UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number: 000-22339
RAMBUS INC.
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------------------------
Delaware 94-3112828
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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ADDRESS
4440 El Camino Real, Los Altos, CA 94022
(Address of principal executive offices) (zip code)
Registrant's 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 [X] No [_]
The number of shares outstanding of the registrant's Common Stock, par value $.001 per share, was 99,373,166 as of March 31, 2001.
RAMBUS INC.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of March 31, 2001 and September 30, 2000................................ 1
Consolidated Condensed Statements of Operations
for the Three and Six Months Ended March 31, 2001 and March 31, 2000....... 2
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended March 31, 2001 and March 31, 2000................. 3
Notes to Unaudited Consolidated Condensed Financial Statements............. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........................ 16
Item 6. Exhibits and Reports on Form 8-K........................................... 17
Signature ........................................................................... 18
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31, September 30,
--------- -------------
2001 2000
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 92,243 $ 63,093
Marketable securities.............................................. 45,873 59,127
Accounts receivable................................................ 512 68
Prepaid and deferred taxes......................................... 24,862 17,661
Prepaids and other current assets.................................. 2,403 2,988
--------- ---------
Total current assets............................................ 165,893 142,937
Property and equipment, net.......................................... 16,087 6,724
Marketable securities, long-term..................................... 8,483 7,548
Restricted cash...................................................... 4,462 2,500
Deferred taxes, long-term............................................ 50,051 55,404
Other assets......................................................... 8,735 4,518
--------- ---------
Total assets.................................................... $ 253,711 $ 219,631
========= =========
LIABILITIES
Current liabilities:
Accounts and taxes payable, accrued payroll and other liabilities.. $ 9,506 $ 9,032
Deferred revenue................................................... 17,477 24,155
--------- ---------
Total current liabilities....................................... 26,983 33,187
Deferred revenue, less current portion............................... 27,800 24,122
--------- ---------
Total liabilities............................................... 54,783 57,309
--------- ---------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares
Issued and outstanding: no shares................................. -- --
Common stock, $.001 par value:
Authorized: 500,000,000 shares
Issued and outstanding: 99,373,166 shares at March 31, 2001
and 97,490,774 shares at September 30, 2000....................... 99 97
Additional paid-in capital........................................... 301,105 285,885
Deferred stock-based compensation.................................... (515) (571)
Accumulated deficit.................................................. (102,050) (123,132)
Accumulated other comprehensive gain................................. 289 43
--------- ---------
Total stockholders' equity...................................... 198,928 162,322
--------- ---------
Total liabilities and stockholders' equity................... $ 253,711 $ 219,631
========= =========
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See Notes to Unaudited Consolidated Condensed Financial Statements.
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
March 31, March 31,
--------- ----------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Contract revenues................................. $ 7,581 $ 12,191 $ 15,450 $ 21,510
Royalties......................................... 23,665 3,503 50,513 6,133
-------- --------- -------- ---------
Total revenues................................. 31,246 15,694 65,963 27,643
-------- --------- -------- ---------
Costs and expenses:
Cost of contract revenues......................... 3,057 3,018 5,277 6,549
Research and development.......................... 4,758 2,900 8,346 5,124
Marketing, general and administrative............. 12,585 5,064 21,832 8,463
Employee stock-related compensation expense....... -- 171,085 -- 171,085
-------- --------- -------- ---------
Total costs and expenses....................... 20,400 182,067 35,455 191,221
-------- --------- -------- ---------
Operating income (loss)........................ 10,846 (166,373) 30,508 (163,578)
Other income, net................................... 2,557 1,167 4,628 2,164
-------- --------- -------- ---------
Income (loss) before income taxes.............. 13,403 (165,206) 35,136 (161,414)
Provision for income taxes.......................... 5,361 1,635 14,054 2,962
-------- --------- -------- ---------
Net income (loss).............................. $ 8,042 $(166,841) $ 21,082 $(164,376)
======== ========= ======== =========
Net income (loss) per share - basic................. $0.08 $(1.75) $0.21 $(1.72)
======== ========= ======== =========
Net income (loss) per share - diluted............... $0.07 $(1.75) $0.20 $(1.72)
======== ========= ======== =========
Number of shares used in per share calculations:
Basic............................................. 99,087 95,557 98,816 95,296
Diluted........................................... 107,588 95,557 108,084 95,296
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See Notes to Unaudited Consolidated Condensed Financial Statements.
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
March 31,
-----------------
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss).................................................. $ 21,082 $(164,376)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash employee stock-related compensation.................... -- 169,878
Tax benefit of stock option exercises........................... 6,659 --
Depreciation.................................................... 1,851 1,467
Amortization of deferred compensation........................... 309 262
Amortization of goodwill........................................ 133 111
Change in operating assets and liabilities:
Accounts receivable.......................................... (444) (501)
Prepaids, deferred taxes and other assets.................... (613) 5,504
Accounts and taxes payable, accrued payroll and other
liabilities................................................. 221 3,243
Deferred revenue............................................. (3,000) (14,781)
--------- ---------
Net cash provided by operating activities................. 26,198 807
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment................................. (11,214) (1,223)
Purchases of marketable securities................................. (442,796) (490,433)
Maturities of marketable securities................................ 455,494 482,380
Acquired technology rights......................................... -- (1,334)
Purchases of investments........................................... (5,000) (2,000)
Increase in restricted cash........................................ (1,962) --
--------- ---------
Net cash used in investing activities..................... (5,478) (12,610)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock......................... 8,563 4,297
--------- ---------
Net cash provided by financing activities................. 8,563 4,297
--------- ---------
Effect of exchange rates on cash and cash equivalents................ (133) 36
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 29,150 (7,470)
Cash and cash equivalents at beginning of period..................... 63,093 14,982
--------- ---------
Cash and cash equivalents at end of period........................... $ 92,243 $ 7,512
========= =========
Supplemental disclosure of cash flow information:
Taxes paid......................................................... $ 7,150 $ 418
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See Notes to Unaudited Consolidated Condensed Financial Statements.
RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiary, Rambus K.K., located in Tokyo, Japan. All intercompany accounts and transactions have been eliminated in the accompanying consolidated condensed financial statements.
In the opinion of management, the consolidated condensed financial statements include all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position and results of operations for each interim period shown. Interim results are not necessarily indicative of results for a full year.
The consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto, for the year ended September 30, 2000, included in the Company's 2000 Annual Report on Form 10-K.
2. Recent Accounting Pronouncements
In the first quarter of fiscal 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of SFAS No. 133 did not have any effect on the Company's financial statements and related disclosures since the Company does not currently hold derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying accounting principles generally accepted in the United States to revenue recognition in financial statements and is effective in the fourth quarter of all fiscal years beginning after December 15, 1999. The Company's accounting policies are consistent with the requirements of SAB 101, so the implementation of SAB 101 in the fourth quarter of fiscal year 2001 is not expected to have an impact on the Company's operating results.
3. Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities.
Comprehensive income (loss) is as follows (in thousands; unaudited):
RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
3. Comprehensive Income (continued)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -----------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss)................................. $8,042 $(166,841) $21,082 $(164,376)
Other comprehensive income (loss):
Foreign currency translation adjustments........ (82) (2) (133) 36
Unrealized gain (loss) on marketable securities. 247 36 379 (25)
------ --------- ------- ---------
Other comprehensive income........................ 165 34 246 11
Total comprehensive income (loss)................. $8,207 $(166,807) $21,328 $(164,365)
====== ========= ======= =========
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4. Contingent Warrants, Common Stock Equivalents, and Options
In November 1996, the Company entered into an agreement with Intel Corporation for the development of high-speed semiconductor memory interface technologies. In January 1997, as part of this agreement, the Company issued a warrant to purchase 4,000,000 shares of common stock of the Company at a purchase price of $2.50 per share (the "Intel warrant"). This warrant will become exercisable only upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM-based chipsets (the "Intel milestones"). The warrant will expire no later than the eighth (8th) anniversary of its issuance. At the time that achievement of the milestones becomes probable, a non-cash charge will be recorded in the statement of operations based on the fair value of the warrant.
In October 1998, the Company's Board of Directors authorized an incentive program in the form of warrants for a total of up to 1,600,000 shares of Rambus common stock (the "DRAM incentive warrants") to be issued to various RDRAM partners upon the achievement of certain product qualification and volume production targets. The warrants, to be issued at the time the targets are met, have an exercise price of $2.50 per share and a life of five years. They vest and become exercisable on the same basis as the Intel warrant, which will result in a non-cash charge to the statement of operations based on the fair value of the warrants at the time the achievement of the Intel milestones becomes probable. As of March 31, 2001, a total of 1,520,000 of these warrants had been issued.
In the first quarter of fiscal 2000, the Company granted to its Chief Executive Officer and to its President a combined total of 2,000,000 Common Stock Equivalents (CSEs) and to its employees approximately 2,160,000 options to purchase Rambus common stock for $2.50 per share. Vesting of these CSEs and options was contingent upon the achievement of key indicators of success for Rambus. Vesting for a portion of these CSEs and options was contingent on an increase in the price of Rambus common stock to greater than $50 per share for 30 consecutive days. This target was achieved by the end of the second quarter of fiscal 2000, and resulted in a $171.1 million employee stock-related compensation charge taken in the same quarter. Except for a $1.2 million employer payroll tax liability, this was a non-cash charge. The remaining CSEs and options will vest on the same basis as the Intel and DRAM incentive warrants, which will result in another almost entirely non-cash charge to the statement of operations based on the fair value of the CSEs and options at the time achievement of the Intel milestones becomes probable.
RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
5. Income Taxes
The Company recorded a provision for income taxes of $5.4 million and $14.1 million in the second quarter and first six months of fiscal 2001, respectively, compared to a provision of $1.6 million and $3.0 million in the comparable periods of fiscal 2000, respectively. The estimated federal and state combined rates on pretax income, excluding non-cash employee stock-related compensation expense, for the first half of fiscal 2001 and fiscal 2000 were 40% and 35%, respectively. The Company's effective tax rate differs from the statutory rate due to timing differences related to the recognition of contract and royalty revenues for tax and financial reporting purposes.
6. Net Income (Loss) Per Share
Net income (loss) per share is computed in accordance with Financial Accounting Standards Board Statement No. 128 (SFAS 128), "Earnings Per Share," which requires the presentation of basic and diluted net income (loss) per share. Basic net income (loss) per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated using the weighted average number of common shares and common stock equivalents, if dilutive, outstanding during the period. In periods of net loss, common stock equivalents are excluded from the diluted loss per share calculation since their effect is antidilutive. In the three and six months ended March 31, 2000, the numbers of common stock equivalents excluded from diluted loss per share calculations because they are antidilutive are 12,502,848 and 10,268,120, respectively. Net income (loss) per share is calculated as follows (in thousands, except per share data; unaudited):
Three Months Ended Six Months Ended
March 31, March 31,
------------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss)...................................... $ 8,042 $(166,841) $ 21,082 $(164,376)
======== ========= ======== =========
Weighted average common shares outstanding............. 99,087 95,557 98,816 95,296
Additional dilutive common stock equivalents........... 8,501 -- 9,268 --
-------- --------- -------- ---------
Diluted shares outstanding............................. 107,588 95,557 108,084 95,296
======== ========= ======== =========
Net income (loss) per share - basic.................... $ 0.08 $ (1.75) $ 0.21 $ (1.72)
======== ========= ======== =========
Net income (loss) per share - diluted.................. $ 0.07 $ (1.75) $ 0.20 $ (1.72)
======== ========= ======== =========
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs, and certain assumptions made by the Company's management. These statements include those concerning the following: the understanding that additional cancellations of contracts of a magnitude experienced in the second quarter of fiscal 2001 are unlikely; the likelihood that the Company will continue to book additional contracts, especially with existing licensees for newer versions of Rambus technologies; the expectation that contract revenues will continue to decline over time; the expectation that increasing RDRAM-compatible IC shipments will more than offset continuing average selling price (ASP) declines in the near term; the belief that the sharp decline in ASPs for SDRAM-compatible ICs will continue, and possibly even accelerate, which will reduce the Company's royalties and total revenues in future periods absent an increase in unit volumes or additional licensees; the belief that the potential to generate RDRAM-compatible royalties for the balance of fiscal 2001 will be largely dependent upon system sales by PC, workstation and digital TV manufacturers and Sony; the expectation that revenues derived from international licenses will continue to represent a significant portion of the Company's total revenues in the future and that the Company will continue to experience significant revenue concentration for the foreseeable future; the belief that the level of contract revenues will continue to fluctuate in the future, both in absolute dollars and as a percentage of revenues; the expectation that research and development expenses will increase over time; the belief that the rate of increase of, and the percentage of revenues represented by, research and development expenses in the future will vary from period to period; the expectation that marketing, general and administrative expenses will increase in the future; the belief that the rate of increase of, and the percentage of revenues represented by marketing, general and administrative expenses in the future will vary from period to period; the expectation that higher cash balances will generate increased income in the future; the anticipation that existing cash balances will be adequate to meet the Company's cash needs for at least the next 12 months; and the intention to protect and vigorously defend the Company's patents in connection with pending legal proceedings. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks include market acceptance of the Company's technologies; systems companies' acceptance of RDRAM-compatible ICs produced by the Company's licensees; market acceptance of the products of systems companies which have adopted the Company's technologies; unit volumes of RDRAM-compatible ICs that will be purchased in the future; level of royalty-bearing revenues that the Company will receive due to these applications; delays, lack of cost- competitiveness or other problems in the introduction or performance of RDRAM- compatible ICs or products which include RDRAM-compatible ICs including, but not limited to, RDRAMs, RDRAM-compatible chipsets and the Sony PlayStation2; the introduction of a competitive memory interface which is perceived to be more cost-effective, such as DDR SDRAM; future dependence upon the PC main memory market and Intel; the loss of any strategic relationships with systems companies or licensees; announcements or introductions of new technologies or products by the Company or the Company's competitors; delays, lack of cost-competitiveness or other problems in the introduction or performance of enhancements or future generations of the Company's current technologies or new products; fluctuations in the market price and demand for DRAMs and logic ICs into which the Company's technologies have been incorporated, especially a severe drop in the price of SDRAMs; competitive pressures resulting in lower contract revenues or royalty rates; changes in the Company's, licensees' and system companies' development and product introduction schedules and levels of expenditure on research and development and marketing; personnel changes, particularly those involving engineering and technical personnel; potential adverse determinations in current and potential additional litigation involving the Company's intellectual property; costs associated with protecting the Company's intellectual property; changes in Company strategies; foreign exchange rate fluctuations or other changes in the international business climate; and general economic trends. A more detailed discussion of risks faced by the Company is set forth in the Company's 2000 Annual Report on Form 10-K filed with the SEC. The Company assumes no obligation to update the forward-looking statements or the discussion of risks.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in the Company's consolidated condensed statements of operations and the percentage change of such items between periods:
Percent of Total Revenues,
Three Months Ended Percent
March 31, Change
-------------------------- 2001 v.
2001 2000 2000
---- ---- ----
Revenues:
Contract revenues....................... 24.3 % 77.7 % (37.8) %
Royalties............................... 75.7 22.3 575.6
------ ---------
Total revenues....................... 100.0 % 100.0 % 99.1 %
====== =========
Costs and expenses:
Cost of contract revenues............... 9.8 19.2 1.3
Research and development................ 15.2 18.5 64.1
Marketing, general and administrative... 40.3 32.3 148.5
Employee stock-related compensation
expense...................... -- 1,090.0 *
------ ---------
Total costs and expenses............. 65.3 1,160.0 *
------ ---------
Operating income (loss)................... 34.7 (1,060.0) *
Other income, net......................... 8.2 7.4 119.1
------ ---------
Income (loss) before income taxes......... 42.9 (1,052.6) *
Provision for income taxes................ 17.2 10.4 227.9
------ ---------
Net income (loss)......................... 25.7% (1,063.0)% * %
====== =========
Percent of Total Revenues,
Six Months Ended Percent
March 31, Change
-------------------------- 2001 v.
2001 2000 2000
---- ---- ----
Revenues:
Contract revenues...................... 23.4 % 77.8 % (28.2) %
Royalties.............................. 76.6 22.2 723.6
------ -------
Total revenues...................... 100.0 % 100.0 % 138.6 %
====== =======
Costs and Expenses:
Cost of contract revenues.............. 8.0 23.7 (19.4)
Research and development............... 12.6 18.5 62.9
Marketing, general and administrative.. 33.1 30.6 158.0
Employee stock-related compensation
expense..................... -- 618.9 *
------ -------
Total costs and expenses............ 53.7 691.7 *
------ -------
Operating income (loss).................. 46.3 (591.7) *
Other income, net........................ 7.0 7.8 113.9
------ -------
Income (loss) before income taxes........ 53.3 (583.9) *
Provision for income taxes............... 21.3 10.7 374.5
------ -------
Net income (loss)........................ 32.0 % (594.6)% * %
====== =======
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Revenues. Total revenues for the three and six months ended March 31, 2001 increased 99.1% and 138.6% to $31.2 million and $66.0 million, respectively, over the comparable three- and six-month periods in the previous year.
Contract revenues decreased 37.8% to $7.6 million (24.3% of total revenues) and 28.2% to $15.5 million (23.4% of total revenues) in the second quarter and first six months of fiscal 2001, respectively, over the comparable periods of fiscal 2000 due largely to the expiration of revenue recognition periods for several RDRAM contracts. Included in the second quarter of fiscal 2001 was approximately $2.1 million of remaining deferred revenue from a contract which was cancelled due to the licensee's reduced activities in the merchant DRAM market, compared to $4.4 million of such revenue in the comparable period of the previous year. Such a cancellation results in the termination of all obligations on RDRAM development for both parties. Since all license and engineering payments already received are nonrefundable, the balance of deferred revenue on this contract was recognized upon cancellation in the second quarter. The Company does not expect additional cancellations of this magnitude in the future.
The Company does anticipate continuing to book additional contracts, especially contracts with existing licensees for newer versions of Rambus technologies. However, it is anticipated that contract revenues will continue to decline over time as the value of contracts for which the revenue recognition periods have expired exceeds the value of new contracts. The Company's past success in signing licensees has reduced the number of potential new licensees, which also contributes to the anticipated continuing decline in contract revenues.
Royalties in the second quarter and first half of fiscal 2001 were $23.7 million (75.7% of total revenues) and $50.5 million (76.6% of total revenues), respectively, more than six and eight times the $3.5 million and $6.1 million reported in the comparable periods of fiscal 2000. Revenues in the fiscal 2001 periods include increased royalties from licensees' shipments of RDRAMs and controllers that connect to RDRAMs (RDRAM-compatible ICs) as wider acceptance increased RDRAM market share and strengthened the shipment ramp into the desktop PC, workstation, digital TV and Sony PlayStation2 markets. As of the end of the second quarter of fiscal 2001, more than 200 computers, game consoles, TVs and other electronic systems worldwide were using RDRAM-compatible ICs. Average selling prices (ASPs) for RDRAMs continued to decline as the Company worked closely with RDRAM licensees to reduce costs. In the fiscal 2001 periods, these ASP declines were more than offset by increasing unit volumes, which resulted in higher royalties from RDRAM-compatible ICs. In the case of RDRAM-compatible ICs, declining ASPs are clearly to the Company's long-term benefit as RDRAMs continue to gain market share. The Company anticipates that increasing unit volumes will more than offset continuing ASP declines in the near term.
The second of the Company's two royalty sources, royalties from licensees for the use of Rambus patents in SDRAMs, DDR SDRAMs and logic products which directly control these memories (SDRAM-compatible ICs), also contributed significantly to the overall increases in royalties and total revenues. The Company recognized its first ever royalties from SDRAM-compatible ICs in the fourth quarter of fiscal 2000. Included in the second quarter of fiscal 2001 are royalties from the Company's first logic-only licensee for SDRAM-compatible controllers, Matsushita Electronics Corporation, known worldwide for its Panasonic brand products. ASPs for SDRAM-compatible ICs have declined sharply in recent periods and the Company expects this trend to continue and even to accelerate. In the absence of increasing unit volumes or additional licensees,
continued declines in SDRAM-compatible ASPs will likely reduce the Company's royalties and total revenues in future periods.
The Company anticipates that its potential to generate RDRAM-compatible royalties for the balance of fiscal 2001 will be largely dependent upon system sales by PC, workstation and digital TV manufacturers and Sony. The markets addressed by systems companies using RDRAM-compatible ICs, including those in the PC and video game console businesses, are characterized by extreme volatility, frequent new product introductions and rapidly shifting consumer preferences, and seasonality, and there can be no assurance as to the unit volumes of RDRAM-compatible ICs that will be purchased in the future or the level of royalty-bearing revenues that the Company will receive due to these applications. None of the systems companies currently incorporating RDRAM- compatible technologies into their products is contractually obligated to continue using RDRAM-compatible ICs. Royalties from both RDRAMs and SDRAMs are subject to extreme fluctuations in the market prices for DRAMs. Given the concentration of royalties from a limited number of sources, it is likely that royalties will continue to vary greatly from period to period.
As of March 31, 2001, the Company had 27 RDRAM-compatible licensees and eight SDRAM-compatible licensees. Because all of the Company's revenues are derived from its relatively small number of licensees, the Company's revenues tend to be highly concentrated. In the second quarter and first six months of fiscal 2001, the Company's top five licensees accounted for 76% of total revenues. During the second quarter of fiscal 2001, four customers accounted for 10%, 11%, 17% and 30% of total revenues. During the first six months of fiscal 2001, the same four customers accounted for 12%, 14%, 18%, and 27% of total revenues. During the second quarter and first six months of fiscal 2000, one customer accounted for 32% and 20% of total revenues, respectively; and a second customer accounted for 13% and 14%. The Company expects that it will continue to experience significant revenue concentration for the foreseeable future. However, the particular licensees which account for revenue concentration may vary from period to period depending on the addition of new contracts, the expiration of deferred revenue schedules under existing contracts, and the volumes and prices at which the licensees sell RDRAM-compatible and SDRAM-compatible ICs to systems companies in any given period.
International revenues constituted 93% and 89% of total revenues in the second quarter and first six months of fiscal 2001, respectively, and 80% and 75% in the comparable periods of fiscal 2000. The Company expects that revenues derived from international licensees will continue to represent a significant portion of its total revenues in the future. All of the revenues from international licensees to date have been denominated in United States dollars.
Substantially all RDRAM-compatible license fees and engineering service fees are bundled together as contract fees because the Company generally does not provide or price these components separately. Since these contracts cover complete technologies developed and supported by the Company, they also generally include rights to upgrades and enhancements. Accordingly, Rambus recognizes contract revenues ratably over the period during which post-contract customer support is expected to be provided. The excess of contract fees received over revenue recognized is shown on the Company's balance sheet as deferred revenue.
SDRAM-compatible licenses also generally provide for the payment of license fees as well as quarterly royalties. The license fees, which generally are millions of dollars, include compensation for use of Rambus patents from the time the Company notifies the licensee of potential infringement. Accordingly, Rambus classifies these fees as royalty revenues, which are recognized ratably over the
five-year contract period. The excess of SDRAM-compatible license fees received over royalty revenue recognized is shown on the Company's balance sheet as deferred revenue. As of March 31, 2001, the Company's deferred revenue from both RDRAM-compatible and SDRAM-compatible licenses was $45.3 million, substantially all of which is scheduled to be recognized in varying amounts over the next five years.
Engineering Costs. Engineering costs, consisting of cost of contract revenues and research and development expenses, increased 32.1% to $7.8 million (25.0% of total revenue) and 16.7% to $13.6 million (20.6% of total revenue) in the second quarter and first six months of fiscal 2001, respectively, over the comparable periods of fiscal 2000. The increase in absolute dollars is primarily attributable to higher operating costs from new office facilities to which the Company relocated at the beginning of the second quarter of fiscal 2001 as well as the addition of engineering personnel to support the Company's technology roadmap improvements and new initiatives in the communications market and chip- to-chip connections.
Cost of Contract Revenues. Cost of contract revenues as a percentage of total revenues decreased to 9.8% in the second quarter of fiscal 2001 from 19.2% in the comparable period of fiscal 2000, and decreased to 8.0% in the first half of fiscal 2001 from 23.7% in the comparable period of fiscal 2000. Cost of revenues accounted for 39.1% of total engineering costs in the second quarter of fiscal 2001, down from 51.0% in the comparable period of fiscal 2000. The decrease in cost of contract revenues as a percentage of total revenues and as a percentage of total engineering costs is primarily due to the successful launch and ramp of RDRAM-compatible technologies into the PC main memory market resulting in a reduction in engineering support efforts, as well as the effect of increasing royalty revenues. The Company believes that the level of cost of contract revenues will continue to fluctuate in the future, both in absolute dollars and as a percentage of revenues, as new generations of RDRAM-compatible ICs go through the normal development and implementation phases.
Research and Development. Research and development expenses as a percentage of total revenues decreased to 15.2% in the second quarter of fiscal 2001 from 18.5% in the comparable period of fiscal 2000, and decreased to 12.6% in the first half of fiscal 2001 from 18.5% in the comparable period of fiscal 2000 due to the increase in the Company's royalty revenues. Research and development expenses accounted for 60.9% of total engineering costs in the second quarter of fiscal 2001, up from 49.0% in the comparable period of fiscal 2000 as the Company was able to shift engineering resources from support of the PC market ramp to development of technology roadmap improvements and new chip connection activities for the networking market. Research and development expenses include approximately $221,000 and $442,000 of acquisition-related costs in the second quarter and first six months of fiscal 2001, respectively, and $230,000 and $373,000 in the comparable periods of fiscal 2000. These acquisition costs relate to the Company's fiscal 2000 purchase of the intellectual property assets of a small company responsible for developing a SerDes cell for network applications. The acquisition was accounted for as a purchase, which resulted in goodwill and deferred compensation costs that are being amortized over periods ranging from 2 to 5 years. The Company expects research and development expenses to increase over time as it enhances and improves its technologies and applies them to new generations of ICs. The rate of increase of, and the percentage of revenues represented by, research and development expenses in the future will vary from period to period based on the research and development projects underway and the change in engineering headcount in any given period, as well as the rate of change in the Company's total revenues.
Marketing, General and Administrative. Marketing, general and administrative expenses increased 148.5% to $12.6 million and 158.0% to $21.8 million in the second quarter and first six months of fiscal 2001, respectively, from the comparable periods of fiscal 2000. These expenses also increased as a percentage of revenues from 32.3% in the second quarter of fiscal 2000 to 40.3% in the same period of fiscal 2001, and from 30.6% in the first half of fiscal 2000 to 33.1% in the same period of fiscal 2001. The increase in marketing, general and administrative expenses primarily represents increased litigation costs associated with the defense of the Company's intellectual property. Litigation costs were $7.3 million in the second quarter of fiscal 2001 and approximately $700,000 in the comparable period of fiscal 2000. Trial delays in several of the pending cases as well as additional discovery required due to the late production of documents by Infineon in the U.S. case contributed to the significant increase in expenses in the fiscal 2001 period. In addition, at the beginning of the second quarter of fiscal 2001, the Company began to incur higher rent and other ongoing operating costs associated with relocating its corporate headquarters to a larger facility to accommodate long-term growth. The Company expects marketing, general and administrative expenses to increase in the future as the Company continues to devote significant resources upon protecting its intellectual property rights through legal activities, marketing its technologies, and assisting systems companies with adapting these technologies to new generations of products. The rate of increase of, and the percentage of revenues represented by, marketing, general and administrative expenses in the future will vary from period to period based on the legal, advertising, trade show, and other marketing and administrative activities undertaken and the change in sales, marketing and administrative headcount in any given period, as well as the rate of change in the Company's total revenues.
Other Income, Net. Other income consists primarily of interest income from the Company's cash investments. Other income increased to $2.6 million in the second quarter of fiscal 2001 from $1.2 million in the comparable period of fiscal 2000, and to $4.6 million in the first six months of fiscal 2001 from $2.2 million in the comparable period of fiscal 2000 primarily due to a combination of higher invested balances and slightly higher interest rates. In addition, other income in the second quarter of fiscal 2001 includes the first profits recognized from the Company's sublease of its former office facilities in Mountain View, California. The Company expects higher cash balances to generate increased interest income in the future.
Provision for Income Taxes. The Company recorded a provision for income taxes of $5.4 million and $14.1 million in the second quarter and first six months of fiscal 2001, respectively, compared to a provision of $1.6 million and $3.0 million in the comparable periods of fiscal 2000, respectively. The estimated federal and state combined rates on pretax income, excluding non-cash employee stock-related compensation expense, for the first half of fiscal 2001 and fiscal 2000 were 40% and 35%, respectively. The Company's effective tax rate differs from the statutory rate due to timing differences related to the recognition of contract and royalty revenues for tax and financial reporting purposes.
Common Stock Split
In March 2000, the Company's board of directors approved a four-for-one split of Rambus' common stock, subject to stockholder approval of an increase in authorized common stock. On May 23, 2000, the Company's stockholders approved an increase in the Company's authorized shares of common stock to 500 million shares. The stock began trading on a split-adjusted basis on June 15, 2000. All references in this Form 10-Q to earnings per share, the number of common shares,
contingent warrants, common stock equivalents, and options, and the share price have been retroactively restated to reflect the common stock split and the increase in authorized common stock.
Contingent Warrants, Common Stock Equivalents, and Options
In November 1996, the Company entered into an agreement with Intel Corporation for the development of high-speed semiconductor memory interface technologies. In January 1997, as part of this agreement, the Company issued a warrant to purchase 4,000,000 shares of common stock of the Company at a purchase price of $2.50 per share (the "Intel warrant"). This warrant will become exercisable only upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM-based chipsets (the "Intel milestones"). The warrant will expire no later than the eighth (8th) anniversary of its issuance. At the time that achievement of the milestones becomes probable, a non-cash charge will be recorded in the statement of operations based on the fair value of the warrant.
In October 1998, the Company's Board of Directors authorized an incentive program in the form of warrants for a total of up to 1,600,000 shares of Rambus common stock (the "DRAM incentive warrants") to be issued to various RDRAM partners upon the achievement of certain product qualification and volume production targets. The warrants, to be issued at the time the targets are met, have an exercise price of $2.50 per share and a life of five years. They vest and become exercisable on the same basis as the Intel warrant, which will result in a non-cash charge to the statement of operations based on the fair value of the warrants at the time the achievement of the Intel milestones becomes probable. As of March 31, 2001, a total of 1,520,000 of these warrants had been issued.
In the first quarter of fiscal 2000, the Company granted to its Chief Executive Officer and to its President a combined total of 2,000,000 Common Stock Equivalents (CSEs) and to its employees approximately 2,160,000 options to purchase Rambus common stock for $2.50 per share. Vesting of these CSEs and options was contingent upon the achievement of key indicators of success for Rambus. Vesting for a portion of these CSEs and options was contingent on an increase in the price of Rambus common stock to greater than $50 per share for 30 consecutive days. This target was achieved by the end of the second quarter of fiscal 2000, and resulted in a $171.1 million employee stock-related compensation charge taken in the same quarter. Except for a $1.2 million employer payroll tax liability, this was a non-cash charge. The remaining CSEs and options will vest on the same basis as the Intel and DRAM incentive warrants, which will result in another almost entirely non-cash charge to the statement of operations based on the fair value of the CSEs and options at the time achievement of the Intel milestones becomes probable.
Liquidity and Capital Resources
As of March 31, 2001, the Company had cash and cash equivalents and marketable securities of $151.1 million, including restricted cash of $4.5 million and a long-term marketable securities component of $8.5 million. As of the same date, the Company had total working capital of $138.9 million, including a short-term component of deferred revenue of $17.5 million.
The Company's operating activities provided net cash of $26.2 million in the first six months of fiscal 2001 compared to net cash provided of $807,000 in the comparable period of fiscal 2000. In the fiscal 2001 period, net cash provided by operating activities consisted mainly of net income adjusted for non-cash items, offset by a decrease in deferred revenue. The decrease in deferred revenue represents contract revenues recognized in the period in excess of new contract billings.
Net cash used in investing activities was $5.5 million in the first six months of fiscal 2001 compared to $12.6 million in the comparable period of fiscal 2000. Net cash used in investing activities in the fiscal 2001 period consisted primarily of purchases of investments and property and equipment.
Net cash provided by financing activities was $8.6 million in the first six months of fiscal 2001 compared to $4.3 million in the comparable period of fiscal 2000. Proceeds from the sale of common stock under the Company's employee stock purchase and option plans are the primary source of net cash provided by financing activities. The Company presently anticipates that existing cash balances will be adequate to meet its cash needs for at least the next 12 months.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk for changes in interest rates relates primarily to its investment portfolio. The Company places its investments with high credit issuers and by policy limits the amount of credit exposure to any one issuer. As stated in its policy, the Company will ensure the safety and preservation of its invested funds by limiting default risk and market risk. The Company has no investments denominated in foreign country currencies and therefore is not subject to foreign exchange risk.
The Company mitigates default risk by investing in high credit quality securities and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.
The table below presents the carrying value and related weighted average interest rates for the Company's investment portfolio. The carrying value approximates fair value at March 31, 2001.
Average Rate
of Return at
Carrying March 31,
Value 2001
(in thousands) (annualized)
Investment portfolio:
--------------------
Cash equivalents....................................... $ 83,880 5.1%
Corporate notes and bonds.............................. 20,515 6.9%
United States government debt securities............... 16,800 5.2%
Foreign debt securities................................ 9,500 6.3%
Commercial paper....................................... 7,541 5.3%
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Total investment portfolio.......................... $138,236
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On August 8, 2000, the Company filed suit in the U.S. District Court for the Eastern District of Virginia against Infineon Technologies AG ("Infineon") and its North American subsidiary for infringement of two U.S. patents. In addition, on August 7, 2000, the Company filed suit in Mannheim, Germany against Infineon for infringement of one European patent. The suits seek injunctions to halt the sale, manufacture and use of Infineon SDRAM and DDR SDRAM memory devices that infringe the Rambus patents. On September 25, 2000, Infineon filed counterclaims against the Company in the U.S. case (USDC Virginia Civil Action No.: 3:00CV524) seeking a declaratory judgment that the two asserted patents are invalid and not infringed and further claiming contributory infringement by the Company of two Infineon U.S. patents. In addition, Infineon also asserts breach of contract and fraud claims in connection with the Company's participation in an industry standards-setting group known as JEDEC. The Infineon counterclaims seek damages based on the alleged contributory infringement, injunctions to halt future infringement, punitive damages based on the alleged fraud and the award to Infineon of a royalty-free license to the Rambus patents. In October 2000, the Company amended its complaint to assert infringement of two additional U.S. patents. In January 2001, Infineon amended its answer and counterclaims to include a request for a declaratory judgment that all four asserted Rambus patents are invalid and not infringed. In addition, Infineon withdrew all contributory patent infringement claims against the Company relating to Infineon's U.S. patents. The Company intends to pursue its own claims and vigorously defend against Infineon's counterclaims. Trial began in the U.S. case on April 23, 2001. In the German case, trial is scheduled for May 18, 2001.
On August 28, 2000, Micron Technology, Inc. ("Micron") filed suit against the
Company in the U.S. District Court in Delaware (USDC Delaware Civil Action No.:
00-792-RRM). The suit asserts violations of federal antitrust laws, deceptive
trade practices, breach of contract, fraud and negligent misrepresentation in
connection with the Company's participation in JEDEC. Based on these
allegations, the suit seeks a declaration of monopolization by the Company,
compensatory and punitive damages, a declaratory judgment that eight Rambus
patents are invalid and not infringed and the award to Micron of a royalty-free
license to the Rambus patents. In February 2001, the Company filed its answer
and counterclaims, whereby the Company disputes Micron's claims and asserts
infringement of eight U.S. patents. The Company intends to pursue its own
claims and vigorously defend against Micron's claims. The U.S. case is
currently in the discovery phase.
In September 2000, the Company filed suit against Micron in Germany, France, Great Britain and Italy for infringement of a European patent. The French and Italian actions included court-sanctioned seizure of documents, samples and mask sets from Micron facilities. The German suit has been scheduled for trial on October 5, 2001. The French suit is in an early phase. The British suit has been temporarily stayed. In the Italian case, although the items seized were ordered returned based on procedural grounds, the Italian court's decision on Micron's liability under the European patent is anticipated in May 2001.
On August 29, 2000, Hyundai Electronics Industries Co., Ltd. ("Hyundai") and various subsidiaries filed suit against the Company in the U.S. District Court for the Northern District of California (USDC Northern District of California Case No.: 00-20905 PVT). The suit asserts breach of contract in connection with the Company's participation in JEDEC and seeks a declaratory judgment that eleven Rambus patents are invalid and not infringed by Hyundai. In November 2000,
Hyundai amended its complaint to further assert violations of federal antitrust laws, deceptive trade practices, breach of contract, fraud and negligent misrepresentation in connection with the Company's participation in JEDEC. Based on these allegations, the suit seeks a declaration of monopolization by the Company as well as compensatory and punitive damages. In February 2001, the Company filed its answer and counterclaims, whereby the Company disputes Hyundai's claims and asserts infringement of 11 U.S. patents. The Company intends to pursue its own claims and vigorously defend against Hyundai's claims. The U.S. case is currently in the discovery phase.
In September 2000, the Company filed suit against Hyundai in Germany, France and Great Britain for infringement of a European patent. The French suit included court-sanctioned seizure of documents and samples from a Hyundai facility. The German suit has been scheduled for trial on October 5, 2001. The French suit is in an early phase. The British suit has been temporarily stayed.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on January 30, 2001 (the "Annual Meeting"). At the Annual Meeting, stockholders voted on two matters: (i) the election of three Class II directors for a term of two years expiring in 2003, and (ii) the ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ending September 30, 2001. The stockholders elected management's nominees as the Class II directors in an uncontested election and ratified the appointment of the independent accountants by the following votes, respectively:
(i) Election of Class II directors for a term of two years expiring in 2003:
Votes For Votes Withheld
---------- --------------
William Davidow 81,365,948 296,227
P. Michael Farmwald 81,368,141 294,034
Geoff Tate 81,275,706 386,469
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The Company's Board of Directors is currently comprised of seven members who are divided into two classes with overlapping two-year terms. The term for Class I directors (Bruce Dunlevie, Charles Geschke, Mark Horowitz, and David Mooring) will expire at the meeting of stockholders to be held in 2002.
(ii) Ratification of appointment of PricewaterhouseCoopers LLP as independent accountants:
Votes For Votes Against Abstentions ------------ ------------- ----------- 81,560,612 47,847 53,716 |
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant filed June 14, 2000, filed herewith.
(b) Reports on Form 8-K
None.
Items 2, 3, and 5 are not applicable and have been omitted.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RAMBUS INC.
Date: May 4, 2001 By: /s/ Gary Harmon
------------ --------------------------------
Gary Harmon,
Senior Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
RAMBUS INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is Rambus Inc.
2. The Amended and Restated Certificate of Incorporation of the Corporation as filed on May 29, 1997 (the "Certificate of Incorporation") is hereby amended by deleting in its entirety the first paragraph of Article FOURTH thereof and by substituting in lieu of said paragraph the following new paragraph:
"IV. This Corporation is authorized to issue two classes of stock to be designated, respectively, `Common Stock' and `Preferred Stock.' The total number of shares which the Corporation is authorized to issue is five hundred five million (505,000,000) shares. Five hundred million (500,000,000) shares shall be Common Stock, each having a par value of one- tenth of one cent ($0.001). Five million (5,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($0.001), 160,000 shares of which shall be designated Series E Participating Preferred Stock ("Series E Preferred") and 4,840,000 shares of which shall be undesignated."
In addition, the Certificate of Incorporation is hereby further amended by inserting the following paragraph as the second paragraph of Article FOURTH thereof:
"Upon the effectiveness of this Certificate of Amendment, every share of Common Stock outstanding or held by the Corporation in its treasury shall be changed and reclassified into four (4) shares of Common Stock, $0.001 par value per share, which shares shall be fully paid and nonassessable shares of Common Stock of the Corporation."
[remainder of page intentionally left blank]
3. The amendment of the certificate of incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
Signed this 14th day of June, 2000.
/s/ Edward Larsen
---------------------------------
Edward Larsen, Sr. Vice President
Administration
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