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RadiSys 10-Q 2011
6.30.2011 10-Q


 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
 
 
(Mark one)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2011

OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
       
For the transition period from
 
to
 
Commission File Number:
0-26844
 
 
RADISYS CORPORATION
(Exact name of registrant as specified in its charter)
  
 
OREGON
 
93-0945232
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5445 N.E. Dawson Creek Drive, Hillsboro, OR
 
97124
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(503) 615-1100
(Registrant's telephone number, including area code)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  [x]    No  [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [x]    No  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
[ ]
 
Accelerated filer
[x]
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
Smaller reporting company
[ ]

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act)     Yes  [ ]    No  [x]

Number of shares of common stock outstanding as of August 2, 2011: 28,024,653
 



RADISYS CORPORATION

FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
Item 1. Financial Statements (Unaudited)
 
 
Consolidated Statements of Operations – Three and Six Months Ended June 30, 2011 and 2010
 
Consolidated Balance Sheets – June 30, 2011 and December 31, 2010
 
Consolidated Statement of Changes in Shareholders’ Equity – Six Months Ended June 30, 2011
 
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 and 2010
 
Notes to Consolidated Financial Statements
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Item 4. Controls and Procedures
 
 
 
 
PART II. OTHER INFORMATION
 
 
Item 1A. Risk Factors
 
Item 6. Exhibits
 
Signatures
 


2



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Revenues
$
79,856

 
$
75,011

 
$
153,483

 
$
142,318

Cost of sales:
 
 
 
 
 
 
 
Cost of sales
54,933

 
50,979

 
107,167

 
96,349

Amortization of purchased technology
1,163

 
1,747

 
2,327

 
3,388

Total cost of sales
56,096

 
52,726

 
109,494

 
99,737

Gross margin
23,760

 
22,285

 
43,989

 
42,581

Research and development
9,600

 
9,605

 
18,607

 
19,311

Selling, general and administrative
10,875

 
11,583

 
21,910

 
22,805

Intangible assets amortization
192

 
186

 
384

 
346

Restructuring and acquisition-related charges, net
2,481

 
(176
)
 
2,521

 
25

Income from operations
612

 
1,087

 
567

 
94

Interest expense
(456
)
 
(548
)
 
(952
)
 
(1,116
)
Interest income
35

 
196

 
91

 
507

Other income (expense), net
(47
)
 
42

 
(140
)
 
21

Income (loss) before income tax expense (benefit)
144

 
777

 
(434
)
 
(494
)
Income tax expense (benefit)
(46
)
 
187

 
(95
)
 
(36
)
Net income (loss)
$
190

 
$
590

 
$
(339
)
 
$
(458
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
0.02

 
$
(0.01
)
 
$
(0.02
)
Diluted
$
0.01

 
$
0.02

 
$
(0.01
)
 
$
(0.02
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
24,334

 
24,104

 
24,341

 
24,025

Diluted
24,475

 
24,350

 
24,341

 
24,025


The accompanying notes are an integral part of these financial statements.


3



RADISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
 
 
June 30,
2011
 
December 31,
2010
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
135,632

  
$
129,078

Accounts receivable, net
48,748

  
42,855

Other receivables
3,064

  
1,665

Inventories, net
15,954

  
15,178

Inventory deposit, net
7,384

 
6,194

Other current assets
4,170

  
4,612

Deferred tax assets, net
616

  
551

Total current assets
215,568

  
200,133

Property and equipment, net
9,380

  
9,487

Intangible assets, net
4,368

  
7,088

Long-term deferred tax assets, net
16,015

  
16,005

Other assets
7,916

  
8,215

Total assets
$
253,247

  
$
240,928

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
37,703

  
$
29,190

Accrued wages and bonuses
6,344

  
6,556

Deferred income
7,275

  
4,424

Other accrued liabilities
12,369

  
12,914

Total current liabilities
63,691

  
53,084

Long-term liabilities:
 
 
 
2013 convertible senior notes
50,000

  
50,000

Other long-term liabilities
534

  
450

Total long-term liabilities
50,534

  
50,450

Total liabilities
114,225

  
103,534

Commitments and contingencies (Note 8)

 

Shareholders’ equity:
 
 
 
Preferred stock — $.01 par value, 5,664 shares authorized; none issued or outstanding

  

Common stock — no par value, 100,000 shares authorized; 24,358 and 24,351 shares issued and outstanding at June 30, 2011 and December 31, 2010
268,599

  
266,945

Accumulated deficit
(135,022
)
 
(134,683
)
Accumulated other comprehensive income:
 
 
 
Cumulative translation adjustments
4,995

  
4,739

Unrealized gain on hedge instruments
450

  
393

Total accumulated other comprehensive income
5,445

  
5,132

Total shareholders’ equity
139,022

  
137,394

Total liabilities and shareholders’ equity
$
253,247

  
$
240,928


The accompanying notes are an integral part of these financial statements.

4



RADISYS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, unaudited)
 
 
Common stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
 
Total
Comprehensive
Loss (1)
 
Shares
 
Amount
Balances, December 31, 2010
24,351

 
$
266,945

 
$
(134,683
)
 
$
5,132

 
$
137,394

 
 
Shares issued pursuant to benefit plans
127

 
914

 
 
 

 
914

 
 
Stock-based compensation associated with employee benefit plans

 
2,137

 
 
 

 
2,137

 
 
Vesting of restricted stock units
47

 

 
 
 

 

 
 
Restricted share forfeitures for tax settlements
(17
)
 
(139
)
 
 
 

 
(139
)
 
 
Repurchases of common stock
(150
)
 
(1,258
)
 
 
 

 
(1,258
)
 
 
Net adjustment for fair value of hedge derivatives

 

 
 
 
57

 
57

 
57

Translation adjustments

 

 
 
 
256

 
256

 
256

Net loss for the period

 

 
(339
)
 

 
(339
)
 
(339
)
Balances, June 30, 2011
24,358

 
$
268,599

 
$
(135,022
)
 
$
5,445

 
$
139,022

 
 
Total comprehensive loss for the six months ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
$
(26
)
 

(1)    For the three and six months ended June 30, 2011 and 2010, total comprehensive income (loss) consisted of the following: 
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Net income (loss) for the period
$
190

 
$
590

 
$
(339
)
 
$
(458
)
Net adjustment for fair value of hedge derivatives
(55
)
 
(645
)
 
57

 
(618
)
Translation adjustments
125

 
(97
)
 
256

 
(277
)
Total comprehensive income (loss)
$
260

 
$
(152
)
 
$
(26
)
 
$
(1,353
)

The accompanying notes are an integral part of these financial statements.
 


5



RADISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
 
For the Six Months Ended
 
June 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net loss
$
(339
)
 
$
(458
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
4,990

 
6,262

Inventory valuation allowance
822

 
817

Deferred income taxes
(69
)
 
112

Non-cash interest expense
224

 
224

Loss (gain) on disposal of property and equipment
107

 
(385
)
Loss on ARS settlement right

 
7,833

Gain on ARS

 
(7,854
)
Stock-based compensation expense
2,137

 
3,440

Other
243

 
204

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(5,893
)
 
1,746

Other receivables
(1,399
)
 
1,485

Inventories
(997
)
 
(756
)
Inventory deposit
(1,190
)
 
263

Other current assets
570

 
(219
)
Accounts payable
8,513

 
3,197

Accrued wages and bonuses
(212
)
 
934

Accrued restructuring
(88
)
 
(2,198
)
Deferred income
2,851

 
1,228

Other accrued liabilities
(777
)
 
(582
)
Net cash provided by operating activities
9,493

 
15,293

Cash flows from investing activities:
 
 
 
Acquisition of Pactolus, net of cash acquired

 
(3,385
)
Proceeds from sale of auction rate securities

 
62,175

Capital expenditures
(2,142
)
 
(1,873
)
Restricted cash

 
(25,796
)
Purchase of long-term assets
(500
)
 
(2,569
)
Proceeds from the sale of property and equipment

 
437

Net cash provided by (used in) investing activities
(2,642
)
 
28,989

Cash flows from financing activities:
 
 
 
Restricted share forfeitures for tax settlement
(139
)
 
(321
)
Borrowings on line of credit

 
13,732

Payments on line of credit

 
(37,691
)
Payments on capital lease obligation
(8
)
 

Repurchases of common stock
(1,258
)
 

Proceeds from issuance of common stock
914

 
1,554

Net cash used in financing activities
(491
)
 
(22,726
)
Effect of exchange rate changes on cash
194

 
(216
)
Net increase in cash and cash equivalents
6,554

 
21,340

Cash and cash equivalents, beginning of period
129,078

 
100,672

Cash and cash equivalents, end of period
$
135,632

 
$
122,012

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the year for:
 
 
 
     Interest
$
688

 
$
688

     Income Taxes paid
$
355

 
$
382

Supplemental disclosure of non-cash financing activities:
 
 
 
     Capital lease obligation
$
81

 
$

The accompanying notes are an integral part of these financial statements.

6



RADISYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Significant Accounting Policies

RadiSys Corporation (the “Company” or “RadiSys”) has adhered to the accounting policies set forth in its Annual Report on Form 10-K for the year ended December 31, 2010 in preparing the accompanying interim consolidated financial statements. The preparation of these statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Additionally, the accompanying financial data as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

The financial information included herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for interim periods.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards," that amends some fair value measurement principles and disclosure requirements. This ASU states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The provisions of this ASU will be applied prospectively for interim and annual periods beginning after December 15, 2011, with early adoption prohibited. The standard will not have a material impact on the Company's financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income”. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present other comprehensive income in the statement of changes in stockholders' equity. The provisions of this ASU will be applied retrospectively for interim and annual periods beginning after December 15, 2011, with early application permitted. The standard will not have a material impact on the Company's financial position or results of operations; however it will change the manner in which the Company presents comprehensive income.

Note 2 — Fair Value of Financial Instruments

The Company measures at fair value certain financial assets and liabilities. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair-value hierarchy:

Level 1— Quoted prices for identical instruments in active markets;

Level 2— Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3— Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.


7



The following table summarizes the fair value measurements for the Company's financial instruments (in thousands):
 
Fair Value Measurements as of June 30, 2011
 
June 30,
2011
  
Level 1
  
Level 2
  
Level 3
Cash surrender value of life insurance contracts
$
3,556

 
$

 
$
3,556

 
$

Foreign currency forward contracts
561

  

  
561

  

Total
$
4,117

  
$

  
$
4,117

 
$


 
Fair Value Measurements as of December 31, 2010
 
December 31,
2010
  
Level 1
  
Level 2
  
Level 3
Cash surrender value of life insurance contracts
$
3,618

 
$

 
$
3,618

 
$

Foreign currency forward contracts
432

  

  
432

  

     Total
$
4,050

  
$

  
$
4,050

 
$


Note 3 — Accounts Receivable and Other Receivables

Accounts receivable consists of sales to the Company's customers which are generally based on standard terms and conditions. Accounts receivable balances consisted of the following (in thousands):
 
June 30,
2011
 
December 31,
2010
Accounts receivable, gross
$
49,634

 
$
43,788

Less: allowance for doubtful accounts
(886
)
 
(933
)
Accounts receivable, net
$
48,748

 
$
42,855


As of June 30, 2011 and December 31, 2010, the balance in other receivables was $3.1 million and $1.7 million. Other receivables consisted primarily of non-trade receivables including receivables for inventory transferred to the Company's contract manufacturing partners. There is no revenue recorded associated with non-trade receivables.

Note 4 — Inventories

Inventories consisted of the following (in thousands):
 
June 30,
2011
 
December 31,
2010
Raw materials
$
8,025

 
$
8,204

Finished goods
11,136

 
10,521

 
19,161

 
18,725

Less: inventory valuation allowance
(3,207
)
 
(3,547
)
Inventories, net
$
15,954

 
$
15,178

 
June 30,
2011
 
December 31,
2010
Inventory deposit (A)
$
9,885

 
$
8,468

Less: inventory deposit valuation allowance
(2,501
)
 
(2,274
)
Inventory deposit, net
$
7,384

 
$
6,194

 

8



(A)
The Company is contractually obligated to reimburse its contract manufacturers for the cost of excess inventory, purchased based on the Company's forecasted demand when there is no alternative use. The Company's inventory deposit represents a cash deposit paid to its contract manufacturers for inventory in excess of near term demand. The deposit is recorded net of adverse purchase commitment liabilities, and therefore the net balance of the deposit represents inventory the Company believes will be utilized. The deposit will be applied against future adverse purchase commitments owed to the Company's contract manufacturers or reduced based on the usage of inventory. See Note 8 - Commitments and Contingencies for additional information regarding the Company's adverse purchase commitment liability.

Consigned inventory is held at third-party locations, including the Company's contract manufacturing partners and customers. The Company retains title to the inventory until purchased by the third-party. Consigned inventory, consisting of raw materials and finished goods, was $3.3 million and $3.0 million at June 30, 2011 and December 31, 2010.

The Company recorded the following charges associated with the valuation of inventory, inventory deposit and the adverse purchase commitment liability (in thousands):
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Inventory, net
$
364

 
$
283

 
$
822

 
$
817

Inventory deposit, net
193

 
684

 
408

 
836

Adverse purchase commitments
546

 
(37
)
 
797

 
61



Note 5 — Accrued Restructuring and Acquisition-Related Charges

Accrued restructuring, which is included in other accrued liabilities in the accompanying Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, consisted of the following (in thousands):
 
June 30,
2011
  
December 31,
2010
Second quarter 2009 restructuring charge
$
58

  
$
58

Fourth quarter 2009 restructuring charge
69

 
182

Fourth quarter 2010 restructuring charge
939

 
1,814

Continuous Computing restructuring charge
900

 

Total accrued restructuring charges
$
1,966

  
$
2,054


The Company evaluates the adequacy of the accrued restructuring charges on a quarterly basis. The Company records certain reclassifications between categories and reversals to the accrued restructuring charges based on the results of the evaluation. The total accrued restructuring charges for each restructuring event are not affected by reclassifications. Reversals are recorded in the period in which the Company determines that expected restructuring obligations are less than the amounts accrued.

Second Quarter 2009 Restructuring

During the second quarter of 2009, the Company initiated a restructuring plan that included the elimination of 115 positions and the relocation of eight employees as part of two strategic initiatives within manufacturing operations and engineering. As part of the initiative, the Company began a transition to a fully outsourced manufacturing model, which has transferred remaining manufacturing from its manufacturing plant in Hillsboro, Oregon to its manufacturing partners in Asia. The plan also included consolidating the Company's North American research and development ("R&D") positions and programs, and specifically transferring projects from its design center in Boca Raton, Florida, to other existing R&D centers. To date, the Company has incurred total second quarter 2009 restructuring costs of $3.0 million which has consisted primarily of accrued severance obligations, healthcare benefits, relocation incentives and related payroll taxes as well as equipment moving costs. This transition was substantially completed in 2010.


9



Fourth Quarter 2009 Restructuring

During the fourth quarter of 2009, the Company initiated a restructuring plan that included the elimination of 22 positions at various locations throughout the company. The primary focus of this initiative was to align expenses with the Company's 2010 operating plan objectives, which included the need to continue focusing on lowered costs. To date, the Company has incurred total fourth quarter 2009 restructuring costs of $742,000, which consisted primarily of severance and related payroll costs as well as healthcare benefits. The Company expects all activities associated with this restructuring plan to be completed by the end of 2011.

For the three months ended June 30, 2011 and 2010, the Company reversed $17,000 and $30,000 in previously estimated amounts associated with the fourth quarter 2009 restructuring plan. The Company incurred additional expenses of $33,000 and $40,000 during the six months ended June 30, 2011 and 2010. The adjustments primarily consisted of employee severance and the reversal of previously estimated payroll taxes.

The following table summarizes the changes to the fourth quarter 2009 restructuring costs (in thousands):
 
Employee
Termination and
Related Costs
Balance accrued as of December 31, 2010
$
182

Additions
61

Reversals
(28
)
Expenditures
(146
)
Balance accrued as of June 30, 2011
$
69


Fourth Quarter 2010 Restructuring

During the fourth quarter of 2010, the Company initiated a restructuring plan that included the elimination of 67 positions at various locations throughout the company. The primary focus of this initiative was to align expenses with the Company’s 2011 operating plan objectives, which included the need to reduce the Company's infrastructure associated with the maturity of the Company's legacy communications networks products, as well as the consolidation of its contract manufacturers. To date, the Company has incurred total fourth quarter 2010 restructuring costs of $1.9 million, which consisted of severance and related payroll costs as well as healthcare benefits. The Company expects all activities associated with this restructuring plan to be substantially completed by the end of 2011.

During the three and six months ended June 30, 2011, the Company recorded a net reversal of $17,000 and $27,000 for previously estimated amounts associated with the fourth quarter 2010 restructuring plan due primarily to lower-than-expected employee separation costs.

The following table summarizes the changes to the fourth quarter 2010 restructuring costs (in thousands):
 
Employee
Termination and
Related Costs
Balance accrued as of December 31, 2010
$
1,814

Additions
108

Reversals
(135
)
Expenditures
(848
)
Balance accrued as of June 30, 2011
$
939


Continuous Computing Related Restructuring

During the second quarter of 2011, the Company initiated a restructuring plan that included the elimination of two senior-level positions. The primary intent of these initial integration activities was to better align sales organization expenses and headcount with expected synergies to be realized as a direct result of the Company's acquisition of Continuous Computing Corporation ("Continuous Computing"), as more fully discussed in Note 15 - Subsequent Event. During the second quarter of 2011 the Company recorded restructuring costs of $900,000, which consisted of severance and related payroll costs as well as

10



healthcare benefits. The Company expects all activities associated with this restructuring plan to be substantially completed by the end of 2011.

The following table summarizes the charges associated with the Continuous Computing restructuring initiative (in thousands):
 
Employee
Termination and
Related Costs
Additions
$
900

Balance accrued as of June 30, 2011
$
900

  
Note 6 — Short-Term Borrowings

Silicon Valley Bank

The Company has a $30.0 million secured revolving line of credit agreement with Silicon Valley Bank ("SVB") that matures September 30, 2012, which is subject to a borrowing base and secured by its accounts receivable. The secured revolving credit facility is available for cash borrowings and for the issuance of letters of credit. The Borrowings under the Agreement bear interest at the prime rate, which was 3.25% as of June 30, 2011, or LIBOR, which was 0.19% as of June 30, 2011, plus 1.25%, with either interest rate determined by the Company’s election. The Company is required to make interest payments monthly. The Company is further required to pay a commitment fee equal to 0.08% of the $30.0 million maximum borrowing limit on an annual basis, and to pay quarterly in arrears an unused facility fee in an amount equal to 0.375% per year of the unused amount of the facility. In addition, the credit facility provides sub-facilities for letters of credit and foreign exchange contracts to be issued on the Company’s behalf.

The credit facility requires the Company to make and maintain certain financial covenants, representations, warranties and other agreements that are customary in credit agreements of this type, which are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. As of June 30, 2011, the Company is in compliance with all covenants associated with its line of credit agreement with SVB.

As of June 30, 2011 and December 31, 2010, the Company had no outstanding balances on the line of credit or letters of credit issued on its behalf.

Note 7 - Convertible Debt

2013 Convertible Senior Notes

During February 2008, the Company offered and sold in a public offering pursuant to the shelf registration statement $55.0 million aggregate principal amount of 2.75% convertible senior notes due 2013 (the “2013 convertible senior notes”). Interest is payable semi-annually, in arrears, on each August 15 and February 15, beginning on August 15, 2008, to the holders of record at the close of business on the preceding August 1 and February 1, respectively. The 2013 convertible senior notes mature on February 15, 2013. Holders of the 2013 convertible senior notes may convert their notes into a number of shares of the Company's common stock determined as set forth in the indenture governing the notes at their option on any day to and including the business day prior to the maturity date. The 2013 convertible senior notes are initially convertible into 76.7448 shares of the Company's common stock per $1,000 principal amount of the notes (which is equivalent to a conversion price of approximately $13.03 per share), subject to adjustment upon the occurrence of certain events. Upon the occurrence of a fundamental change, holders of the 2013 convertible senior notes may require the Company to repurchase some or all of their notes for cash at a price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. In addition, if certain fundamental changes occur, the Company may be required in certain circumstances to increase the conversion rate for any 2013 convertible senior notes converted in connection with such fundamental changes by a specified number of shares of the Company's common stock. The 2013 convertible senior notes are the Company's general unsecured obligations and rank equal in right of payment to all of its existing and future senior indebtedness, and senior in right of payment to the Company's future subordinated debt. The Company's obligations under the 2013 convertible senior notes are not guaranteed by, and are effectively subordinated in right of payment to all existing and future obligations of its subsidiaries and are effectively subordinated in right of payment to its future secured indebtedness to the extent of the assets securing such debt.

In connection with the issuance of the 2013 convertible senior notes, the Company entered into a capped call transaction

11



with a hedge counterparty. The capped call transaction is expected to reduce the potential dilution upon conversion of the 2013 convertible senior notes in the event that the market value per share of the Company's common stock, as measured under the terms of the capped call transaction, at the time of exercise is greater than the strike price of the capped call transaction of approximately $13.03. The strike price of the capped call transaction corresponds to the initial conversion price of the 2013 convertible senior notes and is subject to certain adjustments similar to those contained in the notes. The capped call transaction provides for net-share settlement in the event that the volume-weighted average price per share of the Company's common stock on the settlement date exceeds the strike price of approximately $13.03 per share. In such event, the hedge counterparty would deliver to the Company a number of shares equal to a formula determined by the quotient resulting from (a) the shares being settled times the difference between the volume-weighted average price on the settlement date and the strike price of approximately $13.03 per share, divided by (b) the volume-weighted average price on the settlement date. If the volume-weighted average price on the settlement date equals or exceeds the cap price of $23.085 per share, the difference in (a) would be $23.085 minus $13.03, or $10.055. If the market value per share of the Company's common stock exceeds the cap price of the capped call transaction of $23.085, as measured under the terms of the capped call transaction, the dilution mitigation under the capped call transaction will be limited, which means that there would be dilution to the extent that the then market value per share of the Company's common stock exceeds the cap price of the capped call transaction. Although the capped call transaction covers approximately 4.2 million shares, in order to facilitate an orderly settlement process, the shares are divided into tranches of approximately 211,000 shares each, settling on the twenty consecutive trading days prior to the date of maturity of the Company's convertible notes. Thus, on each settlement date, approximately 211,000 shares would be settled, assuming a volume-weighted average price on such settlement date of $23.085. Assuming a volume-weighted average price of $23.085, the hedge counterparty would deliver to the Company approximately 91,904 shares on each settlement date, calculated as follows: 211,000 x ($23.085 - $13.03)/$23.085 = 91,904.

The following table outlines the effective interest rate, contractually stated interest costs, and costs related to the amortization of issuance costs for the Company's 2013 convertible senior notes:


For the Three Months Ended

For the Six Months Ended
 
June 30,

June 30,
 
2011
  
2010

2011

2010
Effective interest rate
3.64
%
  
3.64
%

3.64
%

3.64
%
Contractually stated interest costs
$
344


$
344


$
688


$
688

Amortization of interest costs
$
112

 
$
112

 
$
224

 
$
224


As of June 30, 2011 and December 31, 2010, the Company had outstanding 2013 convertible senior notes with a face value of $50.0 million. As of June 30, 2011 and December 31, 2010, the fair value of the Company's 2013 convertible senior notes was $46.5 million and $49.1 million.

Note 8 - Commitments and Contingencies

Adverse Purchase Commitments

The Company is contractually obligated to reimburse its contract manufacturers for the cost of excess inventory used in the manufacture of the Company's products, if there is no alternative use. This liability, referred to as adverse purchase commitments, is provided for in other accrued liabilities in the accompanying Consolidated Balance Sheets. Estimates for adverse purchase commitments are derived from reports received on a quarterly basis from the Company's contract manufacturers. Increases to this liability are charged to cost of goods sold. When and if the Company takes possession of inventory reserved for in this liability, the liability is transferred from other accrued liabilities to the excess and obsolete inventory valuation allowance. Adverse purchase commitments amounted to $1.2 million and $1.3 million at June 30, 2011 and December 31, 2010.

Guarantees and Indemnification Obligations

As permitted under Oregon law, the Company has agreements whereby it indemnifies its officers, directors and certain finance employees for certain events or occurrences while an officer, director or employee is or was serving in such capacity at the request of the Company. The term of the indemnification period is for the officer's, director's or employee's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. To date, the Company has not incurred any costs

12



associated with these indemnification agreements and, as a result, management believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of June 30, 2011.

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company's business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to the Company's current products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or the Company's subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally limited. Historically, the Company's costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and accordingly management believes the estimated fair value of the agreements is immaterial.

The Company provides for the estimated cost of product warranties at the time it recognizes revenue. Products are generally sold with warranty coverage for a period of 24 months after shipment. Parts and labor are covered under the terms of the warranty agreement. The workmanship of the Company's products produced by contract manufacturers is covered under warranties provided by the contract manufacturer for a specified period of time ranging from 12 to 15 months. The warranty provision is based on historical experience. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its components suppliers; however ongoing failure rates, material usage and service delivery costs incurred in correcting product failure, as well as specific product class failures out of the Company's baseline experience affect the estimated warranty obligation. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required.

The following is a summary of the change in the Company's warranty accrual reserve (in thousands):
 
For the Six Months Ended
 
June 30,
 
2011
 
2010
Warranty liability balance, beginning of the period
$
3,025

 
$
2,810

Product warranty accruals
1,286

 
1,835

Utilization of accrual
(1,521
)
 
(1,852
)
Warranty liability balance, end of the period
$
2,790

 
$
2,793


The warranty liability balance is included in other accrued liabilities in the accompanying Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010.


13



Note 9 — Basic and Diluted Net Income (Loss) per Share

A reconciliation of the numerator and the denominator used to calculate basic and diluted net income (loss) per share is as follows (in thousands, except per share amounts):
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Numerator — Basic
 
 
 
 
 
 
 
Net income (loss), basic
$
190

 
$
590

 
$
(339
)
 
$
(458
)
Numerator — Diluted
 
 
 
 
 
 
 
Net income (loss), basic
$
190

 
$
590

 
$
(339
)
 
$
(458
)
Interest on convertible notes, net of tax benefit (A)

 

 

 

Net income (loss), diluted
$
190

 
$
590

 
$
(339
)
 
$
(458
)
Denominator — Basic
 
 
 
 
 
 
 
Weighted average shares used to calculate net income (loss)
 
 
 
 
 
 
 
   per share, basic
24,334

 
24,104

 
24,341

 
24,025

Denominator — Diluted
 
 
 
 
 
 
 
Weighted average shares used to calculate net income (loss)
 
 
 
 
 
 
 
   per share, basic
24,334

 
24,104

 
24,341

 
24,025

Effect of convertible notes (A)

 

 

 

Effect of dilutive restricted stock (B)
122

 

 

 

Effect of dilutive stock options (B)
19

 
246

 

 

Weighted average shares used to calculate net income (loss)
 
 
 
 
 
 
 
   per share, diluted
24,475

 
24,350

 
24,341

 
24,025

Net income (loss) per share
 
 
 
 
 
 
 
Basic
$
0.01

 
$
0.02

 
$
(0.01
)
 
$
(0.02
)
Diluted (A), (B)
$
0.01

 
$
0.02

 
$
(0.01
)
 
$
(0.02
)
 
(A)
For the three and six months June 30, 2011 and 2010, 3.8 million as-if converted shares associated with the Company's 2013 convertible senior notes were excluded from the calculation as their effect would have been anti-dilutive.
(B)
For the three and six months ended June 30, 2011 and 2010, the following equity awards, by type, were excluded from the calculation, as their effect would have been anti-dilutive (in thousands):
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
  
2010
Stock options
2,369

 
2,399

 
2,495

  
2,495

Restricted stock
928

 
773

 
1,249

  
923

Total equity award shares excluded
3,297

 
3,172

 
3,744

  
3,418


Note 10 — Income Taxes

The Company's effective tax rate for the three months ended June 30, 2011 and 2010, differs from the statutory rate primarily due to a full valuation allowance provided against its United States (“U.S.”) net deferred tax assets, Canadian research and experimental development claims, the impact of stock option expense, the amortization of goodwill for tax purposes and taxes on foreign income that differ from the U.S. tax rate. In addition to the aforementioned items, the effective tax rate for the three months ended June 30, 2011 differs from the statutory rate due to the re-measurement of uncertain tax positions related to the examination by the Canada Revenue Agency ("CRA").
The Company utilizes the asset and liability method of accounting for income taxes. The Company records deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company

14



considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon the Company's review of all positive and negative evidence, including its projected three year U.S. cumulative pre-tax book loss and taxable loss, it concluded that a full valuation allowance should continue to be recorded against its U.S. net deferred tax assets at June 30, 2011. In certain other foreign jurisdictions, where the Company does not have cumulative losses or other negative evidence, the Company had net deferred tax assets of $16.6 million at June 30, 2011 and December 31, 2010.  In the future, if the Company determines that it is more likely than not that it will realize its U.S. net deferred tax assets, it will reverse the applicable portion of the valuation allowance and recognize an income tax benefit in the period in which such determination is made.
The Company's unrecognized tax benefits and related interest and penalties during the three months ended June 30, 2011 decreased by $81,000 due to the re-measurement of certain uncertain tax positions related to the examination by the CRA. The ending balance for the unrecognized tax benefits was approximately $1.3 million at June 30, 2011. The related interest and penalties were insignificant. It is reasonably possible that the Company's uncertain tax positions could decrease by approximately $1.1 million in the next twelve months due to tax examination closure.
The Company is currently under examination by the CRA for tax years 2006 through 2008. During the fourth quarter of 2010, the CRA issued proposed adjustment notices. During the three months ended June 30, 2011, the CRA has reissued the proposed adjustments and the Company is in the process of reaching an agreement with CRA with respect to the tax carry-forward attributes to be utilized in future tax years. The Company believes that it has adequately provided for uncertain tax positions at June 30, 2011. However, should the Company experience an unfavorable outcome, it could have a material impact on its results of operations, financial position, and cash flows. The Company is not currently under examination by tax authorities in any other jurisdictions.
Note 11 — Stock-based Compensation

On June 15, 2011 the Company's stockholders approved an amendment to the RadiSys Corporation 2007 Stock Plan. The amendment increased the number of shares of the Company's common stock reserved and authorized for issuance under the plan from 3.7 million to 4.7 million. On May 3, 2011 the Company registered 600,000 shares of its common stock under the RadiSys Corporation Inducement Stock Plan for CCPU Employees (the "CCPU Plan"). The CCPU Plan was adopted without shareholder approval in reliance upon the exception provided under Nasdaq Listing Rule 5635(c)(4) relating to awards granted in connection with the hiring of new employees, including grants to transferred employees in connection with a merger or acquisition. Awards under the CCPU Plan are made only to employees of Continuous Computing or its subsidiaries and became effective upon the completion of the acquisition of Continuous Computing on July 8, 2011. The CCPU Plan provides for the issuance of stock options, restricted shares and restricted stock units.

The following table summarizes the awards granted under the RadiSys Corporation 2007 Stock Plan (in thousands):
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
  
2010
 
2011
 
2010
Stock options
53

  
5

 
61
 
58
Restricted stock
196

  

 
196
 
34
Total
249

  
5

 
257
 
92

Stock-based compensation was recognized and allocated as follows (in thousands):
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
  
2010
 
2011
 
2010
Cost of sales
$
170

  
$
202

 
$
355

 
$
446

Research and development
293

  
297

 
606

 
708

Selling, general and administrative
273

  
1,081

 
1,176

 
2,286

Total
$
736

  
$
1,580

 
$
2,137

 
$
3,440



15



Note 12 — Common Stock Repurchase Program

In December 2010, the Board of Directors authorized the repurchase of up to $20 million of the Company's common stock through open-market transactions and privately negotiated transactions from time to time at the discretion of management. The duration of the repurchase program is two years, although it may be extended, suspended or discontinued without prior notice, at the discretion of the Board. Under the program, the Company repurchased common stock with a value of $1.3 million in the first six months of 2011, leaving $18.7 million available for future repurchases of the Company's common stock.

Note 13 — Hedging

The Company’s activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates. The Company manages these risks through the use of forward exchange contracts, designated as foreign currency cash flow hedges, in an attempt to reduce the potentially adverse effects of foreign currency exchange rate fluctuations that occur in the normal course of business. As such, the Company’s hedging activities are all employed solely for risk management purposes. All hedging transactions are conducted with, in the opinion of management, financially stable and reputable financial institutions. For the year ended December 31, 2010 and for the six months ended June 30, 2011, the only hedge instruments executed by the Company are associated with its exposure to fluctuations in the Canadian Dollar which result from obligations such as payroll and rent paid in Canadian Dollar.

These derivatives are recognized on the balance sheet at their fair value. Unrealized gain positions are recorded as other current assets and unrealized loss positions are recorded as other current liabilities. Changes in the fair values of the outstanding derivatives that are highly effective are recorded in other comprehensive income (loss) until net income is affected by the variability of the cash flows of the hedged transaction. Typically, hedge ineffectiveness could result when the amount of the Company’s hedge contracts exceed the Company’s forecasted or actual transactions for which the hedge contracts were designed to hedge. Once a hedge contract matures the associated gain (loss) on the contract will remain in other comprehensive income (loss) until the underlying hedged transaction affects net income (loss), at which time the gain (loss) will be recorded to the expense line item being hedged, which is primarily R&D. The Company only enters into derivative contracts in order to hedge foreign currency exposure. If the Company entered into a contract for speculative reasons or if the Company’s current hedge position becomes ineffective, changes in the fair values of the derivatives would be recognized in earnings in the current period.

During the three months ended June 30, 2011, the Company did not enter into any new foreign currency contracts, while during the six months ended June 30, 2011, the Company entered into 12 new foreign currency forward contracts, with total contractual values of $2.2 million. During the three and six months ended June 30, 2010, the Company entered into 12 and 32 new foreign currency forward contracts, with total contractual values of $1.7 million and $4.5 million.

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives are expected to remain highly effective in future periods. For the three and six months ended June 30, 2011 and for the year ended December 31, 2010, the Company had no hedge ineffectiveness.

 A summary of the aggregate contractual or notional amounts, balance sheet location and estimated fair values of derivative financial instruments designated as cash flow hedges at June 30, 2011 is as follows (in thousands):
 
Contractual/Notional
Amount
  
Consolidated Balance Sheet
Classification
  
Estimated Fair Value
Type of Cash Flow Hedge
Asset
  
(Liability)
Foreign currency forward exchange contracts
$
10,464

  
Other current assets
  
$
561

  
$


A summary of the aggregate contractual or notional amounts, balance sheet location and estimated fair values of derivative financial instruments designated as cash flow hedges at December 31, 2010 is as follows (in thousands):
 
Contractual/Notional
Amount
  
Consolidated Balance Sheet
Classification
  
Estimated Fair Value
Type of Cash Flow Hedge
Asset
  
(Liability)
Foreign currency forward exchange contracts
$
12,547

  
Other current assets
  
$
432

  
$



16



The effect of derivative instruments on the consolidated financial statements for the three months ended June 30, 2011 was as follows (in thousands):
 
Effective Portion
 
Ineffective Portion
Type of Cash Flow Hedge
Hedge Loss
Recognized in
Other
Comprehensive
Income
 
Consolidated Statement of
Operations Classification of Gain
(Loss) Reclassified from
Accumulated Other Comprehensive
Income
 
Hedge Gain Reclassified from
Accumulated
Other
Comprehensive
Income
 
Consolidated
Statement of
Operations
Classification
of Gain (Loss)
Recognized
 
Hedge Gain
(Loss)
Recognized
Foreign currency forward exchange contracts
$
(55
)
  
 
  
 
 
 
  
 
 
 
  
Cost of sales
  
$
20

 
None
  
$

 
 
  
Research and development
  
127

 
None
  

 
 
  
Selling, general and administrative
  
31

 
None
  


The effect of derivative instruments on the consolidated financial statements for the six months ended June 30, 2011 was as follows (in thousands):
 
Effective Portion
 
Ineffective Portion
Type of Cash Flow Hedge
Hedge Gain
Recognized in
Other
Comprehensive
Income
 
Consolidated Statement of
Operations Classification of Gain
(Loss) Reclassified from
Accumulated Other Comprehensive
Income
 
Hedge Gain Reclassified from
Accumulated
Other
Comprehensive
Income
 
Consolidated
Statement of
Operations
Classification
of Gain (Loss)
Recognized
 
Hedge Gain
(Loss)
Recognized
Foreign currency forward exchange contracts
$
57

  
 
  
 
 
 
  
 
 
 
  
Cost of sales
  
$
35

 
None
  
$

 
 
  
Research and development
  
230

 
None
  

 
 
  
Selling, general and administrative
  
74

 
None
  


The effect of derivative instruments on the consolidated financial statements for the three months ended June 30, 2010 was as follows (in thousands):
 
Effective Portion
 
Ineffective Portion
Type of Cash Flow Hedge
Hedge Loss
Recognized in
Other
Comprehensive
Income
 
Consolidated Statement of
Operations Classification of Gain
(Loss) Reclassified from
Accumulated Other Comprehensive
Income
 
Hedge Gain Reclassified from
Accumulated
Other
Comprehensive
Income
 
Consolidated
Statement of
Operations
Classification
of Gain (Loss)
Recognized
 
Hedge Gain
(Loss)
Recognized
Foreign currency forward exchange contracts
$
(645
)
  
 
  
 
 
 
  
 
 
 
  
Cost of sales
  
$
31

 
None
  
$

 
 
  
Research and development
  
208

 
None
  

 
 
  
Selling, general and administrative
  
47

 
None
  


The effect of derivative instruments on the consolidated financial statements for the six months ended June 30, 2010 was as follows (in thousands):

17



 
Effective Portion
 
Ineffective Portion
Type of Cash Flow Hedge
Hedge
Loss
Recognized in
Other
Comprehensive
Income
 
Consolidated Statement of
Operations Classification of Gain
(Loss) Reclassified from
Accumulated Other Comprehensive
Income
 
Hedge Gain Reclassified from
Accumulated
Other
Comprehensive
Income
 
Consolidated
Statement of
Operations
Classification
of Gain (Loss)
Recognized
 
Hedge Gain
(Loss)
Recognized
Foreign currency forward exchange contracts
$
(618
)
  
 
  
 
 
 
  
 
 
 
  
Cost of sales
  
$
59

 
None
  
$

 
 
  
Research and development
  
398

 
None
  

 
 
  
Selling, general and administrative
  
91

 
None
  


Over the next twelve months, the Company expects to reclassify into earnings a gain of approximately $502,000, currently recorded as other comprehensive income, as a result of the maturity of currently held forward exchange contracts.

The bank counterparties in these contracts expose the Company to credit-related losses in the event of their nonperformance. However, to mitigate that risk, the Company only contracts with counterparties who meet its minimum requirements regarding counterparty credit worthiness. In addition, the Company monitors credit ratings, credit spreads and potential downgrades prior to entering into any new hedging contracts.

Note 14 — Segment Information

The Company is one operating segment. This is because results of operations are provided and analyzed at a company wide level. Key resources, decisions, and assessment of performance are also analyzed on a company-wide level. This is the way management organizes the Company for making operating decisions and assessing financial performance by the chief operating decision maker.

Revenues on a product and services basis are as follows (in thousands):
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
  
2010
Hardware
$
72,377

 
$
68,635

 
$
141,598

  
$
129,399

Software royalties and licenses
4,508

 
4,463

 
5,991

  
8,441

Software maintenance
1,509

 
599

 
3,128

  
2,036

Engineering and other services
1,462

 
1,314

 
2,766

  
2,442

Total revenues
$
79,856

 
$
75,011

 
$
153,483

  
$
142,318


Generally, the Company’s customers are not the end-users of its products. The Company ultimately derives its revenues from two end markets as follows (in thousands): 
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
  
2010
 
2011
 
2010
Next Generation Communications Networks Products
$
32,171

 
$
28,591

 
$
62,529

 
$
59,236

Legacy Communications Networks Products
29,472

 
26,488

 
52,994

 
46,498

Total Communications Networks Products
61,643

  
55,079

 
115,523

 
105,734

Medical Products
5,742

 
9,319

 
12,844

 
16,335

Other Commercial Products
12,471

 
10,613

 
25,116

 
20,249

Total Commercial Products
18,213

  
19,932

 
37,960

 
36,584

Total revenues
$
79,856

  
$
75,011

 
$
153,483

 
$
142,318



18



Information about the Company’s geographic revenues and long-lived assets by geographical area is as follows (in thousands):

Geographic Revenues
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
  
2010
 
2011
 
2010
United States
$
23,651

  
$
23,277

 
$
42,357

 
$
49,551

Other North America
252

  
226

 
592

 
441

North America
23,903

  
23,503

 
42,949

 
49,992

Europe, the Middle East and Africa (“EMEA”)
16,340

  
21,345

 
41,796

 
39,024

Asia Pacific
39,613

  
30,163

 
68,738

 
53,302

Total
$
79,856

  
$
75,011

 
$
153,483

 
$
142,318


Long-lived assets by Geographic Area
 
 
June 30,
2011
  
December 31,
2010
Property and equipment, net
 
  
 
United States
$
6,505

  
$
6,404

Other North America
697

  
716

EMEA
27

  
30

Asia Pacific
2,151

  
2,337

Total property and equipment, net
$
9,380

  
$
9,487

Goodwill (A)
 
  
 
EMEA
$
160

  
$
160

Total goodwill
$
160

  
$
160

Intangible assets, net
 
  
 
United States
$
1,101

  
$
1,552

Other North America
519

  
912

EMEA
2,748

  
4,624

Total intangible assets, net
$
4,368

  
$
7,088

 
(A)
Goodwill is included in other assets in the Company's Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010.

The following customer accounted for more than 10% of the Company's total revenues:

For the Three Months Ended

For the Six Months Ended
 
June 30,

June 30,
 
2011
  
2010

2011
 
2010
Nokia Siemens Networks
51.9
%
  
41.4
%

47.3
%
 
37.8
%

As of June 30, 2011 and December 31, 2010, Nokia Siemens Networks accounted for 59.3% and 32.0% of the Company's total accounts receivable balance.

Note 15 — Subsequent Event

On July 8, 2011, the Company completed its previously announced acquisition of Continuous Computing for approximately $77 million in cash and 2,321,016 shares of the Company's common stock. The aggregate cash amount consists

19



of $73 million plus an additional $4.4 million, reflecting a portion of the value of Continuous Computing's estimated net working capital at the closing of the acquisition and subject to adjustment based on the final net working capital of Continuous Computing at closing. The Company also deposited an additional 1,344,444 shares of its common stock into an escrow account and subject to any indemnification claims, one-half of the shares held therein will be released one year after the closing of the acquisition with the remainder to be released six months thereafter.

In addition, the Company has agreed to make certain earn-out payments based on the amount of royalty revenues generated by a specified set of contracts associated with certain of Continuous Computing's products over a period of 36 months after closing. Earn-out payments will be made in cash in three installments following the 18-, 24- and 36-month anniversaries of July 8, 2011, the closing date, and in each case will equal the amount of such royalty revenues during the immediately preceding 18-month, six-month or 12-month period, as applicable, except that, in lieu of making any and all earn-out payments, the Company may elect after the 18-month anniversary of the closing date to make a one-time payment in cash and/or issuance of common stock with a combined aggregate value of $15 million.

In connection with the acquisition, the Company assumed Continuous Computing's stock incentive plan as to stock options held by continuing employees of Continuous Computing that were not vested on or prior to June 30, 2011, which were converted into options to acquire approximately 320,000 shares of the Company's common stock.

Continuous Computing is a developer of communications systems consisting of highly integrated Advanced Telecommunications Computing Architecture platforms and Trillium protocol software coupled with software Professional Services to complement their full solution offering. Their key customer applications include 3G and 4G Wireless infrastructure, Small Cell base stations, Traffic Management, Internet Offload and Network Security. The acquisition is expected to accelerate the Company's strategy to deliver more differentiated platforms and solutions. Continuous Computing also brings expansion into high growth markets with many new customers, creating meaningful customer diversification.

The Company is in the process of finalizing its appraisals of tangible and intangible assets relating to this acquisition, and the preliminary allocation of the purchase price to the assets acquired and liabilities assumed will be recorded in the Company's financial statements for the period ended September 30, 2011.





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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview

RadiSys Corporation is a leading provider of innovative hardware and software platforms for Next Generation IP-based wireless, wireline and video networks. Our products include our market leading Advanced Telecommunications Computing Architecture ("ATCA") and Internet Protocol ("IP") Media Server platforms as well as application software for new IP-based communications services. These products enable customers to bring new high-value products and services to market with speed and flexibility using the latest technologies and with a lower investment. RadiSys products are used in a wide variety of applications including 3G/4G/long term evolution ("LTE") wireless voice, data and video, Femtocell, Voice over Internet Protocol ("VoIP") and Video over IP communications and conferencing, Voice Quality Enhancement ("VQE"), and secure defense communications. Unless required by context, or as otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company” and “RadiSys” refer to RadiSys Corporation and include all of our consolidated subsidiaries.

In July 2011, we acquired Continuous Computing Corporation ("Continuous Computing"), a developer of communications systems consisting of highly integrated ATCA platforms and Trillium protocol software coupled with software Professional Services to complement their full solution offering. Continuous Computing's key customer applications include 3G and 4G Wireless infrastructure, Small Cell base stations, Traffic Management, Internet Offload and Network Security. The acquisition is expected to accelerate the Company's strategy to deliver more differentiated platforms and solutions. Continuous Computing also brings expansion into high growth markets with many new customers, creating meaningful customer diversification.

The acquisition also brings us a new combined leadership team.  Mike Dagenais, previously Continuous Computing's President and CEO, is now our Chief Executive Officer.  Mike brings over 25 years of experience in driving transformational change in the telecommunications industry, including prior executive and management positions at Optical Solutions, Convergent Networks, Lucent, and Nortel.  

Our Markets

We provide application-ready software and hardware platforms to the following two markets:
    
Communications Networks

The communications networks market is comprised of two product categories: Next Generation and Legacy Communication Networks products. Included in the Next Generation Communications Networks product group are our ATCA and media server products. Included in the Legacy Communications Networks product group are our legacy wireless products and all other Communications Networks revenues that are not included in the Next Generation Communications Networks group.

We enable applications in the ATCA market such as 3G/4G/LTE wireless voice, data and video, deep packet inspection (“DPI”), Femtocell, mobile video, VoIP and Video over IP communications and conferencing, VQE, worldwide interoperability for microwave access ("WiMax"), IP Video ("IPTV"), satellite, security and secure defense communications, among others.

We enable applications in the media server market such as conferencing, interactive voice and video network services, transcoding and VQE.

Commercial Systems

The commercial market consists primarily of solutions and systems for the medical imaging, test and measurement, and aerospace and defense submarkets. Specific applications include:

Aerospace and defense: ruggedized terminals, small unmanned ground vehicles and other military applications
Small form factor communications
Medical imaging: X-Ray machines, MRI scanners, CT scan imaging equipment and ultrasound equipment

Market Drivers

We believe there are a number of fundamental drivers for growth in our target markets, including:


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The increasing desire by original equipment manufacturers (“OEMs”) to utilize standards-based, merchant-supplied platforms to develop their systems. We believe more OEMs will see the advantage of combining their internal development efforts with merchant-supplied platforms from partners like RadiSys to deliver a larger number of more valuable new products to get to market faster at a lower total cost.
    
Meaningful traffic growth in the network will require high density, high speed, and high performance systems. RadiSys' ATCA 10G and 40G systems provide 2 to 10 times the density when compared to legacy systems.

The industry structure is changing in that Telecommunications Equipment Manufactures (“TEMs”) are focusing more on applications and network operations, while operators and carriers are focusing more on service and content delivery. RadiSys is benefiting from these market shifts and is providing more platforms and solutions to TEMs.

Continued emergence, growth and evolution of applications utilizing 4G or LTE, WiMAX networks, Femtocell Gateways, VoIP, IP Communications, Mobile Video, Video Gateways, Video Conferencing, IPTV, IP interactive voice response ("IVR")/ Voice-to-text, IP Messaging, Network Surveillance, Network Security, Aerospace and Defense and Packet Inspection, all of which are supported by ATCA.

Our Solutions

We provide our customers with advanced software and hardware platforms that enable them to focus their resources and development efforts on their key areas of differentiation, bring more products and services to market with speed and flexibility, using the latest technologies with reduced product and delivery costs.

Our customers select our solutions because we provide:

Superior technology. We have been the first to market with many technological advancements such as the industry's first 10G common managed platforms, and we are a leader in areas such as IP conferencing and COM Express new product development. Our design capabilities extend to media processing and central processing units (“CPUs”), graphics processing units and network processing units (“NPUs”), digital signal processing and integrated software managed platforms, such as media and application servers, as well as many other areas.

Experienced technical resources. Our research and development ("R&D") staff has extensive experience in designing complex hardware and software solutions for the communications and commercial markets. We believe that our customers benefit from the broad array of IP and solutions that our R&D staff develop and support.

Reduced time to market. We offer standards-based, turn-key solutions such as ATCA and media server solutions for the communications networks market and COM Express solutions for the commercial market. These standards-based solutions combined with our strong technical resources provide our OEM customers with more flexibility and reduced time-to-market than if they developed these solutions internally.

Broad portfolio of products. Our product lines include a large portfolio of solutions including fully integrated platforms and application-ready systems with software rich content. Our product portfolio addresses a large range of customer requirements and applications. We believe that over time many of our customers will increasingly rely on a smaller set of suppliers who can address a broader set of their solution needs.

Long-term customer relationships. We understand what our customers need and work closely with them. Accordingly, we have developed and maintained long-term relationships with many Tier 1 and Tier 2 customers.

Our Strategy

To build market leadership in standards-based advanced infrastructure platforms in our target markets. We believe this strategy enables our customers to focus their resources and development efforts on their key areas of competency, allowing them to provide higher value systems with a time-to-market advantage and a lower total cost. We believe that we are currently the leading vendor in the ATCA and IP Media Server markets. We also believe that we are a leading provider with our COM Express solutions in our targeted markets. We intend to continue to invest significant R&D and sales and marketing resources to build our presence in these market segments.

To develop our offering of higher value platform solutions. Historically, the majority of our revenues were derived from

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the sale of stand-alone boards. We have spent considerable resources developing application-ready platform solutions that incorporate hardware and software developed by us. We intend to increasingly focus our development efforts on providing more software content, positioning us to provide more complete application-ready platforms that provide more value for our customers. These platforms provide an additional revenue opportunity for us, and we believe revenues from these products have the potential to generate higher average selling prices and higher gross margins relative to the sale of boards or hardware centric platforms.

To expand our global customer base. We continue to expand the number of customers that we work with, particularly as more customers become aware of the benefits of standards-based solutions. Our global reach allows us to market our solutions to most of the leading system vendors in our target markets. We are also expanding our customer base through entrance into adjacent markets like aerospace and defense.

To explore new partnerships and strategic acquisitions as a means to build leadership in our target markets. We continue to investigate partnerships and strategic relationships, which can expand the number of solutions we offer and increase our market reach. We also continue to evaluate potential acquisition opportunities to acquire new capabilities, which can help us achieve our strategic goals. For example, in the last five years, we acquired:

Convedia Corporation or Convedia®, a closely-held vendor of IP media servers;

certain assets of the Modular Communications Platform Division (“MCPD”) business from Intel Corporation (“Intel”), which included ATCA and compact peripheral component interconnect (“PCI”) product lines;

the assets of privately-held Pactolus Communications Software Company ("Pactolus"), a developer of Next Generation IP communications solutions for converged time-division multiplexing/internet protocol ("TDM/IP") and session initiation protocol ("SIP") enabled VoIP networks; and

Continuous Computing, a developer of communications systems consisting of highly integrated ATCA platforms and Trillium protocol software coupled with software professional services.

Products Overview

Next Generation Communications Networks Products

During the first half of 2011, we announced the new 40G ATCA packet processing module designed to meet the diverse requirements of next generation LTE networks that will be available for early access starting in the second half of 2011. The packet processing module based on a Cavium Networks processor is targeted at applications such as Serving Gateways, Session Boarder Control, Security Gateways, Deep Packet Inspection, Edge Routers, Media Gateways and Mobility Management Entity network elements found in the 4G LTE Evolved Packet Core. The module provides a three times total compute advantage and a two times performance-per-watt advantage over existing modules.

Commercial Products

In the first half of 2011, we achieved International Traffic in Arms Regulations ("ITAR") compliance to allow for full participation as an approved U.S. aerospace and defense solutions supplier.  This compliance should enable us to expand our customer base for industry-leading, commercial off-the-shelf ("COTS") support systems.

Recent Developments

On July 8, 2011, we completed our previously announced acquisition of Continuous Computing for approximately $77 million in cash and 2,321,016 shares of the Company's common stock. The aggregate cash amount consists of $73 million plus an additional $4.4 million, reflecting a portion of the value of Continuous Computing's estimated net working capital at the closing of the acquisition and subject to adjustment based on the final net working capital of Continuous Computing at closing. We also deposited an additional 1,344,444 shares of our common stock into an escrow account and subject to any indemnification claims, one-half of the shares held therein will be released one year after the closing of the acquisition with the remainder to be released six months thereafter.

In addition, we have agreed to make certain earn-out payments based on the amount of royalty revenues generated by a specified set of contracts associated with certain of Continuous Computing's products over a period of 36 months after closing. Earn-out payments will be made in cash in three installments following the 18-, 24- and 36-month anniversaries of July 8,

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2011, the closing date, and in each case will equal the amount of such royalty revenues during the immediately preceding 18-month, six-month or 12-month period, as applicable, except that, in lieu of making any and all earn-out payments, we may elect after the 18-month anniversary of the closing date to make a one-time payment in cash and/or issuance of common stock with a combined aggregate value of $15 million.

In connection with the acquisition, we assumed Continuous Computing's stock incentive plan as to stock options held by continuing employees of Continuous Computing that were not vested on or prior to June 30, 2011, which were converted into options to acquire approximately 320,000 shares of our common stock.

Financial Results

Total revenue for the three and six months ended June 30, 2011 was $79.9 million and $153.5 million as compared to total revenue of $75.0 million and $142.3 million for the three and six months ended June 30, 2010. Backlog grew 41% during the six months ended June 30, 2011 from $43.9 million at December 31, 2010 to $61.9 million at June 30, 2011. Backlog includes all purchase orders scheduled for delivery within 12 months. The increase in revenues for the three and six months ended June 30, 2011 compared to the same period in 2010 was due to increased revenues from our Communications Networks products and Other Commercial products, partially offset by decreases in revenue from our Medical products.

Gross margins as a percentage of revenues were 29.8% and 28.7% for the three and six months ended June 30, 2011 as compared to 29.7% and 29.9% for the three and six months ended June 30, 2010. Gross margin as a percentage of revenues was unfavorably impacted by the expected decline in gross margins on our Legacy products which was partially offset by a reduction in the amortization of purchased technology and increased margins from our ATCA products.

Net income for the three months ended June 30, 2011 and 2010 was $190,000 and $590,000 compared to a net loss of $339,000 and $458,000 for the six months ended June 30, 2011 and 2010. For the three and six months ended June 30, 2011, net income (loss) was impacted by increased operating expenses and lower margins on increased revenues, offset by a decline in the amortization of purchased technology. Operating expenses increased $2.0 million and $0.9 million in the three and six months ended June 30, 2011 compared to the same prior-year periods due to expenses associated with our acquisition of Continuous Computing and increased restructuring activities.

Cash and cash equivalents amounted to $135.6 million and $129.1 million at June 30, 2011 and December 31, 2010. The increase in cash and cash equivalents was primarily due to cash generated from operating activities of $9.5 million. These cash inflows were offset by repurchases of our common stock for $1.3 million and capital expenditures of $2.1 million.

Critical Accounting Policies and Estimates

We reaffirm our critical accounting policies and use of estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes during the six months ended June 30, 2011 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010 except as discussed in Note 1 - Significant Accounting Policies - Recent Accounting Pronouncements of the Notes to Unaudited Consolidated Financial Statements.


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Results of Operations

The following table sets forth certain operating data as a percentage of revenues for the three and six months ended June 30, 2011 and 2010:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2011
  
2010
 
2011
 
2010
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales:
 
 
 
 
 
 
 
Cost of sales
68.7

 
68.0

 
69.8

 
67.7

Amortization of purchased technology
1.5

 
2.3

 
1.5

 
2.4

Total cost of sales
70.2

 
70.3