UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number: 000-22339 RAMBUS INC. (Exact name of registrant as specified in its charter) <TABLE> - -------------------------------------------------------------------------------- Delaware 94-3112828 <S> <C> - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) - -------------------------------------------------------------------------------- </TABLE> ADDRESS 2465 Latham Street, Mountain View, CA 94040 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (650) 944-8000 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 [_] The number of shares outstanding of the registrant's Common Stock, par value $.001 per share, was 23,933,900 as of March 31, 2000.
RAMBUS INC. FORM 10-Q INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Condensed Balance Sheets as of March 31, 2000 and September 30, 1999................................ 1 Consolidated Condensed Statements of Operations for the Three and Six Months Ended March 31, 2000 and March 31, 1999....... 2 Consolidated Condensed Statements of Cash Flows for the Six Months Ended March 31, 2000 and March 31, 1999................. 3 Notes to Unaudited Consolidated Condensed Financial Statements............. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk................. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................... 16 Item 4. Submission of Matters to a Vote of Security Holders........................ 16 Item 6. Exhibits and Reports on Form 8-K........................................... 17 Signature ........................................................................... 18 </TABLE>
PART I -- FINANCIAL INFORMATION Item 1. Financial Statements. RAMBUS INC. AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except share and per share amounts) <TABLE> <CAPTION> March 31, September 30, --------- ------------- 2000 1999 ---- ---- (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents.......................................... $ 7,512 $ 14,982 Marketable securities.............................................. 84,829 72,158 Accounts receivable................................................ 2,000 1,499 Prepaid and deferred taxes......................................... 4,028 7,579 Prepaids and other current assets.................................. 2,513 2,260 --------- -------- Total current assets............................................ 100,882 98,478 Property and equipment, net.......................................... 3,988 4,232 Marketable securities, less current portion.......................... 1,015 5,658 Restricted cash...................................................... 2,500 2,500 Deferred taxes, long-term............................................ 2,204 4,123 Other assets......................................................... 3,718 782 --------- -------- Total assets.................................................... $ 114,307 $115,773 ========= ======== LIABILITIES Current liabilities: Accounts and taxes payable, accrued payroll and other liabilities.. $ 7,890 $ 4,425 Deferred revenue................................................... 26,392 32,279 --------- -------- Total current liabilities....................................... 34,282 36,704 Deferred revenue, less current portion............................... 8,611 17,505 --------- -------- Total liabilities............................................... 42,893 54,209 --------- -------- STOCKHOLDERS' EQUITY Convertible preferred stock, $.001 par value: Authorized: 5,000,000 shares Issued and outstanding: no shares................................. -- -- Common stock, $.001 par value: Authorized: 60,000,000 shares; Issued and outstanding: 23,933,900 shares at March 31, 2000 and 23,702,668 shares at September 30, 1999....................... 24 24 Additional paid-in capital........................................... 253,478 78,574 Deferred stock-based compensation.................................... (689) -- Accumulated deficit.................................................. (181,381) (17,005) Accumulated other comprehensive loss................................. (18) (29) --------- -------- Total stockholders' equity...................................... 71,414 61,564 --------- -------- Total liabilities and stockholders' equity................... $ 114,307 $115,773 ========= ======== </TABLE> See Notes to Unaudited Consolidated Condensed Financial Statements. 1
RAMBUS INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues: Contract revenues................................. $ 12,191 $ 7,945 $ 21,510 $15,893 Royalties......................................... 3,503 1,914 6,133 4,540 --------- ------- --------- ------- Total revenues................................. 15,694 9,859 27,643 20,433 --------- ------- --------- ------- Costs and expenses: Cost of contract revenues......................... 3,018 2,485 6,549 4,587 Research and development.......................... 2,900 2,498 5,124 5,587 Marketing, general and administrative............. 5,064 3,293 8,463 6,263 Employee stock-related compensation expense....... 171,085 -- 171,085 -- --------- ------- --------- ------- Total costs and expenses....................... 182,067 8,276 191,221 16,437 --------- ------- --------- ------- Operating income (loss)........................ (166,373) 1,583 (163,578) 3,996 Other income, net................................... 1,167 1,657 2,164 2,669 --------- ------- --------- ------- Income (loss) before income taxes.............. (165,206) 3,240 (161,414) 6,665 Provision for income taxes.......................... 1,635 1,231 2,962 2,601 --------- ------- --------- ------- Net income (loss).............................. $(166,841) $ 2,009 $(164,376) $ 4,064 ========= ======= ========= ======= Net income (loss) per share - basic................. $ (6.98) $ 0.09 $ (6.90) $ 0.18 ========= ======= ========= ======= Net income (loss) per share - diluted............... $ (6.98) $ 0.08 $ (6.90) $ 0.16 ========= ======= ========= ======= Number of shares used in per share calculations: Basic............................................. 23,889 23,209 23,824 23,121 Diluted........................................... 23,889 24,980 23,824 24,933 </TABLE> See Notes to Unaudited Consolidated Condensed Financial Statements. 2
RAMBUS INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended March 31, --------- 2000 1999 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income (loss).................................................. $(164,376) $ 4,064 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Non-cash employee stock-related compensation.................... 169,878 -- Depreciation and amortization................................... 1,467 1,565 Amortization of deferred compensation........................... 262 -- Amortization of goodwill and other.............................. 111 (696) Change in operating assets and liabilities: Accounts receivable.......................................... (501) (91) Prepaid and deferred taxes................................... 5,470 3,980 Prepaids and other current assets............................ (253) 93 Other assets................................................. 287 (46) Accounts and taxes payable, accrued payroll and other liabilities................................................. 3,243 980 Deferred revenue............................................. (14,781) (4,468) --------- --------- Net cash provided by operating activities................. 807 5,381 --------- --------- Cash flows from investing activities: Purchase of property and equipment................................. (1,223) (2,083) Purchases of marketable securities................................. (490,433) (757,041) Maturities of marketable securities................................ 482,380 742,369 Acquired technology rights......................................... (1,334) -- Purchases of investments........................................... (2,000) (1,200) Sales of investments............................................... -- 2,822 --------- --------- Net cash used in investing activities..................... (12,610) (15,133) --------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock......................... 4,297 1,803 Principal payments on capital lease obligations.................... -- (101) --------- --------- Net cash provided by financing activities................. 4,297 1,702 --------- --------- Effect of exchange rates on cash and cash equivalents................ 36 107 --------- --------- Net decrease in cash and cash equivalents............................ (7,470) (7,943) Cash and cash equivalents at beginning of period..................... 14,982 25,798 --------- --------- Cash and cash equivalents at end of period........................... $ 7,512 $ 17,855 ========= ========= Supplemental disclosure of cash flow information: Interest paid...................................................... $ -- $ 8 Taxes paid......................................................... $ 418 $ 247 Tax benefit of stock option exercises.............................. $ -- $ 2,615 </TABLE> See Notes to Unaudited Consolidated Condensed Financial Statements. 3
RAMBUS INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiary, Rambus K.K., located in Tokyo, Japan. All intercompany accounts and transactions have been eliminated in the accompanying consolidated condensed financial statements. In the opinion of management, the consolidated condensed financial statements include all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position and results of operations for each interim period shown. Interim results are not necessarily indicative of results for a full year. The consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto, for the year ended September 30, 1999, included in the Company's 1999 Annual Report on Form 10-K. 2. Recent Accounting Pronouncements In October 1999, the Company adopted American Institute of Certified Public Accountants (AICPA) Statement of Position No. 98-9 (SOP 98-9), Modification of SOP 97-2, "Software Revenue Recognition." SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by means of the "residual method" when (1) there is no vendor-specific objective evidence ("VSOE") of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied. Adoption of SOP 98-9 had no material impact on the Company's results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133." SFAS 137 deferred the effective date of SFAS 133 until the first fiscal quarter beginning after June 15, 2000. The Company does not currently hold derivative instruments or engage in hedging activities. The Company expects the adoption of SFAS 133 and SFAS 137 will have no material impact on its financial statements and related disclosures. 4
RAMBUS INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-- (Continued) 3. 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. Comprehensive income (loss) is as follows (in thousands; unaudited): <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income (loss)...................................... $(166,841) $2,009 $(164,376) $4,064 Other comprehensive income (loss): Foreign currency translation adjustments......... (2) (41) 36 107 Unrealized gain (loss) on marketable securities...................................... 36 -- (25) -- --------- ------ --------- ------ Other comprehensive income (loss)...................... 34 (41) 11 107 Total comprehensive income (loss)...................... $(166,807) $1,968 $(164,365) $4,171 ========= ====== ========= ====== </TABLE> Accumulated other comprehensive income (loss) presented in the accompanying consolidated condensed balance sheets consists of cumulative foreign currency translation adjustments and unrealized gains and losses on marketable securities. 4. Contingent Warrants, Common Stock Equivalents, and Options In January 1997, the Company granted a warrant to Intel Corporation for the purchase of 1,000,000 shares of Rambus common stock (the "Intel warrant") at an exercise price of $10.00 per share. The warrant will become exercisable only upon the achievement of certain milestones by Intel relating to shipment volumes of Rambus-based chipsets (the "Intel milestones"). At the time that the achievement of the milestones becomes probable, a non-cash charge will be made to the statement of operations based on the fair value of the warrant. In October 1998, the Company's Board of Directors authorized an incentive program in the form of warrants on a total of up to 400,000 shares of Rambus common stock (the "DRAM incentive warrants") to be issued to various Rambus Direct DRAM partners upon the achievement of certain product qualification and volume production targets. The warrants, to be issued at the time the targets are met, will have an exercise price of $10.00 per share and a life of five years. They will vest and become exercisable on the same basis as the Intel warrant, which will result in a non-cash charge to the statement of operations based on the fair value of the warrants at the time the achievement of the Intel milestones becomes probable. As of March 31, 2000, a total of 90,000 of these warrants had been issued. In the fourth quarter of fiscal 1999, the Company granted to its Chief Executive Officer and to its President a combined total of 500,000 Common Stock Equivalents (CSEs) and to its employees approximately 540,000 options to purchase Rambus common stock for $10.00 per share. Vesting of these CSEs and options was contingent upon the achievement of key indicators of success for Rambus. Vesting for a portion of these CSEs and options was contingent on an increase in the price of Rambus common stock to greater than $200 per share for 30 consecutive days. This target was achieved by the end of the second quarter of fiscal 5
RAMBUS INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-- (Continued) 4. Contingent Warrants, Common Stock Equivalents, and Options (continued) 2000, and resulted in a $171.1 million employee stock-related compensation charge taken in the same quarter. Except for a $1.2 million employer payroll tax liability, this was a non-cash charge. The remaining CSEs and options will vest on the same basis as the Intel and DRAM incentive warrants, which will result in another almost entirely non-cash charge to the statement of operations based on the fair value of the CSEs and options at the time achievement of the Intel milestones becomes probable. 5. Income Taxes The Company recorded a provision for income taxes of $1.6 million and $3.0 million in the second quarter and first six months of fiscal 2000, respectively, compared to a provision of $1.2 million and $2.6 million in the comparable periods of fiscal 1999, respectively. The estimated federal and state combined rates on pretax income, excluding non-cash employee stock-related compensation expense, for the first half of fiscal 2000 and fiscal 1999 were 35% and 39%, respectively. The Company's effective tax rate differs from the statutory rate due to the valuation allowance impact of timing differences related to the recognition of contract revenues for tax and financial reporting purposes. 6. Acquired Technology Rights In November 1999, the Company acquired rights to the intellectual property assets of a network technology company for approximately $1.3 million in cash. The value of these assets will be amortized over five years. As a part of this transaction, the Company also committed to provide certain key employees of the acquired company with $1.8 million of deferred cash and stock-based compensation, subject to vesting. Such deferred compensation will be recognized over the vesting terms, ranging from 2 to 4 years. Research and development expenses include approximately $230,000 and $373,000 of such acquisition-related expenses in the second quarter and first six months of fiscal 2000, respectively. 6
RAMBUS INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-- (Continued) 7. Net Income (Loss) Per Share Net income (loss) per share is computed in accordance with Financial Accounting Standards Board Statement No. 128 (SFAS 128), "Earnings Per Share," which requires the presentation of basic and diluted net income (loss) per share. Basic net income (loss) per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of common shares and common stock equivalents outstanding during the period. In periods of net loss, common stock equivalents are excluded from the diluted loss per share calculation since their effect is antidilutive. In the three and six months ended March 31, 2000, the numbers of common stock equivalents excluded from diluted loss per share calculations because they are antidilutive are 3,125,712 and 2,567,030, respectively. Net income (loss) per share is calculated as follows (in thousands, except per share data; unaudited): <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- 2000 1999 2000 1999 --------- ------- --------- ------- <S> <C> <C> <C> <C> Net income (loss).......................................... $(166,841) $ 2,009 $(164,376) $ 4,064 ========= ======= ========= ======= Weighted average common shares outstanding................. 23,889 23,209 23,824 23,121 Additional dilutive common stock equivalents............... -- 1,771 -- 1,812 --------- ------- --------- ------- Diluted shares outstanding................................. 23,889 24,980 23,824 24,933 ========= ======= ========= ======= Net income (loss) per share - basic........................ $ (6.98) $ 0.09 $ (6.90) $ 0.18 ========= ======= ========= ======= Net income (loss) per share - diluted...................... $ (6.98) $ 0.08 $ (6.90) $ 0.16 ========= ======= ========= ======= </TABLE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The forward-looking statements contained in this discussion and analysis involve risks and uncertainties which could cause future actual results to differ materially. Such risks include market acceptance of the Company's technology; systems companies' acceptance of Rambus ICs produced by the Company's licensees; market acceptance of the products of systems companies which have adopted the Company's technology; delays, lack of cost- competitiveness or other problems in the introduction or performance of Rambus ICs or products which include Rambus ICs including, but not limited to, RDRAMs, Intel Rambus-based chipsets and the Sony PlayStation2; future dependence upon the PC main memory market and Intel; the loss of any strategic relationships with systems companies or licensees; announcements or introductions of new technologies or products by the Company or the Company's competitors; delays, lack of cost-competitiveness or other problems in the introduction or performance of enhancements or future generations of the Company's current technology or new products; fluctuations in the market price and demand for DRAMs and logic ICs into which the Company's technology has been incorporated; competitive pressures resulting in lower contract revenues or royalty rates; changes in the Company's, licensees' and system companies' development and product introduction schedules and levels of expenditure on research and development and marketing; personnel changes, particularly those involving engineering and technical personnel; costs associated with protecting the Company's intellectual property; changes in Company strategies; foreign exchange rate fluctuations or other changes in the international business climate; and general economic trends. A more detailed discussion of risks faced by the Company is set forth in the Company's 1999 Annual Report on Form 10-K filed with the SEC. Results of Operations The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in the Company's consolidated condensed statements of operations and the percentage change of such items between periods: <TABLE> <CAPTION> Percent of Total Revenues, Percent Three Months Ended Change March 31, 2000 v. -------------------------- 2000 1999 1999 -------- -------- -------- <S> <C> <C> <C> Revenues: Contract revenues............................ 77.7 % 80.6 % 53.4 % Royalties.................................... 22.3 19.4 83.0 -------- ------ Total revenues............................ 100.0 % 100.0 % 59.2 % ======== ====== Costs and expenses: Cost of contract revenues................... 19.2 25.2 21.4 Research and development.................... 18.5 25.3 16.1 Marketing, general and administrative....... 32.3 33.4 53.8 Employee stock-related compensation expense.................................... 1,090.0 -- * -------- ------ Total costs and expenses.................. 1,160.0 83.9 * -------- ------ Operating income (loss)......................... (1,060.0) 16.1 * Other income, net............................... 7.4 16.8 (29.6) -------- ------ Income (loss) before income taxes............... (1,052.6) 32.9 * Provision for income taxes...................... 10.4 12.5 32.8 -------- ------ Net income (loss)............................... (1,063.0)% 20.4 % * % ======== ====== </TABLE> 8
<TABLE> <CAPTION> Percent of Total Revenues, Percent Six Months Ended Change March 31, 2000 v. -------------------------- 2000 1999 1999 -------- -------- -------- <S> <C> <C> <C> Revenues: Contract revenues............................. 77.8 % 77.8% 35.3 % Royalties..................................... 22.2 22.2 35.1 ------- ------ Total revenues............................. 100.0 % 100.0% 35.3 % ======= ====== Costs and Expenses: Cost of contract revenues.................... 23.7 22.4 42.8 Research and development..................... 18.5 27.3 (8.3) Marketing, general and administrative........ 30.6 30.7 35.1 Employee stock-related compensation expense..................................... 618.9 -- * ------- ------ Total costs and expenses................... 691.7 80.4 * ------- ------ Operating income (loss).......................... (591.7) 19.6 * Other income, net................................ 7.8 13.0 (18.9) ------- ------ Income (loss) before income taxes................ (583.9) 32.6 * Provision for income taxes....................... 10.7 12.7 13.9 ------- ------ Net income (loss)................................ (594.6)% 19.9% * % ======= ====== </TABLE> ___________________ * Not meaningful Revenues. Total revenues for the three and six months ended March 31, 2000 increased 59.2% and 35.3% to $15.7 million and $27.6 million, respectively, over the comparable three- and six-month periods in the previous year. Contract revenues increased 53.4% to $12.2 million (77.7% of total revenues) and 35.3% to $21.5 million (77.8% of total revenues) in the second quarter and first six months of fiscal 2000, respectively, over the comparable periods of fiscal 1999. The majority of the increase in contract revenues during the second quarter represents recognition of the remaining revenue on the DRAM portion of a contract which was terminated by mutual consent due to the licensee's withdrawal from the commodity DRAM market. Such a termination results in the cancellation of all obligations on RDRAM development for both parties. Since all license and engineering payments already received are nonrefundable, the balance of deferred revenue on this contract was recognized upon termination in the second quarter. Also contributing to the revenue increase for the first half of fiscal 2000 was a change in management's estimate of certain contract revenue recognition periods, which occurred in the fourth quarter of fiscal 1999. Such periods are initially estimated based upon management's judgment of the time over which the Company has an obligation to support its licensees. As the new generation of Rambus technology went into production late in fiscal 1999, a more accurate estimate of the remaining support period could be made. To the extent the new estimated periods were less than the original estimates, the amount of deferred revenue recognized in the first half of fiscal 2000 was greater than in the comparable period of fiscal 1999. This increase was partially offset by the ending of revenue recognition on contracts for which the contract period had expired, including the Texas Instruments ("TI") DRAM contract. Each of the four quarters of fiscal 1999 included approximately $900,000 of contract revenue from the TI DRAM contract. This revenue was recognized on an accelerated basis due to the sale of TI's DRAM business to Micron and was fully recognized by the end of fiscal 1999. While the Company anticipates continuing to book additional contracts, it expects that contract revenues will decline over time as the revenue recognition periods expire for contracts booked 9
previously. The Company's past success in signing licensees has reduced the number of potential new licensees, which also contributes to the anticipated decline in contract revenues. However, in the short term, contract revenues may temporarily increase due to accelerated revenue recognition related to a combination of changes in management's estimates of contract revenue recognition periods and pending mergers and product abandonments in the DRAM industry, which could result in additional contract terminations by the Company. Royalties in the second quarter and first half of fiscal 2000 increased 83.0% to $3.5 million (22.3% of total revenues) and 35.1% to $6.1 million (22.2% of total revenues), respectively, from the comparable periods of fiscal 1999. The Company believes that much of its royalty revenue in each of these fiscal 2000 periods resulted from the game console business - both the relatively high seasonal sales of Nintendo 64 systems and, in the second quarter, the first shipments of Rambus ICs to Sony for the PlayStation2's March debut in Japan. The Company expects Nintendo royalties to decrease seasonally over the next quarter. However, during the same period, the Company expects to recognize the first significant royalties from the shipment of Rambus ICs for use in desktop PCs and workstations as well as increasing royalties from the Sony PlayStation2. Because of the use of its technology in these new markets, the Company believes that royalties will become an increasing portion of its revenues in the future. To date, a majority of the Company's royalties has been derived from the sale of logic ICs incorporating Rambus ASIC cells (RACs) for use in game consoles. If the Company is successful in its strategy to penetrate the PC main memory market segment, the Company expects that royalties from the sale of RDRAMs will eventually account for the largest portion of royalties, since a PC generally uses many more RDRAMs than does a game console. The Company's royalty revenue is largely a function of the adoption of Rambus technology by systems companies and the acceptance of the systems companies' products by end users. The markets addressed by systems companies using Rambus ICs, including those in the game console and PC businesses, are characterized by extreme volatility, frequent new product introductions and rapidly shifting consumer preferences, and there can be no assurance as to the unit volumes of Rambus ICs that will be purchased in the future or the level of royalty-bearing revenues that the Company will receive due to these applications. None of the systems companies currently incorporating Rambus interface technology into their products is contractually obligated to continue using Rambus ICs. Given the concentration of royalties from a limited number of sources, it is likely that royalties will continue to vary greatly from quarter to quarter. As of March 31, 2000, the Company had 32 active licensees compared to 31 such licensees at March 31, 1999. Because all of the Company's revenues are derived from its relatively small number of licensees, revenues tend to be highly concentrated. In the second quarter and first six months of fiscal 2000, the Company's top five licensees accounted for 64% and 54% of total revenues, respectively. During these same periods, Matsushita accounted for 32% and 20% of total revenues, respectively; and NEC for 13% and 14%. The Company expects that it will continue to experience significant revenue concentration for the foreseeable future. However, the particular licensees which account for revenue concentration may vary from period to period depending on the addition of new contracts, the expiration of deferred revenue schedules under existing contracts, and the volumes and prices at which the licensees sell Rambus ICs to systems companies in any given period. To date, companies based in Japan, Korea and Taiwan have accounted for most of the Company's revenues, and for the substantial majority of its international revenues. In the second 10
quarter and first six months of fiscal 2000, international revenues comprised 80% and 75% of total revenues, respectively. The Company expects that revenues derived from international licensees will continue to represent a significant portion of its total revenues in the future. All of the revenues from international licensees to date have been denominated in United States dollars. In a few cases, the Company has received nonrefundable, prepaid royalties which offset the earliest royalty payments otherwise due from the licensee. As of March 31, 2000, $5.0 million of such nonrefundable, prepaid royalties had offset initial royalties, and the Company had a balance of $1.3 million remaining to be offset against future royalties. Substantially all of the license fees, engineering service fees and nonrefundable, prepaid royalties are bundled together as contract fees because the Company generally does not provide or price these components separately. The contracts also generally include rights to upgrades and enhancements. Accordingly, Rambus recognizes contract revenues ratably over the period during which post-contract customer support is expected to be provided. The excess of contract fees received over contract revenue recognized is shown on the Company's balance sheet as deferred revenue. As of March 31, 2000, the Company's deferred revenue was $35.0 million, substantially all of which is scheduled to be recognized in varying amounts over the next four years. Engineering Costs. Engineering costs, consisting of cost of contract revenues and research and development expenses, increased 18.8% to $5.9 million (37.7% of total revenue) and 14.7% to $11.7 million (42.2% of total revenue) in the second quarter and first six months of fiscal 2000, respectively, over the comparable periods of fiscal 1999. The increase in absolute dollars is primarily attributable to engineering personnel added to support the launch of Rambus technology into the PC main memory market, the Company's announced technology roadmap improvements, and new initiatives in the communications market and chip- to-chip connections. Cost of Contract Revenues. Cost of contract revenues as a percentage of total revenues decreased to 19.2% in the second quarter of fiscal 2000 from 25.2% in the comparable period of fiscal 1999, and increased to 23.7% in the first half of fiscal 2000 from 22.4% in the comparable period of fiscal 1999. The decrease in cost of contract revenues as a percentage of total revenues in the second quarter of 2000 compared to 1999 was related to a reduction in the engineering effort required to support the launch and ramp of Rambus technology into the PC main memory market as well as to the effect of the increase in the Company's revenues. The slight increase in cost of contract revenues as a percentage of total revenues in the first half of fiscal 2000 compared to the same period of fiscal 1999 represents the effect of an increase in the first quarter due to the launch and ramp of Rambus technology into the PC main memory market offset by the second quarter decrease. The Company believes that the level of cost of contract revenues will fluctuate in the future, both in absolute dollars and as a percentage of revenues, as new generations of Rambus ICs go through the normal development and implementation phases. Research and Development. Research and development expenses as a percentage of total revenues decreased to 18.5% in the second quarter of fiscal 2000 from 25.3% in the comparable period of fiscal 1999 due to the increase in the Company's revenues. However, the total amount of research and development expenses increased during the quarter as the Company was able to shift engineering resources from support of the ramp into the PC market to development of technology roadmap improvements as well as new chip connection activities. For the first half of fiscal 2000, research and development expenses as a percentage of total revenues decreased to 18.5% from 27.3% in the comparable period of fiscal 1999, primarily due to the increase in the Company's 11
revenues. Research and development expenses include approximately $230,000 and $373,000 of acquisition-related costs in the second quarter and first six months of fiscal 2000, respectively. These acquisition costs relate to the Company's November 1999 purchase of a small company which was developing a SerDes cell for network applications. The acquisition was accounted for as a purchase, which resulted in goodwill and deferred compensation costs that are being amortized over periods ranging from 2 to 5 years. The Company expects research and development expenses to increase over time as it enhances and improves its technology and applies it to new generations of ICs. The rate of increase of, and the percentage of revenues represented by, research and development expenses in the future will vary from period to period based on the research and development projects underway and the change in engineering headcount in any given period, as well as the rate of change in the Company's total revenues. Marketing, General and Administrative. Marketing, general and administrative expenses increased 53.8% to $5.1 million and 35.1% to $8.5 million in the second quarter and first six months of fiscal 2000, respectively, from the comparable periods of fiscal 1999. The increase is primarily due to the addition of administrative personnel to support legal enforcement of the Company's patents and other intellectual property rights, rising legal fees related to the patent infringement actions against Hitachi, and costs related to the Company's 10th anniversary celebration. Partially offsetting these increases was a reduction of approximately $500,000 to a management bonus accrual in the first quarter of fiscal 2000. Management bonus expense is recognized ratably throughout the year as it is earned, but a substantial portion of the actual payments is based upon achievement of goals, which cannot be determined until the end of the calendar year. In this case, certain of the goals were not achieved, which meant that the corresponding portion of the accrued bonuses would not be paid and the accrual was reduced in the December quarter. Marketing, general and administrative expenses represent 32.3% and 30.6% of total revenues for the three and six months ended March 31, 2000, respectively, compared with 33.4% and 30.7% in the same periods of fiscal 1999. The percentage of total revenues was relatively flat from the fiscal 1999 periods to the fiscal 2000 periods due to offsetting increases in marketing, general and administrative expenses and in revenues. The Company expects marketing, general and administrative expenses to increase in the future as the Company focuses additional resources upon marketing its technology, assisting systems companies with adapting this technology to new generations of products, and protecting its intellectual property rights through legal actions. The rate of increase of, and the percentage of revenues represented by, marketing, general and administrative expenses in the future will vary from period to period based on the trade shows, advertising and other sales and marketing activities undertaken and the change in sales, marketing and administrative headcount in any given period, as well as the rate of change in the Company's total revenues. Employee Stock-Related Compensation Expense. In the fourth quarter of fiscal 1999, the Company granted to its Chief Executive Officer and to its President a combined total of 500,000 Common Stock Equivalents (CSEs) and to its employees approximately 540,000 options to purchase Rambus common stock for $10.00 per share. Vesting of these CSEs and options was contingent upon the achievement of key indicators of success for Rambus. In order to tie employee rewards to an increase in stockholder value, vesting for a portion of these CSEs and options was contingent on an increase in the price of Rambus common stock to greater than $200 per share for 30 consecutive days. This target was achieved by the end of the second quarter of fiscal 2000, and resulted in a $171.1 million employee stock-related compensation charge taken in the same quarter. Except for a $1.2 million employer payroll tax liability, this was a non-cash charge. The remaining CSEs and options will vest on the same basis as the Intel and DRAM incentive warrants, as discussed below in the section entitled "Contingent Warrants, Common Stock Equivalents, and Options," which will result in another almost 12
entirely non-cash charge to the statement of operations based on the fair value of the CSEs and options at the time achievement of the Intel milestones becomes probable. Other Income, Net. Other income, net consists primarily of interest income from the Company's short-term cash investments. Other income, net decreased to $1.2 million (7.4% of total revenues) in the second quarter of fiscal 2000 from $1.7 million (16.8% of total revenues) in the comparable period of fiscal 1999, and to $2.2 million (7.8% of total revenues) in the first six months of fiscal 2000 from $2.7 million (13.0% of total revenues) in the comparable period of fiscal 1999 primarily due to a nonrecurring gain on the sale of a security in the second quarter of fiscal 1999. Provision for Income Taxes. The Company recorded provisions for income taxes of $1.6 million and $3.0 million in the second quarter and first six months of fiscal 2000, respectively, compared to provisions of $1.2 million and $2.6 million in the comparable periods of fiscal 1999, respectively. The estimated federal and state combined rates on pretax income, excluding non-cash employee stock-related compensation expense, for the first half of fiscal 2000 and fiscal 1999 were 35% and 39%, respectively. The Company's effective tax rate differs from the statutory rate due to the valuation allowance impact of timing differences related to the recognition of contract revenues for tax and financial reporting purposes. Contingent Warrants, Common Stock Equivalents, and Options In January 1997, the Company granted a warrant to Intel Corporation for the purchase of 1,000,000 shares of Rambus common stock (the "Intel warrant") at an exercise price of $10.00 per share. The warrant will become exercisable only upon the achievement of certain milestones by Intel relating to shipment volumes of Rambus-based chipsets (the "Intel milestones"). At the time that the achievement of the milestones becomes probable, a non-cash charge will be made to the statement of operations based on the fair value of the warrant. In October 1998, the Company's Board of Directors authorized an incentive program in the form of warrants on a total of up to 400,000 shares of Rambus common stock (the "DRAM incentive warrants") to be issued to various Rambus Direct DRAM partners upon the achievement of certain product qualification and volume production targets. The warrants, to be issued at the time the targets are met, will have an exercise price of $10.00 per share and a life of five years. They will vest and become exercisable on the same basis as the Intel warrant, which will result in a non-cash charge to the statement of operations based on the fair value of the warrants at the time the achievement of the Intel milestones becomes probable. As of March 31, 2000, a total of 90,000 of these warrants had been issued. In the fourth quarter of fiscal 1999, the Company granted to its Chief Executive Officer and to its President a combined total of 500,000 Common Stock Equivalents (CSEs) and to its employees approximately 540,000 options to purchase Rambus common stock for $10.00 per share. Vesting of these CSEs and options was contingent upon the achievement of key indicators of success for Rambus. In order to tie employee rewards to an increase in stockholder value, vesting for a portion of these CSEs and options was contingent on an increase in the price of Rambus common stock to greater than $200 per share for 30 consecutive days. This target was achieved by the end of the second quarter of fiscal 2000, and resulted in a $171.1 million employee stock-related compensation charge taken in the same quarter. Except for a $1.2 million employer payroll tax liability, this was a non-cash charge. The remaining CSEs and options will vest on the same basis as the Intel and DRAM incentive warrants, which will result in another almost entirely non-cash charge to the statement of 13
operations based on the fair value of the CSEs and options at the time achievement of the Intel milestones becomes probable. If these warrants, CSEs, and options were valued based upon a stock price of $200, the charge could be $400 million or more. The charge, when and if taken, will be non-cash except for payroll tax liabilities, which would likely be more than offset by cash received by the Company upon exercise of the warrants and options. Liquidity and Capital Resources As of March 31, 2000, the Company had cash and cash equivalents and marketable securities of $95.9 million, including restricted cash of $2.5 million and a long-term marketable securities component of $1.0 million. As of the same date, the Company had total working capital of $66.6 million, including a short-term component of deferred revenue of $26.4 million. Deferred revenue represents the excess of cash received from licensees over revenue recognized on license contracts, and the short-term component represents the amount of this deferred revenue the Company expects to recognize over the next twelve months. Without the short-term component of deferred revenue, working capital would have been $93.0 million as of March 31, 2000. The Company's operating activities provided net cash of $0.8 million in the first six months of fiscal 2000 compared to net cash provided of $5.4 million in the comparable period of fiscal 1999. In the fiscal 2000 period, net cash provided by operating activities consisted mainly of net income adjusted for non-cash items, and adjustments relating to income taxes, offset by a decrease in deferred revenue. The decrease in deferred revenue represents contract revenues recognized in the period in excess of new contract billings. Net cash used in investing activities was $12.6 million in the first six months of fiscal 2000 compared to $15.1 million in the comparable period of fiscal 1999. Net cash used in investing activities in the fiscal 2000 period consisted of net purchases of marketable securities, costs of acquired technology rights and investments, and purchases of property and equipment. Net cash provided by financing activities was $4.3 million in the first six months of fiscal 2000 compared to $1.7 million in the comparable period of fiscal 1999. The primary source of net cash provided by financing activities was sales of the Company's common stock pursuant to employee stock plans. The Company presently anticipates that existing cash balances will be adequate to meet its cash needs for at least the next 12 months. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's exposure to market risk for changes in interest rates relates primarily to its investment portfolio. The Company places its investments with high credit issuers and by policy limits the amount of credit exposure to any one issuer. As stated in its policy, the Company will ensure the safety and preservation of its invested funds by limiting default risk and market risk. The Company has no investments denominated in foreign country currencies and therefore is not subject to foreign exchange risk. The Company 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 ensure portfolio liquidity. The table below presents the carrying value and related weighted average interest rates for the Company's investment portfolio. The carrying value approximates fair value at March 31, 2000. <TABLE> <CAPTION> Average Rate of Return at Carrying March 31, Value 2000 (in thousands) (annualized) <S> <C> <C> Investment portfolio: -------------------- Cash equivalents $ 1,173 6.2% Corporate notes and bonds............................... 15,885 5.6% Municipal notes and bonds............................... 22,429 3.5% United States government debt securities................ 47,530 5.9% ------- Total investment portfolio............................ $87,017 ======= </TABLE> 15
PART II -- OTHER INFORMATION Item 1. Legal Proceedings In January 2000, the Company filed suit in United States District Court against Hitachi Ltd. for willful patent infringement. The Company has subsequently filed similar actions with the International Trade Commission and in Germany. The Company is seeking injunctions against the manufacture, use and sale of certain Hitachi memory and microprocessor products that infringe Rambus patents. The Company is also seeking punitive damages from Hitachi. Rambus seeks to halt the importation, sale, manufacture and use of certain Hitachi semiconductor products which directly or contributorily infringe four Rambus patents. The suit was filed after Hitachi failed to respond to repeated requests by Rambus to conduct further discussions regarding a detailed infringement analysis of Hitachi's non-RDRAM-compatible products, which was presented to Hitachi by Rambus in 1999. Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on February 9, 2000 (the "Annual Meeting"). At the Annual Meeting, stockholders voted on two matters: (i) the election of four Class I directors for a term of two years expiring in 2002, and (ii) the ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ending September 30, 2000. The stockholders elected management's nominees as the Class I directors in an uncontested election and ratified the appointment of the independent auditors by the following votes, respectively: (i) Election of Class I directors for a term of two years expiring in 2002: Votes For Votes Withheld ---------- -------------- Bruce Dunlevie 19,871,937 40,192 Charles Geschke 19,871,495 40,634 Mark Horowitz 19,871,655 40,474 David Mooring 19,872,057 40,072 The Company's Board of Directors is currently comprised of seven members who are divided into two classes with overlapping two-year terms. The term for Class II directors (William Davidow, P. Michael Farmwald, and Geoff Tate) will expire at the meeting of stockholders to be held in 2001. (ii) Ratification of appointment of PricewaterhouseCoopers LLP as independent auditors: Votes For Votes Against Abstentions ----------- ------------- ----------- 19,877,644 20,598 13,887 16
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K None. Items 2, 3, and 5 are not applicable and have been omitted. 17
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RAMBUS INC. Date: May 11, 2000 By: /s/ Gary Harmon ------------------------- -------------------------------- Gary Harmon Sr. Vice President, Finance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer and Duly Authorized Officer) 18