are effective for transactions occurring after May
15, 2002. The Company has elected early adoption of SFAS 145 and, accordingly,
reclassified the extraordinary gain of $0.8 million and its income tax effect of
$0.5 million recorded in the quarter ended March 31, 2002 to a gain on early
extinguishment of convertible subordinated notes of $1.4 million during the six
months ended June 30, 2002. For the year ended December 31, 2002 the Company
recognized a gain on early extinguishments of convertible subordinated notes of
$3.0 million. The Company reclassified gain on early extinguishment of
convertible subordinated notes of $5.1 million including related income tax
effects to Other (Expense) Income from extraordinary gain on early
extinguishment of convertible subordinated notes for the year ended December 31,
2000 in accordance with the provisions of SFAS 145.
In July 2002, the FASB issued SFAS 146, which requires that a liability
for a cost associated with an exit or disposal activity be recognized and be
measured initially at its fair value when a liability is incurred. SFAS 146
eliminates the definition and requirement for recognition of exit costs in EITF
94-3 where an exit cost was recognized at the date of an entity's commitment to
an exit plan. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. RadiSys does not expect the implementation of this statement to have
a material effect on the Company's financial position or results of operations.
In November 2002, the FASB issued FIN 45, which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while the provisions of the disclosure
requirements are effective for the financial statements of interim or annual
reports ending after December 15, 2002. The Company has adopted the disclosure
requirements of FIN 45 during the fourth quarter of 2002. The adoption of the
disclosure requirements of FIN 45 did not have a material effect on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, An Amendment of FASB
Statement No. 123," ("SFAS 148"). SFAS 148 amends certain provisions of SFAS 123
and provides alternative methods of transition in voluntary adoption of SFAS No.
123, "Accounting for Stock-Based Compensation," ("SFAS 123"). The Company
accounts for its stock-based compensation in accordance with the provisions of
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
adopted the disclosure requirements of SFAS 148 during the fourth quarter of
2002.
Part II, Item 8. Financial Statements and Supplementary Data
Quarterly Financial Data (unaudited)
(In thousands, except per share data)
Year Ended December 31, 2002 Year Ended December 31, 2001
-------------------------------------------- --------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
Revenues ........................ $ 52,699 $ 52,152 $ 47,927 $ 47,309 $ 56,159 $ 61,797 $ 53,869 $ 55,888
Gross margin .................... 14,713 15,130 15,161 14,440 9,748 10,284 13,535 1,588
(Loss) income from operations ... (1,361) (6,593) 937 3,277 (20,341) (11,741) (4,393) (21,377)
(Loss) income from continuing
operations ................... (261) (2,672) 47 1,127 (8,478) (8,914) (2,689) (13,036)
Loss from discontinued operations
related to Savvi, net of tax
benefit ...................... (392) (400) (568) (186) -- (548) (485) (336)
Net (loss) income ............... (653) (3,072) (521) 941 (8,478) (9,462) (3,174) (13,372)
Net (loss) income per share from
continuing operations: ....... --
Basic ...................... (0.01) (0.15) -- 0.06 (0.49) (0.52) (0.15) (0.75)
Diluted .................... (0.01) (0.15) -- 0.06 (0.49) (0.52) (0.15) (0.75)
Net (loss) income per share:
Basic ...................... (0.04) (0.18) (0.03) 0.05 (0.49) (0.55) (0.18) (0.77)
Diluted .................... (0.04) (0.18) (0.03) 0.05 (0.49) (0.55) (0.18) (0.77)
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Revenues ................................................... $ 200,087 $ 227,713 $ 340,676
Cost of sales .............................................. 140,643 192,558 223,779
--------- --------- ---------
Gross margin ............................................... 59,444 35,155 116,897
Research and development ................................... 27,728 33,174 37,256
Selling, general, and administrative ....................... 30,111 35,244 39,059
Goodwill amortization ...................................... -- 5,500 5,475
Intangible assets amortization ............................. 3,079 2,101 1,102
Gain on sale of Multibus, net of expenses .................. (1,164) -- --
Restructuring charges ...................................... 3,430 16,988 --
--------- --------- ---------
(Loss) income from operations .............................. (3,740) (57,852) 34,005
Interest (expense) income, net ............................. (2,621) (223) 1,179
Other income (expense), net ................................ 1,880 (1,914) 5,225
--------- --------- ---------
(Loss) income from continuing operations before income tax
(benefit) provision ..................................... (4,481) (59,989) 40,409
Income tax provision (benefit) ............................ 2,722 26,872 (7,763)
--------- --------- ---------
(Loss) income from continuing operations ................... (1,759) (33,117) 32,646
--------- --------- ---------
Discontinued operations related to Savvi business (Note 23):
--------- --------- ---------
Loss from discontinued operations ..................... (3,937) (2,480) --
--------- --------- ---------
Income tax benefit .................................... (2,391) (1,111) --
--------- --------- ---------
Net (loss) income .......................................... $ (3,305) $ (34,486) $ 32,646
========= ========= =========
(Loss) income per share from continuing operations:
Basic ................................................. $ (0.10) $ (1.92) $ 1.92
========= ========= =========
Diluted ............................................... $ (0.10) $ (1.92) $ 1.80
========= ========= =========
Net (loss) income per share:
Basic ................................................. $ (0.19) $ (2.00) $ 1.92
========= ========= =========
Diluted ............................................... $ (0.19) $ (2.00) $ 1.80
========= ========= =========
Weighted average shares outstanding:
Basic ................................................. 17,495 17,249 16,974
========= ========= =========
Diluted ............................................... 17,495 17,249 18,161
========= ========= =========
The accompanying notes are an integral part of these financial statements.
RADISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents (Notes 1 and 2) ........................ $ 33,138 $ 29,036
Short-term investments, net (Notes 1 and 2) ...................... 72,661 71,117
Accounts receivable, net (Notes 1 and 3) ......................... 27,473 41,694
Inventories, net (Notes 1 and 4) ................................. 24,864 32,651
Other current assets ............................................. 4,148 4,278
Deferred tax assets (Notes 1 and 14) ............................. 7,521 13,474
--------- ---------
Total current assets .......................................... 169,805 192,250
Property and equipment, net (Notes 1, 5, and 17) ................... 25,882 30,205
Goodwill (Notes 1, 6, and 17) ...................................... 29,969 30,679
Intangible assets, net (Notes 1, 7, and 17) ........................ 11,159 14,188
Long-term investments, net (Notes 1 and 2) ......................... 13,128 13,197
Long-term deferred tax assets (Notes 1 and 14) ..................... 21,437 20,284
Other assets (Notes 1 and 8) ....................................... 2,706 4,398
--------- ---------
Total assets .................................................. $ 274,086 $ 305,201
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (Notes 1 and 12) ................................ $ 18,933 $ 24,512
Accrued restructuring (Note 9) ................................... 5,178 7,490
Accrued interest payable (Notes 1 and 12) ........................ 1,643 2,068
Accrued wages and bonuses ........................................ 4,879 5,463
Other accrued liabilities (Notes 1 and 10) ....................... 6,698 10,777
--------- ---------
Total current liabilities ..................................... 37,331 50,310
Long-term liabilities (Note 12):
Convertible subordinated notes, net (Notes 1,8, and 12) ......... 77,366 97,521
Mortgage payable ................................................. 6,588 6,659
--------- ---------
Total long-term liabilities ................................... 83,954 104,180
--------- ---------
Total liabilities ............................................. 121,285 154,490
--------- ---------
Commitments and contingencies (Note 13) ............................ -- --
Shareholders' equity (Note 15):
Common stock - no par value, 100,000 shares authorized; 17,605 and
17,347 shares issued and outstanding at December 31, 2002 and
December 31, 2001 .............................................. 161,485 158,716
Accumulated deficit .............................................. (10,025) (6,720)
Accumulated other comprehensive income (loss):
Cumulative translation adjustments (Note 1) ............... 1,230 (1,285)
Unrealized gain on equity securities (Note 1) ................. 111 --
--------- ---------
Total shareholders' equity .................................... 152,801 150,711
--------- ---------
Total liabilities and shareholders' equity .................... $ 274,086 $ 305,201
========= =========
The accompanying notes are an integral part of these financial statements.
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Cumulative Unrealized Accumulated Total
----------------------- translation gain (loss) (deficit) comprehensive
Shares Amount adjustments on securities earnings Total (loss) income
--------- --------- ----------- ------------- ----------- --------- ------------
Balances, December 31, 1999 ...... 16,489 $ 141,030 $ (1,546) $ (349) $ (4,880) $ 134,255
Shares issued pursuant to
benefit plans ............... 878 14,142 -- -- -- 14,142 $ --
Shares repurchased ............ (297) (8,145) -- -- -- (8,145) --
Tax effect of options exercised -- 6,455 -- -- -- 6,455 --
Translation adjustments ....... -- -- (371) -- -- (371) (371)
Unrealized gain on
securities
available-for-sale ............ -- -- -- 349 -- 349 349
Net income for the year ....... -- -- -- -- 32,646 32,646 32,646
--------- --------- --------- --------- --------- --------- ---------
Balances, December 31, 2000 ...... 17,070 153,482 (1,917) -- 27,766 179,331
Comprehensive income,
year ended 2000 .......... $ 32,624
=========
Shares issued pursuant to
benefit plans ............... 351 5,596 -- -- -- 5,596 --
Shares repurchased ............ (74) (1,048) -- -- -- (1,048) --
Tax effect of options exercised -- 686 -- -- -- 686 --
Translation adjustments ....... -- -- 632 -- -- 632 632
Net loss for the year ......... -- -- -- -- (34,486) (34,486) (34,486)
--------- --------- --------- --------- --------- ---------
Balances, December 31, 2001 ...... 17,347 158,716 (1,285) -- (6,720) 150,711
Comprehensive loss,
year ended 2001 .......... $ (33,854)
=========
Shares issued pursuant to
benefit plans ............... 405 3,561 -- -- -- 3,561 --
Shares repurchased ............ (147) (1,093) -- -- -- (1,093) --
Tax effect of options exercised -- 301 -- -- -- 301 --
Translation adjustments ....... -- -- 2,515 -- -- 2,515 2,515
Unrealized gain on
securities
available-for-sale ............ -- -- -- 111 -- 111 111
Net loss for the year ......... -- -- -- -- (3,305) (3,305) (3,305)
--------- --------- --------- --------- --------- --------- ---------
Balances, December 31, 2002 ...... 17,605 $ 161,485 $ 1,230 $ 111 $ (10,025) $ 152,801
========= ========= ========= ========= =========
Comprehensive loss,
year ended 2002 .......... $ (679)
=========
The accompanying notes are an integral part of these financial statements.
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net (loss) income ................................................ $ (3,305) $(34,486) $ 32,646
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization .................................. 11,553 18,472 16,942
Provision for allowance for doubtful accounts .................. 443 1,344 198
Provision for inventory reserves ............................... 6,848 20,547 4,112
Non-cash restructuring (adjustments) charges ................... (188) 5,570 --
Non-cash interest expense ...................................... 2,276 330 461
Realized loss on security available-for-sale ................... -- 509 766
Gain on sale of security available-for-sale .................... -- -- (856)
Gain on settlement of notes receivable ......................... -- -- (663)
Gain on sale of Multibus ....................................... (1,200) -- --
Write-off of fixed assets ...................................... 316 1,210 --
Write-off of capitalized software .............................. 347 197 --
Gain on early extinguishments of convertible subordinated notes (3,010) -- (5,078)
Deferred income taxes .......................................... 4,800 (23,610) (1,726)
Tax benefits on options exercised .............................. 301 686 6,455
Other .......................................................... (180) (50) --
Changes in operating assets and liabilities, net of effects of
business combinations:
Accounts receivable .......................................... 14,278 27,364 (9,820)
Inventories .................................................. 749 49 (15,985)
Other current assets ......................................... 161 (2,031) (1,036)
Accounts payable ............................................. (5,579) (9,464) 12,724
Accrued restructuring ........................................ (1,402) 7,656 --
Accrued interest payable ..................................... (424) (117) 2,185
Income taxes payable ......................................... -- (3,987) 2,115
Accrued wages and bonuses .................................... (584) (2,413) 1,170
Other accrued liabilities .................................... (2,970) (2,423) (2,858)
-------- -------- --------
Net cash provided by operating activities ........................ 23,230 5,353 41,752
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale or maturity of held-to-maturity investments .......... $ 87,970 $ 183,043 $ --
Purchase of held-to-maturity investments ................................ (91,394) (174,093) (93,264)
Business acquisitions and intangibles, net of cash acquired ............. -- (20,959) --
Proceeds from sale of securities available-for-sale ..................... -- -- 1,210
Capital expenditures .................................................... (3,430) (4,590) (14,101)
Proceeds from sale of Multibus business unit ............................ 700 -- --
Employee deferred compensation arrangements ............................. (414) (667) --
Capitalized software production costs and other assets .................. -- (2,621) (3,795)
--------- --------- ---------
Net cash used in investing activities ................................... (6,568) (19,887) (109,950)
--------- --------- ---------
Cash flows from financing activities:
Short-term borrowings ................................................... -- -- (13,931)
Principal payments on capital lease obligation .......................... -- -- (73)
Proceeds from issuance of convertible subordinated notes, net of discount -- -- 116,081
Early extinguishments of convertible subordinated notes ................. (17,472) -- (14,592)
Repayment of Microware convertible debenture ............................ -- (2,200) --
Principal payments on mortgage payable .................................. (71) (31) --
Proceeds from issuance of common stock .................................. 3,561 5,596 14,142
Repurchases of common stock ............................................. (1,093) (1,048) (8,145)
--------- --------- ---------
Net cash (used in) provided by financing activities ..................... (15,075) 2,317 93,482
--------- --------- ---------
Effects of exchange rate changes on cash ..................................... 2,515 632 (371)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ......................... 4,102 (11,585) 24,913
Cash and cash equivalents, beginning of period .......................... 29,036 40,621 15,708
--------- --------- ---------
Cash and cash equivalents, end of period ................................ $ 33,138 $ 29,036 $ 40,621
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ................................................................ $ 5,568 $ 5,812 $ 547
Income taxes ............................................................ 323 2,185 3,234
Supplemental disclosure of noncash investing activity:
Notes receivable received as part of sale of Multibus ........................ $ 500 $ -- $ --
The accompanying notes are an integral part of these financial statements.
RADISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Note 1 - Significant Accounting Policies
Basis of Presentation
RadiSys Corporation ("RadiSys" or the "Company") was incorporated in March
1987 under the laws of the State of Oregon for the purpose of developing,
producing, and marketing computer system (hardware and software) products for
embedded computer applications in the manufacturing automation, medical,
transportation, telecommunications, and test equipment marketplaces. The Company
has evolved into a leading provider of embedded systems for compute, data
processing, and network-intensive applications to OEM's within the commercial
systems, service provider systems, and enterprise systems markets. The
accompanying Consolidated Financial Statements include the accounts of the
Company and its wholly-owned subsidiaries. All inter-company accounts and
transactions have been properly eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. This includes, among other things,
collectibility of accounts receivable; realizability of investments,
inventories, intangible assets, and deferred income taxes; and the adequacy of
warranty obligations and restructuring liabilities. Actual results could differ
from those estimates.
Reclassifications
Certain reclassifications have been made to amounts in prior years to
conform to current year presentation. These changes had no effect on previously
reported results of operations or shareholders' equity.
Revenue Recognition
The Company generally recognizes revenue from hardware product sales upon
shipment to customers provided that:
o an authorized purchase order has been received;
o the price is fixed;
o title has transferred;
o collection of the resulting receivable is probable;
o product returns are reasonably estimable;
o there are no customer acceptance requirements; and
o there are no remaining significant obligations on the part of the Company.
For sales to distributors, probable returns are estimated and accrued,
based upon contractual limitations and historical return rates.
The Company recognizes software product revenue in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2,"
effective February 1, 1998 and by SOP 98-9, "Modification of SOP 97-2, `Software
Revenue Recognition' with Respect to Certain Transactions." Software product
revenues are recognized at the time of shipment or upon delivery of the software
master provided that:
o collection of the resulting receivable is reasonably assured;
o the fee is fixed or determinable; and
o vendor-specific objective evidence exists to allocate the total fee to all
delivered and undelivered elements of the arrangement.
Any post-contract support included in these arrangements are recognized as
earned on the straight-line basis over the terms of the contracts. Software
product revenues were not significant to the Company for the years reported.
Service revenues include custom contract engineering work and custom software
development projects and are recognized on a percentage-of-completion basis.
Service revenues were not significant to the Company's operations for the years
reported. Non-recurring engineering revenue is recognized upon completion of
certain engineering milestones.
Revenue from customers for prepaid, non-refundable royalties is recorded
when the revenue recognition criteria has been met. Revenue for non-prepaid
royalties is recognized at the time the underlying product is shipped by the
customer paying the royalty provided that collection of the resulting receivable
is probable.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original or remaining maturity of three months or less at the date of purchase
to be cash equivalents in accordance with Statement of Financial Accounting
Standard No. 95 "Statement of Cash Flows," ("SFAS 95").
Investments
Investments with original maturities of more than three months but less
than a year are classified as Short-term investments, and investments with
maturities more than a year are classified as Long-term investments in the
consolidated financial statements. Short-term and long-term investments consist
of corporate bonds and commercial paper. The Company classifies, at the date of
acquisition, its investments into categories in accordance with the provisions
of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," ("SFAS 115"). Investments are classified as held-to-maturity if the
Company has the positive intent and ability to hold those securities to maturity
and are stated at amortized cost in the Consolidated Balance Sheets. Investments
classified as held-to-maturity are high credit quality securities with weighted
average maturities of the portfolio not greater than 12 months and no individual
security maturities greater than 24 months in accordance with the Company's
investment policy. Investments classified as available-for-sale are reported at
fair value with the related unrealized gains and losses included in
Shareholders' equity in the Consolidated Balance Sheets. Realized gains and
losses, declines in value of securities judged to be other than temporary, and
interest and dividends on all securities are included in Other income, net and
Interest income, net, in the Consolidated Statements of Operations.
Accounts Receivable
Trade accounts receivable is stated net of an allowance for doubtful
accounts. An allowance for doubtful accounts is maintained for estimated losses
resulting from the inability of customers to make required payments. Management
reviews the allowance for doubtful accounts quarterly for reasonableness and
adequacy. If the financial condition of the Company's customers were to
deteriorate resulting in an impairment of their ability to make payments,
additional provisions for uncollectible accounts receivable may be required. In
the event the Company determined that a smaller or larger reserve was
appropriate, it would record a credit or a charge in the period in which such
determination is made. The Company's customers are concentrated in the
technology industry, consequently, the operations and collection of its accounts
receivable are directly associated with the operational results of the industry.
Inventories
Inventories are stated at the lower of cost or market, net of a reserve
for obsolete and slow moving items. RadiSys uses the first-in, first-out
("FIFO") method to determine cost. Management evaluates its inventory on a
quarterly basis for obsolete or slow-moving items to ascertain if the recorded
allowance is reasonable and adequate. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated net realizable value based upon
assumptions about future demand and market conditions.
The Company is dependent on third party contract manufacturers. Some of
the key components in the Company's products come from single or limited sources
of third party contract manufacturers.
Long-Lived Assets
Property, equipment, and identifiable intangibles are reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Disposal of
Long-Lived Assets" ("SFAS 144"). The Company assesses the impairment of property
and equipment and identifiable intangibles whenever changes in circumstances
indicate that the carrying value may not be recoverable.
When the Company determines that the carrying value of the property and
equipment and identifiable intangibles will not be recoverable, the Company
records the impairment based on a future discounted cash flow method. The
Company estimates future discounted cash flows using assumptions about its
expected future operating performance. The Company's estimates of discounted
cash flows may differ from actual cash flow due to, among other things,
technological changes, economic conditions, or changes to its business
operations. The Company has not recognized impairment losses defined under the
provisions of SFAS 144.Goodwill
Goodwill represents the excess of cost over the assigned value of the net
assets in connection with all acquisitions. Goodwill is reviewed for impairment
in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets," ("SFAS
142"). SFAS 142 requires goodwill to be tested for impairment at least annually
and under certain circumstances written down when impaired, rather than be
amortized as previous standards required. The Company has not recognized
impairment losses defined under the provisions of SFAS 142.
Property and Equipment
Property and equipment is recorded at historical cost and depreciated or
amortized on a straight-line basis as follows:
-----------------------------------------------------------------------------------------------------------------------------
Buildings............................................................... 40 years
-----------------------------------------------------------------------------------------------------------------------------
Machinery, equipment, furniture, and fixtures........................... 5 years
-----------------------------------------------------------------------------------------------------------------------------
Software ,computer hardware, vehicles, and manufacturing test fixtures.. 3 years
-----------------------------------------------------------------------------------------------------------------------------
Leasehold improvements.................................................. Lessor of the lease terms or estimated useful
lives
-----------------------------------------------------------------------------------------------------------------------------
Ordinary maintenance and repair expenses are charged to income when
incurred.
Warranty
Our products are warranted to be free of defect for a period ranging from
one to three years. The Company estimates the costs that may be incurred under
its warranty program and records a liability for the costs at the time product
revenue is recognized. The Company assesses quarterly the reasonableness and
adequacy of the warranty liability and adjusts such amounts as necessary. The
Company has adopted the disclosure requirements of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others," ("FIN 45") issued in November
2002.
Research and Development
Research and development expenses are charged to income as incurred.
Computer Software Production Costs
The Company historically capitalized software development costs incurred
in the production of computer software. On January 1, 2002, the Company
generally discontinued capitalizing software development costs as the Company
concluded it would not incur any material costs between the point of
technological feasibility and general release of the product to customers in the
future. As such software development costs are expensed as research and
development costs beginning January 1, 2002. Amortization of previously
capitalized software development costs is calculated using a straight-line
method over the expected product life cycle.
Income Taxes
As a general practice, RadiSys reinvests the earnings of its foreign
subsidiaries in those operations unless it would be advantageous to repatriate
the foreign subsidiaries' retained earnings. The Company accounts for income
taxes using the asset and liability method. This approach requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. Valuation allowances are
established in accordance with SFAS No. 109, "Accounting for Income Taxes,"
("SFAS 109") to reduce deferred tax assets to the amount expected to "more
likely than not" be realized in future tax returns. Tax law and rate changes are
reflected in the period such changes are enacted.
Fair Value of Financial Assets and Liabilities
RadiSys estimates the fair value of its monetary assets and liabilities
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, and convertible subordinated notes based upon
comparative market values of instruments of a similar nature and degree of risk
in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," ("SFAS 107"). The fair value for the convertible subordinated
notes is based on quoted market prices as of the balance sheet date.
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income," ("SFAS
130"), the Company reports Accumulated other comprehensive (loss) income in its
Consolidated Balance Sheets. Net (loss) income, Translation adjustments and
Unrealized gains (losses) on securities available-for-sale represent the
Company's only other comprehensive income items. The Cumulative translation
adjustments consist of unrealized gains (losses) in accordance with SFAS No. 52,
"Foreign Currency Translation" ("SFAS 52"). The Company has no intention of
liquidating the assets of its non-redundant foreign subsidiaries in the
foreseeable future.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), and provides pro forma disclosures of net (loss) income and net (loss)
income per common share as if the fair value method had been applied in
measuring compensation expense in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123"). Equity instruments are not granted to
non-employees, other than directors, as defined in the respective plan
agreements.
The Company has elected to account for its stock-based compensation under
APB 25; however, as required by SFAS No. 123, the Company computed the value of
options granted during 2002, 2001, and 2000 using the Black-Scholes option
pricing model for pro forma disclosure purposes. The weighted average
assumptions used for stock option grants for 2002, 2001 and 2000 were risk-free
interest rates of 2.87%, 4.21%, and 5.86%, respectively, expected dividend
yields of 0%, expected lives of 3.1, 3.5, and 4 years, respectively, and
expected volatility of 90%, 83%, and 85%, respectively.
The weighted average assumptions used for ESPP shares for 2002, 2001, and
2000 were risk-free interest rates of 3.29%, 4.49%, and 5.46%, respectively,
expected dividend yields of 0%, expected lives of 1.5 years, and expected
volatility of 80%, 73%, and 78%, respectively. The interest rates used are
reflective of the prevailing rates as of grant dates throughout the years. The
weighted-average fair value of Employee Stock Purchase Program ("ESPP") shares
granted in 2002, 2001, and 2000 was $9.4 million, $8.0 million, and $5.5
million, respectively.
Options are assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited as they occur. For the
years ended December 31, 2002, 2001, and 2000, the total value of the options
granted was approximately $14.0 million, $19.8 million, and $32.9 million,
respectively, which would be amortized on a straight-line basis over the vesting
periods of the options.
Had RadiSys accounted for these plans in accordance with SFAS 123, the
Company's net (loss) income and pro forma net (loss) income per share would have
been reported as follows:
(In thousands, except per share amounts)
Years Ended December 31,
-----------------------------------
2002 2001 2000
-------- -------- ----------
Net (loss) income from continuing operations ........ $ (1,759) $(33,117) $ 32,646
Add: Stock-based employee compensation
expense included in reported net
(loss) income, net of
related tax effects ................................ -- -- --
Deduct: Total Stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects ......................... (5,705) (9,875) (13,666)
-------- -------- ----------
Pro forma net (loss) income from continuing operations $ (7,464) $(42,992) $ 18,980
-------- -------- ----------
Loss from discontinued operations .................. (3,937) (2,480) --
Income tax benefit ................................. (2,391) (1,111) --
-------- -------- ----------
Pro forma net (loss) income .......................... $ (9,010) $(44,361) $ 18,980
======== ======== ==========
Net (loss) income per share from continuing
operations:
Basic, as reported ................................. $ (0.10) $ (1.92) $ 1.92
======== ======== ==========
Diluted, as reported ............................... $ (0.10) $ (1.92) $ 1.80
======== ======== ==========
Proforma basic ..................................... $ (0.43) $ (2.49) $ 1.12
======== ======== ==========
Proforma diluted ................................... $ (0.43) $ (2.49) $ 1.05
======== ======== ==========
Net (loss) income per share:
Basic, as reported ................................. $ (0.19) $ (2.00) $ 1.92
======== ======== ==========
Diluted, as reported ............................... $ (0.19) $ (2.00) $ 1.80
======== ======== ==========
Proforma basic ..................................... $ (0.52) $ (2.57) $ 1.12
======== ======== ==========
Proforma diluted ................................... $ (0.52) $ (2.57) $ 1.05
======== ======== ==========
The effects of applying SFAS 123 for providing pro forma disclosure for
2002, 2001, and 2000 are not likely to be representative of the effects on
reported net (loss) income and net (loss) income per share for future years
since options vest over several years and additional awards are made each year.
Net (loss) income per share
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share," ("SFAS 128"). Accordingly, basic earnings per share
amounts are computed based on the weighted average number of common shares
outstanding. Diluted earnings per share amounts are based on the increased
number of common shares that would be outstanding assuming the exercise of
certain outstanding stock options and convertible subordinated notes, when such
conversion would have the effect of reducing earnings per share.
Foreign currency translation
Assets and liabilities of international operations are translated into
U.S. dollars at exchange rates as of December 31, 2002 and 2001. Income and
expense accounts are translated into U.S. dollars at the actual daily rates of
exchange prevailing during the period. Adjustments resulting from translating
foreign functional currency financial statements into U.S. dollars are recorded
as a separate component in shareholders' equity in accordance with SFAS 130.
Foreign exchange transaction gains and losses are included in Other income, net,
in the Consolidated Statements of Operations. Foreign currency transaction
losses, net of gains for the years ended December 31, 2002, 2001, and 2000 were
approximately $1.3 million, $0.8 million, and $0.5 million, respectively.
Recent Accounting Pronouncements
In May 2002, Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," ("SFAS 145"). SFAS 145 rescinds
the automatic treatment of gains or losses from extinguishment of debt as
extraordinary as outlined in SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," ("SFAS 4") unless they meet the criteria for
extraordinary items as outlined in APB Opinion No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." In
addition, SFAS 145 also requires sale-leaseback accounting for certain lease
modifications, as defined in SFAS No. 13, "Accounting for Leases," ("SFAS 13"),
that have economic effects similar to sale-leaseback transactions, and makes
various technical corrections to existing pronouncements. SFAS 145 pertaining to
the provisions of SFAS 4 is effective for the fiscal years beginning after May
15, 2002, and the SFAS 145 provisions related to SFAS 13 are effective for
transactions occurring after May 15, 2002. The Company adopted SFAS 145 during
the quarter ended March 31, 2002. For the year ended December 31, 2002 the
Company recognized a gain on early extinguishments of convertible subordinated
notes of $3.0 million. The Company reclassified gain on early extinguishment of
convertible subordinated notes of $5.1 million including related income tax
effects to Other (expense) income from extraordinary gain on early
extinguishment of convertible subordinated notes for the year ended December 31,
2000 in accordance with the provisions of SFAS 145.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," ("SFAS 146"). SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and be measured initially at its fair value when a liability is
incurred. SFAS 146 eliminates the definition and requirement for recognition of
exit costs in Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)," where an exit
cost was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged.
RadiSys does not expect the implementation of this statement to have a material
effect on the Company's financial position or results of operations.
In November 2002, the FASB issued FIN 45, which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while the provisions of the disclosure
requirements are effective for the financial statements of interim or annual
reports ending after December 15, 2002. The Company has adopted the disclosure
requirements of FIN 45 during the fourth quarter of 2002. The adoption of the
disclosure requirements of FIN 45 did not have a material effect on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, An Amendment of FASB
Statement No. 123," ("SFAS 148"). SFAS 148 amends certain provisions of SFAS 123
and provides alternative methods of transition in voluntary adoption of SFAS
123. The Company accounts for its stock-based compensation in accordance with
the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure requirements of SFAS 148
during the fourth quarter of 2002.
Note 2 - Held-to Maturity Investments
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
December 31, 2002
Short-term held-to-maturity investments - Commercial Paper $ 3,988 $ 1 $ -- $ 3,989
Short-term held-to-maturity investments - Corporate Bonds $68,673 $ 115 $ (153) $68,635
Long-term held-to-maturity investments - Corporate Bonds . $13,128 $ 127 $ (12) $13,243
December 31, 2001
Short-term held-to-maturity investments - Commercial Paper $16,842 $ 71 $ -- $16,913
Short-term held-to-maturity investments - Corporate Bonds $54,275 $ 116 $ (62) $54,329
Long-term held-to-maturity investments - Corporate Bonds . $13,197 $ 117 $ -- $13,314
Reported as:
December 31, December 31,
2002 2001
------------ ------------
Short-term held-to-maturity investments,
net of unamortized premium of $864 and $593, respectively $72,661 $71,117
======= =======
Long-term held-to-maturity investments,
net of unamortized premium of $600 and $507, respectively $13,128 $13,197
======= =======
As of December 31, 2002 the Company's Long-term held-to-maturity
investments had maturities ranging from 13 months to 20 months. The Company's
investment policy is to invest cash in interest bearing and highly liquid cash
equivalents and marketable debt securities with maturity dates not greater than
24 months.
In 2001, RadiSys sold one of its long-term held-to-maturity investments in
order to comply with its investment policy, when it was determined that it held
investments totaling more than $10.0 million with two different issuers which
became affiliated with each other, via a merger. RadiSys' investment policy
stipulates that the Company limit its investment to $10.0 million in any
financial instrument with any one issuer, except with those backed by the U.S.
Government. RadiSys sold one of the affiliated investments with a par value of
$5.0 million and cost basis of $5.1 million for approximately $5.2 million, of
which $0.1 million related to accrued interest and $0.02 million related to a
gain on sale of investment. This sale does not represent a material
contradiction to the Company's stated intent to hold the securities to maturity
and does not establish a pattern of such sales.
Note 3 - Accounts Receivable
Accounts receivable balances as of December 31, 2002 and 2001 consisted of
the following:
December 31, December 31,
2002 2001
------------ ------------
Accounts receivable, gross ................. $ 29,601 $ 44,311
Less: allowance for doubtful accounts ..... (2,128) (2,617)
-------- --------
Accounts receivable, net ................... $ 27,473 $ 41,694
======== ========
During the years ended December 31, 2002, 2001, and 2000, the Company
recorded provision for allowance for doubtful accounts of $0.4 million, $1.3
million, and $0.2 million, respectively.
Note 4 - Inventories
Inventories as of December 31, 2002 and 2001 consisted of the following:
December 31, December 31,
2002 2001
------------ ------------
Raw materials ........................ $ 28,058 $ 43,465
Work-in-process ...................... 1,991 1,362
Finished goods ....................... 4,773 6,943
-------- --------
34,822 51,770
Less: inventory reserves ............. (9,958) (19,119)
-------- --------
Inventories, net ..................... $ 24,864 $ 32,651
======== ========
During the years ended December 31, 2002, 2001, and 2000 the Company
recorded provision for excess and obsolete inventory of $6.8 million, $20.5
million, and $4.1 million, respectively. The inventory provision in 2001 was
recorded as a result of the decisions to consolidate manufacturing operations,
accelerate the end-of-life on non-strategic products and in recognition of
reduced customer demand and decreasing component prices in the marketplace.
The following is a summary of the change in the Company's excess and
obsolete inventory reserve for the years ended December 31, 2002 and 2001:
Inventory
Reserve
Balance
--------
Inventory reserve balance, December 31, 2001 ............... $ 19,119
Usage:
Inventory scrapped ..................................... (10,133)
Sale of inventory ...................................... (2,160)
Inventory utilized ..................................... (3,716)
--------
Subtotal - usage ..................................... (16,009)
Reserve provision .......................................... 6,848
--------
Remaining reserve balance as of December 31, 2002 .......... $ 9,958
========
Inventory reserve balance, December 31, 2000 ............... $ 7,100
Usage:
Inventory scrapped ..................................... (8,528)
Reserve provision .......................................... 20,547
--------
Remaining reserve balance as of December 31, 2001 .......... $ 19,119
========
Note 5 - Property and Equipment
Property and equipment as of December 31, 2002 and 2001, consisted of the
following:
December 31, December 31,
2002 2001
------------ ------------
Land .......................................... $ 4,166 $ 4,166
Building ...................................... 8,988 8,988
Manufacturing equipment ....................... 17,335 17,432
Office equipment and software ................. 20,231 24,930
Leasehold improvements ........................ 3,527 5,669
-------- --------
54,247 61,185
Less: accumulated depreciation and amortization (28,365) (30,980)
-------- --------
Property and equipment, net ................... $ 25,882 $ 30,205
======== ========
During the year ended December 31, 2001, RadiSys wrote off $4.4 million of
fixed assets, of which $3.1 million was recorded as part of a restructuring
charge. The Company wrote off $2.5 million of impaired fixed assets during the
first quarter of 2001 as a result of the decision to close its Houston, Texas
manufacturing plant. Additionally, the Company wrote off $0.1 million of
impaired fixed assets during the second quarter of 2001 due to the closure of
its Boston Digital Signaling Processors ("DSP") design center and $0.5 million
of impaired fixed assets during the fourth quarter of 2001 related to the
decision to consolidate service operations into Hillsboro, Oregon (see Note 9).
The Company also wrote off an additional $1.3 million of impaired fixed assets
not related to restructuring activities.
Depreciation and amortization expense for property and equipment for the
years ended December 31, 2002, 2001, and 2000 was $6.7 million, $8.1 million,
and $7.2 million, respectively.
Note 6 - Goodwill
During the year ended December 31, 2002, the Company recorded adjustments
of $0.5 million to decrease the goodwill associated with the acquisition of
Microware Systems Corporation ("Microware") upon concluding that certain
accruals and other assets recorded at the time of purchase were overstated. The
Company also recorded an adjustment of $0.8 million to decrease the goodwill
associated with the acquisition of Open Computing Platform ("OCP") business from
IBM as a result of further review of the revenue stream formula stipulated in
the acquisition agreement. This decrease was offset by the increased purchase
price of $0.6 million recorded for OCP based upon a formula tied to certain OCP
revenues pursuant to the acquisition agreement.
During the year ended December 31, 2001, the Company acquired $5.1 million
of goodwill in conjunction with the purchase of Microware. Other increases to
goodwill in 2001 include $2.8 million related to the S-Link Corporation
("S-Link") acquisition and $1.1 million related to the increased purchase price
recorded for the OCP acquisition based upon a formula tied to certain OCP
revenues pursuant to the acquisition agreement (see Note 20).
The Company ceased the amortization of goodwill effective January 1, 2002
in order to comply with the provisions of SFAS 142. SFAS 142 further requires
goodwill to be tested for impairment annually and under certain circumstances
written down when impaired, rather than being amortized as previous standards
required. To comply with this provision of SFAS 142, the Company completed a
comprehensive goodwill impairment analysis during the six months ended June 30,
2002. Based upon the analysis, the Company has concluded that as of January 1
and June 30, 2002, there was no goodwill impairment. The Company updated its
goodwill impairment analysis through September 30, 2002 and concluded that as of
September 30, 2002, there was no goodwill impairment. Management concluded there
was no indication of material changes that would require an updated goodwill
impairment analysis as of December 31, 2002. The Company may be required, under
certain circumstances, to update its impairment analysis and may incur losses on
its acquired goodwill and intangible assets.
The following table summarizes the impact of SFAS 142 on net (loss) income
and net (loss) income per share had SFAS 142 been in effect for the years ended
December 31, 2001, and 2000:
Years Ended December 31,
-----------------------------
2001 2000
---------- ----------
Net (loss) income as reported ................... $ (34,486) $ 32,646
Add: Amortization of goodwill .................. 5,500 5,475
Income tax effect ............................... (2,464) (1,052)
---------- ----------
Adjusted net (loss) income ...................... $ (31,450) $ 37,069
========== ==========
Adjusted net (loss) income per share (basic) .... $ (1.82) $ 2.18
Adjusted net (loss) income per share (diluted) .. $ (1.82) $ 2.04
Net (loss) income per share as reported (basic) . $ (2.00) $ 1.92
Net (loss) income per share as reported (diluted) $ (2.00) $ 1.80
Note 7 - Intangible Assets
The following tables summarize details of the Company's total purchased
intangible assets:
Accumulated
Gross Amortization Net
------- ------------ -----------
December 31, 2002
Existing technology ........ $ 4,096 $ (835) $ 3,261
Technology licenses ........ 6,790 (2,075) 4,715
Patents .................... 6,647 (4,104) 2,543
Trade names ................ 736 (96) 640
Other ...................... 237 (237) --
------- ------- -------
Total .................. $18,506 $(7,347) $11,159
======= ======= =======
Accumulated
Gross Amortization Net
------- ------------ -----------
December 31, 2001
Existing technology ........ $ 4,096 $ (504) $ 3,592
Technology licenses ........ 6,790 (566) 6,224
Patents .................... 6,597 (2,935) 3,662
Trade names ................ 736 (26) 710
Other ...................... 237 (237) --
------- ------- -------
Total .................. $18,456 $(4,268) $14,188
======= ======= =======
The Company's purchased intangible assets have lives ranging from 4 to 15
years. In accordance with SFAS 144, the Company reviews for impairment of all
its purchased intangible assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. No
impairment charges have been recognized under SFAS 144. The estimated future
amortization expense of purchased intangible assets as of December 31, 2002 is
as follows:
Estimated
Intangible
Years Ending Amortization
December 31, Amount
--------------------------------------------------------------------------
2003 ...................................... $ 3,395
2004 ...................................... 2,558
2005 ...................................... 2,384
2006 ...................................... 1,008
2007 ...................................... 858
Thereafter ................................... 906
-------
Total ................................. $11,159
=======
During the year ended December 31, 2001, the Company acquired $11.2
million of intangible assets (technology, licenses, patents, and tradenames) in
conjunction with the purchase of Microware. Other increases to intangible assets
include $1.7 million related to the S-Link acquisition. Amortization expense for
intangible assets for the years ended December 31, 2002, 2001, and 2000 was $3.1
million, $2.1 million, and $1.1 million, respectively.
Note 8 - Other Assets
Other assets as of December 31, 2002 and 2001, consisted of the following:
December 31, December 31,
2002 2001
------------ ------------
Capitalized software,
net of accumulated amortization, of $9,833 and $7,324, respectively $ 522 $2,612
Employee deferred compensation arrangements ................................. 834 618
Other ....................................................................... 1,350 1,168
------ ------
Other assets ................................................................ $2,706 $4,398
====== ======
During the year ended December 31, 2002, the Company wrote off $0.3
million of capitalized software. During the year ended December 31, 2001, the
Company wrote off $2.6 million of capitalized software associated with its
end-of-life strategy on certain products as a part of its restructuring
activities (see Note 9) and $0.2 million of capitalized software not related to
restructuring activities. The Company generally discontinued capitalizing
software development costs as the Company concluded it would not incur any
material costs between the point of technological feasibility and general
release of the product to customers in the future. Amortization expense for
capitalized software for the years ended December 31, 2002, 2001, and 2000 was
$1.8 million, $2.8 million, and $3.1 million, respectively.
Employee deferred compensation arrangement of $0.8 million as of December
31, 2002 represents the net cash surrender value of insurance contracts
purchased by the Company as part of its deferred compensation plan established
in January 2001 (see Note 16). Any elective deferrals by the eligible employees
are invested in insurance contracts.
Other long-term assets primarily consist of the Company's
available-for-sale securities in GA common stock and Met Life stock, unamortized
debt issuance costs, and long-term deposits. As of December 31, 2002 and 2001,
the carrying value in GA stock was $0.4 million and $0.3 million, respectively.
During the year ended December 31, 2002, the Company recorded a net unrealized
gain on its investment in GA common stock of $0.11 million, net of tax of $0.08
million. During the year ended December 31, 2002, the Company recorded the
receipt of 2,410 shares of Met Life non-voting common stock in the amount of
$0.07 million received as a policy holder/shareholder. The Company classified
the shares received as available-for-sale securities in accordance with the
provisions of SFAS 115.
As of December 31, 2002 and 2001, the Company had unamortized debt
issuance costs of $0.2 million and $0.3 million, respectively related to the
$120.0 million convertible subordinated notes, adjusted for cumulative early
extinguishments of $21.0 million and $20.0 million during the years ended
December 31, 2002 and 2000 respectively (see Note 12). These costs are being
amortized over seven years, the term of the notes.
Note 9 - Accrued Restructuring
Beginning in the first quarter of 2001, RadiSys initiated a restructuring
of its operations in light of overall market conditions and the economic
downturn. These measures, which included workforce reductions, consolidation of
certain facilities, fixed assets and capitalized software write-downs and other
costs, were all largely intended to align the Company's capacity and
infrastructure to anticipated demand and improve its cost structure.
Accrued restructuring as of December 31, 2002 and December 31, 2001
consisted of the following:
December 31, December 31,
2002 2001
------------ ------------
First quarter 2001 restructuring charge ........ $1,637 $3,234
Second quarter 2001 restructuring charge ....... -- 328
Fourth quarter 2001 restructuring charge ....... 1,591 3,011
Liability assumed in Microware acquisition ..... 190 917
Second quarter 2002 restructuring charge ....... 1,760 --
------ ------
$5,178 $7,490
====== ======
Second Quarter 2002 Restructuring Charge
In June 2002, the Company recorded a restructuring provision of $4.4
million as a result of its continued efforts to improve its cost structure and
consolidate redundant functions and facilities. The restructuring charge
includes a workforce reduction of approximately 90 employees, the closure of the
Houston, Texas Design Center, and the consolidation of certain domestic and
international sales and service offices.
Costs included in the charges were: (i) employee termination and related
costs, (ii) facility charges related to vacating various locations both
domestically and internationally, (iii) write-downs of property and equipment
impaired as a result of the restructuring, and (iv) other charges including
legal and accounting fees. Of the $4.4 million in restructuring charges,
approximately $3.3 million consisted of cash expenditures.
The following table summarizes the write-offs and expenditures related to
the second quarter 2002 restructuring charge:
Employee
termination and Property and Other
related costs Facilities equipment charges Total
--------------- ---------- ------------ ------- -------
Restructuring costs .. $ 2,606 $ 750 $ 530 $ 465 $ 4,351
Expenditures ......... (1,827) (205) 10 (46) (2,068)
Write-offs/adjustments (182) 19 (366) 6 (523)
------- ------- ------- ------- -------
Balance accrued as of
December 31, 2002 . $ 597 $ 564 $ 174 $ 425 $ 1,760
======= ======= ======= ======= =======
Employee termination and related costs consist of severance, insurance
benefits, and related costs associated with the elimination of 70 domestic
positions and 20 international positions. All affected employees were notified
prior to June 30, 2002; however, some costs associated with these terminations
continue to be paid through the quarter ending June 30, 2003. As of December 31,
2002, RadiSys had paid $1.8 million of severance and recorded adjustments of
$0.2 million for the over-accrual of severance costs related to this
restructuring charge.
Included in the facilities charge is $0.8 million related to the decision
to vacate leased spaces at two of the Company's domestic locations and four
international locations. Lease costs for these facilities are charged against
the restructuring accrual on a monthly basis upon vacation of the premises until
the lease contracts expire through June 30, 2005 or the facilities are
sub-leased. If the facilities are not sub-leased, the outstanding facilities
accrual may need to be increased. As of December 31, 2002, the Company had paid
$0.2 million, net of sublease income, to satisfy the lease obligation.
The property and equipment charge of $0.5 million is comprised of the net
book value of the remaining computer hardware, manufacturing test equipment, and
furniture and fixtures at the Houston, Texas facility and the net book value of
furniture and fixtures, computer hardware, and computer software at Netherlands,
Germany, and one of the United Kingdom facilities. The Company's decision to
completely vacate the Texas, Netherlands, Germany, and one of the United Kingdom
facilities during the second quarter prompted the need to write-off the net book
value of part or all of the remaining assets at these locations. As of December
31, 2002, the Company had recorded $0.4 million to write-off the net book value
of the assets.
Other charges include legal and accounting fees related to the
restructuring plan. As of December 31, 2002, the Company had paid $0.05 million
in legal fees.
First Quarter 2001 Restructuring Charge
In March 2001, RadiSys recorded restructuring charges of $9.8 million,
primarily as a result of the Company's decision to close the Houston, Texas
surface mount manufacturing plant and to consolidate all internal manufacturing
operations into the Hillsboro, Oregon plant. Additionally, certain sales offices
were consolidated and end-of-life programs were accelerated on non-strategic
products. These decisions were made in light of overall market conditions and
the economic downturn experienced in the latter part of the fourth quarter of
2000 and, more significantly, during the first quarter of 2001. In 2000,
migration of board assembly work to the Oregon plant was initiated, and in
January 2001, the Company announced its plan to complete board assembly
consolidation. As the quarter progressed, the Company recognized the need for
even greater operating efficiency and decided to completely eliminate
manufacturing operations in Houston, Texas by September 30, 2001. RadiSys
continued to operate a service center in Houston, Texas, until the fourth
quarter of 2001, when a decision was made to consolidate the service center into
the Hillsboro, Oregon and Boca Raton, Florida facilities. During the second
quarter of 2002, the Company made a decision to completely close the Houston,
Texas facility and consolidate the design center into the Hillsboro, Oregon
facility. Subsequently, the design center in Houston, Texas was closed and
vacated in September 2002.
Costs included in the charges were: (i) employee termination and related
costs, (ii) facility and leasehold improvement charges related to vacating the
manufacturing plant and two international sales offices, (iii) write-downs of
property and equipment deemed impaired at the time of the restructuring, (iv)
capitalized software write-downs associated with the acceleration of end-of-life
product strategies, and (v) other charges including legal and accounting fees.
Of the $9.8 million in restructuring charges, approximately $5.3 million consist
of cash expenditures.
The following table summarizes the restructuring charges, write-offs, and
expenditures relating to this initiative, which commenced during the quarter
ended March 31, 2001:
Employee
termination Leasehold
and related improvements and Property and Capitalized Other
costs facilities equipment software charges Total
----------- ---------------- ------------ ----------- ------- -------
Restructuring costs .. $ 2,777 $ 3,434 $ 2,460 $ 1,067 $ 105 $ 9,843
Expenditures ......... (2,545) (378) -- -- (46) (2,969)
Write-offs/adjustments -- (113) (2,460) (1,067) -- (3,640)
------- ------- ------- ------- ------- -------
Balance accrued as of
December 31, 2001 232 2,943 -- -- 59 3,234
Expenditures ......... (36) (679) -- -- (10) (725)
Write-offs/adjustments (196) (627) -- -- (49) (872)
------- ------- ------- ------- ------- -------
Balance accrued as of
December 31, 2002 $ -- $ 1,637 $ -- $ -- $ -- $ 1,637
======= ======= ======= ======= ======= =======
Employee termination and related costs consist of severance and insurance
benefits, and related costs associated with the elimination of approximately 150
manufacturing positions in Houston, Texas along with approximately 50 other
positions in sales and other supporting functions as announced on March 30,
2001. All affected employees were terminated prior to September 30, 2001;
however, the costs associated with these terminations were paid through the
quarter ended March 31, 2002. As of December 31, 2002, RadiSys had paid $2.6
million of severance and related termination costs and recorded adjustments of
$0.2 million for the over-accrual of severance costs related to this
restructuring charge.
Included in the leasehold improvements and facilities charge is $2.5
million related to the decision to vacate leased space at the Houston, Texas
plant and sales offices in France and Germany, and leasehold improvements
approximating $1.0 million related to the Houston, Texas site. Lease costs and
amortization of leasehold improvements for these facilities are charged against
the restructuring accrual on a monthly basis upon vacation of the premises,
until the lease contracts expire on June 30, 2005, or the facilities are
sub-leased. If the facilities are not sub-leased, the outstanding facilities
accrual may need to be increased. During the year ended December 31, 2002 and
the last three quarters of the year ended December 31, 2001, the Company charged
expenditures of $0.7 million and $0.4 million of lease costs and adjustments of
$0.6 million and $0.1 million related to amortization of leasehold improvements,
respectively, against the restructuring accrual.
As a result of the decision to close the Houston manufacturing plant, the
majority of property and equipment at the site was deemed to be impaired based
upon an analysis conducted by the Company. Accordingly, all furniture, fixtures,
and manufacturing and office equipment expected to be sold or scrapped were
written down to estimated salvage values as of March 31, 2001 in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of," ("SFAS 121"). No adjustments were made for assets expected to be
transferred for use at the Hillsboro location. Most of the impaired assets were
utilized until September 30, 2001, the plant closure date. RadiSys completely
removed, sold, or scrapped these impaired assets by the end of 2001. A small
portion of the assets relating to Surface Mount Technology ("SMT") production
were removed from use and disposed of during the second quarter of 2001.
During the quarter ended March 31, 2001, the Company discontinued all
non-strategic in-process capitalized software efforts. As a result of these
decisions, RadiSys wrote off $1.1 million relating to these capitalized software
projects, as no future revenue would be realized from these projects. This
write-off is included in Restructuring charges in the Consolidated Statement of
Operations for the year ended December 31, 2001.
Second Quarter 2001 Restructuring Charge
In June 2001, the Company recorded a restructuring provision of $3.2
million, primarily relating to the closure of the Boston, Massachusetts DSP
design center and severance of approximately 58 employees. The decision to close
the design center and eliminate these positions was a result of a comprehensive
review of the Company's infrastructure to lower its break-even point in
subsequent quarters.
Costs included in the charges were: (i) employee termination and related
costs, (ii) facility and leasehold improvement charges related to vacating the
design center, (iii) write-downs of property and equipment impaired as a result
of the restructuring, (iv) capitalized software write-downs associated with
end-of-life product strategies as a result of the restructuring, and (v) other
charges including legal and accounting fees. All of the affected employees were
terminated by September 30, 2001, and all costs associated with these
terminations were paid through the quarter ended March 31, 2002. Facility
charges continued to be paid and were taken against the accrual in August 2001
once the premises were vacated. Of the $3.2 million in restructuring charges,
approximately $1.2 million consisted of cash expenditures.
The following table summarizes the restructuring charges, write-offs, and
expenditures relating to the second quarter 2001 restructuring charge:
Employee Leasehold
termination and improvements Property and Capitalized Other
related costs and facilities equipment software charges Total
--------------- -------------- ------------ ----------- ------- -------
Restructuring costs .. $ 1,298 $ 249 $ 51 $ 1,521 $ 100 $ 3,219
Expenditures ......... (1,040) (117) -- -- (56) (1,213)
Write-offs/adjustments -- (106) (51) (1,521) -- (1,678)
------- ------- ------- ------- ------- -------
Balance accrued as of
December 31, 2001 . 258 26 -- -- 44 328
Write-offs/adjustments (258) (26) -- -- (44) (328)
------- ------- ------- ------- ------- -------
Balance accrued as of
December 31, 2002 .. $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= =======
Employee termination and related costs consist of severance, insurance
benefits, and related costs associated with the elimination of 18 positions at
the Boston, Massachusetts DSP design center and approximately 40 other positions
at various locations, as announced on June 27, 2001. As of March 31, 2002, all
employee termination and related costs had been paid. The Company recorded an
adjustment of $0.3 million of over-accrued employee termination costs related to
this restructuring accrual during the year ended December 31, 2002.
Included in the leasehold improvements and facilities charge is $0.1
million related to the decision to vacate leased space at the Boston design
center. Leasehold improvements totaling $0.1 million which relate to the Boston
design center were written off as of June 30, 2001 when normal business
activities in the Boston office ceased.
As a result of the decision to close the Boston, Massachusetts DSP design
center, certain property and equipment at the site were deemed to be impaired
based upon an analysis conducted. Accordingly, all furniture, fixtures, office
equipment, and engineering test equipment expected to be sold or scrapped were
written down to estimated salvage values as of June 30, 2001, in accordance with
SFAS 121. No adjustments were made for assets expected to be transferred for use
at one of the Company's other locations.
During the quarter ended June 30, 2001, the Company discontinued all
capitalized software efforts at the Boston design center. As a result, the
Company wrote off $1.5 million relating to these capitalized software projects,
as no future revenue would be realized from these projects. This write-off is
included in Restructuring charges in the Consolidated Statement of Operations
for the year ended December 31, 2001.
Fourth Quarter 2001 Restructuring Charge
In December 2001, the Company recorded a restructuring provision of $3.9
million, primarily relating to continued efforts to consolidate functions and to
eliminate redundant geographical facilities. Part of this restructuring plan
includes consolidating all service operations to the Hillsboro, Oregon facility.
The decision was made in light of overall market conditions and the continuing
impact of the 2001 economic downturn.
Costs included in the charges were: (i) employee termination and related
costs, (ii) facility and leasehold improvement charges related to vacating
various locations both domestically and internationally, (iii) write-downs of
property and equipment impaired as a result of the restructuring, and (iv) other
charges including legal and accounting fees. Of the $3.9 million in
restructuring charges, approximately $3.3 million consist of cash expenditures.
The following table summarizes the restructuring charges, write-offs, and
expenditures relating to the fourth quarter 2001 restructuring charge:
(In thousands)
Employee
termination and Property and Other
related costs Facilities equipment charges Total
--------------- ---------- ------------ ------- -------
Restructuring costs .. $ 914 $ 2,417 $ 463 $ 132 $ 3,926
Expenditures ......... (452) -- -- -- (452)
Write-offs/adjustments -- -- (463) -- (463)
------- ------- ------- ------- -------
Balance accrued as of
December 31, 2001 . 462 2,417 -- 132 3,011
Expenditures ......... (354) (916) -- (27) (1,297)
Write-offs/adjustments (108) (15) -- -- (123)
------- ------- ------- ------- -------
Balance accrued as of
December 31, 2002 . $ -- $ 1,486 $ -- $ 105 $ 1,591
======= ======= ======= ======= =======
Employee termination and related costs consist of severance, insurance
benefits, and related costs associated with the elimination of 60 domestic
positions and six international positions. All affected employees were notified
prior to December 31, 2001; however, the costs associated with these
terminations were paid through the quarter ended December 31, 2002. As of
December 31, 2002, RadiSys had paid $0.8 million of employee termination and
related costs for this restructuring charge. The Company recorded an adjustment
of $0.1 million for over-accrued employee termination costs related to this
restructuring accrual during the year ended December 31, 2002.
Included in the facilities charge is $2.4 million related to the decision
to vacate leased spaces at six of the Company's domestic locations and seven
international locations. Lease costs for these facilities are charged against
the restructuring accrual on a monthly basis upon vacation of the premises,
until the lease contracts expire through June 30, 2005, or the facilities are
sub-leased. If the facilities are not sub-leased the outstanding facilities
accrual may need to be increased. During the year ended December 31, 2002, the
Company charged $0.9 million of lease costs against the restructuring accrual.
The property and equipment charge of $0.5 million is comprised of the
remaining net book value of customized SAP software modules at the Houston
facility. The Company's decision to vacate the remainder of the Houston facility
during the fourth quarter prompted the decision to write off the remaining net
book value of the SAP software costs.
Liabilities Assumed In Microware Acquisition
Prior to the acquisition of Microware (see Note 20), Microware had
recorded a restructuring charge of $1.1 million related to its foreign office
closures and related severance costs. During the year ended December 31, 2002
and the fourth quarter of 2001, RadiSys paid $0.3 million and $0.2 million,
respectively, of employee termination and related costs which were charged
against this accrual. The Company also charged $0.2 million of legal expenses
against this accrual and recorded an adjustment of $0.2 million for over-accrued
employee termination costs as a benefit to income during the year ended December
31, 2002. The remaining balance of $0.2 million represents accrued employee
termination and legal costs related to this restructuring accrual.
Note 10 - Other accrued liabilities
Other accrued liabilities as of December 31, 2002 and 2001, consisted of
the following:
December 31, December 31,
2002 2001
------------ ------------
Accrued warranty reserve ............... $ 1,553 $ 2,344
Deferred revenues ...................... 541 863
Accrued royalty - IBM OCP .............. 691 1,266
Other .................................. 3,913 6,304
------- -------
Other accrued liabilities .............. $ 6,698 $10,777
======= =======
The following is a summary of the change in the Company's warranty accrual
reserve for the years ended December 31, 2002, 2001, and 2000:
Years Ended December 31,
---------------------------------------
2002 2001 2000
------- ------- -------
Balances at the beginning of the year $ 2,344 $ 1,752 $ 1,563
Product warranty accruals ........... 2,956 5,280 2,709
Adjustments for payments made ....... (3,658) (4,688) (2,201)
Adjustments to prior accruals ....... (89) -- (319)
------- ------- -------
Balances at end of year ............. $ 1,553 $ 2,344 $ 1,752
======= ======= =======
Note 11 - Short-Term Borrowings
During the quarter ended March 31, 2003, the Company renewed its line of
credit facility, which expires on March 31, 2004, for $20.0 million at an
interest rate based upon the lower of London Inter-Bank Offered Rate ("LIBOR")
plus 1.0% or the bank's prime rate. The line of credit is collateralized by the
Company's non-equity investments. The market value of these investments must
exceed 125.0% of the borrowed facility amount, and the investments must meet
specified investment grade ratings.
As of December 31, 2002 and December 31, 2001, there was no outstanding
balance on the line of credit.
Note 12 - Long-Term Liabilities
Convertible Subordinated Notes
During the year ended December 31, 2000, RadiSys completed a private
placement of $120.0 million aggregate principal amount of 5.5% convertible
subordinated notes due August 2007. The notes are unsecured obligations
convertible into RadiSys Common Stock at a conversion price of $67.80 per share
and 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.
During the year ended December 31, 2002, RadiSys' Board of Directors
authorized the repurchase in the open market or through privately negotiated
transactions up to $30.0 million of the Company's 5.5% convertible subordinated
notes. This authorization expired on February 21, 2003.
For the year ended December 31, 2002, the Company repurchased
approximately $21.0 million principal amount of the 5.5% convertible
subordinated notes, with an associated net discount of $0.6 million 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.
As of December 31, 2002 and 2001, RadiSys had $77.4 million and $97.5
million of convertible subordinated notes outstanding, net of unamortized
discount of $1.7 million and $2.5 million, respectively. Amortization of
discount on the convertible subordinated notes was $0.3 million for the year
ended December 31, 2002 and 2001, respectively. The estimated fair value of the
convertible subordinated notes was approximately $66.5 million and $70.9 million
at December 31, 2002 and 2001, respectively.
Mortgage Payable
Through the purchase of Microware, RadiSys assumed a long-term mortgage
payable to GMAC Commercial Mortgage Company in the amount of $6.7 million (see
Note 20). The mortgage payable is secured by Microware's facility and by real
estate in Des Moines, Iowa. In accordance with the provisions of the mortgage
agreement, the Company issued an irrevocable standby letter of credit in the
amount of $0.8 million, used as a part of collateral. The Company also had $0.8
million of restricted cash at December 31, 2002 and 2001 relating to the standby
letter of credit. Monthly payments are $0.05 million, including interest at
7.46% with the unpaid balance due on January 1, 2008. The current portion of the
mortgage payable of $0.08 million is included in Accounts payable in the
Consolidated Balance Sheets as of December 31, 2002 and 2001.
The aggregate maturities of long-term liabilities for each of the five
years ending December 31, 2007 and thereafter are as follows:
Convertible
Subordinated Mortgage
Years Ending December 31, Notes Payable
------------ --------
2003 $ -- $ 83
2004 -- 89
2005 -- 97
2006 -- 104
2007 79,024 113
Thereafter -- 6,185
-------- --------
79,024 6,671
Less: unamortized discount (1,658) --
Less: current portion -- (83)
-------- --------
Long-term liabilities $ 77,366 $ 6,588
======== ========
Note 13 - Commitments and Contingencies
RadiSys leases most of its facilities, certain office equipment, and
vehicles under non-cancelable operating leases which require minimum lease
payments expiring from one to 10 years after December 31, 2002. Amounts of
future minimum lease commitments in each of the five years ending December 31,
2003 through 2007 and thereafter are as follows:
Years Ending Future Minimum
December 31, Lease Payments
-----------------------------------------------------------------------
2003 ................................ $ 4,079
2004 ................................ 3,827
2005 ................................ 3,109
2006 ................................ 1,810
2007 ................................ 1,772
Thereafter ............................. 7,194
-------
$21,791
=======
Rent expense totaled $3.6 million, $5.6 million, and $5.2 million for the
years ended December 31, 2002, 2001, and 2000, respectively.
Note 14 - Income Taxes
The income tax (benefit) provision consists of the following
(In thousands)
Years Ended December 31,
-------------------------------------------
2002 2001 2000
-------- -------- --------
Current payable from continuing operations (refundable):
Federal ............................................. $ (7,800) $ (4,505) $ 7,807
State ............................................... -- -- 1,485
Foreign ............................................. 10 62 197
-------- -------- --------
Total current payable .............................. (7,790) (4,443) 9,489
-------- -------- --------
Deferred (from continuing operations):
Federal ............................................ 4,898 (17,615) (2,620)
State .............................................. 1,072 (4,814) (156)
Foreign ............................................ (902) -- 1,050
-------- -------- --------
5,068 (22,429) (1,726)
-------- -------- --------
Total income tax (benefit) provision from continuing
operations ............................................. $ (2,772) $(26,872) $ 1,726
======== ======== ========
The income tax (benefit) provision differs from the amount computed by
applying the statutory federal income tax rate to pretax income as a result of
the following differences:
Years Ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Statutory federal tax rate .............................. (35.0)% (35.0)% 35.0%
Increase (decrease) in rates resulting from:
State taxes .......................................... (3.4) (5.0) 2.9
Goodwill benefit from acquisitions ................... (6.7) (0.4) (0.7)
Deferred tax asset valuation allowance ............... 1.3 (0.3) (17.1)
Taxes on foreign income that differ from U.S. tax rate (5.1) -- 0.9
Tax credits .......................................... (9.9) (3.5) (5.5)
Other ................................................ (1.9) (0.6) 3.7
----- ----- ----
Effective tax rate ...................................... (60.7)% (44.8)% 19.2%
===== ===== ====
The components of deferred taxes consist of the following:
(In thousands)
December 31,
---------------------------
2002 2001
-------- --------
Deferred tax assets:
Accrued warranty ...................... $ 596 $ 934
Inventory ............................. 3,977 7,692
Restructuring accrual ................. 1,769 3,105
Net operating loss carryforwards ...... 25,730 32,359
Tax credit carryforwards .............. 11,688 9,058
Goodwill .............................. 1,840 2,730
Other ................................. 2,907 2,571
-------- --------
Total deferred tax assets ................ 48,507 58,449
Less: valuation allowance ................ (16,176) (19,274)
-------- --------
Net deferred tax assets .................. 32,331 39,175
-------- --------
Deferred tax liabilities:
Capitalized software .................. (9) (952)
Intangible assets - Microware ........ (3,146) (4,092)
Depreciation .......................... (218) (373)
-------- --------
Total deferred tax liabilities ........... (3,373) (5,417)
-------- --------
Total net deferred tax assets ............ $ 28,958 $ 33,758
======== ========
During 2002, the Company received a $6.7 million tax refund from the
Internal Revenue Service ("IRS") pursuant to the provisions of the Economic
Stimulus Bill, Job Creation and Workers Assistance Act of 2002 passed by
Congress during the quarter ended March 31, 2002.
The Company has recorded valuation allowances of $16.2 million and $19.3
million at December 31, 2002 and December 31, 2001, respectively, due to
uncertainty involving utilization of net operating loss and tax credit
carryforwards. The decrease in valuation allowance of approximately $3.1 million
in 2002 resulted from a reduction in valuation allowance for expired net
operating losses acquired through the merger with Texas Micro Inc. ("Texas
Micro") of $2.3 million and a reduction in Microware net operating loss
carryforward benefit of $0.9 million. Any tax benefits subsequently recognized
from the acquired Microware net operating loss carryforwards would be allocated
to goodwill.
During the year ended December 31, 2000, management determined that it was
more likely than not that the Company would realize a $1.5 million portion of
deferred tax asset related to Texas Micro net operating loss carryforwards for
which a valuation allowance had been previously provided. Accordingly, the
income tax expense attributed to continuing operations for the year ended
December 31, 2000 includes a $1.5 million tax benefit for the reduction of the
deferred tax valuation allowance which resulted from this change in estimate.
At December 31, 2002, the Company had total available federal and state
net operating loss carryforwards of approximately $54.6 million and $46.4
million, respectively, before valuation allowance. The Company also had net
operating loss carryforwards of approximately $4.2 million from certain non U.S.
jurisdictions. The non U.S. net operating loss carryforwards are primarily
attributable to Japan of approximately $3.0 million and they expire between 2003
and 2007. The federal net operating loss carryforwards expire between 2003 and
2022 and consist of approximately $7.1 million of current taxable loss remaining
after loss carrybacks to prior years, $32.4 million of loss carryforwards from
the Texas Micro merger in 1999, and $15.1 million of loss carryforwards from the
Microware acquisition in August of 2001. The future utilization of the net
operating loss carryforwards attributable to Texas Micro and Microware is
limited pursuant to Section 382 of the Internal Revenue Code. The annual
utilization limitations are $5.7 million and $0.7 million for Texas Micro and
Microware, respectively.
The Company has federal and state research and development tax credit and
other federal tax credit carryforwards of approximately $11.7 million to reduce
future income tax liabilities at December 31, 2002. The federal and state tax
credits expire between 2003 and 2022. The federal tax credit carryforwards
include research and development tax credits of $3.6 million and $0.2 million
from the Texas Micro and Microware acquisitions, respectively. The utilization
of these acquired credits is subject to an annual limitation pursuant to Section
383 of the Internal Revenue Code. Pretax book (loss)/income from domestic
operations for the fiscal years 2002, 2001 and 2000 was ($7.1) million, ($63.1)
million and $41.0 million, respectively. Pretax book (loss)/income from foreign
operations for the fiscal years 2002, 2001 and 2000 was ($1.3) million, $0.6
million and ($0.6) million, respectively.
The Company has indefinitely reinvested approximately $2.2 million of the
undistributed earnings of certain foreign subsidiaries. Such earnings would be
subject to U.S. taxation if repatriated to the U.S. It is not practical to
determine the amount of the unrecognized deferred tax liability associated with
the indefinitely reinvested foreign earnings.
The Company is under audit by the IRS for years 1999 through 2001. The
year 2002 will be included in the audit once the 2002 federal return is filed.
The IRS also has the option to review the years 1996 through 1998 with respect
to the net operating losses carried back to those years. If IRS asserts and
sustains an unfavorable audit result, the Company may be required to record
additional liability, lose deferred tax assets, and/or make cash payments for
additional taxes, penalties and/or interest. Such amounts could be material and
could have an adverse effect on the Company's financial condition, results of
operations and liquidity. While management believes at this time that no such
adverse result is forthcoming, it is not possible to predict the outcome of the
audit with certainty.
On March 14, 2003, the Company completed the sale of its Savvi business. As a
result of this transaction, the Company recorded $4.1 million in write-offs of
goodwill and intangible assets (see Note 23)
Note 15 - Shareholders' Equity
The following table summarizes the Company's weighted average shares for
the years ended December 31, 2002, 2001, and 2000;
Weighted Average Shares Reconciliation
Years Ended December 31,
----------------------------------
2002 2001 2000
------ ------ ------
Weighted average shares (basic) ...... 17,495 17,249 16,974
Effect of dilutive stock options ..... -- -- 1,187
------ ------ ------
Weighted average shares (diluted) .... 17,495 17,249 18,161
====== ====== ======
The computation of diluted earnings per share ("EPS") does not include the
dilution impact of the subordinated convertible notes for the three years
presented as inclusion would be antidilutive.
Of the total options outstanding at December 31, 2000, 351,000 shares of
common stock were excluded from the computation of diluted EPS as the options'
exercise prices were greater than the average market price of the RadiSys Common
Stock. The Company's diluted weighted average shares in 2002 and 2001 exclude
the effect of stock options as inclusion would be antidilutive.
Stock Repurchase Program
The 2001 stock repurchase program expired during the third quarter of
2002. During the fourth quarter of 2002, the Board of Directors authorized a new
stock repurchase program for the repurchase of up to 500,000 of its outstanding
shares of common stock. During the years ended December 31, 2002, 2001, and
2000, the Company repurchased 147,000, 74,000, and 297,000 of outstanding
shares, respectively, in the open market or through privately negotiated
transactions for $1.1 million, $1.0 million, and $8.1 million, respectively. The
timing and size of any future stock repurchases are subject to market
conditions, stock prices, cash position, and other cash requirements.
Stock option plans
On August 7, 1995, the Company established a 1995 Stock Incentive Plan
("1995 Plan"), under which the Company may issue up to 5.4 million shares of
common stock 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. Unless otherwise stipulated in the plan
document, the Board of Directors, at their discretion, determines the exercise
prices, which may not be less than the fair market value of 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. Pursuant to the provisions of the
1995 Plan and in conjunction with the Company's merger with Texas Micro
completed in August 1999, options that had been granted to the then Texas Micro
employees were converted into options to purchase RadiSys common shares at an
effective conversion rate of approximately 4.96 shares of Texas Micro common
stock to one share of RadiSys common stock. During the year ended December 31,
1999, adjustments were made to reflect the effect of the three-for-two common
stock split authorized by the Board of Directors. The Company recorded no
compensation expense related to the 1995 Plan for the years ended December 31,
2002, 2001, and 2000. Options available for grant under the 1995 Plan totaled
1,000,000, 1,400,000 and 1,700,000 shares as of December 31, 2002, 2001 and
2000, respectively.
In February 2001, RadiSys established a 2001 Nonqualified Stock Option
Plan ("2001 Plan"), under which 1.5 million shares of the Company's common stock
are reserved, subject to adjustments. Grants under the 2001 Plan may be awarded
to selected employees, who are not executive officers or directors of the
Company. The Board of Directors, at their discretion, determine exercise prices
which may not be less than the fair market value of the Company's common stock
at the date of grant, and expiration periods which are a maximum of 10 years
from the date of grant. Options granted shall not become exercisable for the
first six months from the date of grant, unless otherwise determined by the
Board of Directors at their discretion. The Company recorded no compensation
expense related to the 2001 Plan for the years ended December 31, 2002 and 2001.
Options available for grant for the 2001 Plan totaled 282,000 and 1,051,000
shares as of December 31, 2002 and 2001, respectively. The table below
summarizes the activities related to the Company's stock options:
(In thousands, except weighted average exercise prices)
2002 2001 2000
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Beginning balance 3,413 $25.65 2,906 $28.25 2,815 $18.29
Granted ..... 2,134 11.19 1,513 22.05 1,177 43.03
Canceled .... (939) 23.13 (845) 30.63 (404) 25.19
Exercised ... (70) 11.65 (161) 12.71 (682) 14.67
----- ------ ----- ------ ----- ------
Ending balance .. 4,538 $19.59 3,413 $25.65 2,906 $28.25
===== ====== ===== ====== ===== ======
The following table summarizes the information about stock options
outstanding at December 31, 2002:
(Shares in thousands)
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
As of Contractual Exercise As of Exercise
Range of Exercise Prices 12/31/2002 Life Price 12/31/2002 Price
- ----------------------------------------- ---------- -------- ----------- --------
$ 3.74 - $ 9.29 922 6.86 $ 5.25 23 $ 7.45
$ 9.59 - $16.76 1,231 5.50 13.88 285 12.49
$16.83 - $23.88 973 3.78 19.36 652 19.51
$24.00 - $42.00 1,150 4.00 30.52 404 28.39
$42.88 - $61.50 262 3.99 49.80 176 49.59
----- ---- ------ ----- ------
$ 3.74 - $61.50 4,538 4.94 $19.59 1,540 $23.79
===== ==== ====== ===== ======
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. Prior to August 15, 2000, a separate offering of Common Stock to
eligible employees under the ESPP (an "Offering") commenced on February 15 and
August 15 of each calendar year under the ESPP (the "Enrollment Dates") and had
a term of 18 months, except that, in calendar year 1999, the first Offering was
for a period commencing on June 12, 1999 and ending on August 15, 2000.
Beginning with the Offering that commenced on August 15, 2000, separate
offerings of Common Stock to eligible employees under the ESPP (also an
"Offering") commence on February 15, May 15, August 15 and November 15 of each
calendar year (also "Enrollment Dates") and continue for a period of 18 months.
Multiple separate Offerings are in operation under the ESPP at any given time.
An employee may participate in only one Offering at a time and may purchase
shares only through payroll deductions permitted under the provisions stipulated
by the ESPP. The purchase price is the lesser of 85% of the fair market value of
the common stock on date of grant or that of the purchase date. Pursuant to the
provisions of the ESPP, the Company is authorized to issue up to 1,750,000
shares of common stock. For the years ended December 31, 2002, 2001, and 2000
the Company issued 332,000, 202,000, and 196,000 shares under the plan,
respectively.
Note 16 - Benefit Plans
401(k) Savings Plan
The Company established a 401(k) Savings Plan ("401(k) Plan"), a defined
contribution plan, as of January 1, 1989 and amended through January 1, 2001, in
compliance with Section 401(k) and other related sections of the Internal
Revenue Code and corresponding Regulations issued by the Department of Treasury
and Section 404(c) of Employee Retirement Income Security Act of 1974 ("ERISA"),
to provide retirement benefits for its United States employees. Under the
provisions of the plan, eligible employees are allowed pre-tax contributions of
up to 20% of their annual compensation or the maximum amount permitted by the
applicable statutes. Additionally, eligible employees can elect after-tax
contributions of up to 5% of their annual compensation, within the limits set
forth by pre-tax contributions, or to the maximum amount permitted by the
applicable statutes. Pursuant to the provisions of the 401(k) Plan, the Company
may contribute 50% of pre-tax contributions made by eligible employees, adjusted
for loans and withdrawals, up to 6% of annual compensation for each eligible
employee. The Company may elect to make supplemental contributions as
periodically determined by the Board of Directors at their discretion. The
contributions made by the Company on behalf of eligible employees become 100%
vested after three years of service, or 33% per year after one year of service.
The Company's total contributions to the 401(k) Plan amounted to $0.8 million,
$0.9 million, and $1.1 million in 2002, 2001, and 2000, respectively. In
addition, some of the Company's employees outside the United States are covered
by various defined contribution plans, in compliance with the statutes of
respective countries. The expenses incurred for these plans were $0.1 million
for each of the three years presented.
Deferred Compensation Plan
Effective January 1, 2001, the Company established a Deferred Compensation
Plan, providing its directors and certain eligible employees with opportunities
to defer a portion of their compensation as defined by the provisions of the
plan. The Company credits additional amounts to the deferred compensation plan
to make up for reductions of Company contributions under the 401(k) Plan. The
deferred amounts are credited with earnings and losses under investment options
chosen by the participants. The Company sets aside deferred amounts, which are
then invested in long-term insurance contracts. All deferred amounts and
earnings are 100% vested at all times, but are subject to the claims of
creditors of the Company under a bankruptcy proceeding. Benefits are payable to
a participant upon retirement, death, and other termination of employment on
such other date as elected by the participant in accordance with the terms of
the plan (see Note 8). Deferred amounts may be withdrawn by the participant in
case of financial hardship as defined in the plan agreement.
Note 17 - Segment Information
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 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 has aggregated divisional results of operations into a single
reportable segment as allowed under the provisions of SFAS 131 because
divisional results of operations reflect similar long-term economic
characteristics, including average gross margins. Additionally, the divisional
operations are similar with respect to the nature of products sold, types of
customers, production processes employed and distribution methods used.
Accordingly, the Company describes its reportable segment as designing and
manufacturing embedded computing solutions. All of the Company's revenues result
from sales within this segment.
Information about the Company's geographic revenues and long-lived assets
by geographical area is as follows:
Geographic Revenues
Years Ended December 31,
------------------------------------------
2002 2001 2000
-------- -------- --------
United States ........... $109,666 $118,383 $195,129
Europe and Israel ....... 77,081 91,033 125,213
Asia Pacific - Japan .... 5,223 9,843 14,488
Other foreign ........... 8,117 8,454 5,846
======== ======== ========
Total ....................... $200,087 $227,713 $340,676
======== ======== ========
Long-lived assets by Geographic Area
December 31, December 31,
2002 2001
------------ ------------
Property and equipment, net
United States .......................... $25,538 $29,341
Europe ................................. 298 773
Asia Pacific - Japan ................... 46 91
------- -------
Total property and equipment, net .......... $25,882 $30,205
======= =======
Goodwill
United States .............................. $29,969 $30,679
Europe ..................................... -- --
Asia Pacific - Japan ....................... -- --
-------
Total goodwill, net ........................ $29,969 $30,679
=======
Intangible assets, net
United States .......................... $11,159 $14,188
Europe ................................. -- --
Asia Pacific - Japan ................... -- --
------- -------
Total intangible assets, net ............... $11,159 $14,188
======= =======
Two customers accounted for more than 10% of total revenues in 2002.
Nortel accounted for $34.1 million or 17.1% and Nokia accounted for $26.2
million or 13.1% of the total revenues for the year ended December 31, 2002. Two
customers accounted for more than 10% of total revenues in 2001. Nortel
accounted for $35.7 million or 15.7% and Nokia accounted for $24.9 million or
10.9% of the total revenues for the year ended December 31, 2001. Nortel
accounted for $36.5 million or 10.7% of the total revenues for the year ended
December 31, 2000.
Note 18 - Gain on Sale of Assets
During the fourth quarter of 2002, RadiSys sold its Multibus business to
US Technologies for $1.2 million. Consideration included $0.7 million cash and a
$0.5 million note receivable. The sale resulted in a net gain of $1.2 million
recorded in Income from operations in the Consolidated Statement of Operations
for the year ended December 31, 2002 in accordance with the provisions of SFAS
144.
During the first quarter of 2000, RadiSys sold a total of 367,000 shares
of GA common stock for a net gain of $0.9 million. This gain is reflected in
Other income in the Consolidated Statement of Operations for the year ended
December 31, 2000.
Note 19 - Other Income (Expense), net
Other income (expense), net, primarily consisted of foreign currency
transaction losses, net of gains, of $1.3 million, $0.8 million, and $0.5
million, respectively, for the years ended December 31, 2002, 2001, and 2000.
The Company recorded gain on early extinguishments of convertible subordinated
notes of $3.0 million and $5.1 million for the years ended December 31, 2002 and
2000 in other income (expense), net, in order to comply with the provisions of
SFAS 145. Other income (expense) also included the net gain of $0.9 million on
sale of GA common stock recorded during the year ended December 31, 2000 (see
Note 18).
Note 20 - Acquisitions
S-Link Acquisition
On April 20, 2001 RadiSys acquired privately-held S-Link in a cash
transaction totaling approximately $4.7 million. The Company anticipated the
acquisition would enhance its technology and building blocks for signaling
applications within packet networks. The acquisition of S-Link was accounted for
using the purchase method in accordance with APB Opinion No. 16, "Business
Combinations." The results of operations for S-Link have been properly reflected
in the Consolidated Statement of Operations for the year ended December 31, 2001
since the date of acquisition. The aggregate purchase price of $4.7 million was
allocated to fixed assets of $0.2 million, goodwill of $2.8 million, and other
intangible assets relating to acquired technology of $1.7 million. Subsequent to
year-end, RadiSys sold its Savvi business, a product line acquired through the
S-link acquisition.
Microware Acquisition
On August 10, 2001, RadiSys acquired 83% of Microware's net liabilities.
Subsequently, on August 27, 2001, the Company completed the acquisition of the
remaining interest of Microware. The Company anticipated the acquisition of
Microware would provide a highly differentiated leadership position for
solutions using Intel's IXP family of network processors. The acquisition of
Microware was accounted for using the purchase method. The results of operations
for Microware have been properly reflected in the financial statements since the
date of acquisition. The aggregate purchase price of $13.9 million was allocated
to current assets of $2.4 million, fixed assets of $9.9 million, other assets of
$0.6 million, intangibles relating to acquired technology, patents, and license
agreements of $11.2 million, goodwill of $5.1 million, current liabilities of
($5.8) million, accrued restructuring of ($1.1) million, and long-term debt of
($8.4) million. In connection with this acquisition, RadiSys paid off
Microware's 8% convertible debenture with Elder Court for $2.2 million, of which
$0.5 million represented a payment on early settlement of the debenture.
Unaudited Pro Forma Disclosure of 2001 Acquisitions
The following unaudited pro forma information presents the results of
operations of the Company as if the S-Link and Microware acquisitions described
above had occurred as of the beginning of the periods presented, after
reflecting adjustments for amortization of goodwill related to S-Link and
intangibles and the estimated resulting effects on income taxes. The unaudited
pro forma information is not necessarily indicative of the consolidated results
of operations for future periods, or what would actually have been realized had
S-Link and Microware been acquired at the beginning of the periods presented.
(In thousands)
Years Ended December 31,
-------------------------------
2001 2000
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Revenues ............................ $ 235,293 $ 355,207
Net (loss) income ................... $ (40,272) $ 22,436
Net (loss) income per share (basic) . $ (2.33) $ 1.32
Net (loss) income per share (diluted) $ (2.33) $ 1.24
----------- -----------
Note 21 - Legal Proceedings
In the normal course of business, the Company becomes involved in
litigation. As of December 31, 2002, RadiSys had no pending litigation that
would have a material effect on the Company's financial position, results of
operations, or cash flows.
Note 22 - Subsequent Events
In January 2003, the Company announced that it would be taking several
steps intended to further improve its profitability and market diversification.
These steps include an increased level of outsourced manufacturing to reduce
product costs, the sale of its Savvi next-generation telecom IP signaling
business to enable further diversification and other reductions in spending.
As a result of the above restructuring, the Company's employee base was
reduced by 108 positions from the December 31, 2002 level of 620 employees. The
108 positions eliminated included 58 from manufacturing operations, 42 from
shifts in portfolio investments, and 8 in support functions. A majority of the
reductions took place in January 2003 with the remaining reductions projected to
be complete during the first quarter of 2003. As a result of the elimination of
the 108 positions, the Company expects to incur an employee termination and
related charge of approximately $2.0 million in cash.
In January 2003, RadiSys' Board of Directors authorized the repurchase in
the open market or through privately negotiated transactions up to $20.0 million
of the Company's 5.5% convertible subordinated notes.
In February 2003, the Company repurchased approximately $10.3 million
principal amount of the 5.5% convertible subordinated notes, with associated net
discount of $0.3 million for $9.2 million in a negotiated transaction with a
third party. The early extinguishment of the notes resulted in a gain of $0.8
million
On March 14, 2003, the Company completed the sale of its Savvi
next-generation telecom IP signaling business for a loss of approximately $4.3
million.
Note 23 - Discontinued Operations
On March 14, 2003, the Company completed the sale of its Savvi business
resulting in a loss of $4.3 million. As a result of this transaction, the
Company recorded $4.1 million in write-offs of goodwill and intangible assets.
The total $4.7 million loss from discontinued operations recorded in the three
months ended March 31, 2003 includes the $4.3 million loss on the sale of the
Savvi business as well as $393 thousand of net losses incurred by the business
unit during the quarter, before the business unit was sold. Savvi net revenues
are included in the loss from discontinued operations and amounted to $52
thousand, $39 thousand and none for the years ended December 31, 2002, 2001, and
2000, respectively. For the year ended December 31, 2002, a total of $1.5
million, or $0.09 per weighted average share outstanding, was reclassified from
continuing operations to loss from discontinued operations, net of tax benefit.
For the year ended December 31, 2001, a total of $1.4 million, or $0.08 per
weighted average share outstanding, was reclassified from continuing operations
to loss from discontinued operations, net of tax benefit. The Company no income
or loss on the Savvi business line for the year ended December 31, 2000, as the
Savvi business line was part of the S-Link acquisition which was completed in
2001.