UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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 0-17739
RAMTRON INTERNATIONAL CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0962308
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1850 Ramtron Drive, Colorado Springs, CO 80921
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (719) 481-7000
Indicate by check mark whether 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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value - 22,298,385 shares as of November 11, 2004.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Page-1
RAMTRON INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value and share amounts)
Sept. 30, Dec. 31,
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,059 $ 5,303
Accounts receivable, less allowances
of $251 and $215, respectively 8,918 5,981
Inventories 4,277 4,650
Other current assets 132 291
Assets of discontinued operation -- 2,416
--------- ---------
Total current assets 19,386 18,641
Property, plant and equipment, net 3,941 4,195
Intangible assets, net 7,863 6,193
Other assets 474 616
--------- ---------
Total assets $ 31,664 $ 29,645
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,744 $ 3,913
Accrued liabilities 2,531 1,041
Deferred revenue 1,332 1,395
Current portion of long-term promissory notes, net
of unamortized discount of $7 and $293,
respectively 493 2,147
Liabilities of discontinued operation 239 1,418
--------- ---------
Total current liabilities 7,339 9,914
Deferred revenue 5,264 6,020
Long-term promissory notes, net of unamortized
discount of $1,277 and $1,491, respectively 4,638 2,669
--------- ---------
Total liabilities 17,241 18,603
--------- ---------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 authorized:
22,251,177 and 22,191,225 shares issued and
outstanding, respectively 223 222
Additional paid-in capital 235,024 234,909
Accumulated deficit (220,824) (224,089)
--------- ---------
Total stockholders' equity 14,423 11,042
--------- ---------
Total liabilities and stockholders' equity $ 31,664 $ 29,645
========= =========
See accompanying notes to consolidated financial statements.
Page-2
RAMTRON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Revenue:
Product sales $14,687 $ 7,236 $41,746 $26,993
License and development fees 179 117 538 351
Royalties 164 155 582 381
Customer-sponsored research
and development 170 154 551 976
-------- -------- -------- --------
15,200 7,662 43,417 28,701
-------- -------- -------- --------
Costs and expenses:
Cost of product sales 8,608 4,611 24,777 16,133
Research and development 1,390 1,729 4,174 4,362
Customer-sponsored research
and development 195 138 585 830
Sales, general and administrative 3,385 2,398 9,234 7,735
Impairment of goodwill -- -- -- 3,843
-------- -------- -------- --------
13,578 8,876 38,770 32,903
-------- -------- -------- --------
Operating income (loss) from
continuing operations 1,622 (1,214) 4,647 (4,202)
Interest expense, related party (84) (132) (329) (342)
Interest expense, other (222) (252) (673) (637)
Other income 9 5 27 22
-------- -------- --------- --------
Income (loss) from
continuing operations before
income tax provision 1,325 (1,593) 3,672 (5,159)
Income tax provision (34) -- (55) --
-------- -------- --------- --------
Income (loss) from continuing
operations 1,291 (1,593) 3,617 (5,159)
Loss from discontinued operation -- (702) (352) (4,913)
-------- -------- --------- --------
Net income (loss) $ 1,291 $(2,295) $ 3,265 $(10,072)
======== ======== ========= =========
Page-3
Net income (loss) per share:
Basic:
Income (loss) from continuing
operations $ 0.06 $ (0.07) $ 0.16 $ (0.23)
Loss from discontinued operation -- $ (0.03) $ (0.01) $ (0.22)
-------- -------- -------- --------
Total $ 0.06 $ (0.10) $ 0.15 $ (0.45)
======== ======== ======== ========
Diluted:
Income (loss) from continuing
operations $ 0.06 $ (0.07) $ 0.15 $ (0.23)
Loss from discontinued operation -- $ (0.03) $ (0.01) $ (0.22)
-------- -------- -------- --------
Total $ 0.06 $ (0.10) $ 0.14 $ (0.45)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 22,251 22,148 22,215 22,138
======== ======== ======== ========
Diluted 23,459 22,148 23,571 22,138
======== ======== ======== ========
Page-4
RAMTRON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(Amounts in thousands)
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $ 3,265 $(10,072)
Adjustments used to reconcile net income (loss)
to net cash provided by operating activities:
Loss of discontinued operation 352 4,913
Depreciation and amortization 972 863
Amortization of debt discount 500 454
Imputed interest on note payable 50 --
Provision for inventory write-off 150 90
Loss on abandonment of intangible assets 56 157
Gain on sale of equipment (23) (11)
Impairment of goodwill -- 3,843
Changes in assets and liabilities:
Accounts receivable (2,937) 3,421
Inventories 223 2,660
Accounts payable and accrued liabilities 321 (335)
Deferred revenue (819) (1,633)
Other 290 75
--------- ---------
Net cash provided by operating activities 2,400 4,425
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (560) (225)
Proceeds from sale of assets 215 29
Intellectual property (121) (307)
Net cash provided by (used in) discontinued operation 885 (2,573)
--------- ---------
Net cash provided by (used in) investing
activities 419 (3,076)
--------- ---------
Cash flows from financing activities:
Proceeds from line of credit 750 --
Principal payments on debt (2,940) (800)
Issuance of common stock 127 85
--------- ---------
Net cash used in financing activities (2,063) (715)
--------- ---------
Net increase in cash and cash equivalents 756 634
Cash and cash equivalents, beginning of period 5,303 3,222
--------- ---------
Cash and cash equivalents, end of period $ 6,059 $ 3,856
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 250 $ 320
========= =========
Intellectual property acquired through
issuance of long-term debt $ 1,995 $ --
========= =========
See accompanying notes to consolidated financial statements.
Page-5
RAMTRON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
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NOTE 1. BASIS OF PRESENTATION AND MANAGEMENT OPINION
The accompanying consolidated financial statements at September 30, 2004 and
December 31, 2003 and for the three and nine months ended September 30, 2004
and 2003 have been prepared from the books and records of Ramtron
International Corporation (the Company) without audit. The statements reflect
all normal recurring adjustments, which in the opinion of the Company's
management, are necessary for the fair presentation of financial position,
results of operations and cash flows for the periods presented.
Certain information and disclosures normally included in financial statements
have been omitted under Securities and Exchange Commission regulations. It is
suggested that the accompanying financial statements be read in conjunction
with the Company's annual report on Form 10-K for the year ended December 31,
2003. The results of operations for the three and nine month periods ended
September 30, 2004 are not necessarily indicative of the operating results for
the full year.
Certain 2003 balances have been reclassified to conform to the current year
presentation.
NOTE 2. REVENUE RECOGNITION
The Company has historically recorded all shipments to distributors as
deferred revenue until shipped to the end customer because the Company did not
believe it had adequate historical data to make a reasonable estimate of the
amount of future returns as required under Statement of Financial Accounting
Standard No. 48, "Revenue Recognition When Right of Return Exists." During
the first quarter of 2003, the Company concluded that it had sufficient
shipment and return experience to allow for the recognition of revenue on
shipments to distributors at the time of shipment, along with a reserve for
estimated returns. Accordingly, during the first quarter of 2003, the Company
recognized an additional $1.3 million in product sales revenue that would have
been deferred prior to this change in estimate. The impact on gross margins
from this additional revenue was approximately $490,000 during the first
quarter of 2003.
NOTE 3. STOCK-BASED COMPENSATON
The Company accounts for employee stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25 (APB
No. 25), "Accounting for Stock Issued to Employees" and related
interpretations. All options granted under these plans have an exercise
price equal to the market value of the underlying common stock on the date of
grant; therefore, no stock-based compensation is reflected in net income
(loss). Had compensation cost for these plans been determined consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment of FASB Statement No. 123," the Company's net income (loss) for the
three and nine month periods ended September 30, 2004 and 2003 would have
changed to the following adjusted amounts:
Page-6
Three Months Ended
September 30,
-------------------------
2004 2003
-------- --------
(in thousands, except per share amounts)
Net income (loss)
As reported $1,291 $(2,295)
Pro forma 989 (2,460)
Net income (loss) per share:
As reported - basic and diluted $ 0.06 $ (0.10)
Pro forma - basic and diluted 0.04 (0.11)
Nine Months Ended
September 30,
-------------------------
2004 2003
-------- --------
(in thousands, except per share amounts)
Net income (loss)
As reported $3,265 $(10,072)
Pro forma 2,206 (10,754)
Net income (loss) per share
As reported:
- basic $ 0.15 $ (0.45)
- diluted 0.14 (0.45)
Pro forma
- basic $ 0.10 $ (0.49)
- diluted 0.09 (0.49)
For disclosure purposes, the fair value of stock-based compensation was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants during the three and nine months
ended September 30, 2004 and 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Risk free interest rate 3.36% 4.00% 3.12% 4.00%
Expected dividend yield 0% 0% 0% 0%
Expected lives 4.0 yrs 4.0 yrs 4.0 yrs 4.0 yrs
Expected volatility 108% 110% 108% 110%
The weighted average fair value per share of shares granted during the nine
months ended September 30, 2004 and 2003 was $2.65 and $1.62, respectively.
Page-7
NOTE 4. INVENTORIES
Inventories consist of:
Sept. 30, Dec. 31,
2004 2003
--------- --------
(in thousands)
Finished goods $1,972 $1,909
Work in process 2,873 3,191
Obsolescence reserve (568) (450)
------- -------
$4,277 $4,650
======= =======
NOTE 5. EARNINGS PER SHARE
The Company calculates its income (loss) per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
Under SFAS No. 128, basic net income (loss) per share is computed by dividing
reported net income (loss) available to common stockholders by weighted
average shares outstanding. Diluted net income (loss) per share reflects the
potential dilution assuming the issuance of common shares for all dilutive
potential common shares outstanding during the period. In periods where the
Company recorded a net loss, all potentially dilutive securities, including
warrants and stock options, would be anti-dilutive and thus, are excluded from
diluted loss per share.
Page-8
The following table sets forth the calculation of net income (loss) per common
share for the three and nine months ended September 30, 2004 and 2003 (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) applicable to
common shares $ 1,291 $(2,295) $ 3,265 $(10,072)
======== ======== ======== =========
Common shares outstanding:
Historical common shares
outstanding at beginning
of period 22,250 22,138 22,191 22,124
Weighted average common
shares issued during period 1 10 24 14
-------- -------- -------- ---------
Weighted average common shares at
end of period - basic 22,251 22,148 22,215 22,138
Effect of other dilutive securities:
Options 813 -- 893 --
Warrants 395 -- 463 --
-------- -------- -------- ---------
Weighted average common shares at
end of period - diluted 23,459 22,148 23,571 22,138
======== ======== ======== =========
Net income (loss) per share:
basic $ 0.06 $ (0.10) $ 0.15 $ (0.45)
======== ======== ======== =========
diluted $ 0.06 $ (0.10) $ 0.14 $ (0.45)
======== ======== ======== =========
As of September 30, 2004, the Company had equity instruments or obligations
that could create future dilution to the Company's common stockholders and are
not currently classified as outstanding common shares of the Company. The
following table details the shares of common stock that are excluded from the
calculation of earnings per share due to their impact being anti-dilutive:
Three and
Three Months Nine Months Nine Months
Ended Ended Ended
Sept. 30, 2004 Sept. 30, 2004 Sept. 30, 2003
-------------- -------------- --------------
(in thousands)
Warrants 725 725 2,349
Options 2,166 2,137 3,630
Convertible debentures 1,236 1,236 1,910
Page-9
NOTE 6. CONTINGENCIES
PATENT INTERFERENCE PROCEEDING. On April 6, 2004, the Company and National
Semiconductor Corporation (National) entered into an agreement to settle
their long standing patent interference dispute, which began in 1991 as a
patent interference proceeding that was declared in the United States Patent
and Trademark Office (the Patent Office) in regard to one of the Company's
issued United States patents. The patent involved covers a basic
ferroelectric memory cell design invention the Company believes is of
fundamental importance to its ferroelectric random access memory (FRAM)
business in the United States.
Under the terms of the settlement agreement Ramtron abandoned four of the
five claims in its existing patent, two of National's patent applications
relating to the interference claims were assigned to Ramtron and two others
were retained by National. National and Ramtron have agreed to cross
license any and all future patents that may mature from the four applications
at no additional cost to either company. As consideration for the assigned
patent applications and cross license provisions of the agreement, Ramtron
will pay National $2.5 million in equal annual installments of $250,000
through 2013. On March 31, 2004, the Company recorded an intangible
asset and current and long-term debt of approximately $1,955,000, the present
value of the annual installment payments. The Company has not recorded an
impairment of the existing patents held for the technology in dispute as the
Company believes, with the assignments and cross-license arrangements
discussed previously, it is in the same position, as it relates to the ability
to use the technology in dispute, prior to this resolution. In addition, the
Company believes the amounts capitalized related to these patents and licenses
will be recovered through future cash proceeds.
The fifth remaining count of interference will be sent to a Special Master for
a final ruling. Ramtron believes its business would not be materially
affected by an adverse judgment by the Special Master on the remaining count
of interference.
NOTE 7. LONG-TERM DEBT
On March 14, 2002, the Company signed an agreement to issue $8.0 million
of 5 year, 5% fixed rate, convertible debentures. The debentures are
convertible into the Company's common stock at a fixed conversion price of
$3.769, which is equal to 110% of the five-day volume weighted average price
(VWAP) of the Company's common stock prior to the transaction signing. The
debentures are secured by a Deed of Trust on the Company's headquarters
facility in Colorado Springs, Colorado and by a security interest in certain
of its accounts receivable and patents.
In addition, 700,435, 5-year common stock warrants were issued to the
investors with an initial exercise price of $4.28 per share. The warrants were
valued using the Black-Scholes option pricing model with a resulting total
value of approximately $1,773,000 at March 28, 2002. This amount is accounted
for as a discount to the outstanding debentures and is being amortized over
the remaining life of the debentures as a charge to interest expense. The
unamortized discount as of September 30, 2004 and December 31, 2003 was
approximately $852,000 and $1,183,000, respectively.
Page-10
As a result of the conversion terms of these debentures, a beneficial
conversion feature of $900,000 was created. This beneficial conversion
feature is recorded as an increase to additional paid-in capital and as a debt
discount to the outstanding debentures. This discount is being amortized over
the remaining life of the debentures as a charge to interest expense. The
unamortized discount as of September 30, 2004 and December 31, 2003 was
approximately $432,000 and $601,000, respectively.
The debentures contain covenants, which are customary for this type of
financing, including, without limitation, achieving a minimum amount of
earnings before interest, taxes, depreciation and amortization (EBITDA), as
defined in the debenture agreements, and not exceeding a defined level of
capital expenditures. As of June 30, 2003, the Company failed to meet the
minimum EBITDA covenant under the debenture agreements, which by the terms of
the debentures became an event of default on July 30, 2003 (the Default). On
August 18, 2003, the Company entered into a Waiver and Amendment to Debenture
Agreement (the Waiver Agreement) with the debenture holders. The Waiver
Agreement provided for a waiver of the Default as well as a waiver of all
remaining EBITDA covenants during 2003. In addition, the Waiver Agreement
required that the Company make quarterly principal payments to the debenture
holders over the following six quarters. Through September 30, 2004, the
Company has made principal payments totaling $3.3 million. To fulfill the
Company's Waiver Agreement obligations it will make a final quarterly
principal payment of $250,000 on December 31, 2004. The timing of amounts due
in 2004 under the Waiver Agreement have been adjusted to reflect the terms of
the Infineon Technologies AG (Infineon) release agreement entered into in
March 2004 (see Note 10 of the Notes to Consolidated Financial Statements).
If the Company fails to make the required final principal payment, the
debenture holders may elect to convert the missed payment amount to common
stock at a conversion price equal to 90% of the daily volume weighted moving
average for each of the 60 trading days following the notice of failure to pay
or can require all the amounts then outstanding be paid. The debenture
holders may elect to waive any quarterly redemption and during each of the
quarters ended June 30, 2004 and September 30, 2004, one of the debenture
holders elected to waive its right to receive its quarterly payment of
$125,000.
In addition, the Waiver Agreement provided for lowering the exercise price of
the 700,435 common stock warrants held by the debenture holders from $4.28 to
a price equal to 150% of the average closing bid price for the Company's
common stock for the 5-trading days immediately preceding the effective date
of the Waiver Agreement ($3.04) and an extension of the exercise period for
one year. The adjustment to the original terms of the warrants created an
additional non-cash increase to debt discount and additional paid-in capital
of approximately $179,000, which was recorded during the quarter ended
September 30, 2003. This increase to debt discount is being amortized into
interest expense over the remaining life of the debentures.
As of September 30, 2004, the Company was in compliance with all covenants of
the debentures. The Company believes it will be able to meet its covenant
requirements through at least September 30, 2005 and, as such, has classified
the amounts due after September 30, 2005 as long-term as of September 30,
2004.
Page-11
On March 31, 2003, the Company signed an agreement with Wells Fargo Business
Credit, Inc. to provide a secured $3.0 million revolving line of credit. The
credit facility provides for interest at a floating rate equal to the prime
lending rate plus 1.75% per annum, minimum interest charges of $120,000 per
year and a term of 3 years. Security for the credit facility includes the
Company's non-European accounts receivable and inventories. At September 30,
2004, there were no borrowings under this facility. Amounts available under
the credit facility were approximately $3.0 million as of September 30, 2004.
NOTE 8. SEGMENT INFORMATION
The Company's reportable segments are those that are based on the Company's
method of internal reporting, which generally segregates the strategic
business units based upon differences in products and distribution channels.
The Company's continuing operations are conducted through two business
segments. The Company's FRAM business licenses, manufactures and distributes
ferroelectric nonvolatile random access memory products. The Company's wholly
owned subsidiary, Mushkin Inc. (Mushkin), distributes high-speed DRAM products
in the aftermarket through both direct, retail, and e-commerce sales channels.
The accounting policies for determining segment net income (loss) are the same
as those used in the consolidated financial statements. There are no internal
sales between segments.
The following table presents segment information for the three months ended
September 30, 2004 and 2003.
2004 2003
------------------------------------ ------------------------------------
FRAM Mushkin Total FRAM Mushkin Total
------------------------------------ ------------------------------------
(in thousands)
Revenue:
Product sales $10,226 $ 4,461 $14,687 $ 4,622 $ 2,614 $ 7,236
License and development fees 179 -- 179 117 -- 117
Royalties 164 -- 164 155 -- 155
Customer-sponsored
research and development 170 -- 170 154 -- 154
-------- -------- -------- -------- -------- --------
10,739 4,461 15,200 5,048 2,614 7,662
Costs and expenses 9,115 4,463 13,578 6,211 2,665 8,876
-------- -------- -------- -------- -------- --------
Segment income (loss) $ 1,624 $ (2) $ 1,622 $(1,163) $ (51) $(1,214)
======== ======== ======== ======== ======== ========
Page-12
Segment income (loss) excludes interest income, interest expense, provision
for income taxes and miscellaneous charges on a total basis of $(331,000) and
$(379,000) in 2004 and 2003, respectively, not allocated to business segments.
The following table presents segment information for the nine months ended
September 30, 2004 and 2003.
2004 2003
------------------------------------ ------------------------------------
FRAM Mushkin Total FRAM Mushkin Total
------------------------------------ ------------------------------------
(in thousands)
Revenue:
Product sales $28,405 $13,341 $41,746 $19,266 $ 7,727 $26,993
License and
development fees 538 -- 538 351 -- 351
Royalties 582 -- 582 381 -- 381
Customer-sponsored
research and development 551 -- 551 976 -- 976
-------- -------- -------- -------- -------- --------
30,076 13,341 43,417 20,974 7,727 28,701
Costs and expenses 25,630 13,140 38,770 21,241 7,819 29,060
Impairment charges -- -- -- -- 3,843 3,843
-------- -------- -------- -------- -------- --------
Segment income (loss) $ 4,446 $ 201 $ 4,647 $ (267) $(3,935) $(4,202)
======== ======== ======== ======== ======== ========
Total assets $25,258 $ 6,406 $31,664 $17,888 $ 5,509 $23,397
======== ======== ======== ======== ======== ========
Segment income (loss) excludes interest income, interest expense, provision
for income taxes and miscellaneous charges on a total basis of $(1,030,000)
and $(957,000) in 2004 and 2003, respectively, not allocated to business
segments.
NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
Accounting for goodwill and intangible assets requires that goodwill no
longer be amortized but be tested for impairment at least annually at the
reporting unit level in accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets (SFAS No.
142)." Recognized intangible assets with determinable useful lives should be
amortized over their useful life and reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144)." At least
annually, the Company completes an analysis of the fair value of its goodwill
to determine if there is an indicated impairment of its goodwill. The
determination of impairment of goodwill and other intangible assets requires
significant judgments and estimates.
Page-13
As a result of an analysis completed as of June 30, 2003, the Company recorded
a charge of $3,843,000 for impairment of goodwill related to the Company's
Mushkin business unit. As a result of the events discussed below, the Company
determined it was necessary to perform an analysis of the fair value of this
goodwill during the second quarter of 2003. This charge reflected a sustained
downturn in DRAM market conditions that the Company expected to continue for
some time into the future and resulted in lower than expected actual and
projected revenue and profitability of this business unit during 2003. In
calculating the impairment charge, the fair value was estimated using a
discounted cash flow methodology and market comparisons.
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2004, by business segment are as follows:
Goodwill
Balance Changes Balance
as of During as of
December 31, the September 30,
2003 Period 2004
------------ ------------- -------------
(in thousands)
FRAM $ 585 $ -- $ 585
Mushkin 3,435 -- 3,435
------ ------- ------
Total $4,020 $ -- $4,020
====== ======= ======
Included in intangible assets on the Company's Consolidated Balance
Sheets are intangible assets with determinable lives as follows:
September 30, December 31,
2004 2003
------------- ------------
(in thousands)
Amortizable intangible assets:
Patents and licenses $ 6,133 $ 4,280
Accumulated amortization (2,290) (2,107)
-------- --------
Total $ 3,843 $ 2,173
======== ========
Amortization expense for intangible assets for the three months ended
September 30, 2004 and 2003, was approximately $60,000 and $90,000,
respectively. Amortization expense for the nine months ended September 30,
2004 and 2003, was approximately $227,000 and $260,000, respectively.
Estimated amortization expense for intangible assets, is $290,000 in 2004,
$240,000 during 2005 through 2008 and $2.8 million thereafter.
Page-14
NOTE 10. DISCONTINUED OPERATION
During the first quarter of 2004, the Company committed to a plan
to sell substantially all of the remaining assets of its subsidiary Enhanced
Memory Systems, Inc. (EMS). The remaining assets consisted primarily of the
Company's patent portfolio. The Company completed the sale of EMS' patent
portfolio on April 20, 2004, the proceeds of which were $1.5 million. Due
to a write-down of the carrying value of the patent portfolio to its estimated
fair value at March 31, 2004, there was no gain or loss recorded on the
finalization of the sale. Pursuant to the terms of the Company's Security
Agreement with Infineon, the Company was required to seek a release from
Infineon for the sale of EMS' patent portfolio. This release required that
all amounts due to Infineon in 2004 under the Waiver Agreement (see Note 7 of
the Notes of Consolidated Financial Statements) be paid upon receipt of the
proceeds from the sale of EMS' patent portfolio.
In accordance with SFAS No. 144, the consolidated financial statements of the
Company have been recast to present this business as a discontinued operation.
Accordingly, the revenues, costs and expenses and assets and liabilities of
the discontinued operation have been excluded from the respective captions in
the Consolidated Statements of Operations and Balance Sheets and have been
reported in the various statements under the caption, "Loss from discontinued
operation," "Assets of discontinued operation" and "Liabilities of
discontinued operation" for all periods. In addition, certain of the Notes
to Consolidated Financial Statements have been recast for all periods to
reflect the discontinuance of this operation.
Summary results for the discontinued operation are as follows (in thousands):
For the Three Months Ended
September 30,
--------------------------
2004 2003
-------- --------
Operating results:
Revenue $ -- $ 258
Costs and expenses -- 960
-------- --------
Loss from discontinued operation $ -- $ (702)
======== ========
For the Nine Months Ended
September 30,
--------------------------
2004 2003
-------- --------
Operating results:
Revenue $ 311 $ 1,919
Costs and expenses 299 5,971
Impairment of patents 364 861
-------- --------
Loss from discontinued operation $ (352) $(4,913)
======== ========
Page-15
Amounts included in the September 30, 2004 and December 31, 2003 Consolidated
Balance Sheets for the discontinued operation are as follows (in thousands):
September 30, December 31,
2004 2003
------------- ------------
Assets of discontinued operation:
Accounts receivable $ -- $ 217
Inventories -- 303
Intangible asset, net -- 1,896
-------- --------
Total $ -- $ 2,416
======== ========
Liabilities of discontinued operation:
Accounts payable $ 239 $ 1,418
======== ========
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of Ramtron International
Corporation (the Company). The following discussion should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and other financial data included elsewhere herein. Certain
statements under this caption constitute "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934, and, as
such, are based on current expectations and are subject to certain risks and
uncertainties. The reader should not place undue reliance on these forward
looking statements for many reasons including those risks discussed under
"Factors that May Affect Future Results" and elsewhere in this document.
Forward-looking statements may be identified by the use of forward-looking
words or phrases such as "will," "may," "believe," "expect," "intend,"
"anticipate," "could," "should," "plan," "estimate," and "potential," or other
similar words.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to bad debts, inventories, long-lived
assets, income taxes, and contingencies and litigation. The Company bases
its 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.
The Company's significant accounting policies are discussed in Note 1 of the
Notes to Consolidated Financial Statements included in the Company's 2003 Form
10-K; critical estimates inherent in these accounting policies are discussed
in the following paragraphs.
Page-16
REVENUE RECOGNITION. Revenue from product sales to direct customers is
recognized upon shipment as the Company generally does not have any post-
shipment obligations or allow for any acceptance provisions. The Company
defers recognition of sales to distributors when it is unable to make a
reasonable estimate of product returns due to insufficient historical product
return information. The revenue recorded is dependent upon estimates of
expected customer returns and sales discounts.
Revenue from licensing programs is recognized over the period the Company is
required to provide services under the terms of the agreement. Revenue from
research and development activities that are funded by customers are
recognized as the services are performed, generally, as contractual
milestones are met. In situations where the Company licenses its technology
and also provides development assistance, the Company records the total
proceeds to be received as revenue over the longer licensing period. The
revenue recorded by the Company in each reporting period is dependent upon
estimates regarding the cost of projects and the achievement of milestones.
Revenue from royalties is recognized upon the shipment of product from the
Company's technology license partners to direct customers.
The Company records customer-sponsored research and development revenue on
arrangements entered into with customers. The revenue recorded by the
Company in each reporting period is dependent upon estimates regarding
the cost of projects and the achievement of milestones. Changes in estimates
regarding these matters could result in revisions to the amount of revenue
recognized on these arrangements.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS. While the Company maintains a stringent
credit approval process, significant judgments are made by management in
assessing our customers' ability to pay at the time of shipment. Despite this
assessment, from time to time, customers are unable to meet their payment
obligations. The Company continues to monitor its customers' credit
worthiness, and use its judgment in establishing the estimated amounts of
customer receivables which will ultimately not be collected. A significant
change in the liquidity or financial position of its customers could have a
material adverse impact on the collectibility of its accounts receivable and
future operating results.
INVENTORY VALUATION. The Company writes down its inventory for estimated
obsolescence or lack of marketability for the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
Page-17
LONG-LIVED ASSETS. The Company reviews the carrying values of its long-lived
assets whenever events or changes in circumstances indicate that such
carrying values may not be recoverable. Under current standards, the assets
must be carried at historical cost if the projected cash flows from their use
will recover their carrying amounts on an undiscounted basis and without
considering interest. However, if projected cash flows are less than their
carrying value, the long-lived assets must be reduced to their estimated fair
value. Considerable judgment is required to project such cash flows and, if
required, estimate the fair value of the impaired long-lived asset. The
estimated future cash flows are based upon, among other things, assumptions
about expected future operating performance and may differ from actual cash
flows. There can be no assurance that future long-lived asset impairments
will not occur.
GOODWILL. Goodwill represents the excess of the purchase price over the fair
value of identifiable net tangible and intangible assets acquired in a
business combination. Goodwill is required to be tested for impairment
annually, or more frequently if events or changes in circumstances indicate
that goodwill may be impaired. The Company performed its annual goodwill
impairment testing as of December 31, 2003, and determined that no
impairments existed at that date. This assessment requires estimates of
future revenue, operating results and cash flows, as well as estimates of
critical valuation inputs such as discount rates, terminal values and similar
data. The Company will continue to perform periodic and annual impairment
analyses of goodwill resulting from its acquisitions. As a result of such
impairment analyses, impairment charges may be recorded and may have a
material adverse impact on the financial position and operating results of the
Company. Additionally, the Company may make strategic business decisions in
future periods which impact the fair value of goodwill, which could result in
significant impairment charges. There can be no assurance that future
goodwill impairments will not occur.
DEFERRED INCOME TAXES. The Company records deferred tax assets and
liabilities for the estimated future tax effects of temporary differences
between the tax basis of assets and liabilities and amounts recorded in the
consolidated financial statements, and for operating loss and tax credit
carryforwards. Realization of the recorded deferred tax assets is dependent
upon the Company generating sufficient taxable income in the appropriate tax
jurisdiction in future years to obtain benefit from the reversal of net
deductible temporary differences and from tax credit and operating loss
carryforwards. A valuation allowance is provided to the extent that
management deems it more likely than not that the net deferred tax assets
will not be realized. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are changed.
Page-18
RESULTS OF OPERATIONS
OVERVIEW
Ramtron is a fabless semiconductor company that designs, develops and markets
specialized semiconductor memory and integrated products used by our customers
for a wide range of applications.
Ramtron provides non-volatile ferroelectric random access memory
devices (FRAM), analog and mixed signal products, and high-performance dynamic
random access memory (DRAM) modules. Ramtron's FRAM product portfolio
includes serial and parallel non-volatile memories and analog and mixed-
signal integrated semiconductor products, which are developed and marketed by
Ramtron International Corporation. The Company's DRAM products are developed
and marketed through its wholly owned subsidiary, Mushkin Inc. (Mushkin) and
formerly by its 80% owned subsidiary, Enhanced Memory Systems, Inc. (EMS).
Since its inception, the Company has been primarily engaged in the research
and development of ferroelectric technology and the design, development and
commercialization of FRAM products and DRAM products. Revenue has been
derived from the sale of the Company's FRAM and DRAM products beginning in
1992. The Company has also generated revenue under license and development
agreements entered into with a limited number of established semiconductor
manufacturers and involving the development of specific applications of the
Company's technologies. Accordingly, fluctuations in the Company's revenue
have resulted primarily from the timing of significant product orders, the
timing of the signing of license and development agreements, and the
achievement of related performance milestones.
In the second quarter of 2003, the Company determined that it was financially
unfavorable to continue the development and sale of EMS' products under its
then current contractual arrangements with its customers. The Company
achieved only limited success in renegotiating its customer contracts and as a
result the Company decided it would no longer pursue product or service
revenue related to EMS' DRAM technology. These actions and the commitment to
a plan to sell substantially all of remaining EMS assets in the first quarter
of 2004, which required a release from Infineon (see Note 10 of the Notes to
Consolidated Financial Statements) resulted in the classification of EMS as a
discontinued operation during the first quarter of 2004. Accordingly, the
Company's financial results from continuing operations and related discussions
do not include EMS' results of operations for the periods presented.
The Company's total revenue was $43.4 million and $28.7 million for the nine
month periods ended September 30, 2004 and 2003, respectively.
For the nine month periods ending September 30, 2004 and 2003, FRAM product
sales represented approximately 68% and 71% of total product sales revenue,
respectively, while Mushkin product sales represented 32% and 29% for the same
periods. During these periods, product sales revenue accounted for
approximately 96% and 94%, respectively, of total revenue, the remainder of
which was generated principally from license and development fees, royalties
and customer-sponsored research and development revenue.
Page-19
FRAM product sales have become the dominant source of revenue for the Company
as a result of an expansion of the FRAM customer base, deeper penetration of
existing customers, an expanding FRAM product portfolio, and the Company's
participation in the utility meter replacement program at ENEL, a leading
Italian utility company, which is replacing 27,000,000 utility meters in
Italy. Revenue from this program is expected to ramp down in 2005 as the
program reaches completion. Historically, Ramtron has been generating
average quarterly revenue of approximately $4 million related to this program.
We expect this program to contribute approximately $8 million to product
revenue throughout the year ended December 31, 2005. In addition, the Company
has been able to significantly increase revenue from other FRAM customers.
Non-ENEL product revenue totaled approximately $15.0 million and $7.6 million
during the nine months ended September 30, 2004 and 2003, respectively.
The Company's costs and expenses were $38.8 million during the nine months
ended September 30, 2004, compared with $32.9 million for the same period in
2003.
Cost of product sales as a percentage of product revenue was 59% and 60% for
the nine month periods ending September 30, 2004 and 2003, respectively.
Correspondingly, gross margin rates were 41% and 40% for the same periods of
2004 and 2003. FRAM product gross margins during the nine months ending
September 30, 2004 were 53%, compared with 49% during the same period of 2003.
Mushkin product gross margins during the nine months ending September 30, 2004
and 2003 were 13% and 17%, respectively.
QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
2003.
REVENUE. Total revenue for the quarter ended September 30, 2004 was $15.2
million, an increase of $7.5 million, or 98%, from the quarter ended
September 30, 2003.
Product sales increases in both of the Company's product lines resulted in a
103% increase in product revenue for the quarter ended September 30, 2004.
Compared to the quarter ended September 30, 2003, FRAM product revenue
increased $5.6 million, an increase of 121%. This increase is the
result of a $2.8 million increase in revenue from non-ENEL customers and a
$2.8 million increase in ENEL shipments during the quarter ended September 30,
2004 as compared to the same period a year ago. Shipments into the Ampy/ENEL
program were $4.8 million and $2.0 million, or approximately 46% and 43% of
total FRAM product revenue for the quarters ended September 30, 2004 and 2003,
respectively.
Product revenue at the Company's Mushkin subsidiary increased approximately
$1.8 million to $4.5 million during the three months ended September 30, 2004,
or 71%, compared to the same period in 2003 and is primarily the result of
improving economic conditions in the retail and OEM markets Mushkin serves.
Page-20
The Company recognized $179,000 and $117,000 in license and development
fee revenue during the quarters ended September 30, 2004 and 2003,
respectively. License and development fee revenues are the result of
recognizing license fees over the term of the license agreement, generally ten
years.
The Company recognized royalty revenue of $164,000 and $155,000 in the
quarters ended September 30, 2004 and 2003, respectively. Royalty revenue in
2004 and 2003 is attributable to FRAM licensing agreements with existing
licensees.
Customer-sponsored research and development revenue is primarily attributable
to the Company's technology development program with Texas Instruments. The
Company recognized customer-sponsored research and development revenue of
$170,000 and $154,000 during the quarters ended September 30, 2004 and 2003,
respectively. The amount of customer-sponsored research and development
revenue recognized during a given quarter is dependent on the specific
programs the Company is working on, the development stage of each program, the
costs incurred during the quarter, and the amount of work remaining to
complete the program.
COST OF SALES. Overall cost of product sales as a percentage of product
revenue were 59% and 64% for the quarters ended September 30, 2004 and 2003,
respectively. Cost of sales associated with the Company's FRAM products
decreased from 52% in the third quarter of 2003 to approximately 46% in the
third quarter of 2004. FRAM cost of sales declined as the Company achieved
volume related cost reductions. Cost of sales as a percentage of product
revenue for the Company's Mushkin subsidiary were 87% and 85% for the quarters
ended September 30, 2004 and 2003, respectively. This increase and the
corresponding decrease in gross margin percentage is attributable to changes
in the spot market pricing of DRAM components used to manufacture Mushkin
products and increased competition from other companies in the sector.
RESEARCH AND DEVELOPMENT. Combined research and development expenses for the
quarter ended September 30, 2004 decreased $282,000 to $1.6 million, a
decrease of 15% as compared with the same period in 2003. The changes in
research and development expenses are primarily the result of cost reduction
measures adopted during the third quarter of 2003.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative
expenses for the quarter ended September 30, 2004 increased $987,000 to $3.4
million as compared to $2.4 million for the same period in 2003. This change
is primarily the result of increases in sales commissions, and performance
bonus accruals.
INTEREST EXPENSE, RELATED PARTY. Related party interest expense decreased
$48,000 to $84,000 for the quarter ended September 30, 2004, as compared to
the same period in 2003, primarily due to lower outstanding debt balances
during the quarter.
Page-21
INTEREST EXPENSE, OTHER. Other interest expense decreased $30,000 to
$222,000 for the three months ended September 30, 2004, primarily due to
lower outstanding principal balances on the Company's debentures.
LOSS FROM DISCONTINUED OPERATION. During the three months ended March 31,
2004, the Company committed to a plan to sell substantially all of the
remaining assets of its subsidiary EMS. In accordance with SFAS No. 144, the
consolidated financial statements of the Company have been recast to present
this business as a discontinued operation. The decrease from the operating
loss of $702,000 in 2003 to zero in the quarter ended September 30, 2004 is
due to the cessation of activities at EMS.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003.
REVENUE. Total revenue for the nine months ended September 30, 2004 was $43.4
million, an increase of $14.7 million, or 51%, from the nine month period
ended September 30, 2003.
Product sales increases in both of the Company's product lines resulted in a
55% increase in product revenue for the nine months ended September 30, 2004.
FRAM product revenue for the nine months ended September 30, 2004 increased
$9.1 million to $28.4 million, from the nine months ended September 30, 2003.
Increased FRAM product revenue is primarily attributable to increases in
shipments to non-ENEL customers of approximately $7.4 million. Non-ENEL
shipments totaled $15.0 million during the nine months ended September 30,
2004 compared to $7.6 million during the same period in 2003. Shipments into
the ENEL utility metering program represented approximately 47% and 60% of
total FRAM product revenue for the periods ended September 30, 2004 and 2003,
respectively.
The Company historically recorded all shipments to distributors as deferred
revenue until shipped to the end customer because the Company did not believe
it had adequate historical data to make a reasonable estimate of the amount of
future returns as required under Statement of Financial Accounting Standard
No. 48 ("FAS No. 48"), "Revenue Recognition When Right of Return Exists".
During the first quarter of 2003, the Company concluded that it now had
sufficient shipment and return experience to allow for the recognition of
revenue on shipments to distributors at the time of shipment, along with a
reserve for estimated returns. Accordingly, during the first quarter of 2003,
the Company recognized an additional $950,000 in FRAM product sales revenue
that would have been deferred prior to this change in estimate. The impact on
gross margins from this additional revenue was approximately $450,000 during
the first nine months of 2003.
Product revenue at the Company's Mushkin subsidiary increased approximately
$5.6 million to $13.3 million during the nine months ended September 30, 2004,
or 73%, compared to the same period in 2003 and is primarily the result of
improving economic conditions in the retail and OEM memory products markets
Mushkin serves.
Page-22
During the first quarter of 2003, Mushkin recognized $311,000 of revenue
related to a change in the estimated amount of distributor product
returns as discussed above. The impact on gross margins from this additional
revenue was approximately $40,000 during the nine months ended September 30,
2003.
The Company recognized $538,000 and $351,000 in license and development
fee revenue during the nine months ended September 30, 2004 and 2003,
respectively. License and development fee revenues are the result of
recognizing license fees over the term of the license agreement, generally ten
years.
The Company recognized royalty revenue of $582,000 and $381,000 in the nine
month periods ended September 30, 2004 and 2003, respectively. Royalty
revenue in 2004 and 2003 is attributable to FRAM licensing agreements with
existing licensees.
Customer-sponsored research and development revenue is primarily attributable
to the Company's technology development program with Texas Instruments. The
Company recognized customer-sponsored research and development revenue of
$551,000 and $976,000 during the nine months ended September 30, 2004 and
2003, respectively. The amount of customer-sponsored research and development
revenue recognized during a given period is dependent on the specific
programs the Company is working on, the development stage of each program, the
costs incurred during the period, and the amount of work remaining to
complete the program.
COST OF SALES. Overall cost of product sales as a percentage of product
revenue during the nine months ended September 30, 2004 were 59% as compared
with 60% for the same period in 2003. Cost of sales associated with the
Company's FRAM products decreased during the quarter from 51% in 2003 to
approximately 47% in 2004. FRAM cost of sales declined as the Company
improved manufacturing yields and achieved volume related cost reductions.
Cost of sales as a percentage of product revenue for the Company's Mushkin
subsidiary were 87% and 83% for the nine month periods ended September 30,
2004 and 2003, respectively. This increase and the corresponding decrease in
gross margin percentage is attributable to changes in the spot market pricing
of DRAM components used to manufacture Mushkin products and increased
competition from other companies in the sector.
RESEARCH AND DEVELOPMENT. Combined research and development expenses for the
nine month period ended September 30, 2004 decreased $433,000 to $4.8 million,
a decrease of 8% as compared with the same period in 2003. The changes in
research and development expenses are primarily related to decreased customer-
sponsored research and development projects during the first half of 2004 and
cost reduction measures adopted in the third quarter of 2003.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative
expenses for the nine months ended September 30, 2004 increased $1.5 million
to $9.2 million as compared to $7.7 million for the same period in 2003. This
change is primarily the result of increases in sales commissions and
performance bonus accruals.
Page-23
IMPAIRMENT OF GOODWILL. A sustained downturn in DRAM market conditions
resulted in lower than expected actual and projected revenue and profitability
of Mushkin during the first half of 2003. Because the Company believed the
downturn would likely continue to cause lower than expected sales and
profitability for some time into the future the Company believed it was
appropriate to review the fair value of goodwill related to Mushkin as of
June 30, 2003. The result of the Company's review was a charge of $3.8
million for impairment of goodwill in the quarter ended June 30, 2003. In
calculating the impairment charge, the fair value was estimated using a
discounted cash flow methodology and market comparisons. There can be no
assurance that future goodwill impairments will not occur.
INTEREST EXPENSE, RELATED PARTY. Related party interest expense decreased
$13,000 to $329,000 for the nine months ended September 30, 2004, as compared
to the same period in 2003, primarily due to decreases in interest expense
related to principal payments on the convertible debenture issued to Infineon
in March 2002.
INTEREST EXPENSE, OTHER. Other interest expense increased $36,000 to
$673,000 for the nine months ended September 30, 2004, primarily due to
imputed interest charges recorded on amounts due to National Semiconductor
Corporation for the settlement of patent interference litigation as discussed
in Note 6 of Notes to Consolidated Financial Statements and increased minimum
interest charges related to the Company's Wells Fargo credit facility.
LOSS FROM DISCONTINUED OPERATION. During the three months ended March 31,
2004, the Company committed to a plan to sell substantially all of the
remaining assets of its subsidiary EMS. In accordance with SFAS No. 144, the
consolidated financial statements of the Company have been recast to present
this business as a discontinued operation. The $352,000 operating loss in
2004 of the discontinued operation is primarily the result of a $364,000
impairment of the carrying value of EMS' patent portfolio to its estimated
fair value at March 31, 2004. The decrease from the operating loss of $4.9
million in 2003 is due to the reduction in activities at EMS beginning in
April 2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations for the nine months ended September 30, 2004
decreased $2.0 million from the same period in 2003. The decrease was due
primarily to accounts receivable increases of $2.9 million since the end
of 2003. The change in accounts receivable is primarily the result of
increasing FRAM and Mushkin revenue.
Accounts payable and accrued liabilities increased approximately $321,000
during the nine months ended September 30, 2004, from $5.0 million at the end
of 2003 to $5.3 million at September 30, 2004. Declines in accounts payable
of $1.2 million are offset by $1.5 million of increases in accrued liabilities
resulting primarily from increases in sales and performance bonus accruals.
Page-24
Deferred revenue decreased approximately $819,000 from December 31, 2003.
This change is primarily related to the recognition of license fee revenue
from existing licensees and customer-sponsored research and development
revenue related primarily to the Texas Instruments program.
Cash provided by investing activities was $419,000 for the nine months ended
September 30, 2004, compared to cash used of $3.1 million for the same period
in 2003. Capital expenditures were $560,000 in the nine months ended
September 30, 2004, compared to $225,000 in the nine month period ended
September 30, 2003. During the nine months ended September 30, 2004, $885,000
was generated from the operating activities of the Company's discontinued EMS
business segment, primarily from the sale of EMS' intellectual property
portfolio. During the nine-month period ended September 30, 2003, $2.6
million of cash was used in the EMS business segment.
During the nine months ended September 30, 2004, net cash used in financing
activities was $2.1 million compared to $715,000 in the nine month period
ended September 30, 2003. During the nine months ended September 30, 2004,
the Company made principal payments of $1.9 million to the Company's debenture
holders in accordance with the terms of the covenant Waiver Agreement entered
into with holders of the Company's outstanding debentures (See Note 7 of the
Notes to Consolidated Financial Statements). Per the terms of the agreement,
during the remainder of 2004, the Company is required to make principal
payments to the debenture holders totaling $250,000. The Company believes its
future cash flows will be sufficient to meet the required payments through the
remainder of 2004.
The Company has entered into a credit and security agreement with Wells Fargo
Business Credit, Inc. to provide a secured $3 million revolving line of
credit. The credit facility currently provides for interest at a floating
rate equal to the prime lending rate plus 1.75% per annum, minimum interest
charges of $120,000 per year and a term of three years ending on March 31,
2006. Security for the credit facility includes the Company's non-European
accounts receivable and inventories. The Company expects to use the credit
facility for working capital requirements. Borrowing limits are subject to
available collateral balances. At September 30, 2004, the amount available
under the revolving line of credit was $3.0 million. There were no borrowings
on this facility at September 30, 2004. During the nine-month period ended
September 30, 2004, the Company borrowed and repaid $750,000 on this
agreement.
On April 6, 2004, the Company entered into an agreement to settle its long
standing patent interference proceeding with National Semiconductor
Corporation (see Note 6 of Part I - "Contingencies"). As a result of the
settlement beginning April 2004, the Company is required to pay National
$250,000 annually through 2013.
In the future, the primary source of operating cash flows will be product
sales from the Company's FRAM and Mushkin product lines.
Page-25
The Company had $6.1 million in cash and cash equivalents at September 30,
2004. The Company believes it has sufficient resources to fund its operations
through at least September 2005. In view of the Company's expected future
working capital requirements in connection with the design, manufacturing and
sale of its FRAM products, the Company's projected continuing research and
development expenditures and other operating expenditures, the Company may be
required to seek additional equity or debt financing. There is no assurance,
however, that the Company will be able to obtain such financing on terms
acceptable to the Company, or at all. Any issuance of common or preferred
stock to obtain additional funding would result in dilution of existing
stockholders' interests in Ramtron. The inability to obtain additional
financing when needed would have a material adverse effect on the business,
financial condition and operating results and could adversely affect the
Company's ability to continue its business operations.
CONTRACTUAL COMMITMENTS. For more information on the Company's contractual
obligations on operating leases and contractual commitments, see Notes 5 and
6 of the Notes to Consolidated Financial Statements included in the Company's
2003 Form 10-K. At September 30, 2004, the Company's commitments under these
obligations were as follows for the years ended December 31 (in thousands):
Operating NEBF Debt
Leases Consulting Fee(1) Agreements Total
--------- ----------------- ----------- ---------
2004 $ 78 $ 35 $ 280 $ 393
2005 313 80 370 763
2006 187 80 280 547
2007 52 80 4,660 4,792
2008 56 80 250 386
After 2008 -- 80 1,250 1,330
------ ------ ------ ------
Total $686 $435 $7,090 $8,211
====== ====== ====== ======
- -----------
(1) These consulting fees are required to be paid to the National Electrical
Benefit Fund (NEBF) as long as NEBF owns at least 5% of the outstanding
shares of the Company.
OUTLOOK
The Company expects that its revenue growth rates will continue to be variable
in the foreseeable future until the Company's products gain wider market
acceptance, the Company reduces its dependence on certain key customers for
product revenue, new products are developed, and the Company's products can be
manufactured in increased volumes and in a more cost-effective manner.
The Company is continuing its efforts to improve and increase commercial
production and sales of its FRAM and DRAM module products, decrease the cost
of producing such products and develop and commercialize new FRAM and DRAM
module products.
Page-26
There can be no assurance that all of the Company's foundry and alliance
partners will be able to achieve commercial production of the products
currently in development. If such commercial production is not achieved or is
not achieved in a timely manner, the Company's results of operations could be
materially adversely affected.
On June 30, 2003, the Company failed to meet the minimum EBITDA required under
its debenture agreements, which by the terms of the debentures became an event
of default on July 30, 2003. The Company and the debenture holders entered
into an agreement to waive the covenant violation. To fulfill the Company's
Waiver Agreement obligations, it will make a final quarterly principal payment
of $250,000 on December 31, 2004. If the Company fails to make the required
final principal payment, the debenture holders may elect to convert the
missed payment amount to common stock at a conversion price equal to 90% of
the daily volume weighted moving average for each of the 60-trading days
following the notice of failure to pay or can require all the amounts then
outstanding be paid. The debenture holders may elect to waive any quarterly
redemption and during the quarters ended June 30, 2004 and September 30, 2004,
one of the debenture holders elected to waive its right to receive its
quarterly payment of $125,000. As of September 30, 2004, the Company was in
compliance with all covenants of the debentures. The Company believes it will
be able to meet the EBITDA covenant requirements from September 1, 2004
through at least September 30, 2005 and as such, has classified the amounts
due after September 30, 2005 as long-term as of September 30, 2004. The
Company believes its future cash flows will be sufficient to meet the required
payments during 2004.
FORWARD-LOOKING STATEMENTS
The following information should be read in conjunction with "Part I, Item 1.
Financial Statements," "Part I, Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Part I, Item 3.
Quantitative and Qualitative Disclosures About Market Risk" included in the
Report on Form 10-Q. This Report on Form 10-Q and certain information
incorporated herein by reference contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. Forward-
looking statements in this Report on Form 10-Q include, without limitation:
- The statements under the heading "Part 1, Item 1. Financial Statements
- Note 6" concerning (1) the Company's beliefs that its assignments and
cross-license arrangements with National allows the Company the ability
to use FRAM technology in the United States as it would have prior to the
litigation settlement with National and the values capitalized related to
the subject patents and licenses will be recoverable through future cash
proceeds; (2) the Company's belief that its business would not be
materially affected by an adverse judgment by the Special Master
on the remaining count of interference which statements are subject to
various risks and uncertainties including the inaccuracy of our
assessment of the sufficiency of the assignments, cross license rights,
future cash flows and the impact of receiving a judgment adverse to the
Company on the remaining count of interference;
Page-27
- The statements under the heading "Part I, Item 1. Financial Statements
- Note 7" concerning (1) the Company's belief that it will be able to
meet its debt covenant requirements through at least September 30, 2005,
which statements are subject to including, but not limited to, general
economic conditions and conditions specific to the semiconductor
industry, the demand for Ramtron's products and the products of its
principal FRAM customer, order cancellations or reduced bookings, product
mix, competitive factors such as pricing pressures on existing products
and the timing and market acceptance of new product introductions,
Ramtron's ability to secure and maintain an appropriate amount of low-
cost foundry production capacity from its sole foundry source in a timely
manner, Ramtron's foundry partner's timely ability to successfully
manufacture products for Ramtron, Ramtron's foundry partner's ability to
supply increased orders for FRAM products in a timely manner using
Ramtron's proprietary technology, any disruptions of Ramtron's foundry or
test and assembly contractor relationships, the ability to continue
effective cost reductions, unexpected design and manufacturing
difficulties, and the timely development and introduction of new products
and processes;
- The statements under the heading "Part I, Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results
Of Operations" regarding the Company's expected (1) revenue from the ENEL
metering program and the significance of such revenue to the Company's
overall financial performance, revenues and gross margin levels;
(2) sufficiency of cash resources and future cash flows to meet the
remaining 2004 principal payment on the debentures; (3) use of the
Company's credit facility for working capital requirements; (4) source of
Operating cash flows from its FRAM and Mushkin product lines; (5) ability
to meet the EBITDA covenant requirements related to its outstanding
debentures; (6) sufficiency of cash resources to fund the Company's
operations through at least September 30, 2005, which statements are
subject to various risks and uncertainties, including, but not limited
to, general economic conditions and conditions specific to the
semiconductor industry, the demand for Ramtron's products and the
products of its principal FRAM customer, order cancellations or reduced
bookings, product mix, competitive factors such as pricing pressures on
existing products and the timing and market acceptance of new product
introductions, Ramtron's ability to secure and maintain an appropriate
amount of low-cost foundry production capacity from its sole foundry
source in a timely manner, Ramtron's foundry partner's timely ability to
successfully manufacture products for Ramtron, Ramtron's foundry
partner's ability to supply increased orders for FRAM products in a
timely manner using Ramtron's proprietary technology, any disruptions of
Ramtron's foundry or test and assembly contractor relationships, the
ability to continue effective cost reductions, unexpected design and
manufacturing difficulties, and the timely development and introduction
of new products and processes; and
Page-28
- The statements under the heading "Part I, Item 3. Quantitative and
Qualitative Disclosures About Market Risk" regarding the Company's belief
that near-term changes in interest rates, currency exchange rate
fluctuations, inflation and other price pressures will not have a
material effect on future earnings, fair values or cash flows of the
Company, are subject to the risk, among other risks, that we have
inaccurately assessed the degree of expected change in interest rates,
currency exchange rates, inflation and price pressures.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We have a history of losses and there can be no assurance that we will be able
to sustain recent profitability in the future.
We incurred net losses during 2003 of $9.5 million, $1.9 million in 2002 and
$33.0 million in 2001. As of September 30, 2004, we had an accumulated
deficit of $220.8 million. We have spent substantial amounts of money in
developing our FRAM and DRAM products and in our efforts to develop commercial
manufacturing capabilities for those products. Our ability to increase
revenue or sustain profitability in the future will depend substantially on
our ability to increase sales of our products by gaining new customers and
increasing our penetration of existing customers, reduce manufacturing costs,
significantly increase sales of existing products and successfully introduce
and sell new products.
Fluctuations in our historical operating results, in part, have been due to
unpredictable product order flows, a limited customer base, manufacturing and
other fixed costs. These trends may continue in the future. Factors
affecting the demand for our products include the time required for
incorporating our products into customers' product designs and the ability
of our customers' products to gain substantial market acceptance. These
factors also make it difficult for us to predict our future revenues.
Because we base our operating expenses on anticipated revenue trends, which
results in a substantial percentage of our expenses being fixed in the short
term, our difficulty in predicting future revenues could affect our ability
to achieve future profitability and result in fluctuations in operating
results.
Factors that may cause our operating results to vary significantly in the
future include:
- our ability to timely develop and qualify for manufacturing new FRAM
products, including FRAM products with memory capacities greater than
256-kilobits and FRAM products of all densities that incorporate
on-chip analog and mixed signal functions;
- customer acceptance of our products;
- the timing and volume of customer orders;
Page-29
- our ability to manufacture our products on a cost-effective and timely
basis through alliance foundry operations and contract manufacturers
and the sensitivity of our production costs to the manufacturing yields
achieved by our strategic licensees and contract manufacturers; and
- factors not directly related to us, such as market conditions,
competition, pricing pressures, technological developments, product
obsolescence, the availability of supplies and raw materials, available
capacity at our sole-source foundry, and the changing needs of potential
customers in the semiconductor industry in general.
Our products have achieved limited market acceptance, and if our products do
not achieve broader market acceptance, we will be unable to increase our
revenues and may never achieve sustained profitability.
Our success depends on the market acceptance of our FRAM and DRAM module
products and the time required to achieve market acceptance. If one or more
of our products fails to achieve market acceptance or if market acceptance is
delayed, our revenues may not increase and our cash flow and financial
condition could be harmed. We must design products that successfully address
customer requirements if our products are to be widely accepted by the
market. Potential customers will be reluctant to integrate our products into
their systems unless our products are reliable, available at competitive
prices, available within a reasonable period of time from order receipt and
address our customers' current systems requirements.
Because our customer base for FRAM products is highly concentrated, the loss
of our primary FRAM customer or any decrease or delay in purchases from this
customer could significantly reduce our revenues.
In 2003, 2002 and 2001, approximately 60%, 74% and 47%, respectively, of our
FRAM product sales were generated from one customer, ENEL. FRAM product sales
to ENEL represented approximately 47% of our total FRAM product sales through
September 30, 2004. Any substantial reduction or cancellation of business
from this customer or any significant decrease in the prices of FRAM products
sold to it could significantly reduce our revenue, which would also harm our
cash flow, operating results and financial condition.
If we do not continually develop new generations of FRAM and DRAM module
products that achieve broad market acceptance, we will be unable to compete
effectively.
Among other factors, our future success is dependent on our ability to
develop, manufacture and market FRAM and DRAM module products that address
customer requirements and compete effectively in the market with respect to
price, performance and reliability. If we do not compete effectively, we
could suffer price reductions, reduced revenue, reduced gross margins and
reduced market share. New product development, which includes both our
development of new products and the need to "design-in" such new products to
customers' systems, is time consuming and costly. This new product
development requires a long-term forecast of market trends and customer
needs, and often a substantial commitment of capital resources, with no
assurance that products will be commercially viable.
Page-30
In particular, we need to develop new product designs, new process technology
and continue ferroelectric materials development. Our current FRAM products
are designed at our Colorado Springs facility and manufactured at our
partners' manufacturing facilities using 0.5 and 0.35 micron manufacturing
processes. To cost effectively design new products with memory capacities
greater than 256-kilobits our strategic licensees manufacturing capabilities
need to be 0.35 micron or below to improve yields and reduce the cost of such
FRAM products. We believe that our ability to compete in the markets in
which we expect to sell our FRAM products will depend, in part, on our
ability to produce FRAM products in smaller feature sizes and also our
ability to effectively incorporate analog and mixed-signal functions with our
memory products. Our inability to successfully produce FRAM products with
smaller feature sizes or analog and mixed-signal functions would harm our
ability to compete and our operating results.
Although the Company has recently developed analog and mixed-signal products
incorporating our FRAM memory solutions to supplement the Company's
traditional memory product offerings, the Company has a limited operating
history in these markets and has had limited success. If we fail to
introduce new products in a timely manner or are unable to successfully
manufacture such products, or if our customers do not successfully introduce
new systems or products incorporating ours, or market demand for our new
products does not exist as anticipated, our business, financial condition and
results of operations could be seriously harmed.
Our ability to increase sales of our DRAM module products depends principally
on the timely completion of our development and qualification of new DRAM
products that provide price-performance advantages over competing products.
Our continued ability to generate revenue from the sale of DRAM products
will depend on our successful development, manufacture and marketing of new
DRAM module products with improved price-performance characteristics, and we
cannot provide any assurance that we will be successful in accomplishing the
foregoing.
If we do not keep pace with rapid technological changes and frequent new
product introductions, our products may become obsolete, and we may not be
competitive.
The semiconductor memory industry is characterized by rapid technological
changes and product obsolescence, price erosion and variations in
manufacturing yields and efficiencies. To be competitive, we will need to
continually improve our products and keep abreast of new technology. Other
companies, many of which have greater financial, technological and research
and development resources than we do, are researching and developing
semiconductor memory technologies and product configurations that could
reduce or eliminate any future competitive advantages our products may
currently have. We cannot provide any assurance that our ferroelectric
technology will not be supplanted in the future by competing technology or
that we will have the technical capability and financial resources to be
competitive in the semiconductor industry with respect to the continued
design, development and manufacture of either FRAM or DRAM module products.
Page-31
If we fail to protect our intellectual property, or if others use our
proprietary technology without authorization, our competitive position may
suffer.
Our future success and competitive position depends in part upon our ability
to obtain and maintain proprietary technology used in our products. We
attempt to protect our intellectual property rights through a combination of
patent, trademark, copyright and trade secret laws, as well as licensing
agreements and employee and third-party nondisclosure and assignment
agreements. We cannot be assured that any of our patent applications will be
approved or that any of the patents that we own will not be challenged,
invalidated or circumvented by others or be of sufficient scope or strength
to provide us with any meaningful protection or commercial advantage.
Policing the unauthorized use of our intellectual property is difficult, and
we cannot be certain that the steps we have taken will prevent the
misappropriation or unauthorized use of our technologies, particularly in
foreign countries where the laws may not protect our proprietary rights as
fully as in the United States. In addition, we cannot be certain that we
will be able to prevent other parties from designing and marketing FRAM-based
products or that others will not independently develop or otherwise acquire
the same or substantially equivalent technologies as ours.
We may be subject to intellectual property infringement claims that result in
costly litigation and could harm our business and ability to compete.
Our industry is characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patents and other
intellectual property rights. In particular, many leading semiconductor
memory companies have extensive patent portfolios with respect to
semiconductor memory technology, manufacturing processes and product designs.
We may be involved in litigation to enforce our patents or other intellectual
property rights, to protect our trade secrets and know-how, to determine the
validity of property rights of others, or to defend against claims of
invalidity. This type of litigation can be expensive, regardless of whether
we win or lose. Also, we cannot be certain that third parties will not make
a claim of infringement against us or against our semiconductor company
licensees or OEMs in connection with their use of our technology. Any
claims, even those without merit, could be time consuming to defend, result
in costly litigation and diversion of technical and management personnel, or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, may not be available to us on acceptable
terms or at all. A successful claim of infringement against us or one of our
semiconductor manufacturing licensees in connection with its use of our
technology could harm our business.
We depend on a small number of suppliers for the supply of our products.
Problems in their performance can seriously harm our financial results.
Page-32
The Company currently relies on a single independent foundry to manufacture
all of the Company's FRAM products. Reliance on this foundry involves several
risks, including capacity constraints or delays in timely delivery of the
Company's products, reduced control over delivery schedules and the cost of
our products, manufacturing yields, quality assurance and the loss of
production due to seismic activity, weather conditions and other factors.
Although the Company continuously evaluates sources of supply and may seek to
add additional foundry capacity, there can be no assurance that such
additional capacity can be obtained at acceptable prices, if at all. The
occurrence of any supply or other problem resulting from these risks could
have a material adverse effect on the Company's results of operations. The
Company also relies on domestic and offshore subcontractors for die assembly
and testing of products, and is subject to risks of disruption in adequate
supply of such services and quality problems with such services.
To address our wafer supply concerns, we plan to continue working on
expanding our primary foundry capability at Fujitsu and to acquire additional
foundry capability. Even if we enter into an additional foundry relationship,
such manufacturing capacity is not likely to be available for at least 12 to
24 months after reaching an agreement due to significant effort required to
develop and qualify for manufacturing a FRAM technology process. Our
financial condition and results of operations could be materially adversely
affected by the loss of Fujitsu as a supplier or our inability to obtain
additional foundry capacity.
International sales comprise a significant portion of our product sales,
which exposes us to foreign political and economic risks.
For fiscal 2003, 2002 and 2001, international sales comprised approximately
67%, 47% and 23%, respectively, of our net revenue. The increase in export
sales as a percentage of total sales is primarily the result of increasing
FRAM product sales primarily to Europe, Asia and Japan, in part, because of
increased offshore manufacturing activity by U.S. companies. The Company
also believes Europe, Asia and Japan are early adopters of new technologies.
We expect that international sales will continue to represent a significant
portion of our product sales in the future. As a result of the large foreign
component of the Company's revenue, the Company is subject to a number of
risks resulting from such operations. Such risks include political and
economic instability and changes in diplomatic and trade relationships,
foreign currency fluctuations, unexpected changes in regulatory requirements,
delays resulting from difficulty in obtaining export licenses for certain
technology, tariffs and other barriers and restrictions, and the burdens of
complying with a variety of foreign laws. There can be no assurance that
such factors will not adversely impact the Company's results of operations in
the future or require the Company to modify its current business practices.
Page-33
Currently, all our sales and inventory purchases are invoiced and paid in
U.S. dollars, reducing our direct exposure to currency fluctuations. Our
business however, is subject to other risks generally associated with doing
business with foreign subcontractors including, but not limited to foreign
government regulations and political and financial unrest, which may cause
disruptions or delays in shipments to our customers or access to our
inventories. Our business, financial condition and results of operations may
be materially adversely affected by these or other factors related to our
international operations.
We have been unable to fulfill certain FRAM customers' orders according to
the schedule originally requested due to the constraints in our wafer supply.
Due to the lead time constraints in our wafer supply, from time to time we
have been unable to fulfill certain of our customers' orders according to the
schedule originally requested. Although we attempt to maintain an adequate
supply of wafers and communicate to our customers delivery dates that we
believe we can reasonably expect to meet, our customers may not accept
the alternative delivery date or may cancel their outstanding orders.
Reductions in orders received or cancellation of outstanding orders would
result in lower revenues and net income, excess inventories and increased
inventory reserves.
We must build products based on demand forecasts; if such forecasts are
inaccurate, we may incur significant losses.
The Company must order products and build inventory substantially in advance
of product shipments, and there is a risk that because demand for the
Company's products is volatile and subject to fluctuation, the Company will
forecast incorrectly and produce excess or insufficient inventories of
particular products. The Company's customers' ability to reschedule or
cancel orders without significant penalty could adversely affect the
Company's liquidity, as the Company may be unable to adjust its purchases
from its independent foundries to match such customer changes and
cancellations. The Company has in the past produced excess quantities of
certain products, which has had a material adverse effect on the Company's
results of operations. There can be no assurance that the Company, in the
future, will not produce excess quantities of any of its products. To the
extent the Company produces excess or insufficient inventories of particular
products, the Company's results of operations could be adversely affected.
The markets in which we participate are intensely competitive, and if we do
not compete successfully, our revenue and ability to continue to operate
profitably would suffer.
The semiconductor industry is intensely competitive and our FRAM and DRAM
module products face intense competition from numerous domestic and foreign
companies. We may be at a disadvantage in competing with many of our
competitors that have significantly greater financial, technical,
manufacturing and marketing resources, as well as more diverse product lines
that can provide cash flows counter-cyclical to fluctuations in semiconductor
memory operations.
Page-34
Our ability to compete also depends on factors beyond our control, including
the rate at which customers incorporate our products into their own products,
our customers' success in selling their products, the successful protection
of our intellectual property, the success of competitors' products and
general market and economic conditions. Our competitors or customers may
offer new products based on new technologies, industry standards or end-user
or customer requirements, including products that have the potential to
replace or provide lower-cost or higher-performance alternatives to our
products. The introduction of new products by our competitors or customers
could render our existing and future products obsolete or unmarketable.
We compete in various markets with our FRAM strategic licensees and contract
manufacturers, which could significantly reduce our product sales and harm our
operating results.
Our strategic licensees may market products which compete with our FRAM
products. Most of our strategic partners have the right to manufacture and
sell FRAM products for their own account with or without the payment of
royalties, depending upon the terms of their agreements with us. Because our
strategic licensees may manufacture and market FRAM products themselves, they
may give the development and manufacture of their own FRAM products a higher
priority than the development and manufacture of our products. Any delay in
market penetration by our products, or any competition in the marketplace
from FRAM products manufactured and marketed by our strategic licensees,
could reduce our product sales and harm our operating results.
We depend on a relatively small number of key personnel, and if we are unable
to attract additional personnel or retain our key personnel, our business
will suffer.
Our future success depends, among other factors, on the continued service of
our key technical and management personnel and on our ability to continue to
attract and retain qualified employees. We are particularly dependent on the
highly skilled design, process, materials and test engineers involved in the
development and manufacture of our FRAM products and processes. The
competition for these personnel is intense, and the loss of key employees,
including executive officers, or our inability to attract additional
qualified personnel in the future, could have both an immediate and a long-
term adverse effect on us. There can be no assurance that we can retain them
in the future. In addition, none of our employees have entered into post-
employment, non-competition agreements with us and, therefore, our employees
are not contractually restricted from providing services to our competitors.
Our business is subject to strict environmental regulations and legal
uncertainties, which could impose unanticipated requirements on our business
in the future and subject us to liabilities.
Page-35
Federal, state and local regulations impose various environmental controls on
the discharge of chemicals and gases used in our strategic licensees' and
contract manufacturers' manufacturing processes. Compliance with these
regulations can be costly. Increasing public attention has been focused on
the environmental impact of semiconductor operations. Any changes in
environmental rules and regulations may impose the need for additional
investments in capital equipment and the implementation of compliance
programs in the future. Any failure by us or our strategic licensees or
contract manufacturers to comply with present or future environmental rules
and regulations regarding the discharge of hazardous substances could subject
us to serious liabilities or cause us to suspend manufacturing operations,
which could seriously harm our business, financial condition and results of
operations.
Earthquakes, other natural disasters and power shortages or interruptions may
damage our business.
Some of our major contract manufacturers' facilities are located near major
earthquake zones. If a major earthquake or other natural disaster occurs,
which damages those facilities or restricts their operations, our business,
financial condition and results of operations would be materially adversely
affected. Similarly, a major earthquake or other natural disaster near one
or more of our major suppliers, like the one that occurred near Fujitsu's
manufacturing facility in Iwate, Japan in May 2003, could disrupt the
operations of those suppliers, which could limit the supply of our products
and harm our business.
We have limited cash flows, and we may have limited ability to raise
additional funds to finance our operations.
In view of our expected future working capital requirements in connection
with the manufacture and sale of our FRAM and DRAM module products, our
projected research and development and other operating expenditures, we may be
required to seek additional equity or debt financing. We cannot be sure that
any additional financing or other sources of capital will be available to us
on acceptable terms, or at all. The inability to obtain additional financing
when needed would have a material adverse effect on our business, financial
condition and operating results and could adversely affect our ability to
continue our business operations. If additional financing is obtained, any
issuance of common or preferred stock to obtain funding would result in
further dilution of our existing stockholders' interests.
Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002
are uncertain, and if we fail to comply in a timely manner, our business could
be harmed and our stock price could decline.
Page-36
Rules adopted by the Securities and Exchange Commission pursuant to Section
404 of the Sarbanes-Oxley Act require annual assessment of our internal
control over financial reporting, and attestation of our assessment by our
independent auditors. This requirement will first apply to our Annual Report
on Form 10-K for the fiscal year ending December 31, 2004. The standards that
must be met for management to assess the internal control over financial
reporting as effective are new and complex, and require significant
documentation, testing and possible remediation to meet the detailed
standards. We may encounter problems or delays in completing activities
necessary to make an assessment of our internal control over financial
reporting. In addition, the attestation process by our independent auditors
is new and we may encounter problems or delays in completing the
implementation of any requested improvements or remediations and receiving an
attestation of our assessment by our independent auditors. We can provide no
assurance as to our, or our independent auditors, conclusions at December 31,
2004, with respect to the effectiveness of our internal controls over
financial reporting. The existence of the above factors creates a risk that
we, or our independent auditors will not be able to conclude at December 31,
2004, that our internal controls over financial reporting are effective as
required by the Sarbanes-Oxley Act. If we cannot assess our internal control
over financial reporting as effective, or if our independent auditors are
unable to provide an unqualified attestation report on such assessment,
investors could lose confidence in our reported financial information and the
trading price of our stock could drop.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in United States interest rates
and changes in foreign currency exchange rates as measured against the United
States dollar. These exposures are directly related to its normal operating
activities. The Company currently has no derivative financial instruments.
Interest payable on the Company's convertible debentures is fixed at 5% over
the term of the debentures. As such, changes in interest rates will not
affect future earnings or cash flows.
The Company manages interest rate risk by investing its excess cash in cash
equivalents bearing variable interest rates, which are tied to various market
indices. The Company does not believe that near-term changes in interest
rates will result in a material effect on future earnings, fair values or cash
flows of the Company. The net effect of a 10% change in interest rates on
outstanding cash and cash equivalents at September 30, 2004 would have less
than a $100,000 effect on the Company's earnings or cash flows.
Page-37
The Company has a wholly owned subsidiary located in Japan. The operating
costs of this subsidiary are denominated in Japanese Yen, thereby creating
exposures to exchange rate variations. To date, this subsidiary has had only
limited operations and is expected to continue to have limited operations in
the foreseeable future, and, therefore, the Company does not believe any
changes in exchange rates will have a material effect on future earnings,
fair values or cash flows of the Company. The Company does not believe that
reasonably possible near-term variations in exchange rates will result in a
material effect on future earnings, fair values or cash flows of the Company,
and therefore, the Company has chosen not to enter into foreign currency
hedging instruments. There can be no assurance that such an approach will be
successful, especially in the event of a significant and sudden change in
Japanese currency valuation.
The Company recently formalized a process for FRAM wafer purchase price
adjustments related to fluctuations in Japanese Yen currency exchange rates
with its supplier, Fujitsu. Under this agreement, Ramtron's FRAM wafer
purchase price in US dollars will be adjusted quarterly to reflect the
previous quarter's average Japanese Yen to US dollar exchange rate. The
Company does not believe near-term variations in exchange rates that are
reasonably possible will result in a material effect on future earnings, fair
value, or cash flows of the Company; therefore, the Company has chosen not to
enter into foreign currency hedging instruments. There can be no assurance
that such an approach will be successful, especially in the event of a
significant and sudden change in Japanese currency valuation.
Average selling prices of the Company's products have not increased
significantly as a result of inflation during the past several years,
primarily due to intense competition within the semiconductor industry. The
effect of inflation on the Company's costs of production has been minimized
through improvements in production efficiencies. The Company anticipates
that these factors will continue to minimize the effects of any foreseeable
inflation and other price pressures within the industry and markets in which
the Company participates.
ITEM 4 - CONTROLS AND PROCEDURES
Under the direction of Ramtron's Chief Executive Officer and Chief
Financial Officer, Ramtron evaluated its disclosure controls and procedures
and internal control over financial reporting and concluded that
(i) Ramtron's disclosure controls and procedures were effective as of
September 30, 2004, and (ii) no change in internal control over financial
reporting occurred during the quarter ended September 30, 2004, that has
materially affected, or is reasonably likely to materially affect, such
internal control over financial reporting.
Page-38
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to assess
as of the end of each fiscal year the effectiveness of its internal control
over financial reporting, and its independent auditors must attest to such
assessment. Ramtron must comply with these requirements for the first time in
connection with the preparation of its financial statements for the year
ending December 31, 2004. The Company is engaged in a comprehensive effort to
comply with Section 404. The Company cannot provide any assurance that its
documentation will be completed in a timely manner, and that it will be able
to provide an acceptable attestation report regarding the effectiveness of its
internal control over financial reporting. If Ramtron is unable to complete
the required procedures within the time specified by Section 404, we may be
unable to file our Annual Report on Form 10-K by the required deadline. In
addition, if upon implementation, Ramtron's internal control over financial
reporting is deemed to not be effective, investor confidence and share value
may be negatively affected.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Information required by this item is incorporated by reference from the
information contained under the caption "Part II, Item 1, Legal Proceedings"
in the Company's Form 10-Q for the period ended March 31, 2004 as filed with
the Securities and Exchange Commission.
ITEMS 2 - 5 - NONE
ITEM 6 - EXHIBITS
(a) Exhibits:
10.1 Offer Letter between the Registrant and Eric A. Balzer,
dated October 28, 2004.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
Officer.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 of Principal
Executive Officer.
32.2 Certification Pursuant to 18 U.S.C. Section 1350 of Principal
Financial Officer.
Page-39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAMTRON INTERNATIONAL CORPORATION
(Registrant)
November 15, 2004 /S/ Eric A. Balzer
-------------------------
Eric A. Balzer
Chief Financial Officer
(Principal Accounting Officer)
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