RAMBUS INC - Quarter Report: 2008 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
o | 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)
Delaware (State or other jurisdiction of incorporation or organization) |
94-3112828 (I.R.S. Employer Identification No.) |
4440 El Camino Real, Los Altos, CA 94022
(Address of principal executive offices) (zip code)
(Address of principal executive offices) (zip code)
Registrants telephone number, including area code: (650) 947-5000
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants Common Stock, par value $.001 per share, was 104,801,363 as of September 30, 2008.
RAMBUS INC.
TABLE OF CONTENTS
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3 | ||||||||
PART I. | FINANCIAL INFORMATION |
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Item 1. | Financial Statements: |
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5 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
Item 2. | 33 | |||||||
Item 3. | 44 | |||||||
Item 4. | 46 | |||||||
PART II. | 47 | |||||||
Item 1. | 47 | |||||||
Item 1A. | 47 | |||||||
Item 2. | 63 | |||||||
Item 3. | 63 | |||||||
Item 4. | 63 | |||||||
Item 5. | 63 | |||||||
Item 6. | 63 | |||||||
Signature | 64 | |||||||
Exhibit Index | 65 | |||||||
EX-10.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (Quarterly Report) contains forward-looking statements.
These forward-looking statements include, without limitation, predictions regarding the following
aspects of our future:
| Outcome and effect of current and potential future intellectual property litigation; | ||
| Litigation expenses; | ||
| Resolution of the Federal Trade Commission and European Commission matters involving us; | ||
| Protection of intellectual property; | ||
| Amounts owed under licensing agreements; | ||
| Terms of our licenses; | ||
| Indemnification and technical support obligations; | ||
| Success in the markets of our or our licensees products; | ||
| Research and development costs and improvements in technology; | ||
| Sources, amounts and concentration of revenue, including royalties; | ||
| Effective tax rates; | ||
| Realization of deferred tax assets/release of deferred tax valuation allowance; | ||
| Product development; | ||
| Sources of competition; | ||
| Pricing policies of our licensees; | ||
| Success in renewing license agreements; | ||
| Operating results; | ||
| International licenses and operations, including our design facility in Bangalore, India; | ||
| Methods, estimates and judgments in accounting policies; | ||
| Growth in our business; | ||
| Acquisitions, mergers or strategic transactions; | ||
| Ability to identify, attract, motivate and retain qualified personnel; | ||
| Trading price of our Common Stock; | ||
| Internal control environment; |
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| Corporate governance; | ||
| Accounting, tax, regulatory, legal and other outcomes and effects of the stock option investigation; | ||
| Consequences of the derivative, class-action and other lawsuits related to the stock option investigation; | ||
| The level and terms of our outstanding debt; | ||
| Engineering, marketing and general and administration expenses; | ||
| Contract revenue; | ||
| Interest and other income, net; | ||
| Adoption of new accounting pronouncements; | ||
| Likelihood of paying dividends; | ||
| Effects of changes in the economy and credit market on our industry and business; and | ||
| Restructuring activities. |
You can identify these and other forward-looking statements by the use of words such as may,
future, shall, 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 INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
(In thousands, except shares | ||||||||
and per share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 106,786 | $ | 119,391 | ||||
Marketable securities |
272,186 | 321,491 | ||||||
Accounts receivable |
1,740 | 442 | ||||||
Unbilled receivables |
690 | 1,478 | ||||||
Prepaids and other current assets |
8,141 | 8,349 | ||||||
Deferred taxes |
222 | 11,595 | ||||||
Total current assets |
389,765 | 462,746 | ||||||
Restricted cash |
1,238 | 2,286 | ||||||
Deferred taxes, long-term |
2,613 | 116,209 | ||||||
Intangible assets, net |
8,040 | 13,441 | ||||||
Property and equipment, net |
23,672 | 24,587 | ||||||
Goodwill |
4,454 | 4,454 | ||||||
Other assets |
4,791 | 3,624 | ||||||
Total assets |
$ | 434,573 | $ | 627,347 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 9,091 | $ | 11,283 | ||||
Accrued salaries and benefits |
9,478 | 9,985 | ||||||
Accrued litigation expenses |
13,636 | 26,234 | ||||||
Income taxes payable |
479 | 834 | ||||||
Other accrued liabilities |
4,988 | 5,060 | ||||||
Deferred revenue |
2,329 | 2,756 | ||||||
Total current liabilities |
40,001 | 56,152 | ||||||
Deferred revenue, less current portion |
33 | | ||||||
Convertible notes |
160,000 | 160,000 | ||||||
Long-term income taxes payable |
3,020 | 2,917 | ||||||
Other long-term liabilities |
771 | 1,194 | ||||||
Total liabilities |
203,825 | 220,263 | ||||||
Commitments and contingencies (Note 7 and 13) |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Convertible preferred stock, $.001 par value: |
||||||||
Authorized: 5,000,000 shares |
||||||||
Issued and outstanding: no shares at September 30, 2008 and December 31, 2007 |
| | ||||||
Common stock, $.001 par value: |
||||||||
Authorized: 500,000,000 shares |
||||||||
Issued and outstanding: 104,801,363 shares at September 30, 2008 and
105,294,534 shares at December 31, 2007 |
105 | 105 | ||||||
Additional paid-in capital |
644,760 | 601,821 | ||||||
Accumulated deficit |
(412,436 | ) | (194,966 | ) | ||||
Accumulated other comprehensive (loss) income |
(1,681 | ) | 124 | |||||
Total stockholders equity |
230,748 | 407,084 | ||||||
Total liabilities and stockholders equity |
$ | 434,573 | $ | 627,347 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements
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RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenue: |
||||||||||||||||
Royalties |
$ | 25,793 | $ | 35,327 | $ | 91,174 | $ | 118,263 | ||||||||
Contract revenue |
3,635 | 6,388 | 13,707 | 21,145 | ||||||||||||
Total revenue |
29,428 | 41,715 | 104,881 | 139,408 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of contract revenue* |
4,611 | 5,781 | 18,411 | 18,878 | ||||||||||||
Research and development* |
17,511 | 18,312 | 59,048 | 60,339 | ||||||||||||
Marketing, general and administrative* |
31,288 | 29,914 | 88,377 | 79,657 | ||||||||||||
Restructuring costs* |
4,024 | | 4,024 | | ||||||||||||
Impairment of intangible asset |
2,158 | | 2,158 | | ||||||||||||
Costs of restatement and related legal activities |
392 | 4,169 | 3,564 | 18,631 | ||||||||||||
Total costs and expenses |
59,984 | 58,176 | 175,582 | 177,505 | ||||||||||||
Operating loss |
(30,556 | ) | (16,461 | ) | (70,701 | ) | (38,097 | ) | ||||||||
Interest and other income, net |
2,704 | 5,645 | 10,207 | 16,496 | ||||||||||||
Loss before income taxes |
(27,852 | ) | (10,816 | ) | (60,494 | ) | (21,601 | ) | ||||||||
Provision for (benefit from) income taxes (Note 9) |
92 | (4,318 | ) | 124,748 | (8,495 | ) | ||||||||||
Net loss |
$ | (27,944 | ) | $ | (6,498 | ) | $ | (185,242 | ) | $ | (13,106 | ) | ||||
Net loss per share: |
||||||||||||||||
Basic |
$ | (0.27 | ) | $ | (0.06 | ) | $ | (1.77 | ) | $ | (0.13 | ) | ||||
Diluted |
$ | (0.27 | ) | $ | (0.06 | ) | $ | (1.77 | ) | $ | (0.13 | ) | ||||
Weighted average shares used in per share calculation |
||||||||||||||||
Basic |
104,897 | 103,820 | 104,795 | 103,820 | ||||||||||||
Diluted |
104,897 | 103,820 | 104,795 | 103,820 | ||||||||||||
* Includes stock-based compensation: |
||||||||||||||||
Cost of contract revenue |
$ | 1,321 | $ | 1,333 | $ | 4,604 | $ | 4,069 | ||||||||
Research and development |
$ | 3,326 | $ | 3,190 | $ | 10,997 | $ | 9,821 | ||||||||
Marketing, general and administrative |
$ | 4,371 | $ | 4,138 | $ | 12,899 | $ | 14,512 | ||||||||
Restructuring costs |
$ | 547 | $ | | $ | 547 | $ | |
See Notes to Unaudited Condensed Consolidated Financial Statements
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RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (185,242 | ) | $ | (13,106 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Stock-based compensation |
28,500 | 28,402 | ||||||
Depreciation |
8,440 | 8,635 | ||||||
Amortization of intangible assets |
3,543 | 3,963 | ||||||
Restructuring costs (non-cash) |
547 | | ||||||
Impairment of intangible asset |
2,158 | | ||||||
Deferred tax provision (benefit) |
124,290 | (9,425 | ) | |||||
Loss on disposal of property and equipment |
15 | | ||||||
Change in operating assets and liabilities, net of effect of business acquisitions: |
||||||||
Accounts receivable and unbilled receivables |
(510 | ) | (587 | ) | ||||
Prepaids and other assets |
(92 | ) | (3,373 | ) | ||||
Accounts payable |
(812 | ) | 6,956 | |||||
Accrued salaries and benefits and other accrued liabilities |
(1,663 | ) | (3,289 | ) | ||||
Accrued litigation expenses |
(12,598 | ) | 2,168 | |||||
Income taxes payable |
(252 | ) | 674 | |||||
Increases in deferred revenue |
2,203 | 19,117 | ||||||
Decreases in deferred revenue |
(2,597 | ) | (21,145 | ) | ||||
Net cash provided by (used in) operating activities |
(34,070 | ) | 18,990 | |||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(8,197 | ) | (5,659 | ) | ||||
Acquisition of intangible assets |
(300 | ) | (30 | ) | ||||
Purchases of marketable securities |
(304,574 | ) | (428,219 | ) | ||||
Maturities of or proceeds from the sale of marketable securities |
352,322 | 616,059 | ||||||
Cash paid for acquisition of business |
| (1,139 | ) | |||||
Decrease in restricted cash |
1,048 | 56 | ||||||
Net cash provided by investing activities |
40,299 | 181,068 | ||||||
Cash flows from financing activities: |
||||||||
Payments under installment payment arrangement |
(1,250 | ) | (4,250 | ) | ||||
Proceeds from issuance of common stock under employee stock plans |
17,277 | | ||||||
Repurchase and retirement of Company common stock |
(34,921 | ) | | |||||
Net cash used in financing activities |
(18,894 | ) | (4,250 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
60 | 146 | ||||||
Net increase(decrease) in cash and cash equivalents |
(12,605 | ) | 195,954 | |||||
Cash and cash equivalents at beginning of period |
119,391 | 73,304 | ||||||
Cash and cash equivalents at end of period |
$ | 106,786 | $ | 269,258 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Property and equipment received and accrued in accounts payable and other accrued
liabilities |
$ | 89 | $ | 1,119 |
See Notes to Unaudited Condensed Consolidated Financial Statements
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RAMBUS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Rambus Inc. (Rambus or the Company) and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated
financial statements. Investments in entities with less than 20% ownership and in which Rambus does
not have the ability to significantly influence the operations of the investee are being accounted
for using the cost method and are included in other assets.
In the opinion of management, the unaudited condensed consolidated financial statements
include all adjustments (consisting only of normal recurring items) necessary to state 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 unaudited condensed consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission (the 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 in Form 10-K for the year ended December 31, 2007.
We have reclassified certain prior year balances to conform to the current years
presentation. None of these reclassifications had an impact on reported net loss for any of the
periods presented.
2. Recent Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 162, The Hierarchy of General Accepted Accounting Principle.
SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This statement shall be effective 60 days following the
Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With General Accepted
Accounting Principles. The Company believes the adoption of this pronouncement will not have a
material impact on the Companys financial statements.
In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
(FSP APB 14-1), which clarifies the accounting for convertible debt instruments that may be
settled in cash upon conversion, including partial cash settlement. FSP APB 14-1 specifies that an
issuer of such instruments should separately account for the liability and equity components of the
instruments in a manner that reflect the issuers non-convertible debt borrowing rate when interest
costs are recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years beginning
after December 15, 2008, and retrospective application is required for all periods presented. The
Company is currently evaluating the potential impact of the adoption of FSP APB 14-1 on its
financial statements. FSP APB 14-1 will apply to the Company and it expects to record additional
non-cash interest expense related to its outstanding convertible debt instruments beginning in the
first quarter of 2009.
In April 2008, the FASB issued FSP FAS 142-3, Determination of Useful Life of Intangible
Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing
the renewal or extension assumptions used to determine the useful life of a recognized intangible
asset under FAS 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 also requires expanded
disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted.
The Company is currently evaluating the potential impact the adoption of FAS FSP 142-3 will have on
its financial statements.
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In February 2008, the FASB issued FASB Staff Position 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP 157-1) and FSP 157-2, Effective Date of FASB Statement
No. 157 (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from
its scope. FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. These nonfinancial items include assets and liabilities
such as reporting units measured at fair value in a goodwill impairment test and nonfinancial
assets acquired and liabilities assumed in a business combination. The provisions of SFAS No. 157
were adopted by the Company, as it applies to its financial instruments, effective beginning
January 1, 2008. The impact of adoption of SFAS No. 157 is discussed in Note 14, Fair Value of
Financial Instruments.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations. This Statement
replaces SFAS No. 141. SFAS No. 141R establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141R also
provides guidance for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141R applies prospectively
to business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The Company believes the adoption
of this pronouncement will not have a material impact on the Companys financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. SFAS No. 160 requires that ownership interests
in subsidiaries held by parties other than the parent, and the amount of consolidated net income,
be clearly identified, labeled, and presented in the consolidated financial statements within
equity, but separate from the parents equity. It also requires that once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially
measured at fair value. Sufficient disclosures are required to clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling owners. The provisions
of SFAS No. 160 will be effective for the Company beginning January 1, 2009. The Company believes
the adoption of this pronouncement will not have a material impact on the Companys financial
statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115. SFAS No. 159 is
effective for the Company in the fiscal year beginning January 1, 2008. SFAS No. 159 permits an
entity to choose to measure many financial instruments and certain other items at fair value at
specified election dates. Subsequent unrealized gains and losses on items for which the fair value
option has been elected will be reported in earnings. SFAS No. 159 became effective in the first
quarter of fiscal 2008. The Company has not elected to apply the fair value option to any of its
financial instruments that are presently accounted for at cost.
3. Revenue Recognition
Overview
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. Determination of whether or not these criteria have been
met may require the Company to make judgments, assumptions and estimates based upon current
information and historical experience.
Rambus revenue consist of royalty revenue and contract revenue generated from agreements with
semiconductor companies, system companies and certain reseller arrangements. Royalty revenue
consists of patent license and product license royalties. Contract revenue consist of fixed license
fees, fixed engineering fees and service fees associated with integration of Rambus chip interface
products into its customers products. Contract revenue may also include support or maintenance.
Reseller arrangements generally provide for the pass-through of a percentage of the fees paid to
the reseller by the resellers customer for use of Rambus patent and product licenses. Rambus does
not recognize revenue for these arrangements until it has received notice of revenue earned by and
paid to the reseller, accompanied by the pass-through payment from the reseller. Rambus does not
pay commissions to the reseller for these arrangements.
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Many of Rambus licensees have the right to cancel their licenses. In such arrangements,
revenue is only recognized to the extent that is consistent with the cancellation provisions.
Cancellation provisions within such contracts generally provide for a prospective cancellation with
no refund of fees already remitted by customers for products provided and payment for services
rendered prior to the date of cancellation. Unbilled receivables represent enforceable claims and are deemed
collectible in connection with the Companys revenue recognition policy.
Royalty Revenue
Rambus recognizes royalty revenue upon notification by its licensees. 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 other than its independent registered public accounting firm to perform, on
Rambus behalf, periodic audits of some of the licensees 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 revenue: (1) patent license royalties and (2) product
license royalties.
Patent licenses. Rambus licenses its broad portfolio of patented inventions to semiconductor
and systems 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 Rambus patent
portfolio. Rambus generally recognizes revenue from these arrangements as amounts become due. The
contractual terms of the agreements generally provide for payments over an extended period of time.
Product licenses. Rambus develops proprietary and industry-standard chip interface products,
such as RDRAM and XDR that Rambus provides to its customers under product license agreements. 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 (except for those royalties subject
to the FTC order discussed below) upon notification from the licensee of the royalties earned and
when collectability is deemed reasonably assured.
On February 2, 2007, the Federal Trade Commission (the FTC) issued an order requiring Rambus
to limit the royalty rates charged for certain SDR and DDR SDRAM memory and controller products
sold after April 12, 2007. The FTC stayed this requirement on March 16, 2007, subject to certain
conditions. One such condition of the stay limits the royalties Rambus can receive under certain
contracts so that they do not exceed the FTCs Maximum Allowable Royalties (MAR). Amounts in
excess of MAR that are subject to the order are excluded from revenue. On April 22, 2008, the
United States Court of Appeals for the District of Columbia (the CADC) overturned the FTC
decision and remanded the matter back to the FTC for further proceedings consistent with the
Courts opinion. On June 6, 2008, the FTC petitioned the CADC to rehear the case en banc. On August
26, 2008, the Court denied the FTCs petition for rehearing of this matter en banc, and on
September 9, 2008, the Court issued its mandate setting aside the FTCs order and instructing the
FTC to take actions consistent with the Courts ruling. The FTC did not seek, nor did it receive, a
stay of the Courts ruling, and thus the FTCs order in the case has been vacated. On October 16,
2008, the FTC issued an order (FTC Disposition Order) authorizing Rambus to receive the excess
consideration that customers have previously deducted from their quarterly payments made to Rambus
under the Patent License Agreement (see Note 13 Litigation and Asserted Claims).
At the time of the issuance of the mandate on September 9, 2008, $6.2 million had been
determined as amounts in excess of MAR and had been excluded from revenue. As the FTCs order has
been vacated, the Company will recognize the previously unrecognized revenue in excess of MAR of
$6.2 million as revenue when the corresponding cash payments are received. In the three months
ended September 30, 2008, $0.9 million of the amounts in excess of MAR was previously received and
recognized as revenue in the third quarter of 2008. The remaining $5.3 million will be recognized
when the payments are received from the customers.
Contract Revenue
Rambus generally recognizes revenue in accordance with the provisions of SOP 81-1 for
development contracts related to licenses of its chip interface products, such as XDR and FlexIO
that involve significant engineering and integration services. Revenue derived from such license
and engineering services is recognized using the completed contract or 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 upon contract costs
incurred. Prior to the first quarter of 2008, Rambus determined progress to completion using
labor-hours incurred. The change to input measures better reflects the overall gross margin over
the life of the contract. This change did not have a significant impact on the Companys results of
operations. Rambus has evaluated use of output measures versus
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input measures and has determined that its output is not sufficiently uniform with respect to cost, time and effort per unit of
output to use output measures as a measure of progress to completion. 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 may be due on pre-determined dates and include significant up-front
fees.
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. If Rambus determines that it is
necessary to revise the estimates of the total costs 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 efforts necessary to complete a project were less
than the original assumptions, the contract fees would be recognized sooner than originally
expected. Conversely, if the newly estimated total efforts necessary to complete a project were
longer than the original assumptions, the contract fees will be recognized over a longer period.
In certain periods, the estimated cost of contract revenue may exceed contract revenue that
did not factor in the expected stream of future royalty payments. This can be further impacted by
timing of expensing of pre-contract costs as research and development expenses and expensing of
completed contract costs where the realizability of an asset is uncertain. As of September 30,
2008, the Company had accrued a liability of approximately $0.8 million related to estimated loss
contracts. These expenses are recognized in cost of contract revenue during the quarter when such
loss is determined.
If application of the percentage-of-completion method results in recognizable revenue prior to
an invoicing event under a customer contract, the Company will recognize the revenue and record an
unbilled receivable. Amounts invoiced to Rambus customers in excess of recognizable revenue are
recorded as deferred revenue. The timing and amounts invoiced to customers can vary significantly
depending on specific contract terms and can therefore have a significant impact on deferred
revenue or unbilled receivables in any given period.
If there is significant uncertainty about the time to complete or the deliverables by either
party, Rambus evaluates the appropriateness of applying the completed contract method of accounting
under SOP 81-1. Such evaluation is completed on a contract-by-contract basis. For all contracts
where revenue recognition must be delayed until the contract deliverables are substantially
complete, Rambus evaluates the realizability of the assets which the accumulated costs would
represent and defers or expenses as incurred based upon the conclusions of its realization
analysis.
Rambus also recognizes revenue in accordance with SOP 97-2, SOP 98-4 and SOP 98-9 for
development contracts related to licenses of its chip interface products that involve non-essential
engineering services and post contract support (PCS). 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 arrangements are comprised
of license fees and engineering service fees which are not essential to the functionality of the
product. Rambus rates for PCS and for engineering services are specific to each development
contract and not standardized in terms of rates or length. Because of these characteristics, the
Company does not have a sufficient population of contracts from which to derive vendor specific
objective evidence for each of the elements.
Therefore, as required by SOP 97-2, after Rambus delivers the product, if the only undelivered
element is PCS, Rambus will recognize all revenue ratably over either the contractual PCS period or
the period during which PCS is expected to be provided. Rambus reviews assumptions regarding the
PCS 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 to be 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.
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4. Comprehensive Loss
Rambus comprehensive loss consists of its net loss plus other comprehensive income (loss)
consisting of foreign currency translation adjustments and unrealized gains and losses on
marketable securities, net of taxes.
The components of comprehensive loss, net of tax, are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Net loss |
$ | (27,944 | ) | $ | (6,498 | ) | $ | (185,242 | ) | $ | (13,106 | ) | ||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation adjustments, net of tax |
| 114 | 60 | 146 | ||||||||||||
Unrealized gain (loss) on marketable securities, net of tax |
(1,112 | ) | 217 | (1,865 | ) | 536 | ||||||||||
Other comprehensive income (loss) |
(1,112 | ) | 331 | (1,805 | ) | 682 | ||||||||||
Total comprehensive loss |
$ | (29,056 | ) | $ | (6,167 | ) | $ | (187,047 | ) | $ | (12,424 | ) | ||||
As a result of providing a full valuation allowance of the net deferred tax assets in the
U.S., the Company reversed $0.5 million of unrealized gain (loss) previously recorded in other
comprehensive income (loss) during the quarter ended June 30, 2008.
5. Stock-Based Compensation and Employee Stock Plans
For the nine months ended September 30, 2008 and 2007, the Company maintained stock plans
covering a broad range of potential equity grants including stock options, nonvested equity stock
and equity stock units and performance based instruments. In addition, the Company sponsors an
ESPP, whereby eligible employees are entitled to purchase Common Stock semi-annually, by means of
limited payroll deductions, at a 15% discount from the fair market value of the Common Stock as of
specific dates.
Stock Options: During the three and nine months ended September 30, 2008, Rambus granted
90,990 and 1,854,880 stock options, respectively, with an estimated total grant-date fair value of
$1.0 million and $21.1 million, respectively. During the three and nine months ended September 30,
2008, Rambus recorded stock-based compensation related to stock options of $8.6 million and $25.9
million, respectively. These amounts include approximately $0.2 million of accrued stock-based
compensation expense related to the next quarter in connection with the restructuring effort.
During the three and nine months ended September 30, 2007, Rambus granted 108,500 and
2,867,950 stock options, respectively, with an estimated total grant-date fair value of $0.9
million and $35.2 million, respectively. During the three and nine months ended September 30, 2007,
Rambus recorded stock-based compensation expense related to stock options of $8.8 million and $27.4
million, respectively, for all unvested options granted, including the modification charge for the
extension of expiring options discussed below.
The effect of recording stock-based compensation for the three and nine months ended September
30, 2007 includes a charge resulting from the Companys modifying the terms of 33 and 138 grants,
respectively, by offering an extension of time to exercise. An additional charge was taken during
the nine month period to extend the time of the extension of the 59 grants previously extended in
2006. The total modification charge was $0.4 million and $3.2 million during the three and nine
months ended September 30, 2007, respectively.
The total intrinsic value of options exercised was $2.3 million and $12.5 million for the
three and nine months ended September 30, 2008, respectively. There were no option exercises in the
first nine months of 2007. Intrinsic value is the total value of exercised shares based on the
price of the Companys common stock at the time of exercise less the cash received from the
employees to exercise the options.
During the three and nine periods ended September 30, 2008, proceeds from employee stock
option exercises totaled approximately $4.5 million and $14.8 million, respectively.
There were no tax benefits realized as a result of employee stock option exercises, stock
purchase plan purchases, and vesting of equity stock and stock units for the nine months ended
September 30, 2008 and 2007 calculated in accordance with SFAS No. 123(R).
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Valuation Assumptions
The fair value of stock awards is estimated as of the grant date using the Black-Scholes
Merton option-pricing model assuming a dividend yield of 0% and the additional weighted-average
assumptions as listed in the following table:
Stock Option Plans | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Stock Option Plans |
||||||||||||||||
Expected stock price volatility |
70 | % | 53%-68 | % | 63-70 | % | 53%-69 | % | ||||||||
Risk free interest rate |
3.3 | % | 4.4%-4.9 | % | 3.0-3.3 | % | 4.4%-4.9 | % | ||||||||
Expected term (in years) |
5.3 | 6.2 | 5.3 | 6.2 | ||||||||||||
Weighted-average fair value of stock options granted |
$ | 10.25 | $ | 8.44 | $ | 11.35 | $ | 12.28 |
Employee Stock Purchase Plan | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 (1) | 2007(1) | 2008 | 2007(1) | |||||||||||||
Employee Stock Purchase Plan |
||||||||||||||||
Expected stock price volatility |
| | 58 | % | | |||||||||||
Risk free interest rate |
| | 1.7 | % | | |||||||||||
Expected term (in years) |
| | 0.5 | | ||||||||||||
Weighted-average fair value of
purchase rights granted under the
purchase plan |
| | $ | 7.41 | |
(1) | No grants were made under the employee stock purchase plan during the three and nine months ended September 30 2007 or the three months ended September 30, 2008. |
In the first quarter of 2008, the Company changed its methodology for determining estimated
expected term for employee stock options from the Monte Carlo simulation model to observed
historical exercise patterns. The change in methodology resulted from an analysis of observed
historical exercise patterns which better approximates the actual expected term. The impact of this
change was not significant to the Companys results from operations.
See Note 9 Income Taxes for additional information related to tax effects of stock-based
compensation.
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Summary of shares available for grant under stock option plans
As of September 30, 2008, 2,214,659 shares of the 8,400,000 shares approved under the 2006
Plan remain available for grant. The 2006 Plan is now Rambus only plan for providing stock-based
incentive compensation to eligible employees, executive officers and non-employee directors and
consultants.
A summary of shares available for grant under the Companys plans is as follows:
Shares Available | ||||
for Grant | ||||
Shares available as of December 31, 2007 |
4,589,131 | |||
Stock options granted |
(1,854,880 | ) | ||
Stock options forfeited |
1,024,684 | |||
Stock options expired under former plans |
(636,776 | ) | ||
Nonvested equity stock and stock units granted (1) |
(907,500 | ) | ||
Total shares available for grant as of September 30, 2008 |
2,214,659 | |||
(1) | For purposes of determining the number of shares available for grant under the 2006 Plan against the maximum number of shares authorized, each restricted stock granted reduces the number of shares available for grant by 1.5 shares and each restricted stock forfeited increases shares available for grant by 1.5 shares. |
General Stock Option Information
The following table summarizes stock option activity under the 1997, 1999 and 2006 Plans for
the nine months ended September 30, 2008 and information regarding stock options outstanding,
exercisable, and vested and expected to vest as of September 30, 2008.
Options Outstanding | ||||||||||||||||
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise Price | Contractual | Intrinsic | |||||||||||||
Shares | Per Share | Term | Value | |||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||
Outstanding as of December 31, 2007 |
18,750,738 | $ | 20.17 | |||||||||||||
Options granted |
1,854,880 | 19.83 | ||||||||||||||
Options exercised |
(1,323,529 | ) | 11.18 | |||||||||||||
Options forfeited |
(1,024,684 | ) | 23.33 | |||||||||||||
Outstanding as of September 30, 2008 |
18,257,405 | 20.60 | 5.62 | $ | 23,500 | |||||||||||
Vested or expected to vest at September
30, 2008 |
16,773,498 | 21.27 | 5.61 | 17,335 | ||||||||||||
Options exercisable at September 30, 2008 |
11,348,116 | 21.55 | 4.58 | 17,261 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value
for in-the-money options at September 30, 2008, based on the $12.85 closing stock price of Rambus
Common Stock on September 30, 2008 on the Nasdaq Global Select Market, which would have been
received by the option holders had all option holders exercised their options as of that date. The
total number of in-the-money options outstanding and exercisable as of September 30, 2008 was
3,387,975 and 2,719,811, respectively.
As of September 30, 2008, there was $57.4 million of total unrecognized compensation cost, net
of expected forfeitures, related to unvested stock-based compensation arrangements granted under
the stock option plans. That cost is expected to be recognized over a weighted-average period of
2.9 years. The total fair value of options vested as of September 30, 2008 was $211.0 million.
Employee Stock Purchase Plans
Under the 2006 Employee Stock Purchase Plan, the Company issued 146,633 shares at a price of
$16.77 per share during the nine months ended September 30, 2008. No purchases were made under the
Employee Stock Purchase Plans during the nine months ended September 30, 2007. As of September 30,
2008, 1,453,367 shares under the 2006 Purchase Plan remain available for issuance. During the three
months ended September 30, 2008, the Company commenced a restructuring effort which reduced overall
headcount. As a
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result, the Company revised its estimate of expected compensation expense related to the
Employee Stock Purchase Plan. For the three and nine months ended September 30, 2008, the Company
recorded compensation expense related to the Employee Stock Purchase Plan of $0.3 million and $1.3
million, respectively. As of September 30, 2008, there was $0.1 million of total unrecognized
compensation cost related to share-based compensation arrangements granted under the Employee Stock
Purchase Plan. That cost is expected to be recognized over one month.
Nonvested Equity Stock and Stock Units
For the three and nine months ended September 30, 2008, Rambus granted nonvested equity stock
units to certain officers and employees, totaling 408,000 shares and 605,000 shares, respectively.
These nonvested equity stock units have a service condition, generally a service period of four
years. Included in the 2008 grants are 48,000 nonvested equity stock units which were granted to
its chief executive officer with vesting subject to the achievement of certain performance
conditions related to revenue goals and other factors. For the nine months ended September 30,
2008, the Company has not recognized any compensation expense for these performance equity stock
units granted to its chief executive officer since the Company does not currently believe that the
performance conditions will be met. During the second quarter of 2008, the Company updated the
estimated forfeiture rate for all other nonvested equity stock units based on managements future
expectations. The nonvested equity stock units were valued at the date of grant giving them a fair
value of approximately $11.3 million.
For the three and nine months ended September 30, 2008, Rambus recorded stock-based
compensation expense of approximately $0.6 million and $1.8 million, respectively, related to all
outstanding unvested equity stock grants. For the three and nine months ended September 30, 2007,
Rambus recorded stock-based compensation expense of approximately $0.3 million and $1.0 million,
respectively, related to all outstanding unvested equity stock grants. Unrecognized stock-based
compensation related to all nonvested equity stock grants, net of an estimate of forfeitures, was
approximately $12.6 million at September 30, 2008.
The following table reflects the activity related to nonvested equity stock and stock units
for the nine months ended September 30, 2008:
Weighted- | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Nonvested Equity Stock and Stock Units | Shares | Fair Value | ||||||
Nonvested at December 31, 2007 |
244,177 | $ | 21.41 | |||||
Granted |
605,000 | 18.73 | ||||||
Vested |
(59,177 | ) | 20.26 | |||||
Nonvested at September 30, 2008 |
790,000 | $ | 19.45 | |||||
Contingent Unvested Options
As of December 31, 2007, there were 635,348 contingent unvested options, which vest upon the
achievement of certain milestones by Intel relating to shipment volumes of RDRAM 850E chipsets.
Intel has since phased out the 850E chipset and as a result the unvested options will never vest.
The impact of the unvested options has been excluded from the calculation of net loss per share.
During the nine months ended September 30, 2008, 40,300 contingent unvested options were forfeited.
The forfeitures of the contingent unvested options are included in the forfeitures in the table
summarizing stock option activity.
As of September 30, 2008, there were 595,048 contingent unvested options, none of which are
expected to vest.
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6. Marketable Securities
Rambus invests its excess cash primarily in U.S. government agency and treasury notes,
commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that
mature within three years.
All cash equivalents and marketable securities are classified as available-for-sale and are
summarized as follows:
September 30, 2008 | ||||||||||||||||
Weighted | ||||||||||||||||
Unrealized | Rate of | |||||||||||||||
(dollars in thousands) | Fair Value | Book Value | Gain (Loss), net | Return | ||||||||||||
Money Market Funds |
$ | 84,819 | $ | 84,819 | $ | | 1.74 | % | ||||||||
Municipal Bonds and Notes |
1,004 | 1,000 | 4 | 3.85 | % | |||||||||||
U.S. Government Bonds and Notes |
191,604 | 192,015 | (411 | ) | 3.04 | % | ||||||||||
Corporate Notes, Bonds, and Commercial Paper |
98,519 | 99,390 | (871 | ) | 3.01 | % | ||||||||||
Total cash equivalents and marketable securities |
375,946 | 377,224 | (1,278 | ) | ||||||||||||
Cash |
3,026 | 3,026 | | |||||||||||||
Total cash, cash equivalents and marketable securities |
$ | 378,972 | $ | 380,250 | $ | (1,278 | ) | |||||||||
December 31, 2007 | ||||||||||||||||
Weighted | ||||||||||||||||
Unrealized | Rate of | |||||||||||||||
(dollars in thousands) | Fair Value | Book Value | Gain, net | Return | ||||||||||||
Money Market Funds |
$ | 104,836 | $ | 104,836 | $ | | 4.82 | % | ||||||||
Municipal Bonds and Notes |
3,008 | 3,000 | 8 | 4.81 | % | |||||||||||
U.S. Government Bonds and Notes |
108,660 | 108,568 | 92 | 4.39 | % | |||||||||||
Corporate Notes, Bonds, and Commercial Paper |
219,734 | 219,668 | 66 | 4.90 | % | |||||||||||
Total cash equivalents and marketable securities |
436,238 | 436,072 | 166 | |||||||||||||
Cash |
4,644 | 4,644 | | |||||||||||||
Total cash, cash equivalents and marketable securities |
$ | 440,882 | $ | 440,716 | $ | 166 | ||||||||||
Available-for-sale securities are reported at fair value on the balance sheets and classified
as follows:
September 30, | December 31, | |||||||
(dollars in thousands) | 2008 | 2007 | ||||||
Cash equivalents |
$ | 103,760 | $ | 114,747 | ||||
Short term marketable securities |
272,186 | 321,491 | ||||||
Total cash equivalents and marketable securities |
375,946 | 436,238 | ||||||
Cash |
3,026 | 4,644 | ||||||
Total cash, cash equivalents and marketable securities |
$ | 378,972 | $ | 440,882 | ||||
The estimated fair value of cash equivalents and marketable securities classified by date of
contractual maturity and the associated unrealized gain (loss) at September 30, 2008 and December
31, 2007 are as follows:
As of | Unrealized Gain (Loss), net | |||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | ||||||||||||||||
Contractual maturity: |
||||||||||||||||
Due within one year |
$ | 244,021 | $ | 361,974 | $ | (748 | ) | $ | 27 | |||||||
Due from one year through three years |
131,925 | 74,264 | (530 | ) | 139 | |||||||||||
$ | 375,946 | $ | 436,238 | $ | (1,278 | ) | $ | 166 | ||||||||
The unrealized losses were insignificant in relation to our total available-for-sale
portfolio. The unrealized losses can be attributed to present credit market conditions.
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The Company adopted SFAS No. 157 effective January 1, 2008 for financial assets and
liabilities measured on a recurring basis. SFAS No. 157 applies to all financial assets and
financial liabilities that are being measured and reported on a fair value basis. For the
discussion regarding the impact of the adoption of SFAS No. 157 on the Companys marketable
securities, see Note 14, Fair Value of Financial Instruments.
7. Commitments and Contingencies
On February 1, 2005, Rambus issued $300.0 million aggregate principal amount of zero coupon
convertible senior notes (the convertible notes) due February 1, 2010 to Credit Suisse First
Boston LLC and Deutsche Bank Securities as initial purchasers who then sold the convertible notes
to institutional investors. Rambus elected to pay the principal amount of the convertible notes in
cash when they are due. Subsequently, Rambus repurchased a total of $140.0 million face value of
the outstanding convertible notes in 2005. The convertible notes outstanding as of September 30,
2008 were $160.0 million and were classified as a non-current liability in the accompanying
condensed consolidated balance sheets.
As of September 30, 2008, Rambus material contractual obligations were:
Payment Due by Year | ||||||||||||||||||||||||||||
Remainder of | ||||||||||||||||||||||||||||
Total | 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Contractual obligations(1) |
||||||||||||||||||||||||||||
Operating leases |
$ | 17,404 | $ | 2,624 | $ | 7,381 | $ | 6,277 | $ | 645 | $ | 477 | $ | | ||||||||||||||
Convertible notes |
160,000 | | | 160,000 | | | | |||||||||||||||||||||
Purchased software license agreements(2) |
1,014 | 507 | 507 | | | | | |||||||||||||||||||||
Total |
$ | 178,418 | $ | 3,131 | $ | 7,888 | $ | 166,277 | $ | 645 | $ | 477 | $ | | ||||||||||||||
(1) | The above table does not reflect possible payments in connection with uncertain tax benefits associated with FASB Interpretation No. (FIN) 48 of approximately $14.1 million, including $11.1 million recorded as a reduction of long-term deferred tax assets and $3.0 million in long-term income taxes payable, as of September 30, 2008. As noted below in Note 9, Income Taxes, although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time. | |
(2) | Rambus has commitments with various software vendors for non-cancellable license agreements that generally have terms greater than one year. The above table summarizes those contractual obligations as of September 30, 2008, which are also included on Rambus condensed consolidated balance sheets under current and other long-term liabilities. |
Rent expense was approximately $1.7 million and $5.2 million for the three and nine months
ended September 30, 2008, respectively. Rent expense was approximately $1.6 million and $4.8
million for the three and nine months ended September 30, 2007, respectively.
Deferred rent, included primarily in other long-term liabilities, was approximately $1.2
million and $1.5 million as of September 30, 2008 and December 31, 2007, respectively.
In connection with certain litigation taking place in Germany, the German courts have
requested that the Company set aside adequate funds to cover potential court cost claims.
Accordingly, approximately $0.6 million is restricted as to withdrawal, managed by a third party
subject to certain limitations under the Companys investment policy and included in restricted
cash, long-term, to cover the German court requirements.
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 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 September 30, 2008 or
December 31, 2007.
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Several securities fraud class actions, private lawsuits and shareholder derivative actions
were filed in state and federal courts against certain of the Companys current and former officers
and directors related to the stock option granting actions. 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 officers or directors 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 reduces Rambus
exposure and enables Rambus to recover a portion of future amounts to be paid. As a result of these
indemnification agreements, Rambus continues to make payments on behalf of current and former
officers. As of September 30, 2008, the Company had made payments of approximately $6.8 million on
their behalf, including $0.4 million in the quarter ended September 30, 2008. As of September 30,
2007, the Company had made payments of approximately $5.2 million on their behalf, including $0.8
million in the quarter ended September 30, 2007. These payments were recorded under costs of
restatement and related legal activities in the condensed consolidated statements of operations.
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 September 30, 2008 or December 31, 2007, respectively. 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.
8. Stockholders Equity
Share Repurchase Program
In October 2001, Rambus Board of Directors (the Board) approved a share repurchase program
of its Common Stock, principally to reduce the dilutive effect of employee stock options. To date,
the Board has approved the authorization to repurchase up to 19.0 million shares of the Companys
outstanding Common Stock over an undefined period of time. For the three months ended September 30,
2008, 0.6 million shares were repurchased with an aggregate value of $10.0 million. During the nine
months ended September 30, 2008, the Company repurchased approximately 2.0 million shares with an
aggregate value of $34.9 million. As of September 30, 2008, Rambus had repurchased a cumulative
total of approximately 15.2 million shares of its Common Stock with an aggregate value of
approximately $219.5 million since the commencement of this program. As of September 30, 2008,
there remained an outstanding authorization to repurchase approximately 3.8 million shares of
Rambus outstanding Common Stock.
Rambus records stock repurchases as a reduction to stockholders equity. As prescribed by
Accounting Principles Board (APB) Opinion No. 6, Status of Accounting Research Bulletins,
Rambus records a portion of the purchase price of the repurchased shares as an increase to
accumulated deficit when the cost of the shares repurchased exceeds the average original proceeds
per share received from the issuance of Common Stock. During the nine months ended September 30,
2008, the cumulative price of the shares repurchased exceeded the proceeds received from the
issuance of the same number of shares. The excess of $32.2 million was recorded as an increase to
accumulated deficit for the nine months ended September 30, 2008. During the nine months ended
September 30, 2007, the Company did not repurchase any Common Stock.
9. Income Taxes
The effective tax rate for the quarter ended September 30, 2008 was 0.3% which is lower than
the U.S. statutory tax rate applied to the Companys net loss primarily due to the establishment of
a full valuation allowance on our U.S. net deferred tax assets in the second quarter of 2008. The
effective tax rate for the quarter ended September 30, 2007 was 40.0% which was higher than the
U.S. statutory tax rate applied to the Companys net loss primarily due to research and development
tax credits, non-deductible stock-based compensation expense related to our executives and other
employees, state income taxes and foreign income taxes.
As of September 30, 2008, the Companys condensed consolidated balance sheet included net
deferred tax assets, before valuation allowance, of approximately $152.9 million, which consists of
net operating loss carryovers, tax credit carryovers, depreciation and amortization, employee
stock-based compensation expenses and certain liabilities. For the quarter ended June 30, 2008, the
Company recorded a non-cash income tax provision of $130.5 million to establish a valuation
allowance to fully reserve previously recorded net
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tax benefits generated from pre-tax losses in the U.S. Management periodically evaluates the
realizability of the Companys net deferred tax assets based on all available evidence, both
positive and negative. The realization of net deferred tax assets is solely dependent on the
Companys ability to generate sufficient future taxable income during periods prior to the
expiration of tax statutes to fully utilize these assets. As previously disclosed in the Companys
2007 Form 10-K for the year ended December 31, 2007, the Companys forecasted future operating
results are highly influenced by, among other factors, assumptions regarding (1) the Companys
ability to achieve its forecasted revenue, (2) its ability to effectively manage its expenses in
line with its forecasted revenue and (3) general trends in the semiconductor industry.
The Company weighed both positive and negative evidence and determined that there is a need
for the valuation allowance during the quarter ended June 30, 2008 due to the existence of three
years of historical cumulative losses and a revised forecast that projected future losses from
operations in the U.S., which the Company considered significant verifiable negative evidence.
Though considered positive evidence, projected income from favorable patent litigation and related
settlements were not included in the determination for the valuation allowance due to the Companys
inability to reliably estimate the timing and amounts of such settlements. The Company intends to
maintain the valuation allowance until sufficient positive evidence exists to support reversal of
the valuation allowance.
Rambus maintains liabilities for uncertain tax benefits within its non-current income taxes
payable accounts. These liabilities involve judgment and estimation and are monitored by management
based on the best information available including changes in tax regulations, the outcome of
relevant court cases and other information.
As of September 30, 2008, the Company had $14.1 million of unrecognized tax benefits,
including $11.1 million recorded as a reduction of long-term deferred tax assets and $3.0 million
in long-term income taxes payable. If recognized, approximately $0.5 million would be recorded as
an income tax benefit. No benefit would be recorded for the remaining unrecognized tax benefits as
the recognition would require a corresponding increase in the valuation allowance. As of December
31, 2007, the Company had $14.0 million of unrecognized tax benefits, including $8.5 million
recorded as a reduction of long-term deferred tax assets, which is net of approximately $2.6
million of federal tax benefits, and including $2.9 million in long-term income taxes payable.
Although it is possible that some of the unrecognized tax benefits could be settled within the
next 12 months, the Company cannot reasonably estimate the outcome at this time.
Rambus recognizes interest and penalties related to uncertain tax positions as a component of
the income tax provision (benefit). At December 31, 2007 and September 30, 2008, an insignificant
amount of interest and penalties are included in long-term income taxes payable.
Rambus files U.S. federal income tax returns as well as income tax returns in various states
and foreign jurisdictions. Rambus is currently under a payroll examination by the Internal Revenue
Service for the years ended December 31, 2004 and 2005. The Company is also under examination by
the California Franchise Tax Board for the fiscal year ended March 31, 2003 and the years ended
December 31, 2003 and 2004. Although the outcome of any tax audit is uncertain, the Company
believes it has adequately provided for any additional taxes that may be required to be paid as a
result of such examinations. If the Company determines that no payment will ultimately be required,
the reversal of these tax liabilities may result in tax benefits being recognized in the period
when that conclusion is reached. However, if an ultimate tax assessment exceeds the recorded tax
liability for that item, an additional tax provision may need to be recorded. The impact of such
adjustments in the Companys tax accounts could have a material impact on the consolidated results
of operations in future periods.
The Company is subject to general examination by the IRS for tax years ended 2005 through
2007. The Company is also subject to examination by the State of California for tax years ended
March 31, 2003 through December 31, 2007. In addition, any research and development credit
carryforwards and net operating loss generated in prior years and utilized in these or future years
may also be subject to examination by the IRS and the State of California. The Company is also
subject to examination in various other jurisdictions for various periods.
10. Earnings (Loss) Per Share
Earnings (loss) per share is calculated in accordance with SFAS No. 128, Earnings Per Share.
Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted earnings (loss) per share is
calculated by dividing the earnings (loss) by the weighted average number of common shares and
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potentially dilutive securities outstanding during the period. Potentially dilutive common
shares consist of incremental common shares issuable upon exercise of stock options, employee stock
purchases, restricted stock and restricted stock units and shares issuable upon the conversion of
convertible notes. The dilutive effect of the convertible notes is calculated under the
if-converted method. The dilutive effect of outstanding shares under the Companys stock plans is
reflected in diluted earnings per share by application of the treasury stock method. This method
includes consideration of the amounts to be paid by the employees, the amount of excess tax
benefits that would be recognized in equity if the instrument was exercised and the amount of
unrecognized stock-based compensation related to future services. No potential dilutive common
shares are included in the computation of any diluted per share amount when a net loss is reported.
The following table sets forth the computation of basic and diluted loss per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Numerator: |
||||||||||||||||
Net loss |
$ | (27,944 | ) | $ | (6,498 | ) | $ | (185,242 | ) | $ | (13,106 | ) | ||||
Denominator: |
||||||||||||||||
Weighted average shares used to compute basic EPS |
104,897 | 103,820 | 104,795 | 103,820 | ||||||||||||
Dilutive potential shares from stock options, ESPP
and nonvested equity stock and stock units |
| | | | ||||||||||||
Weighted average shares used to compute diluted EPS |
104,897 | 103,820 | 104,795 | 103,820 | ||||||||||||
Net loss per share: |
||||||||||||||||
Basic |
$ | (0.27 | ) | $ | (0.06 | ) | $ | (1.77 | ) | $ | (0.13 | ) | ||||
Diluted |
$ | (0.27 | ) | $ | (0.06 | ) | $ | (1.77 | ) | $ | (0.13 | ) |
For the three and nine months ended September 30, 2008 and 2007, approximately 5.9 million
shares that would be issued upon the conversion of the contingently issuable convertible notes were
excluded from the calculation of earnings per share because the conversion price was higher than
the average market price of the Common Stock during these periods. For the three months ended
September 30, 2008 and 2007, options to purchase approximately 11.9 million and 12.5 million
shares, respectively, and for the nine months ended September 30, 2008 and 2007, options to
purchase approximately 10.5 million and 11.0 million shares, respectively, were excluded from the
calculation because they were anti-dilutive after considering proceeds from exercise, taxes and
related unrecognized stock-based compensation expense. For the three and nine months ended
September 30, 2008, an additional 2.7 million and 3.4 million shares, respectively, including
nonvested equity stock and stock units, that would be dilutive have been excluded from the weighted
average dilutive shares because there was a net loss for the period.
11. Business Segments, Exports and Major Customers
Rambus operates in a single industry segment, the design, development and licensing of chip
interface technologies and architectures. Five customers accounted for 23%, 13%, 13%, 13% and 10%,
respectively, of revenue in the three months ended September 30, 2008. Four customers accounted for
19%, 16%, 15% and 10%, respectively, of revenue in the three months ended September 30, 2007. Six
customers accounted for 20%, 14%, 12%, 11%, 10% and 10%, respectively, of revenue in the nine
months ended September 30, 2008. Three customers accounted for 21%, 16% and 14%, respectively, of
revenue in the nine months ended September 30, 2007. Rambus expects that its revenue concentration
will decrease over the long term 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. Revenue is attributed to individual countries according to the countries in which the
licensees are headquartered. Revenue from customers in the following geographic regions is
recognized as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Japan |
$ | 23,279 | $ | 25,619 | $ | 83,839 | $ | 93,985 | ||||||||
North America |
5,857 | 6,593 | 18,518 | 20,454 | ||||||||||||
Taiwan |
10 | 875 | 532 | 1,025 | ||||||||||||
Korea |
102 | 373 | 541 | 859 | ||||||||||||
Singapore |
114 | 532 | 288 | 532 | ||||||||||||
Europe |
66 | 7,723 | 1,163 | 22,553 | ||||||||||||
$ | 29,428 | $ | 41,715 | $ | 104,881 | $ | 139,408 | |||||||||
At September 30, 2008, of the $23.7 million of total long-lived assets, approximately $20.3
million are located in the United States, $2.7 million are located in India and $0.7 million are
located in other foreign locations. At December 31, 2007, of the $24.6 million of total long-lived
assets, approximately $20.2 million were located in the United States, $3.6 million were located in
India and $0.8 million were located in other foreign locations.
12. Amortizable Intangible Assets
The components of the Companys intangible assets as of September 30, 2008 and December 31,
2007 were as follows:
As of September 30, 2008 | ||||||||||||
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
(In thousands) | ||||||||||||
Patents |
$ | 9,941 | $ | (5,236 | ) | $ | 4,705 | |||||
Intellectual property |
10,384 | (9,313 | ) | 1,071 | ||||||||
Customer contracts and contractual relationships |
4,000 | (2,102 | ) | 1,898 | ||||||||
Existing technology |
2,700 | (2,334 | ) | 366 | ||||||||
Non-competition agreement |
100 | (100 | ) | | ||||||||
Total intangible assets |
$ | 27,125 | $ | (19,085 | ) | $ | 8,040 | |||||
As of December 31, 2007 | ||||||||||||
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
(In thousands) | ||||||||||||
Patents |
$ | 9,941 | $ | (4,363 | ) | $ | 5,578 | |||||
Intellectual property |
10,084 | (7,759 | ) | 2,325 | ||||||||
Customer contracts and contractual relationships |
8,000 | (3,344 | ) | 4,656 | ||||||||
Existing technology |
2,700 | (1,828 | ) | 872 | ||||||||
Non-competition agreement |
100 | (90 | ) | 10 | ||||||||
Total intangible assets |
$ | 30,825 | $ | (17,384 | ) | $ | 13,441 | |||||
Amortization expense for intangible assets for the three and nine months ended September 30,
2008 was $0.8 million and $3.5 million, respectively. Amortization expense for intangible assets
for the three and nine months ended September 30, 2007 was $1.3 million and $3.9 million,
respectively.
During the three months ended September 30, 2008, based on communication it received from a
customer, the Company determined that approximately $2.2 million of its intangible assets had no
alternative future use and was impaired as a result of a customers change in technology
requirements. The intangible asset relates to a contractual relationship acquired in the Velio
acquisition during December 2003.
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The estimated future amortization expense of intangible assets as of September 30, 2008 was as
follows (amounts in thousands):
Years Ending December 31: | Amount | |||
2008 (remaining 3 months) |
$ | 796 | ||
2009 |
2,708 | |||
2010 |
1,521 | |||
2011 |
1,193 | |||
2012 |
921 | |||
Thereafter |
901 | |||
$ | 8,040 | |||
The valuation and useful lives of the acquired intangible assets were allocated based on
estimated fair values at the acquisition dates. The value of the agreements, along with interviews
and managements 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 revenue, operating expenses and income
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.
13. Litigation and Asserted Claims
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 complaint, as
amended and narrowed through motion practice, asserts claims for fraud, violations of federal
antitrust laws and deceptive practices in connection with Rambus participation in a standards
setting organization called JEDEC, and seeks a declaratory judgment that the Rambus patents-in-suit
are unenforceable, invalid and not infringed by Hynix, compensatory and punitive damages, and
attorneys fees. Rambus denied Hynixs claims and filed counterclaims for patent infringement
against Hynix.
The case was divided into three phases. In the first phase, Hynix tried its unclean hands
defense beginning on October 17, 2005 and concluding on November 1, 2005. In its January 4, 2006
Findings of Fact and Conclusions of Law, the court held that Hynixs unclean hands defense failed.
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.
The second phase of the Hynix-Rambus trial on patent infringement, validity and damages
began on March 15, 2006, and was submitted to the jury on April 13, 2006. On April 24, 2006, the
jury returned a verdict in favor of Rambus on all issues and awarded Rambus a total of
approximately $307 million in damages, excluding prejudgment interest. Specifically, the jury found
that each of the ten selected patent claims was supported by the written description, and was not
anticipated or rendered obvious by prior art; therefore, none of the patent claims were invalid.
The jury also found that Hynix infringed all eight of the patent claims for which the jury was
asked to determine infringement; the court had previously determined on summary judgment that Hynix
infringed the other two claims at issue in the trial. On July 17, 2006, the court granted Hynixs
motion for a new trial on the issue of damages unless Rambus agreed to a reduction of the total
jury award to approximately $134 million. The court found that the record supported a maximum
royalty rate of 1% for SDR SDRAM and 4.25% for DDR SDRAM, which the court applied to the stipulated
U.S. sales of infringing Hynix products through December 31, 2005. On July 27, 2006, Rambus elected
remittitur of the jurys award to approximately $134 million. On June 24, 2008, the court heard
oral argument on Rambus motion to supplement the damages award and for equitable relief related to
Hynixs infringement of Rambus patents. No opinion has issued to date on Hynixs post-trial motions
for judgment as a matter of law and new trial on certain issues relating to validity and
infringement, nor has any opinion issued to date on Rambus motions for equitable relief,
supplemental damages, and prejudgment interest. Hynix filed a motion on July 7, 2008 to reduce the
amount of remitted damages and any supplemental damages that the court may award, as well as to
limit the products that could be affected by any injunction that the court may grant, on the
grounds of patent exhaustion. Following a hearing on August 29, 2008, the court denied Hynixs
motion.
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The third phase of the Hynix-Rambus trial involved Hynixs affirmative JEDEC-related antitrust
and fraud allegations against Rambus. On April 24, 2007, the court ordered a coordinated trial of
certain common JEDEC-related claims alleged by the
manufacturer parties (i.e., Hynix, Micron, Nanya and Samsung) and defenses asserted by Rambus
in Hynix v Rambus, Case No. C 00-20905 RMW, and three other cases pending before the same court
(Rambus Inc. v. Samsung Electronics Co. Ltd. et al., Case No. 05-02298 RMW, Rambus Inc. v. Hynix
Semiconductor Inc., et al., Case No. 05-00334, and Rambus Inc. v. Micron Technology, Inc., et al.,
Case No. C 06-00244 RMW, each described in further detail below). On December 14, 2007, the court
excused Samsung from the coordinated trial based on Samsungs agreement to certain conditions,
including trial of its claims against Rambus by the court within six months following the
conclusion of the coordinated trial. The coordinated trial involving Rambus, Hynix, Micron and
Nanya began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26,
2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each
of their claims. Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their
burden of proving that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important
representations that it did not have any intellectual property pertaining to the work of JEDEC and
intended or reasonably expected that the representations would be heard by or repeated to others
including Hynix, Micron or Nanya; (3) Rambus uttered deceptive half-truths about its intellectual
property coverage or potential coverage of products compliant with synchronous DRAM standards then
being considered by JEDEC by disclosing some facts but failing to disclose other important facts;
or (4) JEDEC members shared a clearly defined expectation that members would disclose relevant
knowledge they had about patent applications or the intent to file patent applications on
technology being considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed
motions for a new trial and for judgment on certain of their equitable claims and defenses. A
hearing on those motions was held on May 1, 2008. A further hearing on the equitable claims and
defenses was held on May 27, 2008. On July 24, 2008, the court issued an order denying Hynix,
Micron, and Nanyas motion for new trial. The court has not yet ruled on their equitable claims and
defenses.
European Patent Infringement Case
Beginning on September 4, 2000, Rambus filed suit against Hynix in multiple European
jurisdictions for infringement of EP 0 525 068 (the 068 patent). Rambus later filed a further
infringement action against Hynix in Mannheim, Germany on a second
patent, EP 1 022 642 (the 642
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 a hearing in the opposition with
respect to the 642 patent has not yet been scheduled. On January 8, 2008, the Mannheim court
issued an Order of Cost with respect to the 068 proceeding requiring Rambus to reimburse Hynix
court fees in the amount of $0.6 million. This amount has since been paid.
Micron Litigation
U.S District Court in Delaware: Case No. 00-792-SLR
On August 28, 2000, Micron filed suit against Rambus in the U.S. District Court in Delaware.
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. Rambus has filed an answer
and counterclaims disputing Microns claims and asserting infringement by Micron of twelve U.S.
patents.
This case has been divided into three phases in the same general order as in the Hynix
00-20905 action: (1) unclean hands; (2) patent infringement; and (3) antitrust, equitable estoppel,
and other JEDEC-related issues. A bench trial on Microns unclean hands defense began on November
8, 2007 and concluded on November 15, 2007. The court ordered post-trial briefing on the issue of
when Rambus became obligated to preserve documents because it anticipated litigation. A hearing on
that issue was held on May 20, 2008. The court ordered further post-trial briefing on the remaining
issues from the unclean hands trial, and a hearing on those issues was held on September 19, 2008.
The matter was taken under submission, and no decision has issued to date.
U.S. District Court of the Northern District of California
On January 13, 2006, Rambus filed suit against Micron in the U.S. District Court in the
Northern District of California. Rambus alleges that fourteen Rambus patents are infringed by
Microns DDR2, DDR3, GDDR3, and other advanced memory products. Rambus seeks compensatory and
punitive damages, attorneys fees, and injunctive relief. Micron has denied Rambus allegations and
is alleging counterclaims for violations of federal antitrust laws, unfair trade practices,
equitable estoppel, fraud and negligent misrepresentation in connection with Rambus participation
in JEDEC. Micron seeks a declaration of monopolization by Rambus,
injunctive relief, compensatory and punitive damages, attorneys fees, and a declaratory
judgment of invalidity, unenforceability, and noninfringement of the fourteen patents in suit.
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As explained above, the court ordered a coordinated trial (without Samsung) of certain common
JEDEC-related claims and defenses asserted in Hynix v Rambus, Case No. C 00-20905 RMW, Rambus Inc.
v. Samsung Electronics Co. Ltd. et al., Case No. 05-02298 RMW, Rambus Inc. v. Hynix Semiconductor
Inc., et al., Case No. 05-00334, and Rambus Inc. v. Micron Technology, Inc., et al., Case No. C
06-00244 RMW. The coordinated trial involving Rambus, Hynix, Micron and Nanya began on January 29,
2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a
verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims.
Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their burden of proving
that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important representations that
it did not have any intellectual property pertaining to the work of JEDEC and intended or
reasonably expected that the representations would be heard by or repeated to others including
Hynix, Micron or Nanya; (3) Rambus uttered deceptive half-truths about its intellectual property
coverage or potential coverage of products compliant with synchronous DRAM standards then being
considered by JEDEC by disclosing some facts but failing to disclose other important facts; or (4)
JEDEC members shared a clearly defined expectation that members would disclose relevant knowledge
they had about patent applications or the intent to file patent applications on technology being
considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed motions for a new trial
and for judgment on certain of their equitable claims and defenses. A hearing on those motions was
held on May 1, 2008. A further hearing on the equitable claims and defenses was held on May 27,
2008. On July 24, 2008, the court issued an order denying Hynix, Micron, and Nanyas motion for new
trial. The court has not yet ruled on their equitable claims and defenses.
In these cases (except for the Hynix 00-20905 action), a hearing on claim construction and the
parties cross-motions for summary judgment on infringement and validity was held on June 4 and 5,
2008. On July 10, 2008, the court issued its claim construction order relating to the
Farmwald/Horowitz patents in suit and denied Hynix, Micron, Nanya, and Samsungs (collectively, the
Manufacturers) motions for summary judgment of noninfringement and invalidity based on their
proposed claim construction. The court issued claim construction orders relating to the Ware
patents in suit on July 25 and August 27, 2008, and denied the Manufacturers motion for summary
judgment of noninfringement of certain claims. On September 4, 2008, at the courts direction,
Rambus elected to proceed to trial on twelve patent claims, each from the Farmwald/Horowitz family.
On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement
against the Manufacturers under the Ware patents in suit (U.S. Patent Nos. 6,493,789 and
6,496,897), and each partys claims relating to those patents were dismissed with prejudice. One or
more trials on Rambus patent infringement claims is set to begin on January 19, 2009.
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 642 patent and a third Rambus patent,
EP 1 004 956 (the 956 patent).
Rambus suit against Micron for infringement of the 642 patent in Mannheim, Germany, has not been
active. The Mannheim court issued an Order of Cost with respect to
the 068 proceeding requiring
Rambus to reimburse Micron attorneys fees in the amount of $0.45 million. This amount has since
been paid.
One
proceeding in Italy relating to the 642 patent was adjourned at a hearing on June 15,
2007, each party bearing its own costs. In two other proceedings in
Italy relating to the 956
patent, the court has scheduled hearings for May 6, 2009, regarding continuation of the
proceedings. 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 Rambus pursuant to a court order. Micron asserts that its damages
allegedly caused by this seizure equal or exceed $30.0 million. Micron formally filed suit against
Rambus relating to this seizure in February 2006. Rambus filed its written defense on April 24,
2006. The Italian court has ordered further briefing on issues related to Rambus suit in Italy for
infringement of its 068 patent. No decision has issued to date.
DDR2, GDDR2 & GDDR3 Litigation (DDR2)
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 court against Hynix, Infineon, Nanya, and Inotera. Infineon and
Inotera were subsequently
dismissed from this litigation and Samsung was added as a defendant. Rambus alleges that
certain of its patents are infringed by certain of the defendants SDRAM, DDR, DDR2,
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DDR3, gDDR2, GDDR3, GDDR4 and other advanced memory products. Hynix, Samsung and Nanya have
denied Rambus claims and asserted counterclaims against Rambus for, among other things, violations
of federal antitrust laws, unfair trade practices, equitable estoppel, and fraud in connection with
Rambus participation in JEDEC.
As explained above, the court ordered a coordinated trial of certain common JEDEC-related
claims and defenses asserted in Hynix v Rambus, Case No. C 00-20905 RMW, Rambus Inc. v. Samsung
Electronics Co. Ltd. et al., Case No. 05-02298 RMW, Rambus Inc. v. Hynix Semiconductor Inc., et
al., Case No. 05-00334, and Rambus Inc. v. Micron Technology, Inc., et al., Case No. C 06-00244
RMW. The court subsequently excused Samsung from the coordinated trial on December 14, 2007, based
on Samsungs agreement to certain conditions, including trial of its claims against Rambus within
six months following the conclusion of the coordinated trial. That trial is currently scheduled to
begin on September 22, 2008. The coordinated trial involving Rambus, Hynix, Micron and Nanya began
on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury
returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims.
Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their burden of proving
that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important representations that
it did not have any intellectual property pertaining to the work of JEDEC and intended or
reasonably expected that the representations would be heard by or repeated to others including
Hynix, Micron or Nanya; (3) Rambus uttered deceptive half- truths about its intellectual property
coverage or potential coverage of products compliant with synchronous DRAM standards then being
considered by JEDEC by disclosing some facts but failing to disclose other important facts; or (4)
JEDEC members shared a clearly defined expectation that members would disclose relevant knowledge
they had about patent applications or the intent to file patent applications on technology being
considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed motions for a new trial
and for judgment on certain of their equitable claims and defenses. A hearing on those motions was
held on May 1, 2008. A further hearing on the equitable claims and defenses was held on May 27,
2008. On July 24, 2008, the court issued an order denying Hynix, Micron, and Nanyas motion for new
trial. The court has not yet ruled on their equitable claims and defenses.
In these cases (except for the Hynix 00-20905 action), a hearing on claim construction and the
parties cross-motions for summary judgment on infringement and validity was held on June 4 and 5,
2008. On July 10, 2008, the court issued its claim construction order relating to the
Farmwald/Horowitz patents in suit and denied the Manufacturers motions for summary judgment of
noninfringement and invalidity based on their proposed claim construction. The court issued claim
construction orders relating to the Ware patents in suit on July 25 and August 27, 2008, and denied
the Manufacturers motion for summary judgment of noninfringement of certain claims. On September
4, 2008, at the courts direction, Rambus elected to proceed to trial on twelve patent claims, each
from the Farmwald/Horowitz family. On September 16, 2008, Rambus granted a covenant not to assert
any claim of patent infringement against the Manufacturers under U.S. Patent Nos. 6,493,789 and
6,496,897, and each partys claims relating to those patents were dismissed with prejudice. One or
more trials on Rambus remaining patent infringement claims is set to begin on January 19, 2009.
Samsung Litigation
U.S District Court in the Northern District of California
On June 6, 2005, Rambus filed a patent infringement suit against Samsung in the U.S. District
Court in the Northern District of California alleging that Samsungs SDRAM and DDR SDRAM parts
infringe nine of Rambus patents. Samsung has denied Rambus claims and asserted 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 has also counterclaimed that Rambus aided and abetted breach of fiduciary duty and
intentionally interfered with Samsungs contract with a former employee by knowingly hiring a
former Samsung employee who allegedly misused proprietary Samsung information. Rambus has denied
Samsungs counterclaims.
As explained above, the court ordered a coordinated trial of certain common JEDEC-related
claims and defenses asserted in Hynix v Rambus, Case No. C 00-20905 RMW, Rambus Inc. v. Samsung
Electronics Co. Ltd. et al., Case No. 05-02298 RMW, Rambus Inc. v. Hynix Semiconductor Inc., et
al., Case No. 05-00334, and Rambus Inc. v. Micron Technology, Inc., et al., Case No. C 06-00244
RMW. The court subsequently excused Samsung from the coordinated trial on December 14, 2007, based
on Samsungs agreement to certain conditions, including trial of its claims against Rambus within
six months following the conclusion of the coordinated trial as discussed below. In these cases
(except for the Hynix 00-20905 action), a hearing on claim construction and the parties
cross-motions for summary judgment on infringement and validity was held on June 4 and 5, 2008. On
July 10, 2008, the court issued its claim construction order relating to the Farmwald/Horowitz
patents in suit and denied the Manufacturers motions for summary judgment of noninfringement and
invalidity based on their proposed claim construction. The court issued claim construction orders
relating to the
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Ware patents in suit on July 25 and August 27, 2008, and denied the Manufacturers motion for
summary judgment of noninfringement of certain claims. On September 4, 2008, at the courts
direction, Rambus elected to proceed to trial on twelve patent claims, each from the
Farmwald/Horowitz family. On September 16, 2008, Rambus granted a covenant not to assert any claim
of patent infringement against the Manufacturers under U.S. Patent Nos. 6,493,789 and 6,496,897,
and each partys claims relating to those patents were dismissed with prejudice. One or more trials
on Rambus remaining patent infringement claims is set to begin on January 19, 2009.
On August 11, 2008, the Court granted summary judgment in Rambus favor on Samsungs claims
for aiding and abetting a breach of fiduciary duty, intentional interference with contract, and
certain aspects of Samsungs unfair competition claim. On September 16, 2008, the Court entered a
stipulation and order of dismissal with prejudice of certain of Samsungs claims and defenses
(including those based on Rambus alleged JEDEC conduct) and Rambus defenses corresponding to
Samsungs claims. A bench trial on the remaining claims and defenses that are unique to Samsung
(breach of license, breach of duty of good faith and fair dealing, and estoppel based on those
claims) was held between September 22 and October 1, 2008. Post-trial briefing on these issues as
well as Samsungs claims and defenses related to its allegations that Rambus spoliated evidence has
been completed, but no decision has issued to date.
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 seeking a declaratory judgment that four Rambus patents are invalid, unenforceable and/or
not infringed. Rambus answered the complaint, disputing Samsungs claims. Rambus granted Samsung
covenants not to sue Samsung for infringement of the four patents for which Samsung sought
declaratory relief. Rambus subsequently offered to pay Samsungs attorneys fees, but Samsung did
not accept the offer. On November 8, 2005, the Virginia court granted Rambus motion to dismiss
with respect to Samsungs claims for declaratory judgment but denied Rambus motion with respect to
Samsungs claim for attorneys fees pursuant to 35 U.S.C. § 285. On July 19, 2006, the Virginia
court issued orders finding that: (1) it had subject matter jurisdiction over Samsungs motions;
(2) Samsung is a prevailing party; (3) Rambus had spoliated evidence in anticipation of
litigation against DRAM manufacturers such as Samsung; (4) Rambus spoliation rendered the case
exceptional; (5) Rambus did not assert its counterclaims in subjective bad faith or for the purpose
of vexation; (6) Rambus counterclaims were not objectively baseless at the time they were filed;
and (7) Samsung was not entitled to an award of attorneys fees.
Rambus filed a notice of appeal to the United States Court of Appeals for the Federal Circuit
(the CAFC) on August 16, 2006. Oral argument was heard on August 7, 2007. On April 29, 2008, the
CAFC vacated the orders of the Virginia court denying Samsungs application for attorney fees and
entering findings with respect to the alleged spoliation of evidence. The CAFC held that the
Virginia courts findings with respect to alleged spoliation constituted an impermissible advisory
opinion. The CAFC further held that Rambus offer to pay Samsungs attorneys fees rendered the
case moot, and that the Virginia court did not thereafter have independent jurisdiction to assess
whether the case was exceptional. The CAFC remanded the matter to the Virginia court with the
instruction that the court dismiss Samsungs complaint. On May 30, 2008, the Virginia court
dismissed Samsungs complaint pursuant to the CAFCs opinion.
On July 28, 2008, Samsung filed a petition seeking review of the CAFC decision by the United
States Supreme Court. On October 6, 2008, the United States Supreme Court denied Samsungs
petition.
FTC Complaint
On June 19, 2002, the FTC filed a complaint against Rambus. The FTC alleged that through
Rambus action and inaction at JEDEC, Rambus 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.
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On February 17, 2004, the FTC Chief Administrative Law Judge issued his initial decision
dismissing the FTCs complaint against Rambus on multiple independent grounds (the Initial
Decision). The FTCs Complaint Counsel appealed this decision.
On August 2, 2006, the FTC released its July 31, 2006, opinion and order reversing and
vacating the Initial Decision and determining that Rambus violated Section 5 of the Federal Trade
Commission Act. Following further briefing and oral argument on issues relating to remedy, the FTC
released its opinion and order on remedy on February 5, 2007. The remedy order set the maximum
royalty rate that Rambus could collect on the manufacture, use or sale in the United States of
certain JEDEC-compliant parts after the effective date of the Order. The order also mandated that
Rambus offer a license for these products at rates no higher than the maximums set by the FTC,
including a further cap on rates for the affected non-memory products. The order further required
Rambus to take certain steps to comply with the terms of the order and applicable disclosure rules
of any standard setting organization of which it may become a member.
The FTCs order explicitly did not set maximum rates or other conditions with respect to
Rambus royalty rates for DDR2 SDRAM, other post-DDR JEDEC standards, or for non-JEDEC-standardized
technologies such as those used in RDRAM or XDR DRAM.
On March 16, 2007, the FTC issued an order granting in part and denying in part Rambus motion
for a stay of the remedy pending appeal. The March 16 order permitted Rambus to acquire rights to
royalty payments for use of the patented technologies affected by the February 2 remedy order
during the period of the stay in excess of the FTC-imposed maximum royalty rates on SDRAM and DDR
SDRAM products, provided that funds above the maximum allowed rates be either placed into an escrow
account to be distributed, or payable pursuant a contingent contractual obligation, in accordance
with the ultimate decision of the court of appeals. In an opinion accompanying its order, the FTC
clarified that it intended its remedy to be forward-looking and prospective only, and therefore
unlikely to be construed to require Rambus to refund royalties already paid or to restrict Rambus
from collecting royalties for the use of its technologies during past periods.
On April 27, 2007, the FTC issued an order granting in part and denying in part Rambus
petition for reconsideration of the remedy order. The FTCs order and accompanying opinion on
Rambus petition for reconsideration clarified the remedy order in certain respects. For example,
(a) the FTC explicitly stated that the remedy order did not require Rambus to make refunds or
prohibit it from collecting royalties in excess of maximum allowable royalties that accrue up to
the effective date of the remedy order; (b) the remedy order was modified to specifically permit
Rambus to seek damages in litigation up to three times the specified maximum allowable royalty
rates on the ground of willful infringement and any allowable attorneys fees; and (c) under the
remedy order, licensees were permitted to pay Rambus a flat fee in lieu of running royalties, even
if such an arrangement resulted in payments above the FTCs rate caps in certain circumstances.
Rambus appealed the FTCs liability and remedy orders to the United States Court of Appeals
for the District of Columbia (the CADC). Oral argument was heard February 14, 2008. On April 22,
2008, the CADC issued an opinion which requires vacatur of the FTCs orders. The CADC held that the
FTC failed to demonstrate that Rambus conduct was exclusionary, and thus failed to establish its
allegation that Rambus unlawfully monopolized any relevant market. The CADCs opinion set aside the
FTCs orders and remanded the matter to the FTC for further proceedings consistent with the
opinion. Regarding the chance of further proceedings on remand, the CADC expressed serious concerns
about the strength of the evidence relied on to support some of the Commissions crucial findings
regarding the scope of JEDECs patent disclosure policies and Rambus alleged violation of those
policies. On August 26, 2008, the CADC denied the FTCs petition to rehear the case en banc. On
October 16, 2008, the FTC issued an order explicitly authorizing Rambus to receive amounts above
the maximum rates allowed by the FTCs now-vacated order payable pursuant to any contingent
contractual obligation.
Indirect Purchaser Class Action
On August 10, 2006, the first of nine class action lawsuits were filed against Rambus in 2006
alleging violations of federal and state antitrust laws, violations of state consumer protection
laws, and various common law claims based almost entirely on the same conduct which was the subject
of the FTCs July 31, 2006 opinion. Three of these lawsuits filed outside of California were
dismissed pursuant to agreement of the parties. The remaining six of these cases were consolidated
under the caption, In re Rambus Antitrust Litigation, 06-4852 RMW (N.D. Cal.). The consolidated
complaint seeks injunctive and declaratory relief, disgorgement, restitution and compensatory and
punitive damages in an unspecified amount, and attorneys fees and costs. On March 28, 2007, Rambus
filed a motion to dismiss the consolidated complaint. On July 27, 2007, the court heard oral
argument on Rambus motion and took the matter under submission. No final order has been issued to
date.
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European Commission Competition Directorate-General
On or about April 22, 2003, Rambus was notified by the European Commission Competition
Directorate-General (Directorate) (the European Commission) 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 Infineons complaint to the European
Commission in late July 2003, and on October 8, 2003, at the request of the European Commission,
filed its response. The European Commission sent Rambus a further request for information on
December 22, 2006, which Rambus answered on January 26, 2007. On August 1, 2007, Rambus received a
statement of objections from the European Commission. The statement of objections alleges that
through Rambus participation in the JEDEC standards setting organization and subsequent conduct,
Rambus violated European Union competition law. Rambus filed a response to the statement of
objections on October 31, 2007, and a hearing was held on December 4 and 5, 2007. The matter is
currently under submission by the European Commission.
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 et seq.), conspiring to monopolize under the Cartwright Act
(California Bus. & Prof. Code §§ 16720 et seq.), intentional interference with prospective economic
advantage, and unfair competition (California Bus. & Prof. Code §§ 17200 et seq.). This lawsuit
alleges that there were concerted efforts beginning in the 1990s to deter innovation in the DRAM
market and to boycott Rambus and/or deter market acceptance of Rambus RDRAM product. Subsequently,
Infineon and Siemens were dismissed from this action (as a result of a settlement with Infineon)
and three Samsung-related entities were added as defendants.
On June 28, 2007, Hynix filed a motion for summary judgment on the ground that Rambus claims
should be dismissed on the grounds that they allegedly were compulsory counterclaims in the Hynix
00-20905 action. Following briefing and oral argument, the court denied Hynixs motion in an order
filed November 2, 2007. Hynix sought review of the trial courts order by the California Court of
Appeal, which the appellate court summarily denied on January 17, 2008. On January 28, 2008, Hynix
filed a petition for review of this decision by the California Supreme Court. Rambus filed an
answer requesting that Hynixs petition be denied. On March 19, 2008, the California Supreme Court
issued an order denying Hynixs petition.
On May 28, 2008, defendants filed a motion for judgment on the pleadings in their favor on
what they refer to as Rambus cause of action for price fixing in and of itself. At a hearing
held on July 23, 2008, the San Francisco court denied defendants motion from the bench. A hearing
on Rambus motion for summary judgment on the grounds that Microns cross-complaint is barred by
the statute of limitations was held on August 1, 2008. At the hearing, the San Francisco court
granted Rambus motion as to Microns first cause of action (alleged violation of Californias
Cartwright Act) and continued the motion as to Microns second and third causes of action (alleged
violation of unfair business practices act and alleged intentional interference with prospective
economic advantage). No further order has issued on Rambus motion.
Trial is scheduled to begin on March 16, 2009.
Stock Option Investigation Related Claims
On May 30, 2006, the Audit Committee commenced an internal investigation of the timing of past
stock option grants and related accounting issues.
On May 31, 2006, the first of three shareholder derivative actions was filed in the Northern
District of California against Rambus (as a nominal defendant) and certain current and former
executives and board members. These actions have been consolidated for all purposes under the
caption, In re Rambus Inc. Derivative Litigation, Master File No. C-06-3513-JF (N.D. Cal.), and
Howard Chu and Gaetano Ruggieri were appointed lead plaintiffs. The consolidated complaint, as
amended, alleges violations of certain federal and state securities laws as well as other state law
causes of action. The complaint seeks disgorgement and damages in an unspecified amount,
unspecified equitable relief, and attorneys fees and costs.
On August 22, 2006, another shareholder derivative action was filed in Delaware Chancery Court
against Rambus (as a nominal defendant) and certain current and former executives and board members
(Bell v. Tate et al., 2366-N (Del. Chancery)). On May 16, 2008, this case was dismissed pursuant to
a notice filed by the plaintiff.
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On October 18, 2006, the Board of Directors formed a Special Litigation Committee (the SLC)
to evaluate potential claims or other actions arising from the stock option granting activities.
The Board of Directors appointed J. Thomas Bentley, Chairman of the Audit Committee, and Abraham
Sofaer, a retired federal judge and Chairman of the Legal Affairs Committee, both of whom joined
the Rambus Board of Directors in 2005, to comprise the SLC.
On August 24, 2007, the final written report setting forth the findings of the SLC was filed
with the court. As set forth in its report, the SLC determined that all claims should be terminated
and dismissed against the named defendants in In re Rambus Inc. Derivative Litigation with the
exception of claims against named defendant Ed Larsen, who served as Vice President, Human
Resources from September 1996 until December 1999, and then Senior Vice President, Administration
until July 2004. The SLC entered into settlement agreements with certain former officers of the
Company. These settlements are conditioned upon the dismissal of the claims asserted against these
individuals in In re Rambus Inc. Derivative Litigation. The aggregate value of the settlements to
the Company exceeds $6.5 million in cash and estimated equivalent value as well as substantial
additional value to the Company relating to the relinquishment of claims to over 2.7 million stock
options. The SLC stated its intention to assert control over the litigation. The conclusions and
recommendations of the SLC are subject to review by the court. On October 5, 2007, Rambus filed a
motion to terminate in accordance with the SLCs recommendations. Pursuant to the parties
agreement, that motion was taken off calendar.
On August 30, 2007, another shareholder derivative action was filed in the Southern District
of New York against Rambus (as a nominal defendant) and PricewaterhouseCoopers LLP (Francl v.
PricewaterhouseCoopers LLP et al., No. 07-Civ. 7650 (GBD)). On November 21, 2007, the New York
court granted PricewaterhouseCoopers LLPs motion to transfer the action to the Northern District
of California.
Subject to court approval, the parties have agreed in principle to settle In re Rambus Inc.
Derivative Litigation and Francl v. PricewaterhouseCoopers LLP et al., No. 07-Civ. 7650 (GBD). The
settlement, which is subject to review by the court, provides for a payment by Rambus of $2.0
million and would lead to a dismissal with prejudice of all claims against all defendants, with the
exception of claims against Ed Larsen, in these actions. The $2.0 million was accrued for during
the quarter ended June 30, 2008 within accrued litigation expenses.
On July 17, 2006, the first of six class action lawsuits was filed in the Northern District of
California against Rambus and certain current and former executives and board members. These
lawsuits were consolidated under the caption, In re Rambus Inc. Securities Litigation, C-06-4346-JF
(N.D. Cal.). The settlement of this action was preliminarily approved by the court on March 5,
2008. Pursuant to the settlement agreement, Rambus paid $18.3 million into a settlement fund on
March 17, 2008. Some alleged class members requested exclusion from the settlement. A final
fairness hearing was held on May 14, 2008. That same day the court entered an order granting final
approval of the settlement agreement and entered judgment dismissing with prejudice all claims
against all defendants in the consolidated class action litigation.
On March 1, 2007, a pro se lawsuit was filed in the Northern District of California by two
alleged Rambus shareholders against Rambus, certain current and former executives and board
members, and PricewaterhouseCoopers LLP (Kelley et al. v. Rambus, Inc. et al. C-07-01238-JF (N.D.
Cal.)). This action was consolidated with a substantially identical pro se lawsuit filed by another
purported Rambus shareholder against the same parties. The consolidated complaint against Rambus
alleges violations of federal and state securities laws, and state law claims for fraud and breach
of fiduciary duty. Following several rounds of motions to dismiss, on April 17, 2008, the court
dismissed all claims with prejudice except for plaintiffs claims under sections 14(a) and 18(a) of
the Securities and Exchange Act of 1934 as to which leave to amend was granted. On June 2, 2008,
plaintiffs filed an amended complaint containing substantially the same allegations as the prior
complaint although limited to claims under sections 14(a) and 18(a) of the Securities and Exchange
Act of 1934. Rambus motion to dismiss the amended complaint was heard on September 12, 2008. The
court took the matter under submission, and no decision has issued to date.
On September 11, 2008, the same pro se plaintiffs filed a separate lawsuit in Santa Clara
County Superior Court against Rambus, certain current and former executives and board members, and
PricewaterhouseCoopers LLP (Kelley et al. v. Rambus, Inc. et al., Case No. 1-08-CV-122444). The
complaint alleges violations of certain California state securities statues as well as fraud and
negligent misrepresentation based on substantially the same underlying factual allegations
contained in the pro se lawsuit filed in federal court. Rambus response to the complaint is not
yet due.
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On August 25, 2008, an amended complaint was filed by certain individuals and entities in
Santa Clara County Superior Court against Rambus, certain current and former executives and board
members, and PricewaterhouseCoopers LLP (Steele et al. v. Rambus
Inc. et al., Case No. 1-08-CV-113682). The amended complaint alleges violations of certain
California state securities statutes as well as fraud and negligent misrepresentation. On October
10, 2008, Rambus filed a demurrer to the amended complaint, and a hearing is scheduled for December
5, 2008.
NVIDIA Litigation
U.S District Court in the Northern District of California
On July 10, 2008, Rambus filed suit against NVIDIA Corporation (NVIDIA) in the U.S. District
Court for the Northern District of California alleging that NVIDIAs products with memory
controllers for at least the SDR, DDR, DDR2, DDR3, GDDR and GDDR3 technologies infringe 17 patents.
On August 29, 2008, NVIDIA filed a motion to dismiss or strike the complaint, or in the
alternative, for more definite statement. A hearing is currently scheduled for November 14, 2008.
On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement
against NVIDIA under U.S. Patent Nos. 6,493,789 and 6,496,897.
U.S. District Court in the Middle District of North Carolina
On July 11, 2008, one day after Rambus filed suit, NVIDIA filed its own action against Rambus
in the U.S. District Court for the Middle District of North Carolina alleging that Rambus committed
antitrust violations of the Sherman Act; committed antitrust violations of North Carolina law; and
engaged in unfair and deceptive practices in violation of North Carolina law. NVIDIA seeks
injunctive relief, damages, and attorneys fees and costs. On September 8, 2008, Rambus filed a
motion to dismiss the complaint. On September 17, 2008, Rambus filed a motion to transfer this
action to the Northern District of California where Rambus first-filed patent infringement suit is
pending against NVIDIA. No hearing dates have been scheduled for either of these motions, and no
rulings have issued to 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 any delay in their resolution could affect Rambus ability to license
its intellectual property going forward.
The Company records a contingent liability when it is probable that a loss has been incurred
and the amount is reasonably estimable in accordance with SFAS No. 5, Accounting for
Contingencies.
14. Fair Value of Financial Instruments
The Company adopted SFAS No. 157 effective January 1, 2008 for financial assets and
liabilities measured on a recurring basis. SFAS No. 157 applies to all financial assets and
financial liabilities that are being measured and reported on a fair value basis. There was no
impact for adoption of SFAS No. 157 to the consolidated financial statements. SFAS No. 157 requires
disclosure that establishes a framework for measuring fair value and expands disclosure about fair
value measurements. The statement requires fair value measurement be classified and disclosed in
one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either
directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market activity).
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The following table summarizes the valuation of our cash equivalents and marketable securities
by the above SFAS No. 157 pricing levels as of September 30, 2008:
As of September 30, 2008 | ||||||||||||||||
Quoted | ||||||||||||||||
market | Significant | |||||||||||||||
prices in | other | Significant | ||||||||||||||
active | observable | unobservable | ||||||||||||||
markets | inputs | inputs | ||||||||||||||
(in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Available-for-sale securities |
$ | 375,946 | $ | 84,819 | $ | 291,127 | $ | |
The following table presents the financial instruments that are not carried at fair value but
which require fair value disclosure as of September 30, 2008 and December 31, 2007:
As of September 30, 2008 | As of December 31, 2007 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
(in thousands) | Value | Fair Value | Value | Fair Value | ||||||||||||
Convertible notes |
$ | 160,000 | $ | 158,710 | $ | 160,000 | $ | 164,482 |
The fair value of the convertible notes are determined based on recent quoted market prices
for these notes. The carrying value of other financial instruments, including cash, accounts
receivable, accounts payable and other payables, approximate fair value due to their short
maturities.
The Company monitors its investments for other than temporary losses by considering current
factors, including the economic environment, market conditions, operational performance and other
specific factors relating to the business underlying the investment, reductions in carrying values
when necessary and the Companys ability and intent to hold the investment for a period of time
which may be sufficient for anticipated recovery in the market. Any other than temporary loss is
reported under Interest and other income, net in the condensed consolidated statement of
operations. As of September 30, 2008 and December 31, 2007, the Company has not incurred any
impairment loss on its investments.
The Company has adopted SFAS No. 159 effective January 1, 2008. The Company has not elected
the fair value option for financial instruments not already carried at fair value.
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15. Restructuring Costs
During the third quarter of 2008, the Company initiated a workforce reduction in certain areas
of excess capacity. The cash severance, including continuance of certain employee benefits, totaled
approximately $3.5 million and non-cash employee severance of approximately $0.5 million of
stock-based compensation expense. The total restructuring charge for the three and nine month
period ended September 30, 2008 was approximately $4.0 million. The Company paid approximately $1.6
million of severance and benefits during the quarter. The remaining $1.9 million of severance and
benefits will be paid during the fourth quarter of 2008. The Company expects to complete its
restructuring activities during the fourth quarter of 2008.
The following table provides a summary of the restructuring activities for the period
indicated:
Employee | Employee | |||||||||||||||
Termination/Severance | Termination/Severance | |||||||||||||||
and Related Benefits | and Related Benefits | Other Expenses | ||||||||||||||
Cash | Non-Cash | Total | ||||||||||||||
(in thousands) | ||||||||||||||||
Balance at December 31, 2007 |
$ | | $ | | $ | | $ | | ||||||||
Charges to operations |
3,477 | 547 | | 4,024 | ||||||||||||
Charges utilized/paid |
(1,553 | ) | (547 | ) | | (2,100 | ) | |||||||||
Balance at September 30, 2008 |
$ | 1,924 | $ | | $ | | $ | 1,924 | ||||||||
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements
relate to our expectations for future events and time periods. All statements other than statements
of historical fact are statements that could be deemed to be forward-looking statements, including
any statements regarding trends in future revenue or results of operations, gross margin or
operating margin, expenses, earnings or losses from operations, synergies or other financial items;
any statements of the plans, strategies and objectives of management for future operations; any
statements concerning developments, performance or industry ranking; any statements regarding
future economic conditions or performance; any statements regarding pending investigations, claims
or disputes; any statements of expectation or belief; and any statements of assumptions underlying
any of the foregoing. Generally, the words anticipate, believes, plans, expects, future,
intends, may, should, estimates, predicts, potential, continue and similar
expressions identify forward-looking statements. Our forward-looking statements are based on
current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes
in condition, significance, value and effect. As a result of the factors described herein, and in
the documents incorporated herein by reference, including, in particular, those factors described
under Risk Factors, we undertake no obligation to publicly disclose any revisions to these
forward-looking statements to reflect events or circumstances occurring subsequent to filing this
report with the Securities and Exchange Commission.
Rambus, RDRAM, XDR, FlexIO and FlexPhase are trademarks or registered trademarks of Rambus
Inc. Other trademarks that may be mentioned in this quarterly report on Form 10-Q 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 |
ABP | |
Double Data Rate |
DDR | |
Dynamic Random Access Memory |
DRAM | |
Fully Buffered-Dual Inline Memory Module |
FB-DIMM | |
Gigabits per second |
Gb/s | |
Graphics Double Data Rate |
GDDR | |
Input/Output |
I/O | |
Peripheral Component Interconnect |
PCI | |
Rambus Dynamic Random Access Memory |
RDRAM | |
Single Data Rate |
SDR | |
Synchronous Dynamic Random Access Memory |
SDRAM | |
eXtreme Data Rate |
XDR |
From time to time we will refer to the abbreviated names of certain entities and, as such,
have provided a chart to indicate the full names of those entities for your convenience.
Advanced Micro Devices Inc. |
AMD | |
ARM Holdings plc |
ARM | |
Cadence Design Systems, Inc. |
Cadence | |
Cisco Systems, Inc. |
Cisco | |
Elpida Memory, Inc. |
Elpida | |
Fujitsu Limited |
Fujitsu | |
GDA Technologies, Inc. |
GDA | |
Hewlett-Packard Company |
Hewlett-Packard | |
Hynix Semiconductor, Inc. |
Hynix | |
Infineon Technologies AG |
Infineon | |
Inotera Memories, Inc. |
Inotera | |
Intel Corporation |
Intel | |
International Business Machines Corporation |
IBM | |
Joint Electron Device Engineering Council |
JEDEC | |
Juniper Networks, Inc. |
Juniper | |
Matsushita Electrical Industrial Co. |
Matsushita | |
Micron Technologies, Inc. |
Micron |
33
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Nanya Technology Corporation |
Nanya | |
NEC Electronics Corporation |
NECEL | |
Optical Internetworking Forum |
OIF | |
Qimonda AG (formerly Infineons DRAM operations) |
Qimonda | |
Peripheral Component Interconnect Special Interest Group |
PCI-SIG | |
Renesas Technology Corporation |
Renesas | |
S3 Graphics, Inc. |
S3 Graphics | |
Samsung Electronics Co., Ltd. |
Samsung | |
Sony Computer Electronics |
Sony | |
Spansion, Inc. |
Spansion | |
ST Microelectronics |
ST Micro | |
Synopsys Inc. |
Synopsys | |
Tessera Technologies, Inc. |
Tessera | |
Texas Instruments Inc. |
Texas Instruments | |
Toshiba Corporation |
Toshiba | |
Velio Communications |
Velio |
Business Overview
We design, develop and license chip interface technologies and architectures 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.
As of September 30, 2008, our chip interface technologies are covered by more than 730 U.S.
and foreign patents. Additionally, we have approximately 500 patent applications 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 leadership (which are Rambus-proprietary products widely licensed to our
customers) 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 with us.
We derive the majority of our annual revenue 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, Fujitsu, Qimonda, Intel,
Matsushita, NECEL, Renesas, Spansion and Toshiba have licensed our patents for use in their own
products.
We derive additional revenue by licensing our leadership and industry-standard chip interface
products to our customers for use in their semiconductor and system products. Our customers include
leading companies such as Fujitsu, Elpida, IBM, Intel, Matsushita, Texas Instruments, Sony, ST
Micro, Qimonda 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.
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Royalties represent a substantial portion of our total revenue. The remaining part of our
revenue is contract services revenue which includes license fees and engineering services fees. The
timing and amounts invoiced to customers can vary significantly depending on specific contract
terms and can therefore have a significant impact on deferred revenue or unbilled receivables in
any given period.
We have a high degree of revenue concentration, with our top five licensees representing
approximately 72% and 67% of our revenue for the three and nine months ended September 30, 2008,
respectively. This compares with the three and nine months ended September 30, 2007, in which
revenue from our top five licensees accounted for approximately 68% of our revenue respectively.
For the three months ended September 30, 2008, revenue from Fujitsu, Matsushita, NEC, AMD and Sony
each accounted for 10% or more of our total revenue. For the nine months ended September 30, 2008,
revenue from Fujitsu, Elpida, Sony, AMD, Matsushita and NEC each accounted for 10% or more of our
total revenue. For the three months ended September 30, 2007, revenue from Qimonda, Fujitsu, Elpida
and Toshiba each accounted for 10% or more of our total revenue. For the nine months ended
September 30, 2007, revenue from Fujitsu, Qimonda and Elpida each accounted for 10% or more of our
total revenue.
Our revenue from companies headquartered outside of the United States accounted for
approximately 80% and 82% of our total revenue for the three and nine months ended September 30,
2008, respectively, as compared to 84% and 85% for the three and nine months ended September 30,
2007, respectively. We expect that we may continue to experience significant revenue concentration
and have significant revenue from sources outside the United States for the foreseeable future.
Historically, 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 and we
anticipate future litigation expenses will 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.
Furthermore, our success in litigation matters pending before courts and regulatory bodies that
relate to our intellectual property rights have impacted and will likely continue to impact our
ability and the terms upon which we are able to negotiate new or renegotiate existing licenses for
our technology.
We expect that revenue derived from international licensees will continue to represent a
significant portion of our total revenue in the future. To date, all of the revenue 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
financial instruments to hedge foreign exchange rate risk.
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Results of Operations
The following table sets forth, for the periods indicated, the percentage of total revenue
represented by certain items reflected in our unaudited condensed consolidated statements of
operations:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenue: |
||||||||||||||||
Royalties |
87.7 | % | 84.7 | % | 86.9 | % | 84.8 | % | ||||||||
Contract revenue |
12.3 | % | 15.3 | % | 13.1 | % | 15.2 | % | ||||||||
Total revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of contract revenue* |
15.7 | % | 13.9 | % | 17.6 | % | 13.5 | % | ||||||||
Research and development* |
59.5 | % | 43.9 | % | 56.3 | % | 43.3 | % | ||||||||
Marketing, general and administrative* |
106.3 | % | 71.7 | % | 84.2 | % | 57.1 | % | ||||||||
Restructuring costs* |
13.7 | % | | % | 3.8 | % | | % | ||||||||
Impairment of asset |
7.3 | % | | % | 2.1 | % | | % | ||||||||
Costs of restatement and related
legal activities |
1.3 | % | 10.0 | % | 3.4 | % | 13.4 | % | ||||||||
Total costs and expenses |
203.8 | % | 139.5 | % | 167.4 | % | 127.3 | % | ||||||||
Operating loss |
(103.8 | )% | (39.5 | )% | (67.4 | )% | (27.3 | )% | ||||||||
Interest and other income, net |
9.2 | % | 13.5 | % | 9.7 | % | 11.8 | % | ||||||||
Loss before income taxes |
(94.6 | )% | (26.0 | )% | (57.7 | )% | (15.5 | )% | ||||||||
Provision for (benefit from) income taxes |
0.3 | % | (10.4 | )% | 118.9 | % | (6.1 | )% | ||||||||
Net loss |
(94.9 | )% | (15.6 | )% | (176.6 | )% | (9.4 | )% | ||||||||
* Includes stock-based compensation: |
||||||||||||||||
Cost of contract revenue |
4.5 | % | 3.2 | % | 4.4 | % | 2.9 | % | ||||||||
Research and development |
11.3 | % | 7.6 | % | 10.5 | % | 7.0 | % | ||||||||
Marketing, general and administrative |
14.9 | % | 9.9 | % | 12.3 | % | 10.4 | % | ||||||||
Restructuring costs |
1.9 | % | | % | 0.5 | % | | % |
Three Months | Nine Months | |||||||||||||||||||||||
Ended September 30, | Change in | Ended September 30, | Change in | |||||||||||||||||||||
(Dollars in millions) | 2008 | 2007 | Percentage | 2008 | 2007 | Percentage | ||||||||||||||||||
Total Revenue |
||||||||||||||||||||||||
Royalties |
$ | 25.8 | $ | 35.3 | (27.0 | )% | $ | 91.2 | $ | 118.3 | (22.9 | )% | ||||||||||||
Contract revenue |
3.6 | 6.4 | (43.1 | )% | 13.7 | 21.1 | (35.2 | )% | ||||||||||||||||
Total revenue |
$ | 29.4 | $ | 41.7 | (29.5 | )% | $ | 104.9 | $ | 139.4 | (24.8 | )% | ||||||||||||
Royalty Revenue
Patent Licenses
In the three and nine months ended September 30, 2008, our largest source of royalties was
related to the license of our patents for SDR and DDR-compatible products. Royalties decreased
approximately $9.8 million and $31.8 million for SDR and DDR-compatible products in the three and
nine months ended September 30, 2008, respectively, as compared to the same periods in 2007,
primarily due to decreased royalty revenue from Qimonda, Fujitsu and Elpida.
We are in negotiations with prospective and existing licensees. We expect SDR 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. In July 2008, we announced our decision to defer negotiations
with Elpida related to patent license renewal, which will decrease revenue from patent royalties in
future quarters.
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On February 2, 2007, the Federal Trade Commission (the FTC) issued an order requiring us to
limit the royalty rates charged for certain SDR and DDR SDRAM memory and controller products sold
after April 12, 2007. The FTC stayed this requirement on March 16, 2007, subject to certain
conditions. One such condition of the stay limits the royalties we can receive under certain
contracts so that they do not exceed the FTCs Maximum Allowable Royalties (MAR). On June 6,
2008, the FTC petitioned the CADC to rehear the case en banc. On August 26, 2008 the Court denied
the FTCs petition for rehearing of this matter en banc, and on September 9, 2008, the Court issued
its mandate setting aside the FTCs order and instructing the FTC to take actions consistent with
the Courts ruling. The FTC did not seek, nor did it receive, a stay of the Courts ruling, and
thus the FTCs order in the case has been vacated. On October 16, 2008, the FTC issued an order
(FTC Disposition Order) authorizing Rambus to receive the excess consideration that customers
have previously deducted from their quarterly payments made to Rambus under the Patent License
Agreement.
At the time of the issuance of the mandate on September 9, 2008, $6.2 million had been
determined as amounts in excess of MAR and had been excluded from revenue. As the FTCs order has
been vacated, we will recognize the previously unrecognized revenue in excess of MAR of $6.2
million as revenue when the corresponding cash payments are received. In the three months ended
September 30, 2008, $0.9 million of the amounts in excess of MAR was previously received and
recognized as revenue in Q308. The remaining $5.3 million will be recognized when the payments are
received from the customers.
Product Licenses
In the three and nine months ended September 30, 2008, royalties from XDR, FlexIO, DDR and
serial link-compatible products represented the second largest category of royalties. Royalties
from XDR, FlexIO, DDR and serial link-compatible products increased approximately $0.6 million and
$4.3 million during the three and nine months ended September 30, 2008, respectively, as compared
to the same period in 2007. This increase was primarily due to higher royalties from DDR and serial
link-compatible products. In the future, we expect royalties from XDR, FlexIO, DDR and serial
link-compatible products will continue to vary from period to period based on our licensees
shipment volumes, sales prices and product mix.
In the three and nine months ended September 30, 2008, royalties from RDRAM-compatible
products represented the third largest source of royalties. Royalties from RDRAM memory chips and
controllers decreased approximately $0.4 million and increased approximately $0.4 million during
the three and nine months ended September 30, 2008, respectively, as compared to the same period in
2007. The variance was primarily due to the fluctuation of royalties from RDRAM controllers.
Contract Revenue
Percentage-of-Completion Contracts
Percentage of completion contract revenue decreased approximately $0.4 million and $1.3
million for the three and nine months ended September 30, 2008, respectively, as compared to the
same period in 2007 due to lower revenue from various leadership chip interface contracts. We
believe that percentage-of-completion contract revenue recognized will continue to fluctuate over
time, based on our ongoing contractual requirements, the amount of work performed, and by changes
to work required, as well as new contracts booked in the future.
Other Contracts
Revenue for other contracts decreased approximately $2.3 million and $6.1 million for the
three and nine months ended September 30, 2008, respectively, as compared to the corresponding
period in 2007 due to decreased revenue from leadership chip interface contracts including FlexIO
and XDR and industry standard chip interface contracts. We believe that other contracts revenue
will continue to fluctuate over time based on our ongoing contract requirements, the timing of
completing engineering deliverables, as well as new contracts booked in the future.
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Engineering costs:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | Change in | September 30, | Change in | |||||||||||||||||||||
(Dollars in millions) | 2008 | 2007 | Percentage | 2008 | 2007 | Percentage | ||||||||||||||||||
Engineering costs |
||||||||||||||||||||||||
Cost of contract revenue |
$ | 3.3 | $ | 4.5 | (26.0 | )% | $ | 13.8 | $ | 14.8 | (6.8 | )% | ||||||||||||
Stock-based compensation |
1.3 | 1.3 | (0.9 | )% | 4.6 | 4.1 | 13.2 | % | ||||||||||||||||
Total cost of contract revenue |
4.6 | 5.8 | (20.3 | )% | 18.4 | 18.9 | (2.5 | )% | ||||||||||||||||
Research and development |
14.2 | 15.1 | (6.2 | )% | 48.0 | 50.5 | (4.9 | )% | ||||||||||||||||
Stock-based compensation |
3.3 | 3.2 | 4.3 | % | 11.0 | 9.8 | 12.0 | % | ||||||||||||||||
Total research and development |
17.5 | 18.3 | (4.4 | )% | 59.0 | 60.3 | (2.1 | )% | ||||||||||||||||
Total engineering costs |
$ | 22.1 | $ | 24.1 | (8.2 | )% | $ | 77.4 | $ | 79.2 | (2.2 | )% | ||||||||||||
Total engineering costs decreased 8.2% for the three months ended September 30, 2008 as
compared to the same period in 2007 primarily due to utilization or reversal of previously
recognized loss contract provisions and decreases in salaries and related support costs in
connection with the restructuring. Bonus expense in the third quarter of 2008 was also lower due to
performance metrics which were not achieved. In addition, amortization of intangible assets in the
third quarter of 2008 was lower due to the completion of amortization of certain intangibles in the
second quarter of 2008.
Total engineering costs decreased 2.2% for the nine months ended September 30, 2008 as
compared to the same period in 2007 due to the one-time tax reimbursement expenses of approximately
$4.1 million recorded in the first quarter of 2007 which was partially offset by increases in 2008
in stock-based compensation expense, salary expenses and patent expenses. The tax reimbursement
expenses were associated with our decision to reimburse current and former non-executive employees
for Internal Revenue Code Section 409A penalty taxes imposed on them in connection with their
exercise of repriced options in 2006. In addition, the bonus expense for the nine months ended
September 30, 2008 was lower than the comparable 2007 period due to performance metrics which were
not achieved.
In certain periods, the estimated cost of contract revenue may exceed contract revenue that
did not factor in the expected stream of future royalty payments. This can be further impacted by
timing of expensing of pre-contract costs as research and development expenses and the cost to
complete contracts where the realizability of an asset is uncertain. As of September 30, 2008, the
Company had accrued a liability of approximately $0.8 million related to estimated loss revenue
contracts. Loss revenue contract costs are recognized in cost of contract revenue when such loss is
determined.
In the near term, we expect engineering costs will decline as a result of our cost reduction
initiative undertaken in the third quarter of 2008.
Marketing, general and administrative costs:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | Change in | September 30, | Change in | |||||||||||||||||||||
(Dollars in millions) | 2008 | 2007 | Percentage | 2008 | 2007 | Percentage | ||||||||||||||||||
Marketing, general and
administrative costs |
||||||||||||||||||||||||
Marketing, general and
administrative costs |
$ | 11.2 | $ | 14.1 | (20.5 | )% | $ | 37.5 | $ | 41.9 | (10.3 | )% | ||||||||||||
Litigation expense |
15.7 | 11.7 | 34.3 | % | 38.0 | 23.3 | 62.8 | % | ||||||||||||||||
Stock-based compensation |
4.4 | 4.1 | 5.6 | % | 12.9 | 14.5 | (11.1 | )% | ||||||||||||||||
Total marketing,
general and
administrative costs |
$ | 31.3 | $ | 29.9 | 4.6 | % | $ | 88.4 | $ | 79.7 | 11.0 | % | ||||||||||||
Total marketing, general and administrative costs increased 4.6% and 11.0% for the three and
nine months ended September 30, 2008, respectively, as compared to the comparable periods in 2007.
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The increase for the three month period ended September 30, 2008 from the comparable period in
2007 was due primarily to increased litigation expenses related to certain cases that went to trial
during the third quarter of 2008 as well as preparation for upcoming trials. This increase was
partially offset by lower bonus expense due to performance metrics which were not achieved, and
lower general legal, marketing and advertising, and professional fees.
The increase for the nine month period ended September 30, 2008 was due primarily to increased
litigation expenses of $14.7 million, of which a majority of the expenses were related to major
cases that went to trial during 2008 as well as preparation for upcoming trials. The decrease in
stock-based compensation expense for the nine month period ended September 30, 2008 from the
comparable period in 2007 was due primarily to the one-time equity award modification charges
related to extensions of expiring options recorded in 2007. Non-litigation related marketing,
general and administrative expenses also decreased in the nine month period ended September 30,
2008 from the comparable period in 2007 primarily due the one-time tax reimbursement expenses of
approximately $2.5 million recorded in the first quarter of 2007. The tax reimbursement expenses
were associated with our decision in 2007 to reimburse current and former non-executive employees
for the Internal Revenue Code Section 409A penalty taxes imposed on them in connection with their
exercise of repriced options in 2006. In addition, bonus expense during the nine month period ended
September 30, 2008 was lower than in the comparable period in 2007 due to performance metrics which
were not achieved, and overall marketing and advertising expenses were decreasing in 2008.
In the future, marketing, general and administrative costs will vary from period to period
based on the advertising, legal, and other marketing and administrative activities undertaken, 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 variability of litigation
activities, but are expected to remain at levels higher than 2007 for the foreseeable future. In
the near term, we expect marketing, general and administrative costs will decline as a result of
our cost reduction initiative undertaken in the third quarter of 2008.
Restructuring costs:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | Change in | September 30, | Change in | |||||||||||||||||||||
(Dollars in millions) | 2008 | 2007 | Percentage | 2008 | 2007 | Percentage | ||||||||||||||||||
Restructuring costs |
$ | 4.0 | $ | | NA | $ | 4.0 | $ | | NA | ||||||||||||||
During the third quarter of 2008, we initiated a workforce reduction in certain areas of
excess capacity. The cash severance, including continuance of certain employee benefits, totaled
approximately $3.5 million and non-cash employee severance of approximately $0.5 million of
stock-based compensation expense. The total restructuring charge for the three month period ended
September 30, 2008 was approximately $4.0 million. We paid approximately $1.6 million of severance
and benefits during the quarter. The remaining $1.9 million of severance will be paid during the
fourth quarter of 2008. We expect cash savings of approximately $17.0 million annually as a result
of our restructuring measures. We expect to complete our restructuring activities during the fourth
quarter of 2008. We plan to fund the remaining cash restructuring costs with cash flows generated
from operating activities.
Impairment of Intangible asset:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | Change in | September 30, | Change in | |||||||||||||||||||||
(Dollars in millions) | 2008 | 2007 | Percentage | 2008 | 2007 | Percentage | ||||||||||||||||||
Impairment of intangible asset |
$ | 2.2 | $ | | NA | $ | 2.2 | $ | | NA | ||||||||||||||
During the three months ended September 30, 2008, we determined that approximately $2.2
million of our intangible assets had no alternative future use and was impaired as a result of a
customers change in technology requirements. The intangible asset relates to a contractual
relationship acquired in the Velio acquisition during December 2003.
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Costs of restatement and related legal activities:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | Change in | September 30, | Change in | |||||||||||||||||||||
(Dollars in millions) | 2008 | 2007 | Percentage | 2008 | 2007 | Percentage | ||||||||||||||||||
Cost of restatement
and related legal
activities |
$ | 0.4 | $ | 4.2 | (90.6 | )% | $ | 3.6 | $ | 18.6 | (80.9 | )% | ||||||||||||
Costs of restatement and related legal activities consist primarily of investigation, audit,
legal and other professional fees related to the 2006-2007 stock option investigation and the
filing of the restated financial statements and related litigation.
Costs of restatement and related legal activities were $0.4 million and $3.6 million for the
three and nine months ended September 30, 2008, respectively, due primarily to litigation expenses
associated with the derivative lawsuit related to this stock option investigation. Costs in the
third quarter and first nine months of 2008 were significantly lower than in the third quarter and
first nine months of 2007 because the majority of the investigation was completed during 2007.
Until all the litigation and related issues are resolved, we anticipate that there could be
additional amounts relating to these matters in the future.
Interest and other income, net:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | Change in | September 30, | Change in | |||||||||||||||||||||
(Dollars in millions) | 2008 | 2007 | Percentage | 2008 | 2007 | Percentage | ||||||||||||||||||
Interest and other income, net |
$ | 2.7 | $ | 5.6 | (52.1 | )% | $ | 10.2 | $ | 16.5 | (38.1 | )% | ||||||||||||
Interest and other income, net consists primarily of interest income generated from
investments in high quality fixed income securities as well as changes in exchange rates. The
decrease in interest and other income, net for the three and nine months ended September 30, 2008
as compared to the same period in 2007 was primarily due to lower average investment balances and
lower yields on invested balances during the periods ended September 30, 2008.
In the future, we expect that interest and other income, net, will vary from period to period
based on the amount of cash and marketable securities, interest rates and foreign currency exchange
rates.
Provision for (benefit from) income taxes:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | Change in | September 30, | Change in | |||||||||||||||||||||
(Dollars in millions) | 2008 | 2007 | Percentage | 2008 | 2007 | Percentage | ||||||||||||||||||
Provision for (benefit from) income taxes |
$ | 0.1 | $ | (4.3 | ) | NM | $ | 124.7 | $ | (8.5 | ) | NM | ||||||||||||
Effective tax rate |
(0.3 | )% | 40.0 | % | (206.2 | )% | 39.3 | % |
* | NM percentage is not meaningful as the change is too large. |
Our effective tax rate for the three and nine months ended September 30, 2008 is lower and
higher than the U.S. statutory tax rate applied to our net losses, respectively, primarily due the
establishment of a full valuation allowance on our U.S. net deferred tax assets.
Our effective tax rate for the three and nine months ended September 30, 2007 was higher than
the U.S. statutory tax rate primarily due to research and development tax credits, non-deductible
stock-based compensation expense related to our executives and other employees, state income taxes
and foreign income taxes.
For the quarter ended June 30, 2008, we recorded a non-cash income tax provision of $130.5
million to establish a valuation allowance. Management periodically evaluates the realizability of
our net deferred tax assets based on all available evidence, both positive and negative. The
realization of net deferred tax assets is solely dependent on the Companys ability to generate
sufficient future taxable income during periods prior to the expiration of tax statutes to fully
utilize these assets. As previously disclosed in the Form 10-K for the year ended December 31,
2007, our forecasted future operating results are highly influenced by, among other
factors, assumptions regarding (1) our ability to achieve our forecasted revenue, (2) our
ability to effectively manage our expenses in line with our forecasted revenue and (3) general
trends in the semiconductor industry.
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We weighed both positive and negative evidence and determined that there is a need for the
valuation allowance during the quarter ended June 30, 2008 due to the existence of three years of
historical cumulative losses and a revised forecast that projected future losses from operations in
the U.S., which we considered significant verifiable negative evidence. Though considered positive
evidence, projected income from favorable patent and related settlement litigation were not
included in the determination for the valuation allowance due to our inability to reliably estimate
the timing and amounts of such settlements. We intend to maintain the valuation allowance until
sufficient positive evidence exists to support reversal of the valuation allowance.
Liquidity and Capital Resources
As of | ||||||||
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
(In millions) | ||||||||
Cash and cash equivalents |
$ | 106.8 | $ | 119.4 | ||||
Marketable securities |
272.2 | 321.5 | ||||||
Total cash, cash equivalents, and marketable securities |
$ | 379.0 | $ | 440.9 | ||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
(In millions) | ||||||||
Net cash provided by (used in) operating activities |
$ | (34.1 | ) | $ | 19.0 | |||
Net cash provided by investing activities |
$ | 40.3 | $ | 181.1 | ||||
Net cash used in financing activities |
$ | (18.9 | ) | $ | (4.3 | ) |
Liquidity
Although we used cash for operating activities in the first three quarters of 2008, we
continue to believe that total cash, cash equivalents and marketable securities will continue at
adequate levels to finance our operations, projected capital expenditures and commitments for the
next twelve months. Cash needs for the first three quarters of 2008 were funded primarily from
investing activities, as investments in marketable securities matured and were not reinvested.
Operating Activities
Cash used in operating activities of $34.1 million for the nine months ended September 30,
2008 was primarily attributable to the net loss for the period adjusted for non-cash items,
including the tax provision related to the deferred tax asset valuation allowance, stock-based
compensation expense, depreciation and amortization expense, and impairment of an asset. The
increased working capital for the nine months ended September 30, 2008 was primarily due to of a
decrease in accrued litigation expenses due to payments related to the class action lawsuit
settlement.
Cash provided by operating activities of $19.0 million for the nine months ended September 30,
2007 was primarily attributable to the net loss for the period adjusted for non-cash items
including stock-based compensation expense, and depreciation and amortization expense. Changes in
non-cash working capital for the nine months ended September 30, 2007 included increases in prepaid
and other assets due primarily to prepaid software maintenance agreements and deferred tax assets
resulting from our operating loss offset by a net increase in accounts payable primarily due to
restatement and related legal expenses and capitalized software license maintenance agreements.
We plan to fund the remaining cash restructuring costs with cash flows generated from
operating activities.
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Investing Activities
Cash provided by investing activities of approximately $40.3 million for the nine months ended
September 30, 2008 primarily consisted of proceeds from the maturities of available-for-sale
marketable securities of $352.3 million, of which only $304.6 million was reinvested in
available-for-sale marketable securities. We also paid $8.2 million related to acquired property
and equipment, primarily computer software licenses.
Cash provided by investing activities for the nine months ended September 30, 2007 primarily
consisted of proceeds from the maturities of available-for-sale investments of $616.1 million,
offset by purchases of available-for-sale investments of $428.2 million.
Financing Activities
Cash used in financing activities was $18.9 million for the nine months ended September 30,
2008. During the nine months ended September 30, 2008, proceeds from issuance of stock from
employee stock plans totaled approximately $17.3 million. In addition, we repurchased stock with
an aggregate value of $34.9 million under our share repurchase program refer to Share
Repurchase Program below. The Company also made installment payments in regards to an acquire
software license.
We did not engage in any stock-related financing activities for the nine months ended
September 30, 2007 primarily due to the stock option investigation and restatement, during which
time we suspended our common stock repurchase program and suspended employee stock option exercises
and purchases under our employee stock purchase plan. We used approximately $4.3 million to make
payments under installment payment arrangements during that period.
We currently anticipate that existing cash and cash equivalent balances and cash flows from
operations will be adequate to meet our cash needs for at least the next 12 months as well as
satisfy our cash requirement to redeem our convertible notes due in 2010. We do not anticipate any
liquidity constraints as a result of either the current credit environment or investment fair value
fluctuations. Additionally, we have the intent and ability to hold our debt investments that have
unrealized losses in accumulated other comprehensive income for a sufficient period of time to
allow for recovery of the principal amounts invested. We continually monitor the credit risk in our
portfolio and mitigate our credit risk exposures in accordance with our policies. We may also incur
additional expenditures related to future potential restructuring activities. As described
elsewhere in this Managements Discussion and Analysis of Financial Condition and Results of
Operations and this Quarterly Report on Form 10-Q, we are involved in ongoing litigation related
to the protection of our intellectual property and our past stock option investigation. Any adverse
settlements or judgments in any of this litigation could have a material adverse impact on our
results of operations, cash balances and cash flows in the period in which such events occur.
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Contractual Obligations
On February 1, 2005, we issued $300.0 million aggregate principal amount of zero coupon
convertible senior notes (the convertible notes) due February 1, 2010 to Credit Suisse First
Boston LLC and Deutsche Bank Securities as initial purchasers who then sold the convertible notes
to institutional investors. We elected to pay the principal amount of the convertible notes in cash
when they are due. Subsequently, we repurchased a total of $140.0 million face value of the
outstanding convertible notes in 2005. As of September 30, 2008, there were $160.0 million of
convertible notes outstanding which were classified as a non-current liability in the accompanying
condensed consolidated balance sheets.
As of September 30, 2008, our material contractual obligations were:
Payments Due by Year | ||||||||||||||||||||||||||||
Remainder | ||||||||||||||||||||||||||||
Total | of 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Contractual obligations(1) |
||||||||||||||||||||||||||||
Operating leases |
$ | 17,404 | $ | 2,624 | $ | 7,381 | $ | 6,277 | $ | 645 | $ | 477 | $ | | ||||||||||||||
Convertible notes |
160,000 | | | 160,000 | | | | |||||||||||||||||||||
Purchased software license agreements(2) |
1,014 | 507 | 507 | | | | | |||||||||||||||||||||
Total |
$ | 178,418 | $ | 3,131 | $ | 7,888 | $ | 166,277 | $ | 645 | $ | 477 | $ | | ||||||||||||||
(1) | The above table does not reflect possible payments in connection with uncertain tax benefits associated with FIN 48 of approximately $14.1 million, including $11.1 million recorded as a reduction of long-term deferred tax assets and $3.0 million in long-term income taxes payable, as of September 30, 2008. Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, we cannot reasonably estimate the outcome at this time. | |
(2) | We have commitments with various software vendors for non-cancellable license agreements that generally have terms greater than one year. The above table summarizes those contractual obligations as of September 30, 2008, which are also included on our condensed consolidated balance sheets under current and other long-term liabilities. |
Share Repurchase Program
In October 2001, the Board approved a share repurchase program of our Common Stock,
principally to reduce the dilutive effect of employee stock options. To date, the Board has
approved the authorization to repurchase up to 19.0 million shares of our outstanding Common Stock
over an undefined period of time. For the three months ended September 30, 2008, 0.6 million shares
were repurchased with an aggregate value of $10.0 million. During the nine months ended September
30, 2008, we repurchased approximately 2.0 million shares with an aggregate value of $34.9 million.
As of September 30, 2008, we had repurchased a cumulative total of approximately 15.2 million
shares of our Common Stock with an aggregate value of approximately $219.5 million since the
commencement of this program. As of September 30, 2008, there remained an outstanding authorization
to repurchase approximately 3.8 million shares of our outstanding Common Stock.
We record stock repurchases as a reduction to stockholders equity. As prescribed by APB
Opinion No. 6, Status of Accounting Research Bulletins, we record a portion of the purchase price
of the repurchased shares as an increase to accumulated deficit when the cost of the shares
repurchased exceeds the average original proceeds per share received from the issuance of Common
Stock. During the nine months ended September 30, 2008, the cumulative price of the shares
repurchased exceeded the proceeds received from the issuance of the same number of shares. The
excess of $32.2 million was recorded as an increase to accumulated deficit for the nine months
ended September 30, 2008. During the nine months ended September 30, 2007, we did not repurchase
any Common Stock.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our condensed 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,
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liabilities, revenue and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing 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. Our critical accounting
estimates include those regarding (1) revenue recognition, (2) litigation, (3) income taxes and (4)
stock-based compensation. For a discussion of our critical accounting estimates, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December
31, 2007.
Recent Accounting Pronouncements
See Note 2 Recent Accounting Pronouncements of Notes to Unaudited Condensed Consolidated
Financial Statements for discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks, primarily arising from the effect of interest rate
fluctuations on our investment portfolio. Interest rate fluctuation may arise from changes in the
markets view of the quality of the security issuer, the overall economic outlook, and the time to
maturity of our portfolio. We mitigate this risk by investing only in high quality, highly liquid
instruments. Securities with original maturities of one year or less must be rated by two of the
three industry standard rating agencies as follows: A1 by Standard & Poors, P1 by Moodys and/or
F-1 by Fitch. Securities with original maturities of greater than one year must be rated by two of
the following industry standard rating agencies as follows: AA- by Standard & Poors, Aa3 by
Moodys and/or AA- by Fitch. By corporate policy, we limit the amount of our credit exposure to
$10.0 million for any one commercial issuer. Our policy requires that at least 10% of the portfolio
be in securities with a maturity of 90 days or less. In addition, we may make investments in
securities with maturities up to 36 months. However, the bias of our investment policy is toward
shorter maturities.
We invest our cash equivalents and short-term marketable securities in a variety of U.S.
dollar financial instruments such as Treasuries, Government Agencies, Repurchase Agreements,
Commercial Paper and Corporate Notes. Our policy specifically prohibits trading securities for the
sole purposes of realizing trading profits. However, we may liquidate a portion of our portfolio if
we experience unforeseen liquidity requirements. In such a case if the environment has been one of
rising interest rates we may experience a realized loss, similarly, if the environment has been one
of declining interest rates we may experience a realized gain. As of September 30, 2008, we had an
investment portfolio of fixed income marketable securities of $375.9 million including cash
equivalents. If market interest rates were to increase immediately and uniformly by 10% from the
levels as of September 30, 2008, the fair value of the portfolio would decline by approximately
$0.6 million. Actual results may differ materially from this sensitivity analysis.
We bill our customers in U.S. dollars. Although the fluctuation of currency exchange rates may
impact our customers, and thus indirectly impact us, we do not attempt to hedge this indirect and
speculative risk. Our overseas operations consist primarily of small business development offices
in any one country and one design center in India. We monitor our foreign currency exposure;
however, as of September 30, 2008, we believe our foreign currency exposure is not material enough
to warrant foreign currency hedging.
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The table below summarizes the fair value, book value, unrealized gain (loss), net and related
weighted rate of return for our marketable securities portfolio as of September 30, 2008 and
December 31, 2007.
September 30, 2008 | ||||||||||||||||
Weighted | ||||||||||||||||
Unrealized | Rate of | |||||||||||||||
Available-for-sale securities (dollars in thousands) | Fair Value | Book Value | Gain (Loss), net | Return | ||||||||||||
Money Market Funds |
$ | 84,819 | $ | 84,819 | $ | | 1.74 | % | ||||||||
Municipal Bonds and Notes |
1,004 | 1,000 | 4 | 3.85 | % | |||||||||||
U.S. Government Bonds and Notes |
191,604 | 192,015 | (411 | ) | 3.04 | % | ||||||||||
Corporate Notes, Bonds, and Commercial Paper |
98,519 | 99,390 | (871 | ) | 3.01 | % | ||||||||||
Total cash equivalents and marketable securities |
375,946 | 377,224 | (1,278 | ) | ||||||||||||
Cash |
3,026 | 3,026 | | |||||||||||||
Total cash, cash equivalents and marketable securities |
$ | 378,972 | $ | 380,250 | $ | (1,278 | ) | |||||||||
December 31, 2007 | ||||||||||||||||
Weighted | ||||||||||||||||
Unrealized | Rate of | |||||||||||||||
Available-for-sale securities (dollars in thousands) | Fair Value | Book Value | Gain, net | Return | ||||||||||||
Money Market Funds |
$ | 104,836 | $ | 104,836 | $ | | 4.82 | % | ||||||||
Municipal Bonds and Notes |
3,008 | 3,000 | 8 | 4.81 | % | |||||||||||
U.S. Government Bonds and Notes |
108,660 | 108,568 | 92 | 4.39 | % | |||||||||||
Corporate Notes, Bonds, and Commercial Paper |
219,734 | 219,668 | 66 | 4.90 | % | |||||||||||
Total cash equivalents and marketable securities |
436,238 | 436,072 | 166 | |||||||||||||
Cash |
4,644 | 4,644 | | |||||||||||||
Total cash, cash equivalents and marketable securities |
$ | 440,882 | $ | 440,716 | $ | 166 | ||||||||||
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our CEO and CFO,
we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such
terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act), as of September 30, 2008, the end of the period covered by
this Quarterly Report on Form 10-Q. Disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported on a timely basis and that such information is
accumulated and communicated to management, including our CEO and CFO. To the extent that
components of our internal control over financial reporting are included within our disclosure
controls and procedures, they are included in the scope of managements annual assessment of our
internal control over financial reporting.
Based on this evaluation, our management, including our CEO and CFO, has concluded that the
Company has made substantial progress in remediating the material weakness described below. We will
continue to monitor remediation throughout the year and final assessment will be determined as part
of year end testing of internal control over financial reporting.
Previously, we did not maintain a sufficient complement of personnel with an appropriate level
of accounting knowledge, experience and training in the application of generally accepted
accounting principles commensurate with our financial reporting requirements. Specifically, this
deficiency resulted in audit adjustments that corrected an understatement of revenue and audit
adjustments to deferred revenue, deferred rent, property and equipment, depreciation, consulting
expenses and certain accrual accounts and disclosures in the consolidated financial statements for
the year ended December 31, 2006 and in an audit adjustment that corrected an understatement of
operating expenses and related legal accrual accounts and disclosures in the consolidated financial
statements for the year ended December 31, 2007, primarily arising from an insufficient review by
us of relevant information obtained through communications with third parties. Additionally, this
deficiency could result in misstatements of the aforementioned accounts and disclosures that would
result in a material misstatement to the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management previously determined this control
deficiency constituted a material weakness.
We have undertaken the remedial actions described below and in connection with the preparation
of this Quarterly Report, our management performed additional analyses, reconciliations and other
post-closing procedures and has concluded that the Companys consolidated financial statements for
the periods covered by and included in this Quarterly Report are fairly stated in all material
respects in accordance with generally accepted accounting principles in the U.S. for each of the
periods presented herein.
Implemented or Planned Remedial Actions of the Material Weakness
In response to the identification of the material weakness described above, management
initiated the following corrective actions:
| During the quarter ended December 31, 2007, we hired a new VP of Finance, with experience in public accounting as well as in senior accounting roles in a public company, who oversees all of our accounting functions. | ||
| During the quarter ended December 31, 2007, and prior to filing the financial statements, we hired two Assistant Corporate Controllers; one to oversee revenue recognition and financial systems and the other to oversee external reporting. We have also hired a General Ledger and Consolidations Manager. | ||
| During the quarter ended December 31, 2007, we required all of our finance, accounting and stock administration staff to attend training in various areas of U.S. generally accepted accounting principles. In this regard, members of our finance, accounting and operations departments have attended revenue recognition, SEC reporting and stock administration training in the fourth quarter of 2007. | ||
| We have on-going efforts to improve communications between finance personnel responsible for completing reviews of our accrual accounts and operations personnel responsible for the execution of the work on those transactions and have instituted quarterly close meetings involving finance and operations personnel; and |
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| We are continuing our efforts to review our internal control over financial reporting with the intent to automate previously manual processes specifically in the areas of legal billing administration. |
Additionally, management is investing in on-going efforts to continuously improve the control
environment and has committed considerable resources to the continuous improvement of the design,
implementation, documentation, testing and monitoring of our internal controls.
Management believes the Company has made substantial progress in remediating the material
weakness based on the measure addressed above. We will continue to monitor remediation throughout
the year and final assessment will be determined as part of year end testing of internal control
over financial reporting.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting except as described above in the
section, Implemented or Planned Remedial Actions of the Material Weakness.
Limitation on Effectiveness of Controls
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.
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
with GAAP, 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
companys assets that could have a material effect on its 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.
PART IIOTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item regarding legal proceedings is incorporated by reference
to the information set forth in Note 13 Litigation and Asserted Claims of the Notes to Unaudited
Condensed Consolidated Financial Statements of this Form 10-Q.
Item 1A. Risk Factors
Because of the following factors, as well as other variables affecting our operating results,
past financial performance may not be a reliable indicator of future performance, and historical
trends should not be used to anticipate results or trends in future periods. See also
Forward-looking Statements elsewhere in this report.
Risks Associated With Our Business, Industry and Market Conditions
If market leaders do not adopt our chip interface products, our results of operations could
decline.
An important part of our strategy is to penetrate market segments for chip interfaces by
working with leaders in those market segments. This strategy is designed to encourage other
participants in those segments 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.
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We target system companies to adopt our chip interface technologies, particularly those that
develop and market high volume business and consumer products, which have traditionally been
focused on PCs, including PC graphics processors, and video game consoles, but also are expanding
to include HDTVs, cellular and digital phones, PDAs, digital cameras and other consumer electronics
that incorporate all varieties of memory and chip interfaces. In particular, our strategy includes
gaining acceptance of our technology in high volume consumer applications, including video game
consoles, such as the Sony PlayStation ® 2 and Sony PLAYSTATION ® 3, HDTVs and set top boxes. 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:
| competition faced by a system company in its particular industry; | ||
| the timely introduction and market acceptance of a system companys products; | ||
| the engineering, sales and marketing and management capabilities of a system company; | ||
| technical challenges unrelated to our chip interfaces faced by a system company in developing its products; | ||
| the financial and other resources of the system company; | ||
| the supply of semiconductors from our licensees in sufficient quantities and at commercially attractive prices; | ||
| the ability to establish the prices at which the chips containing our chip interfaces are made available to system companies; and | ||
| the degree to which our licensees promote our chip interfaces to a system company. |
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 their segments thereby 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.
To continue to grow, we may have to invest more resources in research and development than
anticipated, which could increase our operating expenses and negatively impact our operating
results.
If new competitors, technological advances by existing competitors, our entry into new
markets, or other competitive factors require us to invest significantly greater resources than
anticipated in our research and development efforts, our operating expenses would increase. For the
three and nine months ended September 30, 2008, research and development expenses were $17.5
million and $59.0 million, respectively, including stock-compensation of approximately $3.3 million
and $11.0 million, respectively. If we are required to invest significantly greater resources than
anticipated in research and development efforts without an increase in revenue, our operating
results could decline. Research and development expenses are likely to fluctuate from time to time
to the extent we make periodic incremental investments in research and development and these
investments may be independent of our level of revenue. In order to grow, which may include
entering new markets, we anticipate that we will continue to devote substantial resources to
research and development, and we expect these expenses to increase in absolute dollars in the
foreseeable future due to the increased complexity and the greater number of products under
development as well as hiring additional employees.
Our revenue is concentrated in a few customers, and if we lose any of these customers, our
revenue may decrease substantially.
We have a high degree of revenue concentration, with our top five licensees representing
approximately 72% and 67% of our revenue for the three and nine months ended September 30, 2008,
respectively. This compares with the three and nine months ended September 30, 2007, in which
revenue from our top five licensees accounted for approximately 68% of our revenue, respectively.
For the three months ended September 30, 2008, revenue from Fujitsu, Matsushita, NEC, AMD and Sony
each accounted for 10% or more
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of our total revenue. For the nine months ended September 30, 2008, revenue from Fujitsu,
Elpida, Sony, AMD, Matsushita and NEC each accounted for 10% or more of our total revenue. For the
three months ended September 30, 2007, revenue from Qimonda, Fujitsu, Elpida and Toshiba each
accounted for 10% or more of our total revenue. For the nine months ended September 30, 2007,
revenue from Fujitsu, Qimonda and Elpida each accounted for 10% or more of our total revenue. We
may continue to experience significant revenue concentration for the foreseeable future.
Substantially all of our licensees have the right to cancel their licenses. Failure to renew
licenses and/or the loss of any of our top five licensees would cause revenue to decline
substantially. Intel has been one of our largest customers 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 that expired in September 2006. Intel now has a paid up license
for the use of all of our patents which claimed priority prior to September 2006. 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 continue to replace the revenue 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.
We are in negotiations with licensees and prospective licensees to reach SDR and DDR patent
license agreements. We expect SDR and DDR patent license 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 SDR and DDR-compatible contracts, our results of operations may
decline significantly.
Our business and operating results may be harmed if we are unable to manage growth in our
business or if we undertake any restructuring activities.
Our business historically has experienced periods of rapid growth that have placed, and may
continue to place, significant demands on our managerial, operational and financial resources. In
managing 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 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 we are unsuccessful in recruiting and retaining personnel, our
business and operating results will be harmed.
From time to time, we may undertake to restructure our business, such as the reduction in our
workforce that we announced in August 2008. There are several factors that could cause a
restructuring to have an adverse effect on our business, financial condition and results of
operations. These include potential disruption of our operations, the development of our
technology, the deliveries to our customers and other aspects of our business. Employee morale and
productivity could also suffer and we may lose employees whom we want to keep. Loss of sales,
service and engineering talent, in particular, could damage our business. Any restructuring would
require substantial management time and attention and may divert management from other important
work. Employee reductions or other restructuring activities also cause us to incur restructuring
and related expenses such as severance expenses. Moreover, we could encounter delays in executing
any restructuring plans, which could cause further disruption and additional unanticipated expense.
Unanticipated changes in our tax rates or in the tax laws and regulations could expose us to
additional income tax liabilities which could affect our operating results and financial
condition.
We are subject to income taxes in both the United States and various foreign jurisdictions.
Significant judgment is required in determining our worldwide provision (benefit) for income taxes
and, in the ordinary course of business, there are many transactions and calculations where the
ultimate tax determination is uncertain. Our effective tax rate could be adversely affected by
changes in the
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mix of earnings in countries with differing statutory tax rates, changes in the valuation of
deferred tax assets and liabilities, changes in tax laws and regulations as well as other factors.
For example, the state of California has enacted regulations which limit the use of net operating
losses and certain tax credits, including research and development credits, in 2008 and 2009 which
could lead to an increase in our effective tax rate. Our tax determinations are regularly subject
to audit by tax authorities and developments in those audits could adversely affect our income tax
provision. Although we believe that our tax estimates are reasonable, the final determination of
tax audits or tax disputes may be different from what is reflected in our historical income tax
provisions which could affect our operating results.
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
condition and results of operations. We are dependent on the semiconductor 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:
| completed before changes in the semiconductor industry render them obsolete; | ||
| available when system companies require these innovations; and | ||
| sufficiently compelling to cause semiconductor manufacturers to enter into licensing arrangements with us for these new technologies. |
Finally, significant technological innovations generally require a substantial investment
before their commercial viability can be determined. 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.
We face intense competition that may cause our results of operations to suffer.
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 XDR licensees, produce
versions of DRAM such as SDR, DDRx and GDDRx SDRAM which compete with 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
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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. Wider applications of other developing memory technologies, including
FLASH memory, may also pose competition to our licensed memory solutions.
As the semiconductor industry is highly cyclical, significant economic downturns characterized
by diminished demand, erosion of average selling prices, production overcapacity and production
capacity constraints could affect the semiconductor industry. We believe we currently are
experiencing such a period of economic downturn. As a result, we may face a reduced number of
licensing wins, tightening of customers operating budgets, extensions of the approval process for
new licenses and consolidation among our customers, all of which may adversely affect the demand
for our technology and may cause us to experience substantial period-to-period fluctuations in our
operating results.
JEDEC has standardized what it calls extensions of DDR, known as DDR2 and DDR3. 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 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 leadership 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.
In the FlexIO processor bus chip interface market segment, 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 segments,
our results of operations could suffer.
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 charged by our licensees 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.
Our licensing cycle is lengthy and costly and our marketing and sales efforts may be
unsuccessful.
The process of persuading customers to adopt and license our chip interface technologies can
be lengthy and, even if successful, 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. We generally incur significant marketing and sales expenses prior to
entering into our license agreements, generating a license fee and establishing a royalty stream
from each licensee. The length of time it takes to establish a new licensing relationship can take
many months. In addition, our ongoing intellectual property litigation and regulatory
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actions have and will likely continue to have an impact on our ability to enter into new licenses
and renewals of licenses. As such, we may incur costs in any particular period before any
associated revenue stream begins. If our marketing and sales efforts are very lengthy or
unsuccessful, then we may face a material adverse effect on our business and results of operations
as a result of delay or failure to obtain royalties.
Future revenue is difficult to predict for several reasons, and our failure to predict revenue
accurately may cause us to miss analysts estimates and result in our stock price declining.
Our lengthy and costly license negotiation cycle makes our future revenue difficult to predict
in the event that we are not successful entering into licenses with our customers on our estimated
timelines. In addition, a portion of our revenue comes from development and support services
provided to our licensees. Depending upon the nature of the services, a portion of the related
revenue may be recognized ratably over the support period, or may be recognized according to
contract accounting. Contract revenue accounting may result in deferral of the service fees to the
completion of the contract, or may be recognized over the period in which services are performed on
a percentage-of-completion basis. 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 our missing previously announced earnings
guidance or analysts estimates which would likely cause our stock price to decline.
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 revenue in any particular period, it is difficult for us to accurately
forecast revenue and profitability. Factors other than those set forth above, which are beyond our
ability to control or assess in advance, that could cause our operating results to fluctuate
include:
| semiconductor and system companies acceptance of our chip interface products; | ||
| the success of high volume consumer applications, such as the Sony PLAYSTATION ® 3; | ||
| the dependence of our royalties upon fluctuating sales volumes and prices of licensed chips that include our technology; | ||
| the seasonal shipment patterns of systems incorporating our chip interface products; | ||
| the loss of any strategic relationships with system companies or licensees; | ||
| semiconductor or system companies discontinuing major products incorporating our chip interfaces; | ||
| the unpredictability of the timing and amount of any litigation expenses; | ||
| changes in our chip and system company customers development schedules and levels of expenditure on research and development; | ||
| our licensees terminating or failing to make payments under their current contracts or seeking to modify such contracts; | ||
| changes in our strategies, including changes in our licensing focus and/or possible acquisitions of companies with business models different from our own; and | ||
| changes in the economy and credit market and their effects upon demand for our technology and the products of our licensees. |
For the three and nine months ended September 30, 2008, royalties accounted for 87.7% and
86.9%, respectively, and for the three and nine months ended September 30, 2007, royalties
accounted for 84.7% and 84.8%, respectively, of our total revenue, and we believe that royalties
will continue to represent a majority of total revenue for the foreseeable future. Royalties are
generally 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 recognized only if collectibility is
assured. As a result of these uncertainties and effects being outside of our control, royalty
revenue are difficult to predict and make accurate financial forecasts difficult to achieve, which
could cause our stock price to become volatile and decline.
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Current economic conditions may adversely affect our industry, business and results of
operations.
The U.S. and world economies are undergoing a period of slowdown or recession, and the future
economic environment may continue to be less favorable than that of recent years. This slowdown
has and could further lead to reduced consumer and business spending in the foreseeable future,
including amongst our licensees and the purchasers of their products. If such spending continues
to slow down or decrease, our industry, business and results of operations may be adversely
impacted
A substantial portion of our revenue is derived from sources outside of the United States and
these revenue and our business generally are subject to risks related to international operations
that are often beyond our control.
For the three and nine months ended September 30, 2008, revenue from our sales to
international customers constituted approximately 80% and 82% of our total revenue, respectively,
and for the three and nine months ended September 30, 2007, revenue from our sales to international
customers constituted approximately 84% and 85% of our total revenue, respectively. We currently
have international operations in India (design), Japan (business development), Taiwan (business
development), Germany (business development) and Korea (business development). As a result of our
continued focus on international markets, we expect that future revenue derived from international
sources will continue to represent a significant portion of our total revenue.
To date, all of the revenue 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
financial instruments to hedge foreign exchange rate risk.
Our international operations and revenue are subject to a variety of risks which are beyond
our control, including:
| export controls, tariffs, import and licensing restrictions and other trade barriers; | ||
| profits, if any, earned abroad being subject to local tax laws and not being repatriated to the United States or, if repatriation is possible, limited in amount; | ||
| changes to tax codes and treatment of revenue from international sources, including being subject to foreign tax laws and potentially being liable for paying taxes in that foreign jurisdiction; | ||
| foreign government regulations and changes in these regulations; | ||
| social, political and economic instability; | ||
| lack of protection of our intellectual property and other contract rights by jurisdictions in which we may do business to the same extent as the laws of the United States; | ||
| changes in diplomatic and trade relationships; | ||
| cultural differences in the conduct of business both with licensees and in conducting business in our international facilities and international sales offices; | ||
| operating centers outside the United States; | ||
| hiring, maintaining and managing a workforce remotely and under various legal systems; and | ||
| geo-political issues. |
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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.
Our results of operations could vary as a result of the methods, estimates, and judgments we use
in applying our accounting policies.
The methods, estimates, and judgments we use in applying our accounting policies have a
significant impact on our results of operations, as described elsewhere in this report. Such
methods, estimates, and judgments are, by their nature, subject to substantial risks,
uncertainties, and assumptions, and factors may arise over time that lead us to change our methods,
estimates, and judgments. Changes in those methods, estimates, and judgments could significantly
affect our results of operations. In particular, the calculation of share-based compensation
expense under Statement of Financial Accounting Standards No. 123(R) (SFAS No. 123(R)) requires
us to use valuation methodologies which were not developed for use in valuing employee stock
options and a number of assumptions, estimates, and conclusions regarding matters such as expected
forfeitures, expected volatility of our share price, and the exercise behavior of our employees.
Furthermore, there are no means, under applicable accounting principles, to compare and adjust our
expense if and when we learn about additional information that may affect the estimates that we
previously made, with the exception of changes in expected forfeitures of share-based awards.
Factors may arise that lead us to change our estimates and assumptions with respect to future
share-based compensation arrangements, resulting in variability in our share-based compensation
expense over time. Changes in forecasted stock-based compensation expense could impact our cost of
contract revenue, research and development expenses, marketing, general and administrative expenses
and our effective tax rate, which could have an adverse impact on our results of operations.
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 companys or divisions personnel and
operations, which could negatively affect our operating results. In addition:
| the key personnel of the acquired company may decide not to work for us; | ||
| we may experience additional financial and accounting challenges and complexities in areas such as tax planning, cash management and financial reporting; | ||
| our ongoing business may be disrupted or receive insufficient management attention; | ||
| we may not be able to recognize the cost savings or other financial benefits we anticipated; and | ||
| our increasing international presence resulting from acquisitions may increase our exposure to international currency, tax and political risks. |
In connection with future acquisitions or mergers, strategic transactions or other
arrangements, we may incur substantial expenses regardless of whether the transaction occurs. 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.
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, compensate, motivate and
retain qualified personnel, especially engineers, who can enhance our existing technologies and
introduce new technologies. Competition for qualified personnel, particularly those with
significant industry experience, is intense, in particular in the San Francisco Bay Area where we
are
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headquartered and in the area of Bangalore, India where we have a design center. We are also
dependent upon our senior management personnel. 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.
Decreased effectiveness of equity-based compensation could adversely affect our ability to
attract and retain employees.
We have historically used stock options and other forms of stock-based compensation as key
components of our employee compensation program in order to align employees interests with the
interests of our stockholders, encourage employee retention and provide competitive compensation
and benefit packages. As a result of changes in accounting principles, we have incurred increased
compensation costs associated with our stock-based compensation programs. As a result and as part
of our overall compensation philosophy, we have worked to reduce the issuance of equity as a
percentage of overall compensation and the number of equity awards issued annually as a percentage
of our total outstanding shares. In addition, if we face any difficulty relating to obtaining
stockholder approval of our equity compensation plans, it could make it harder or more expensive
for us to grant stock-based payments to employees in the future. As a result of these factors
leading to lower equity compensation of our employees, we may find it difficult to attract, retain
and motivate employees, and any such difficulty could materially adversely affect our business.
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.
Risks Related to Corporate Governance and Capitalization Matters
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 listed on The Nasdaq Global Select 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:
| any progress, or lack of progress, in the development of products that incorporate our chip interfaces; | ||
| our signing or not signing new licensees; | ||
| new litigation or developments in current litigation as discussed above; | ||
| announcements of our technological innovations or new products by us, our licensees or our competitors; | ||
| positive or negative reports by securities analysts as to our expected financial results; | ||
| developments with respect to patents or proprietary rights and other events or factors; | ||
| any delisting of our Common Stock from The Nasdaq Global Select Market; and | ||
| changes in general market sentiment due to macroeconomic and geopolitical factors. |
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.
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If we fail to remediate any material weaknesses in our internal control over financial reporting,
we may be unable to accurately report our financial results or reasonably prevent fraud which
could result in a loss of investor confidence in our financial reports and have an adverse effect
on our business and operating results and our stock price.
Effective internal control over financial reporting is essential for us to produce reliable
financial reports and prevent fraud. If we cannot provide reliable financial information or prevent
fraud, our business and operating results, as well as our stock price, could be harmed. During the
year ended December 31, 2007, we discovered, and may in the future discover, material weaknesses in
our internal control over financial reporting. A failure to implement and maintain effective
internal control over financial reporting, could harm our operating results, result in a material
misstatement of our financial statements, cause us to fail to meet our financial reporting
obligations or prevent us from providing reliable and accurate financial reports or avoiding or
detecting fraud. This, in turn, could result in a loss of investor confidence in the accuracy and
completeness of our financial reports, which could have an adverse effect on our stock price.
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 new SEC regulations and Nasdaq 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 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.
The matters relating to the independent investigation of our historical stock option granting
practices and the restatement of our previous financial statements could adversely affect our
business, financial condition, results of operations and cash flows.
During 2006 and 2007, our Audit Committee conducted an internal investigation of the timing of
stock option grant practices and related accounting issues, and, as a result of the findings, we
restated various previously filed financial statements. The costs of the investigation and
restatement and any settlements, payment of claims, fines, taxes and other costs led to substantial
expenses that materially affected our cash balance and cash flows from operations, and significant
expenditures may continue to be incurred in the future. In addition, the recent restatement of our
financial results and any negative outcome that may occur from these investigations could impact
our reputation, including our relationships with our investors and our licensees, our ability to
hire and retain qualified personnel, our ability to acquire new licensees and other business
partners and, ultimately, our ability to generate revenue.
Future government actions may result from the completion of the investigation of stock option
grants. We are also under examination by the Internal Revenue Service (IRS) on the various tax
reporting implications resulting from the investigation. There is no assurance that other
regulatory inquiries will not be commenced by other U.S. federal, state or foreign regulatory
agencies, including the IRS and other tax authorities. The unfavorable resolution of any potential
tax or other regulatory proceeding or action could require us to make significant payments in
overdue taxes, penalties and fines or otherwise record charges (or reduce tax assets) that may
adversely affect our results of operations and financial condition.
In addition, our bylaws and certain indemnification agreements require us to indemnify our
current and former directors, officers, employees and agents against most actions of a civil,
criminal, administrative or investigative nature unless such person acted criminally, in a manner
opposed to our best interests or did not act in good faith. Generally, we are required to advance
indemnification expenses prior to any final adjudication of an individuals culpability. Therefore,
the expense of indemnifying our current and former directors, officers and employees and agents in
their defense or related expenses as a result of the derivative, class action and any regulatory
actions related to the investigation and financial restatement may be significant. Therefore, our
indemnification obligations could result in the diversion of our financial resources that adversely
affects our business, financial condition and results of operations.
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We have been named as a party to several lawsuits arising from matters relating to our stock
option investigation which may result in unfavorable outcomes and significant judgments,
settlements and legal expenses which could cause our business, financial condition and results of
operations to suffer.
Several shareholder derivative actions were filed in state and federal courts against certain
of our current and former officers and directors, as well as our current auditors, related to the
stock option investigation. The actions were brought by persons identifying themselves as
shareholders and purporting to act on our behalf. We are named solely as a nominal defendant
against whom the plaintiffs seek no recovery. The complaints allege that certain of these
defendants violated securities laws and/or breached their fiduciary duties to us and obtained
unjust enrichment in connection with grants of stock options to certain of our officers that were
allegedly improperly dated. The complaints seek unspecified monetary damages and disgorgement from
the defendants, as well as unspecified equitable relief.
Additionally, several securities fraud class actions and individual lawsuits were filed in
federal court against us and certain of our current and former officers and directors. The
complaints generally allege that the defendants violated the federal securities laws by filing
documents with the SEC containing false statements regarding our accounting treatment of the stock
option granting actions under investigation. The individual lawsuits allege not only federal and
state securities law violations, but also state law claims for fraud and breach of fiduciary duty.
The class actions were consolidated into a single proceeding and have settled. The settlement
provides for a payment of $18.3 million, which we paid into a settlement fund in March 2008, for a
dismissal with prejudice of all claims against all defendants. Some potential class members
requested exclusion from the settlement. On May 8, 2008, the court entered an order granting final
approval of the settlement agreement and entered judgment dismissing with prejudice all claims
against all defendants in the consolidated class action litigation. For more information about the
litigation described above, see Note 13 Litigation and Asserted Claims of Notes to Unaudited
Condensed Consolidated Financial Statements.
The amount of time to resolve these current and any future lawsuits is uncertain, and these
matters could require significant management and financial resources which could otherwise be
devoted to the operation of our business. Although we have expensed or accrued for certain
liabilities that we believe will result from certain of these actions, the actual costs and
expenses to defend and satisfy all of these lawsuits and any potential future litigation will
exceed our current estimated accruals, possibly significantly. Unfavorable outcomes and significant
judgments, settlements and legal expenses in the litigation related to our past stock option
granting practices could have material adverse impacts on our business, financial condition,
results of operations, cash flows and the trading price of our Common Stock.
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 convertible senior notes (convertible notes) due February 1, 2010, of which $160.0
million remains outstanding as of the date of this report.
The degree to which we are leveraged could have important consequences, including, but not
limited to, the following:
| our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited; | ||
| a substantial portion of our cash flows from operations will be dedicated to the payment of the principal of our indebtedness as we are required to pay the principal amount of the convertible notes in cash when due; | ||
| if we elect to pay any premium on the convertible notes with shares of our Common Stock or we are required to pay a make-whole premium with our shares of Common Stock, our existing stockholders interest in us would be diluted; and | ||
| we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions. |
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
convertible notes under such instruments and in some cases acceleration of any future debt under
instruments that may contain cross-default or cross-acceleration provisions. Any required repayment
of the convertible notes as a result of an acceleration would lower our current cash on hand such
that we would not have those funds available for the use in our business.
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If we are at any time unable to generate sufficient cash flow from operations to service our
indebtedness when payment is due, 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 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 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:
| our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as blank check preferred stock, with rights senior to those of Common Stock; | ||
| our board of directors is staggered into two classes, only one of which is elected at each annual meeting; | ||
| stockholder action by written consent is prohibited; | ||
| nominations for election to our board of directors and the submission of matters to be acted upon by stockholders at a meeting are subject to advance notice requirements; | ||
| certain provisions in our bylaws and certificate of incorporation such as notice to stockholders, the ability to call a stockholder meeting, advanced notice requirements and the stockholders acting by written consent may only be amended with the approval of stockholders holding 66 2 / 3 % of our outstanding voting stock; | ||
| the ability of our stockholders to call special meetings of stockholders is prohibited; and | ||
| our board of directors is expressly authorized to make, alter or repeal our bylaws. |
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.
Litigation, Regulation and Business Risks Related to our Intellectual Property
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
revenue and stock price.
We seek to diligently protect our intellectual property rights. In connection with the
extension of our licensing program to SDR SDRAM-compatible and DDR SDRAM-compatible products, we
became involved in litigation related to such efforts against different parties in multiple
jurisdictions, including our recently filed lawsuit against NVIDIA for patent infringement. In each
of these cases, we have claimed infringement of certain of our patents, while the manufacturers of
such products have generally sought damages and a determination that the patents in suit are
invalid, unenforceable, and not infringed. Among other things, the opposing parties have alleged
that certain of our patents are unenforceable because we engaged in document spoliation, litigation
misconduct and/or acted improperly during our 1991 to 1995 participation in the JEDEC standard
setting organization (including allegations of antitrust violations and unfair competition). See
Note 13 Litigation and Asserted Claims of Notes to Unaudited Condensed Consolidated Financial
Statements for additional information regarding certain cases that are active as of the date of
this report.
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There can be no assurance that any or all of the opposing parties will not succeed, either at
the trial or appellate level, 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 royalties for the use of our patented technology. Moreover, there
is a risk that if one party prevails against us, other parties could use the adverse result to
defeat or limit our claims against them; conversely, there can be no assurance that if we prevail
against one party, we will succeed against other parties on similar claims, defenses, or
counterclaims. In addition, there is the risk that the pending litigations and other circumstances
may cause us to accept less than what we now believe to be fair consideration in settlement. Among
other things, there can be no assurance that we will succeed in negotiating future settlements or
licenses on terms better than those 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 (including delays in negotiating licenses with other actual or potential licensees),
will tend to discourage future design partners, will tend to impair adoption of our existing
technologies and divert the efforts and attention of our management and technical personnel from
other business operations. In addition, we may be unsuccessful in our litigation if we have
difficulty obtaining the cooperation of former employees and agents who were involved in our
business during the relevant periods related to our litigation and are now needed to assist in
cases or testify on our behalf. 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
or not infringed; 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 of
any or all of these adverse results could cause a substantial decline in our revenue and stock
price.
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 revenue to decline substantially .
In addition to private litigations, we are involved in proceedings brought against us by one
or more government agencies and we may become involved in future proceedings by other government
agencies. The FTC brought an administrative action against us alleging, among other things, that we
had failed to disclose certain patents and patent applications during our membership in JEDEC while
it established SDRAM standards and that we, therefore, should be precluded from enforcing certain
of our intellectual property rights in patents with a priority date prior to June 1996. See Note 13
Litigation and Asserted Claims of Notes to Unaudited Condensed Consolidated Financial Statements
for a discussion of the FTC action. At the conclusion of this proceeding, the FTC found that our
conduct at JEDEC was improper and issued an order on February 2, 2007, that, among other things,
limited the royalty rates we may charge to license certain patents that cover certain
JEDEC-compliant SDR and DDR SDRAM memory and controller products sold after April 12, 2007. On
April 22, 2008, the U.S. Court of Appeals for the D.C. Circuit overturned the FTC decisions
regarding Rambus, and vacated the FTCs orders. The FTC has not decided whether to file a petition
for certiorari with the U.S. Supreme Court. Additionally, the European Commission has instituted
similar proceedings against us but has not yet issued a decision. These proceedings, or one by any
other governmental agency, may result in adverse determination against us or in other outcomes that
could limit our ability to enforce or license our intellectual property, and could cause our
revenue to decline substantially. The pendency of these two cases has impaired our ability to
enforce or license our patents or collect royalties from existing or potential licensees, as such
existing or potential licensees may await the final outcome of these cases before agreeing to new
licenses or pay royalties.
In addition, third parties have and may attempt to use adverse findings by a government agency
to limit our ability to enforce our patents in private litigations and to assert claims for
monetary damages against us. Although we have successfully defeated certain attempts to do so,
there can be no assurance that other third parties will not be successful in the future or that
additional claims or actions arising out of adverse findings by a government agency will not be
asserted against us.
Further, third parties have sought and may seek review and reconsideration of the
patentability of inventions claimed in certain of our patents by the United States Patent &
Trademark Office (the PTO) and/or the European Patent Office (the EPO). An adverse decision by
the PTO or EPO could invalidate some or all of these patent claims and could also result in
additional adverse consequences affecting other related U.S. or European patents. If a sufficient
number of such patents are impaired, our ability to enforce or license our intellectual property
would be significantly weakened and this could cause our revenue to decline substantially.
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Litigation or other third-party claims of intellectual property infringement could require us to
expend substantial resources and could prevent us from developing or licensing our technology on
a cost-effective basis.
Our research and development programs are in highly competitive fields in which numerous third
parties have issued patents and patent applications with claims closely related to the subject
matter of our research and development programs. We have also been named in the past, and may in
the future be named, as a defendant in lawsuits claiming that our technology infringes upon the
intellectual property rights of third parties. In the event of a third-party claim or a successful
infringement action against us, we may be required to pay substantial damages, to stop developing
and licensing our infringing technology, to develop non-infringing technology, and to obtain
licenses, which could result in our paying substantial royalties or our granting of cross licenses
to our technologies. Threatened or ongoing third-party claims or infringement actions may prevent
us from pursuing additional development and licensing arrangements for some period. For example, we
may discontinue negotiations with certain customers for additional licensing of our patents due to
the uncertainty caused by our ongoing litigation on the terms of such licenses or of the terms of
such licenses on our litigation. We may not be able to obtain licenses from other parties at a
reasonable cost, or at all, which could cause us to expend substantial resources, or result in
delays in, or the cancellation of, new product.
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:
| any current or future U.S. or foreign patent applications will be approved and not be challenged by third parties; | ||
| our issued patents will protect our intellectual property and not be challenged by third parties; | ||
| the validity of our patents will be upheld; | ||
| our patents will not be declared unenforceable; | ||
| the patents of others will not have an adverse effect on our ability to do business; | ||
| Congress or the U.S. courts or foreign countries will not change the nature or scope of rights afforded patents or patent owners or alter in an adverse way the process for seeking patents; | ||
| changes in law will not be implemented that will affect our ability to protect and enforce our patents and other intellectual property; | ||
| new legal theories and strategies utilized by our competitors will not be successful; or | ||
| others will not independently develop similar or competing chip interfaces or design around any patents that may be issued to us. |
If any of the above were to occur, our operating results could be adversely affected.
Our inability to protect and own the intellectual property we create 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 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 use of
our intellectual property in the products of third party manufacturers, and our ability to
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enforce intellectual property rights against them to obtain appropriate compensation. 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 rely upon the accuracy on our licensees recordkeeping, and any inaccuracies or payment
disputes for amounts owed to us under our licensing agreements 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 rarely are undertaken because they can be expensive, time consuming, and
potentially detrimental to our ongoing business relationship with our licensees. Therefore, we 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 our receiving more or
less royalty revenue than we are entitled to under the terms of our license agreements. If we
conducted royalty audits in the future, such audits may 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.
We may not be able to satisfy the requirements under the Qimonda settlement and license agreement
that would require Qimonda 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 was assigned to Qimonda (formerly Infineons DRAM operations) in
October 2006 in connection with Infineons spin-off of Qimonda. The settlement and license
agreement, among other things, requires Qimonda to pay to us an aggregate payment of $50.0 million
in quarterly installments of approximately $5.85 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, Qimonda will be required to make additional payments to us that may aggregate
up to $100.0 million. As we have not yet succeeded in entering into these additional license
agreements necessary to trigger Qimondas obligations, Qimondas quarterly payment decreased to
$3.2 million in the fourth quarter of 2007, and has ceased as of the first quarter of 2008. The
quarterly payments with Qimonda will not recommence until we enter into additional license
agreements with certain other DRAM manufacturers. We may not succeed in entering into these
additional license agreements necessary to trigger Qimondas obligations under the settlement and
license agreement to pay to us additional amounts, thereby reducing the value of the settlement and
license agreement to us.
An acquisition by Qimonda of a third party DRAM manufacturer 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.
The Company recently amended its patent license agreement with Qimonda. The amended license
grants a supplemental term license of approximately the same scope as the original term license
originally provided for in the agreement, but specifies that in the event Infineon ceases to
control or otherwise own a majority of Qimonda shares, certain competitors would not accede to this
license upon such competitors acquisition of control of Qimonda. Furthermore, such acquiring
competitor would not receive the benefit of a release from Rambus for past damages, including past
infringement of Rambus patent portfolio. To the extent that Qimonda acquires another company,
including such certain competitors, the acquired company would accede to the license and would be
eligible to receive the benefit of the release from Rambus for past damages. Following such an
acquisition by Qimonda, the combined entity would be required to pay a stepped up payment
calculated in accordance with the percentage increase in the DRAM volume brought about by the
acquisition. Such an increase in the payments could make it more difficult for us to obtain the
royalties we believe are appropriate from the market as a whole. Such an acquisition by Qimonda of
any of the certain competitors would in addition reduce the number of companies from which we may
seek compensation for the antitrust injury alleged by us in our pending price-fixing action in San
Francisco. Except in the case of the certain competitors, the extension of any such benefits to a
third party entity, whether acquiring control or otherwise a majority of shares of Qimonda or being
acquired by Qimonda, could, in addition, result in the release of claims to such third party
entity, thus reducing the number of companies from which we may seek compensation for patent
damages.
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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 indemnification and support obligations could
result in substantial expenses. In addition to the time and expense required for us to indemnify or
supply such support to our licensees, a licensees 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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
Please refer to the Exhibit Index of this quarterly report on Form 10-Q.
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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: October 30, 2008 | By: | /s/ Satish Rishi | ||
Satish Rishi | ||||
Senior Vice President, Finance and Chief Financial Officer |
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INDEX TO EXHIBITS
Exhibit | ||
Number | Description of Document | |
3.1(1)
|
Amended and Restated Certificate of Incorporation of Registrant filed May 29, 1997. | |
3.2(2)
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant filed September 14, 2000. | |
3.3(3)
|
Amended and Restated Bylaws of Registrant dated November 13, 2007. | |
10.1(4)
|
Amendment No. 1 to Settlement and License Agreement, dated as of July 8, 2008, by and between Registrant and Qimonda AG. | |
31.1
|
Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Incorporated by reference to the Form 10-K filed on December 15, 1997. | |
(2) | Incorporated by reference to the Form 10-Q filed on May 4, 2001. | |
(3) | Incorporated by reference to the Form 10-Q filed on August 4, 2008. | |
(4) | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
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