UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2005
OR
For the transition period from to
Commission file number: 000-22339
RAMBUS INC.
(Exact name of registrant as specified in its charter)
4440 El Camino Real
Los Altos, CA 94022
(Address of principal executive offices) (Zip Code)
(650) 947-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant as of June 30, 2005 was approximately $914.1 million based upon the closing price reported for such date on the Nasdaq Stock Market. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the Registrant’s common stock, $.001 par value, was 100,907,174 as of January 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant’s next Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Executive Compensation
Item 12.
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
POWER OF ATTORNEY
INDEX TO EXHIBITS
EX-21.1 (Subsidiaries of Registrant)
EX-23.1 (Consent of Independent Registered Public Accounting Firm)
EX-31.1 (Certification of Principal Executive Officer)
EX-31.2 (Certification of Principal Financial Officer)
EX-32.1 (Certification of Chief Executive Officer and Chief Financial Officer)
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This Annual Report on Form 10-K (Annual Report) contains forward-looking statements. These forward-looking statements include, without limitation, predictions regarding the following aspects of our future:
You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A, “Risk Factors.” All forward-looking statements included in this document are based on our assessment of information available to us at this time. We assume no obligation to update any forward-looking statements.
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Rambus, RDRAM, XDR, FlexIO and FlexPhase are trademarks or registered trademarks of Rambus Inc. Other trademarks that may be mentioned in this annual report on Form 10-K are the property of their respective owners.
Industry terminology, used widely throughout this annual report, has been abbreviated and, as such, these abbreviations are defined below for your convenience:
Advanced Backplane
Double Data Rate
Dynamic Random Access Memory
Fully Buffered—Dual Inline Memory Module
Gigabytes per second
Graphics Double Data Rate
Input/Output
Peripheral Component Interconnect
Synchronous Dynamic Random Access Memory
System Packet Interface
From time to time we will refer to the abbreviated names of certain companies and, as such, have provided a chart to indicate the full names of those companies for your convenience.
Advanced Micro Devices Inc.
ARM Holdings plc
Cadence Design Systems, Inc.
Canon Inc.
Cisco Systems, Inc.
Cray Computer Corporation
Elpida Memory, Inc.
Fujitsu Limited
GDA Technologies, Inc.
Hewlett-Packard Company
Hynix Semiconductor, Inc.
Infineon Technologies AG
Inotera Memories, Inc.
Intel Corporation
International Business Machines Corporation
Juniper Networks, Inc.
Matsushita Electrical Industrial Co.
Micron Technologies, Inc.
Mitsubishi Electric Corporation
Nanya Technology Corporation
NEC Electronics Corporation
NurLogic Design, Inc.
Renesas Technology Corporation
S3 Graphics, Inc.
Samsung Electronics Co., Ltd.
Sony Computer Electronics
ST Microelectronics
Synopsys Inc.
Tessera Technologies, Inc.
Texas Instruments Inc.
Toshiba Corporation
Velio Communications
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Item 1. Business
Rambus™ Inc. (“we” or “Rambus”) was founded in 1990 and reincorporated in Delaware in March 1997. Our principal executive offices are located at 4440 El Camino Real, Los Altos, California. Our Internet address is www.rambus.com. You can obtain copies of our Forms 10-K, 10-Q, 8-K, and other filings with the SEC, and all amendments to these filings, free of charge from our website as soon as reasonably practicable following our filing of any of these reports with the SEC. In addition, you may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy, and information statements, and other information regarding registrants that file electronically with the SEC at www.sec.gov.
We invent and license chip interface technologies that are foundational to nearly all digital electronics products. Our chip interface technologies are designed to improve the time-to-market, performance, and cost-effectiveness of our customers’ semiconductor and system products for computing, communications and consumer electronics applications.
Our chip interface technologies are covered by more than 440 U.S. and international patents. Additionally, we have over 480 patent applications currently pending. These patents and patent applications cover important inventions in memory and logic chip interfaces, in addition to other technologies. We believe that our chip interface technologies provide a higher performance, lower risk, and more cost-effective alternative for our customers than can be achieved through their own internal research and development efforts.
We offer our customers two alternatives for using our chip interface technologies in their products:
First, we license our broad portfolio of patented inventions to semiconductor and system companies who use these inventions in the development and manufacture of their own products. Such licensing agreements may cover the license of part, or all, of our patent portfolio. Patent license agreements are royalty bearing.
Second, we develop proprietary and industry-standard chip interface products that we provide to our customers under license for incorporation into their semiconductor and system products. Because of the often complex nature of implementing state-of-the art chip interface technology, we offer our customers a range of engineering services to help them successfully integrate our chip interface products into their semiconductors and systems. Product license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Engineering services are customarily bundled with our product licenses, and are performed on a fixed price basis. Further, under product licenses, our customers may receive licenses to our patents necessary to implement the chip interface in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts.
Background
The performance of computers, consumer electronics and other electronic systems is often constrained by the speed of data transfer between the chips within the system. Ideally, the rate of the data transfer between chips should support the rate of data transfer on-chip. Over the last decade, however, this has not been the case as on-chip frequencies continue to exceed the frequency of communication between chips at a growing rate. Further, the inability to scale packaging technology (number of signal pins on a package) at the rate at which transistor counts scale through improvements in semiconductor process technology only worsens the chip interface “bottleneck.” As a result, continued advances to increase on-chip frequencies or transistor densities face potentially diminishing returns in increasing overall system performance. Our technologies help semiconductor and system designers speed the performance of chip interfaces thus helping to boost the overall performance of electronic systems.
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Our Offerings
Patent Licensing
We derive the majority of our annual revenues by licensing our broad portfolio of patents for chip interfaces to our customers. Such licenses may cover part or all of our patent portfolio. Leading semiconductor and system companies such as AMD, Elpida, Infineon, Intel, Matsushita, NECEL, and Renesas have taken licenses to our patents for use in their own products. Examples of the many patented innovations in our portfolio include:
Fully Synchronous DRAM which is designed to allow precise timing from a DRAM system, improving memory transfer efficiency.
Dual Edge Clockingwhich is designed to allow data to be sent on both the leading and trailing edge of the clock pulse effectively doubling the transfer rate out of a memory core without the need for higher system clock speeds.
Variable Burst Length which is designed to improve data transfer efficiency by allowing varying amounts of data to be sent per a memory read or write request in DRAMs and Flash memory.
FlexPhase™ technology which uses flexible circuits to synchronize data output and compensate for circuit timing errors.
Channel Equalization which is designed to improve signal integrity and system margins by reducing Inter-Symbol Interference in high speed parallel and serial link channels.
Product Licensing
We license our proprietary and industry-standard chip interface products to our customers for use in their semiconductor and system products. Our customers include leading companies such as Elpida, Fujitsu, IBM, Intel, Texas Instruments, Sony, ST Micro, and Toshiba. Due to the complex nature of implementing our technologies, we provide engineering services under certain of these licenses to help successfully integrate our chip interface products into their semiconductors and systems. Additionally, product licensees may receive, as an adjunct to their chip interface license agreements, patent licenses as necessary to implement the chip interface in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts.
Our proprietary chip interface products include the XDR, XDR2 and RDRAM memory chip interface products, the FlexIO processor bus, and the ABP chip interface.
The XDR chip interface enables what we believe to be the world’s fastest production DRAM with operation up to 6.4 Gb/s. XDR DRAM has been selected as the main memory solution for Sony’s upcoming PlayStation®3 as well as a number of as yet unannounced consumer electronic applications.
The XDR2 memory chip interfaceincorporates our recently announced innovation of DRAM microthreading and delivers the world’s highest performance for graphics intensive applications such as gaming and digital video.
RDRAM memory has shipped in the PlayStation®2, Intel-based PCs, Texas Instruments DLPTM TVs and in Juniper routers. Our customers have sold over 500 million RDRAM devices across all applications during its history. This product is approaching end-of-life and we anticipate revenues from RDRAM will continue to decline.
The FlexIO processor bus is what we believe to be the world’s fastest. It is one of our two key chip interface products that enable the Cell processor co-developed by Sony, Toshiba and IBM.
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ABP is a serial link chip interface product which provides for high speed operation in very challenging backplane environments in network switches and routers.
In addition to our proprietary products, we offer industry-standard chip interface products for DDR, DDR-2, GDDR, PCI ExpressTM and Fibre Channel. We also offer digital logic controllers for PCI Express, Gigabit and 10 Gigabit Ethernet, and SPI 4.2.
Target Markets, Applications and Customers
We work with leading and emerging semiconductor and system customers to enable their next generation products. We engage with our customers across the entire product life cycle, from system architecture development, to chip design, to system integration, to production ramp up through product maturation. Our chip interface technologies are incorporated into a broad range of high-volume applications in the computing, consumer electronics and communications markets. System level products that utilize our chip interfaces include servers, printers, video projectors, video game consoles, digital TVs, set-top boxes, routers and switches manufactured by such companies as Canon, Cisco, Cray, Hewlett-Packard, Juniper, Matsushita and Sony.
Our Strategy
The key elements of our strategy are as follows:
Develop Core Technology: Develop and patent our core technology to provide us with a fundamental competitive advantage in memory and logic chip interfaces.
Develop Products: Develop products which incorporate our core technology and provide our customers with the benefits of superior performance, faster time-to-market, lower risk and greater cost effectiveness for a range of applications in computing, communications and consumer electronics.
Engage With Leading Companies: Engage with leading semiconductor and system customers to solve their critical chip interface design problems and incorporate our high performance, low-risk, silicon-proven chip interfaces into their solutions.
License our Chip Interface Technologies: License our patented inventions and specific chip interface products to customers for use in their semiconductor and system products.
Design and Manufacturing
Our chip interface technologies are developed with high-volume manufacturing processes in mind, such as industry-standard complementary metal-oxide semiconductor processes among others, including those available from leading semiconductor manufacturers. Typically, our chip interface products are delivered in one of three ways: implementation package, custom development or off-the-shelf design. We provide implementation packages to licensees who wish to port our chip interface designs to a manufacturing process being used to develop their semiconductor products. This package typically includes a specification, a generalized circuit layout database and test parameter software. We do custom development when licensees have contracted with us to produce a specific design implementation optimized for the licensee’s manufacturing process. In such cases, the licensee provides specific design rules and transistor models for the licensee’s process. We deliver off-the-shelf products when licensees purchase a previously developed chip interface design, which is typically the case with fabless semiconductor companies where the design rules and transistor models are provided by a third-party foundry manufacturer.
Research and Development
Our ability to compete in the future will be substantially dependent on our ability to advance our chip interfaces and patented inventions in order to meet changing market needs. To this end, we have assembled a
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team of highly skilled engineers whose activities are focused on further development of our chip interfaces and patented inventions as well as adaptation of current chip interfaces to specific customers’ processes. Our engineers are developing new chip interfaces and new versions of existing chip interfaces that we expect will allow chip data transfer at higher speeds, as well as provide other improvements and benefits. Our design and development process is a multi-disciplinary effort requiring expertise in system architecture, digital and analog circuit design and layout, semiconductor process characteristics, packaging, printed circuit board routing, signal integrity and high-speed testing techniques.
As of January 31, 2006, we had 237 employees in our engineering departments, representing 69% of our total human resources. For the twelve months ended December 31, 2005, 2004, and 2003, research and development expenses were $41.0 million, $32.6 million and $30.4 million, respectively. We expect to continue to invest substantial funds in research and development activities. In addition, because our license and customer service agreements often call for us to provide engineering support, a portion of our total engineering costs are allocated to the cost of contract revenues, even though some of these engineering efforts have direct applicability to our technology development.
Competition
The semiconductor industry is intensely competitive and has been impacted by price erosion, rapid technological change, short product life cycles, cyclical market patterns and increasing foreign and domestic competition. Some semiconductor companies have developed and support competing logic chip interfaces including their own serial link chip interfaces and parallel bus chip interfaces. We also face competition from semiconductor and intellectual property companies who provide their own DDR memory chip interface technology and solutions. In addition, most DRAM manufacturers, including our RDRAM and XDR licensees, produce versions of DRAM such as SDRAM, DDRx (where the “x” is a number that represents a version) and GDDRx (where the “x” is a number that represents a version) which compete with RDRAM and XDR chips. We believe that our principal competition for memory chip interfaces may come from our licensees and prospective licensees, some of which are evaluating and developing products based on technologies that they contend or may contend will not require a license from us. In addition, our competitors are also taking a system approach similar to ours in seeking to solve the application needs of system companies. Many of these companies are larger and may have better access to financial, technical and other resources than we possess.
The JEDEC Solid State Technology Association, a standards setting body including semiconductor and system companies, has standardized what they call an extension of DDR, known as DDR2. JEDEC is also standardizing what they describe as an extension of DDR that they refer to as DDR3 and a FB-DIMM standard. Other efforts are underway to create other products including those sometimes referred to as GDDR4 and GDDR5, as well as new ways to integrate products such as system-in-package DRAM. To the extent that these alternatives might provide comparable system performance at lower or similar cost than RDRAM and XDR memory chips, or are perceived to require the payment of no or lower royalties, or to the extent other factors influence the industry, our licensees and prospective licensees may adopt and promote alternative technologies. Even to the extent we determine that such alternative technologies infringe our patents, there can be no assurance that we would be able to negotiate agreements that would result in royalties being paid to us without litigation, which could be costly and the results of which would be uncertain.
In the industry standard and proprietary serial link chip interface business, we face additional competition from semiconductor companies that sell discrete transceiver chips for use in various types of systems, from semiconductor companies that develop their own serial link chip interfaces, as well as from competitors, such as ARM and Synopsys, who license similar serial link chip interface products and digital controllers. At the 10 Gb/s speed, competition will also come from optical technology sold by system and semiconductor companies. There are standardization efforts under way or completed for serial links from standard bodies such as PCI-SIG and OIF. We may face increased competition from these types of consortia in the future that could negatively impact our serial link chip interface business. Even to the extent we determine that such alternative technologies infringe
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our patents, there can be no assurance that we would be able to negotiate agreements that would result in royalties being paid to us without litigation, which could be costly and the results of which would be uncertain.
In the FlexIO processor bus chip interface business, we face additional competition from semiconductor companies who develop their own parallel bus chip interfaces, as well as competitors who license similar parallel bus chip interface products. We may also see competition from industry consortia or standard setting bodies that could negatively impact our FlexIO processor bus chip interface business. Even to the extent we determine that such alternative technologies infringe our patents, there can be no assurance that we would be able to negotiate agreements that would result in royalties being paid to us without litigation, which could be costly and the results of which would be uncertain.
As with our memory chip interface products, to the extent that competitive alternatives to our serial or parallel logic chip interface products might provide comparable system performance at lower or similar cost, or are perceived to require the payment of no or lower royalties, or to the extent other factors influence the industry, our licensees and prospective licensees may adopt and promote alternative technologies.
Employees
As of December 31, 2005, we had 333 full-time employees. We believe that our future success is dependent on our continued ability to identify, attract, motivate and retain qualified personnel. To date, we believe that we have been successful in recruiting qualified employees and that our relationship with our employees is excellent.
Patents and Intellectual Property Protection
We maintain and support an active program to protect our intellectual property, primarily through the filing of patent applications and the defense of issued patents against infringement. We currently have more than 440 U.S. and international patents on various aspects of our technology, with expiration dates ranging from 2010 to 2022, and have over 480 pending patent applications. In addition, we attempt to protect our trade secrets and other proprietary information through agreements with licensees and systems companies, proprietary information agreements with employees and consultants and other security measures. We also rely on trademarks and trade secret laws to protect our intellectual property.
Business Segment Data, Customers and Our Foreign Operations
We operate in a single industry segment. Information concerning revenue, results of operations and revenues by geographic area is set forth in Item 6, “Selected Financial Data,” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 11 of our Notes to Consolidated Financial Statements, all of which are incorporated herein by reference. Information concerning identifiable assets is set forth in Note 11 of our Notes to Consolidated Financial Statements, all of which are incorporated herein by reference. Information on customers that comprise 10% or more of our consolidated revenues and risks attendant to our foreign operations is set forth in Item 1A, “Risk Factors.”
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Item 1A. Risk Factors
We face current and potential adverse determinations in litigation stemming from our efforts to protect and enforce our patents and intellectual property, which could broadly impact our intellectual property rights, distract our management and cause a substantial decline in our revenues and stock price.
We seek to diligently protect our intellectual property rights. In connection with the extension of our licensing program to SDRAM-compatible and DDR-compatible products in 2000-01, we became involved in litigation related to such efforts. As of February 21, 2005, we are in litigation with four such potential SDRAM-compatible and DDR-compatible licensees. In each of these cases, we have claimed infringement of our patents while the potential licensees have generally sought damages and a determination that our patents at suit are invalid and not infringed. These potential licensees have also relied or may rely upon defenses and counterclaims (some not yet formally asserted) that our patents are unenforceable based on various allegations concerning our alleged conduct in the 1990s and early 2000s, including that we engaged in document spoliation, litigation misconduct and/or acted improperly during our 1991-96 participation in the JEDEC standard setting organization.
For example, Hynix has now broadened its counterclaims to attempt to include our 1990s relationship with Intel and our alleged disparagement of DDR and SDRAM products in the 1990s and early 2000s. By way of further example, Micron, Hynix, Samsung and Nanya have alleged that we have unclean hands based on alleged litigation misconduct and document spoliation, allegations that overlap with those successfully used by Infineon to obtain the early 2005 dismissal of our patent claims in the our case against Infineon in Virginia. Although we recently defeated Hynix’s similar unclean hands and spoliation claims, Hynix has sought a new trial on these issues or permission to appeal the court’s decision. There can be no assurance that such claims will not again be successfully used to defeat or limit our patent or other claims.
There can be no assurance that parties will not succeed with such claims or counterclaims against us or that they will not in some other way establish broad defenses against our patents, achieve conflicting results, or otherwise avoid or delay paying what we believe to be appropriate royalties for the use of our patents or that the pending litigations and other circumstances will not reach a point where we elect to compromise for less than what we now believe to be fair consideration. Among other things, there can be no assurance that we will succeed in negotiating future settlements or licenses on terms better than those recently extended in our Infineon settlement. There can be no assurances that the circumstances under which we negotiated our Infineon settlement will turn out to be significantly different from the circumstances of future cases and future settlements, although we currently believe that significant differences do exist.
Any of these matters, whether or not determined in our favor or settled by us, is costly, may cause delays, will tend to discourage future design partners, will tend to impair adoption of our existing technologies and diverts the efforts and attention of our management and technical personnel from other business operations. Furthermore, any adverse determination or other resolution in litigation could result in our losing certain rights beyond the rights at issue in a particular case, including, among other things: our being effectively barred from suing others for violating certain or all of our intellectual property rights; our patents being held invalid or unenforceable; our being subjected to significant liabilities; our being required to seek licenses from third parties; our being prevented from licensing our patented technology; or our being required to renegotiate with current licensees on a temporary or permanent basis. Delay or any or all of these adverse results could cause a substantial decline in our revenues and stock price.
An acquisition of all of Infineon’s DRAM operations could make it more difficult for us to obtain royalty rates we believe are appropriate and could reduce the number of companies in our antitrust litigation
Our license with Infineon, which was part of our settlement, provides for the extension of certain benefits under that license to a successor in interest that, under certain conditions, acquires all of Infineon‘s DRAM operations. If such an acquisition were to occur, such successor would be entitled to the extension of such
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benefits, including the ability to pay a royalty calculated by multiplying the Infineon rate by the percentage increase in DRAM volume represented by the successor company’s combined operations. Such an extension of benefits could also make it more difficult for us to obtain the royalty rates we believe are appropriate from the market as a whole. Such an extension of benefits would, in addition, also operate to extend a release of claims to such successor, thus reducing the number of companies to which we believe we are entitled to look for compensation for the antitrust injury alleged by us in our pending San Francisco antitrust action.
An adverse resolution by or with a governmental agency, such as the Federal Trade Commission or the European Commission, could result in severe limitations on our ability to protect and license our intellectual property, and would cause our revenues to decline substantially.
If there were an adverse determination by, or other resolution with, a government agency, it may limit our ability to enforce our intellectual property rights or to obtain licenses, which would cause our revenues to decline substantially. For example, in June 2002, the FTC filed a complaint against us alleging, among other things, that we had failed to disclose certain patents and patent applications during our participation in the establishment of SDRAM standards with JEDEC and that we should be precluded from enforcing our intellectual property rights in patents with a priority date prior to June 1996. Although the initial decision in the FTC proceeding supported our position and dismissed the complaint, that initial decision has been appealed by the FTC staff and may be reversed by the FTC or subject to some future compromise given developments in that case or the totality of circumstances we face. Among other things, the FTC has recently permitted a partial re-opening of the record. The European Commission has directed inquiries to us relating to similar topics. If proceedings by one of these agencies, or any other governmental agency, result in a resolution that could limit our ability to enforce or license our intellectual property, our revenues could decline substantially.
On May 13, 2004, the Technical Appeals Board of the European Patent Office issued its written opinion as to the revocation of European Patent No. 0525068. In addition, on January 13, 2005, an opposition board of the European Patent Office revoked our European Patent No. 004956, and issued its written decision on February 9, 2005. We are appealing this decision to an appellate panel of the European Patent Office. While this result still leaves us with additional issued patents in Europe relating to one or both of SDRAM and DDR SDRAM memory products, there are similar pending opposition proceedings with respect to some of those patents as well. If a sufficient number of such patents are similarly impaired or revoked, our ability to enforce or license our intellectual property would be significantly impaired and this could cause our revenues to decline substantially.
If we are unable to successfully protect our inventions through the issuance and enforcement of patents, our operating results could be adversely affected.
We have an active program to protect our proprietary inventions through the filing of patents. There can be no assurance, however, that:
If any of the above were to occur, our operating results could be adversely affected.
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Our inability to protect and own the intellectual property created by us would cause our business to suffer.
We rely primarily on a combination of license, development and nondisclosure agreements, trademark, trade secret and copyright law, and contractual provisions to protect our other, non-patentable intellectual property rights. If we fail to protect these intellectual property rights, our licensees and others may seek to use our technology without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation. The growth of our business depends in large part on the applicability of our intellectual property to the products of third party manufacturers, and our ability to enforce intellectual property rights against them. In addition, effective trade secret protection may be unavailable or limited in certain foreign countries. Although we intend to protect our rights vigorously, if we fail to do so, our business will suffer.
We might experience payment disputes for amounts owed to us under our licensing agreements, and this may harm our results of operations.
Many of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis. While licenses with such terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, and potentially detrimental to our ongoing business relationship with our licensees. We have implemented a royalty audit program, which consists of periodic royalty audits of our major licensees, using accounting firms that are independent of our independent registered public accounting firm, PricewaterhouseCoopers LLP. We have performed royalty audits from time to time but we primarily rely on the accuracy of the reports from licensees without independently verifying the information in them. Our failure to audit our licensees’ books and records may result in us receiving more or less royalty revenues than we are entitled to under the terms of our license agreements. The result of such royalty audits could result in an increase, as a result of a licensee’s underpayment, or decrease, as a result of a licensee’s overpayment, to previously reported royalty revenues. Such adjustments are recorded in the period they are determined. Any adverse material adjustments resulting from royalty audits or dispute resolutions may result in us missing analyst estimates and causing our stock price to decline. Royalty audits may also trigger disagreements over contract terms with our licensees and such disagreements could hamper customer relations, divert the efforts and attention of our management from normal operations and impact our business operations and financial condition.
If market leaders do not adopt our chip interface products, our results of operation could decline.
An important part of our strategy is to penetrate markets for chip interfaces by working with leaders in those markets. This strategy is designed to encourage other participants in those markets to follow such leaders in adopting our chip interfaces. If a high profile industry participant adopts our chip interfaces but fails to achieve success with its products or adopts and achieves success with a competing chip interface, our reputation and sales could be adversely affected. In addition, some industry participants have adopted, and others may in the future adopt, a strategy of disparaging our memory solutions adopted by their competitors or a strategy of otherwise undermining the market adoption of our solutions.
By way of example, we target system companies to adopt our chip interface technologies, particularly those that develop and market high volume business and consumer products such as PCs and video game consoles. We are subject to many risks beyond our control that influence whether or not a particular system company will adopt our chip interfaces, including, among others:
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Our strategy also includes gaining acceptance of our technology in high volume consumer applications, including video game consoles, such as the Sony PlayStation®2, digital TVs and set top boxes. There can be no assurance that consumer products that currently use our technology will continue to do so, nor can there be any assurance that the consumer products that incorporate our technology will be successful in generating expected royalties, nor can there be any assurance that any of our technologies selected for licensing will be implemented in a commercially developed or distributed product.
If any of these events occur and market leaders do not successfully adopt our technologies, our strategy may not be successful and, as a result, our results of operations could decline.
Our revenue is concentrated in a few customers, and if we lose any of these customers, our revenues may decrease substantially.
For the twelve months ended December 31, 2005, 2004 and 2003, revenues from our top five licensees accounted for approximately 73%, 74% and 75% of our revenues, respectively. For the twelve months ended December 31, 2005, revenues from Intel, Elpida, Toshiba and Matsushita each accounted for greater than 10% of our total revenues. For the twelve months ended December 31, 2004, revenues from Intel, Toshiba and Elpida each accounted for greater than 10% of our total revenues. For the twelve months ended December 31, 2003, revenues from Intel, Toshiba and Samsung each accounted for greater than 10% of our total revenues. We recently entered into agreements with Infineon and AMD, which are expected to account for a significant percentage of our revenues in 2006. We may continue to experience significant revenue concentration for the foreseeable future.
Substantially all of our licensees, including Intel, have the right to cancel their licenses. Failure to renew licenses and/or the loss of any of our top five licensees would cause revenues to decline substantially. Intel is our largest customer and is an important catalyst for the development of new memory and logic chip interfaces in the semiconductor industry. We have a patent cross-license agreement with Intel for which we will receive quarterly royalty payments through the second quarter of 2006. The patent cross-license agreement expires in September 2006, at which time, Intel will have a paid up license for the use of all of our patents claiming priority prior to September 2006. Intel has the right to cancel the agreement with us prior to the expiration of the contract. We have other licenses with Intel, in addition to the patent cross-license agreement, for the development of serial link chip interfaces. If we do not replace the revenues we previously received under the Intel contract, our results of operations may decline significantly.
In addition, some of our commercial agreements require us to provide certain customers with the lowest royalty rate that we provide to other customers for similar technologies, volumes and schedules. These clauses may limit our ability to effectively price differently among our customers, to respond quickly to market forces, or otherwise to compete on the basis of price. The particular licensees which account for revenue concentration have varied from period to period as a result of the addition of new contracts, expiration of existing contracts, industry consolidation, the expiration of deferred revenue schedules under existing contracts, and the volumes and prices at which the licensees have recently sold licensed semiconductors to system companies. These variations are expected to continue in the foreseeable future, although we anticipate that revenue will continue to be concentrated in a limited number of licensees.
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We are in negotiations with licensees to renew SDRAM and DDR-compatible contracts. Two licensees are on interim agreements which will expire this year and one licensee is on an extension which expires this year. We are also in negotiations with new potential licensees. We expect SDRAM and DDR-compatible royalties will continue to vary from period to period based on our success in renewing existing license agreements and adding new licensees, as well as the level of variation in our licensees’ reported shipment volumes, sales price and mix, offset in part by the proportion of licensee payments that are fixed. If we are unsuccessful in renewing any of our SDRAM and DDR-compatible contracts, our results of operations may decline significantly.
Some of our revenue is subject to the pricing policies of our licensees over whom we have no control.
We have no control over our licensees’ pricing of their products and there can be no assurance that licensee products using or containing our chip interfaces will be competitively priced or will sell in significant volumes. One important requirement for our memory chip interfaces is for any premium in the price of memory and controller chips over alternatives to be reasonable in comparison to the perceived benefits of the chip interfaces. If the benefits of our technology do not match the price premium charged by our licensees, the resulting decline in sales of products incorporating our technology could harm our operating results.
We face intense competition that may cause our results of operations to suffer.
JEDEC has standardized what they call an extension of DDR, known as DDR2. JEDEC is also standardizing what they describe as an extension of DDR that they refer to as DDR3 and a FB-DIMM standard. Other efforts are underway to create other products including those sometimes referred to as GDDR4 and GDDR5, as well as new ways to integrate products such as system-in-package DRAM. To the extent that these alternatives might provide comparable system performance at lower or similar cost than RDRAM and XDR memory chips, or are perceived to require the payment of no or lower royalties, or to the extent other factors influence the industry, our licensees and prospective licensees may adopt and promote alternative technologies. Even to the extent we determine that such alternative technologies infringe our patents, there can be no assurance that we would be able to negotiate agreements that would result in royalties being paid to us without litigation, which could be costly and the results of which would be uncertain.
In the industry standard and proprietary serial link chip interface business, we face additional competition from semiconductor companies that sell discrete transceiver chips for use in various types of systems, from semiconductor companies that develop their own serial link chip interfaces, as well as from competitors, such as ARM and Synopsys, who license similar serial link chip interface products and digital controllers. At the 10 Gb/s speed, competition will also come from optical technology sold by system and semiconductor companies. There are standardization efforts under way or completed for serial links from standard bodies such as PCI-SIG and OIF. We may face increased competition from these types of consortia in the future that could negatively impact our serial link chip interface business.
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In the FlexIO processor bus chip interface business, we face additional competition from semiconductor companies who develop their own parallel bus chip interfaces, as well as competitors who license similar parallel bus chip interface products. We may also see competition from industry consortia or standard setting bodies that could negatively impact our FlexIO processor bus chip interface business.
As with our memory chip interface products, to the extent that competitive alternatives to our serial or parallel logic chip interface products might provide comparable system performance at lower or similar cost, or are perceived to require the payment of no or lower royalties, or to the extent other factors influence the industry, our licensees and prospective licensees may adopt and promote alternative technologies, which could negatively impact our memory and logic chip interface business.
If for any of these reasons we cannot effectively compete in these primary market areas, our results of operations could suffer.
Future revenues are difficult to predict for several reasons, including our lengthy and costly licensing cycle, and our failure to predict revenues accurately may cause us to miss analysts’ estimates and result in our stock price declining.
Because our licensing cycle is a lengthy process, the accurate prediction of future revenues from new licenses is difficult. By way of example, the process of persuading system companies to adopt our chip interface technologies can be lengthy and, even if adopted, there can be no assurance that our chip interfaces will be used in a product that is ultimately brought to market, achieves commercial acceptance or results in significant royalties to us. In addition, engineering services are dependent upon the varying level of assistance desired by licensees and, therefore, revenue from these services is also difficult to predict. We employ two methods of contract revenue accounting based upon the state of the technology licensed, the dollar magnitude of the program and the ability to estimate work required over the contract period. We use ratable revenue recognition for mature technologies that require insignificant support after delivery of the technology. This method results in expenses associated with a particular contract to be recognized as incurred over the contract period, whereas contract fees associated with the contract are recognized ratably over the period during which the post contract customer support is expected to be provided. We also use percentage-of-completion accounting for contracts that may require significant development and support over the contract term. There can be no assurance that we can accurately estimate the amount of resources required to complete projects, or that we will have, or be able to expend, sufficient resources required to complete a project. Furthermore, there can be no assurance that the product development schedule for these projects will not be changed or delayed. All of these factors make it difficult to predict future licensing revenue and may result in us missing analysts’ estimates which would likely cause our stock price to decline.
The price of our common stock may fluctuate significantly, which may make it difficult for holders to resell their shares when desired or at attractive prices.
Our common stock is quoted on the NASDAQ National Market under the symbol “RMBS.” The trading price of our common stock has been subject to wide fluctuations which may continue in the future in response to, among other things, the following:
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In addition, the equity markets have experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock, which may make it difficult for holders to resell their shares when desired or at attractive prices.
Our quarterly and annual operating results are unpredictable and fluctuate, which may cause our stock price to be volatile and decline.
Since many of our revenue components fluctuate and are difficult to predict, and our expenses are largely independent of revenues in any particular period, it is difficult for us to accurately forecast revenues and profitability. Factors other than those set forth above that could cause our operating results to fluctuate include:
In the twelve months ended December 31, 2005, 2004 and 2003 royalties accounted for 83%, 83% and 87% of our total revenues, respectively, and we believe that royalties will continue to represent a majority of total revenues for the foreseeable future. Royalties are recognized in the quarter in which we receive a report from a licensee regarding the sale of licensed chips in the prior quarter; however, royalties are only recognized if collectibility is reasonably assured. Some royalties are also dependent upon fluctuating sales volumes and prices of licensed chips that include our technology, all of which are beyond our ability to control or assess in advance. In addition, royalty revenues are affected by the seasonal shipment patterns of systems incorporating our chip interface products, or by a system company change in its source of licensed chips, and the new source’s different royalty rates.
As a result of these uncertainties and effects being outside of our control, royalty revenues are difficult to predict and make accurate financial forecasts difficult to achieve, which could cause our stock price to become volatile and decline.
FASB’s adoption of Statement 123(R) will cause, and changes to existing accounting pronouncements or taxation rules or practices may cause, adverse revenue fluctuations, affect our reported results of operations or how we conduct our business.
In December 2004, FASB issued Statement 123(R), “Share Based Payment.” On April 14, 2005, the SEC announced the adoption of a new rule that amended the compliance dates for SFAS No. 123(R). Under this new rule, companies are allowed to implement SFAS No. 123(R) starting in the first quarter of fiscal year 2006. SFAS No. 123(R) will require us to measure compensation costs for all stock based compensation (including stock options and our employee stock purchase plan, as currently constructed) at fair value and take a compensation charge equal to that value. Also, a change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. Other new accounting pronouncements or taxation rules and varying interpretations of
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accounting pronouncements or taxation practice have occurred and may occur in the future. This change to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
If we cannot respond to rapid technological change in the semiconductor industry by developing new innovations in a timely and cost effective manner, our operating results will suffer.
The semiconductor industry is characterized by rapid technological change, with new generations of semiconductors being introduced periodically and with ongoing improvements. We derive most of our revenue from our chip interface technologies that we have patented. We expect that this dependence on our fundamental technology will continue for the foreseeable future. The introduction or market acceptance of competing chip interfaces that render our chip interfaces less desirable or obsolete would have a rapid and material adverse effect on our business, results of operations and financial condition. The announcement of new chip interfaces by us could cause licensees or system companies to delay or defer entering into arrangements for the use of our current chip interfaces, which could have a material adverse effect on our business, financial results and condition of operations. We are dependent on the industry to develop test solutions that are adequate to test our chip interfaces and to supply such test solutions to our customers and us.
Our continued success depends on our ability to introduce and patent enhancements and new generations of our chip interface technologies that keep pace with other changes in the semiconductor industry and which achieve rapid market acceptance. We must continually devote significant engineering resources to addressing the ever increasing need for higher speed chip interfaces associated with increases in the speed of microprocessors and other controllers. The technical innovations that are required for us to be successful are inherently complex and require long development cycles, and there can be no assurance that our development efforts will ultimately be successful. In addition, these innovations must be:
Finally, significant technological innovations generally require a substantial investment before their commercial viability can be determined. By way of example, our XDR and FlexIO chip interfaces and the manufacturing processes to incorporate them are new and complex, which may lead to technology and product development scheduling risks and there remains significant contract work to be completed, therefore percentage of completion accounting is used for these licenses. There can be no assurance that we have accurately estimated the amount of resources required to complete the projects, or that we will have, or be able to expend, sufficient resources required for these types of projects. In addition, there is market risk associated with these products, and there can be no assurance that unit volumes, and their associated royalties, will occur. If our technology fails to capture or maintain a portion of the high volume consumer market, our business results could suffer.
If we cannot successfully respond to rapid technological changes in the semiconductor industry by developing new products in a timely and cost effective manner our operating results will suffer.
Any dispute regarding our intellectual property may require us to indemnify certain licensees, the cost of which could severely hamper our business operations and financial condition.
In any potential dispute involving our patents or other intellectual property, our licensees could also become the target of litigation. While we generally do not indemnify our licensees, some of our license agreements provide limited indemnities, some require us to provide technical support and information to a licensee that is involved in litigation involving use of our technology, and we may agree to indemnify others in the future. Our support and indemnification obligations could result in substantial expenses. In addition to the time and expense
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required for us to supply such support or indemnification to our licensees, a licensee’s development, marketing and sales of licensed semiconductors could be severely disrupted or shut down as a result of litigation, which in turn could severely hamper our business operations and financial condition.
We may not be able to satisfy the requirements under the Infineon settlement and license agreement that would require Infineon to pay us up to an additional $100.0 million in royalty payments.
On March 21, 2005, we entered into a settlement and license agreement with Infineon (and its former parent Siemens) which, among other things, requires Infineon to pay to us aggregate royalties of $50.0 million in quarterly installments of $5.9 million, which started on November 15, 2005. The settlement and license agreement further provides that if we enter into licenses with certain other DRAM manufacturers, Infineon will be required to make additional royalty payments to us which may aggregate up to $100.0 million. We may not succeed in entering into these additional license agreements necessary to trigger Infineon’s obligations under the settlement and license agreement to pay to us additional royalty payments, thereby reducing the value of the settlement and license agreement to us.
We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, and to defend our intellectual property.
We have indebtedness. On February 1, 2005, we issued $300.0 million aggregate principal amount of zero coupon senior convertible notes due February 1, 2010, of which $160.0 million remains outstanding as of February 21, 2006.
The degree to which we are leveraged could have important consequences, including, but not limited to, the following:
A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of the debt under such instruments and in some cases acceleration of debt under other instruments that may contain cross-default or cross-acceleration provisions. If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness, however, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.
Our business and operating results will be harmed if we are unable to manage growth in our business.
Our business has experienced periods of rapid growth that have placed, and may continue to place, significant demands on our managerial, operational and financial resources. In order to manage this growth, we must continue to improve and expand our management, operational and financial systems and controls. We also need to continue to expand, train and manage our employee base. We cannot assure you that we will be able to
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timely and effectively meet demand and maintain the quality standards required by our existing and potential customers and licensees. If we ineffectively manage our growth or are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed.
We may make future acquisitions or enter into mergers, strategic transactions or other arrangements that could cause our business to suffer.
We may continue to make investments in companies, products or technologies or enter into mergers, strategic transactions or other arrangements. If we buy a company or a division of a company, we may experience difficulty integrating that company or division’s personnel and operations, which could negatively affect our operating results. In addition:
In connection with future acquisitions or mergers, strategic transactions or other arrangements, we may incur substantial expenses regardless of whether the transaction occurs. We may also incur non-cash charges in connection with a merger, acquisition, strategic transaction or other arrangement. In addition, we may be required to assume the liabilities of the companies we acquire. By assuming the liabilities, we may incur liabilities such as those related to intellectual property infringement or indemnification of customers of acquired businesses for similar claims, which could materially and adversely affect our business. We may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve restrictive covenants or be dilutive to our existing stockholders.
A substantial portion of our revenues is derived from sources outside of the United States and these revenues are subject to risks related to international operations that are often beyond our control.
For the twelve months ended December 31, 2005, 2004 and 2003, revenues from our sales to international customers constituted approximately 71%, 69% and 64% of our total revenues, respectively. We currently have international operations in India (design), Japan (sales development), Taiwan (sales development) and Germany (sales development). As a result of our continued focus on international markets, we expect that future revenues derived from international sources will continue to represent a significant portion of our total revenues.
To date, all of the revenues from international licensees have been denominated in U.S. dollars. However, to the extent that such licensees’ sales to systems companies are not denominated in U.S. dollars, any royalties which are based as a percentage of the customers sales, that we receive as a result of such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of licensed semiconductors sold by our foreign licensees were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed semiconductors could fall, which in turn would reduce our royalties. We do not use derivative instruments to hedge foreign exchange rate risk.
Our international operations and revenues are subject to a variety of risks which are beyond our control, including:
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We and our licensees are subject to many of the risks described above with respect to companies which are located in different countries, particularly home video game console and PC manufacturers located in Asia and elsewhere. There can be no assurance that one or more of the risks associated with our international operations could not result in a material adverse effect on our business, financial condition or results of operations.
If we are unable to attract and retain qualified personnel, our business and operations could suffer.
Our success is dependent upon our ability to identify, attract, motivate and retain qualified personnel who can enhance our existing technologies and introduce new technologies. Competition for qualified personnel, particularly those with significant industry experience, is intense. We are also dependent upon our senior management personnel, many of whom have worked together for us for many years. The loss of the services of any of our senior management personnel, or key sales personnel in critical markets, or critical members of staff, or of a significant number of our engineers could be disruptive to our development efforts or business relationships and could cause our business and operations to suffer.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and the NASDAQ National Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.
Although we have complied with the certification and attestation requirements under Section 404 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2005, we may not be able to continue to meet such requirements annually and our failure to satisfy these requirements could adversely affect our financial results and the price of our common stock.
While we have evaluated our internal controls over financial reporting as of December 31, 2005 and complied with the management certification and our Independent Register Public Accounting Firm attestation
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requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in connection with this Form 10-K for the year ended December 31, 2005, we may not continue to meet such certification and attestation requirements annually. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, or if our independent registered public accounting firm is unable to attest to the evaluation, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NASDAQ National Market, which could adversely affect our financial results and the market price of our common stock.
Our operations are subject to risks of natural disasters, acts of war, terrorism or widespread illness at our domestic and international locations, any one of which could result in a business stoppage and negatively affect our operating results.
Our business operations depend on our ability to maintain and protect our facility, computer systems and personnel, which are primarily located in the San Francisco Bay area. The San Francisco Bay area is in close proximity to known earthquake fault zones. Our facility and transportation for our employees are susceptible to damage from earthquakes and other natural disasters such as fires, floods and similar events. Should an earthquake or other catastrophes, such as fires, floods, power loss, communication failure or similar events disable our facilities, we do not have readily available alternative facilities from which we could conduct our business, which stoppage could have a negative effect on our operating results. Acts of terrorism, widespread illness and war could also have a negative effect at our international and domestic facilities.
Our restated certificate of incorporation and bylaws, our stockholder rights plan, and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock.
Our restated certificate of incorporation, our bylaws, our stockholder rights plan and Delaware law contain provisions that might enable our management to discourage, delay or prevent change in control. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. Among these provisions are:
In addition, the provisions in our stockholder rights plan could make it more difficult for a potential acquirer to consummate an acquisition of our company. We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our outstanding voting stock, the person is an “interested stockholder” and may not engage in any “business combination” with us for a period of three years from the time the person acquired 15% or more of our outstanding voting stock.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2005, we occupied buildings in the leased facilities described below:
Number of Buildings
Location
Primary Use
United States
• Los Altos, CA (Headquarters)
• Chapel Hill, NC
• Austin, TX
In January 2006, we signed a lease for a new facility in Mountain View, California to accommodate our growing needs. The primary use of this facility will be for executive, administrative, and sales and marketing functions. We believe that with the addition of this Mountain View lease, our facilities are adequate to meet our current needs.
Item 3. Legal Proceedings
For the information required by this item regarding legal proceeding we refer you to Note 15 titled “Litigation and Asserted Claims” of our Notes to Consolidated Financial Statements of this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the Nasdaq National Market under the symbol “RMBS.” The following table sets forth for the periods indicated the high and low sales price per share of our common stock as reported on the Nasdaq National Market.
Twelve Months Ended
December 31, 2005
December 31, 2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Information regarding our securities authorized for issuance under equity compensation plans is included in Item 12 (“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”) of this report on Form 10-K.
As of January 31, 2006, there were 966 holders of record of our common stock. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future.
Share Repurchase Program
In October 2001, our Board of Directors approved a stock repurchase program of our common stock principally to reduce the dilutive effect of employee stock options. As of December 31, 2005, our Board had authorized the purchase in open market transactions of up to 14.1 million shares of our outstanding common stock over an undefined period of time. As of December 31, 2005, we had repurchased 12.6 million shares of our common stock at an average price per share of $13.05, which includes 4.1 million shares repurchased in connection with our $300.0 million zero coupon senior convertible subordinated note offering on February 1, 2005. As of December 31, 2005, there remained an outstanding authorization to repurchase 1.5 million shares of our outstanding common stock as represented in the table below:
Period
10/1/05 - 10/31/05
11/1/05 - 11/30/05
12/1/05 - 12/31/05
Total
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Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Consolidated Financial Statements and notes thereto provided in Item 15 “Exhibits and Financial Statement Schedules.” For a discussion of factors that could cause the information set forth below to not be indicative of our future financial condition or results of operations, see Item 1A. “Risk Factors.”
December 31,
Operations:
Total revenues
Net income
Net income per share–basic
Net income per share–diluted
Financial Position (at period end):
Cash, cash equivalents and marketable securities
Total assets
Deferred revenue
Convertible notes
On April 10, 2003, the Board of Directors of Rambus voted to change the fiscal year end of Rambus from September 30 to December 31, effective January 1, 2003. As a result, selected financial data above is presented for the twelve months ended December 31, 2005 (audited), 2004 (audited), 2003 (audited), the three months ended December 31, 2002 (audited), 2001 (unaudited), and the twelve months ended September 30, 2002 (audited) and 2001 (audited).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements, including, without limitation, our expectations regarding revenues, expenses and results of operations. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in Item 1A. “Risk Factors,” and below. We assume no obligation to update the forward-looking statements or such risk factors.
Overview
Rambus invents and licenses chip interface technologies that are foundational to nearly all digital electronics products. Our chip interface technologies are designed to improve the time-to-market, performance, and cost-effectiveness of our customers’ semiconductor and system products for computing, communications and consumer electronics applications.
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Second, we develop proprietary and industry-standard chip interface products that we provide to our customers under license for incorporation into their semiconductor and system products. Because of the often complex nature of implementing state-of-the art chip interface technology, we offer our customers a range of engineering services to help them successfully integrate our chip interface products into their semiconductors and systems. Product license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Engineering services are customarily bundled with our product licenses, and are generally performed on a fixed price basis. Further, under product licenses, our customers may receive licenses to our patents necessary to implement the chip interface in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts.
We derive the majority of our annual revenues by licensing our broad portfolio of patents for chip interfaces to our customers. Such licenses may cover part or all of our patent portfolio. Leading semiconductor and system companies such as AMD, Elpida, Infineon, Intel, NECEL, and Renesas have taken licenses to our patents for use in their own products.
We derive additional revenues by licensing our proprietary and industry-standard chip interface products to our customers for use in their semiconductor and system products. Due to the complex nature of implementing our technologies, we provide engineering services under certain of these licenses to help successfully integrate our chip interface products into their semiconductors and systems. Additionally, product licensees may receive, as an adjunct to their chip interface license agreements, patent licenses as necessary to implement the chip interface in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts.
Royalties represent a substantial portion of our total revenue. The remaining part of our revenue is engineering services revenue which includes license fees and engineering services fees. Amounts invoiced to our customers in excess of recognized revenue are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms, and can have a significant impact on deferred revenues in any given period.
We have a high degree of revenue concentration, with our top five licensees representing 73%, 74% and 75% of our revenues for the twelve months ended December 31, 2005, 2004 and 2003, respectively. For the twelve months ended December 31, 2005, revenue from Intel, Elpida, Toshiba and Matsushita, each accounted for greater than 10% of our total revenues. For the twelve months ended December 31, 2004, revenue from Intel, Toshiba and Elpida, each accounted for greater than 10% of our total revenues. For the twelve months ended December 31, 2003, revenues from Intel, Toshiba and Samsung, each accounted for greater than 10% of total revenues. Our revenue from companies based outside of the United States accounted for 71%, 69% and 64% of our revenues for the twelve months ended December 31, 2005, 2004 and 2003, respectively. We expect that we will have significant revenues from companies based outside the United States for the foreseeable future and our revenue concentration will decrease over time as we license new customers.
For the last five years, we have been involved in significant litigation stemming from the unlicensed use of our inventions. Our litigation expenses have been high and difficult to predict during this time and we anticipate future litigation expenses to continue to be significant, volatile and difficult to predict. If we are successful in the litigation and/or related licensing, our revenue could be substantially higher in the future; if we are unsuccessful, our revenue would likely decline.
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Revenue Concentration
As indicated in the section titled “Overview,” we have a high degree of revenue concentration. Many of our licensees have the right to cancel their licenses, and if we are unable to replace the revenue attributable to our agreement with Intel, currently one of our top five licensees, which will end in June 2006, our revenues could decline substantially. The particular licensees which account for revenue concentration have varied from period to period as a result of the addition of new contracts, expiration of existing contracts, industry consolidation, the expiration of deferred revenue schedules under existing contracts, and the volumes and prices at which the licensees have recently sold licensed semiconductors to system companies. These variations are expected to continue in the foreseeable future, although we expect that our revenue concentration will decrease over time as we license new customers.
The royalties we receive are partly a function of the adoption of our chip interfaces by system companies. Many system companies purchase semiconductors containing our chip interfaces from our licensees and do not have a direct contractual relationship with us. Our licensees generally do not provide detail as to the identity or volume of licensed semiconductors purchased by particular system companies. As a result, we face difficulty in analyzing the extent to which our future revenues will be dependent upon particular system companies. System companies face intense competitive pressure in their markets, which are characterized by extreme volatility, frequent new product introductions and rapidly shifting consumer preferences. There can be no assurance as to the unit volumes of licensed semiconductors that will be purchased by these companies in the future or as to the level of royalty-bearing revenues that our licensees will receive from sales to these companies. Additionally, there can be no assurance that a significant number of other system companies will adopt our chip interfaces or that our dependence upon particular system companies will decrease in the future.
International Revenues
We expect that revenues derived from international licensees will continue to represent a significant portion of our total revenues in the future. To date, all of the revenues from international licensees have been denominated in U.S. dollars. However, to the extent that such licensees’ sales to systems companies are not denominated in U.S. dollars, any royalties that we receive as a result of such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of licensed semiconductors sold by our foreign licensees were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed semiconductors could fall, which in turn would reduce our royalties. We do not use derivative instruments to hedge foreign exchange rate risk.
For additional information concerning international revenues, see Note 11 titled “Business Segments, Exports and Major Customers” of our Notes to Consolidated Financial Statements of this Form 10-K.
Expenses
We intend to continue making significant expenditures associated with engineering, marketing, general and administration including litigation expenses, and expect that these costs and expenses will continue to be a significant percentage of revenues in future periods. Whether such expenses increase or decrease as a percentage of revenues will be substantially dependent upon the rate at which our revenues change.
Engineering. Engineering costs are allocated between cost of contract revenues and research and development expenses. Cost of contract revenues is determined based on the portion of engineering costs which have been incurred during the period of the adaptation of our chip interfaces for specific licensee processes. The balance of engineering costs, incurred for general development of our chip interfaces, is charged to research and development. In a given period, the allocation of engineering costs between these two components is a function of the timing of development and implementation cycles. Engineering costs are recognized as incurred and do not correspond to the recognition of revenues under the related contracts.
Marketing, general and administrative. Marketing, general and administrative expenses include expenses and costs associated with trade shows, public relations, advertising, legal, finance, insurance and other marketing and
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administrative efforts. Litigation expenses are a significant portion of our marketing, general and administrative expenses and they can vary significantly from quarter to quarter. Consistent with our business model, sales and marketing activities are focused on developing relationships with potential licensees and on participating with existing licensees in marketing, sales and technical efforts directed to system companies. In many cases, we must dedicate substantial resources to the marketing and support of system companies. Due to the long business development cycles we face and the semi-fixed nature of marketing, general and administrative expenses in a given period generally are unrelated to the level of revenues in that period or in recent or future periods.
Taxes. We report certain items of income and expense for financial reporting purposes in different years than they are reported for tax purposes. Specifically, we report contract fees and royalties when received for tax purposes, as required by tax law. For financial reporting purposes, however, we recognize revenues from XDR, FlexIO, and RDRAM contract fees, assuming collectibility, either ratably over the period post-contract customer support is expected to be provided or by using the percentage-of-completion method of accounting, depending upon the nature of the contract. We recognize revenues from SDRAM-compatible and DDR-compatible license fees, assuming collectibility, over the contract period and recognize royalty revenues upon notification from licensees. Thus, we recognize revenue earlier for tax than for financial reporting purposes. Accordingly, our net operating profit or loss for tax purposes may be more or less than the amount recorded for financial reporting purposes.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in our consolidated condensed statements of operations:
Revenues:
Contract revenues
Royalties
Costs and expenses:
Cost of contract revenues
Research and development
Marketing, general & administrative
Litigation
Total costs and expenses
Operating income
Interest and other income, net
Income before income taxes
Provision for income taxes
2004 to 2005
Change
2003 to 2004
Total Revenues (in millions)
Contract revenue
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Please refer to Critical Accounting Policies, “Revenue Recognition” on page 49 for a more detailed explanation of our revenue recognition policies on percentage of completion contracts, other contracts and royalties.
Contract Revenue
Percentage of Completion Contracts
For the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004, percentage of completion contract revenue increased by approximately $0.2 million due to new XDR and FlexIO chip interface contracts offset in part by the decrease in recognition of revenue associated with XDR, FlexIO and serial link chip interface contracts originating prior to 2005.
For the twelve months ended December 31, 2004 as compared to the twelve months ended December 31, 2003, percentage of completion contract revenue increased by $7.6 million due to the increase in recognition of revenue associated with our XDR, FlexIO, and serial link chip interface contracts. The increase in recognition of revenue during 2004 was primarily a result of the increase in the amount of work performed under these contracts.
We believe that percentage of completion contract revenues recognized will continue to fluctuate over time based on our ongoing contractual requirements, cash received, the amount of work performed, and by changes to work required, as well as new contracts booked in the future. Most of our XDR and FlexIO contracts were complete as of the twelve months ending December 31, 2005. If new percentage of completion contracts are not signed and implemented our contract revenue may decline.
Other Contracts
For the twelve months ended December 31, 2005 as compared to the same period in 2004, revenue which is recognized over the estimated service periods increased by approximately $1.9 million primarily due to the increase in recognition of revenue associated with DDR, serial link, XDR and FlexIO contracts.
For the twelve months ended December 31, 2004 as compared to the same period in 2003, revenue which is recognized over the estimated service periods increased by approximately $1.6 million primarily due to the increase in recognition of revenue associated with serial link interface contracts.
Royalty Revenues
Patent Licenses
In the twelve months ended December 31, 2005, 2004 and 2003, our largest source of royalties was related to the license of our patents for SDRAM and DDR-compatible products. Royalties increased by approximately $12.4 million for SDRAM and DDR-compatible products in the twelve months ended December 31, 2005 as compared to the same period in 2004, primarily due to increased shipment volumes of SDRAM and DDR controllers and the first quarterly royalty payment from Infineon. Royalties increased by approximately $20.0 million for SDRAM and DDR-compatible products in the twelve months ended December 31, 2004 as compared to the same period in 2003, primarily due to increased shipment volumes of SDRAM and DDR controllers.
As of December 31, 2005, SDRAM and DDR-compatible royalties were based on a percentage of the licensee’s revenue with the exception of four contracts; for which fixed quarterly payments are made. On December 31, 2005, we entered into a five-year patent license agreement with AMD. We expect to recognize royalty revenues under the AMD agreement on a quarterly basis as amounts become due and payable as the contractual terms of the agreement provide for payments on an extended term basis. The first amounts due and payable under the AMD agreement begin in the first quarter of 2006. We expect to recognize royalty revenues of
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$18.8 million in the year 2006, $15.0 million in the years 2007 through 2009 and $11.3 million in the year 2010 under the AMD agreement. The AMD agreement provides a license to our patents used in the design of DDR2, DDR3, FB-DIMM, PCI Express and XDR controllers as well as other current and future high-speed memory and logic controller interfaces. No revenue was recognized under the AMD agreement in 2005. As of December 31, 2004, SDRAM and DDR-compatible royalties were based on a percentage of the licensee’s revenue with the exception of two contracts that allowed for fixed quarterly payments.
We are in negotiations with licensees to renew SDRAM and DDR-compatible contracts. Two licensees are on interim agreements which will expire in April and October of 2006 and one licensee is on an extension which also expires in July of 2006. We are also in negotiations with new potential licensees. We expect SDRAM and DDR-compatible royalties will continue to vary from period to period based on our success in renewing existing license agreements and adding new licensees, as well as the level of variation in our licensees’ reported shipment volumes, sales price and mix, offset in part by the proportion of licensee payments that are fixed. We estimate that SDRAM and DDR-compatible royalties will increase in 2006 as compared to 2005. The estimated increase is primarily a result of a full year’s worth of royalties for Infineon and AMD.
The Intel patent cross-license agreement represented the second largest source of royalties in the twelve months ended December 31, 2005, 2004 and 2003. Royalties under this agreement were unchanged in the twelve months ended December 31, 2005 as compared to the same periods in 2004 and 2003. We expect to continue recognizing revenue from this agreement through June 30, 2006, at which time, Intel will have a paid-up license for the use of all of the patents that we own claiming priority prior to September 30, 2006 and for which we own applications as of that date. If we are unable to replace the revenue attributable to our agreement with Intel, currently one of our top five licensees, which will end in June 2006, our revenues could decline substantially.
Product Licenses
In the twelve months ended December 31, 2005, 2004 and 2003, royalties from RDRAM-compatible products represented the third largest source of royalties. Royalties from RDRAM memory chips and controllers decreased during the twelve months ended December 31, 2005 as compared to the same period in 2004 by approximately $3.4 million, Royalties decreased during the twelve months ended December 31, 2005 as compared to the same period in 2004 as a result of lower shipment volumes of memory chips, and lower shipment volumes and lower average selling prices of memory controllers. RDRAM is approaching end-of-life and in the future, we expect RDRAM royalties will continue to decline.
In the twelve months ended December 31, 2004 as compared to the same period in 2003, royalties from RDRAM-compatible products decreased by approximately $2.7 million as a result of decreased shipments of RDRAM memory chips offset in part by an increase in royalties from RDRAM controllers. We believe that the decrease in royalties for RDRAM memory chips for the twelve months ended December 31, 2004 as compared to the same period in 2003 was mostly driven by a decline in shipments of RDRAM memory chips for Intel’s 850E chipset.
Royalties from XDR, FlexIO and serial link-compatible products represent the fourth largest category of royalties. Royalties from XDR, FlexIO and serial link-compatible products increased during the twelve months ended December 31, 2005 as compared to the same period in 2004 by approximately $1.2 million. This increase was primarily a result of minimum guaranteed royalties from a contract for serial link-compatible products. Royalties from XDR, FlexIO and serial link-compatible products increased during the twelve months ended December 31, 2004 as compared to the same period in 2003 by approximately $0.2 million.
In the future, we expect XDR, FlexIO and serial link royalties will continue to vary from period to period based on our licensees’ shipment volumes, sales prices, and product mix. We expect that XDR and FlexIO royalties will increase associated with the expected launch of the Sony PlayStation®3 product.
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Engineering costs (in millions)
For the twelve months ended December 31, 2005 as compared to the same period in 2004, the increase in total engineering costs was a result of increased compensation costs (approximately $2.4 million) associated with the hiring of approximately 76 employees (27 in the U.S and 49 in India), increased amortization of intangible asset costs (approximately $1.8 million) associated with the purchase of digital core design assets from GDA during the second quarter of 2005 and the purchase of serial link intellectual property from Cadence during the third quarter of 2004, increased consulting costs (approximately $1.2 million), and increased depreciation and amortization costs (approximately $1.0 million).
For the twelve months ended December 31, 2004 as compared to the same period in 2003, the increase in total engineering costs was a result of the increase in compensation costs (approximately $2.6 million) primarily due to the hiring of approximately 54 additional employees in 2003, amortization costs as part of our purchase of serial link intellectual property from Velio during the quarter ended December 31, 2003 (approximately $1.3 million), amortization costs as part of our purchase of serial link intellectual property from Cadence during the quarter ended September 30, 2004 (approximately $1.2 million) and an increase in patent filing costs (approximately $1.2 million).
In the future, we expect that engineering costs will continue to increase associated with accounting for stock-based compensation and continued investments in high performance chip interface technologies.
Marketing, general andadministrative costs (in millions)
Marketing, general and administrative costs
Litigation expense
Total marketing, general and administrative costs
The increase in total marketing, general and administrative costs including litigation expense for the twelve months ended December 31, 2005 as compared to the same period in 2004 was primarily due to increased expenses associated with the defense of our intellectual property (approximately $15.2 million), increased compensation costs (approximately $4.3 million) primarily due to the hiring of approximately 23 employees and stock-based compensation costs associated with the restricted stock grant to our CEO in the first quarter of 2005, increased information technology costs (approximately $1.8 million) primarily due to increased investment in business applications and infrastructure, and increased professional services costs (approximately $0.7 million).
The increase in total marketing, general and administrative costs including litigation expense for the twelve months ended December 31, 2004 as compared to the same period in 2003 was primarily due to increased expenses, associated with the defense of our intellectual property (approximately $2.7 million), increased investments in sales and marketing (approximately $1.6 million) which included marketing events, compensation costs and public relations, increased corporate governance costs (approximately $1.2 million) and increased legal personnel expenses (approximately $1.1 million) which included recruiting and compensation costs.
In the future, we expect that marketing, general and administrative expenses will vary from period to period based on the legal, trade shows, advertising, and other marketing and administrative activities undertaken, accounting for stock options and the change in sales, marketing and administrative headcount in any given period. Litigation expenses are expected to vary from period to period due to the volatility of litigation activities.
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Please refer to Note 15, “Litigation and Asserted Claims” of our Notes to Consolidated Financial Statements for a more detailed explanation of our litigation activities.
Interest and other income, net(in millions)
In the twelve months ended December 31, 2005, as compared to the same period in 2004, the increase consists primarily of gains on the purchases of the outstanding convertible notes that were issued in the first quarter of 2005 (approximately $24.0 million, net of unamortized note issuance costs) and higher interest income primarily due to higher cash and marketable securities balances and interest rates (approximately $8.0 million), offset by amortization of note issuance costs (approximately $1.1 million), the 2004 pre-tax gain on the sale of our investment in Tessera (approximately $3.6 million), and the 2004 pre-tax gain in 2004 from a default on a sublease of our former headquarters (approximately $0.4 million).
In the twelve months ended December 31, 2004 as compared to the same period in 2003, the increase in interest and other income, net was primarily due to a gain on the sale of our investment in Tessera in 2004 (approximately $3.6 million).
In the future, we expect that Interest and other income, net will vary from period to period based upon notes purchases to extent the purchase value is less than face value, the amount of cash and marketable securities and interest rates.
Provision for income taxes(in millions)
In the twelve months ended December 31, 2005, our effective tax rate was approximately 40.5% as compared with a rate of approximately 29.9% for the comparable period in 2004. The effective tax rate increased primarily due to a reduction in foreign tax credits, a reduction in research and development tax credits, and nondeductible stock compensation, partially offset by a decrease in state taxes.
In the twelve months ended December 31, 2004, our effective tax rate was approximately 30% as compared with a rate of approximately 32% for the twelve months ended December 31, 2003. The effective tax rate decreased primarily due to state taxes and research and development tax credits.
In the twelve months ended December 31, 2005, we decreased our net deferred tax assets by $16.5 million, mainly due to tax benefits from the use of net operating loss, the recognition of deferred revenue, and the tax amortization of intangible assets, partially offset by an increase in tax credits.
The deferred tax asset valuation allowance of $0.9 million is subject to periodic adjustment as facts and circumstances warrant. The ability to realize the deferred tax asset is dependent on sufficient levels of future taxable income and other factors.
Contingent Warrants, Common Stock Equivalents, and Options
Warrants
In October 1998, our Board of Directors authorized an incentive program in the form of warrants for a total of up to 1,600,000 shares of our common stock to be issued to various RDRAM licensees. The warrants, which
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were issued at the time certain targets were met, have an exercise price of $2.50 per share and a life of five years from the date of issuance. These warrants vest and become exercisable only upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM chipsets, which could result in a non-cash charge to the statement of operations based on the fair value of the warrants if and when the achievement of the Intel milestones becomes probable. Since Intel has phased out the 850E chipset, we consider the likelihood that the unvested warrants will vest is remote. As of December 31, 2005, warrants exercisable for a total of 1,520,000 shares had been issued and 280,000 remain outstanding. The remainder of these outstanding warrants expired in January 2006. The impact of these warrants has been excluded from the calculation of net income per share.
Contingent Common Stock Equivalents and Options
As of December 31, 2005, there were 1,000,000 contingent unvested Common Stock Equivalents, or CSEs, and 799,346 contingent unvested options, which vest upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM chipsets. These CSEs were granted to our previous Chief Executive Officer (CEO) and President in 1999 and the options were granted to certain of our employees in 1999 and 2001. The CSEs were granted with a term of 10 years and the options were granted with an exercise price of $2.50 and a term of 10 years. If and when the achievement of the Intel milestones become probable, there would be an almost entirely non-cash charge to our statement of operations based on the fair value of the CSEs and options. Since Intel has phased out the 850E chipset, we consider the likelihood that the unvested CSEs and options will vest is remote. The impact of these CSEs and options has been excluded from the calculation of net income per share.
In October 2001, our Board of Directors approved a stock repurchase program of our common stock principally to reduce the dilutive effect of employee stock options. Since the beginning of the program, our Board has authorized the purchase in open market transactions of up to 14.1 million shares of our outstanding common stock over an undefined period of time. As of December 31, 2005, we had repurchased 12.6 million shares of our common stock at an average price per share of $13.05, which includes 4.1 million shares repurchased in connection with our $300.0 million zero coupon senior convertible subordinated note offering on February 1, 2005. As of December 31, 2005, there remained an outstanding authorization to repurchase 1.5 million shares of our outstanding common stock.
Liquidity and Capital Resources
Cash flows (in millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
As of December 31, 2005, we had cash and cash equivalents and marketable securities of $355.4 million, including a long-term component of $194.6 million. As of December 31, 2005, we had total working capital of $149.2 million, including a short-term component of deferred revenue of $1.0 million. Deferred revenue represents the excess of billings to licensees over revenue recognized on license contracts, and the short-term component represents the amount of this deferred revenue expected to be recognized over the next twelve months.
Operating Activities
Cash generated by operating activities in the twelve months ended December 31, 2005 was primarily the result of net income of $33.7 million adjusted for certain non-cash and non-operating items including a gain on
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the repurchase of our convertible notes ($24.0 million), depreciation (approximately $9.2 million), amortization of intangible assets and note issuance costs (approximately $5.4 million), amortization of stock-based compensation (approximately $2.7 million), a decrease in prepaids, deferred taxes and other assets (approximately $16.1 million), and an increase in the tax benefit of stock options exercised (approximately $3.6 million). This cash generated by operating activities was partially offset by a net decrease in deferred revenue (approximately $14.5 million). The net decrease in deferred revenue represents revenues recognized in excess of contract billings during the period, primarily related to the revenue associated with our XDR and FlexIO contracts.
Cash generated by operating activities in the twelve months ended December 31, 2004 was primarily the result of net income of $33.6 million adjusted for certain non-cash items, including depreciation and amortization of $8.1 million and an increase in tax benefit of stock options exercised of $39.5 million. Operating activities were also affected by a decrease in accounts receivable of $8.8 million primarily related to payments received under XDR and FlexIO chip interface contracts. This cash generated from operating activities was partially offset by an increase in prepaids, deferred taxes and other assets of $31.0 million based primarily due to our election to capitalize certain research and development expenses for tax purposes and a net decrease in deferred revenue of $18.4 million resulting from contract revenues recognized in excess of contract billings primarily related to increased revenues for XDR and FlexIO chip interface contracts in which billings were made in the prior year.
In the twelve months ended December 31, 2003, net cash provided by operations was primarily the result of net income of $23.2 million adjusted for certain non-cash items, including depreciation of $5.6 million and the tax benefit resulting from stock options exercised of $19.2 million. Operating activities were also affected by a net increase to deferred revenue of $4.4 million resulting from contract billings in excess of contract revenues recognized, partially offset by an increase in accounts receivable of $9.2 million primarily due to increased billings for the XDR and FlexIO chip interface contracts and increases in prepaids, deferred taxes and other assets of $18.6 million, primarily due to increased foreign withholding taxes paid on payments received from international licensees and the renewal of software maintenance contracts.
Investing Activities
Cash used in investing activities in the twelve months ended December 31, 2005 primarily consisted of net purchases of marketable securities (approximately $125.6 million) resulting from the investment of a portion of the net proceeds from the issuance of convertible notes. In addition, $5.4 million was used to acquire certain proprietary digital core designs from GDA, $2.5 million was used to acquire certain serial link intellectual property assets from Cadence and $7.9 million was used for the purchase of property and equipment, including computer and software purchases in the United States and computer equipment, software, leasehold improvements and office equipment and furniture for a new facility in India. The change is partially offset by a reduction in restricted investments (approximately $2.8 million) due to the settlement in the Infineon case, which removed the restrictions in restricted investments, as discussed in Note 15 titled “Litigation and Asserted Claims” of our Notes to Consolidated Financial Statements of this Form 10-K.
Cash used in investing activities for the twelve months ended December 31, 2004 primarily consisted of net purchases and maturities of marketable securities of $42.6 million and cash paid for the acquisition and related acquisition costs of certain serial link intellectual property assets from Cadence totaling $11.1 million and $12.3 million for purchases of property and equipment (including software tools purchased from Cadence). These uses of cash were partially offset by proceeds of $5.6 million from the sale of our investment in Tessera.
In the twelve months ended December 31, 2003, cash used in investing activities primarily consisted of cash paid for the acquisition and related acquisition costs of certain signaling assets of Velio totaling $13.2 million and purchases of property and equipment of $4.2 million, partially offset by a reduction in restricted investments of $7.4 million based on a favorable litigation ruling which removed restrictions on certain investments and proceeds of $4.5 million received on the sale of our investment in NurLogic.
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Financing Activities
Net cash provided by financing activities was $99.7 million in the twelve months ended December 31, 2005. We received net proceeds from the issuance of convertible notes (approximately $292.8 million) and net proceeds from the issuance of common stock associated with exercises of employee stock options and common stock issued under our employee stock purchase plan (approximately $8.5 million). This cash provided from the issuance of convertible notes and common stock was partially offset by the repurchase of our common stock (approximately $88.2 million) and the repurchases of outstanding convertible notes (approximately $113.0 million). In addition, we paid approximately $0.4 million out of $2.8 million under an installment payment arrangement relating to a property and equipment purchase.
Cash generated by financing activities in the twelve months ended December 31, 2004, was the result of net proceeds of $45.1 million from the issuance of common stock associated with exercises of employee stock options and stock issued under the employee stock purchase plan. This cash provided from the issuance of common stock was partially offset by $21.7 million we used to repurchase common stock under our stock repurchase program.
In the twelve months ended December 31, 2003, we generated net proceeds of $25.9 million from the issuance of common stock and used cash of $29.8 million to repurchase common stock.
We currently anticipate that existing cash and cash equivalent balances and cash flows from our operating activities will be adequate to meet our cash needs for at least the next 12 months.
Contractual Obligations
We lease our present office facilities in Los Altos, California, under an operating lease agreement through December 31, 2010. As part of this lease transaction, we provided a letter of credit restricting $600,000 of our cash as collateral for certain of our obligations under the lease. The cash is restricted as to withdrawal and is managed by a third party subject to certain limitations under our investment policy. We also lease a facility in Chapel Hill, North Carolina through November 15, 2009 and lease a facility for our design center in Bangalore, India through November 30, 2009. In addition, as a result of our acquisition of GDA in 2005, we entered into a lease for an additional facility in Bangalore, India through March 31, 2007. As a result of the GDA acquisition, we also accrued $1.0 million which was due to GDA upon the second and final closing of the acquisition, which occurred in January 2006.
On February 1, 2005, we issued $300.0 million aggregate principal amount of convertible notes due February 1, 2010 to Credit Suisse First Boston LLC (Credit Suisse) and Deutsche Bank Securities (Deutsche Bank). We elected to pay the principal amount of the convertible notes in cash when they are due and the initial conversion price of the convertible notes is $26.84 per share. Subsequently, we have repurchased a total of $140.0 million face value of the outstanding notes. As a result, the convertible notes outstanding and payable as of December 31, 2005 were reduced to $160.0 million. See Note 14 titled “Convertible Notes” of our Notes to Consolidated Financial Statements for the terms of these notes.
As of December 31, 2005, our material contractual obligations are (in thousands):
More than
5 years
Operating Leases
Long-Term Debt
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In January 2006, we signed a lease for an additional facility in Mountain View, California through November 11, 2009. Our operating lease obligations under this lease are $476,000 in the “less than 1 year” category, $1.0 million in the “1-3 years” category and $468,000 in the “3-5 years” category and are not reflected in the table above.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, investments, income taxes, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our revenue recognition policy is based on the American Institute of Certified Public Accountants Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2) as amended by Statement of Position 98-4 (SOP 98-4) and Statement of Position 98-9 (SOP 98-9). Additionally, revenue is recognized on some of our products, according to Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).
We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. If any of these criteria are not met, we defer recognizing the revenue until such time as all criteria are met.
Our revenues consist of royalty revenues and contract revenues generated from agreements with semiconductor companies, system companies and certain reseller arrangements. Royalty revenues consist of product license royalties and patent license royalties. Contract revenues consist of license fees and engineering fees associated with integration of our chip interface products into our customers’ products. Reseller arrangements generally provide for the payment of license fees associated with the marketing, distribution and sublicensing, and in some circumstances, fabricating of our interface technologies. Many of our licensees have the right to cancel their licenses. Revenue is only recognized to the extent that it is permitted in the cancellation provisions and any cancellations would have an effect on revenue recognition that is prospective in nature.
We recognize royalty revenues upon notification by the licensees if collectibility is reasonably assured. The terms of the royalty agreements generally either require licensees to give us notification and to pay the royalties within 60 days of the end of the quarter during which the sales occur or are based on a fixed royalty that is due within 45 days of the end of the quarter. From time to time, we engage accounting firms independent of our independent registered public accounting firm to perform, on our behalf, periodic audits of some of the licensee’s reports of royalties to us and any adjustment resulting from such royalty audits is recorded in the period such adjustment is determined. We have two types of royalty revenues: (1) product license royalties and (2) patent license royalties.
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Product licenses. We develop proprietary and industry-standard chip interface products, such as RDRAM and XDR, that we provide to our customers under product license agreements which are incorporated into their semiconductor and systems products. These arrangements include royalties which can be based on either a percentage of sales or number of units sold. We recognize revenue from these arrangements on a quarterly basis upon notification from the licensee if collectibility is reasonably assured.
Patent licenses. We license our broad portfolio of patented inventions to semiconductor and systems companies, such as Intel and AMD, who use these inventions in the development and manufacture of their own products. Such licensing agreements may cover the license of part, or all, of our patent portfolio. We recognize revenue from these arrangements on a quarterly basis as amounts become due and payable as the contractual terms of the agreement provide for payments on an extended term basis.
We have elected to recognize revenue in accordance the provisions of SOP 81-1 for licenses of our chip interface products, such as XDR and FlexIO that involve significant engineering services to help our customers integrate our chip interface products into their semiconductors and systems, Revenues from such licenses are recognized over the period that we perform services. Revenues derived from such license and engineering services are recognized using the percentage-of-completion method. For all license and service agreements accounted for using the percentage-of-completion method, we determine progress-to-completion using input measures based on labor-hours incurred. A provision for estimated losses on fixed price contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. We review assumptions regarding the work necessary to complete projects on a quarterly basis. If we determine that it is necessary to revise the estimates of the work required to complete a contract, the total amount of revenue recognized over the life of the contract would not be affected. However, to the extent the new assumptions regarding the total amount of work necessary to complete a project were less than the original assumptions, the contract fees would be recognized sooner than originally expected. Conversely, if the new estimated total amount of work necessary to complete a project was longer than the original assumptions, the contract fees would be recognized over a longer period.
We have elected to recognize revenue in accordance with SOP 97-2, SOP 98-4 and SOP 98-9 for licenses of our chip interface products that don’t involve significant engineering services. These SOPs apply to all entities that earn revenue on products containing software, where software is not incidental to the product as a whole. Contract fees for the products and services provided under these agreements are comprised of license fees and engineering service fees. Contract fees are bundled together as the total price of the agreement does not vary as a result of inclusion or exclusion of services and vendor specific objective evidence, or VSOE, for the undelivered element has not been established. Accordingly, after we have delivered the product and the only undelivered element is post-contract customer support (PCS), we recognize revenue ratably over either the contractual PCS period or the period during which PCS is expected to be provided. These remaining PCS obligations are essential to the functionality of the product and are primarily to keep the product updated and include activities such as responding to inquiries and periodic customer meetings. Part of these contract fees may be due upon the achievement of certain milestones, such as provision of certain deliverables by us or production of chips by the licensee. The remaining fees are due on pre-determined dates and include significant up-front fees. We review assumptions regarding the post-contract customer support periods on a regular basis. If we determine that it is necessary to revise the estimates of the support periods, the total amount of revenue recognized over the life of the contract would not be affected. However, if the new estimated periods were shorter than the original assumptions, the contract fees would be recognized ratably over a shorter period. Conversely, if the new estimated periods were longer than the original assumptions, the contract fees would be recognized ratably over a longer period.
We assess whether the fee associated with each transaction is fixed or determinable and collection is reasonably assured and evaluate the payment terms. If a portion of the fee is due beyond normal payment terms, we recognize the revenue on the payment due date, assuming collection is reasonably assured. We assess
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collectibility based on a number of factors, including past transaction history and the overall credit-worthiness of the customer. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.
Amounts invoiced to our customers in excess of recognized revenues are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period.
As of December 31, 2005, we are involved in certain legal proceedings, as discussed in Note 15 titled “Litigation and Asserted Claims” of our Notes to Consolidated Financial Statements of this Form 10-K. Based upon consultation with the outside counsel handling our defense in these matters and an analysis of potential results, we have not accrued any amounts for potential losses related to these proceedings. Because of uncertainties related to both the amount and range of loss on the pending litigation, management is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability related to our pending litigation. We will record accruals for losses if and when we determine the negative outcome of such matters to be probable and reasonably estimable. Our estimates regarding such losses could differ from actual results. Revisions in our estimates of the potential liability could materially impact our results of operations, financial position, and cash flows. We recognize litigation expenses in the period in which the litigation services were provided.
Income Taxes
As part of preparing our consolidated financial statements, we are required to calculate the income tax expense or benefit which relates to the pretax income or loss for the period. In addition, we are required to assess the realization of the tax asset or liability to be included on the consolidated balance sheet as of the reporting dates.
This process requires us to calculate various items including permanent and temporary differences between the financial accounting and tax treatment of certain income and expense items, differences between federal and state tax treatment of these items, the amount of taxable income reported to various states, foreign taxes and tax credits. The differing treatment of certain items for tax and accounting purposes results in deferred tax assets and liabilities, which are included on our consolidated balance sheet.
At December 31, 2005, our balance sheet included net deferred tax assets of approximately $72.4 million, relating primarily to the difference between tax and book treatment of depreciation and amortization; employee stock related compensation expenses, deferred revenue, net operating loss and tax credit carryovers. We have established a partial valuation allowance against our deferred tax assets due to the uncertainty surrounding the realization of certain assets. The valuation allowance as of December 31, 2005 of approximately $0.9 million relates to the tax benefit of the employee stock related compensation expense.
The valuation allowance is based on our estimates of taxable income by jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from the estimates or we adjust the estimates in future periods, an additional valuation allowance may have to be recorded, which could materially impact our financial position and results of operation.
Stock-Based Compensation
We account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Stock options are generally granted with exercise prices equivalent to fair market value, and no compensation cost is recognized.
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When stock options are granted with exercise prices below fair market value, employee stock-related compensation expense is recognized accordingly.
On January 10, 2005, we granted 125,000 shares of restricted stock to our CEO and President. The price of the underlying shares is $0.001 per share. We recorded deferred stock-based compensation of $2.7 million based on the fair market value of our common stock on the date of grant. The deferred stock-based compensation was amortized ratably over the vesting period of six months and a total of $2.7 million was recorded in marketing, general and administrative expense in the year ended December 31, 2005. There was no outstanding deferred stock-based compensation balance as of December 31, 2005.
We comply with the disclosure provisions as required under Statement of Financial Accounting Standards, or SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” issued in December 2002. For purposes of pro forma disclosures, the estimated fair value of the stock awards is amortized ratably to expense over the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite services. The fair value of the options is estimated as of the grant date using the Black-Scholes option-pricing model. The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate. For the year ended December 31, 2005, we used an equally weighted historical and market-based implied volatility for the computation of stock-based compensation. For the years ended December 31, 2004 and 2003, we used historical volatility for the computation of stock-based compensation.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payments” (SFAS No. 123R), revising SFAS No. 123. The revision supersedes APB No. 25 and its related implementation guidance. SFAS No. 123R eliminates the alternative use of the intrinsic value method permitted under APB No. 25 and requires publicly-traded companies to measure the cost of equity-based awards granted to employees based on the grant-date fair value of the award. We will adopt SFAS No. 123R in the first quarter of 2006 using the modified prospective method. We will apply the Black-Scholes model to estimate the fair value of share-based payments to employees, which will then be amortized on a ratable basis over the requisite service period.
Recent Accounting Pronouncements
See Note 2 titled “Summary of Significant Accounting Policies” of our Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including government and corporate obligations and money market funds. Short term and long term marketable securities are generally classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax.
Investments in fixed-rate interest-earning instruments carry varying degrees of interest rate risk. The fair market value of our fixed-rate securities may be adversely impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest-rate risk than those with shorter maturities. Due in part to this factor, our investment income may fall short of expectations or we may suffer losses in principal if securities are sold that have declined in market value due to changes in interest rates.
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The table below summarizes the book value, fair value, unrealized loses and related weighted average interest rates for our marketable securities portfolio as of December 31, 2005 and 2004 (in thousands, except percentages).
Marketable securities:
United States government agencies
Corporate notes and bonds
Municipal notes and bonds
Total marketable securities
Item 8. Financial Statements and Supplementary Data
See Item 15 of this Form 10-K for required financial statements and supplementary data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such items are defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, including our CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2005. In making its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
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Based on our evaluation, under the criteria set forth by COSO in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Our management, including our CEO and CFO, acknowledge that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Item 9B. Other Information
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Certain information required by Part III is omitted from this Report on Form 10-K since we intend to file our definitive Proxy Statement for our next Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), no later than April 30, 2006, and certain information to be included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item concerning our directors is incorporated by reference to the information set forth in the section titled “Election of Directors” in our Proxy Statement. Information required by this item concerning our executive officers is incorporated by reference to the information set forth in the section entitled “Executive Officers of the Company” in our Proxy Statement. Information regarding Section 16 reporting compliance is incorporated by reference to the information set forth in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.
We have a Code of Business Conduct and Ethics for all of our directors, officers and employees. Stockholders may request a free copy of our Code of Business Conduct and Ethics from:
Rambus Inc.
Attention: Investor Relations
Tel: 650-947-5050
To date, there have been no waivers under our Code of Business Conduct and Ethics. We will post any waivers, if and when granted, of our Code of Business Conduct and Ethics on our website at http://www.rambus.com/inv/.
Item 11. Executive Compensation
The information required by this item regarding executive compensation is incorporated by reference to the information set forth in the sections titled “Executive Compensation” in our Proxy Statement.
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans” in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item regarding certain relationships and related transactions is incorporated by reference to the information set forth in the section titled “Certain Relationships and Related Transactions” in our Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item regarding principal auditor fees and services is incorporated by reference to the information set forth in the section titled “Principal Accounting Fees and Services” in our Proxy Statement.
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Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
The following consolidated financial statements of the Registrant and Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, are included herewith:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the twelve months ended December 31, 2005, 2004, and 2003
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the twelve months ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the twelve months ended December 31, 2005, 2004 and 2003
Notes To Consolidated Financial Statements
Consolidated Supplementary Financial Data (unaudited)
(a)(2) Financial Statement Schedules
Schedules not listed above have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Rambus Inc.:
We have completed integrated audits of Rambus Inc.’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and comprehensive income, and of cash flows, present fairly, in all material respects, the financial position of Rambus Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
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with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
San Francisco, California
February 21, 2006
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RAMBUS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Prepaid and deferred taxes
Prepaids and other current assets
Total current assets
Marketable securities, long term
Restricted investments
Deferred taxes, long term
Purchased intangible assets, net
Property and equipment, net
Goodwill
Other assets
LIABILITIES
Current liabilities:
Accounts payable
Accrued salaries and benefits
Accrued litigation expenses
Other accrued liabilities
Total current liabilities
Deferred revenue, less current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 6, 7 and 15)
STOCKHOLDERS’ EQUITY
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares;Issued and outstanding: no shares at December 31, 2005 and December 31, 2004
Common Stock, $.001 par value:
Authorized: 500,000,000 shares;Issued and outstanding: 99,397,257 shares at December 31, 2005 and 102,971,000 shares at December 31, 2004
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Marketing, general and administrative (Includes stock-based compensation of $2,689, $0 and $0 in the twelve months ended December 31, 2005, 2004 and 2003, respectively)
Net income per share:
Basic
Diluted
Number of shares used in per share calculations:
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Balances, December 31, 2002
Components of comprehensive income:
Foreign currency translation adjustments
Unrealized loss on marketable securities, net of tax
Total comprehensive income
Issuance of Common Stock upon exercise of options, net
Issuance of Common Stock under Employee Stock Purchase Plan
Repurchase and Retirement of Common Stock under Repurchase Plan
Tax benefit of stock option exercises
Balances, December 31, 2003
Balances, December 31, 2004
Issuance of Common Stock upon exercise of options and restricted stock agreement, net
Deferred stock-based compensation
Amortization of deferred stock-based compensation
Balances, December 31, 2005
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization of intangible assets and note issuance costs
Gain on repurchase of convertible notes
Decrease in valuation allowance related to investments
Gain on sale of investment
Stock-based compensation
Loss on disposal of property and equipment
Change in operating assets and liabilities:
Accounts receivable
Prepaids, deferred taxes and other assets
Accounts and taxes payable, accrued salaries and benefits and other accrued liabilities
Increases in deferred revenue
Decreases in deferred revenue
Cash flows from investing activities:
Purchases of property and equipment
Purchase of intangible assets
Acquisition of business
Purchases of marketable securities
Maturities of marketable securities
Decrease (increase) in restricted investments
Proceeds from sale of investment
Purchase of investment
Cash flows from financing activities:
Payments under installment payment arrangement
Net proceeds from issuance of Common Stock under stock options and employee stock purchase plan
Repurchase of Common Stock
Net proceeds from issuance of Convertible Notes
Repurchase of Convertible Notes
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Non-cash investing and financing activities:
Property and equipment acquired under installment payment arrangement
Intellectual property rights received on disposition of investment
Supplemental disclosure of cash flow information:
Taxes paid
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company
Rambus Inc. and subsidiaries (the “Company” or “Rambus”) invent and license chip interface technologies that are foundational to nearly all digital electronics products. Rambus’ chip interface technologies designed to improve the time-to-market, performance, and cost-effectiveness of our customers’ semiconductor and system products for computing, communications and consumer electronics applications. Rambus was incorporated in California in March 1990 and reincorporated in Delaware in March 1997.
2. Summary of Significant Accounting Policies
Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of Rambus and its wholly owned subsidiaries, Rambus K.K., located in Tokyo, Japan and Rambus, located in George Town, Grand Caymans, BWI, of which Rambus Chip Technologies (India) Private Limited and Rambus Deutschland GmbH are subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements. Identifiable assets and revenues of the subsidiaries are not significant. Investments in entities with less than 20% ownership by Rambus and in which Rambus does not have the ability to significantly influence the operations of the investee are accounted for using the cost method and are included in other assets.
Reclassification
Certain prior year amounts have been reclassified to conform with the current year’s presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Rambus’ revenue recognition policy is based on the American Institute of Certified Public Accountants Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2) as amended by Statement of Position 98-4 (SOP 98-4) and Statement of Position 98-9 (SOP 98-9). Additionally, revenue is recognized on some of Rambus’ contracts, according to Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).
Rambus recognizes revenue when persuasive evidence of an arrangement exists, Rambus has delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. If any of these criteria are not met, Rambus defers recognizing the revenue until such time as all criteria are met.
Rambus’ revenues consist of royalty revenues and contract revenues generated from agreements with semiconductor companies, system companies and certain reseller arrangements. Royalty revenues consist of product license royalties and patent license royalties. Contract revenues consist of license fees and engineering fees associated with integration of Rambus’ chip interface products into its customers’ products. Reseller arrangements generally provide for the payment of license fees associated with the marketing, distribution and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
sublicensing, and in some circumstances, fabricating of Rambus’ interface technologies. Many of Rambus’ licensees have the right to cancel their licenses. Revenue is only recognized to the extent that it is permitted as provided for within the cancellation provisions. Many cancellation provisions within such contracts provide for a prospective cancellation with no impact to fees already remitted by customers for products provided or services rendered prior to the date of cancellation.
Rambus recognizes royalty revenues upon notification by the licensees if collectibility is reasonably assured. The terms of the royalty agreements generally either require licensees to give Rambus notification and to pay the royalties within 60 days of the end of the quarter during which the sales occur or are based on a fixed royalty that is due within 45 days of the end of the quarter. From time to time, Rambus engages accounting firms independent of our independent registered public accounting firm to perform, on Rambus’ behalf, periodic audits of some of the licensee’s reports of royalties to Rambus and any adjustment resulting from such royalty audits is recorded in the period such adjustment is determined. Rambus has two types of royalty revenues: (1) product license royalties and (2) patent license royalties.
Product licenses. Rambus develops proprietary and industry-standard chip interface products, such as RDRAM and XDR, that Rambus provide to its customers under product license agreements which are incorporated into their semiconductor and systems products. These arrangements include royalties which can be based on either a percentage of sales or number of units sold. Rambus recognizes revenue from these arrangements on a quarterly basis upon notification from the licensee if collectibility is reasonably assured.
Patent licenses. Rambus licenses its broad portfolio of patented inventions to semiconductor and systems companies, such as Intel and AMD, who use these inventions in the development and manufacture of their own products. Such licensing agreements may cover the license of part, or all, of Rambus’ patent portfolio. Rambus recognizes revenue from these arrangements on a quarterly basis as amounts become due and payable as the contractual terms of the agreement provide for payments on an extended term basis.
Rambus recognizes revenue in accordance the provisions of SOP 81-1 for licenses of its chip interface products, such as XDR and FlexIO that involve significant engineering services to help Rambus’ customers integrate Rambus’ chip interface products into their semiconductors and systems, Revenues from such licenses are recognized proportionately as Rambus performs services. Revenues derived from such license and engineering services are recognized using the percentage-of-completion method. For all license and service agreements accounted for using the percentage-of-completion method, Rambus determines progress-to-completion using input measures based on labor-hours incurred. A provision for estimated losses on fixed price contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. Rambus reviews assumptions regarding the work necessary to complete projects on a quarterly basis. If Rambus determines that it is necessary to revise the estimates of the work required to complete a contract, the total amount of revenue recognized over the life of the contract would not be affected. However, to the extent the new assumptions regarding the total amount of work necessary to complete a project were less than the original assumptions, the contract fees would be recognized sooner than originally expected. Conversely, if the new estimated total amount of work necessary to complete a project was longer than the original assumptions, the contract fees would be recognized over a longer period. If there is significant uncertainty about the time to complete or the deliverables, Rambus would evaluate the appropriateness of applying the completed contract method of accounting. Such evaluation will be completed by Rambus on a contract by contract basis.
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Rambus recognizes revenue in accordance with SOP 97-2, SOP 98-4 and SOP 98-9 for licenses of its chip interface products that do not involve significant engineering services. These SOPs apply to all entities that earn revenue on products containing software, where software is not incidental to the product as a whole. Contract fees for the products and services provided under these agreements are comprised of license fees and minimal engineering service fees. Contract fees are bundled together as the total price of the agreement does not vary as a result of inclusion or exclusion of services and vendor specific objective evidence, or VSOE, for the undelivered element has not been established. Accordingly, after Rambus has delivered the product and the only undelivered element is post-contract customer support (PCS), Rambus recognizes revenue ratably over either the contractual PCS period or the period during which PCS is expected to be provided. These remaining PCS obligations are essential to the functionality of the product and are primarily to keep the product updated and include activities such as responding to technical inquiries. Part of these contract fees may be due upon the achievement of certain milestones, such as provision of certain deliverables by Rambus or production of chips by the licensee. The remaining fees are due on pre-determined dates and include significant up-front fees. Rambus reviews assumptions regarding the post-contract customer support periods on a regular basis. If Rambus determines that it is necessary to revise the estimates of the support periods, the total amount of revenue recognized over the life of the contract would not be affected. However, if the new estimated periods were shorter than the original assumptions, the contract fees would be recognized ratably over a shorter period. Conversely, if the new estimated periods were longer than the original assumptions, the contract fees would be recognized ratably over a longer period.
Rambus assesses whether the fee associated with each transaction is fixed or determinable and collection is reasonably assured and evaluate the payment terms. If a portion of the fee is due beyond normal payment terms, Rambus recognizes the revenue on the payment due date, assuming collection is reasonably assured. Rambus assesses collectibility based on a number of factors, including past transaction history and the overall credit-worthiness of the customer. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.
Amounts invoiced to Rambus’ customers in excess of recognized revenues are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period.
Allowance for Doubtful Accounts. Rambus’ allowance for doubtful accounts is determined using a combination of factors to ensure that Rambus’ trade receivables balances are not overstated due to uncollectibility. The Company performs ongoing customer credit evaluation within the context of the industry in which it operates, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed necessary. A specific allowance of doubtful account of up to 100% of the invoice value will be provided for any problematic customer balances. Delinquent account balances are written-off after management has determined that the likelihood of collection is not possible. For all periods presented, Rambus reported a balance of $0 in its allowance for doubtful accounts.
Costs incurred in research and development, which include engineering expenses, such as salaries and related benefits, depreciation, professional services and overhead expenses related to the general development of Rambus’ products, are expensed as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. Rambus has not capitalized any software development costs since the period between establishing technological feasibility is relatively short and as such, these costs have not been significant.
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Income taxes are accounted for using an asset and liability approach, which requires the recognition of deferred tax assets and liabilities for expected future tax events that have been recognized differently in Rambus’ consolidated financial statements and tax returns. The measurement of current and deferred tax assets and liabilities are based on provision of the enacted tax law and the effects of future changes in tax laws and rates. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
Computation of Net Income Per Share
Net income per share is calculated in accordance with Financial Accounting Standards Board Statement No. 128, “Earnings Per Share” (SFAS No. 128), which requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common stock and potentially dilutive securities outstanding during the period.
Rambus accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Stock options are generally granted with exercise prices equivalent to fair market value, and no compensation cost is recognized. When stock options are granted with exercise prices below fair market value, employee stock-related compensation expense is recognized accordingly.
On January 10, 2005, Rambus granted 125,000 shares of restricted stock to its CEO and President. The price of the underlying shares is $0.001 per share. Rambus recorded deferred stock-based compensation of $2.7 million based on the fair market value of Rambus’ common stock on the date of grant. The deferred stock-based compensation was amortized ratably over the vesting period of six months and a total of $2.7 million was recorded in marketing, general and administrative expense in the year ended December 31, 2005. There was no outstanding deferred stock-based compensation balance as of December 31, 2005.
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Rambus complies with the disclosure provision requirements of Statement of Financial Accounting Standards, or SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” issued in December 2002. If Rambus had recognized employee compensation expense based upon the fair value of stock option awards, including shares issued under the Rambus employee stock purchase plan (collectively called stock awards), at the grant date consistent with the methodology prescribed under SFAS No. 123, Rambus’ net income (loss) and net income (loss) per share would have changed to the pro forma amounts indicated below (in thousands, except share data):
Net Income, as reported
Add: Stock-based employee compensation expense included in reported net earnings, net of tax
Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax
Pro forma net income (loss)
Basic income (loss) per share
As reported
Pro forma
Diluted income (loss) per share
Diluted (1)
For purposes of pro forma disclosures, the estimated fair value of the stock awards is amortized ratably to expense over the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite services. The effects of applying SFAS No. 123 on the pro forma disclosures for years ended December 31, 2005, 2004 and 2003 are not necessarily indicative of the effects on the results of operations in future periods.
The fair value of the options is estimated as of the grant date using the Black-Scholes option-pricing model assuming a dividend yield of 0% and the following additional weighted-average assumptions:
Expected stock price volatility
Risk-free interest rate
Expected life of options
Weighted-average fair value of stock options granted
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Weighted-average fair value of purchase rights granted under the purchase plan
For the year ended December 31, 2005, Rambus used an equally weighted historical and market-based implied volatility for the computation of stock-based compensation. For the years ended December 31, 2004 and 2003, Rambus used historical volatility for the computation of stock-based compensation.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Rambus’ options have characteristics significantly different from those of traded options. Changes in the subjective input assumptions can materially affect the fair value estimate.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original or remaining maturities of three months or less at the date of purchase. The Company maintains its cash balances with high quality financial institutions and has not experienced any material losses.
Marketable Securities
Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported, net of tax, in stockholders’ equity as part of accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Realized gains and losses are recorded on the specific identification method and are included in interest and other income.
Fair Value of Financial Instruments
The amounts reported for cash equivalents, marketable securities, account receivables, accounts payable, convertible notes and other accrued liabilities are considered to approximate fair values based upon comparable market information available at the respective balance sheet dates. In addition, Rambus has restricted investments due to lease obligations and litigation rulings.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over estimated useful lives of three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the terms of the leases. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the related gain or loss is included in results from operations.
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Rambus assesses the impairment of goodwill on an annual basis, and potentially more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Factors Rambus considers important which could trigger an impairment review include the following:
When Rambus determines that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, Rambus measures this impairment based on a projected discounted cash flow. Rambus performed an annual impairment review in the fourth quarters of 2005 and 2004 and found no instance of impairment of its recorded goodwill of $3.3 million and $0.6 million at December 31, 2005 and 2004, respectively. If Rambus’ estimates or the related assumptions change in the future, Rambus may be required to record an impairment charge for goodwill to reduce its carrying amount to its estimated fair value.
Impairment of Long-Lived Assets and Other Intangible Assets
Rambus evaluates the recoverability of long-lived assets with finite lives in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets”, or SFAS 144. Intangible assets, including purchased technology and other intangible assets, are carried at cost less accumulated amortization. Finite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives of three to ten years. SFAS 144 requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value amount of an asset may not be recoverable. An impairment charge is recognized in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. A significant impairment of finite-lived intangible assets could have a material adverse effect on Rambus’ financial position and results of operations.
Investments in non-consolidated companies
Rambus makes investments in early stage private companies and private equity funds for business and strategic purposes. These investments are accounted for under the cost method, as Rambus does not have the ability to exercise significant influence over these companies’ operations. Rambus periodically monitors its investments for impairment and will record reductions in carrying values if and when necessary. The evaluation process is based on information that it requests from these privately-held companies. This information is not subject to the same disclosure regulations as U.S. public companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. As part of this evaluation process, a review of each company’s cash position, recent financing activities, financing needs, earnings/revenue outlook, operational performance, management/ownership changes, and competition is performed. If Rambus determines that the carrying value of an investment is at an amount above fair value, or if a company has completed a financing with new third-party investors based on a valuation significantly lower than the carrying value of Rambus’ investment and the decline is other than temporary, an investment loss is recorded in Rambus’ consolidated statement of operations. In calculating the loss to be recorded, Rambus takes into account the latest
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valuation of each of the portfolio companies based on recent sales of equity securities to outside third party investors.
In the twelve months ended December 31, 2004, Rambus sold its investment in Tessera, a publicly traded company, for a pre-tax gain of $3.6 million, which is included in “Interest and Other Income” on the consolidated statement of operations.
Foreign Currency Translation
Rambus considers the local currency to be the functional currency for its international subsidiaries. The translation from foreign currencies to U.S. dollars is performed for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rate during the period. Adjustments resulting from such translation are included in stockholders’ equity as accumulated other comprehensive income (loss). Gains or losses resulting from foreign currency transactions are recorded in the results of operations and have not been significant for any periods presented.
Segment Reporting
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in a company’s financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Rambus has identified one operating and reporting segment. This segment operates in five geographic regions: United States, Japan, Korea, Europe and Taiwan. Enterprise-wide information is provided in accordance with SFAS No. 131. Information concerning the geographic breakdown of revenues and identifiable assets is set forth in Note 11.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. Other comprehensive income is presented in the statement of stockholders’ equity and comprehensive income.
As of December 31, 2005, Rambus is involved in certain legal proceedings. Based upon consultation with the outside counsel handling Rambus’ defense in these matters and an analysis of potential results, Rambus has not accrued any amounts for potential losses related to these proceedings. Because of uncertainties related to both the amount and range of loss on the pending litigation, management is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, management will assess the potential liability related to pending litigation. Rambus will record accruals for losses if and when management determines the negative outcome of such matters to be probable and reasonably estimable. Management’s estimates regarding such losses could differ from actual results. Revisions in management’s estimates of the potential liability could materially impact Rambus’ results of operations, financial position, or cash flows. Rambus recognizes litigation expenses in the period in which the litigation services are provided by external parties.
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In September 2004, the EITF reached a consensus on EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” In accordance with EITF Issue No. 04-8, potential shares issuable under contingently convertible securities with a market price trigger should be accounted for the same way as other convertible securities and included in the diluted earnings per share computation, regardless of whether the market price trigger has been met. Potential shares should be calculated using the if-converted method or the net share settlement method. EITF Issue No. 04-8 was effective for periods ending after December 15, 2004 and is to be applied by retrospectively restating previously reported diluted earnings per share. Under EITF Issue No. 04-8, convertible notes are included in the diluted earnings per share computation, unless these shares are deemed to be anti-dilutive. Rambus considered EITF Issue No. 04-8 in relation to the $300.0 million aggregate principal amount of convertible notes issued on February 1, 2005 and concluded that the adoption of EITF Issue No. 04-8 did not have an impact on previously reported financial statements as the shares were deemed to have been for all periods presented, anti-dilutive. Shares issuable under the provisions of the convertible notes were also excluded from the computation of diluted earnings per share for the year ended December 31, 2005 as the shares were anti-dilutive.
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which replaced FASB Statement No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) and superseded Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R eliminates the alternative use of the intrinsic value method permitted under APB No. 25 and requires all share-based payments to employees, including grants of employee stock options to be recognized in the financial statements based on their grant date fair values. Under SFAS 123R, the pro forma disclosures previously permitted no longer will be an alternative to financial statement recognition. SFAS 123R was originally effective for all interim or annual periods beginning after June 15, 2005, with early adoption encouraged. In April 2005, the Securities and Exchange Commission (the “SEC”) postponed the effective date of SFAS 123R until the issuer’s first fiscal year beginning after June 15, 2005.
Rambus will adopt SFAS 123R in the first quarter of 2006 using the modified prospective method. SFAS 123R requires companies that chose under SFAS 123 to recognize actual forfeitures when they occurred rather than estimate them at the grant date make a one-time cumulative adjustment at the adoption date for estimated forfeitures, regardless of the transition method. We are currently analyzing the estimated forfeiture adjustment amount for outstanding awards at adoption. Rambus will apply the Black-Scholes model to estimate the fair value of share-based payments to employees, which will then be amortized on a ratable basis over the requisite service period.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretations of SFAS 123R and the valuation of share-based payments for public companies. Rambus is evaluating the requirements of SFAS 123R and SAB 107 and expects that the adoption of SFAS 123R on January 1, 2006 will have a material impact on Rambus’ consolidated results of operations and earnings per share beginning in the first quarter of 2006. Rambus’ assessment of the estimated compensation charges is affected by Rambus’ stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact resulting in uncertainty as to whether future stock-based compensation expense will be similar to the historical SFAS 123 pro forma expense. These variables include, but are not limited to, the volatility of our stock price and employee stock option exercise behaviors.
In November 2005, the FASB issued FASB Staff Position No. 123(R)-3 “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (FSP 123(R)-3). FSP 123(R)-3 provides an
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alternative transition method of accounting for the tax effects of adopting SFAS 123(R). This FSP grants one year from the later of the date of the FSP or the adoption of SFAS 123(R) to the company for determination of the one-time election for purposes of transition. However, Rambus is evaluating the alternative methods.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to fiscal years beginning after December 15, 2005 and is required to be adopted by Rambus in the first quarter of 2006. Rambus is currently evaluating the effect that the adoption of FSP 115-1 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.
3. Business Risks and Credit Concentration
Rambus operates in the intensely competitive semiconductor industry, which has been characterized by price erosion, rapid technological change, short product life cycles, cyclical market patterns, litigation regarding patent and other intellectual property rights, and heightened foreign and domestic competition. Significant technological changes in the industry could adversely affect operating results.
Rambus markets and sells its chip interfaces to a narrow base of customers and generally does not require collateral. For the twelve months ended December 31, 2005, revenue from Intel, Elpida, Toshiba and Matsushita each accounted for greater than 10% of our total revenues. For the twelve months ended December 31, 2004, revenue from Intel, Toshiba, and Elpida, each accounted for greater than 10% of Rambus’ total revenues. For the twelve months ended December 31, 2003, revenue from Intel, Toshiba and Samsung each accounted for greater than 10% of Rambus’ total revenues. Rambus expects that its revenue concentration will decrease over time as Rambus licenses new customers.
As of December 31, 2005 and 2004, Rambus’ cash and cash equivalents were invested with principally three financial institutions in the form of commercial paper, money market accounts, and demand deposits. Rambus’ exposure to market risk for changes in interest rates relates primarily to its investment portfolio. Rambus places its investments with high credit issuers and, by policy, attempts to limit the amount of credit exposure to any one issuer. As stated in Rambus’ policy, it will ensure the safety and preservation of Rambus’ invested funds by limiting default risk and market risk. Rambus has no investments denominated in foreign country currencies and therefore is not subject to foreign exchange risk.
Rambus mitigates default risk by investing in high credit quality securities and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to enable portfolio liquidity.
4. Marketable Securities
Rambus invests its excess cash primarily in U.S. government agency and treasury notes; commercial paper, corporate notes and bonds; and municipal notes and bonds that mature within 3 years.
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All marketable securities are classified as available-for-sale and are summarized as follows (in thousands):
Twelve months ended
The estimated fair value of short and long-term investments classified by date of contractual maturity at December 31, 2005 and 2004 are as follows (in thousands):
Due within one year
Due after one year through three years
The estimated fair value of investments in the table above includes an unrealized loss of $0.8 million for those investments due within one year and an unrealized loss of $1.9 million for those investments due after one year through three years as of December 31, 2005. The estimated fair value of investments in the table above includes an unrealized loss of $0.4 million for those investments due within one year and an unrealized loss of $1.3 million for those investments due after one year through three years as of December 31, 2004.
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5. Balance Sheet Details
Purchased Intangible Assets, net
Purchased intangible assets are composed of the following (in thousands):
Patents
Serial link cells
Customer contracts and contractual relationships
Existing technology
Non-competition agreement
Total purchased intangible assets
Property and Equipment, net
Property and equipment, net is comprised of the following (in thousands):
Computer equipment
Computer software
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
Rambus has no capital lease items in its property and equipment.
Goodwill, net
Changes in the carrying value of goodwill in the twelve months ended December 31, 2005 are as follows (in thousands):
Balance at December 31, 2004
Goodwill acquired during the period
Balance at December 31, 2005
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6. Commitments and Contingencies
Rambus leases its present office facilities in Los Altos, California, under an operating lease agreement through December 31, 2010. As part of this lease transaction, Rambus provided a letter of credit restricting $600,000 of its cash as collateral for certain of its obligations under the lease. The cash is restricted as to withdrawal and is managed by a third party subject to certain limitations under Rambus’ investment policy. Rambus also leases a facility in Chapel Hill, North Carolina through November 15, 2009 and leases a facility for its design center in Bangalore, India through November 30, 2009. In addition, as a result of our acquisition of GDA in 2005, Rambus entered into a lease for an additional facility in Bangalore, India through March 31, 2007. As a result of the GDA acquisition, Rambus also accrued $1.0 million which was due to GDA upon the second and final closing of the acquisition, which occurred in January 2006.
On February 1, 2005, Rambus issued $300.0 million aggregate principal amount of convertible notes due February 1, 2010 to Credit Suisse First Boston LLC (Credit Suisse) and Deutsche Bank Securities (Deutsche Bank). Rambus elected to pay the principal amount of the convertible notes in cash when they are due and the initial conversion price of the convertible notes is $26.84 per share. Subsequently, Rambus has repurchased a total of $140.0 million face value of the outstanding notes. As a result, the convertible notes outstanding and payable as of December 31, 2005 were reduced to $160.0 million. See Note 14 titled “Convertible Notes” of Rambus’ Notes to Consolidated Financial Statements for the terms of these notes.
As of December 31, 2005, Rambus’ material contractual obligations are (in thousands):
In January 2006, Rambus signed a lease for an additional facility in Mountain View, California through November 11, 2009. Rambus’ operating lease obligations under this lease are $476,000 in the “less than 1 year” category, $1.0 million in the “1-3 years” category and $468,000 in the “3-5 years” category and are not reflected in the table above.
Rent expense was approximately $5.1 million for each of the twelve months ended December 31, 2005 and 2004 and $4.7 million for the twelve months ended December 31, 2003.
Deferred rent was approximately $1.7 million as of December 31, 2005 and 2004.
Indemnifications
Rambus enters into standard license agreements in the ordinary course of business. Although Rambus does not indemnify most of its customers, there are times when an indemnification is a necessary means of doing business. Indemnifications cover customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to Rambus’ products. The maximum amount of indemnification Rambus could be required to make under these agreements is generally limited to fees received by Rambus. Rambus estimates the fair value of its indemnification obligation
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as insignificant, based upon its history of litigation concerning product and patent infringement claims. Accordingly, Rambus has no liabilities recorded for indemnification under these agreements as of December 31, 2005 or 2004.
As permitted under Delaware law, Rambus has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at Rambus’ request in such capacity. The term of the indemnification period is for the officer’s or director’s term in such capacity. The maximum potential amount of future payments Rambus could be required to make under these indemnification agreements is unlimited. Rambus has a director and officer insurance policy that limits Rambus’ exposure and enables Rambus to recover a portion of any future amounts to be paid. As a result of Rambus’ insurance policy coverage, Rambus believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. Accordingly, Rambus has no liabilities recorded for these agreements as of December 31, 2005 or 2004.
Warranties
Rambus offers some of its customers a warranty that its products will conform to their functional specifications. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, Rambus has no liabilities recorded for these warranties as of December 31, 2005 or 2004. Rambus assesses the need for a warranty accrual on a quarterly basis and there can be no guarantee that a warranty accrual will not become necessary in the future.
7. Stockholders’ Equity
Preferred and Common Stock
In February 1997, Rambus established a Stockholder Rights Plan pursuant to which each holder of Rambus’ common stock shall receive a right to purchase one-thousandth of a share of Series E Preferred Stock for $125 per right, subject to a number of conditions. Such rights are subject to adjustment in the event of a takeover or commencement of a tender offer not approved by the Board of Directors. In July 2000, the Rambus Board of Directors agreed to restate the exercise price to $600 per right in an Amended and Restated Preferred Shares Rights Agreement. In November 2002, the Rambus Board of Directors agreed to restate the exercise price to $60 per right in an Amended and Restated Preferred Shares Rights Agreement.
Stock Option Plans
Rambus officers and employees are eligible to participate in the 1997 Stock Plan. Employees who are not executive officers are also eligible to participate in the 1999 Nonstatutory Stock Option Plan. The 1997 Stock Plan permits the Board of Directors of Rambus (Board) or the Compensation Committee of the Board to grant stock options, stock purchase rights and common stock Equivalents to employees, including executive officers, on such terms as the Board or the Compensation Committee may determine. The 1999 Nonstatuatory Stock Option Plan permits the Board or the Compensation Committee to grant stock options to employees on such terms as the Board or the Compensation Committee may determine. The Board or the Compensation Committee has authority to grant and administer stock options to all Rambus employees. The 1997 Stock Plan will expire in 2007 and the 1999 Nonstatutory Stock Option Plan will expire in 2009.
In determining the size of a stock option grant to a new officer or other key employee, the Board or the Compensation Committee takes into account equity participation by comparable employees within Rambus, external competitive circumstances and other relevant factors. These options typically vest over 60 months and
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thus require the employee’s continued service to Rambus. Additional options may be granted to current employees to reward exceptional performance or to provide additional unvested equity incentives for retention. The method of vesting of additional options granted to current employees has and will vary over time based on the determination of the Board or the Compensation Committee.
In addition, under the 1997 Stock Plan, the Board has delegated to two executive officers the authority to grant new hire options to non-executive officer employees. Each option granted to a new employee under this authority is subject to the following terms:
In March 1990, Rambus adopted the 1990 Stock Plan under which 10,628,572 shares of common stock were reserved for issuance. Incentive stock options were granted with exercise prices of no less than fair market value, and nonqualified stock options could be granted with exercise prices of no less than 85% of the fair market value of the common stock on the grant date, as determined by the Board of Directors. The options generally vest over a four-year period but may be exercised immediately subject to repurchase by the Company for those options that are not vested. As of December 31, 2005 and 2004, there were no shares held by employees that were subject to repurchase.
In May 1997, the 1990 Stock Plan was terminated and the 1997 Stock Plan was adopted. The 1997 Stock Plan authorizes the issuance of incentive stock options and nonstatutory stock options to employees and nonstatutory stock options to directors, employees or paid consultants of the Company. The 1997 Stock Plan provides for an annual increase equal to the lesser of (i) the number of Shares needed to restore the maximum aggregate number of Shares which may be optioned and sold under the Plan to 4,000,000 Shares, (ii) four percent (4%) of the outstanding Shares on such date, or (iii) a lesser amount determined by the Board of Directors. Rambus has reserved 28,670,221 shares of common stock for issuance under the Plan. The plan expires ten years after adoption, and the Board of Directors or a committee designated by the Board of Directors has the authority to determine to whom options will be granted, the number of shares, the vesting period and the exercise price (which generally cannot be less than 100% of the fair market value at the date of grant for incentive stock options). The options are exercisable at times and in increments as specified by the Board of Directors, and expire not more than ten years from date of grant. In October 1999, the 1997 Stock Plan was revised to add the provision and ability of Rambus to grant common stock Equivalents, which are unfunded and unsecured rights to receive shares in the future.
In October 1999, Rambus adopted the 1999 Nonstatutory Stock Option Plan, which authorizes the issuance of nonstatutory options to employees and consultants. Rambus has reserved 14,800,000 shares of common stock for issuance under the 1999 Nonstatuatory Stock Option Plan. The plan expires ten years after adoption, and the Board of Directors or a committee designated by the Board of Directors has the authority to determine to whom options will be granted, the number of shares, the vesting period, the expiration date, and the exercise price (which generally is the fair market value at the date of grant).
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Distribution and Dilutive Effect of Options
The following table illustrates the grant dilution and exercise dilution for the twelve months ended December 31, 2005 and 2004 (in thousands, except percentages):
Shares of common stock outstanding
Granted
Canceled
Net options granted
Grant dilution (1)
Exercised
Exercise dilution (2)
The following table summarizes the options granted to the named executive officers. The named executive officers are Rambus’ Chief Executive Officer and the four other most highly paid executive officers whose salary and bonus were in excess of $100,000.
Options granted to the named executive officers
Options granted to the named executive officers as a % of total options granted
Options granted to the named executive officers as a % of net options granted
Options granted to the named executive officers as a % of outstanding shares
Cumulative options held by named executive officers as a % of total options outstanding
The following table presents the option exercises for the twelve months ended December 31, 2005 (and option values as of that date for the named executive officers:
Number of
Shares
Acquired
on Exercise
Value
Realized
Number of Securities
Underlying Unexercised Options
at December 31, 2005
Intrinsic Values of
Unexercised, In-the-Money
Options at December 31, 2005(1)
Named executive officers
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A summary of activity under all stock option plans is as follows:
Options
Available for
Grant
Weighted
AverageExercise Price
Per Share
Outstanding as of December 31, 2002
Options granted
Options exercised
Options canceled
Outstanding as of December 31, 2003
Shares reserved
Outstanding as of December 31, 2004
Outstanding as of December 31, 2005
The following table summarizes information about outstanding and exercisable options as of December 31, 2005:
Range of Exercise Prices
Number
Outstanding
Weighted Average
Remaining
Contractual Life
Exercise Price
Exercisable
$ 1.25 – $ 4.67
$ 4.72 – $ 4.86
$ 5.93 – $ 9.30
$ 9.86 – $14.18
$14.24 – $15.23
$15.26 – $15.66
$15.67 – $15.67
$15.78 – $24.04
$24.15 – $31.16
$31.30 – $83.00
$ 1.25 – $83.00
As of December 31, 2005, a total of 31,744,983 shares of common stock were (of which 26,027,517 were outstanding and 5,717,466 were available for future grant) reserved for issuance under all stock option plans. As of December 31, 2005 and 2004, options for the purchase of 14,844,322 and 11,968,699 shares, respectively, were exercisable without being subject to repurchase by the Company.
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Employee Stock Purchase Plan
In May 1997, Rambus adopted the 1997 Employee Stock Purchase Plan (the “Purchase Plan”). At December 31, 2005, 1,280,723 shares of common stock were available for issuance under the Purchase Plan. The Purchase Plan provides for an annual increase equal to the lesser of (i) the number of Shares needed to restore the maximum aggregate number of Shares which may be optioned and sold under the Purchase Plan to 1,600,000 Shares, (ii) one (1%) of the outstanding Shares on such date, or (iii) a lesser amount determined by the Board of Directors. The Purchase Plan authorizes the granting of stock purchase rights to eligible employees during two-year offering periods with exercise dates approximately every six months. Shares are purchased through employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of Rambus’ common stock at either the first day of each offering period or the date of purchase. Under the Purchase Plan, Rambus issued 319,277 shares in the twelve months ended December 31, 2005 and 543,129 shares in the twelve months ended December 31, 2004 at an average price per share of $11.45 and $6.55, respectively.
In October 1998, Rambus’ Board of Directors authorized an incentive program in the form of warrants for a total of up to 1,600,000 shares of its common stock to be issued to various RDRAM licensees. The warrants, which were issued at the time certain targets were met, have an exercise price of $2.50 per share and a life of five years from the date of issuance. These warrants vest and become exercisable only upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM chipsets, which could result in a non-cash charge to the statement of operations based on the fair value of the warrants if and when the achievement of the Intel milestones becomes probable. Since Intel has phased out the 850E chipset, the likelihood that the unvested warrants will vest is considered remote. As of December 31, 2005, warrants exercisable for a total of 1,520,000 shares had been issued and 280,000 remain outstanding. The remainder of these outstanding warrants expired in January 2006. The impact of these warrants has been excluded from the calculation of net income per share.
As of December 31, 2005, there were 1,000,000 contingent unvested Common Stock Equivalents, or CSEs, and 799,346 contingent unvested options, which vest upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM chipsets. These CSEs were granted to Rambus’ previous Chief Executive Officer (CEO) and President in 1999 and the options were granted to certain of Rambus’ employees in 1999 and 2001. The CSEs were granted with a term of 10 years and the options were granted with an exercise price of $2.50 and a term of 10 years. If and when the achievement of the Intel milestones become probable, there would be an almost entirely non-cash charge to our statement of operations based on the fair value of the CSEs and options. Since Intel has phased out the 850E chipset, we consider the likelihood that the unvested CSEs and options will vest is remote. The impact of these CSEs and options has been excluded from the calculation of net income per share.
Restricted Stock
As described in Note 2, Rambus granted 125,000 shares of restricted stock to its Chief Executive Officer. On July 19, 2005, the vesting period ended and the shares were exercised at a total cost of $125.00 on the same day.
In October 2001, Rambus’ Board of Directors approved a stock repurchase program of its common stock principally to reduce the dilutive effect of employee stock options. Since the beginning of the program, Rambus’
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Board has authorized the purchase in open market transactions of up to 14.1 million shares of Rambus’ outstanding common stock over an undefined period of time. As of December 31, 2005, Rambus had repurchased 12.6 million shares of its common stock at an average price per share of $13.05, which includes 4.1 million shares repurchased in connection with Rambus’ $300.0 million zero coupon senior convertible subordinated note offering on February 1, 2005. As of December 31, 2005, there remained an outstanding authorization to repurchase 1.5 million shares of Rambus’ outstanding common stock.
Rambus records stock repurchases as a reduction to stockholders’ equity. As prescribed by APB Opinion No. 6, “Status of Accounting Research Bulletins,” Rambus is required to record a portion of the purchase price of the repurchased shares as a reduction to retained earnings when the cost of the shares repurchased exceeds the original proceeds received from the issuance of common stock. Through December 31, 2004, the cumulative purchase price of the shares repurchased was less than the original proceeds received from the issuance of common stock. Accordingly, Rambus recorded the repurchases as a reduction of common stock and APIC and did not allocate any of the purchase price of the shares repurchased to retained earnings. In the twelve months ended December 31, 2005, Rambus determined the cumulative price of the shares repurchased exceeded the proceeds received from the issuance of the same number of shares. The excess of $59.8 million was recorded as a reduction of retained earnings.
8. Employee Benefit Plans
Rambus has a 401(k) Profit Sharing Plan (the “Plan”) qualified under Section 401(k) of the Internal Revenue Code of 1986. Each eligible employee may elect to contribute up to 60% of the employee’s annual compensation to the Plan. Rambus, at the discretion of its Board of Directors, may match employee contributions to the Plan. For the twelve months ended December 31, 2005 and 2004, Rambus made matching contributions totaling $260,000 and $233,000, respectively.
9. Income Taxes
The provision for income taxes comprises (in thousands):
Federal:
Current
Deferred
State:
Foreign:
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The differences between Rambus’ effective tax rate and the U.S. federal statutory regular tax rate are:
Expense at U.S. federal statutory rate
Expense at state statutory rate
R&D credit
Foreign tax credit
Non-deductible stock compensation
Other
The components of the net deferred tax assets are as follows (in thousands):
Deferred tax assets:
Depreciation and amortization
Other liabilities and reserves
Employee stock-based compensation
Net operating loss carryover
Tax credits
Total deferred tax asset
Valuation allowance
Deferred tax assets, net
Rambus has established a partial valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of certain tax assets. The valuation allowance as of December 31, 2005 of approximately $0.9 million relates to the tax benefit of the employee stock related compensation expense. Management periodically evaluates the recoverability of the deferred tax assets and recognizes the tax benefit only as reassessment demonstrates they are realizable. At such time it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance is adjusted. The actual taxable income, stock option exercises in the future and other factors that determine how much benefit Rambus ultimately realizes from the deferred tax benefit could vary materially from its estimates.
In the event that actual results differ from the estimates or Rambus adjusts in future periods the estimates upon which the valuation allowance has been determined, an additional valuation allowance may have to be recorded, which could materially impact Rambus’ financial position and results of operation.
As of December 31, 2005, Rambus has federal and state net operating loss carryforwards of $ 42.1 million and $28.3 million, respectively, which expire through 2024. As of December 31, 2005, Rambus has federal and state research and experimentation tax credit carryforwards of $19.6 million and $14.9 million, respectively. Rambus’ net operating loss and tax credit carryforwards may be subject to an annual limitation in the case of a greater than 50% change in stock ownership as defined by federal and state law.
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Rambus is subject to tax examinations of its tax returns by the Internal Revenue Service and other tax authorities in various jurisdictions. Rambus regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.
10. Net Income Per Share
Net income per share is calculated as follows (in thousands, except per share data):
Numerator:
Denominator:
Weighted average shares used to compute basic EPS
Dilutive potential shares
Dilutive common stock warrants
Weighted average shares used to compute diluted EPS
For the twelve months ended December 31, 2005, there were approximately 14.8 million anti-dilutive shares which were excluded from the calculation of diluted weighted average shares outstanding. Options to purchase 6.3 million shares and 3.2 million shares of common stock were not included in the computation of diluted shares for the twelve months ended December 31, 2004 and 2003, respectively. Exercise prices of these options were greater than the average market price of the common shares for the period or the options, CSEs or warrants, were contingent upon the satisfaction of certain conditions, as described in Note 7 under “Warrants” and “Contingent Common Stock Equivalents and Options” that had not been met as of years ended December 31, 2005, 2004 and 2003.
11. Business Segments, Exports and Major Customers
Rambus operates in a single industry segment.
The top four customers accounted for 26%, 17%, 11% and 10%, respectively, of revenues in the year ending December 31, 2005. Three customers accounted for 28%, 15% and 13%, respectively, of revenues in the twelve months ended December 31, 2004. Three customers accounted for 34%, 18% and 12%, respectively, of revenues in the twelve months ended December 31, 2003. Rambus expects that its revenue concentration will decrease over time as Rambus licenses new customers.
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Rambus sells its chip interfaces and licenses to customers in the Far East, North America, and Europe. The net income for all periods presented is derived primarily from Rambus’ North American operations, which generates revenues from customers in the following geographic regions (in thousands):
Japan
Korea
Europe
Taiwan
Revenues are attributed to individual countries according to the countries in which the licensees are headquartered. Long-lived assets are primarily located in the United States.
12. Acquisition
On April 15, 2005, Rambus completed the acquisition of a portion of GDA including certain proprietary digital core designs for a preliminary total of $6.4 million in cash, including transaction costs. Rambus did not have a pre-existing relationship with GDA before the acquisition. Under the terms of the purchase agreement, Rambus paid a total of $5.3 million in cash to GDA at the initial closing. Rambus is contractually obligated to pay out an additional $1.0 million in conjunction with its acquisition of intellectual property from GDA, and has recorded the corresponding accrual. In addition, Rambus paid $184,000 for legal fees incurred in connection with this transaction. The acquisition has been recorded using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” As a result of the acquisition, Rambus recorded $3.7 million of purchased intangible assets and $2.7 million of goodwill. The valuation of the purchased intangible assets was determined based on their estimated fair values at the acquisition date. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the purchased intangible assets. Key assumptions included estimates of revenue growth, cost of revenues, operating expenses, and discount rates. The discount rates used in the valuation of intangible assets reflected the level of risk associated with the investment, as well as the time value of money.
The purchased intangible assets are being amortized over useful lives of three to five years using the straight-line method. The useful life of existing technology was based on management estimates and the estimated length of economic benefit derived from the technology. The useful life of the non-competition agreement was based on the contractual term of the agreement. The useful life of customer contracts and related relationships was based on estimated customer attrition and technology obsolescence. Amortization expense was $0.6 million in the twelve months ended December 31, 2005. Rambus estimates that it will expense approximately $0.9 million in each of the twelve months ending December 31, 2006 through 2008, $0.4 million in the twelve months ending December 31, 2009 and $0.1 million in the twelve months ending December 31, 2010.
In addition to the $6.4 million preliminary purchase price, the purchase agreement calls for an earn-out payment that is based on future performance and events. Under the terms of the purchase agreement, the earn-out payment is computed on cash collections from the sale or license of acquired GDA’s products. The earn-out period is one year from the initial closing date and cash collection may occur up to one year beyond the earn-out
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period. Payment is earned based upon cash collections. A maximum of $5.0 million can be earned. Using guidance provided by SFAS No. 141, “Business Combinations,” Rambus concluded that the earn-out payment is a contingent payment and that the amount was not determinable as of December 31, 2005. As a result, Rambus has not recorded a liability for the earn-out payment as of December 31, 2005. Any accruals for the earn-out payment will be recorded as adjustments to the purchase price and will result in increases to goodwill.
The preliminary purchase price has been allocated as follows (in thousands):
Amortizable intangible assets:
Customer contracts and relationships
Total preliminary purchase price
13. Acquisition of Intellectual Property
Cadence Design Systems
In July 2004, Rambus completed the acquisition of certain serial link intellectual property from Cadence for $11.0 million in cash. As a result of this acquisition, Rambus acquired intellectual property to be incorporated into Rambus’ serial link product line of serial link cells. In addition, if Cadence achieves certain milestones by a pre-determined time, Rambus has the option, but not the obligation, to purchase additional serial link intellectual property from Cadence for $5.0 million in cash, which intellectual property would also be incorporated into Rambus’ serial link product line of serial link cells. Rambus acquired additional serial link intellectual property from Cadence for an initial price of $2.5 million in December 2005 under the agreement. Cadence Engineering Services will gain access to Rambus’ portfolio of serial link cells to deliver customized design solutions as needed. Cadence will be the exclusive EDA industry reseller of Rambus’ foundry serial link cells and will exclusively sell only Rambus foundry serial link cells off-the-shelf. The technology is valuable for currently available products and continues to be the basis for products under development.
As a result of the acquisition, Rambus recorded $11.1 million of purchased intangible assets, including transaction costs, in 2004 and $2.5 million of purchased intangible assets in 2005. The valuation and useful lives of the acquired intangible assets were allocated based on estimated fair values at the acquisition dates. Management estimates were used to determine the useful lives of the assets. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the acquired patented technology. Key assumptions included estimates of revenue growth, cost of revenues, operating expenses and taxes. The discount rates used in the valuation of intangible assets reflected the level of risk associated with the particular technology and the current return on investment requirements of the market. These assets are being amortized over their useful lives of four to seven years. Amortization expense of these purchased intangible assets was $2.4 million and $1.2 million for the twelve months ended December 31, 2005 and 2004, respectively, Rambus estimates that it will expense approximately $3.0 million in each of the twelve months ending December 31, 2006 and 2007, $2.1 million in the twelve months ending December 31, 2008, $1.2 million in the twelve months ending December 31, 2009, $0.5 million in the twelve months ending December 31, 2010 and $0.3 million in the twelve months ending December 31, 2011.
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The components of purchased intangibles assets are as follows (in thousands):
Serial Link Cells
Purchased intangible assets:
Velio Communications, Inc.
In December 2003, Rambus completed the acquisition of certain high speed signaling assets from Velio for $13.0 million in cash. As a result of this acquisition, Rambus recorded purchased intangible assets of $13.2 million, including transaction costs. The valuation and useful lives of the acquired intangible assets were allocated based on estimated fair values at the acquisition date. The acquired intangible assets include the acquisition of certain Velio high speed signaling assets, the related Velio patent portfolio and the existing Velio licensing business. Rambus integrated these assets into its serial link product line. The technology is valuable for currently available products and continues to be the basis for products under development under an existing contract with one important customer. The value of this contract, along with interviews and management’s estimates were used to determine the useful lives of the assets. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the acquired patented technology. Key assumptions included estimates of revenue growth, cost of revenues, operating expenses and taxes. The discount rates used in the valuation of intangible assets reflected the level of risk associated with the particular technology and the current return on investment requirements of the market. These assets are being amortized over their useful lives of ten years. Amortization expense of purchased intangible assets was $1.3 million in each of the twelve months ended 2005 and 2004 and $29,000 for the twelve months ended December 31, 2003. There were no contingent payments required as part of this acquisition. Rambus estimates that it will expense a total of approximately $1.3 million, ratably, for each of the twelve months ending December 31, 2006 through 2013.
The components of purchased intangible assets are as follows (in thousands):
Contractual relationships
Purchased intangible assets
14. Convertible Notes
On February 1, 2005, Rambus issued $300.0 million aggregate principal amount of zero coupon senior convertible notes due February 1, 2010 to Credit Suisse First Boston LLC (Credit Suisse) and Deutsche Bank Securities (Deutsche Bank) in a private offering.
The notes are unsecured senior obligations, ranking equally in right of payment with all of Rambus’ existing and future unsecured senior indebtedness, and senior in right of payment to any future indebtedness that is expressly subordinated to the notes.
The notes are convertible at any time prior to the close of business on the maturity date into, in respect of each $1,000 principal of notes:
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The notes are subject to repurchase in cash in the event of a fundamental change involving Rambus at a price equal to 100% of the principal amount. Rambus may be obligated to pay an additional premium (payable in shares of common stock) in the event the notes are converted following a fundamental change. The premium is based on numerous factors and could be up to 33% per $1,000 principal amount of notes.
Upon the occurrence of an event of default, Rambus’ obligations under the notes may become immediately due and payable. An event of default is defined as:
Rambus may not redeem the notes prior to their maturity date.
As a result of this issuance, Rambus recorded $7.2 million of related note issuance costs in long-term other assets which are being amortized over the term of the notes. For the year ended December 31, 2005, Rambus recorded amortization expense of $1.1 million. Rambus estimates that it will expense a total of approximately $.8 million, ratably, in each of the twelve months ending December 31, 2006 through 2009 and $0.1 million in the twelve months ending December 31, 2010.
On July 20, 2005, Rambus repurchased $60.0 million face value of the outstanding notes, for a price of approximately $49.6 million. The gain of approximately $10.4 million, less related unamortized note issuance costs of approximately $1.3 million was recognized as other income in the year ended December 31, 2005.
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On August 30, 2005, Rambus repurchased $45.0 million face value of the outstanding notes for a price of approximately $34.5 million. The gain of approximately $10.5 million, less related unamortized notes issuance costs of approximately $1.0 million was recognized as other income in the year ended December 31, 2005.
On October 20, 2005, Rambus repurchased $35.0 million face value of the outstanding notes for a price of approximately $28.9 million. The gain of approximately $6.1 million, less related unamortized notes issuance costs of approximately $0.7 million was recognized as other income in the year ended December 31, 2005.
These repurchases were financed from Rambus’ investment portfolio.
The gain from the repurchase of the $140.0 million face value of the notes was treated as a discrete item for the purposes of calculating the quarter’s tax provision.
As of December 31, 2005, $160.0 million of the convertible notes remained outstanding.
15. Litigation and Asserted Claims
Infineon Litigation
On August 8, 2000, Rambus filed suit in the U.S. District Court for the Eastern District of Virginia (the “Virginia court”) against Infineon, and its North American subsidiary for infringement of two U.S. patents. In February 2005, the Virginia court held a four-day bench trial on Infineon’s unclean hands defense, which included allegations of litigation misconduct and spoliation of evidence. On March 1, 2005, the Virginia court orally stated that Infineon had proven that Rambus had unclean hands, that Rambus had spoliated evidence, and that dismissal of Rambus’ patent infringement case was the appropriate sanction. On March 21, 2005, before the Virginia court issued written findings of fact and conclusions of law, the parties reached a global settlement of all disputes between them, and dismissed with prejudice all outstanding lawsuits between the companies worldwide. Although the parties settled their dispute, in one patent infringement action in Germany, Infineon’s attorneys continue to dispute with Rambus the amount of court fees that Rambus is required to pay under German law following the European Patent Office’s dismissal of a Rambus European patent, EP 0 525 068. The issue has been fully briefed, but the Mannheim court has not yet issued a decision.
Hynix Litigation
U.S District Court of the Northern District of California
On August 29, 2000, Hynix (formerly Hyundai) and various subsidiaries filed suit against Rambus in the U.S. District Court for the Northern District of California (the “California court”). The case was assigned to the Honorable Ronald M. Whyte. The complaint, as amended, asserts claims for breach of contract, fraud, negligent misrepresentation, and violations of federal antitrust laws and deceptive practices in connection with Rambus’ participation in JEDEC, and seeks a declaratory judgment that the Rambus patents-in-suit are invalid and not infringed by Hynix, compensatory and punitive damages, and attorneys’ fees. Rambus denied Hynix’s claims and has filed counterclaims alleging that Hynix has infringed and is infringing 59 patent claims in 15 Rambus patents.
The California court divided the case into three phases: (1) Hynix’s unclean hands and spoliation of evidence defenses; (2) Rambus’ patent infringement case and Hynix’s patent-related affirmative defenses; and (3) Hynix’s claims arising from Rambus’ conduct at JEDEC and other alleged misconduct not directly tied to patent issues. The unclean hands trial was held in October 2005. Under the current court calendar, the patent trial is set to begin on March 6, 2006, and the conduct trial on May 15, 2006; these dates, however, are subject to change.
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In January 2005, the California court held on summary judgment that Hynix infringed 29 Rambus patent claims. Hynix filed a motion on January 25, 2005, for relief from the court’s order as to certain of those claims under Rule 60(b)(1) due to its “excusable neglect.” The California court granted Hynix’s motion on March 4, 2005, and vacated its grant of summary judgment as to 18 claims previously held infringed. Two of the remaining 11 claims held infringed on summary judgment are among the 10 claims selected by Rambus for the phase 2 patent trial. On October 18, 2005, Hynix moved for reconsideration of the court’s summary judgment order due to an intervening appellate court decision regarding claims construction. The California court denied Hynix’s motion on February 21, 2006.
Relying on the Virginia court’s oral ruling in the Infineon case in March 2005, Hynix moved to dismiss this case on the grounds of collateral estoppel. The California court denied Hynix’s motion on April 25, 2005.
In September 2005, Samsung and Nanya—defendants in a separate but related patent infringement cases filed by Rambus—sought to intervene and consolidate their own unclean hands defenses in the Hynix unclean hands trial. They also sought to reset the trial to a later date. The California court denied Samsung and Nanya’s request on October 3, 2005, and denied Samsung’s renewed motion to consolidate on January 4, 2006.
The first phase of the Hynix-Rambus trial—on unclean hands and spoliation—began as scheduled on October 17, 2005 and concluded on November 1, 2005. On January 4, 2006, the California court issued its Findings of Fact and Conclusions of Law. Among other things, the court found that Rambus did not adopt its document retention policy in bad faith, did not engage in unlawful spoliation of evidence, and that while Rambus disposed of some relevant documents pursuant to its document retention policy, Hynix was not prejudiced by the destruction of Rambus documents. Accordingly, the California court held that Hynix’s unclean hands defense failed. On January 19, 2006, Hynix filed a motion for new trial or permission to appeal the court’s unclean hands decision. The hearing on this motion is set for February 23, 2006. The effect of this motion, if any, on the January 4, 2006 decision, the March 6, 2006 patent trial, or the May 15, 2006 conduct trial, or any other aspect of this case is presently unknown.
At the California court’s direction, the parties in the three related cases pending before the court—Rambus, Hynix, Samsung, and Nanya—agreed to explore settlement of their various disputes in mediation. Rambus, Hynix, Samsung, and Micron also agreed to mediation of the price-fixing dispute at the urging of San Francisco Superior Court (see below). As a result, there were three separate mediations: a Rambus-Samsung mediation on December 12-13, 2005; a Rambus-Hynix-Micron mediation on January 10-11, 2006; and a Rambus-Hynix-Samsung-Nanya mediation on January 17-18 and 20, 2006. None of the mediations has resulted in settlement to date, and no additional mediation sessions are currently scheduled. There can be no assurances of any settlement prior to further litigation in these cases.
European Patent Infringement Case
Beginning on September 4, 2000, Rambus filed suit against Hynix in multiple European jurisdictions for infringement of European patent, EP 0 525 068 (the “‘068 patent”). Rambus later filed a further infringement action against Hynix in Mannheim, Germany on a second patent, EP 1 004 956 (the “‘956 patent”). Both patents were opposed by Hynix, Micron, and Infineon in the European Patent Office (EPO). The ‘068 patent was revoked by an Appeal Board in 2004, and the ‘956 patent was revoked in the first instance by an Opposition Board on January 13, 2005. The decision with respect to the ‘956 patent is being appealed. As a result of these developments, only the infringement case with respect to the ‘956 patent remains pending against Hynix in Europe.
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Micron Litigation
U.S District Court in Delaware
On August 28, 2000, Micron filed suit against Rambus in the U.S. District Court in Delaware (the “Delaware court”). The suit asserts violations of federal antitrust laws, deceptive trade practices, breach of contract, fraud and negligent misrepresentation in connection with Rambus’ participation in JEDEC. Micron seeks a declaration of monopolization by Rambus, compensatory and punitive damages, attorneys’ fees, a declaratory judgment that eight Rambus patents are invalid and not infringed, and the award to Micron of a royalty-free license to the Rambus patents. In February 2001, Rambus filed its answer and counterclaims, whereby Rambus disputed Micron’s claims and asserted infringement by Micron of the eight U.S. patents.
On July 14, 2005, the Delaware court indicated at a status conference that trial in this case would not occur until after the conclusion of the Hynix case in the Northern District of California. On January 13, 2006, the Delaware court issued an order confirming that trial here will proceed in three phases in the same general order as in the Hynix case: (1) unclean hands; (2) patent infringement; and (3) antitrust, equitable estoppel, and related issues (“conduct”).
Also on January 13, 2006, the Delaware court issued an order lifting the stay that had prevented Rambus from filing certain new patent litigation against Micron since February 27, 2002, and granting Rambus leave to amend and supplement its counterclaims in the Delaware action. As a result, four Rambus patents have been added to this lawsuit. During a scheduling conference on February 9, 2006, the Delaware court set the unclean hands trial to begin on October 22, 2006; the patent trial to begin on November 5, 2007; and the conduct trial to begin on November 10, 2008.
As discussed above, Micron participated in the Rambus-Hynix-Micron mediation on January 10-11, 2006, but declined an invitation to participate in the mediation on January 17, 2006. No other mediation sessions are currently scheduled with Micron.
On February 14, 2006, Rambus filed a motion to transfer this case to the Northern District of California.
U.S. District Court of the Eastern District of Virginia
On February 21, 2006, Micron filed suit against Rambus in the District Court in the Eastern District of Virginia, asserting claims for violation of the federal civil Racketeer Influenced and Corrupt Organizations Act (RICO) and Virginia state conspiracy laws. Among other things, the complaint alleges document spoliation and litigation misconduct. Rambus believes these claims lack merit, and intends to defend itself vigorously.
European Patent Infringement Cases
On September 11, 2000, Rambus filed suit against Micron in multiple European jurisdictions for infringement of its ‘068 patent (described above), which was later revoked. Additional suits were filed pertaining to the ‘956 patent and a third Rambus patent, EP 1 022 642 (the “‘642 patent”). Currently, Rambus has pending litigation against Micron in Italy and Germany only. Two proceedings in Italy relate to the ‘956 and ‘642 patents; in December 2005, the courts postponed those proceedings until late 2006. Rambus’ suit against Micron for infringement of the ‘642 patent in Mannheim, Germany, has not been active.
On September 29, 2005, Rambus received a letter from Micron seeking to toll a statute of limitations period in Italy for a purported cause of action resulting from a seizure of evidence in Italy in 2000 carried out by
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Rambus pursuant to a court order. Micron asserts that its damages allegedly caused by this seizure equal or exceed $30.0 million.
DDR2, GDDR2 & GDDR3 Litigation
U.S District Court in the Northern District of California
On January 25, 2005, Rambus filed a patent infringement suit in the U.S. District Court in the Northern District of California against Hynix, Infineon, Nanya, and Inotera regarding DDR2 and GDDR2, and GDDR3 products. Judge Whyte has granted Rambus’ motion to have this case declared ‘as related to’ the Hynix case, such that both cases are currently pending before him.
Pursuant to the settlement with Infineon noted above, Rambus dismissed Infineon with prejudice from this litigation. Rambus added Samsung as a defendant on June 6, 2005. On July 18, 2005, Inotera moved to dismiss on the grounds that it does not sell product or conduct business in the United States. Inotera was dismissed from the lawsuit without prejudice by way of stipulated order on October 5, 2005. Accordingly, this case is currently pending against Hynix, Samsung, and Nanya only. These defendants have all filed answers denying Rambus’ claims, as well as counterclaims against Rambus.
On July 15, 2005, Rambus filed a motion to dismiss certain of Samsung’s and Nanya’s defenses and counterclaims. On August 20, 2005, Rambus also filed a motion to dismiss certain of Hynix’s defenses and counterclaims. On October 28, 2005, the California court granted Rambus’ motions as to all defendants and gave defendants leave to amend their pleadings.
On November 18, 2005, the court issued a temporary stay in this case to conserve resources and allow the parties to focus on the mediation efforts discussed above. This stay expired on January 31, 2006.
Samsung Litigation
U.S. District Court in the Northern District of California
On June 6, 2005, Rambus filed a lawsuit against Samsung in the U.S. District Court in the Northern District of California. The suit alleges that Samsung’s manufacture, use and sale of SDRAM and DDR SDRAM parts infringe 11 of Rambus’ patents. (The number of patents was later reduced by two, after Rambus gave Samsung the covenant not to sue discussed below.) Judge Whyte has granted Rambus’ motion to have this case declared ‘as related to’ the Hynix and DDR2 cases currently pending before him.
Samsung answered the complaint on June 22, 2005, and filed counterclaims for non-infringement, invalidity and unenforceability of the patents, violations of various antitrust and unfair competition statutes, breach of license, and breach of duty of good faith and fair dealing. Samsung also counterclaimed that Rambus aided and abetted breach of fiduciary duty and intentionally interfered with Samsung’s contract with a former employee by knowingly hiring a former Samsung employee who allegedly misused proprietary Samsung information. On July 15, 2005, Rambus denied Samsung’s counterclaims and moved to dismiss certain of Samsung’s defenses and counterclaims. On October 28, 2005, the California court granted Rambus’ motion and gave Samsung leave to amend its pleading.
On November 18, 2005, the California court issued a temporary stay in this case to conserve resources and allow the parties to focus on the mediation efforts discussed above. This stay expired on January 31, 2006.
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U.S District Court in the Eastern District of Virginia
On June 7, 2005, Samsung sued Rambus in the U.S. District Court in the Eastern District of Virginia. In its complaint, as amended, Samsung seeks a declaratory judgment that four Rambus patents are invalid, unenforceable and/or not infringed. Rambus answered the complaint on July 12, 2005, disputing Samsung’s claims, and granting a covenant not to sue Samsung for infringement of two patents for which Samsung sought declaratory relief: 5,954,804 (the “‘804 patent”) and 6,032,214 (the “‘214 patent”). Samsung stated that the language in the covenant not to sue was not acceptable. On August 8, 2005, Samsung moved for partial summary judgment of patent unenforceability based on the February 2005 Infineon unclean hands hearing before the same court.
On September 6, 2005, Rambus filed a revised covenant not to sue Samsung with respect to the ‘804 and ‘214 patents. The parties filed a stipulation on September 13, 2005 dismissing without prejudice Samsung’s claims that those two patents are invalid, unenforceable and/or not infringed. On September 22, 2005, Rambus granted Samsung a second covenant not to sue for infringement of the remaining two patents in suit—U.S. patent nos. 5,953,263 and 6,034,918. Consequently, Rambus’ counterclaims against Samsung for infringement of these two patents were dismissed with prejudice on September 28, 2005.
On September 27, 2005, Rambus filed a motion to dismiss this action on the ground that the two covenants not to sue divested the Virginia court of subject matter jurisdiction. On October 3, 2005, Rambus submitted an offer to Samsung to pay its attorneys’ fees; Rambus believes that this offer mooted any claim by Samsung for attorneys’ fees. Samsung did not accept the offer. Instead, Samsung opposed Rambus’ motion to dismiss on October 5, 2005, arguing that it is entitled to a judicial determination of whether this litigation was exceptional warranting the payment of its attorneys’ fees under 35 U.S.C. § 285.
On November 8, 2005, the Virginia court issued orders on the various matters pending before it. The court (1) denied Samsung’s motion for partial summary judgment as moot; (2) granted Rambus’ motion to dismiss with respect to Samsung’s claims for declaratory judgment but denied the motion with respect to Samsung’s claim for attorney’s fees pursuant to 35 U.S.C. §285; and (3) ordered that the Rambus v. Infineon record shall be made part of the record in this action for purposes of deciding the exceptional case issue. The Virginia court also set the procedures for adjudication of the exceptional case issue and Samsung’s attorneys’ fees claim. Samsung seeks to recover more than $476,000 in attorneys’ fees.
Rambus notified the Virginia court that it made a Rule 68 offer of judgment to Samsung on November 30, 2005, and that this offer divested the court of any remaining subject matter jurisdiction. Samsung did not accept the Rule 68 offer. A hearing on the jurisdiction issue and supplemental argument on the exceptional case issue is set for February 21, 2006.
Delaware Chancery Court
On June 23, 2005, Samsung sued Rambus in the Delaware Chancery Court asserting claims similar to their counterclaims in the Northern District of California action. The suit seeks a declaration that Rambus patents claiming a priority date prior to the termination of its former employee’s employment with Samsung be declared unenforceable as against Samsung as a result of Samsung’s allegations charging Rambus with aiding and abetting breach of fiduciary duty and intentional interference with contract. Rambus filed an answer on July 18, 2005, denying Samsung’s claims. Discovery in this litigation is ongoing.
FTC Complaint
On June 19, 2002, the Federal Trade Commission, or FTC, filed a complaint against Rambus. The FTC alleged that through Rambus’ action and inaction at a standards setting organization called JEDEC, Rambus
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violated Section 5 of the FTC Act in a way that allowed Rambus to obtain monopoly power in—or that by acting with intent to monopolize it created a dangerous probability of monopolization in—synchronous DRAM technology markets. The FTC also alleged that Rambus’ action and practices at JEDEC constituted unfair methods of competition in violation of Section 5 of the FTC Act. As a remedy, the FTC sought to enjoin Rambus’ right to enforce patents with priority dates prior to June 1996 as against products made pursuant to certain existing and future JEDEC standards.
On February 17, 2004, the FTC Chief Administrative Law Judge issued his initial decision dismissing the FTC’s complaint against Rambus on multiple independent grounds. The FTC’s Complaint Counsel appealed this decision. All substantive briefing and argument on this appeal is complete.
As previously reported, Complaint Counsel has moved to reopen the record to admit documents regarding Rambus’ alleged spoliation of evidence. At the FTC’s request, the parties filed responses in December 2004, designating portions of the record that pertain to the alleged spoliation. Rambus believes that a number of allegations made by Complaint Counsel in its response were improper and inaccurate. Following the Virginia court’s oral ruling on unclean hands and spoliation in the Infineon case, Complaint Counsel again moved to reopen the record to permit further examination of the spoliation allegations. On May 13, 2005, the FTC granted this motion in part, limiting the reopening of the record to the evidence Infineon submitted during the Infineon hearing in February 2005. The FTC ruled on July 20, 2005 that supplemental evidence would be accepted into the record.
The parties submitted supplemental proposed findings of fact on August 10, 2005. On the same date, Complaint Counsel filed a motion seeking sanctions due to alleged spoliation by Rambus. On September 20, 2005, Rambus moved to reopen the record to admit newly obtained evidence from the San Francisco price-fixing case, discussed below, that Rambus believes rebuts Complaint Counsel’s proposed findings. Although these documents are subject to a protective order, Rambus moved to amend the protective order in the San Francisco case to permit their use in this action. On September 29, 2005, Complaint Counsel moved to reopen the record to admit certain documents from Rambus’ backup tapes pertaining to Rambus’ alleged spoliation of evidence. In a non-public order on February 2, 2006, the FTC Commissioners granted in part Complaint Counsel’s motion to reopen the record. In the same order, the Commissioners denied Rambus’ motion to reopen the record, but they did so without prejudice to Rambus being able to refile the motion depending on the ruling on Rambus’ motion in the San Francisco court to amend the protective order. The hearing on Rambus’ motion to amend the protective order in the San Francisco price-fixing case is set for February 23, 2006.
European Commission Competition Directorate-General
On or about April 22, 2003, Rambus was notified by the European Commission Competition Directorate-General (Directorate) (the “EU Directorate”) that it had received complaints from Infineon and Hynix. Rambus answered the ensuing requests for information prompted by those complaints on June 16, 2003. Rambus obtained a copy of Infineon’s complaint to the EU Directorate in late July 2003, and on October 8, 2003, at the request of the Directorate, filed its response. Rambus has not heard from the EU Directorate on this matter since that date.
On June 18, 2004, Rambus requested that the EU Directorate investigate the collusive activities of Infineon/Siemens, Hynix, and Micron, as described in Rambus’ complaint filed in the “price fixing” case in the San Francisco Superior Court. On March 10, 2005, Rambus received a responsive letter from the EU Directorate requesting certain additional information. Rambus replied to this request on May 23, 2005. On March 29, 2005, as part of its settlement with Infineon, Rambus withdrew its complaint to the extent that it was directed to Infineon/Siemens. Rambus received a second letter from the EU Directorate on August 3, 2005, requesting further information following the settlement agreement with Infineon. Rambus responded on August 23, 2005.
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Price-Fixing Case
Superior Court of California for the County of San Francisco
On May 5, 2004, Rambus filed a lawsuit against Micron, Hynix, Infineon and Siemens in San Francisco Superior Court (the “San Francisco court”) seeking damages for conspiring to fix prices (California Bus. & Prof. Code §16720), conspiring to monopolize under the Cartwright Act (California Bus. & Prof. Code §§16720), intentional interference with prospective economic advantage, and unfair competition (California Bus. & Prof. Code §§17200). Damages are estimated to significantly exceed $1.0 billion dollars (and, when trebled, may significantly exceed $10 billion dollars). This lawsuit alleges that there were concerted efforts beginning in the 1990’s to deter innovation in the DRAM market and to boycott Rambus and/or deter market acceptance of Rambus’ RDRAM product
Pursuant to its settlement with Infineon, Rambus dismissed with prejudice Infineon and Siemens from this action on March 21, 2005. On May 23, 2005, Hynix filed a motion to compel arbitration of Rambus’ dispute with the Hynix defendants. The San Francisco court denied Hynix’s motion to compel arbitration at a hearing on July 12, 2005. Hynix filed a notice of appeal of the court’s decision on October 11, 2005. Micron’s motion to stay this action pending Hynix’s appeal was denied on October 31, 2005.
On June 15, 2005, after receiving access to documents produced by Micron and Hynix to the Department of Justice (the “DOJ”) Rambus added three Samsung-related entities as defendants. On September 29, 2005, Samsung filed a motion to compel arbitration of Rambus’ dispute with the Samsung defendants. The San Francisco court denied Samsung’s motion on October 31, 2005, and entered its Statement of Decision on January 3, 2006. Samsung filed a notice of appeal of this decision on February 6, 2006.
As a result of the DOJ’s on-going investigation, three DRAM companies—Infineon, Hynix, and Samsung—have to date pled guilty to a DRAM price fixing conspiracy that was designed to eliminate competition and that extended from 1999 through 2002. A fourth company, Elpida, which is not a defendant in the San Francisco action, recently agreed to plead guilty to the DRAM price fixing conspiracy as well. The Samsung plea agreement expressly included an admission specific to RDRAM price fixing. The plea agreement for Hynix expressly required the company to cooperate in an ongoing investigation of RDRAM price fixing. Elpida’s plea agreement has not been approved by the court and is not yet public. A fifth company, Micron, has indicated that it is cooperating with the DOJ, and that, although it does not expect fines or jail sentences, there is evidence that it did fix prices with fellow DRAM manufacturers. Total fines agreed to date by the co-conspirators (excluding Elpida) in connection with this DOJ price fixing investigation exceed $645.0 million.
Alberta Telecommunications Research Centre Litigation
On November 15, 2005, Alberta Telecommunications Research Centre, dba TR Labs, a Canadian company, filed suit against Rambus in the U.S. District Court in the Eastern District of Virginia. The complaint alleges that Alberta is the owner of U.S. patent no. 5,361,277 (the “‘277 patent”), and asserts claims for interferences-in-fact pursuant to 35 U.S.C. §291 between the ‘277 patent and Rambus’ U.S. patent nos. 5,243,703 (the “‘703 patent”) and 5,954,804 (the “‘804 patent”); infringement of the ‘277 patent by Rambus; and unjust enrichment. Alberta seeks an order assigning the claims of the ‘703 and ‘804 patent to Alberta, disgorgement of Rambus’ profits from licensing the ‘703 and ‘804 patents, compensatory and punitive damages, attorneys’ fees, and injunctive relief.
Rambus moved to dismiss Alberta’s claims on January 26, 2006, and to transfer the action to the Northern District of California in the event the Virginia district court does not grant Rambus’ motion to dismiss in its entirety. Briefing on these motions was completed on February 9, 2006. On January 30, 2006, the Virginia court ordered Rambus to answer the complaint within 11 days and the parties to participate in a court-supervised
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settlement conference within 50 days. Rambus filed an answer on February 10, 2006. The Virginia court has set the hearing on these motions for March 16, 2006, and it will conduct an initial pretrial conference on the same date.
Potential Future Litigation
In addition to the litigation described above, participants in the DRAM and controller markets continue to adopt Rambus technologies into various products. Rambus has notified many of these companies of their use of Rambus technology and continues to evaluate how to proceed on these matters. There can be no assurance that any ongoing or future litigation will be successful. Rambus spends substantial company resources defending its intellectual property in litigation, which may continue for the foreseeable future given the multiple pending litigations. The outcomes of these litigations—as well as delay in their resolution—could affect Rambus’ ability to license its intellectual property going forward.
16. Subsequent Events
Effective January 13, 2006, at the request of Geoffrey Tate, Chairman of the Board of Rambus, Mr. Tate entered into an agreement with the Rambus, pursuant to which Mr. Tate agreed to cancel an aggregate of (i) 665,000 unvested options to purchase common stock of the Rambus and (ii) 500,000 unvested common stock equivalents of the Rambus held by him. This action was taken by Mr. Tate unilaterally in connection with his wishing to conform his compensation going forward as a non-employee Board member of Rambus to Rambus’ current policies with respect to Board and executive compensation.
On January 23, 2006, Rambus announced that its Board of Directors approved an increase in the authorization under the Rambus’ stock repurchase program, which has been in effect since October 2001. Rambus is authorized to repurchase up to an additional five million shares of its outstanding common stock over an undefined period of time, depending on market conditions, share price and other factors. This is in addition to the remaining current authorization for 1.5 million shares. The repurchases may be made on the open market, in block trades or otherwise and may include derivative transactions. The program may be suspended or discontinued at any time.
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CONSOLIDATED SUPPLEMENTARY FINANCIAL DATA
(in thousands, except share data)
(unaudited)
Revenue:
Contract Revenues
Costs and expenses
Marketing, general and administrative (1)
Operating Income
Interest and other income, net (2)
Provision for (benefit from) income taxes (3)
Net income per share—basic
Net income per share—diluted
Shares used in per share calculations—basic
Shares used in per share calculations—diluted
Stock prices:
High
Low
(1) Stock-based compensation included in marketing, general and administrative expenses
(2) Interest and other income, net includes gains from repurchases made in the third and fourth quarters of 2005 of a portion of the outstanding convertible notes that were issued in the first quarter of 2005.
(3) Provision for income taxes increased in the third and fourth quarters of 2005 due to higher income before taxes and higher utilization of foreign tax credits. For purposes of calculating the provision, the gains from repurchases of a portion of outstanding notes were treated as discrete items.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 21, 2006
/s/ ROBERT K. EULAU
Robert K. Eulau,
Sr. Vice President, Finance and Chief Financial Officer
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KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert K. Eulau as his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on, sign, and file with the Securities and Exchange Commission any and all amendments to this Annual Report on Form 10-K, together with all schedules and exhibits thereto (ii) act on, sign, and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, and (iii) take any and all actions that may be necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ HAROLDHUGHES
Harold Hughes
Chief Executive Officer, President and Director (Principal Executive Officer)
Robert K. Eulau
Sr. Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ GEOFFREYTATE
Geoffrey Tate
Chairman of the Board of Directors
/s/ BRUCEDUNLEVIE
Bruce Dunlevie
Director
/s/ P. MICHAELFARMWALD
P. Michael Farmwald
/s/ J. THOMASBENTLEY
J. Thomas Bentley
/s/ ABRAHAM D. SOFAER
Abraham D. Sofaer
/s/ MARKHOROWITZ
Mark Horowitz
/s/ KEVINKENNEDY
Kevin Kennedy
/s/ DAVIDMOORING
David Mooring
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Exhibit
Description of Document
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
See Item 15(a)(2) above.