Edgar Filing: RADISYS CORP

09.30.13 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	September 30, 2013



[ ]	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.)

5435 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 such 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.



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 November 5, 2013: 29,097,024

RADISYS CORPORATION

FORM 10-Q

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2013 and 2012		3
Condensed Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2013 and 2012		4
Condensed Consolidated Balance Sheets – September 30, 2013 and December 31, 2012		5
Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2013 and 2012		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		34
Item 4. Controls and Procedures		34

PART II. OTHER INFORMATION
Item 1A. Risk Factors		35
Item 6. Exhibits		35
Signatures		36

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RADISYS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Revenues	$	54,109		$	63,725		$	187,725		$	216,796
Cost of sales:
Cost of sales	37,874			43,687			127,936			142,234
Amortization of purchased technology	2,069			2,390			6,504			7,223
Total cost of sales	39,943			46,077			134,440			149,457
Gross margin	14,166			17,648			53,285			67,339
Research and development	11,456			11,845			35,011			36,104
Selling, general and administrative	10,522			11,793			31,145			33,966
Intangible asset amortization	1,303			1,303			3,911			3,911
Impairment of goodwill	—			29,748			—			29,748
Restructuring and acquisition-related charges, net	2,881			(2,717		)	4,037			(234		)
Loss from operations	(11,996		)	(34,324		)	(20,819		)	(36,156		)
Interest expense	(300		)	(436		)	(913		)	(1,279		)
Other income, net	200			22			573			312
Loss before income tax expense	(12,096		)	(34,738		)	(21,159		)	(37,123		)
Income tax expense	624			373			2,230			1,496
Net loss	$	(12,720	)	$	(35,111	)	$	(23,389	)	$	(38,619	)
Net loss per share:
Basic	$	(0.44	)	$	(1.28	)	$	(0.82	)	$	(1.43	)
Diluted	$	(0.44	)	$	(1.28	)	$	(0.82	)	$	(1.43	)
Weighted average shares outstanding:
Basic	28,931			27,534			28,692			26,985
Diluted	28,931			27,534			28,692			26,985

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

RADISYS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net loss	$	(12,720	)	$	(35,111	)	$	(23,389	)	$	(38,619	)
Other comprehensive income (loss):
Translation adjustments	(138		)	462			(589		)	(87		)
Net adjustment for fair value of hedge derivatives	(233		)	781			(881		)	108
Other comprehensive income (loss)	(371		)	1,243			(1,470		)	21
Comprehensive loss	$	(13,091	)	$	(33,868	)	$	(24,859	)	$	(38,598	)

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

RADISYS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)



	September 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	31,559		$	33,182
Accounts receivable, net	42,496			51,881
Other receivables	1,955			2,394
Inventories, net	25,758			20,071
Inventory deposit, net	463			8,836
Other current assets	4,045			4,248
Deferred tax assets, net	4,799			5,376
Total current assets	111,075			125,988
Property and equipment, net	15,660			17,713
Intangible assets, net	59,869			70,284
Long-term deferred tax assets, net	11,001			11,161
Other assets	3,274			7,248
Total assets	$	200,879		$	232,394

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	36,619		$	41,191
Accrued wages and bonuses	5,299			7,168
Deferred income	7,625			9,222
Convertible senior notes	—			16,919
Line of credit	15,000			—
Other accrued liabilities	10,333			9,601
Total current liabilities	74,876			84,101
Long-term liabilities:
Convertible senior notes	18,000			18,000
Other long-term liabilities	3,422			4,851
Total long-term liabilities	21,422			22,851
Total liabilities	96,298			106,952
Commitments and contingencies (Note 8)
Shareholders’ equity:
Common stock — no par value, 100,000 shares authorized; 29,061 and 28,471 shares issued and outstanding at September 30, 2013 and December 31, 2012	307,722			303,724
Accumulated deficit	(203,075		)	(179,686		)
Accumulated other comprehensive income:
Cumulative translation adjustments	1,580			2,169
Unrealized loss on hedge instruments	(1,646		)	(765		)
Total accumulated other comprehensive income	(66		)	1,404
Total shareholders’ equity	104,581			125,442
Total liabilities and shareholders’ equity	$	200,879		$	232,394

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

RADISYS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



	Nine Months Ended
	September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(23,389	)	$	(38,619	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	16,586			16,448
Impairment of goodwill	—			29,748
Inventory valuation allowance	578			772
Deferred income taxes	850			614
Stock-based compensation expense	3,761			394
Write off of purchased computer software	2,868			—
Net gain from sale of software assets	(1,532		)	—
Other	(1,370		)	1,072
Changes in operating assets and liabilities:
Accounts receivable	9,943			(2,328		)
Other receivables	395			1,779
Inventories	(8,385		)	5,753
Inventory deposit	10,412			(1,031		)
Other current assets	143			511
Accounts payable	(4,860		)	3,895
Accrued wages and bonuses	(1,855		)	(3,155		)
Accrued restructuring	1,233			(1,967		)
Deferred income	(1,673		)	(3,002		)
Other accrued liabilities	200			(8,255		)
Net cash provided by operating activities	3,905			2,629
Cash flows from investing activities:
Capital expenditures	(4,343		)	(9,095		)
Purchase of long-term assets	—			(368		)
Proceeds from sale of software assets	1,107			—
Net cash used in investing activities	(3,236		)	(9,463		)
Cash flows from financing activities:
Borrowings on line of credit	15,000			—
Repayment of convertible subordinated notes	(16,919		)	(10,081		)
Proceeds from issuance of common stock	626			1,100
Payments on contingent consideration liability	(378		)	—
Other financing activities	(405		)	(140		)
Net cash used in financing activities	(2,076		)	(9,121		)
Effect of exchange rate changes on cash	(216		)	13
Net decrease in cash and cash equivalents	(1,623		)	(15,942		)
Cash and cash equivalents, beginning of period	33,182			47,770
Cash and cash equivalents, end of period	$	31,559		$	31,828
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	1,110		$	1,378
Income taxes	$	673		$	1,017

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

RADISYS CORPORATION

NOTES TO CONDENSED 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, 2012 in preparing the accompanying interim condensed 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, revenues, expenses and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Additionally, the accompanying financial data as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 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 condensed 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, 2012.

Certain prior year balances have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total cash flows, total net revenues, operating loss, net loss, total assets, total liabilities or shareholders’ equity.

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.

Note 2 — Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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.

Foreign currency forward contracts are measured at fair value using models based on observable market inputs such as foreign currency exchange rates; therefore, they are classified within Level 2 of the valuation hierarchy. The cash surrender value of life insurance contracts and deferred compensation liability are measured at fair value using quoted market prices for similar instruments; therefore, they are classified within Level 2 of the valuation hierarchy.

The Company has obligations ("contingent consideration"), to be paid in cash, related to the acquisition of Continuous Computing Corporation ("Continuous Computing") based on the amount of product royalty revenues to be generated by a specified set of contracts associated with certain of Continuous Computing's products over a period of 36 months after closing. The contingent consideration liability was established at the time of acquisition and is evaluated at the end of each reporting period. As the significant inputs used in determining the fair value are unobservable, this liability is classified within Level 3 of the fair value hierarchy.

The fair value of this contingent consideration is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including revenue projections and discount rates consistent with the level of risk of achievement; therefore the Company developed its own assumptions for the expected

product royalty revenues generated under the arrangement. The fair value of the contingent consideration is affected most significantly by changes in the amount and timing of the revenue projections. If the revenue projections increase or decrease the fair value of the contingent consideration will increase or decrease accordingly in amounts that will vary based on the timing of the projected revenues and the timing of the expected payments.

The following table summarizes the fair value measurements for the Company's financial instruments (in thousands):



	Fair Value Measurements as of September 30, 2013
	Total			Level 1		Level 2			Level 3
Cash surrender value of life insurance contracts^(A)	$	1,827		$	—	$	1,827		$	—
Deferred compensation liability ^(A)	(1,302		)	—		(1,302		)	—
Foreign currency forward contracts	(989		)	—		(989		)	—
Contingent consideration liability	(423		)	—		—			(423		)
Total	$	(887	)	$	—	$	(464	)	$	(423	)



(A)	During the period ended September 30, 2013, the company terminated its Deferred Compensation Plan. The distribution of plan assets and participant balances began during the quarter ended September 30, 2013 and will continue through January 2015 based on participant elections.



	Fair Value Measurements as of December 31, 2012
	Total			Level 1		Level 2			Level 3
Cash surrender value of life insurance contracts	$	3,398		$	—	$	3,398		$	—
Deferred compensation liability	(1,395		)	—		(1,395		)	—
Foreign currency forward contracts	(297		)	—		(297		)	—
Contingent consideration liability	(2,541		)	—		—			(2,541		)
Total	$	(835	)	$	—	$	1,706		$	(2,541	)

The following table summarizes our Level 3 activity for the Company's contingent consideration liability (in thousands):



	Level 3
Balance at December 31, 2012	$	2,541
Change in estimate	(1,891		)
Payments	(378		)
Accretion	151
Balance at September 30, 2013	$	423

The Company records all changes in estimates and accretion on the contingent consideration liability to restructuring and acquisition-related charges, net in the Condensed Consolidated Statements of Operations. Of the $0.4 million contingent consideration liability, $0.1 million is recorded in other accrued liabilities and $0.3 million is recorded in other long-term liabilities on the Condensed Consolidated Balance Sheet at September 30, 2013.

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):



	September 30, 2013			December 31, 2012
Accounts receivable, gross	$	42,960		$	52,660
Less: allowance for doubtful accounts	(464		)	(779		)
Accounts receivable, net	$	42,496		$	51,881

As of September 30, 2013 and December 31, 2012, the balance in other receivables was $2.0 million and $2.4 million. Other receivables consisted primarily of non-trade receivables including receivables for value-added taxes and inventory transferred to the Company's contract manufacturing partners on which the Company does not recognize revenue.

Note 4 — Inventories

Inventories consisted of the following (in thousands):



	September 30, 2013			December 31, 2012
Raw materials	$	20,252		$	10,420
Work-in-process	908			605
Finished goods	8,976			11,245
	30,136			22,270
Less: inventory valuation allowance	(4,378		)	(2,199		)
Inventories, net	$	25,758		$	20,071



	September 30, 2013			December 31, 2012
Inventory deposit ^(A)	$	1,226		$	11,637
Less: inventory deposit valuation allowance	(763		)	(2,801		)
Inventory deposit, net	$	463		$	8,836

(A)

Beginning in the third quarter of 2013 the Company modified the inventory deposit arrangement with its contract manufacturing partner. Prior to the modification, the Company was obligated to reimburse its contract manufacturer for the cost of excess inventory that has been purchased as a result of the Company's forecasted demand when there is no alternative use. Under the new arrangement, rather than reimburse the contract manufacturer, the Company is now obligated to purchase inventory on consignment. The calculation of excess inventory and its impact on the Company’s cash and reported aggregate inventory levels is the same under the consignment arrangement as it was under the prior deposit arrangement. As of September 30, 2013, the balance of consigned inventory at the Company’s contract manufacturing partner was $10.3 million with the remaining inventory deposit associated with inventory held at the Company’s outsourced hardware repair service provider. The remaining 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 manufacturer 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 partner 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 $11.9 million and $0.7 million at September 30, 2013 and December 31, 2012.

The Company recorded the following charges associated with the valuation of inventory, inventory deposit and the adverse purchase commitment liability (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Inventory, net	$	214	$	336	$	578	$	772
Inventory deposit, net	66		158		876		521
Adverse purchase commitments	271		40		403		12

Note 5 — Restructuring and Acquisition-Related Charges

The following table summarizes the Company's restructuring and acquisition-related gains and charges as presented in the Condensed Consolidated Statement of Operations (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Employee-related restructuring expenses	$	2,916		$	1,131		$	4,081		$	2,745
Fair value adjustments to Continuous Computing contingent consideration liability	(395		)	(4,107		)	(1,740		)	(5,145		)
Facility reductions	(155		)	259			(155		)	1,590
Write off of purchased computer software	—			—			2,868			—
Net gain from sale of OS-9 software assets	—			—			(1,532		)	—
Integration-related expenses	515			—			515			576
Restructuring and acquisition-related charges, net	$	2,881		$	(2,717	)	$	4,037		$	(234	)

Restructuring and acquisition-related charges typically consist of costs incurred for employee terminations due to a reduction of personnel resources resulting from modifications of business strategy or business emphasis. Employee severance and related costs include severance benefits, notice pay and outplacement services. Restructuring and acquisition-related charges may also include expenses incurred associated with acquisition or divestiture activities, facility abandonments and other expenses associated with business restructuring actions.

For the three months ended September 30, 2013, the Company recorded the following restructuring and acquisition-related charges:


•	$2.9 million net expense for the severance of 154 employees related to Shanghai and Penang site reductions, net of reductions resulting from changes in previously estimated amounts for employee severance and associated payroll costs;


•	$0.4 million gain due to the decrease in fair value of the Continuous Computing contingent consideration liability. The Company assesses the fair value of the contingent consideration liability on a quarterly basis, adjusting the liability to fair value based on a detailed analysis of all expected contingent consideration eligible revenues;


•	$0.2 million gain resulting from the revision of prior sublease assumptions for a previously abandoned facility; and


•	$0.5 million net expense associated with asset write-offs, legal fees, and personnel overlap resulting from resource consolidation.

For the three months ended September 30, 2012, the Company recorded the following restructuring and acquisition-related charges:


•	$1.1 million net expense for the severance of four employees, including a $0.9 million contractual severance benefit provided to our former Chief Executive Officer, net of reductions resulting from changes in previously estimated amounts for employee severance and associated payroll costs;


•	$4.1 million gain due to the decrease in fair value of the Continuous Computing contingent consideration liability; and


•	$0.3 million net expense resulting from facilities rationalization in certain North American sites.

For the nine months ended September 30, 2013, the Company recorded the following restructuring and acquisition-related charges:


•	$4.1 million net expense for the severance of 182 employees primarily related to Shanghai and Penang site reductions, net of reductions resulting from changes in previously estimated amounts for employee severance and associated payroll costs;


•	$1.7 million gain due to the decrease in fair value of the Continuous Computing contingent consideration liability;


•	$0.2 million gain resulting from the revision of prior sublease assumptions for a previously abandoned facility;


•	$2.9 million expense relating to the write off of the Company's SEG purchased computer software due to management's decision to abandon future development of this technology;


•	$1.5 million net gain from the sale of the Company's OS-9 software assets; and


•	$0.5 million net expense associated with asset write-offs, legal fees, and personnel overlap resulting from resource consolidation.

For the nine months ended September 30, 2012, the Company recorded the following restructuring and acquisition-related charges:


•	$2.7 million net expense for the severance of employees, including a $0.9 million contractual severance benefit provided to our former Chief Executive Officer, and severance paid to other executive officers, net of reductions resulting from changes in previously estimated amounts for employee severance and associated payroll costs;


•	$5.1 million gain due to the decrease in fair value of the Continuous Computing contingent consideration liability;


•	$1.6 million net expense resulting from facilities rationalization in certain North American sites; and


•	$0.6 million expense related to expenses incurred related to the integration and acquisition of Continuous Computing.

Accrued restructuring, which is included in other accrued liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, consisted of the following (in thousands):



	Severance, payroll taxes and other employee benefits			Facility reductions			Total
Balance accrued as of December 31, 2012	$	198		$	990		$	1,188
Additions	4,138			—			4,138
Reversals	(57		)	(155		)	(212		)
Expenditures	(2,417		)	(277		)	(2,694		)
Balance accrued as of September 30, 2013	$	1,862		$	558		$	2,420

Of the $2.4 million accrued restructuring at September 30, 2013, $0.2 million represents the long-term portion of accrued lease abandonment charges, with the remaining balance representing the short-term portion of accrued restructuring.

The Company evaluates the adequacy of the accrued restructuring charges on a quarterly basis. Reversals are recorded in the period in which the Company determines that expected restructuring obligations are less than the amounts accrued.

Note 6 — Short-Term Borrowings

Silicon Valley Bank

The Company has a $35.0 million secured revolving line of credit agreement (as amended, the "Agreement") with Silicon Valley Bank ("SVB") with a stated maturity date of July 28, 2016. On November 1, 2013 the Agreement was amended to reduce the total size of the secured revolving credit facility from $40.0 million to $35.0 million, revise the minimum two quarter rolling EBITDA financial covenant for the quarters ended September 30, 2013, December 31, 2013, and March 31, 2014 and modify certain terms within the liquidity ratio, all of which are reflected herein.

concentration by certain customers, not greater than 60 days past due and no greater than 120 days from original invoice date. EBITDA non-formula availability is $15.0 million when two rolling quarters EBITDA is $9.0 million or greater and $10.0 million when two rolling quarters EBITDA is $6.0 million or greater but less than $9.0 million. Borrowings under the Agreement bear interest based on a debt to EBITDA ratio where EBITDA is calculated on a rolling four quarter basis. The calculation of interest under the Agreement is as follows:


•	Debt to EBITDA ratio less than 2.0:1.0 - LIBOR, which was 0.18% as of September 30, 2013, plus 2.00%;


•	Debt to EBITDA ratio less than 3.0:1.0, but more than or equal to 2.0:1.0 - LIBOR plus 2.25%;


•	Debt to EBITDA more than or equal to 3.0:1.0 - LIBOR plus 2.50%.

The Company is required to make interest payments monthly. The Company was further required to pay a commitment fee equal to $35,000 on the original closing date of the Agreement and annually thereafter and to pay quarterly in arrears an unused facility fee based on the debt to EBITDA ratio as follows: debt to EBITDA ratio less than 2.0:1.0 - 0.375% per year of the unused amount of the facility; and debt to EBITDA ratio of 2.0:1.0 or greater - 0.50% per year of the unused amount of the facility.

The Agreement requires the Company to make and maintain certain financial covenants, representations, warranties and other agreements that are customary in credit agreements of this type. The Agreement also requires the Company to maintain the following specific financial covenants:

•

minimum monthly liquidity ratio of 1.25 at the end of intra-quarter months and 1.5 at the end of quarter end months. The liquidity ratio is defined as cash, cash equivalents and short term investments (with cash and cash equivalents held by the Company's foreign subsidiaries not to exceed $10.0 million and excluding any investments held by the Company's foreign subsidiaries) plus eligible accounts receivable, divided by the sum of obligations owing to SVB under the Agreement;

•

beginning September 30, 2014 until the 2015 convertible senior notes are repaid, (i) minimum cash balance of $18.0 million held at either SVB or in an account held with a financial institution where SVB shall have received a Qualifying Control Agreement (as defined in the Agreement) and (ii) immediately after giving pro forma effect to the payment of the 2015 convertible senior notes as if such payment occurred on September 30, 2014, compliance with the liquidity covenant noted above;

•

minimum two quarter rolling EBITDA (earnings before interest, taxes, depreciation, amortization, stock based compensation, non-cash restructuring charges (as defined in the Agreement) and cash restructuring charges not to exceed $12.0 million cumulatively during 2013 and 2014 combined) of $2.0 million for the quarter ending September 30, 2013, $(3.0) million for the quarter ending December 31, 2013, $2.0 million for the quarter ending March 31, 2014, $6.0 million for the quarters ending June 30, 2014, September 30, 2014 and December 31, 2014 and $9.0 million in subsequent quarters; and


•	capital expenditures may not exceed $11.0 million during the period January 1, 2013 to December 31, 2013 and $8.0 million in subsequent years.

As of September 30, 2013 and December 31, 2012, the Company had outstanding balances of $15.0 million and $0.0 million issued on its behalf under the Agreement. At September 30, 2013, the Company had $12.2 million of total borrowing availability remaining under the Agreement. After giving effect to the amendment to the Agreement, the Company was in compliance with all covenants under the Agreement.

Note 7 — Convertible Debt

2013 Convertible Senior Notes

On February 15, 2013, the Company repaid at maturity the entire outstanding balance of the 2.75% convertible senior notes due 2013 (the "2013 convertible senior notes") in accordance with the terms thereof.

2015 Convertible Senior Notes

On June 20, 2012, the Company entered into subscription agreements with certain holders of the Company's 2013 convertible senior notes. Pursuant to the subscription agreements, on June 29, 2012 the Company exchanged $18.0 million aggregate principal amount of the 2013 convertible senior notes for $18.0 million aggregate principal amount of the Company's 4.50% convertible senior notes due 2015 (the "2015 convertible senior notes"). The 2015 convertible senior notes mature on February 15, 2015. Holders of the 2015 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 2015 convertible senior notes are initially convertible into 117.2333 shares of the Company's common stock per $1,000 principal amount of the notes (which is equivalent to a conversion price of approximately $8.53 per share), subject to adjustment upon the occurrence of certain events. Upon the occurrence of a fundamental change, holders of the 2015 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 2015 convertible senior notes converted in connection with such fundamental changes by a specified number of shares of the Company's common stock. The 2015 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 2015 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.

As of September 30, 2013 and December 31, 2012, the Company had outstanding 2015 convertible senior notes with a face value of $18.0 million. As of September 30, 2013 and December 31, 2012, the fair values of our 2015 convertible senior notes were $17.8 million and $17.7 million, which are based on the most recent quoted prices of the Company's publicly traded debt on each balance sheet date.

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 and 2015 convertible senior notes:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Effective interest rate of 2013 convertible senior notes	NA			3.73		%	3.73		%	3.73		%
Effective interest rate of 2015 convertible senior notes	4.50		%	4.50		%	4.50		%	4.50		%
Contractually stated interest costs	$	203		$	351		$	666		$	970
Amortization of issuance costs	$	11		$	131		$	50		$	352

Note 8 — Commitments and Contingencies

Adverse Purchase Commitments

The Company is contractually obligated to reimburse its contract manufacturer 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 presented in other accrued liabilities in the accompanying Condensed Consolidated Balance Sheets. Estimates for adverse purchase commitments are derived from reports received on a quarterly basis from the Company's contract manufacturer. Increases to this liability are charged to cost of sales. If and when 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 (Note 4 —Inventories).

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 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 September 30, 2013.

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.

Accrued Warranty

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 12 or 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 the contract manufacturer is covered under warranties provided by the contract manufacturer for 12 months. The warranty provision is based on historical experience by product family. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its components suppliers; however ongoing failure rates, material usage and service delivery costs incurred in correcting product failure, as well as specific product class failures out of the 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):



	Nine Months Ended
	September 30,
	2013			2012
Warranty liability balance, beginning of the period	$	3,954		$	3,438
Product warranty accruals	2,295			3,209
Utilization of accrual	(2,835		)	(3,529		)
Warranty liability balance, end of the period	$	3,414		$	3,118

At September 30, 2013 and December 31, 2012, $2.7 million and $3.1 million of the warranty liability balance was included in other accrued liabilities and $0.7 million and $0.8 million was included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets.

Note 9 — Basic and Diluted Net Loss per Share

A reconciliation of the numerator and the denominator used to calculate basic and diluted net loss per share is as follows (in thousands, except per share amounts):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Numerator — Basic
Net loss	$	(12,720	)	$	(35,111	)	$	(23,389	)	$	(38,619	)
Numerator — Diluted
Net loss	$	(12,720	)	$	(35,111	)	$	(23,389	)	$	(38,619	)
Interest on convertible notes, net of tax benefit ^(B)	—			—			—			—
Net loss, diluted	$	(12,720	)	$	(35,111	)	$	(23,389	)	$	(38,619	)
Denominator — Basic
Weighted average shares used to calculate net loss per share, basic	28,931			27,534			28,692			26,985
Denominator — Diluted
Weighted average shares used to calculate net loss per share, basic	28,931			27,534			28,692			26,985
Effect of escrow shares ^(A)	—			—			—			—
Effect of convertible notes ^(B)	—			—			—			—
Effect of dilutive restricted stock units ^(C)	—			—			—			—
Effect of dilutive stock options ^(C)	—			—			—			—
Weighted average shares used to calculate net loss per share, diluted	28,931			27,534			28,692			26,985
Net loss per share
Basic	$	(0.44	)	$	(1.28	)	$	(0.82	)	$	(1.43	)
Diluted	$	(0.44	)	$	(1.28	)	$	(0.82	)	$	(1.43	)

(A)

For the three months ended September 30, 2013, there were no remaining contingently issuable shares outstanding. For the three months ended September 30, 2012, 0.8 million contingently issuable shares were excluded from the calculation as their effect would have been anti-dilutive. For the nine months ended September 30, 2013 and 2012, 20,000 and 1.1 million contingently issuable shares were excluded from the calculation as their effect would have been anti-dilutive.

(B)

For the three months ended September 30, 2013 and 2012, 2.1 million and 3.8 million as-if converted shares associated with the Company's convertible senior notes were excluded from the calculation as their effect would have been anti-dilutive. For the nine months ended September 30, 2013 and 2012, 2.3 million and 3.6 million as-if converted shares associated with the Company's convertible senior notes were excluded from the calculation as their effect would have been anti-dilutive.


(C)	For the three and nine months ended September 30, 2013 and 2012, the following equity awards, by type, were excluded from the calculation, as their effect would have been anti-dilutive (in thousands):



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Stock options	3,561	2,476	3,561	2,476
Restricted stock units	376	658	376	658
Performance based restricted stock units^(D)	1,678	1,050	1,678	1,050
Total equity award shares excluded	5,615	4,184	5,615	4,184

(D)

For the three and nine months ended September 30, 2013, the Company excluded 1.5 million restricted stock units granted under the Long-Term Incentive Plan ("LTIP") as the performance criteria required for issuance of the awards was not satisfied as of these dates. For the three and nine months ended September 30, 2013, the Company excluded 0.2 million restricted stock units granted under the Overlay Plan of the 2007 Stock Plan, as the awards had been earned but not vested as of these dates.

Note 10 — Income Taxes

The Company's effective tax rate for the three months ended September 30, 2013 and 2012 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, and taxes on foreign income that differ from the U.S. tax rate. 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 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 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 September 30, 2013. 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 $15.8 million and $16.5 million at September 30, 2013 and December 31, 2012. In the future, if the Company determines that it is more likely than not that it will realize its US 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 September 30, 2013 increased by $11,000 primarily due to uncertain tax exposures. The ending balance for the unrecognized tax benefits was approximately $3.1 million at September 30, 2013. The related interest and penalties were $0.7 million and $0.3 million. The uncertain tax positions that are reasonably possible to decrease in the next twelve months are insignificant.

The Company is currently under tax examination in India. The periods covered under examination are the Company's financial years 2005 through 2007 and 2009. The examination is in various stages of appellate proceedings and all material uncertain tax positions associated with the examination have been taken into account in the ending balance of the unrecognized tax benefits at September 30, 2013. As of September 30, 2013, the Company is not under examination by tax authorities in any other jurisdictions.

Note 11 — Stock-based Compensation

The following table summarizes awards granted under the Radisys Corporation 2007 and LTIP Stock Plans (in thousands):



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Stock options	1,253	391	1,746	464
Restricted stock units	75	265	82	342
Performance based restricted stock units	95	1,050	131	1,050
Total	1,423	1,706	1,959	1,856

Stock-based compensation was recognized and allocated as follows (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Cost of sales	$	167	$	107	$	408	$	(98	)
Research and development	361		284		844		315
Selling, general and administrative	1,111		587		2,509		177
Total	$	1,639	$	978	$	3,761	$	394

During the nine months ended September 30, 2012, the Company reversed previously recognized LTIP stock compensation expense as it was determined that attainment of the LTIP performance goals was improbable. The impact of the 2012 reversals by functional income statement classification is as follows: Cost of Sales ($0.2) million, R&D ($0.6) million, and SG&A ($1.6) million.

Note 12 — 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 employed solely for risk management purposes. All hedging transactions are conducted with, in the opinion of management, financially stable and reputable financial institutions. As of September 30, 2013 and December 31, 2012, the only hedge instruments executed by the Company are associated with its exposure to fluctuations in the Indian Rupee, which result from obligations such as payroll and rent paid in this currency.

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 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 reclassified out of accumulated other comprehensive income (loss) and recorded to the expense line item being hedged. The Company only enters into derivative contracts in order to hedge foreign currency exposure, and these contracts do not exceed two years from inception. 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.

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 nine months ended September 30, 2013 and 2012 and for the year ended December 31, 2012, the Company had no hedge ineffectiveness.

During the three and nine months ended September 30, 2013, the Company entered into 21 and 33 new foreign currency forward contracts with total notional contractual values of $10.3 million and $12.8 million. During the three and nine months ended September 30, 2012, the Company entered into 21 and 62 new foreign currency forward contracts with total notional contractual values of $3.3 million and $10.2 million.

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 September 30, 2013 is as follows (in thousands):



	Contractual/Notional Amount		Condensed Consolidated Balance Sheet Classification	Estimated Fair Value
Type of Cash Flow Hedge	Contractual/Notional Amount		Condensed Consolidated Balance Sheet Classification	Asset		(Liability)
Foreign currency forward exchange contracts	$	18,922	Other accrued liabilities	$	—	$	(989	)



	Contractual/Notional Amount		Condensed Consolidated Balance Sheet Classification	Estimated Fair Value
Type of Cash Flow Hedge	Contractual/Notional Amount		Condensed Consolidated Balance Sheet Classification	Asset		(Liability)
Foreign currency forward exchange contracts	$	13,986	Other accrued liabilities	$	—	$	(297	)

The effect of derivative instruments on the consolidated financial statements for the three months ended September 30, 2013 was as follows (in thousands):



Effective Portion			Ineffective Portion
Condensed Consolidated Statements of Operations Classification of (Gain) Loss	Hedge (Gain) Loss Reclassified from Accumulated Other Comprehensive Income		Condensed Consolidated Statements of Operations Classification of (Gain) Loss Recognized		Hedge (Gain) Loss Recognized
Cost of sales	$	169	$	—	$	—
Research and development	233		—		—
Selling, general and administrative	43		—		—

The effect of derivative instruments on the consolidated financial statements for the three months ended September 30, 2012 was as follows (in thousands):



Effective Portion			Ineffective Portion
Condensed Consolidated Statements of Operations Classification of (Gain) Loss	Hedge (Gain) Loss Reclassified from Accumulated Other Comprehensive Income		Condensed Consolidated Statements of Operations Classification of (Gain) Loss Recognized		Hedge (Gain) Loss Recognized
Cost of sales	$	123	$	—	$	—
Research and development	70		—		—
Selling, general and administrative	51		—		—

The effect of derivative instruments on the consolidated financial statements for the nine months ended September 30, 2013 was as follows (in thousands):



Effective Portion			Ineffective Portion
Condensed Consolidated Statements of Operations Classification of (Gain) Loss	Hedge (Gain) Loss Reclassified from Accumulated Other Comprehensive Income		Condensed Consolidated Statements of Operations Classification of (Gain) Loss Recognized		Hedge (Gain) Loss Recognized
Cost of sales	$	347	$	—	$	—
Research and development	335		—		—
Selling, general and administrative	119		—		—

The effect of derivative instruments on the consolidated financial statements for the nine months ended September 30, 2012 was as follows (in thousands):



Effective Portion			Ineffective Portion
Condensed Consolidated Statements of Operations Classification of (Gain) Loss	Hedge (Gain) Loss Reclassified from Accumulated Other Comprehensive Income		Condensed Consolidated Statements of Operations Classification of (Gain) Loss Recognized		Hedge (Gain) Loss Recognized
Cost of sales	$	191	$	—	$	—
Research and development	116		—		—
Selling, general and administrative	35		—		—

The following is a summary of changes to comprehensive income (loss) associated with the Company's hedging activities (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Beginning balance of unrealized loss on forward exchange contracts	$	(1,413	)	$	(1,447	)	$	(765	)	$	(774	)
Other comprehensive income (loss) before reclassifications	(678		)	537			(1,682		)	(234		)
Amounts reclassified from other comprehensive income (loss)	445			244			801			342
Other comprehensive income (loss)	(233		)	781			(881		)	108
Ending balance of unrealized loss on forward exchange contracts	$	(1,646	)	$	(666	)	$	(1,646	)	$	(666	)

Over the next twelve months, the Company expects to reclassify into earnings a loss of approximately $1.3 million currently recorded as other comprehensive loss, 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 13 — Segment Information

The Company's Chief Operating Decision Maker, our Chief Executive Officer, reviews our results of operations on a consolidated level. Key resources, decisions, and assessment of performance are also analyzed on a company-wide level and therefore, the Company is one operating segment.

Generally, the Company's customers are not the end-users of its products. The Company ultimately derives revenues from the following four product groups (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
ATCA Platforms	$	27,744	$	27,687	$	94,284	$	101,869
Software-Solutions	9,563		11,584		33,824		39,746
COM Express and Rackmount Server	13,380		13,861		42,225		37,963
Other Products	3,422		10,593		17,392		37,218
Total revenues	$	54,109	$	63,725	$	187,725	$	216,796

Revenues by geographic area were as follows (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
United States	$	21,205	$	21,321	$	77,333	$	75,611
Other North America	770		715		1,856		2,376
China	8,890		12,352		23,681		35,222
Japan	6,751		8,943		25,207		32,350
Other Asia Pacific	3,616		5,117		16,323		24,141
Asia Pacific ("APAC")	19,257		26,412		65,211		91,713
Europe, the Middle East and Africa (“EMEA”)	12,877		15,277		43,325		47,096
Foreign Countries	32,904		42,404		110,392		141,185
Total	$	54,109	$	63,725	$	187,725	$	216,796

Long-lived assets by geographic area are as follows (in thousands):



	September 30, 2013		December 31, 2012
Property and equipment, net
United States	$	7,974	$	8,572
Other North America	959		953
China	3,710		4,685
India	2,768		3,110
Other APAC	228		358
APAC	6,706		8,153
EMEA	21		35
Foreign Countries	7,686		9,141
Total property and equipment, net	$	15,660	$	17,713

Intangible assets, net
United States	$	59,789	$	68,903
Other North America	80		211
EMEA	—		1,170
Foreign Countries	80		1,381
Total intangible assets, net	$	59,869	$	70,284



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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Nokia Siemens Networks	20.7	%	23.7	%	19.5	%	23.1	%
NEC	NA		11.2	%	10.4	%	11.6	%
Philips Medical	11.6	%	NA		NA		NA



The following customers accounted for more than 10% of accounts receivable:
	September 30, 2013	December 31, 2012
Nokia Siemens Networks	27.6%	24.7%
Philips Medical	10.1%	NA

Note 14 — Subsequent Event

On November 5, 2013 the Company announced plans to consolidate all Asia-based platform engineering and operations functions within its Shenzhen site, resulting in the closing of the Company's Malaysia-based operations. In addition, the Company intends to co-locate its contract manufacturer near Shenzhen. Specific to the Penang site closure, the Company recorded restructuring charges for minimum statutory severance of approximately $0.7 million in the quarter ended September 30, 2013 and expects to record additional restructuring charges of approximately $1.0 million in the quarter ended December 31, 2013. Substantially all of the restructuring charges are associated with severance and employee-related costs and are expected to result in future cash expenditures. The consolidation of operational and developmental activities to the Company’s Shenzhen site is expected to be completed by September 30, 2014.

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

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and the related notes included in this Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. 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.

Overview

Radisys Corporation is a leader in enabling wireless infrastructure solutions for the telecom, aerospace, and defense markets. Our market-leading Media Resource Function ("MRF") and Advanced Telecommunications Computing Architecture ("ATCA") products, world-renowned Trillium software, Computer-on-Module ("COM") Express compute platforms and Network Appliance coupled with an expert professional services organization enable our customers to bring high-value products and services to the telecom market faster and with lower investment and risk. These products are targeted throughout the telecommunication network from Radio Access Network ("RAN") to the Evolved Packet Core to the IP Multimedia Subsystem ("IMS") and include the following:

•

MRF products, which can be purchased either as a complete product on our own ATCA platform (MPX-12000) or as software-only MPX-OS when our customers want to leverage other computer platforms, provides a suite of media processing capabilities that function in the network's IMS including audio conferencing, Voice over Long-Term Evolution ("VoLTE"), Rich Communications Services (“RCS”) and video conferencing;

•

ATCA and Network Appliance products provide the platforms necessary to control and move data in the network core enabling applications such as Deep Packet Inspection and policy management. When these products are combined with our professional service organization of network experts, we enable our customers to bring to market solutions such as compact packet cores, intelligent gateways (security, femto, and LTE gateways) and load balancers, at a cost and time to market advantage for our customers when compared to internally developed solutions; and


•	Trillium software is the foundation for a complete turn-key application for small cells in both the 3G and LTE RAN networks. Additionally, we leverage our Trillium technology to enable small cell applications in adjacent markets and applications that leverage similar small cell technology.

Third Quarter 2013 Summary

During the third quarter of 2013 we experienced revenue challenges within our Software-Solutions product group. Software-Solutions revenue declined 18% compared to the third quarter of 2012 as a result of a decline in MRF revenues largely due to decreased audio conferencing revenues which historically has been characterized by nonlinear customer order patterns and an expected large MPX-12000 order from an Asian carrier being delayed until a subsequent quarter. Despite these challenges, we continued to make progress against the strategic objectives set out in the third quarter of 2013 which are further summarized below.

Following is a summary-level comparison of the three months ended September 30, 2013 and 2012:

•

Revenues decreased $9.6 million to $54.1 million for the three months ended September 30, 2013 from $63.7 million for the three months ended September 30, 2012. The decline was caused by an expected decrease in Other Products revenue as these products continue to trend towards end of life. ATCA revenue stayed flat as deployments in North America were offset by decreased shipments in the Asia Pacific ("APAC") and Europe, Middle East, and Africa ("EMEA") regions. Our Software-Solutions revenues declined due to the timing of deployments by our largest customers. COM Express and Rackmount Server revenues decreased due to decreased orders from mid-tier customers.


•	Our gross margin decreased 150 basis points ("bps") in the three months ended September 30, 2013 to 26.2% from 27.7% of revenue in the three months ended September 30, 2012. This decrease was the result of decreased overall revenue levels from our higher margin Software-Solutions product group offset by decreased warranty expense due to lower cost per repair.


•	R&D expense decreased $0.4 million to $11.5 million for the three months ended September 30, 2013 from $11.8 million for the three months ended September 30, 2012. The decrease is related to lower project-related spend for new

product introductions specifically related to our ATCA 40G products, which were substantially released by the end of 2012.

•

SG&A expense decreased $1.3 million to $10.5 million for the three months ended September 30, 2013 from $11.8 million for the three months ended September 30, 2012. This decrease was the result of additional legal fees that were incurred in 2012 related to the exchange of our 2013 senior convertible notes. Payroll, commissions, and facility expenses also decreased due to decreased headcount, lower sales, and site consolidation.


•	Cash and cash equivalents decreased $1.6 million to $31.6 million at September 30, 2013 from $33.2 million at December 31, 2012. Cash generated by operating activities of $3.9 million was not sufficient to offset cash used in investing and financing activities primarily for capital expenditures of $4.3 million and the net repayment of debt of $1.9 million.

Strategy

During the third quarter of 2013 management announced the completion of its strategic assessment of our business and outlined the following top strategic priorities:

•

At least double our MRF revenue in the next three years. We have gained meaningful traction with the introduction of our new carrier grade MPX-12000 and recently launched virtualized MPX-OS software to enable media processing within LTE networks in addition to our market leadership position in audio conferencing. Given the momentum of customer trials and network deployments, we intend to increase our product development investments to ensure we meet customer needs and enable anticipated product revenue growth.

•

Grow our Trillium software and solutions revenue 20% annually. Our pipeline of Trillium opportunities has grown meaningfully in the first nine months of 2013. The opportunity for growth comes from small cells that carriers are using to optimize spectrum utilization in LTE network deployments as well as from adjacent markets that utilize the same technology in different applications. Deployments in these markets leverage our professional services organization to enable our customer’s technology we also expect to drive revenue growth. In early 2013, we re-aligned our global sales organization to focus on individual product sales. This new focused approach and dedicated Trillium sales team has enabled the expansion in customer opportunities.

•

Restore our hardware product groups to profitability and focus investment on enabling a virtualized platform. Moving forward, our hardware strategy will be to enable a virtualized platform to capitalize on the market's transition to software defined networks (“SDN”) and network function virtualization (“NFV”) by leveraging ATCA's inherent strength in processing data. At the same time, we will be sizing our cost structure to ensure our platforms product lines are profitable at approximately $170 million in annual revenue. We also announced plans to reduce our annual gross expenses by $20 million across our hardware business over the next eighteen months.

Following is a detail of cost-reduction actions taken to date:

•

On October 17, 2013, we notified employees at our Penang, Malaysia facility that we will be consolidating all APAC based platform operations and engineering functions into our Shenzhen, China facility. In addition, we will transfer our contract manufacturing from Penang to the Shenzhen area in order to realize further operational efficiencies. Additionally, on November 5, 2013 we announced our new contract manufacturing partner in Shenzhen will be Ennoconn Corporation.

This action will result in a reduction in force of 77 employees, of which 49 and 23 are involved in operations and engineering, while the remaining are administrative employees. We expect the transition to our Shenzhen site, including our operations function, contract manufacturing, and Penang site closure to be complete by September 30, 2014.


•	On July 30, 2013, we finalized plans and publicly announced the consolidation of our China development centers to Shenzhen, China. This action will result in a reduction in force of 63 employees from our Shanghai facility. We expect the transition of the development function to our Shenzhen site to be completed during the fourth quarter of 2013.


•	During the quarter ended September 30, 2013, we made other targeted reductions within the Administrative, Engineering and Marketing groups which included 14 North American employees.


•	Consolidation of supporting functions from our Irish entity to our corporate headquarters. This action resulted in a reduction in force of 5 general and administrative employees and the closure of our Ireland office.


•	Canceling future product development related to our lower end, value line of Com Express products resulting in a more efficient use of cash and other resources.

Further, on November 5, 2013 management announced plans to undertake additional actions which are expected to reduce annual operating expenses by an additional $10 million from current levels. Once complete, the above actions are expected to reduce our annual combined R&D and SG&A expenses to $70 million in 2014, with an expected $6 million additional annual reduction in cost of sales due to the savings associated with our contract manufacturing partner transition and site consolidation. Taken together, these actions are expected to result in material cash and non-cash restructuring charges, the extent of which are not estimable at this time. We expect these strategic priorities, while initially leading to increased losses and cash consumption, will ultimately restore Radisys to profitability and lead to positive long-term cash generation.

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012

Results of Operations

The following table sets forth certain operating data as a percentage of revenues for the three and nine months ended September 30, 2013 and 2012:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales:
Cost of sales	70.0		68.6		68.2		65.6
Amortization of purchased technology	3.8		3.7		3.4		3.3
Total cost of sales	73.8		72.3		71.6		68.9
Gross margin	26.2		27.7		28.4		31.1
Research and development	21.2		18.6		18.7		16.7
Selling, general, and administrative	19.4		18.5		16.6		15.7
Intangible asset amortization	2.5		2.0		2.0		1.8
Impairment of goodwill	—		46.7		—		13.7
Restructuring and acquisition-related charges, net	5.3		(4.2	)	2.2		(0.1	)
Loss from operations	(22.2	)	(53.9	)	(11.1	)	(16.7	)
Interest expense	(0.6	)	(0.6	)	(0.5	)	(0.5	)
Other income, net	0.4		—		0.3		0.1
Loss before income tax expense	(22.4	)	(54.5	)	(11.3	)	(17.1	)
Income tax expense	1.1		0.6		1.2		0.7
Net loss	(23.5	)%	(55.1	)%	(12.5	)%	(17.8	)%

Revenues

The following table sets forth our revenues by product group for the three and nine months ended September 30, 2013 and 2012 (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013		2012		Change		2013		2012		Change
ATCA Platforms	$	27,744	$	27,687	0.2	%	$	94,284	$	101,869	(7.4	)%
Software-Solutions	9,563		11,584		(17.4	)	33,824		39,746		(14.9	)
COM Express and Rackmount Server	13,380		13,861		(3.5	)	42,225		37,963		11.2
Other Products	3,422		10,593		(67.7	)	17,392		37,218		(53.3	)
Total revenues	$	54,109	$	63,725	(15.1	)%	$	187,725	$	216,796	(13.4	)%

Revenues in the ATCA product group increased $0.1 million for the three months ended September 30, 2013 from the comparable period in 2012. Revenues from our ATCA product group increased $1.8 million due to a $3.0 million increase as the result of a customer developing the core infrastructure for a new telecom network and offset by $1.2 million in decreased revenue from mid-tier customers.

Revenues in the ATCA product group decreased $7.6 million for the nine months ended September 30, 2013 from the comparable period in 2012. These decreases were the result of strong shipments to a top five customer deploying network optimization equipment in the first quarter of 2012 and deployments to increase network capacity in the Japanese market during the first half of 2012; both of which returned to normalized levels during the first nine months of 2013.

Revenues in the Software-Solutions product group decreased $2.0 million for the three months ended September 30, 2013 from the comparable period in 2012. In the third quarter of 2013 we experienced general softness in the audio conferencing market which caused delays in the timing of deployments by our largest customers.

Revenues in the Software-Solutions product group decreased $5.9 million for the nine months ended September 30, 2013 from the comparable period in 2012. Strong MRF deployments for use in audio conferencing applications during 2012 by our largest customer were not repeated during the comparable period of 2013. These decreases were offset by revenue from the first sales and successful launch of our ATCA-based MRF product called the MPX-12000 in support of VoLTE and RCS applications which have exceeded management’s initial expectations for 2013.

Revenues in the COM Express and Rackmount Server product group decreased $0.5 million for the three months ended September 30, 2013 from the comparable period in 2012 due to an expected decrease in shipments to mid-tier customers.

Revenues in the COM Express and Rackmount Server product group increased $4.3 million for the nine months ended September 30, 2013 from the comparable period in 2012. The increase in revenue is related to deployments by a specific end-customer during the first half of 2013, which we expect to be one-time in nature.

Revenues in the Other Products product group decreased $7.2 million and $19.8 million for the three and nine months ended September 30, 2013 from the comparable periods in 2012. The decline in revenues was expected by management as these hardware-centric products trend towards end of life and our largest customer continues to transition to next-generation network elements.

Revenue by Geography

The following tables outline overall revenue dollars and the percentage of revenues, by geographic region, for the three and nine months ended September 30, 2013 and 2012 (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013		2012		Change		2013		2012		Change
North America	$	21,975	$	22,036	(0.3	)%	$	79,189	$	77,987	1.5	%
Asia Pacific	19,257		26,412		(27.1	)	65,211		91,713		(28.9	)
Europe, the Middle East and Africa ("EMEA")	12,877		15,277		(15.7	)	43,325		47,096		(8.0	)
Total	$	54,109	$	63,725	(15.1	)%	$	187,725	$	216,796	(13.4	)%



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
North America	40.6	%	34.6	%	42.2	%	36.0	%
Asia Pacific	35.6		41.4		34.7		42.3
EMEA	23.8		24.0		23.1		21.7
Total	100.0	%	100.0	%	100.0	%	100.0	%

North America. Revenues from the North America region decreased $0.1 million for the three months ended September 30, 2013 from the comparable period in 2012. Revenues from our ATCA product group increased $3.0 million due to a customer developing the core infrastructure for a new telecom network. This increase was offset by $1.2 million in decreased revenue from our mid-tier customers within our ATCA product group. Additionally, revenues from our Software-Solutions product group decreased by $1.3 million due to a general softening in the audio conferencing market into which we sell our MRF products.

For the nine months ended September 30, 2013 revenues from the North America region increased $1.2 million from the comparable period in 2012. COM Express and Rackmount Server revenues increased $4.4 million as the result of shipments to support a specific customer's deployments during the first half of 2013. This was offset by a $3.7 million decrease in revenues from our Software-Solutions product group related to the timing of audio conferencing product deployments by our largest customers.

Asia Pacific. Revenues from the Asia Pacific region decreased $7.2 million and $26.5 million for the three and nine months ended September 30, 2013 from the comparable periods in 2012. Revenues from our ATCA product group decreased by $0.9 million and $8.5 million due to the increased shipments we experienced in the first half of 2012 to support our Japanese customers as they deployed next-generation wireless networks and last-time buys associated with certain products. Revenues from our Other Products product group decreased $5.6 million and $18.6 million as these hardware-centric products trend towards end of life and customers transition to next-generation network equipment.

EMEA. Revenues from the EMEA region decreased $2.4 million for the three months ended September 30, 2013 from the comparable period in 2012 due to decreased revenues of $0.9 million from our ATCA product group as overall telecom spend in European markets remains soft and a $1.6 million decrease from our Other Products product group as these hardware-centric products trend towards end of life and our largest customer continues to transition to next-generation network elements.

Revenues from the EMEA region decreased $3.8 million for the nine months ended September 30, 2013 from the comparable period in 2012. Revenue from our Software-Solutions product group was down $3.0 million due to decreased overall telecom spend in European markets. Additionally, revenue from our Other Products product group decreased $0.8 million as these hardware-centric products trend towards end of life and our largest customer continues to transition to next-generation network elements.

We currently expect continued fluctuations in the revenue contribution from each geographic region. Additionally, we expect non-U.S. revenues to remain a significant portion of our revenues.

Gross Margin

The following table summarizes our cost of sales and gross margin for the three and nine months ended September 30, 2013 and 2012 (in thousands):



	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2013			2012			Change		2013			2012			Change
Cost of Sales	$	37,874		$	43,687		(13.3	)%	$	127,936		$	142,234		(10.1	)%
Amortization of Purchased Technology	2,069			2,390			(13.4	)	6,504			7,223			(10.0	)
Total Cost of Sales	$	39,943		$	46,077		(13.3	)	$	134,440		$	149,457		(10.0	)
Gross Margin	26.2		%	27.7		%	(5.4	)%	28.4		%	31.1		%	(8.7	)%

Gross margin as a percentage of revenues decreased 150 bps for the three months ended September 30, 2013 from the comparable period in 2012. Decreased warranty expense due to lower cost per repair favorably impacted margin by 180 bps; however, this favorable impact was offset by a 320 bps decrease due to unfavorable product mix within our ATCA product group and decreased revenue from our higher margin Software-Solutions product group.

Gross margin as a percentage of revenues decreased 270 bps for the nine months ended September 30, 2013 from the comparable period in 2012. Decreased warranty expense favorably impacted margin by 40 bps; however, this was offset by a 310 bps decrease due to unfavorable product mix within our ATCA product group and decreased revenue from our higher margin Software-Solutions product group.

Operating Expenses

The following table summarizes our operating expenses for the three and nine months ended September 30, 2013 and 2012 (in thousands):



	Three Months Ended							Nine Months Ended
	September 30,							September 30,
	2013		2012			Change		2013		2012			Change
Research and development	$	11,456	$	11,845		(3.3	)%	$	35,011	$	36,104		(3.0	)%
Selling, general and administrative	10,522		11,793			(10.8	)	31,145		33,966			(8.3	)
Intangible asset amortization	1,303		1,303			—		3,911		3,911			—
Impairment of goodwill	—		29,748			(100.0	)	—		29,748			(100.0	)
Restructuring and acquisition-related charges, net	2,881		(2,717		)	206.0		4,037		(234		)	NM
Total	$	26,162	$	51,972		(49.7	)%	$	74,104	$	103,495		(28.4	)%

Research and Development

R&D expenses consist primarily of product development and related equipment expenses in addition to salary, bonuses and benefits for R&D personnel. R&D expenses decreased $0.4 million for the three months ended September 30, 2013 from the comparable period in 2012 due to decreased product development costs of $0.3 million as a result of lower project-related spend for new product introductions specifically related to our ATCA 40G products, which were substantially released by the end of 2012.

R&D expenses decreased $1.1 million for the nine months ended September 30, 2013 from the comparable period in 2012 as we completed the transition of a large portion of our R&D employees to lower-cost geographies during 2012 and resulting in a $0.6 million decrease in payroll-related expenses. In addition, R&D product development expenses decreased $1.4 million due to lower project-related spend for new product introductions specifically related to our ATCA 40G products, which were substantially released by the end of 2012. These decreases are offset by an increase in stock compensation expense resulting from the reversal of $0.6 million of previously recognized LTIP stock compensation expense during the second quarter of 2012. R&D headcount decreased to 439 at September 30, 2013 from 441 at September 30, 2012.

Selling, General, and Administrative

SG&A expenses consist primarily of salary, commissions, bonuses and benefits for sales, marketing, executive and administrative personnel, as well as professional services and costs of other general corporate activities. SG&A expenses decreased $1.3 million for the three months ended September 30, 2013 from the comparable period in 2012. During the three months ended September 30, 2012, we incurred additional legal fees related to the exchange of our 2013 convertible senior notes; these expenses did not re-occur in 2013 and, among other factors, contributed to a $0.7 million decrease in legal expenses. Additionally, payroll-related and facilities expenses decreased $0.5 million attributable to headcount reductions and site consolidation.

SG&A expenses decreased $2.8 million for the nine months ended September 30, 2013 from the comparable period in 2012 due to several factors, including a $1.3 million gain associated with a customer settlement relating to licensing infringement recognized in 2013 and a $1.7 million decrease in payroll and commission expenses due to decreased headcount and sales. Additionally, facilities consolidation resulted in a cost savings of $1.3 million from the comparable period. These decreases were offset by an increase in stock compensation expense due to the reversal of $1.6 million of previously recognized LTIP stock compensation expense during the second quarter of 2012, as we determined it was improbable that the LTIP performance goals would be attained during the measurement period. SG&A headcount decreased to 191 at September 30, 2013 from 204 at September 30, 2012 as a result of restructuring activities undertaken to right-size our SG&A organizations.

Intangible Asset Amortization

Intangible asset amortization remained unchanged for the three and nine months ended September 30, 2013 from the comparable periods in 2012 due to routine amortization of acquired intangible assets. During the third quarter of 2013, we analyzed our long-lived assets for impairment and concluded there was no impairment of our long-lived assets at September 30, 2013.

Restructuring and Acquisition-Related Charges, Net

Restructuring and acquisition-related charges, net includes expenses associated with restructuring activities and other non-recurring gains and losses. We evaluate the adequacy of the accrued restructuring charges on a quarterly basis. As a result, we record reversals to the accrued restructuring in the period in which we determine that expected restructuring and other obligations are less than the amounts accrued.

The increase in restructuring and acquisition-related charges, net for the three and nine months ended September 30, 2013 from the comparable periods in 2012 is due to restructuring actions associated with our Shanghai and Malaysia site reductions.

Restructuring and acquisition-related charges, net for the three months ended September 30, 2013 include the following:


•	$2.9 million net expense for the severance of 154 employees primarily related to Shanghai and Penang site reductions, net of reductions resulting from changes in previously estimated amounts for employee severance and associated payroll costs;


•	$0.4 million gain due to the decrease in fair value of the Continuous Computing contingent consideration liability. we assess the fair value of the contingent consideration liability on a quarterly basis, adjusting the liability to fair value based on a detailed analysis of all expected contingent consideration eligible revenues;


•	$0.2 million gain resulting from the revision of prior sublease assumptions for a previously abandoned facility; and


•	$0.5 million net expense associated with asset write-offs, legal fees, and personnel overlap resulting from resource consolidation.

Restructuring and acquisition-related charges, net for the nine months ended September 30, 2013 include the following:


•	$4.1 million net expense for the severance of 182 employees primarily related to Shanghai and Penang site reductions, net of reductions resulting from changes in previously estimated amounts for employee severance and associated payroll costs;


•	$1.7 million gain due to the decrease in fair value of the Continuous Computing contingent consideration liability;


•	$0.2 million gain resulting from the revision of prior sublease assumptions for a previously abandoned facility;


•	$2.9 million expense relating to the write off of the Company's SEG purchased computer software due to management's decision to abandon future development of this technology;


•	$1.5 million net gain from the sale of our OS-9 software assets; and


•	$0.5 million net expense associated with asset write-offs, legal fees, and personnel overlap resulting from resource consolidation.

Stock-based Compensation Expense

Included within cost of sales, R&D and SG&A are expenses associated with stock-based compensation. Stock-based compensation expense consists of amortization of stock-based compensation associated with unvested stock options, restricted stock units and the employee stock purchase plan ("ESPP"). We incurred and recognized stock-based compensation expense as follows (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013		2012		Change		2013		2012			Change
Cost of sales	$	167	$	107	56.1	%	$	408	$	(98	)	516.3	%
Research and development	361		284		27.1		844		315			167.9
Selling, general and administrative	1,111		587		89.3		2,509		177			1,317.5
Total	$	1,639	$	978	67.6	%	$	3,761	$	394		854.6	%

Stock-based compensation expense increased $0.7 million and $3.4 million for the three and nine months ended September 30, 2013 from the comparable periods in 2012 due to recognition of LTIP and Overlay Plan restricted stock unit awards in the three and nine months ended September 30, 2013 and the 2012 reversal of previously recognized LTIP expense. The impact of the 2012 reversals by functional income statement classification is as follows: Cost of Sales ($0.2) million, R&D ($0.6) million, and SG&A ($1.6) million.

Non-Operating Expenses

The following table summarizes our non-operating expenses (in thousands):



	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2013			2012			Change		2013			2012			Change
Interest expense	$	(300	)	$	(436	)	31.2	%	$	(913	)	$	(1,279	)	28.6	%
Interest income	1			12			(91.7	)	24			24			—
Other income, net	199			10			1,890.0		549			288			90.6
Total	$	(100	)	$	(414	)	75.8	%	$	(340	)	$	(967	)	64.8	%

Interest Expense

Interest expense includes interest incurred on our convertible senior notes and our line of credit. The decrease in interest expense during the three and nine months ended September 30, 2013, over the comparable periods in 2012, was due to the repayment of our 2013 convertible senior notes on February 15, 2013 and is offset by interest paid from borrowings on our line of credit during 2013.

Other Income, Net

For the three and nine months ended September 30, 2013, other income from the comparable periods in 2012 increased by $0.2 million and $0.3 million as a result of favorable currency movement against the US Dollar and an increase in the recognition of forward points associated with our hedge contracts to purchase the Indian Rupee.

Income Tax Provision

The following table summarizes our income tax provision (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013		2012		Change		2013		2012		Change
Income tax expense	$	624	$	373	67.3	%	$	2,230	$	1,496	49.1	%

We recorded tax expense of $0.6 million and $2.2 million for the three and nine months ended September 30, 2013. Our effective tax rates for the three months ended September 30, 2013 and 2012 were (5.2%) and (10.5%). The effective tax rate fluctuation is mainly due to income tax rate differences among the jurisdictions in which pretax income (loss) is generated.

Liquidity and Capital Resources

The following table summarizes selected financial information as of the dates indicated (in thousands):



	September 30, 2013		December 31, 2012		September 30, 2012
Cash and cash equivalents	$	31,559	$	33,182	$	31,828
Working capital	36,199		41,887		39,859
Accounts receivable, net	42,496		51,881		50,930
Inventories, net	25,758		20,071		20,493
Accounts payable	36,619		41,191		41,408
Line of credit	15,000		—		—
2013 convertible senior notes	—		16,919		16,919
2015 convertible senior notes	18,000		18,000		18,000

Cash Flows

As of September 30, 2013, the amount of cash held by our foreign subsidiaries was $10.4 million. It is not our intent to permanently reinvest funds in certain of our foreign entities and we expect to repatriate cash from these foreign entities on an ongoing basis in future periods. Repatriation of funds from these foreign entities is not expected to result in actual cash tax payments due to the utilization of previously generated operating losses and credits of our U.S. entity. During the period ended September 30, 2013 we finalized the process of restructuring our Irish entities, which enabled us to repatriate additional cash back to the U.S. We do not expect these changes to result in actual cash tax payments.

Cash and cash equivalents decreased by $1.6 million to $31.6 million as of September 30, 2013 from $33.2 million as of December 31, 2012. Activities impacting cash and cash equivalents were as follows (in thousands):



	Nine Months Ended
	September 30,
	2013			2012
Operating Activities
Net loss	$	(23,389	)	$	(38,619	)
Non-cash adjustments	21,741			49,691
Changes in operating assets and liabilities	5,553			(8,443		)
Cash provided by operating activities	3,905			2,629
Cash used in investing activities	(3,236		)	(9,463		)
Cash used in financing activities	(2,076		)	(9,121		)
Effects of exchange rate changes	(216		)	13
Net decrease in cash and cash equivalents	$	(1,623	)	$	(15,942	)

Cash provided by operating activities during the nine months ended September 30, 2013 was $3.9 million. For the nine months ended September 30, 2013, primary impacts to changes in our working capital consisted of the following:


•	Net trade accounts receivable decreased $9.9 million as the result of decreased revenues and the timing of payments received from our customers;


•	Inventories, net decreased $1.7 million due to increased focus on operational execution and reducing our inventory levels;


•	Deferred income decreased $1.7 million due to the recognition of previously deferred Software-Solutions revenue as the undelivered elements or acceptance provisions contained in certain arrangements were satisfied;


•	Accounts payable decreased by $4.9 million due to decreased payables to our contract manufacturing partner as the result of lower revenues and the timing of payments to vendors; and


•	Accrued wages and bonuses decreased $1.9 million due to the payment of 2012 cash-based variable compensation and timing of payroll-related accruals.

Cash used in investing activities during the nine months ended September 30, 2013 of $3.2 million was due to capital expenditures of $4.3 million related principally to test fixtures and R&D equipment for the continued development of our MPX-12000 ATCA-based MRF product and 40G ATCA products. These additions were offset by cash received from the sale of our OS-9 software assets of $1.1 million.

Cash used in financing activities during the nine months ended September 30, 2013 of $2.1 million relates to cash used for the repayment of $16.9 million of 2013 convertible senior notes, offset by $15.0 million of cash received from draws on our line of credit.

Line of Credit

Silicon Valley Bank

We have a $35.0 million secured revolving line of credit agreement (as amended, the "Agreement") with Silicon Valley Bank ("SVB") with a stated maturity date of July 28, 2016. On November 1, 2013 the Agreement was amended to reduce the total size of the secured revolving credit facility from $40.0 million to $35.0 million, revise the minimum two quarter rolling EBITDA financial covenant for the quarters ended September 30, 3013, December 31, 2013, and March 31, 2014 and modify certain terms within the liquidity ratio, all of which are reflected herein.

The secured revolving credit facility is available for cash borrowings and is subject to a borrowing formula based upon eligible accounts receivable and EBITDA (as defined in the Agreement) non-formula thresholds. Eligible accounts receivable include 80% of domestic and 65% of foreign accounts receivable (70% in certain cases) for our U.S. companies, limited to concentration by certain customers, not greater than 60 days past due and no greater than 120 days from original invoice date. EBITDA non-formula availability is $15.0 million when two rolling quarters EBITDA is $9.0 million or greater and $10.0 million when two rolling quarters EBITDA is $6.0 million or greater but less than $9.0 million. Borrowings under the Agreement bear interest based on a debt to EBITDA ratio where EBITDA is calculated on a rolling four quarter basis. The calculation of interest under the Agreement is as follows:


•	Debt to EBITDA ratio less than 2.0:1.0 - LIBOR, which was 0.18% as of September 30, 2013, plus 2.00%;


•	Debt to EBITDA ratio less than 3.0:1.0, but more than or equal to 2.0:1.0 - LIBOR plus 2.25%;


•	Debt to EBITDA more than or equal to 3.0:1.0 - LIBOR plus 2.50%.

We are required to make interest payments monthly. We are further required to pay a commitment fee equal to $35,000 on the original closing date of the Agreement and annually thereafter and to pay quarterly in arrears an unused facility fee based on the debt to EBITDA ratio as follows: debt to EBITDA ratio less than 2.0:1.0 - 0.375% per year of the unused amount of the facility; and debt to EBITDA ratio of 2.0:1.0 or greater - 0.50% per year of the unused amount of the facility.

The Agreement requires us to make and maintain certain financial covenants, representations, warranties and other agreements that are customary in credit agreements of this type. The Agreement also requires us to maintain the following specific financial covenants:

•

minimum monthly liquidity ratio of 1.25 at the end of intra-quarter months and 1.5 at the end of quarter end months. The liquidity ratio is defined as cash, cash equivalents and short term investments (with cash and cash equivalents held by our foreign subsidiaries not to exceed $10.0 million and excluding any investments held by our foreign subsidiaries) plus eligible accounts receivable, divided by the sum of obligations owing to SVB under the Agreement;

•

31, 2014 and $9.0 million in subsequent quarters; and


•	capital expenditures may not exceed $11.0 million during the period January 1, 2013 to December 31, 2013 and $8.0 million in subsequent years.

As of September 30, 2013 and December 31, 2012, we had outstanding balances of $15.0 million and $0.0 million issued on our behalf under the Agreement. At September 30, 2013, we had $12.2 million of total borrowing availability remaining under the Agreement. After giving effect to the amendment to the Agreement, we were in compliance with all covenants under the Agreement.

2013 Convertible Senior Notes

On February 15, 2013, we repaid at maturity the entire outstanding balance of the 2.75% convertible senior notes due 2013 (the "2013 convertible senior notes") in accordance with the terms thereof.

2015 Convertible Senior Notes

On June 20, 2012, we entered into subscription agreements with certain holders of the 2013 convertible senior notes. Pursuant to the subscription agreements, on June 29, 2012 we exchanged $18.0 million aggregate principal amount of the 2013 convertible senior notes for $18.0 million aggregate principal amount of the new 2015 convertible senior notes. The 2015 convertible senior notes mature on February 15, 2015. Holders of the 2015 convertible senior notes may convert their notes into a number of shares of our 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 2015 convertible senior notes are initially convertible into 117.2333 shares of our common stock per $1,000 principal amount of the notes (which is equivalent to a conversion price of approximately $8.53 per share), subject to adjustment upon the occurrence of certain events. Upon the occurrence of a fundamental change, holders of the 2015 convertible senior notes may require us 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, we may be required in certain circumstances to increase the conversion rate for any 2015 convertible senior notes converted in connection with such fundamental changes by a specified number of shares of our common stock. The 2015 convertible senior notes are general unsecured obligations and rank equal in right of payment to all of our existing and future senior indebtedness, and senior in right of payment to our future subordinated debt. Our obligations under the 2015 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.

As of September 30, 2013 and December 31, 2012, we had outstanding 2015 convertible senior notes with a face value of $18.0 million. As of September 30, 2013 and December 31, 2012, the fair values of our 2015 convertible senior notes were $17.8 million and $17.7 million, which are based on the most recent quoted prices of our publicly traded debt on each balance sheet date.

Contractual Obligations

Our contractual obligations as of December 31, 2012 are summarized in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations," of the Company's Annual Report on Form 10-K for the year ended December 31, 2012. For the nine months ended September 30, 2013, there have been no material changes in our contractual obligations outside the ordinary course of business, except for the repayment of $16.9 million aggregate principal amount of our 2013 convertible senior notes and the $15.0 million draw against our line of credit. As of September 30, 2013, we have agreements regarding foreign currency forward contracts with total contractual values of $18.9 million that mature through 2014.

In addition to the above, we have approximately $3.2 million associated with unrecognized tax benefits. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but do not believe the ultimate settlement of our obligations will materially affect our liquidity.

Off-Balance Sheet Arrangements

We do not engage in any activity involving special purpose entities or off-balance sheet financing.

Liquidity Outlook

At September 30, 2013, our cash and cash equivalents amounted to $31.6 million. We believe that our current cash and cash equivalents combined with the remaining credit available under our line of credit facility will satisfy our short and long-term expected working capital needs, capital expenditures, and other liquidity requirements associated with our existing business operations. We expect to maintain current borrowing levels under our SVB line of credit agreement throughout the remainder of 2013 and 2014. After giving effect to the November 1, 2013 amendment to the line of credit we anticipate maintaining covenant compliance throughout the duration of our anticipated borrowing, ensuring our current borrowing level and available borrowing capacity remains available to us.

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, 2012. There have been no significant changes during the three months ended September 30, 2013 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, 2012.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements including:


•	expectations and goals for revenues, gross margin, research and development ("R&D") expenses, selling, general and administrative ("SG&A") expenses and profits;


•	the impact of our restructuring events on future operating results;


•	timing of revenue recognition;


•	expected customer orders;


•	our projected liquidity;


•	future operations and market conditions;


•	industry trends or conditions and the business environment;


•	future levels of inventory and backlog and new product introductions;


•	financial performance, revenue growth, management changes or other attributes of Radisys following acquisition or divestiture activities; and


•	other statements that are not historical facts.

All statements that relate to future events or to our future performance are forward-looking statements. In some cases, forward-looking statements can be identified by terms such as “may,” “will,” “should,” “expect,” “plans,” “seeks,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “seek to continue,” “consider”, “intends,” or other comparable terminology. These forward-looking statements are made pursuant to safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or our industries’ actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

These factors include, among others, the Company's high degree of customer concentration, the use of a single contract manufacturer for a significant portion of the production of our products, as well as the success of transitioning contract manufacturing partners, key employee attrition, the anticipated amount and timing of revenues from design wins and product orders due to the Company's customers' product development schedule, cancellations or delays, market conditions, matters affecting the embedded system industry, including changes in industry standards, changes in customer requirements and new product introductions, currency exchange rate fluctuations, changes in tariff and trade policies and other risks associated with foreign operations, actions by regulatory authorities or other third parties, the Company's ability to successfully manage the transition from 10G to 40G Advanced Telecommunications Computing Architecture ("ATCA") product technologies, cash generation, the Company's ability to successfully complete any restructuring, acquisition or divestiture activities and other factors described in "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated in the subsequent quarterly reports on Form 10-Q. Although forward-looking statements help provide additional information about us, investors should keep in mind that forward-looking statements are only predictions, at a point in time, and are inherently less reliable than historical information.

We do not guarantee future results, levels of activity, performance or achievements, and we do not assume responsibility for the accuracy and completeness of these statements. The forward-looking statements contained in this report are made and

based on information as of the date of this report. We assume no obligation to update any of these statements based on information after the date of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates, foreign currency exchange rates, and equity trading prices, which could affect our financial position and results of operations.

Foreign Currency Risk. We pay the expenses of our international operations in local currencies, namely, the Canadian Dollar, Euro, Chinese Yuan, Indian Rupee, Japanese Yen, Malaysian Ringgit, and British Pound Sterling. Our international operations are subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, foreign exchange rate volatility and other regulations and restrictions. Accordingly, future results could be materially and adversely affected by changes in these or other factors. We are also exposed to foreign exchange rate fluctuations as the balance sheets and income statements of our foreign subsidiaries are translated into U.S. Dollars during the consolidation process. Because exchange rates vary, these results, when translated, may vary from expectations and adversely affect overall expected profitability.

Based on our policy, we have established a foreign currency exposure management program which uses derivative foreign exchange contracts to address nonfunctional currency exposures. In order to reduce the potentially adverse effects of foreign currency exchange rate fluctuations, we have entered into forward exchange contracts. These hedging transactions limit our exposure to changes in the U.S. Dollar to the Indian Rupee exchange rate, and as of September 30, 2013 the total notional or contractual value of the contracts we held was $18.9 million. These contracts will mature over the next 20 months.

Holding other variables constant, a 10% adverse fluctuation, in relation to our hedge positions, of the U.S. Dollar relative to the Indian Rupee would require an adjustment of $1.8 million and increase our Indian Rupee hedge liability as of September 30, 2013, to $2.9 million. A 10% favorable fluctuation, in relation to our hedge positions, of the U.S. Dollar relative to the Indian Rupee would result in an adjustment of $1.9 million, reversing our Indian Rupee hedge liability and creating a hedge asset as of September 30, 2013, in the amount of $0.9 million. We do not expect a 10% fluctuation to have any material impact on our operating results as the underlying hedged transactions will move in an equal and opposite direction. If there is an unfavorable movement in the Indian Rupee relative to our hedged positions this would be offset by reduced expenses, after conversion to the U.S. Dollar, associated with obligations paid for in the Indian Rupee.

Convertible Notes. The fair value of the 2015 convertible senior notes is sensitive to interest rate changes as well as changes in our stock price. Interest rate changes would result in an increase or decrease in the fair value of the 2015 convertible senior notes due to differences between market interest rates and rates in effect at the inception of the obligation. Fluctuations in our stock price would result in an increase or decrease in the fair values of the 2015 convertible senior notes due to the value of the notes derived from the conversion feature. Unless we elect to repurchase our 2015 convertible senior notes in the open market, changes in the fair value of the 2015 convertible senior notes have no impact on our cash flows or consolidated financial statements. The estimated fair value of the 2015 convertible senior notes were $17.8 million and $17.7 million at September 30, 2013 and December 31, 2012.

Item 4. Controls and Procedures

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.

During our most recent fiscal quarter ended September 30, 2013, no change occurred in the Company's "internal control over financial reporting" (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There are many factors that affect our business and the results of our operations, many of which are beyond our control. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors and Part II, Item 7. 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, 2012, which could materially affect our business, financial condition or future results. The risks described in this report and our Annual Report on Form 10-K for the year ended December 31, 2012 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 6. Exhibits

(a) Exhibits



Exhibit 10.1	Second Amended and Restated Loan and Security Agreement, dated July 29, 2013, between Radisys Corporation and Silicon Valley Bank. Incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 30, 2013 (SEC File No. 000-26844).
Exhibit 10.2	Amendment No. 1 to Second Amended and Restated Loan and Security Agreement, dated November 4, 2013, between Radisys Corporation and Silicon Valley Bank. Incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 4, 2013 (SEC File No. 000-26844).
Exhibit 31.1*	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2*	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1*	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2*	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Presentation Linkbase
101.DEF	XBRL Taxonomy Definition Linkbase



*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		RADISYS CORPORATION
Dated:	November 7, 2013	By:	/s/ Brian Bronson
			Brian Bronson
			President and Chief Executive Officer

Dated:	November 7, 2013	By:	/s/ Allen Muhich
			Allen Muhich
			Chief Financial Officer and Vice President of Finance (Principal Financial and Accounting Officer)

EXHIBIT INDEX



Exhibit 10.1	Second Amended and Restated Loan and Security Agreement, dated July 29, 2013, between Radisys Corporation and Silicon Valley Bank. Incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 30, 2013 (SEC File No. 000-26844).
Exhibit 10.2	Amendment No. 1 to Second Amended and Restated Loan and Security Agreement, dated November 4, 2013, between Radisys Corporation and Silicon Valley Bank. Incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 4, 2013 (SEC File No. 000-26844).
Exhibit 31.1*	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2*	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1*	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2*	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Presentation Linkbase
101.DEF	XBRL Taxonomy Definition Linkbase



*	Filed herewith