Acquistion of Continuous Computing Corporation

9 Months Ended

Sep. 30, 2011

Acquisition [Abstract]

Business Combination Disclosure [Text Block]

Acquisition of Continuous Computing Corporation

On July 8, 2011, the Company acquired 100% of the outstanding shares of Continuous Computing Corporation ("Continuous Computing"), a developer of communications systems consisting of highly integrated ATCA platforms and Trillium protocol software. The Company expects the acquisition to accelerate our 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.

Under the terms of the acquisition agreement, the Company paid approximately $81.5 million in cash and 2,321,016 in shares of our common stock. The aggregate cash amount consisted of $73.0 million plus an $8.5 million working capital adjustment. 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. The common stock issued to former shareholders of Continuous Computing has a fair value of $30.8 million, based on the closing price of the Company's common stock on July 8, 2011 of $8.39 per share.

In addition, the Company has agreed to make certain earn-out payments based on the amount of product 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 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 at any time prior to the fifth business day following 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. The estimated fair value of this contingent consideration at the acquisition date was $7.4 million and is included in other long-term liabilities in the Consolidated Balance Sheet at September 30, 2011. See Note 3 - Fair Value of Financial Instruments for additional information regarding the valuation of the contingent consideration liability.

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 322,000 shares of the Company's common stock. See Note 12 - Stock-based Compensation for additional information regarding the valuation of the assumed options.

The total preliminary acquisition consideration is as follows (in thousands):

Cash paid for initial consideration	$	73,009
Working capital adjustment	8,504
Fair value of contingent consideration (earn-out payments)	7,400
Share consideration payable upon closing:
3.7 million Radisys common shares	30,753
Fair value of stock options	65
Total preliminary purchase price	$	119,731

Preliminary Purchase Price Allocation

The Company accounted for the transaction using the acquisition method and, accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price was allocated using the information available and is preliminary. The Company may adjust the preliminary purchase price allocation if additional information is obtained during the measurement period (up to one year from the acquisition date) regarding, among other things, assets valuations, liabilities assumed and revisions to preliminary estimates.

Continuous Computing is subject to legal and regulatory requirements, including but not limited to those related to taxation in each of the jurisdictions in the countries in which it operated. The Company has conducted a preliminary assessment of liabilities arising from these tax matters in each of these jurisdictions, and has recognized provisional amounts in its initial accounting for the acquisition of Continuous Computing for the identified liabilities. However, the Company is continuing its review of these matters during the measurement period, and if new information is obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed as the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional tax amounts initially recognized.

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. The preliminary allocation of the total purchase price is as follows (in thousands):

Total preliminary purchase price					$	119,731
Fair value of net tangible assets acquired and liabilities assumed:
	Cash and cash equivalents	$	2,214
	Accounts receivable	13,433
	Inventories	4,036
	Prepaid expenses and other current assets	3,393
	Fixed assets	2,304
	Other assets	614
	Accounts payable	(5,368		)
	Accrued expenses	(6,802		)
	Deferred revenue	(1,825		)
	Other long-term liabilities	(702		)
					11,297
Fair value of identifiable intangible assets acquired					89,240
Net deferred tax liability					(6,801		)
Goodwill					$	25,995

The goodwill created by the transaction of $26.0 million is not deductible for tax purposes. Key factors that make up the goodwill created by the transaction include expected synergies from the combination of operations and the knowledge and experience of the acquired workforce and infrastructure.

Valuation of Intangible Assets Acquired

The following table summarizes the intangible assets acquired in connection with the acquisition (in thousands):

	Fair Value		Estimated Life (yrs)
Developed technology:
ATCA developed technology	$	33,600	7
Trillium developed technology	18,500		7
Software developed technology	1,850		7
Legacy developed technology	1,300		2
Total developed technology	55,250
Customer relationships	25,500		6
Trade name	7,900		10
Backlog	590		0.5
Total intangible assets subject to amortization	$	89,240

The Company is amortizing purchased technology and backlog to amortization of purchased technology in the Consolidated Income Statements over the respective estimated life of each intangible asset.  Customer relationships and trade name are being amortized to intangible assets amortization in the Consolidated Statements of Income over the respective estimated life of each intangible asset.

Transaction-Related Expenses

The Company has incurred significant transaction costs directly related to the Continuous Computing transaction. The incremental expenses related to legal, accounting and valuation services, and investment banking fees. During the three and nine months ended September, 2011, the Company incurred restructuring costs associated with severance and other related compensation charges. In addition, the Company has incurred significant integration-related costs which include expenses associated with operational consolidation, training, re-branding, and consulting. These charges are included in cost of sales and restructuring and acquisition-related charges, net on the Consolidated Statements of Income.

The table below presents the amounts related to these expenses included in our Consolidated Statements of Income (in thousands):

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Cost of sales	$	212	$	—	$	212	$	—
Restructuring and acquisition-related charges, net
Transaction costs	1,719		—		3,347		—
Restructuring costs	3,411		—		4,311		—
Integration-related costs	644		—		644		—
Total restructuring and acquisition-related charges, net	5,774		—		8,302		—
Total transaction-related expenses	$	5,986	$	—	$	8,514	$	—

Unaudited Actual and Pro Forma Information

Our consolidated revenues for the three and nine months ended September 30, 2011 included $15.3 million from Continuous Computing subsequent to the acquisition date. The following table presents the unaudited pro forma results for the periods set forth below. The unaudited pro forma financial information combines the results of operations as though the acquisition had occurred on January 1, 2010. No pro forma adjustments have been made for our incremental transaction, restructuring or integration-related costs. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had occurred on January 1, 2010: (in thousands, except per share data):

	Actual		Pro-Forma			Pro-Forma
	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2011		2010			2011			2010
Revenues	$	97,876	$	89,507		$	282,363		$	259,317
Net income (loss)	$	2,765	$	(1,253	)	$	(5,126	)	$	(7,115	)
Net income (loss) per share:
Basic	$	0.10	$	(0.05	)	$	(0.19	)	$	(0.27	)
Diluted	$	0.10	$	(0.05	)	$	(0.19	)	$	(0.27	)