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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 000-22339
RAMBUS INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3112828
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2465 Latham Street, Mountain View, CA 94040
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(650) 903-3800
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the registrant's Common Stock held by
non-affiliates of the Registrant as of November 30, 1997 was approximately $755
million based upon the closing price reported for such date on the Nasdaq
National Market. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the Registrant have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of outstanding shares of the Registrant's Common Stock, $.001
par value, was 22,569,542 as of November 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's next Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs, and certain
assumptions made by the Company's management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth herein under "Factors Affecting Future Results" on pages
5 through 11, as well as those noted in the documents incorporated herein by
reference. Unless required by law, the Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. However, readers should carefully
review the risk factors set forth in other reports or documents the Company
files from time to time with the Securities and Exchange Commission,
particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.
Item 1. Business
Rambus Inc. ("Rambus" or the "Company") designs, develops, licenses and
markets high-speed chip-to-chip interface technology to enhance the performance
and cost-effectiveness of computers, consumer electronics and other electronic
systems. The Company licenses semiconductor companies to manufacture and sell
memory and logic ICs incorporating Rambus interface technology and markets its
solution to systems companies to encourage them to design Rambus interface
technology into their products. The Company's technology cost-effectively
increases the data transfer rate, or "memory bandwidth," allowing semiconductor
memory devices to keep pace with faster generations of processors and
controllers and thus supports the accelerating data transfer requirements of
multimedia and other high-bandwidth applications.
Rambus was incorporated in California in March 1990 and reincorporated in
Delaware in March 1997.
Background
The performance of a computer or other electronic system is typically
constrained by the speed of its slowest element. In the past, that element was
the logic IC that controlled the system's specific functions and performed
calculations-the microprocessor. In recent years, however, new generations of
microprocessors and controllers have become substantially faster and more
powerful, and increasingly the bottleneck in system performance is becoming the
component that stores the instructions and data needed by the microprocessors
and controllers-the DRAM.
Since 1980, the typical operating frequency of Intel and other mainstream
microprocessors has increased approximately 40 times from 5 MHz (million cycles
per second) to over 200 MHz. During this same period, the typical operating
frequency of a standard DRAM (known as a "page mode" DRAM) has increased by
approximately five times. Even the evolutionary improvements to DRAM technology,
including the FPM (fast-page mode) DRAM, the EDO (extended-data-out) DRAM, the
SDRAM (synchronous DRAM) and the SGRAM (a version of the SDRAM for graphics
applications), have only been able to provide an improvement of up to
approximately ten times. This growing disparity between the frequency of
microprocessors and DRAMs is termed the "Performance Gap."
While microprocessors have undergone both manufacturing and architectural
improvements, significant innovations for DRAMs have generally only occurred on
the manufacturing side. DRAM manufacturers have been successful in increasing
DRAM "density," or storage capacity, from roughly 1 Kbit (thousand bits) to 64
Mbits (million bits) per chip, thereby reducing the number of DRAMs required for
a given amount of memory. However, corresponding architectural improvements
necessary to increase DRAM data transfer rates to keep pace with increasing
microprocessor speeds have not occurred.
Rambus Technology
Rambus has created a revolutionary chip-to-chip interface architecture,
which allows data to be transferred through a simplified bus at significantly
higher frequencies than permitted by conventional technologies. Rambus has
focused
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the application of its interface technology on the Performance Gap and licenses
its interface technology to memory and logic semiconductor manufacturers, which
incorporate this interface technology into their IC designs to supply systems
companies with Rambus ICs. The key elements of the Rambus interface are
Rambus-based DRAMs ("RDRAMs"), Rambus ASIC cells ("RACs") and the
interconnecting circuitry known as the "Rambus Channel." While Rambus technology
can be used to address a wide variety of chip-to-chip data transfer
requirements, the largest immediate application is to connect logic circuits to
memory in home video games, PCs, workstations and other electronic systems.
Rambus interface technology currently allows data transfers of up to 600
megabytes per second between a logic IC and DRAMs by transferring data at a
frequency of 600 MHz over a byte-wide bus. System performance can be further
enhanced by applying Rambus interface technology to multiple channels on a logic
IC. For example, a Rambus-based logic IC can utilize four channels to achieve
data transfer of up to 2.4 gigabytes per second. In addition, Rambus is working
with Intel and others on the definition of an extension to the Rambus interface
technology for 64 Mbit generation RDRAMs, scheduled for introduction in late
1998 and called "Direct Rambus" technology, which will be further optimized for
PC main memory applications. This technology is scheduled to increase the
operating frequency of RDRAMs to 800 MHz and double the bus width to allow data
transfers of up to 1.6 gigabytes per second. There can be no assurance that the
dates or performance criteria referred to in the preceeding forward-looking
statements will be obtained. See "Factors Affecting Future Results - Future
Dependence upon PC Main Memory Market Segment and Intel" and "- Rapid
Technological Change; Reliance on Fundamental Technology; Importance of Timely
New Product Development."
Target Markets and Applications
The high-speed interface technology Rambus has developed is applicable to
data transfer between most semiconductor chips. The Company has chosen to
concentrate the application of its technology on the interface between logic ICs
and memory devices because of the acute performance needs and the relevant
market sizes. While Rambus interface technology is useful in providing increased
memory bandwidth in any electronic system, the Company believes that the systems
which will best utilize the high bandwidth provided by current Rambus technology
are the relatively high-volume, low-cost systems in which the cost of the memory
subsystems represents a significant portion of the selling price. To date, the
principal applications for the Company's technology have been in the consumer
multimedia, PC multimedia and workstation multimedia markets. These areas
accounted for the sale of approximately $13,000, $11 million and $447 million of
Rambus ICs by Rambus licensees in calendar 1994, 1995 and 1996, respectively.
In November 1996, Rambus entered into a development and license contract
with Intel. The contract provides for the parties to cooperate in the
development of a specification for Direct Rambus next-generation 64 Mbit RDRAMs,
which will be targeted at the PC main memory market segment. The contract also
calls for Intel to use reasonable best efforts to develop a PC main memory
controller designed for use with these RDRAMs. The Company believes that Direct
Rambus technology will offer superior bandwidth compared to other solutions for
PC main memory applications. However, these RDRAMs and the Intel memory
controllers are not scheduled for mass production until 1999, and there can be
no assurance that such devices will be successfully developed or that, if
developed, will be successful in penetrating the market segment for PC main
memory.
The Company believes that its technology, which enables high memory
bandwidth at low cost, is well suited to a broad range of other applications.
Other Rambus-based applications currently being developed include multifunction
peripheral controllers for use in combination fax/copier/scanner/laser printer
applications and networking equipment such as high-speed ethernet switches.
There can be no assurance that such devices will be designed incorporating
Rambus interface technology or that sales of such devices will be meaningful.
Rambus Licensees
Rambus licenses its technology on a nonexclusive and worldwide basis to
semiconductor manufacturers who sell Rambus ICs to systems companies which have
adopted Rambus technology. An important element of the Company's strategy is to
license its technology broadly in order to establish Rambus interface technology
as a standard and to provide systems companies with sources for Rambus ICs from
established semiconductor companies. Rambus provides licenses to both DRAM
manufacturers and logic IC manufacturers, who can license Rambus interface
technology for use in producing RDRAMs and/or logic ICs containing RACs. At
September 30, 1997, Rambus had a total of 21 licensees.
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Rambus licensees include thirteen DRAM manufacturers which collectively
accounted for over 90% of worldwide DRAM sales in calendar 1996: Fujitsu,
Hitachi, Hyundai Electronics, IBM, LG Semicon, Micron Technology, Mitsubishi,
NEC, Oki Electric Industry, Samsung Electronics, Siemens, Texas Instruments and
Toshiba. At September 30, 1997, four of these licensees were in production of
RDRAMs and nearly all were in development of next-generation Direct RDRAMs.
Rambus logic licensees include Chromatic Research, Cirrus Logic, Fujitsu, IBM,
Intel, LG Semicon, LSI Logic, NEC, SGS-THOMSON, Texas Instruments and Toshiba.
At September 30, 1997, four of these licensees were in production of logic ICs
which include RACs.
Rambus Business Model and Strategy
In order to establish Rambus interface technology as an industry standard,
the Company has adopted an innovative business model in which it neither
manufactures nor sells semiconductors incorporating the Company's technology.
The Company licenses its technology on a nonexclusive and worldwide basis to
semiconductor companies which manufacture and sell RDRAMs and logic ICs
containing RACs to systems companies which have adopted Rambus technology.
Systems companies are not required to obtain a Rambus license to incorporate
Rambus ICs into their products. However, an important part of the Company's
strategy is to maintain close ties to these systems companies to encourage the
adoption of Rambus technology.
The Rambus business model and strategy are designed to promote Rambus as an
industry standard, target leading systems companies in markets that the Company
believes represent the greatest potential for Rambus IC sales, provide systems
companies with multiple sources for RDRAMs, share research and development
efforts with licensees, maintain technology leadership, pursue a system-level
approach and generate revenue through a combination of contract fees and
royalties.
Contract fees have provided the majority of the capital needed to date by
the Company to develop its fundamental technology, and the Company believes that
its business model is well suited to continue funding future development.
However, there is no assurance that the Company's current partner licensees will
generate revenue, or that the Company will be able to add new license contracts
in the future, at levels sufficient to provide significant funding for further
development activities.
Royalties, which are generally a percentage of the revenues received by
licensees on their sales of Rambus ICs, are normally payable by a Rambus
licensee on sales occurring during the life of the Rambus patents being
licensed. For a typical systems application of Rambus technology, the Company
receives royalties from the sale of both logic ICs containing RACs and RDRAMs as
they are shipped by Rambus licensees. Royalty rates range up to a maximum of
approximately 2.5% for RDRAMs and a maximum of approximately 5% for logic ICs,
and in some cases may decline based on the passage of time or on the total
volume of Rambus ICs shipped. The exact rate and structure of a royalty
arrangement with a particular licensee depend on a number of factors, including
the amount of the license fee to be paid by the licensee and the marketing and
engineering commitment made by the licensee.
Design and Manufacturing
Rambus interface technology has been developed to allow semiconductor
companies to use familiar, widely-available design tools and conventional
techniques when designing their Rambus-enabled chips. A new Rambus licensee
receives an implementation package from the Company which contains all the
information needed to develop a Rambus IC in the licensee's process. There are
separate implementation packages for RDRAMs and for RACs. An implementation
package includes a specification, a generalized circuit layout database for the
particular version of the RDRAM or RAC which the licensee intends to develop,
test parameter software and, for RDRAMs, a DRAM core interface specification.
Many licensees have contracted to have Rambus produce the specific
implementation required to optimize the generalized circuit layout for the
licensee's manufacturing process. In such cases, the licensee provides specific
design rules and transistor models which Rambus designers use to integrate RDRAM
or RAC circuits into the licensee's process. However, Rambus anticipates that as
licensees become more familiar with the Rambus technology, they will be able to
do more of the implementation work without Rambus' assistance.
Rambus has developed its technology to be manufacturable using familiar,
industry-standard CMOS semiconductor processes. For this reason the Company
believes that the wafer fabrication yields of RDRAMs and logic products
containing RACs are consistent with those for similar products in the same
manufacturing facility. However, because of the extra Rambus interface
circuitry, an RDRAM chip is somewhat larger than a standard DRAM. Therefore, a
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manufacturer will generally produce fewer RDRAMs than standard DRAMs for a given
wafer size and an RDRAM chip will be somewhat more expensive than the standard
version. Rambus believes that this die size premium is about 10% to 20% for the
current 16 Mbit generation, but will be reduced to a target of less than 10% for
64 Mbit Direct RDRAMs. In addition, RDRAM manufacturers are responsible for
their own manufacturing processes and Rambus has no role in the manufacture of
RDRAMs. For example, Rambus has no influence on decisions in regard to any
process changes or on whether or when to "shrink" or otherwise change a design
to reduce the cost of the chips.
Current implementations of RDRAMs and Rambus logic ICs can be packaged in
widely available, inexpensive packaging. System companies connect RDRAMs to
Rambus logic ICs using normal printed circuit board ("PCB") materials and
manufacturing techniques. System companies are provided with detailed
specifications from Rambus on circuit board layout and construction. Circuit
boards can be fabricated and assembled using standard PCB techniques and
equipment.
Research and Development
The ability of the Company to compete in the future will be substantially
dependent on its ability to advance its interface technology in order to meet
changing market needs. To this end, Company engineers are involved in developing
new versions of the Rambus interface technology which will allow chip-to-chip
data transfer at higher speeds as well as provide other improvements. The
Company has assembled a team of highly skilled engineers whose activities are
focused on further development of Rambus interface technology as well as
adaptation of current technology to specific licensees' processes. Because of
the complexity of these activities, the design and development process at Rambus
is a multi-disciplinary effort requiring expertise in computer architecture,
digital and analog circuit design and layout, DRAM and logic semiconductor
process characteristics, packaging, PCB routing and high-speed testing
techniques.
As of September 30, 1997, Rambus had 99 employees in its design engineering
departments. Approximately two thirds of these employees have advanced technical
degrees. In fiscal 1995, 1996 and 1997, research and development expenses were
approximately $3.1 million, $5.2 million and $9.8 million, respectively. In
addition, because the Company's license agreements often call for engineering
support by Rambus, a substantial portion of the Company's total engineering
costs has been allocated to cost of contract revenues, even though these
engineering efforts have direct applicability to Rambus' technology development.
The Company expects that it will continue to invest substantial funds in
research and development activities. There can be no assurance that new versions
of the Rambus interface technology can be developed and introduced by the
Company's licensees in a timely fashion or that such new technology will be
accepted by the market. Moreover, the end markets for the Company's technology,
particularly the home video game and PC markets, are subject to rapid
technological change and there can be no assurance that as such markets change
the Company's interface technology will remain current and suitable.
Competition
The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change, short product life
cycles, cyclical market patterns and increasing foreign and domestic
competition. All major DRAM manufacturers, including the Rambus licensees, are
developing higher-frequency versions of standard DRAMs such as EDO, SDRAMs and
SGRAMs which compete with RDRAMs. These companies are much larger and have
better access to financial, certain technical and other resources than Rambus.
Additional high-speed DRAMs have recently been introduced by other semiconductor
companies for specialized applications.
The Company believes that its success in establishing a new high-speed
memory interface has been due to the systems approach it has taken to solving
the application needs of companies in home video game, PC and other electronic
systems businesses. However, the Company believes competitors have begun to take
a similar approach. The Company believes that its principal competition may come
from its licensees and prospective licensees, many of which are evaluating and
developing products based on alternative technologies. Many DRAM suppliers have
indicated that they are developing a new technology called Double Data Rate
("DDR") SDRAMs, aimed at doubling the memory bandwidth from SDRAMs without
increasing the clock frequency. In addition, a consortium including both large
DRAM manufacturers and systems companies is promoting a specification for an
alternative high-speed interface standard called SyncLink or SLDRAM. To the
extent that these alternative technologies provide comparable system performance
at lower cost than RDRAMs, or do not require the payment of comparable
royalties, the Company's licensees and prospective licensees may adopt and
promote the alternative technologies. There can be no assurance that the
Company's future competition will not have a material adverse effect on the
Company's business, financial
4
condition and results of operations. In addition, certain semiconductor
companies have recently introduced a new kind of IC which combines logic and
DRAM on the same chip. Such chips, called "embedded DRAM," eliminate the need
for any chip-to-chip interface and are primarily being used for graphics
applications. Embedded DRAMs are well suited for applications where component
space saving and power consumption are important, such as in the graphics
subsystems of notebook PCs. There can be no assurance that competition from
embedded DRAMs will not increase in the future.
Patents and Intellectual Property Protection
The Company has an active program to protect its proprietary technology
through the filing of patents. At September 30, 1997, the Company held 34 United
States patents on various aspects of its technology, with expiration dates
ranging from 2010 to 2014 and had applications pending for an additional 69
United States patents. The Company's United States patents do not prevent the
manufacture or sale of Rambus-based ICs abroad. At September 30, 1997, the
Company held six foreign patents and had additional foreign patent applications
pending in Taiwan, Korea, Japan and various other jurisdictions. In addition,
the Company attempts to protect its trade secrets and other proprietary
information through agreements with licensees and systems companies, proprietary
information agreements with employees and consultants and other security
measures. The Company also relies on trademarks and trade secret laws to protect
its intellectual property.
Rambus believes that it is important to develop and maintain a uniform
RDRAM memory interface standard. The Company's contracts generally prevent a
licensee from using licensee-developed patented improvements related to Rambus
technology to block other licensees from using the improvements or requiring
them to pay additional royalties related to their use of Rambus interface
technology. Specifically, the contracts generally require licensees to grant to
Rambus a royalty-free cross-license on patented licensee intellectual property
related to the implementation of Rambus interface technology, which Rambus
sublicenses to other licensees which have entered into similar arrangements. Not
all licensees have granted Rambus cross-licenses and there is no assurance that
such a blocking arrangement will not occur in the future.
Sales and Marketing
Consistent with the Company's business model, sales and marketing
activities are focused on developing relationships with potential licensees and
on participating with existing licensees in marketing, sales and technical
efforts directed to systems companies. In many cases, Rambus must dedicate
substantial resources to market to and support systems companies. The Company's
sales and marketing efforts include applications engineering and other technical
support for systems companies, as well as trade shows, advertising and other
traditional marketing activities.
Employees
As of September 30, 1997 the Company had 139 employees, including three in
Japan. Of this total, 99 were in engineering, 27 were in marketing and sales,
and 13 were in finance and administration. Overall, approximately three quarters
of the Company's employees have technical degrees, and more than half of the
Company's employees have advanced technical degrees. The Company's future
success will largely be dependent on its ability to attract, retain and motivate
highly qualified technical and management personnel who are in great demand in
the semiconductor industry. The Company's employees are not represented by any
collective bargaining agreements and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good.
Factors Affecting Future Results
Unpredictable and Fluctuating Operating Results. Because many of the
Company's revenue components fluctuate and are difficult to predict, and its
expenses are largely independent of revenues in any particular period, it is
difficult for the Company to accurately forecast revenues and profits or losses.
Historically, contract revenues have represented the largest portion of the
Company's revenues. The Company recognizes contract revenues ratably over the
period during which post-contract customer support is expected to be provided.
While this means that contract revenues from current licenses are relatively
predictable, accurate prediction of revenues from new licenses is difficult
because the development of a business relationship with a potential licensee is
a lengthy process, frequently spanning a year or more, and the fiscal period in
which a new license agreement will be entered into, if at all, and the financial
terms of such an agreement are difficult to predict. In addition to license
fees, contract revenues include fees for engineering services, which are
dependent upon the varying level of assistance desired by licensees and,
therefore, the revenue from these
5
services is also difficult to predict. Adding to the complexity of making
accurate financial forecasts is the fact that certain expenses associated with a
particular contract are typically front-end loaded, except for expenses
associated with upgrades and enhancements, whereas contract fees associated with
that contract are recognized ratably over the period during which the
post-contract customer support is expected to be provided.
Royalties accounted for 22.4% of total revenues in fiscal 1997. While the
Company does not expect a significant increase in royalty revenue in the near
term, the Company believes that royalties will represent an increasing portion
of total revenue in the long term. Increasing royalty revenues will add to the
difficulty in making accurate financial forecasts. Such royalties are recognized
in the quarter in which the Company receives a report from a licensee regarding
the shipment of Rambus ICs in the prior quarter, and are dependent upon
fluctuating sales volumes and prices of chips containing Rambus technology, all
of which are beyond the Company's ability to control or assess in advance. The
Company believes that its continued success will be substantially dependent upon
royalties increasing at a rate which more than offsets decreases in the
recognition of deferred revenue under existing contracts as their recognition
periods expire, as well as the Company's ability to add new licensees and to
license new generations of its technology to its existing licensees. Because a
systems company can change its source of Rambus ICs at any time, and because the
new Rambus license source could have a considerable nonrefundable prepaid
royalty balance as well as different royalty rates, any such change by a systems
company, particularly one which accounts for substantial volumes of Rambus ICs,
could have a sudden and significant adverse effect on the Company's revenues.
The Company's business is subject to a variety of additional risks that
could materially adversely affect quarterly and annual operating results,
including market acceptance of the Company's technology; systems companies'
acceptance of Rambus ICs produced by the Company's licensees; market acceptance
of the products of systems companies which have adopted the Company's
technology; the loss of any strategic relationships with systems companies or
licensees; announcements or introductions of new technologies or products by the
Company or the Company's competitors; delays or problems in the introduction or
performance of enhancements or future generations of the Company's technology;
fluctuations in the market price and demand for DRAMs and logic ICs into which
the Company's technology has been incorporated; competitive pressures resulting
in lower contract revenues or royalty rates; changes in the Company's and system
companies' development schedules and levels of expenditure on research and
development; personnel changes, particularly those involving engineering and
technical personnel; costs associated with protecting the Company's intellectual
property; changes in Company strategies; foreign exchange rate fluctuations or
other changes in the international business climate; and general economic trends
and other factors.
Volatility of Stock Price. The trading price of the Company's Common Stock
could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new products by
the Company, its licensees or its competitors, developments with respect to
patents or proprietary rights and other events or factors. The trading price of
the Company's Common Stock could also be subject to wide fluctuations in
response to the publication of reports and changes in financial estimates by
securities analysts, and it is possible that the Company's actual results in one
or more future periods will fall short of those estimates by securities
analysts. In addition, the equity markets have experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
History of Losses; No Assurance of Profitability. As of September 30, 1997,
the Company's accumulated deficit was approximately $32.5 million. While the
Company generated net income for the last four consecutive quarters, it incurred
significant losses in each quarter of fiscal 1996 and in each quarter of its
prior fiscal years. There can be no assurance that in the future the Company
will be profitable on a quarterly or annual basis.
Dependence upon Limited Number of Licensees. The Company neither
manufactures nor sells devices containing its interface technology. Rather, the
Company licenses its technology to semiconductor companies, which in turn
manufacture and sell Rambus ICs to systems companies which incorporate Rambus
technology into their products. The Company's strategy to become an industry
standard is dependent upon the Company's ability to make its technology widely
available to systems companies through multiple semiconductor manufacturers, and
there can be no assurance that the Company will be successful in maintaining its
relationships with its current licensees or in entering into new relationships
with additional licensees. The Company faces numerous risks in successfully
obtaining licensees on terms consistent with the Company's business model,
including, among others, the lengthy and expensive process of building a
relationship with a potential licensee before there is any assurance of a
license agreement with such party; persuading large semiconductor companies to
work with, to rely for critical technology on, and to disclose proprietary
manufacturing technology to, a smaller company such as Rambus; persuading
potential licensees to bear certain
6
development costs associated with Rambus technology and to make the necessary
investment to successfully produce Rambus ICs; and successfully transferring
technical know-how to licensees. In addition, there are a relatively limited
number of larger semiconductor companies to which the Company could license its
interface technology in a manner consistent with its business model. The Company
believes that its principal competition may come from its licensees and
prospective licensees, many of which are evaluating and developing products
based on alternative technologies.
Dependence upon Systems Companies. Although sales of Rambus ICs to systems
companies which have adopted the Company's technology for their products are not
made directly by the Company, such sales directly affect the amount of royalties
received by the Company. Therefore, the Company's success is substantially
dependent upon the adoption of the Company's interface technology by systems
companies, particularly those which develop and market high-volume business and
consumer products such as home video games and PCs. The Company is subject to
many risks beyond its control that influence the success or failure of a
particular systems company, including among others competition faced by the
systems company in its particular industry; market acceptance of the systems
company's products; the engineering, sales and marketing and management
capabilities of the systems company; technical challenges unrelated to Rambus
technology faced by the systems company in developing its products; and the
financial and other resources of the systems company. The process of persuading
systems companies to adopt the Company's technology can be lengthy and, even if
adopted, there can be no assurance that the Rambus technology will be used in a
product that is ultimately brought to market, achieves commercial acceptance or
results in significant royalties to the Company. Rambus must dedicate
substantial resources to market to and support systems companies, in addition to
supporting the sales and marketing and technical efforts of its licensees in
promoting Rambus technology to systems companies. To date, the Company has not
charged systems companies for technical support. Because the Company does not
control the business practices of its licensees, it has no ability to establish
the prices at which its technology is made available to systems companies or the
degree to which its licensees promote Rambus technology to systems companies.
No Assurance of Adoption of Rambus Technology as an Industry Standard. An
important part of the Company's strategy to become an industry standard is to
penetrate new markets by targeting leaders in those markets. This strategy is
designed to encourage other participants in those markets to follow such leaders
in adopting Rambus technology. Should a high profile industry participant adopt
Rambus technology for one or more of its products but fail to achieve success
with those products, other industry participants' perception of Rambus
technology could be adversely affected. Any such event could reduce future sales
of Rambus ICs. Likewise, were a market leader to adopt and achieve success with
a competing technology, the Company's reputation and sales could be adversely
affected. In addition, some industry participants have adopted, and others may
in the future adopt, a strategy of disparaging the Rambus solution adopted by
their competitors. Failure of the Company's technology to be adopted as an
industry standard would have a material adverse effect on the Company's
business, financial condition and results of operations.
Future Dependence upon PC Main Memory Market Segment and Intel. An
important part of the Company's strategy is to penetrate the market segment for
PC main memory. Rambus believes that PC main memory currently accounts for
approximately one-half of all DRAMs sold. In November 1996, Rambus signed a
development and license contract with Intel Corporation which provides for the
parties to cooperate in the development of a specification for an extension of
the RDRAM optimized for PC main memory applications. The contract also calls for
Intel to use reasonable best efforts to develop a PC main memory controller
designed for use with such RDRAMs. The anticipated development period for the
new RDRAM technology is at least two years and there are a number of
technological issues which must be successfully resolved prior to
implementation. There can be no assurance that Intel will successfully develop a
controller for use with RDRAMs in time to meet market requirements, or at all.
In addition, there can be no assurance that the market for high bandwidth PC
main memory products, as anticipated by Intel, will develop by 1999 or at all.
Under the contract, Intel can terminate its relationship with Rambus at any
time. Even if such development efforts are completed, there is no assurance that
RDRAMs will be built by the Company's licensees and purchased by PC
manufacturers in sufficient quantity to become a standard for PC main memory.
The Company established a relationship with Intel several years ago, but Intel
did not at that time pursue development relating to Rambus technology. There can
be no assurance that Intel's current emphasis or priorities will not change in
the future, resulting in less attention and fewer resources being devoted to the
current Rambus relationship. Although certain aspects of the current
relationship between the two companies are contractual in nature, many important
aspects depend on the continued cooperation of the two companies. There can be
no assurance that Rambus and Intel will be able to work together successfully
over an extended period of time. In addition, there can be no assurance that
Intel will not develop or adopt competing technologies in the future.
Revenue Concentration. The Company is subject to revenue concentration
risks at both the licensee and the systems company levels. In fiscal 1997, 1996,
and 1995, revenues from the Company's top five licensees accounted for
7
approximately 63%, 65% and 70% of the Company's revenues, respectively. (In
fiscal 1997, NEC accounted for approximately 29% of revenues and LG
Semiconductor accounted for approximately 10% of revenues.) Because the revenues
derived from various licensees vary from period to period depending on the
addition of new contracts, the expiration of deferred revenue schedules under
existing contracts and the volumes and prices at which the licensees have
recently sold Rambus ICs to systems companies, the particular licensees which
account for revenue concentration have varied from period to period. These
variations are expected to continue in the foreseeable future although the
Company anticipates that revenue will continue to be concentrated in a limited
number of licensees.
The royalties received by the Company are a function of the adoption of
Rambus technology at the systems company level. Systems companies purchase
semiconductors containing Rambus technology from Rambus licensees, and generally
do not have a direct contractual relationship with the Company. The Company's
licensees generally do not provide detail as to the identity of, or volume of
Rambus ICs purchased by, particular systems companies. As a result, the Company
faces difficulty in analyzing the extent to which its future revenues will be
dependent upon particular systems companies.
The profitability first attained by the Company in fiscal 1997 was
attributable partially to an increase in royalties from NEC, which the Company
believes was largely due to royalties on Rambus technology incorporated into the
Nintendo 64 video game system. For reasons described in the foregoing paragraph,
the Company cannot precisely quantify this amount, because its licensees
generally are not required to identify the particular products that incorporate,
or the particular systems companies which purchase, Rambus ICs. The Company
anticipates that sales from its licensees to Nintendo will continue to account
for a substantial portion of royalties in fiscal 1998. Nintendo faces intense
competitive pressure in the video game market, which is characterized by extreme
volatility, frequent new product introductions and rapidly shifting consumer
preferences, and there can be no assurance as to the unit volumes of Rambus ICs
that will be purchased by Nintendo in the future or the level of royalty-bearing
revenues that the Company's licensees will receive from Nintendo.
The Company believes its potential to generate royalties in fiscal 1998 is
largely dependent on system sales by Nintendo and sales of multimedia controller
chips by Cirrus Logic and Chromatic Research. None of these companies is under
any obligation to continue using Rambus technology in its current product or to
incorporate Rambus technology into its future products. There can be no
assurance that a significant number of other systems companies will adopt the
Company's technology or that the Company's dependence upon particular systems
companies will decrease in the future.
Reliance upon DRAM Market; Declines in DRAM Price and Unit Volume per
System. To date, a majority of the Company's royalties has been derived from the
sale of logic ICs incorporating RACs. If the Company is successful in its
strategy to penetrate the PC main memory market, the Company expects that
royalties from the sale of RDRAMs will eventually account for the largest
portion of royalties. Royalties on RDRAMs are based on the volumes and prices of
RDRAMs manufactured and sold by the Company's licensees. The royalties received
by the Company therefore are influenced by many of the risks faced by the DRAM
market in general, including constraints on the volumes shipped during periods
of shortage and reduced average selling prices. The DRAM market is intensely
competitive and generally is characterized by declining average selling prices
over the life of a generation of chips. Such price decreases, and the
corresponding decreases in per unit royalties received by the Company, can be
sudden and dramatic. Compounding the effect of price decreases is the fact that,
under certain of the Company's license agreements, royalty rates decrease as a
function of time or volume. With the introduction of each new generation of
higher density RDRAMs, the Company generally expects higher prices resulting in
higher royalties per device, but with correspondingly fewer devices required per
system. There can be no assurance that decreases in DRAM prices or in the
Company's royalty rates will not have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be successful in maintaining or increasing its
share of any market.
Rapid Technological Change; Reliance on Fundamental Technology; Importance
of Timely New Product Development. The semiconductor industry is characterized
by rapid technological change, with new generations of semiconductors being
introduced periodically and with ongoing evolutionary improvements. Since
beginning operations in 1990, the Company has derived all of its revenue from
its interface technology and expects that this dependence on its fundamental
technology will continue for the foreseeable future. Accordingly, broad
acceptance of the Company's interface technology is critical to the Company's
future success. The introduction or market acceptance of competing technology
which renders the Company's interface technology less desirable or obsolete
would have a rapid and material adverse effect on the Company's business,
results of operations and financial condition. The announcement of new products
by the Company, such as the "Direct Rambus" technology which is under
development, could cause
8
licensees or systems companies to delay or defer entering into arrangements for
the use of the Company's technology, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's operating results will depend to a significant extent on its
ability to introduce enhancements and new generations of its interface
technology which keep pace with other changes in the semiconductor industry and
which achieve rapid market acceptance. The Company must continually devote
significant engineering resources to addressing the ever-increasing need for
memory bandwidth associated with increases in the speed of microprocessors and
other controllers. Technical innovations of the type that will be required for
the Company to be successful are inherently complex and require long development
cycles, and there can be no assurance that the Company's development efforts
will ultimately be successful. In addition, these innovations must be completed
before changes in the semiconductor industry have rendered them obsolete, must
be available when systems companies require these innovations, and must be
sufficiently compelling to cause semiconductor manufacturers to enter into
licensing arrangements with Rambus for the new technology. There can be no
assurance that Rambus will be able to meet these requirements. Moreover,
significant technological innovations generally require a substantial investment
before their commercial viability can be determined. There can be no assurance
that the Company will have the financial resources necessary to fund future
development, that the Company's licensees will continue to share certain
research and development costs with the Company as they have in the past, or
that revenues from enhancements or new generations of the Company's technology,
even if successfully developed, will exceed the costs of development.
Competition. The semiconductor industry is intensely competitive and has
been characterized by price erosion, rapid technological change, short product
life cycles, cyclical market patterns and increasing foreign and domestic
competition. Most major DRAM manufacturers are developing higher-frequency
versions of standard DRAMs such as EDO, SDRAMs and SGRAMs which compete with
RDRAMs. These DRAM manufacturers, including most Rambus DRAM licensees, are much
larger and have better access to financial and technical resources than Rambus.
Additional high-speed DRAMs have recently been introduced by other semiconductor
companies for specialized applications.
The Company believes that its principal competition may come from its
licensees and prospective licensees, many of which are evaluating and developing
products based on alternative technologies and are beginning to take a systems
approach similar to the Company's in solving the application needs of systems
companies. Many DRAM suppliers have indicated that they are developing a new
technology called Double Data Rate ("DDR") SDRAMs, aimed at doubling the memory
bandwidth from SDRAMs without increasing the clock frequency. In addition, a
consortium including both large DRAM manufacturers and systems companies is
promoting a specification for an alternative high-speed interface standard
called SyncLink. To the extent that these alternative technologies provide
comparable system performance at lower or similar cost than RDRAMs, or do not
require the payment of comparable royalties, the Company's licensees and
prospective licensees may adopt and promote the alternative technologies. There
can be no assurance that the Company's future competition will not have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, certain semiconductor companies have recently
introduced a new kind of IC which combines logic and DRAM on the same chip. Such
chips, called "embedded DRAM," eliminate the need for any chip-to-chip interface
and are primarily being used for graphics applications. Embedded DRAMs are well
suited for applications where component space saving and power consumption are
important, such as in the graphics subsystems of notebook PCs. There can be no
assurance that competition from embedded DRAMs will not increase in the future.
Limited Protection of Intellectual Property; Likelihood of Potential
Litigation. While the Company has an active program to protect its proprietary
technology through the filing of patents, there can be no assurance that the
Company's pending United States or foreign patent applications or any future
United States or foreign patent applications will be approved, that any issued
patents will protect the Company's intellectual property or will not be
challenged by third parties, or that the patents of others will not have an
adverse effect on the Company's ability to do business. Furthermore, there can
be no assurance that others will not independently develop similar or competing
technology or design around any patents that may be issued to the Company.
The Company attempts to protect its trade secrets and other proprietary
information through agreements with licensees and systems companies, proprietary
information agreements with employees and consultants and other security
measures. The Company also relies on trademarks and trade secret laws to protect
its intellectual property. Despite these efforts, there can be no assurance that
others will not gain access to the Company's trade secrets, or that the Company
can meaningfully protect its intellectual property. In addition, effective trade
secret protection may be unavailable or limited in certain foreign countries.
Although the Company intends to protect its rights vigorously, there can be no
assurance that such measures will be successful.
9
Rambus believes that it is important to develop and maintain a uniform
RDRAM memory interface standard. The Company's contracts generally prevent a
licensee from using licensee-developed patented improvements related to Rambus
technology to block other licensees from using the improvements or requiring
them to pay additional royalties related to their use of Rambus interface
technology. Specifically, the contracts generally require licensees to grant to
Rambus a royalty-free cross-license on patented licensee intellectual property
related to the implementation of Rambus interface technology, which Rambus
sublicenses to other licensees that have entered into similar arrangements. Not
all licensees have granted Rambus cross-licenses, and there is no assurance that
such a blocking arrangement will not occur in the future.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. While the Company has
not received formal notice of any infringement of the rights of any third party,
questions of infringement in the semiconductor field involve highly technical
and subjective analyses. Litigation may be necessary in the future to enforce
the Company's patents and other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity, and
there can be no assurance that the Company would prevail in any future
litigation. Any such litigation, whether or not determined in the Company's
favor or settled by the Company, would be costly and would divert the efforts
and attention of the Company's management and technical personnel from normal
business operations, which would have a material adverse effect on the Company's
business, financial condition and results of operations. Adverse determinations
in litigation could result in the loss of the Company's proprietary rights,
subject the Company to significant liabilities, require the Company to seek
licenses from third parties or prevent the Company from licensing its
technology, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
In any potential dispute involving the Company's patents or other
intellectual property, the Company's licensees could also become the target of
litigation. While the Company generally does not indemnify its licensees, some
of its license agreements require the Company to provide technical support and
information to a licensee which is involved in litigation involving use of
Rambus technology. The Company is bound to indemnify certain licensees under the
terms of certain license agreements, and the Company may agree to indemnify
others in the future. The Company's support and indemnification obligations
could result in substantial expenses to the Company. In addition to the time and
expense required for the Company to supply such support or indemnification to
its licensees, a licensee's development, marketing and sales of Rambus ICs could
be severely disrupted or shut down as a result of litigation, which in turn
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Risks Associated with International Licenses. To date, companies based in
Japan and Korea have accounted for the substantial majority of the Company's
revenues, and nearly all of its international revenues. In fiscal 1997, 1996,
and 1995, international revenues constituted approximately 80%, 86% and 90% of
the Company's total revenues, respectively. The Company expects that revenues
derived from international licensees will continue to represent a significant
portion of its total revenues in the future. All of the revenues from
international licensees have to date been denominated in United States dollars.
However, to the extent that such licensees' sales to systems companies are not
denominated in United States dollars, any royalties that the Company receives as
a result of such sales could be subject to fluctuations in currency exchange
rates. In addition, if the effective price of Rambus ICs sold to the Company's
foreign licensees were to increase as a result of fluctuations in the exchange
rate of the relevant currencies, demand for Rambus ICs could fall, which in turn
would reduce the Company's royalties. The Company does not use derivative
instruments to hedge foreign exchange rate risk. In addition, international
operations and demand for the products of the Company's licensees are subject to
a variety of risks, including tariffs, import restrictions and other trade
barriers, changes in regulatory requirements, longer accounts receivable payment
cycles, adverse tax consequences, export license requirements, foreign
government regulation, political and economic instability and changes in
diplomatic and trade relationships. In particular, the laws of certain countries
in which the Company currently licenses or may in the future license its
technology require significant withholding taxes on payments for intellectual
property, which the Company may not be able to offset fully against its United
States tax obligations. The Company is subject to the further risk of the tax
authorities in those countries recharacterizing certain engineering fees as
license fees, which could result in increased tax withholdings and penalties.
The Company's licensees are subject to many of the risks described above with
respect to systems companies which are located in different countries,
particularly video game and PC manufacturers located in Asia and elsewhere.
There can be no assurance that one or more of the risks associated with
international licenses of the Company's technology will not have a direct or
indirect material adverse effect on the Company's business, financial condition
and results of operations. Moreover, the laws of certain foreign countries in
which the Company's technology is or may in the future be licensed may not
protect the Company's intellectual
10
property rights to the same extent as the laws of the United States, thus
increasing the possibility of infringement of the Company's intellectual
property.
Dependence on Key Personnel. The Company's success depends to a significant
extent on its ability to identify, attract, motivate and retain qualified
technical, sales, marketing, finance and executive personnel. Because the future
success of the Company is dependent upon its ability to continue enhancing and
introducing new generations of such technology, the Company is particularly
dependent upon its ability to identify, attract, motivate and retain qualified
engineers with the requisite educational background and industry experience.
Competition for qualified engineers, particularly those with significant
industry experience, is intense. The Company is also dependent upon its senior
management personnel, most of whom have worked together at the Company for
several years. The loss of the services of any of the senior management
personnel or a significant number of the Company's engineers could be disruptive
to the Company's development efforts or business relationships and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company generally does not enter into employment
contracts with its employees and does not maintain key person life insurance.
Management of Expanded Operations. The Company is not experienced in
managing rapid growth. The Company may not be equipped to successfully manage
any future periods of rapid growth or expansion, which could be expected to
place a significant strain on the Company's limited managerial, financial,
engineering and other resources. The Company's licensees and systems companies
rely heavily on the Company's technological expertise in designing, testing and
manufacturing products incorporating the Company's interface technologies.
Relationships with new licensees or systems companies generally require
significant engineering support. As a result, any increases in adoption of the
Company's technology will increase the strain on the Company's resources,
particularly the Company's engineers. Any delays or difficulties in the
Company's research and development process caused by these factors or others
could make it difficult for the Company to develop future generations of its
interface technology and to remain competitive. In addition, the rapid rate of
hiring new employees could be disruptive and adversely affect the efficiency of
the Company's research and development process. The rate of the Company's future
expansion, if any, in combination with the complexity of the technology involved
in the Company's licensee-based business model, may demand an unusually high
level of managerial effectiveness in anticipating, planning, coordinating and
meeting the operational needs of the Company as well as the needs of the
licensees and systems companies. Additionally, the Company may be required to
reorganize its managerial structure in order to more effectively respond to the
needs of customers. Given the small pool of potential licensees and target
systems companies, the adverse effect on the Company resulting from a lack of
effective management in any of these areas will be magnified. Inability to
manage the expansion of the Company's business would have a material adverse
effect on its business, financial condition and results of operations.
Item 2. Properties
The Company leases approximately 38,000 square feet in one building in
Mountain View, California for its U.S. engineering, marketing and administrative
operations. The principal lease expires in 2005, with an option to extend the
lease for an additional five years. The Company also leases space in Tokyo for
an office which provides sales and technical support to systems companies in
Japan. The Company believes that it will not have difficulty in securing
additional facilities if required.
Item 3. Legal Proceedings
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's business, operating results or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's initial public offering of its Common Stock occurred on
May 13, 1997 at a price of $12.00 per share. The Company's Common Stock is
listed on the Nasdaq National Market under the symbol "RMBS." For the period
from commencement of trading through June 30, 1997 the high and low prices
reported by Nasdaq were $53.00 and $22.50, respectively. For the quarter ending
September 30, 1997 the high and low prices were $86.75 and $44.25, respectively.
As of November 30, 1997, there were 427 holders of record of the Company's
Common Stock. Because many of the Company's shares of Common Stock are held by
brokers and other institutions on behalf of stockholders, the Company is unable
to estimate the total number of stockholders represented by these record
holders. The Company has never paid or declared any cash dividends on its Common
Stock or other securities and does not anticipate paying cash dividends in the
foreseeable future.
(b) The Company completed its initial public offering pursuant to a
Registration Statement on Form S-1 (File No. 333-22885) declared effective by
the Securities and Exchange Commission on May 13, 1997 and issued 3,162,500
shares (including the underwriter's over-allotment option) of its Common Stock,
par value $0.001 per share, to the public at a price of $12.00 per share. The
managing underwriters for the initial public offering were Morgan Stanley & Co.
Incorporated, Hambrecht & Quist LLC and Robertson, Stephens & Company LLC. The
offering has been terminated and all shares have been sold. The Company received
approximately $34,117,000 of cash from the initial public offering, net of
underwriting discounts, commissions, and other offering costs and expenses.
Since August 22, 1997 (the date of the Company's Initial Report on Form
SR), the Company used approximately $4.3 million of the net proceeds from the
Company's initial public offering to fund operating expenses, $0.7 million to
purchase and install machinery and equipment, and $0.1 million to repay
indebtedness. The Company has placed approximately $21.8 million in temporary
investments pending future use.
No payments constituted direct or indirect payments to directors, officers,
general partners of the issuer or their associates, or to persons owning ten
percent or more of any class of equity securities of the issuer or to affiliates
of the issuer.
Item 6. Selected Consolidated Financial Data
Year Ended September 30,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands except per share data)
Operations:
Total revenues $ 26,015 $ 11,270 $ 7,364 $ 5,000 $ 3,371
Operating income (loss) 1,954 (4,568) (6,053) (6,197) (5,962)
Net income (loss) 1,981 (4,415) (7,020) (6,629) (6,336)
Net income (loss) per share $ 0.09 $ (0.73) $ (1.24) $ (1.29) $ (1.44)
Financial Position (at year end):
Total assets $ 87,878 $ 12,868 $ 18,307 $ 8,395 $ 7,807
Total debt (capital lease obligations) 512 1,297 1,616 1,655 1,698
12
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Overview
Since its founding in March 1990, Rambus has been engaged in the
development of high-speed chip-to-chip interface technology which can be used to
enhance the performance and cost-effectiveness of consumer electronics, computer
systems and other electronic systems. The Company neither manufactures nor sells
semiconductors incorporating the Company's technology. Rather, the Company
licenses its technology on a nonexclusive and worldwide basis to semiconductor
companies which manufacture and sell RDRAMs and logic ICs containing RACs to
systems companies which have adopted Rambus technology. Systems companies are
not required to obtain a Rambus license to incorporate Rambus ICs into their
products.
Revenues. The Company's revenues consist of contract fees and royalties.
Contract fees are comprised of license fees, engineering service fees and
nonrefundable, prepaid royalties, and represented substantially all of the
Company's revenues through fiscal 1996 and approximately 78% of the Company's
revenues in fiscal 1997. The Company's contracts generally require a licensee to
pay a contract fee to Rambus typically ranging from a few hundred thousand
dollars for a narrow license covering a single logic product to millions of
dollars for a license with broad coverage of Rambus technology. Part of these
fees may be due upon the achievement of certain milestones, such as provision of
certain deliverables by Rambus or production of chips by the licensee. All
contract fees are nonrefundable.
In a few cases, the Company has received nonrefundable, prepaid royalties
which offset the earliest royalty payments otherwise due from the licensee. As
of September 30, 1997, $3.1 million of such nonrefundable, prepaid royalties had
offset initial royalties, and the Company had a balance of $3.7 million
remaining to be offset against future royalties.
Substantially all of the license fees, engineering service fees and
nonrefundable, prepaid royalties are bundled together as contract fees because
the Company generally does not provide or price these components separately. The
contracts also generally include rights to upgrades and enhancements.
Accordingly, Rambus recognizes contract revenues ratably over the period during
which post-contract customer support is expected to be provided. The excess of
contract fees received over contract revenue recognized is shown on the
Company's balance sheet as "deferred revenue." As of September 30, 1997, the
Company's deferred revenue was $54.5 million, substantially all of which is
scheduled to be recognized in varying amounts over the next five years.
Royalties, which are generally a percentage of the revenues received by a
licensee on its sales of the Company's ICs, are normally payable by the licensee
on sales occurring during the life of the Company's patents being licensed. For
a typical application of the Company's technology, the Company receives
royalties from the sale of both RDRAMs and logic ICs containing RACs. Royalty
rates range up to a maximum of approximately 2.5% for RDRAMs and a maximum of
approximately 5% for logic ICs, and in some cases may decline based on the
passage of time or on the total volume of the Company's ICs shipped by a
licensee. The exact rate and structure of a royalty arrangement with a
particular licensee depend on a number of factors, including the amount of the
contract fee paid by the licensee and the marketing and engineering commitment
made by the licensee.
Rambus recognizes royalties from a licensee in the quarter in which it
receives the report detailing shipments of Rambus ICs by such licensee in the
prior quarter. While the Company does not expect a significant increase in
royalty revenue in the near term, as prepaid royalties are offset and as Rambus
ICs are incorporated into additional applications the Company believes that
royalties will become an increasing portion of revenues over the long term. To
date, a majority of the Company's royalties has been derived from the sale of
logic ICs incorporating RACs. If the Company is successful in its strategy to
penetrate the PC main memory market segment, the Company expects that royalties
from the sale of RDRAMs will eventually account for the largest portion of
royalties.
As of September 30, 1997, the Company had 21 licensees. Because all of the
Company's revenues are derived from its relatively small number of licensees,
the Company's revenues tend to be highly concentrated. In fiscal 1997, 1996 and
1995 revenues from the top five licensees accounted for approximately 63%, 65%
and 70% of the Company's revenues, respectively. In fiscal 1997, NEC accounted
for approximately 29% of revenues and LG Semicon accounted for approximately 10%
of revenues. The Company expects that it will continue to experience significant
revenue concentration for the foreseeable future. However, the particular
licensees which account for revenue concentration may vary from period to period
depending on the addition of new contracts, the expiration of deferred revenue
schedules
13
under existing contracts, and the volumes and prices at which the licensees sell
Rambus ICs to systems companies in any given period.
The royalties received by the Company are also a function of the adoption
of Rambus technology by systems companies and the acceptance of the systems
companies' products by end users. The Company generally does not have a direct
contractual relationship with systems companies, and the royalty reports
submitted by the Company's licensees generally do not disclose the identity of,
or unit volume of Rambus ICs purchased by, particular systems companies. As a
result, it is difficult for the Company to predict the extent to which its
future revenues will be dependent upon particular systems companies.
To date, companies based in Japan and Korea have accounted for the
substantial majority of the Company's revenues, and nearly all of its
international revenues. In fiscal 1997, 1996 and 1995, international revenues
comprised approximately 81%, 86% and 90% of the Company's net revenues,
respectively. The Company expects that revenues derived from international
licensees will continue to represent a significant portion of its total revenues
in the future. All of the revenues from international licensees to date have
been denominated in United States dollars.
Expenses. Since the Company's inception in March 1990, its engineering
costs (which consist of cost of contract revenues and research and development
expenses) and marketing, general and administrative expenses have continually
increased as the Company has added personnel and ramped up its activities in
these areas. Engineering costs and marketing, general and administrative
expenses generally have decreased as a percentage of revenues throughout this
period due to the relatively rapid revenue base expansion which the Company
experienced as it began entering into license agreements. The Company intends to
continue making significant expenditures associated with engineering, marketing
and administration, and expects that these costs and expenses will continue to
be a significant percentage of revenues in future periods. Whether such expenses
increase or decrease as a percentage of revenues will be substantially dependent
upon the rate at which the Company's revenues change.
Engineering costs are allocated between cost of contract revenues and
research and development expenses. Cost of contract revenues is determined based
on the portion of engineering costs which have been incurred during the period
for the adaptation of Rambus interface technology for specific licensee
processes. The balance of engineering costs, incurred for general development of
Rambus technology, is charged to research and development. In a given period,
the allocation of engineering costs between these two components is a function
of the timing of development and implementation cycles. As a generation of
technology matures from the development stage through implementation, the
majority of engineering costs shifts from research and development expenses to
cost of contract revenues. Engineering costs are recognized as incurred and do
not correspond to the recognition of revenues under the related contracts.
Marketing, general and administrative expenses include salaries, travel
expenses and costs associated with trade shows, advertising, finance and other
marketing and administrative efforts. Costs of technical support for systems
companies, including applications engineering, are also charged to marketing,
general and administrative expense. Consistent with the Company's business
model, sales and marketing activities are focused on developing relationships
with potential licensees and on participating with existing licensees in
marketing, sales and technical efforts directed to systems companies. In many
cases, Rambus must dedicate substantial resources to market to and support
systems companies. Due to the long business development cycles faced by the
Company and the semi-fixed nature of administrative expenses, marketing, general
and administrative expenses in a given period generally are unrelated to the
level of revenues in that period or in recent or near-term future periods.
Taxes. The Company reports certain items of income and expense for
financial statement purposes in different years than they are reported in the
tax return. Specifically, the Company reports contract fees and royalties when
received for tax purposes, as required by tax law. For financial reporting
purposes, the Company records revenues from contract fees over the period
post-contract support is expected to be provided. Accordingly, the Company's net
operating loss for tax purposes is less than the cumulative operating deficit
recorded for financial statement purposes.
14
Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentage of total revenues represented by certain items reflected in the
Company's consolidated statements of operations:
1997 1996 1995
---- ---- ----
Revenues:
Contract revenues ............................. 77.6% 99.4 % 100.0%
Royalties ..................................... 22.4 0.6 --
-------- ---------- ------
Total revenues .......................... 100.0% 100.0 % 100.0 %
====== ====== ======
Costs and expenses:
Cost of contract revenues ..................... 21.1 42.8 71.1
Research and development ...................... 37.7 46.3 42.3
Marketing, general and administrative ......... 33.7 51.4 68.8
------- ------- ------
Total costs and expenses ................ 92.5 140.5 182.2
------- ------ -----
Operating income (loss) ............................ 7.5 (40.5) (82.2)
Other income ....................................... 5.2 3.9 4.4
-------- -------- -------
Income (loss) before income taxes .................. 12.7 (36.6) (77.8)
Provision for income taxes ......................... 5.1 2.6 17.5
-------- -------- ------
Net income (loss) .................................. 7.6% (39.2)% (95.3)%
======= ====== ======
Revenues. Revenues were $26.0 million, $11.3 million and $7.4 million in
fiscal 1997, 1996 and 1995, respectively. While the Company received its first
royalties in fiscal 1996, most of the 53.0% increase in revenues compared to
fiscal 1995 was due to a combination of new contracts and a full year of
revenues from contracts booked during fiscal 1995. In fiscal 1997, contract
revenues increased 80.2% to $20.2 million compared to fiscal 1996 as a result of
the Company's entering into contracts with new licensees and additional
contracts with current licensees for new developments, especially for an
extension of the Company's technology to provide a higher bandwidth interface
for future PC main memory applications.
The Company recorded its first significant royalties in fiscal 1997, a
total of $5.8 million or 22.4% of total revenues. During this period, royalties
were primarily from NEC and, the Company believes, were largely based on sales
of Rambus ICs for use in the Nintendo 64 home video game system. The Company
anticipates that its potential to generate royalties in the next several
quarters is largely dependent on system sales by Nintendo and, to a lesser
extent, sales by Cirrus Logic and Chromatic Research of logic ICs incorporating
RACs for PC graphics and multimedia applications. Nintendo faces intense
competitive pressure in the home video game market, which is characterized by
extreme volatility, frequent new product introductions and rapidly shifting
consumer preferences, and there can be no assurance as to the unit volumes of
Rambus ICs that will be purchased by Nintendo in the future or the level of
royalty-bearing revenues that the Company's licensees will receive from
Nintendo. None of the systems companies currently incorporating Rambus interface
technology into their products is contractually obligated to continue using
Rambus ICs.
Engineering Costs. Engineering costs, consisting of cost of contract
revenues and research and development expenses, were $15.3 million, $10.0
million and $8.4 million, which represented 58.8%, 89.1% and 113.4% of revenues,
in fiscal 1997, 1996 and 1995, respectively. The increase in engineering costs
was due primarily to an increase in engineering personnel, and the decrease as a
percentage of revenues was primarily the result of the Company's growth in
revenues.
Cost of Contract Revenues. Cost of contract revenues was $5.5 million, $4.8
million and $5.2 million, which represented 21.1%, 42.8% and 71.1% of revenues,
in fiscal 1997, 1996 and 1995, respectively. Cost of contract revenues decreased
7.9% in fiscal 1996 compared to fiscal 1995 due to several of the Company's
licensees reaching the production phase during fiscal 1996, thus reducing the
implementation, customization, support and enhancement services required of the
Company. Cost of contract revenues increased 13.9% in fiscal 1997 compared to
fiscal 1996 due to the need for the Company to support several additional
licensees. The decrease in cost of contract revenues as a percentage of revenues
from fiscal 1995 to fiscal 1997 was primarily the result of the Company's growth
in revenues. The Company believes that the level of cost of contract revenues
will continue to fluctuate in the future, both in absolute dollars and as a
percentage of revenues, as new generations of Rambus ICs go through the normal
development and implementation phases.
15
Research and Development. Research and development expenses were $9.8
million, $5.2 million and $3.1 million, which represented 37.7%, 46.3% and 42.3%
of revenues, in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Research
and development expenses increased 67.4% in fiscal 1996 compared to fiscal 1995
and 88.1% in fiscal 1997 compared to fiscal 1996 due to development efforts
related to a new generation of 64 Mbit RDRAMs and associated RACs, including an
extension of the Company's technology to provide a higher bandwidth interface
for future PC main memory applications. The higher costs were primarily due to
increased engineering personnel. The Company expects research and development
expenses to increase over time as it enhances and improves its technology and
applies it to new generations of ICs. The rate of increase of, and the
percentage of revenues represented by, research and development expenses in the
future will vary from period to period based on the research and development
projects underway and the change in engineering headcount in any given period,
as well as the rate of change in the Company's total revenues.
Marketing, General and Administrative. Marketing, general and
administrative expenses were $8.8 million, $5.8 million and $5.1 million, which
represented 33.7%, 51.4% and 68.8% of revenues, in fiscal 1997, 1996 and 1995,
respectively. The increase in absolute dollars was primarily due to a buildup of
the marketing and sales teams in both the U.S. and Japan as well as increased
costs associated with applications engineering and other technical support
provided to systems companies. The decrease in marketing, general and
administrative expenses as a percentage of revenues reflects the increased
revenue base. The Company expects marketing, general and administrative expenses
to increase in the future as the Company puts additional effort into marketing
its technology and assisting systems companies to adapt this technology to new
generations of products and as a result of additional cost associated with
becoming a public company. The rate of increase of, and the percentage of
revenues represented by, marketing, general and administrative expenses in the
future will vary from period to period based on the trade shows, advertising and
other sales and marketing activities undertaken and the change in sales,
marketing and administrative headcount in any given period, as well as the rate
of change in the Company's total revenues.
Other Income. Other income consists primarily of interest income from the
Company's short-term cash investments, offset by interest expense on leases and
other equipment financing. Other income was $1.3 million, $439,000 and $322,000,
which represented 5.2%, 3.9% and 4.4% of revenues, in fiscal 1997, 1996 and
1995, respectively. The increase in absolute dollars was due to interest on
higher average cash investment balances, offset by interest associated with
leased equipment. The Company expects net other income to increase in the future
due to additional interest income on higher cash balances.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $1.3 million in fiscal 1997, $286,000 in fiscal 1996 and $1.3 million
in fiscal 1995. Whereas the fiscal 1995 and 1996 provisions primarily represent
foreign withholding tax on license revenue, the 1997 provision was based on an
estimated federal and state combined rate of 40% on income before income taxes.
At September 30, 1997 the Company had deferred tax assets of approximately
$20 million, primarily relating to the difference between tax and book treatment
of deferred revenue. The Company has established a partial valuation allowance
against its deferred tax assets due to the uncertainty surrounding the
realization of such assets. If it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation allowance will be
reduced.
Other
The Company has granted to Intel Corporation a warrant for the purchase of
1,000,000 shares of Common Stock at an exercise price of $10.00 per share. The
warrant will become exercisable only upon the achievement of certain milestones,
which will result in a charge to the statement of operations at the time of
achievement of the milestones based on the fair value of the warrant.
Liquidity and Capital Resources
Prior to the initial public offering of its common stock, completed in May
1997, the Company funded its operations primarily from contract payments and, to
a lesser extent, the private sale of equity. Including net proceeds of
approximately $34 million from its initial public offering, the Company had cash
and cash equivalents and marketable securities of $71.8 million as of September
30, 1997 and total working capital of $49.7 million, including a short-term
component of deferred revenue of $24.5 million. Deferred revenue represents the
excess of cash received from licensees
16
over revenue recognized on license contracts, and the short-term component
represents the amount of this deferred revenue to be recognized over the next
twelve months. Without the short-term component of deferred revenue, working
capital would have been $74.2 million at September 30, 1997.
The Company's operating activities provided net cash of $31.9 million in
fiscal 1997, used net cash of $3.5 million in fiscal 1996 and provided net cash
of $1.3 million in fiscal 1995. Cash generated by operations in fiscal 1995 was
primarily the result of an increase in deferred revenue offset by the net loss,
adjusted for non-cash items and an increase in accounts receivable. Cash used by
operations in fiscal 1996 was due to the net loss, adjusted for non-cash items,
and a decrease in deferred revenue offset by a decrease in accounts receivable.
Cash generated by operations in fiscal 1997 was primarily the result of an
increase in deferred revenue, net income adjusted for non-cash items, and an
increase in taxes payable, accrued payroll and other liabilities, offset by
increases in deferred tax assets and prepaids and other current assets. Prepaids
and other current assets increased primarily due to increased interest
receivable. The increase in deferred revenue for fiscal 1997 was due to new
billings on license contracts in excess of revenues recognized thereon.
Net cash used in investing activities was $47.2 million and $10.4 million
in fiscal 1997 and fiscal 1995, respectively; net cash provided by investing
activities was $3.9 million in fiscal 1996. Investing activities have consisted
primarily of net purchases of marketable securities and purchases of property
and equipment.
Net cash provided by financing activities were $35.2 million and $8.5
million in fiscal 1997 and fiscal 1995, respectively; net cash used in financing
activities was $546,000 in fiscal 1996. Financing activities in fiscal 1995
consisted primarily of sales of convertible preferred stock and preferred stock
purchase rights offset by principal payments on capital leases. Net cash used in
financing activities in fiscal 1996 consisted of principal payments on capital
leases offset by proceeds from the sale of common stock. Net cash provided by
financing activities in fiscal 1997 was primarily due to completion of the
Company's initial public offering of its common stock.
The Company presently anticipates that existing cash balances will be
adequate to meet its cash needs for at least the next 12 months.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 8. Financial Statements and Supplementary Data
See Item 14 of this Form 10-K for required financial statements and
supplementary data.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
17
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K since the Registrant will file its definitive Proxy Statement for its
next Annual Meeting of Stockholders, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended (the "Proxy Statement"), not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information to be included in the Proxy Statement is incorporated herein
by reference.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item concerning the Company's directors
and executive officers is incorporated by reference to the information set forth
in the sections entitled "Executive Officer Compensation - Executive Officers of
the Company" in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended September 30, 1997.
Item 11. Executive Compensation
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Proposal One - Election of Directors - Director Compensation" and "Executive
Officer Compensation" in the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's fiscal year ended September 30, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Share Ownership by Principal
Stockholders and Management" in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended September 30, 1997.
Item 13. Certain Relationships and Related Transactions
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions with Management" in the Company's
Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of the Company's fiscal year ended
September 30, 1997.
18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page
----
(a) (1) Financial Statements
The following consolidated financial statements of the Registrant
and Report of Coopers & Lybrand L.L.P., Independent Accountants,
are included herewith:
Report of Coopers & Lybrand L.L.P., Independent Accountants...........................................22
Consolidated Balance Sheets as of September 30, 1997 and 1996.........................................23
Consolidated Statements of Operations for the years ended September 30, 1997, 1996, and 1995..........24
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended September 30, 1997,
1996, and 1995........................................................................................25
Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996, and 1995..........26
Notes to Consolidated Financial Statements............................................................27
Consolidated Supplementary Financial Data.............................................................40
(a) (2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts.......................................................42
This financial statement schedule of the Company for each of the
years ended September 30, 1997, 1996 and 1995 is filed as part of
this Form 10-K and should be read in conjunction with the
Consolidated Financial Statements, and related notes thereto, of
the Company. All other financial statement schedules have been
omitted because the required information is not present or not
present in amounts sufficient to require submission of the schedule
or because the information required is included in the consolidated
financial statements or notes thereto.
19
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(a) (3) Exhibits
Exhibit
Number Description of Document
------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of
Registrant filed May 29, 1997.
3.2(1) Amended and Restated Bylaws of Registrant dated February 28,
1997.
4.1(1) Form of Registrant's Common Stock Certificate.
4.2(1) Amended and Restated Information and Registration Rights
Agreement, dated as of January 7, 1997, between Registrant and
the parties indicated therein.
4.3(1) Form of Preferred Shares Rights Agreement dated April 1, 1997.
4.4(1) Common Stock Purchase Warrant dated January 7, 1997.
10.1(1) Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.
10.2(1)(2) Semiconductor Technology License Agreement, dated as of July
4, 1991, between Registrant and NEC Corporation.
10.2.1(1)(2) Amendment No. 1 to Semiconductor Technology License Agreement,
dated as of April 28, 1995, between Registrant and NEC
Corporation.
10.2.2(1)(2) Supplement No. 1 to Semiconductor Technology License
Agreement, dated as of February 25, 1993, between Registrant
and NEC Corporation.
10.2.3(1)(2) Supplement No. 2 to Semiconductor Technology License
Agreement, dated as of July 28, 1994, between Registrant and
NEC Corporation.
10.2.4(1)(2) Supplement No. 4 to Semiconductor Technology License
Agreement, dated as of August 31, 1995, between Registrant and
NEC Corporation.
10.2.5(1)(2) Supplement No. 5 to Semiconductor Technology License
Agreement, dated as of November 14, 1994, between Registrant
and NEC Corporation.
10.2.6(1)(2) Supplement No. 6 to Semiconductor Technology License
Agreement, dated as of December 27, 1994, between Registrant
and NEC Corporation.
10.2.7(1)(2) Supplement No. 8 to Semiconductor Technology License
Agreement, dated as of September 27, 1996, between Registrant
and NEC Corporation.
10.2.8(1)(2) Supplement No. 9 to Semiconductor Technology License
Agreement, dated as of September 10, 1996, between Registrant
and NEC Corporation.
10.2.9(1)(2) Supplement No. 10 to Semiconductor Technology License
Agreement, dated as of February 27, 1997, between Registrant
and NEC Corporation.
10.2.10(1)(2) Supplement No. 11 to Semiconductor Technology License
Agreement, dated as of March 4, 1997, between Registrant and
NEC Corporation.
10.2.11(2)(3) TRAC Addendum to Supplement No. 11 to Semiconductor Technology
License Agreement, dated as of April 23, 1997, between
Registrant and NEC Corporation.
10.2.12(2)(3) Supplement No. 12 to Semiconductor Technology License
Agreement, dated as of September 26, 1997, between Registrant
and NEC Corporation.
10.3(1)(2) Semiconductor Technology Agreement, dated as of December 9,
1994, between Registrant and Goldstar Electron Co., Ltd.
10.3.1(1)(2) First Amendment to Semiconductor Technology Agreement, dated
as of June 30, 1995, between Registrant and Goldstar Electron
Co., Ltd.
20
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(a) (3) Exhibits (Continued)
10.3.2(1)(2) Amendment No. 2 to Semiconductor Technology Agreement, dated
as of March 20, 1996, between Registrant and Goldstar Electron
Co., Ltd.
10.3.3(1)(2) Amendment No. 3 to Semiconductor Technology Agreement, dated
as of June 12, 1996, between Registrant and Goldstar Electron
Co., Ltd.
10.3.4(2)(3) Amendment No. 4 to Semiconductor Technology Agreement, dated
as of May 21, 1997, between Registrant and Goldstar Electron
Co., Ltd.
10.3.5(2)(3) Amendment No. 5 to Semiconductor Technology Agreement, dated
as of August 29, 1997, between Registrant and Goldstar
Electron Co., Ltd.
10.3.6(2)(3) Amendment No. 6 to Semiconductor Technology Agreement, dated
as of August 28, 1997, between Registrant and Goldstar
Electron Co., Ltd.
10.4(1)(2) Semiconductor Technology License Agreement, dated as of
November 15, 1996, between Registrant and Intel Corporation.
10.5(1) 1990 Stock Plan, as amended, and related forms of agreements.
10.6(1) 1997 Stock Plan and related forms of agreements.
10.7(1) 1997 Employee Stock Purchase Plan and related forms of
agreements.
10.8(1) Standard Office Lease, dated as of March 10, 1991, between
Registrant and South Bay/Latham.
10.9(1) Form of Promissory Note between the Registrant and certain
executive officers.
11.1 Statement re: Computation of Net Income (Loss) Per Share.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
27.1 Financial Data Schedule.
- ----------
(1) Incorporated by reference to Registration Statement No. 333-22885.
(2) Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
(3) To be filed by amendment.
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed in the fourth quarter ended
September 30, 1997.
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Rambus Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Rambus Inc.
and Subsidiary as of September 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Rambus Inc. and
Subsidiary as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
October 10, 1997
22
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30,
----------------------------
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 20,641 $ 742
Marketable securities ................................................................. 51,184 7,812
Accounts receivable, less allowance for doubtful accounts of
$10 in 1997 and $8 in 1996 ......................................................... 925 718
Deferred tax assets ................................................................... 5,974 --
Prepaids and other current assets ..................................................... 2,033 873
-------- --------
Total current assets ............................................................. 80,757 10,145
Property and equipment, net ................................................................ 4,338 2,340
Investment ................................................................................. 986 --
Other assets ............................................................................... 1,797 383
-------- --------
Total assets ..................................................................... $ 87,878 $ 12,868
======== ========
LIABILITIES
Current liabilities:
Accounts payable ...................................................................... $ 378 $ 228
Income taxes payable .................................................................. 3,292 84
Accrued salaries and benefits ......................................................... 1,454 338
Other accrued liabilities ............................................................. 1,042 587
Current portion of:
Capital lease obligations .......................................................... 382 753
Deferred revenue ................................................................... 24,473 13,082
-------- --------
Total current liabilities ........................................................ 31,021 15,072
Capital lease obligations, less current portion ............................................ 130 544
Deferred revenue, less current portion ..................................................... 30,066 9,396
-------- --------
Total liabilities ................................................................ 61,217 25,012
-------- --------
Commitments (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares;
Issued and outstanding: no shares at September 30, 1997 and
11,296,822 shares at September 30, 1996 ............................................ -- 11
Common stock, $.001 par value:
Authorized: 60,000,000 shares;
Issued and outstanding: 22,310,499 shares at September 30, 1997
and 5,758,749 shares at September 30, 1996 ......................................... 22 6
Additional paid-in capital ................................................................. 59,865 22,330
Stockholders' notes receivable ............................................................. (680) --
Accumulated deficit ........................................................................ (32,511) (34,492)
Cumulative translation adjustment .......................................................... (35) 1
-------- --------
Total stockholders' equity (deficit) ............................................. 26,661 (12,144)
-------- --------
Total liabilities and stockholders' equity (deficit) ........................ $ 87,878 $ 12,868
======== ========
See Notes to Consolidated Financial Statements.
23
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended September 30,
--------------------------------------------------
1997 1996 1995
-------- -------- --------
Revenues:
Contract revenues .............................................. $ 20,186 $ 11,205 $ 7,364
Royalties ...................................................... 5,829 65 --
-------- -------- --------
Total revenues ............................................ 26,015 11,270 7,364
-------- -------- --------
Costs and expenses:
Cost of contract revenues ...................................... 5,491 4,821 5,236
Research and development ....................................... 9,815 5,218 3,117
Marketing, general and administrative .......................... 8,755 5,799 5,064
-------- -------- --------
Total costs and expenses .................................. 24,061 15,838 13,417
-------- -------- --------
Operating income (loss) ................................... 1,954 (4,568) (6,053)
Interest and other income, net ...................................... 1,536 737 619
Interest expense .................................................... (194) (298) (297)
-------- -------- --------
Income (loss) before income taxes ......................... 3,296 (4,129) (5,731)
Provision for income taxes .......................................... 1,315 286 1,289
-------- -------- --------
Net income (loss) ......................................... $ 1,981 $ (4,415) $ (7,020)
======== ======== ========
Net income (loss) per share ......................................... $ 0.09 $ (0.73) $ (1.24)
======== ======== ========
Number of shares used in per share calculations ..................... 21,711 6,088 5,665
======== ======== ========
See Notes to Consolidated Financial Statements.
24
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended September 30, 1997, 1996 and 1995
(in thousands)
Convertible
Preferred Stock Common Stock Additional Stockholders'
-------------------- -------------------- Paid-In Notes Accumulated
Shares Amount Shares Amount Capital Receivable Deficit
-------- -------- -------- -------- -------- -------- --------
Balances, September 30, 1994 .................... 9,414 $ 9 5,150 $ 5 $ 13,010 $ -- $(23,057)
Issuance of common stock upon
exercise of options ......................... -- -- 499 1 189 -- --
Issuance of Series D preferred
stock, net of issuance costs of
$35 ......................................... 1,883 2 -- -- 7,963 -- --
Repurchase of common stock for
cash ........................................ -- -- (88) -- (3) -- --
Sale of Series A preferred stock
purchase rights ............................. -- -- -- -- 936 -- --
Foreign currency translation
adjustments ................................. -- -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- -- (7,020)
-------- -------- -------- -------- -------- -------- --------
Balances, September 30, 1995 .................... 11,297 $ 11 5,561 6 22,095 -- (30,077)
Issuance of common stock upon
exercise of options ......................... -- -- 212 -- 239 -- --
Repurchase of common stock for
cash ........................................ -- -- (14) -- (4) -- --
Foreign currency translation
adjustments ................................. -- -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- -- (4,415)
-------- -------- -------- -------- -------- -------- --------
Balances, September 30, 1996 .................... 11,297 $ 11 5,759 6 22,330 -- (34,492)
Issuance of common stock upon
initial public offering, net of
issuance costs of $3,832 .................... -- -- 3,163 3 34,114 -- --
Issuance of common stock upon
exercise of options ......................... -- -- 2,092 2 2,564 (1,047) --
Conversion of preferred stock to
common stock ................................ (11,297) (11) 11,297 11 -- -- --
Repayments of stockholders'
notes receivable ............................ -- -- -- -- -- 367 --
Tax benefit of stock option
exercises ................................... -- -- -- -- 857 -- --
Foreign currency translation
adjustments ................................. -- -- -- -- -- -- --
Net income .................................... -- -- -- -- -- -- 1,981
-------- -------- -------- -------- -------- -------- --------
Balances, September 30, 1997 .................... -- $ -- 22,311 $ 22 $ 59,865 $ (680) $(32,511)
======== ======== ======== ======== ======== ======== ========
Cumulative
Translation
Adjustment Total
-------- --------
Balances, September 30, 1994 ................... $ 27 $(10,006)
Issuance of common stock upon
exercise of options ........................ -- 190
Issuance of Series D preferred
stock, net of issuance costs of
$35 ........................................ -- 7,965
Repurchase of common stock for
cash ....................................... -- (3)
Sale of Series A preferred stock
purchase rights ............................ -- 936
Foreign currency translation
adjustments ................................ 2 2
Net loss ..................................... -- (7,020)
-------- --------
Balances, September 30, 1995 ................... 29 (7,936)
Issuance of common stock upon
exercise of options ........................ -- 239
Repurchase of common stock for
cash ....................................... -- (4)
Foreign currency translation
adjustments ................................ (28) (28)
Net loss ..................................... -- (4,415)
-------- --------
Balances, September 30, 1996 ................... 1 (12,144)
Issuance of common stock upon
initial public offering, net of
issuance costs of $3,832 ................... -- 34,117
Issuance of common stock upon
exercise of options ........................ -- 1,519
Conversion of preferred stock to
common stock ............................... -- --
Repayments of stockholders'
notes receivable ........................... -- 367
Tax benefit of stock option
exercises .................................. -- 857
Foreign currency translation
adjustments ................................ (36) (36)
Net income ................................... -- 1,981
-------- --------
Balances, September 30, 1997 ................... $ (35) $ 26,661
======== ========
See Notes to Consolidated Financial Statements.
25
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended September 30,
-----------------------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) .................................................... $ 1,981 $ (4,415) $ (7,020)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ................................... 2,070 1,194 1,552
Other ........................................................... 45 82 36
Change in operating assets and liabilities:
Accounts receivable ........................................ (207) 488 (1,096)
Deferred tax assets ........................................ (5,974) -- --
Prepaids and other current assets .......................... (1,160) (33) (226)
Other assets ............................................... (1,414) 130 191
Accounts payable ........................................... 150 118 (20)
Income taxes payable ....................................... 4,065 2 5
Accrued salaries and benefits .............................. 1,116 107 50
Other accrued liabilities .................................. 394 (173) (278)
Deferred revenue ........................................... 30,861 (1,036) 8,096
--------- --------- ---------
Net cash provided by (used in)
operating activities ................................ 31,927 (3,536) 1,290
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment ................................... (3,854) (1,952) (1,227)
Proceeds from sale of property and equipment ......................... 4 467 516
Purchases of marketable securities ................................... (279,222) (20,050) (27,611)
Maturities of marketable securities .................................. 235,850 25,410 17,939
--------- --------- ---------
Net cash provided by (used in)
investing activities ................................ (47,222) 3,875 (10,383)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock ........................... 35,636 239 190
Repayments of stockholders' notes receivable ......................... 367 -- --
Issuance of Series D preferred stock ................................. -- -- 7,965
Sale of convertible preferred stock purchase rights .................. -- -- 936
Repurchase of common stock ........................................... -- (4) (3)
Proceeds from bank loans ............................................. 794 -- --
Principal payments on bank loans ..................................... (794) -- --
Principal payments on capital lease obligations ...................... (773) (781) (566)
--------- --------- ---------
Net cash provided by (used in)
financing activities ............................... 35,230 (546) 8,522
--------- --------- ---------
Foreign currency translation adjustment ................................... (36) (28) 2
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...................... 19,899 (235) (569)
Cash and cash equivalents at beginning of period .......................... 742 977 1,546
--------- --------- ---------
Cash and cash equivalents at end of period ................................ $ 20,641 $ 742 $ 977
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid ........................................................ $ 194 $ 298 $ 297
Taxes paid ........................................................... 4,224 286 1,266
License of technology for common stock ............................... 1,200 -- --
Issuance of stockholders' notes receivable ........................... 1,047 -- --
Tax benefit of stock option exercises ................................ 857 -- --
Acquisition of equipment under capital leases ........................ -- -- 39
See Notes to Consolidated Financial Statements.
26
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company:
Rambus Inc. and Subsidiary (the Company) designs, develops, licenses and
markets high-speed chip-to-chip interface technology to enhance the performance
and cost-effectiveness of computers, consumer electronics, and other electronic
systems. The Company licenses semiconductor companies to manufacture and sell
memory and logic ICs incorporating Rambus interface technology and markets its
solution to systems companies to encourage them to design Rambus interface
technology into their products.
The Company was incorporated in California in March 1990 and reincorporated
in Delaware in March 1997.
2. Summary of Significant Accounting Policies:
Financial Statement Presentation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Rambus K.K., located in Tokyo,
Japan. All intercompany accounts and transactions have been eliminated in the
accompanying consolidated financial statements. Identifiable assets and revenues
of the subsidiary are not significant.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
The Company has entered into nonexclusive technology agreements with
semiconductor licensees. These agreements provide a license to use the Company's
proprietary technology and to receive engineering implementation services,
customer support, and enhancements.
The Company delivers to a new licensee an implementation package which
contains all information needed to develop a Rambus chip in the licensee's
process. An implementation package includes a specification, a generalized
circuit layout database software for the particular version of the chip which
the licensee intends to develop, test parameter software and, for memory chips,
a core interface specification. Test parameters are the programs that test the
Rambus technology embedded in the customer's product. Many licensees have
contracted to have Rambus provide the specific engineering implementation
services required to optimize the generalized circuit layout for the licensee's
manufacturing process. The contracts also provide for the right to receive
ongoing customer support which includes technical advice on chip specifications,
enhancements, debugging and testing.
The Company recognizes revenue consistent with Statement of Position 91-1,
Software Revenue Recognition ("SOP"). This SOP applies to all entities that earn
revenue on products containing software, where software is not incidental to the
product as a whole.
Contract fees for the services provided under these agreements are
comprised of license fees, engineering service fees and nonrefundable, prepaid
royalties. Contract fees are bundled together as the total price of the
agreement does not vary as a result of inclusion or exclusion of services.
Accordingly, the revenues from such contract fees are recognized ratably over
the period during which the post-contract customer support is expected to be
provided independent of the payment schedules under the contract, including
milestones. This period represents the estimated life of the technology which
was initially eight years and is currently five years. At the time the Company
begins to recognize revenue under the contract, the remaining obligations, as
defined by the SOP, are no longer significant. These remaining obligations are
primarily to keep the product updated and include activities such as responding
to inquiries and periodic customer meetings. Historically the product life has
been less than the contract life. However, the Company defers 5% of the
27
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
2. Summary of Significant Accounting Policies (Continued):
contract value to meet any insignificant obligations arising under those
contracts subsequent to product life. At September 30, 1997 and 1996, the
amounts included in deferred revenue to meet these obligations were $2.4 million
and $1.4 million, respectively.
Part of these contract fees may be due upon the achievement of certain
milestones, such as provision of certain deliverables by the Company or
production of chips by the licensee. The remaining fees are due on
pre-determined dates and include significant up-front fees.
The Company recognizes royalties upon notification of sale by its
licensees. The terms of the royalty agreements generally require licensees to
give notification to the Company and to pay royalties within 60 days of the end
of the quarter during which the sales take place.
Research and Development:
Costs incurred in research and development are expensed as incurred.
Software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when a product is
available for general release to customers. The Company has not capitalized any
software development costs since such costs have not been significant.
Income Taxes:
The Company accounts for income taxes under the liability method whereby
deferred tax asset or liability account balances are calculated at the balance
sheet date using current laws and rates in effect. Research and development
credits are accounted for using the flow-through method.
Computation of Historical Net Income (Loss) Per Share and Pro Forma Net
Income (Loss) Per Share:
Historical net income (loss) per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of the incremental
common shares issuable upon conversion of convertible preferred stock (using the
"if converted" method) and stock options and warrants (using the treasury stock
method) as if converted for all periods.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin (SAB) No. 83, all common shares and all common share equivalents issued
by the Company at prices below the initial public offering price during the 12
month period prior to the initial public offering have been included in the
calculation of the number of shares used to determine net income (loss) per
share as if the shares had been outstanding for all periods presented prior to
the initial filing date.
Pro forma net loss per share for the years ended September 30, 1996 and
1995 gives retroactive effect to the conversion of all outstanding shares of
convertible preferred stock into common stock, which took place upon the closing
of the Company's initial public offering, using the "if converted" method.
Pro forma net loss per share is as follows (in thousands, except per share
data):
Year Ended September 30,
------------------------
1996 1995
-------- --------
Net loss ............................................... $ (4,415) $ (7,020)
======== ========
Pro forma net loss per share ............................ $ (0.25) $ (0.41)
======== ========
Pro forma number of shares used in per share calculations 17,385 16,962
======== ========
28
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Summary of Significant Accounting Policies (Continued):
Stock-Based Compensation:
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for its stock plans. The Company provides additional
pro forma disclosures as required under Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." See
Note 9.
Cash and Cash Equivalents:
Cash equivalents are highly liquid investments with original or remaining
maturities of three months or less at the date of purchase. Cash equivalents
present risk of changes in value because of interest rate changes. The Company
maintains its cash balances with high quality financial institutions and has not
experienced any material losses relating to any investment instruments.
Marketable Securities:
Available-for-sale securities are carried at fair value, based on quoted
market prices, with the unrealized gains or losses, net of tax, reported in
stockholders' equity (deficit). The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity,
both of which are included in interest income. Realized gains and losses are
recorded on the specific identification method.
Fair Value of Financial Instruments:
The amounts reported for cash equivalents, receivables and other financial
instruments are considered to approximate fair values based upon comparable
market information available at the respective balance sheet dates.
Property and Equipment:
Property and equipment are stated at cost and depreciated on a
straight-line basis over estimated useful lives of three to five years.
Leasehold improvements and property under capital leases are amortized on a
straight-line basis over the shorter of their estimated useful lives or the
terms of the leases. Upon disposal, assets and related accumulated depreciation
are removed from the accounts and the related gain or loss is included in
results from operations.
Foreign Currency Translation:
The functional currency for the Company's foreign operation in Japan is the
Japanese yen. The translation from the Japanese yen to U.S. dollars is performed
for balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using the weighted average
exchange rate during the period. Adjustments resulting from such translation are
reflected as a separate component of stockholders' equity (deficit). Gains or
losses resulting from foreign currency transactions are included in the results
of operations.
New Pronouncements:
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (SFAS 128), which specifies the computation,
presentation, and disclosure requirements for net income per share. SFAS 128
will become effective for the Company's 1998 fiscal year. The impact of the
adoption of SFAS 128 on the financial statements of the Company has not yet been
determined.
29
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Summary of Significant Accounting Policies (Continued):
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This statement establishes requirements
for disclosure of comprehensive income and will become effective for the
Company's 1999 fiscal year, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally represents
all changes in stockholders' equity except those resulting from investments or
contributions by stockholders. The Company is evaluating alternative formats for
presenting this information, but does not expect this pronouncement to
materially impact the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). This statement establishes standards for disclosure about operating
segments in annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
supercedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS 131 will become effective
for the Company's 1999 fiscal year and requires that comparative information
from earlier years be restated to conform to the requirements of this standard.
The Company is evaluating the requirements of SFAS 131 and the effects, if any,
on the Company's current reporting and disclosures.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 97-2 (SOP 97-2), "Software Revenue
Recognition," which supercedes SOP 91-1. SOP 97-2 will become effective for
transactions entered into beginning in the Company's 1999 fiscal year.
Retroactive application of the provisions of SOP 97-2 is prohibited. The Company
does not expect SOP 97-2 to materially impact the Company's results of
operations.
3. Business Risks and Credit Concentration:
The Company operates in the intensely competitive semiconductor industry,
which has been characterized by price erosion, rapid technological change, short
product life cycles, cyclical market patterns and heightened foreign and
domestic competition. Significant technological changes in the industry could
adversely affect operating results.
The Company markets and sells its technology to a narrow base of customers
and generally does not require collateral. At September 30, 1997, three
customers accounted for 53%, 28% and 11% of accounts receivable. At September
30, 1996, three customers accounted for 59%, 21% and 17% of accounts receivable.
As of September 30, 1997 and 1996, the Company's cash and cash equivalents
are deposited with principally one financial institution in the form of
commercial paper, money market accounts, and demand deposits.
Financial instruments that potentially subject the Company to
concentrations of credit risk comprise principally cash and cash equivalents,
available-for-sale securities and trade accounts receivable. The Company invests
its excess cash primarily in commercial paper and U.S. government agency and
treasury notes that mature within one year.
30
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Marketable Securities:
All marketable securities are classified as available-for-sale and are
summarized as follows (in thousands):
September 30,
-------------------
1997 1996
------- -------
Corporate notes and bonds .................... $31,412 $ --
United States government debt securities ..... 14,801 2,442
Certificates of deposit ...................... 3,000 --
Commercial paper ............................. 1,971 5,370
------- -------
$51,184 $ 7,812
======= =======
All marketable securities classified as current have scheduled maturities
of less than one year. At September 30, 1997 and 1996, the cost of marketable
securities represents the fair value of the securities, and there are no
unrealized holding gains or losses.
5. Property and Equipment:
Property and equipment, net is comprised of the following (in thousands):
September 30,
--------------------
1997 1996
-------- --------
Computer equipment ........................... $ 5,617 $ 3,684
Computer software ............................ 4,211 2,771
Furniture and fixtures ....................... 1,062 818
Leasehold improvements ....................... 371 272
-------- --------
11,261 7,545
Less accumulated depreciation and amortization (6,923) (5,205)
-------- --------
$ 4,338 $ 2,340
======== ========
Depreciation and amortization expense was approximately $1,857,000,
$1,148,000, and $1,288,000 in the years ended September 30, 1997, 1996 and 1995.
Property and equipment under capital leases included above is comprised of
(in thousands):
September 30,
----------------------
1997 1996
------- -------
Computer equipment ..................... $ 873 $ 2,302
Furniture and fixtures ................. 344 403
------- -------
1,217 2,705
Less accumulated amortization .......... (895) (1,989)
------- -------
$ 322 $ 716
======= =======
31
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Investment:
In December 1996, the Company licensed technology to Monolithic System
Technology, Inc. (MoSys) in exchange for a cash payment of $50,000 and 184,617
shares of MoSys common stock valued at $1,200,000, based on the latest round of
equity financing. These shares represented a 1% equity interest in MoSys at the
time of issuance. The license fee of $1,250,000 was initially recorded as
deferred revenue and is being recognized as revenue in accordance with the
Company's revenue recognition policy.
7. Capital Lease Obligations:
The Company has leased equipment under capital lease obligations maturing
through fiscal year 1999. The lease agreements require the Company to maintain
liability and property insurance.
At September 30, 1997, future minimum annual payments due under the capital
lease obligations are as follows (in thousands):
Fiscal Year:
1998 .................................................. $ 434
1999 .................................................. 137
-----
Minimum lease payments ................................ 571
Less amount representing interest ..................... (59)
-----
Total minimum payments ................................ 512
Less amount due in one year ........................... (382)
-----
Long term amount due after one year ................... $ 130
=====
8. Lease Commitments and Commitments to the Company's Founders:
The Company leases its office facilities under operating lease agreements
that expire through February 2005. Upon expiration of the leases, the Company
has an option to renew for one five-year term at the then fair market rate. The
Company is responsible for taxes, insurance and utilities related to the leased
facilities. As of September 30, 1997, aggregate future minimum payments under
the leases are (in thousands):
Fiscal Year:
1998 ................................................ $ 804
1999 ................................................ 830
2000 ................................................ 849
2001 ................................................ 758
2002 ................................................ 736
Thereafter .......................................... 1,853
------
Total minimum lease payments ........................ $5,830
======
Rent expense was approximately $987,000, $736,000, and $581,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
Rambus Partners
In September 1992, the Company entered into agreements to pay certain cash
amounts to its founders for certain patent rights and technology. The total
amounts paid to the founders under these agreements were approximately $244,000
in each of the fiscal years 1997, 1996 and 1995. Included in the accompanying
balance sheets under the caption other accrued liabilities are amounts payable
to the founders of approximately $244,000 at September 30, 1996 and none at
September 30, 1997. The associated deferred amounts to the founders totaling
$233,000 and $456,000 at
32
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Lease Commitments and Commitments to the Company's Founders (Continued):
September 30, 1997 and 1996, respectively, include $223,000 classified in other
current assets for each period with the remaining balance classified in other
assets.
9. Stockholders' Equity (Deficit):
Preferred and Common Stock:
In February 1997, the Company established a Stockholder Rights Plan
pursuant to which each holder of the Company's common stock shall receive a
right to purchase one-thousandth of a share of Series E Preferred Stock for $125
per right, subject to a number of conditions. Such rights are subject to
adjustment in the event of a takeover or commencement of a tender offer not
approved by the Board of Directors. In May 1997, all of the then outstanding
preferred shares were automatically converted into common stock concurrent with
the closing of the initial public offering.
In connection with the Company's March 1997 reincorporation in Delaware,
the number of authorized shares of common stock was increased to 60,000,000 at
$0.001 par value.
In May 1997, the Company sold 3,162,500 shares of common stock in an
initial public offering that generated net proceeds of approximately
$34,117,000.
As of September 30, 1997 and 1996, the total shares held by employees that
were subject to repurchase was 708,243 and 261,283, respectively.
Stock Option Plans:
In March 1990, the Company adopted the 1990 Stock Plan under which
2,657,143 shares of common stock were reserved for issuance. Incentive stock
options may be granted with exercise prices of no less than fair market value,
and nonqualified stock options may be granted with exercise prices of no less
than 85% of the fair market value of the common stock on the grant date, as
determined by the Board of Directors. Grants to employees of the Company who are
also directors of the Company may not exceed 800,000 shares of common stock. The
options generally vest over a four-year period but may be exercised immediately
subject to repurchase by the Company for those options that are not vested.
Vesting periods are determined by the Board of Directors at the date of grant.
During 1992 and 1994, the 1990 Stock Plan was amended to authorize the
granting of options which shall vest within one year from the date that certain
options previously granted to the optionee (as defined in the Plan) have vested
in full. Pursuant to requirements imposed by the California Department of
Corporations, these options may be granted only to those employees whose annual
compensation exceeds $60,000 per year. The total number of shares reserved for
these options is 950,000.
Upon completion of a public offering of the Company's common stock in May
1997, the 1990 Stock Plan was terminated and the 1997 Stock Plan was adopted.
The 1997 Stock Plan authorizes the issuance of incentive stock options and
nonstatutory stock options to employees and nonstatutory stock options to
directors, employees or paid consultants of the Company. The Company has
reserved 1,000,000 shares of common stock for issuance under the plan. The plan
expires ten years after adoption, and the Board of Directors or a committee
designated by the Board of Directors has the authority to determine to whom
options will be granted, the number of shares, the vesting period and the
exercise price (which generally cannot be less than 100% of the fair market
value at the date of grant for incentive stock options). The options are
exercisable at times and in increments as specified by the Board of Directors,
and expire not more than ten years from date of grant.
33
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. Stockholders' Equity (Deficit) (Continued):
Stock Option Plans (Continued):
A summary of activity under all stock option plans is as follows:
Options Outstanding
-----------------------
Options Number Weighted
Available of Average Exercise
for Grant Shares Price Per Share
---------- --------- ---------
Outstanding at September 30, 1994 ...... 634,601 2,357,757 $ 0.24
Shares reserved ........................ 875,000 -- --
Options granted ........................ (1,204,900) 1,204,900 $ 1.41
Options canceled ....................... 37,513 (37,513) $ 0.27
Options exercised ...................... -- (498,789) $ 0.38
---------- ---------
Outstanding at September 30, 1995 ...... 342,214 3,026,355 $ 0.68
Shares reserved ........................ 1,000,000 -- --
Options granted ........................ (347,500) 347,500 $ 3.84
Options canceled ....................... 70,738 (70,738) $ 1.08
Options exercised ...................... -- (197,667) $ 1.12
---------- ---------
Outstanding at September 30, 1996 ...... 1,065,452 3,105,450 $ 1.00
Shares reserved ........................ 1,000,000 -- --
Options granted ........................ (1,411,350) 1,411,350 $14.37
Options exercised ...................... -- (2,092,428) $ 1.22
Options canceled ....................... 20,000 (20,000) $ 8.00
---------- ---------
Outstanding at September 30, 1997 ...... 674,102 2,404,372 $ 8.55
========== =========
The following table summarizes information about outstanding and
exercisable options as of September 30, 1997:
Options Outstanding Options Exercisable
--------------------------------------------------------- ------------------------------------
Weighted Average
Range of Remaining Weighted Average Weighted Average
Exercise Prices Number Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price
- --------------- ------------------ ---------------- -------------- ------------------ --------------
$ 0.13 - $ 1.00 906,378 6.84 $ 0.72 906,378 $ 0.72
$ 3.00 - $ 5.00 662,419 8.69 4.29 662,419 4.29
$ 7.00 - $12.00 645,575 9.52 9.45 395,575 7.83
$57.00 - $66.13 190,000 9.99 57.72 -- --
---------- ----------
2,404,372 8.32 $ 8.55 1,964,372 $ 3.36
========== ==========
As of September 30, 1997, a total of 3,078,474 shares of common stock were
reserved for issuance under all stock option plans. As of September 30, 1997,
options for the purchase of 429,018 shares were exercisable without being
subject to repurchase by the Company.
34
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. Stockholders' Equity (Deficit) (Continued):
Employee Stock Purchase Plan:
In May 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 400,000 shares of common stock for issuance under
the Purchase Plan. The Purchase Plan authorizes the granting of stock purchase
rights to eligible employees during two-year offering periods with exercise
dates approximately every six months. The first offering period commenced in May
1997 and will end on the last trading day in the period ending April 30, 1999.
Shares are purchased through employee payroll deductions at purchase prices
equal to 85% of the lesser of the fair market value of the Company's common
stock at either the first day of each offering period or the date of purchase.
As of September 30, 1997, no shares had been issued under the Purchase Plan.
Stockholders' Notes Receivable:
During the year ended September 30, 1997, the Company issued loans to
certain key personnel in connection with the exercise of options to purchase
shares of the Company's common stock. The loans bear interest at an annual rate
of 12%, are evidenced by promissory notes, and are secured by a pledge of the
underlying shares of common stock. Principal and accrued interest on the loans
are due in September 1998. The aggregate principal balance outstanding at
September 30, 1997 is approximately $680,000.
Warrant:
In November 1996, the Company entered into an agreement with Intel
Corporation for the development of high-speed semiconductor memory interface
technology. In January 1997, as part of this agreement, the Company issued a
warrant to purchase 1,000,000 shares of common stock of the Company at a
purchase price of $10.00 per share. This warrant will become exercisable only
upon the achievement of certain specified performance milestones, resulting in a
charge to the statement of operations at the time of achievement of these
milestones based on the fair value of the warrant.
Stock-Based Compensation:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its stock plans. Accordingly, no compensation expense has been recognized for
its stock-based compensation plans. If the Company had recognized compensation
expense based upon the fair value of stock option awards at the grant date
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," the Company's net income (loss) and net income (loss) per share
would have changed to the pro forma amounts indicated below:
Year Ended September 30,
-------------------------
1997 1996
--------- ----------
Net income (loss) as reported ................... $ 1,981 $ (4,415)
Net income (loss) pro forma ..................... $ 1,586 $ (4,509)
Net income (loss) per share as reported ......... $ 0.09 $ (0.73)
Net income (loss) per share pro forma ........... $ 0.07 $ (0.74)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
35
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. Stockholders' Equity (Deficit) (Continued):
Stock-Based Compensation (Continued):
The fair value of each option grant is estimated as of the grant date using
the Black-Scholes option-pricing model assuming a dividend yield of 0% and the
following additional weighted-average assumptions:
Stock Option Plans
--------------------
1997 1996
---- ----
Expected stock price volatility .................... 71% 71%
Risk-free interest rate ............................ 6.2% 5.9%
Expected life of options ........................... 4.5 years 4.5 years
The weighted-average fair value of stock options granted during the
years ended September 30, 1997 and 1996, calculated using the Black-Scholes
option valuation model, is $8.79 and $2.12, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options.
The effects of applying SFAS 123 on the pro forma disclosures for the years
ending September 30, 1997 and 1996 are not likely to be representative of the
effects on pro forma disclosures in future years. SFAS No. 123 is applicable
only to options granted by the Company subsequent to October 1, 1995. The pro
forma effect of options outstanding as of September 30, 1997 will not be fully
reflected until 2002.
10. Employee Benefit Plans:
The Company has a 401(k) Profit Sharing Plan (the "Plan") qualified under
Section 401(k) of the Internal Revenue Code of 1986. Each eligible employee may
elect to contribute up to 20% of the employee's annual compensation to the Plan.
The Company, at the discretion of its Board of Directors, may match employee
contributions to the Plan but has not done so for the years ended September 30,
1997, 1996 and 1995.
36
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. Income Taxes:
The provision for income taxes comprises (in thousands):
Year Ended September 30,
--------------------------------
1997 1996 1995
------- ------- -------
Foreign withholding tax:
Current .................... $ 1,498 $ 270 $ 1,235
Federal:
Current .................... 4,335 -- 40
Deferred ................... (5,999) -- --
State:
Current .................... 2,458 16 14
Deferred ................... (977) -- --
------- ------- -------
$ 1,315 $ 286 $ 1,289
======= ======= =======
The Company's effective tax rate on pretax income differs from the U.S.
federal statutory regular tax rate as follows:
Year Ended September 30,
----------------------
1997 1996 1995
---- ---- ----
Expense (benefit) at U.S. federal statutory rate 34.0% (34.0)% (34.0)%
Tax losses not currently benefited ............. -- 34.0 34.0
Expense at state statutory rate ................ 5.7 -- --
Nondeductible amortization ..................... 2.7 -- --
R&D credit ..................................... (15.1) -- --
Change in valuation allowance .................. 12.7 -- --
Foreign withholding tax ........................ -- 6.5 21.6
Other .......................................... -- 0.4 0.9
---- ---- ----
40.0% 6.9% 22.5%
==== ==== ====
37
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. Income Taxes (Continued):
The components of the net deferred tax assets are as follows (in
thousands):
September 30,
--------------------
1997 1996
-------- --------
Deferred tax assets:
Deferred revenue ........................ $ 21,725 $ 9,206
Deferred compensation ................... -- 98
Depreciation and amortization expense ... 391 174
Other liabilities and reserves .......... 1,444 220
Foreign tax credits ..................... -- 2,440
Research and development credits ........ -- 868
Net operating loss ...................... -- 3,361
-------- --------
Total deferred tax asset ........... 23,560 16,367
Deferred tax liability:
Deferred royalty cost ................... (95) (296)
Valuation allowance .......................... (16,489) (16,071)
-------- --------
Deferred tax assets, net ........... $ 6,976 $ --
======== ========
The Company has established a partial valuation allowance against its
deferred tax assets due to the uncertainty surrounding the realization of such
assets. Management periodically evaluates the recoverability of the deferred tax
assets and recognizes the tax benefit only as reassessment demonstrates they are
realizable. At such time, if it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation allowance will be
reduced.
12. Related Party Transactions:
Chromatic Research Inc. In February 1994, the Company licensed its
interface technology to Chromatic Research, Inc. ("Chromatic"), a multimedia
processor design company. Under the terms of the license, Rambus received
626,053 shares of Chromatic Series B Preferred Stock (representing 5% of the
then outstanding shares of Chromatic) and continuing royalties. Chromatic was
formed in May 1993 (then called Xenon Microsystems Corporation) by, among
others, Dr. Farmwald, who continues to serve as a director of, and consultant
to, Chromatic through the date hereof. Investors in Chromatic include affiliates
of Mohr, Davidow Ventures, Merrill, Pickard, Anderson & Eyre and Kleiner,
Perkins, Caufield & Byers. In connection with these investments in Chromatic,
Dr. Davidow and Mr. Dunlevie joined and continue to sit on the Board of
Directors of Chromatic. The initial valuation of the Chromatic stock,
approximately $626,000, has been fully written down by the Company. Revenue
recognized as license fees under this agreement was $119,000 in each of the
years ended September 30, 1997, 1996 and 1995. As of September 30, 1997 and
1996, the remaining balance of license fees of approximately $200,000 and
$319,000, respectively, is included in deferred revenue.
38
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
13. Business Segments, Exports and Major Customers:
The Company operates in a single industry segment.
Two customers accounted for 29% and 10% of revenues in the year ended
September 30, 1997. Six customers accounted for 14%, 15%, 11%, 11%, 13% and 12%
of revenues in the year ended September 30, 1996. Six customers accounted for
16%, 12%, 15%, 12%, 14% and 13% of revenues in the year ended September 30,
1995.
The Company sells its technology to customers in the Far East, North
America, and Europe. The net income and loss for all periods presented are
derived primarily from the Company's North American operations, which generates
revenues from the following geographic regions (in thousands):
Year Ended September 30,
-----------------------------------
1997 1996 1995
------- ------- -------
Far East ................... $20,638 $ 9,692 $ 6,619
North America .............. 5,076 1,578 745
Europe ..................... 301 -- --
------- ------- -------
$26,015 $11,270 $ 7,364
======= ======= =======
39
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED SUPPLEMENTARY FINANCIAL DATA
(in thousands, except per share amounts)
(Unaudited)
Fiscal years by quarter
--------------------------------------------------------------------------------
1997 1996
------------------------------------- ----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------- ------- ------- ------- ------- ------- ------- -------
Revenues:
Contract revenues ............... $ 6,344 $ 5,375 $ 4,401 $ 4,066 $ 3,299 $ 2,833 $ 2,562 $ 2,510
Royalties ....................... 1,472 1,399 1,533 1,425 64 1 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total revenues ............. 7,816 6,774 5,934 5,491 3,363 2,834 2,562 2,510
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of contract revenues ....... 1,601 1,494 1,359 1,037 1,245 1,275 1,186 1,115
Research and development ........ 2,935 2,512 2,105 2,263 1,570 1,235 1,271 1,142
Marketing, general and
administrative ............... 2,347 2,263 2,057 2,088 1,688 1,497 1,205 1,409
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses ... 6,883 6,269 5,521 5,388 4,503 4,007 3,662 3,666
Operating income (loss) .............. 933 505 413 103 (1,140) (1,173) (1,100) (1,156)
Interest and other income, net ....... 843 374 80 45 151 85 92 112
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes .... 1,776 879 493 148 (989) (1,088) (1,008) (1,044)
Provision for income taxes ........... 710 352 197 56 103 -- 101 82
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) .................... $ 1,066 $ 527 $ 296 $ 92 $(1,092) $(1,088) $(1,109) $(1,126)
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share .......... $ 0.04 $ 0.02 $ 0.01 $ 0.01 $ (0.18) $ (0.18) $ (0.18) $ (0.19)
======= ======= ======= ======= ======= ======= ======= =======
Shares used in per share
calculations ...................... 24,274 22,403 20,196 19,971 6,145 6,113 6,097 5,997
40
INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE
Our report on the financial statements of Rambus Inc. and Subsidiary is
included on page 22 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 19 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
October 10, 1997
41
RAMBUS INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Valuation allowance for doubtful accounts
Additions
Balance at charged to Charged to
beginning of costs and other Balance at end
For the year ended: period expenses accounts Deductions of period
- ------------------- ------ -------- -------- ---------- ---------
September 30, 1995 .............................. -- $ 8 -- -- $ 8
September 30, 1996 .............................. $ 8 -- -- -- $ 8
September 30, 1997 .............................. $ 8 $ 2 -- -- $10
Valuation allowance for deferred tax asset
Additions
Balance at charged to Charged to
beginning of costs and other Balance at end
For the year ended: period expenses accounts Deductions of period
- ------------------- ------ -------- -------- ---------- ---------
September 30, 1995................. $10,802 $3,624 -- -- $14,426
September 30, 1996................. $14,426 $1,645 -- -- $16,071
September 30, 1997................. $16,071 $ 418 -- -- $16,489
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RAMBUS INC.
Date: December 5, 1997 By:/s/ Gary Harmon
----------------------- -------------------------
Gary Harmon,
Vice President, Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Geoff Tate President, Chief Executive Officer December 5, 1997
- ------------------------ and Director (Principal Executive
Geoff Tate Officer)
/s/ Gary Harmon Vice President, Finance and Chief December 5, 1997
- ------------------------ Financial Officer (Principal
Gary Harmon Financial and Accounting Officer)
/s/ William Davidow Chairman of the Board of Directors December 5, 1997
- ------------------------
William Davidow
/s/ Bruce Dunlevie Director December 5, 1997
- ------------------------
Bruce Dunlevie
/s/ P. Michael Farmwald Director December 5, 1997
- ------------------------
P. Michael Farmwald
/s/ Charles Geschke Director December 5, 1997
- ------------------------
Charles Geschke
/s/ Mark Horowitz Director December 5, 1997
- ------------------------
Mark Horowitz
43