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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 000-22339
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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) 944-8000
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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)
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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 October 31, 2000 was approximately $3.7
billion 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 97,641,516 as of October 31, 2000.
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.
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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. These statements include those
concerning the following: the belief that the Company's business model will be
successful in establishing the RDRAM chip connection technology as an industry
standard, maintain technology leadership and generate revenue through a
combination of license fees and royalties; the belief that RDRAMs can be
manufactured in a manner and at a sufficiently competitive price compared to
standard DRAMs to allow for the development of a mass market; the intention to
protect and vigorously defend the Company's patents in connection with pending
legal proceedings; the intention to negotiate SDRAM-compatible licenses with
certain DRAM manufacturers; the expectation that royalties will represent the
majority of the Company's total revenue in future periods; the likelihood that
the Company's RDRAM-compatible licensees will continue to contract with the
Company for implementation services; the expectation that the Company will
continue to derive all of its revenue from its chip connection technology; the
expectation that revenues derived from international licenses will continue to
represent a significant portion of the Company's total revenue; and the belief
that the Company will not encounter difficulty in securing additional
facilities if required. 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 6 through 13, 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 connection technology to enhance the performance and
cost-effectiveness of computers, consumer electronics and communications
systems. The Company licenses semiconductor companies to manufacture and sell
memory and logic ICs incorporating Rambus chip connection technology and
markets its solution to systems companies to encourage them to design this
technology into their products. The Company's chip connection 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.
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 mainstream microprocessors
has increased from 5 MHz (million cycles per second) to over 1 GHz (billion
cycles per second). During this same period, the typical operating frequency of
a standard DRAM has increased only to 133 MHz. This growing disparity between
the frequency of microprocessors and DRAMs is termed the "Performance Gap."
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While microprocessors have undergone both manufacturing and architectural
improvements, significant innovations for DRAMs have generally only occurred in
the manufacturing area. DRAM manufacturers have been successful in increasing
DRAM "density," or storage capacity, from roughly 1 Kbit (thousand bits) to 128
Mbits (million bits) per chip for standard production devices, 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 connection architecture, which
addresses the Performance Gap by transferring data through a simplified bus at
significantly higher frequencies than permitted by conventional technologies.
To date, the largest immediate application for this interface technology is to
connect logic circuits to memory in home video game consoles, PCs, workstations
and other electronic systems. The key elements of the Rambus interface are
Rambus DRAMs ("RDRAMs"), Rambus ASIC cells ("RACs") and the interconnecting
circuitry known as the "Rambus Channel."
Rambus chip connection technology allows data transfers of up to 1.6
gigabytes per second between a logic IC and RDRAMs by transferring data at a
frequency of 800 MHz over a two byte wide bus. System performance can be
further enhanced by applying Rambus 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 6.4 gigabytes per second.
Rambus technology can be used to address a wide variety of chip connection
data transfer requirements. The Company has recently announced its first non
memory-based technology, a SerDes cell. Similar to a RAC in the Rambus memory
technology, the SerDes cell provides a 3.125 gigabit per second data connection
for use in high-speed networks. Typical applications for this technology are
backplanes in high-speed network routers and switches.
Target Markets and Applications
To date, the major markets for the Company's technology have been in
consumer products and in PCs/workstations. In the consumer area, the principal
application has been for home video game consoles. An earlier generation of the
Rambus chip connection technology is in the Nintendo64 video game console, and
current Rambus technology is used in the newest version of the Sony video game
system known as PlayStation 2. Other consumer applications for the Company's
technology include digital televisions, VCRs and set-top boxes which have
recently been introduced in Japan.
In the PC/workstation market, Rambus memory technology is used to provide a
high memory bandwidth connection to Intel Pentium III processors. The
connections are provided via Rambus memory controllers, which are a portion of
two chipsets developed by Intel. One of these chipsets, designed for use in the
PC workstation market, has been highly successful and Rambus technology is now
fully established in this market. The other chipset, intended for the much
larger main PC market has been less successful due to a variety of factors
including inherent bandwidth limitations of the chipset design and relatively
high cost of RDRAMs compared to standard memory. In connection with the
introduction of its new processor, the Pentium 4, in late 2000, Intel has
designed a new chipset which includes a Rambus memory controller. There can be
no assurance that previous problems have been completely solved, that the
pricing of Rambus DRAMs will be reduced to a competitive level or that the
Intel chipset and Rambus technology will be successful in penetrating the
market segment for PC main memory.
Other applications for the Company's technology include inkjet and laser
printers and networking equipment such as high-speed routers and Ethernet
switches.
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
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Company's technology. The Company licenses its technology on a nonexclusive and
worldwide basis to semiconductor companies which manufacture and sell products
which incorporate Rambus technology. The Company offers two types of licenses.
The first, for technology which is fully compatible with the Rambus standard
("RDRAM-compatible licenses"), allows semiconductor manufacturers to
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 in order to encourage the adoption of Rambus technology.
In the case of RDRAM-compatible licenses, 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-compatible 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.
The second type of license covers the use of Rambus patents in non-Rambus-
compatible ICs, specifically in synchronous DRAM ("SDRAM") and double data-rate
("DDR") SDRAM memory devices and logic ICs which control such memory. In the
case of these "SDRAM-compatible licenses," the Rambus business model and
strategy are designed to maximize the return on investment in R&D and patents
through the generation of license fees and royalties.
Rambus provides licenses to both DRAM manufacturers and logic IC
manufacturers. At September 30, 2000, Rambus had a total of 28 RDRAM-compatible
licensees and four SDRAM-compatible licensees. RDRAM-compatible licensees
include ten DRAM manufacturers which collectively accounted for approximately
90% of worldwide DRAM sales in calendar 1999: Hitachi, Hyundai Electronics,
Infineon, Micron Technology, Mitsubishi, NEC, Samsung Electronics, Toshiba,
Vanguard and Winbond. At September 30, 2000, five of these licensees were
shipping RDRAMs. RDRAM-compatible logic licensees include Agilent Technologies,
Compaq, Hewlett-Packard, IBM, Intel, LSI Logic, Matsushita, NEC, PMC Sierra,
Texas Instruments, Toshiba and Vitesse. At September 30, 2000, nine logic
licensees were shipping logic ICs which include RACs. At September 30, 2000,
SDRAM-compatible licensees were Hitachi, NEC, Oki Electric Industry and
Toshiba. After the end of the fiscal year the Company added Elpida Memory, a
joint venture of Hitachi and NEC, and Samsung Electronics as additional SDRAM-
compatible licensees. In fiscal 2000, Toshiba, NEC and Samsung accounted for
15%, 13% and 11% of total revenues, respectively.
Royalties, which are generally a percentage of the revenues received by
licensees on their sales of licensed ICs, are normally payable by a Rambus
licensee on sales occurring during the life of the Rambus patents being
licensed in the case of RDRAM-compatible licenses, and over a five year
contract life in the case of SDRAM-compatible licenses. For a typical systems
application of Rambus technology, the Company receives royalties from the sale
of both licensed logic ICs and DRAMs 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 associated Rambus logic ICs, and in some cases
may decline based on the passage of time or on the total volume of Rambus ICs
shipped. In the case of SDRAM-compatible licenses, the royalty rates for SDRAMs
and associated controllers are generally less than the comparable RDRAM-
compatible rates, and for DDR and associated controllers the rates are
generally higher. 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, in the case of RDRAM-compatible
licenses, the marketing and engineering commitment made by the licensee.
Design and Manufacturing
RDRAM-compatible 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 RDRAM-compatible
licensee receives an implementation package from the Company which contains all
the
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information needed to develop a Rambus-compatible 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 RDRAM-compatible 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 RDRAM-compatible technology, they will be able to do more of the
implementation work without Rambus' assistance.
Rambus has developed its RDRAM-compatible 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 in mass-production volumes are consistent with those
for similar products in the same manufacturing facility and in the same stage
of production ramp. However, because of the extra Rambus interface circuitry
and other features, an RDRAM chip is somewhat larger than a standard SDRAM.
Therefore, a manufacturer will generally produce fewer RDRAMs than standard
SDRAMs for a given wafer size and an RDRAM chip will be somewhat more expensive
than the standard version. Also, 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.
RDRAMs use newer-generation chip scale packaging ("CSP") and require high-
speed testers for a portion of the test procedure. While the Company feels that
testing costs for RDRAMs in mass production volumes will be no greater than for
current standard DRAMs, additional capital equipment is required and startup
costs are incurred by the manufacturers producing Rambus DRAMs. In addition,
for PC main memory applications memory modules (called "RIMMs"), connectors and
clock chips must be produced by multiple vendors and available in volume. There
is no assurance that such changes in the manufacturing processes and
infrastructure of the DRAM industry can be accomplished at a sufficiently
competitive price to allow the development of a mass market for RDRAM-
compatible technology.
Research and Development
The ability of the Company to compete in the future will be substantially
dependent on its ability to advance its chip connection technology in order to
meet changing market needs. To this end, Company engineers are involved in
developing new versions of the Rambus technology which will allow chip-to-chip
data transfer at higher speeds as well as provide other improvements. The
Company has announced a 1066Mhz version of its current technology, as well as a
1.6GHz new generation which will be introduced in the future. The Company has
assembled a team of highly skilled engineers whose activities are focused on
further development of Rambus chip connection 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, 2000, Rambus had 110 employees in its engineering
departments. Approximately two thirds of these employees have advanced
technical degrees. In fiscal 2000, 1999 and 1998, research and development
expenses were approximately $11.5 million, $8.1 million and $9.6 million,
respectively. In addition, because the Company's RDRAM-compatible 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
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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
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. Most major DRAM manufacturers, including Rambus licensees, produce
higher-frequency versions of standard DRAMs such as SDRAMs which compete with
RDRAMs. These companies are much larger and have better access to financial,
certain technical and other resources than Rambus.
The Company believes that its success in establishing a new high-speed
memory interface has been due in part to the systems approach it has taken to
solving the application needs of companies in home video console, 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 will come from its RDRAM-compatible licensees and prospective
licensees, many of which are evaluating and developing products based on
alternative technologies. Some DRAM suppliers have begun to produce DDR SDRAMs,
aimed at doubling the memory bandwidth from SDRAMs without increasing the clock
frequency. While Rambus has been successful in negotiating SDRAM-compatible
licenses with some DRAM manufacturers which include the payment of royalties on
DDR, other manufacturers have not agreed to a license and are in litigation
with the Company. See "Legal Proceedings."
A consortium including both large DRAM manufacturers and systems companies
is thought to be developing an extension of DDR known as DDR-2 and another
consortium is working on advanced DRAM technology ("ADT"). To the extent that
these alternative technologies provide comparable system performance at lower
or similar cost than RDRAMs, or are perceived to require the payment of lower
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 condition and results of operations. While the
Company might determine that such alternative technologies, when and if
developed, infringe the Company's patents, there can be no assurance that the
Company would be able to negotiate agreements which would result in royalties
paid to the Company without litigation, which could be costly and the result of
which would be uncertain.
In addition, certain semiconductor companies are now marketing ICs which
combine logic and DRAM on the same chip. Such technology, called "embedded
DRAM," eliminates the need for any chip connection interface. 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, 2000, the Company held 97
United States patents on various aspects of its technology, with expiration
dates ranging from 2010 to 2019 and had applications pending for an additional
approximately 120 United States patents. The Company's United States patents do
not prevent the manufacture or sale of Rambus-based ICs abroad. At September
30, 2000, the Company held twelve foreign patents and had an additional
approximately 43 foreign patent applications pending in Europe and Asia. 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 RDRAM-compatible contracts generally
prevent a licensee from using licensee-
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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 chip connection 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. Nonetheless,
there is no assurance that such a blocking arrangement will not occur in the
future.
Factors Affecting Future Results
Current and Potential Litigation. As the Company has extended its licensing
program to SDRAM-compatible products, it has increasingly become involved in
litigation either instigated by the Company or by the potential licensee. As of
September 30, 2000, the Company was in litigation with three such potential
SDRAM-compatible licensees. In each of these cases, the Company has claimed
infringement of its patents whereas the potential licensees have generally
sought damages and a determination that the Rambus patents at suit are invalid
and not infringed. While the Company's objective in all these cases is to
achieve settlements resulting in SDRAM-compatible licenses, there can be no
assurance that such settlements will take place, that the Company will prevail
if there is no settlement or that additional litigation will not result from
future efforts by the Company to obtain additional SDRAM-compatible licenses.
In addition, future litigation may be necessary to enforce the Company's
patents and other intellectual property rights, to protect the Company's trade
secrets, or to determine the validity and scope of the proprietary rights of
others, 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, is costly and could 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 RDRAM-compatible 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 RDRAM-compatible 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 RDRAM-compatible 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.
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 profitability.
Until the fourth quarter of FY 2000, contract revenues had represented the
largest portion of the Company's revenues. The Company recognizes contract
revenues ratably over the period during which post-contract customer support on
RDRAM-compatible licenses is expected to be provided. While this means that
contract revenues from current licenses are generally predictable, changes can
be introduced by a reevaluation by Company management of the length of the
post-contract support period. The initial estimate of this period is subject to
revision as the RDRAM-compatible IC being developed under a contract nears
production, and such revision will result in an increase or decrease to the
quarterly revenue for that contract. In addition, accurate prediction of
revenues from new licenses is difficult because the development of a business
relationship with a potential licensee is a lengthy
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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. Contract revenues also include
fees for engineering services, which are dependent upon the varying level of
assistance desired by licensees and, therefore, the revenue from these 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 may not be incurred evenly over the contract period,
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 74% of total revenues in the fourth quarter of
fiscal 2000 and 45% of total revenues in the full fiscal year. The Company
believes that royalties will represent the majority of total revenue in future
periods. 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
licensed 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 revenue under existing contracts, 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
licensed ICs at any time, and because the new Rambus license source could have
different royalty rates, any such change by a systems company, particularly one
which accounts for substantial volumes of licensed 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 which
could materially adversely affect quarterly and annual operating results,
including market acceptance of the Company's technology; systems companies'
acceptance of RDRAM-compatible ICs produced by the Company's licensees; market
acceptance of the products of systems companies which have adopted the
Company's 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
has been subject to wide fluctuations which may continue in the future in
response to quarterly variations in operating results; progress or lack of
progress in the development of RDRAM-compatible ICs by licensees or RDRAM-based
products by systems companies; signing or not signing new licensees, especially
for SDRAM-compatible licenses; new litigation or developments in current
litigation; 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.
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,
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which in turn manufacture and sell licensed 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 RDRAM-compatible 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
development costs associated with Rambus technology and to make the necessary
investment to successfully produce RDRAM-compatible ICs; and successfully
transferring technical know-how to licensees. To obtain new SDRAM-compatible
licenses the Company may have to resort to litigation, in many cases against
the same companies who are RDRAM-compatible licensees of the Company. 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 RDRAM-compatible 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 from RDRAM-compatible ICs received by the Company.
Therefore, the Company's success is partially dependent upon the adoption of
the Company's chip connection technology by systems companies, particularly
those which develop and market high-volume business and consumer products such
as home video game consoles 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. Even if a systems company develops a
Rambus-based product, success in the market will depend in part on a supply of
ICs from Rambus licensees in sufficient quantities and at commercially
attractive prices. 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 RDRAM-Compatible Technology as an Industry
Standard; Cost of RDRAM-Compatible Technology. An important part of the
Company's strategy for its RDRAM-compatible technology 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 RDRAM-compatible technology. Should a high
profile industry participant adopt RDRAM-compatible technology for one or more
of its products but fail to achieve success with those products, other industry
participants' perception of RDRAM-compatible technology could be adversely
affected. Any such event could reduce future sales of RDRAM-compatible 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
8
standard would have a material adverse effect on the Company's business,
financial condition and results of operations.
One important requirement for the Company's RDRAM-compatible technology to
be adopted as an industry standard is for any premium in the price and cost of
Rambus memory over alternatives to be reasonable in comparison to the perceived
benefits of the technology. However, there can be no assurance that the price
and cost premium for RDRAMs over standard memory can be reduced sufficiently to
allow the development of Rambus as an industry standard. To date, RDRAMs have
had a lower than desired yield to the full 800 MHz specification, and some
parts have had to be sold at a lower price based on a 700 MHz or even a 600 MHz
specification. There can be no assurance that a market for such downgraded
RDRAMs will continue to be available or that yields to the full 800 MHz
specification will reach satisfactory levels. In addition, because of the extra
Rambus interface circuitry and other features, an RDRAM chip is somewhat larger
than a standard DRAM. Therefore, a 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. Also, 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.
RDRAMs use newer-generation chip scale packaging ("CSP") and require high-
speed testers for a portion of the test procedure. While the Company feels that
testing costs for RDRAMs in mass production volumes will be no greater than for
current standard DRAMs, additional capital equipment is required and startup
costs are incurred by the manufacturers producing RDRAMs. In addition, for PC
main memory applications memory modules (called "RIMMs"), connectors and clock
chips must be produced by multiple vendors and available in volume. There is no
assurance that such changes in the manufacturing processes and infrastructure
of the DRAM industry can be accomplished at a sufficiently competitive price to
allow the development of a mass market for RDRAM-compatible technology.
Dependence upon PC Main Memory Market Segment and Intel. An important part
of the Company's strategy is for its RDRAM-compatible technology to penetrate
the market segment for PC main memory. Rambus believes that PC main memory
currently accounts for more than one-half of all DRAMs sold. To date, the only
use of RDRAM-compatible technology in this market is via two chipsets developed
by Intel which allow RDRAMs to connect to Pentium III processors. One of these
chipsets, designed for use in the PC workstation market, has been highly
successful and Rambus technology is now fully established in this market. The
other chipset, intended for the much larger main PC market has been less
successful due to a variety of factors including inherent bandwidth limitations
of the chipset design and relatively high cost of RDRAMs compared to standard
memory. In connection with the scheduled introduction in late 2000 of its new
processor, the Pentium 4, Intel has designed a new chipset which includes a
Rambus memory controller. There can be no assurance that previous problems have
been completely solved, that the pricing of Rambus DRAMs will be reduced to a
competitive level or that the Intel chipset and Rambus technology will be
successful in penetrating the market segment for PC main memory. Furthermore,
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 developing Rambus-based chipsets. Also, there can be no assurance
that Rambus and Intel will continue to be able to work together successfully
over an extended period of time nor 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 2000, 1999, and
1998, revenues from the Company's top five licensees accounted for
approximately 54%, 47% and 49% of the Company's revenues, respectively. In
fiscal 2000, 1999, and 1998 NEC accounted for approximately 13%, 11% and 22% of
revenues, respectively. Also in fiscal 2000, Toshiba and Samsung accounted for
15% and 11% of revenues, respectively. In fiscal 1999, two other licensees
accounted for 11% and 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
9
under existing contracts and the volumes and prices at which the licensees have
recently sold licensed 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 licensed 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. However, the
Company believes that in fiscal 2000 it is likely that sales by licensees to
Nintendo, Sony and to PC manufacturers accounted for the majority of the
Company's royalty revenues. All these systems companies face intense
competitive pressure in their markets, which are characterized by extreme
volatility, frequent new product introductions and rapidly shifting consumer
preferences, and there can be no assurance as to the unit volumes of licensed
ICs that will be purchased by these companies in the future or the level of
royalty-bearing revenues that the Company's licensees will receive from sales
to these companies. 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. In fiscal 2000, a majority of the Company's royalties was derived from
the sale of DRAMs. Royalties on DRAMs are based on the volumes and prices of
DRAMs 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 during periods of surplus. 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 RDRAM-compatible
license agreements, royalty rates decrease as a function of time or volume.
With the introduction of each new generation of higher density DRAMs, 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 chip connection technology and expects that this dependence on its
fundamental technology will continue for the foreseeable future. Accordingly,
broad acceptance of the Company's technology is critical to the Company's
future success. The introduction or market acceptance of competing technology
which renders the Company's chip connection 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 could cause 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 chip connection
technology which keep pace with other changes in the semiconductor industry and
which achieve rapid market acceptance. The Company must continually devote
10
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, including Rambus licensees, produce
higher-frequency versions of standard DRAMs such as SDRAMs which compete with
RDRAMs. These companies are much larger and have better access to financial,
certain technical and other resources than Rambus.
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. Some DRAM suppliers have begun to produce DDR SDRAMs, aimed
at doubling the memory bandwidth from SDRAMs without increasing the clock
frequency. While Rambus has been successful in negotiating SDRAM-compatible
licenses with some DRAM manufacturers which include the payment of royalties on
DDR, other manufacturers have not agreed to a license and are in litigation
with the Company.
A consortium including both large DRAM manufacturers and systems companies
is thought to be developing an extension of DDR known as DDR-2 and another
consortium is working on advanced DRAM technology ("ADT"). To the extent that
these alternative technologies provide comparable system performance at lower
or similar cost than RDRAMs, or are perceived to require the payment of lower
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. While the
Company might determine that such alternative technologies, when and if
developed, infringe the Company's patents, there can be no assurance that the
Company would be able to negotiate agreements which would result in royalties
paid to the Company without litigation, which could be costly and the result of
which would be uncertain.
In addition, certain semiconductor companies are now marketing ICs which
combine logic and DRAM on the same chip. Such technology, called "embedded
DRAM," eliminates the need for any chip connection interface. 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. 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.
11
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.
Rambus believes that it is important to develop and maintain a uniform RDRAM
memory interface standard. The Company's RDRAM-compatible 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. Nonetheless, there is no assurance that such a blocking
arrangement will not occur in the future.
Risks Associated with International Licenses. In fiscal 2000, 1999 and 1998,
international revenues constituted approximately 82%, 60% and 73% 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 licensed ICs sold by the
Company's foreign licensees were to increase as a result of fluctuations in the
exchange rate of the relevant currencies, demand for licensed 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 console 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 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
12
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 RDRAM-compatible 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 RDRAM-compatible 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 42,000 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. In August 1999 the Company
signed a lease for a 96,000 square-foot building currently under construction
in Los Altos, California. The lease has an initial term of ten years, with
options to extend the term for two periods of five years each. The Company
anticipates moving its U.S. operations to this new building upon its
completion, scheduled for late 2000. The Company also leases space in Tokyo and
Taipei for offices which provide sales and technical support to systems
companies in Japan and Taiwan. The Company believes that it will not have
difficulty in securing additional facilities if required.
Item 3. Legal Proceedings
On August 8, 2000, the Company filed suit in the U.S. District Court for the
Eastern District of Virginia against Infineon Technologies AG ("Infineon") and
its North American subsidiary for infringement of two U.S. patents. In
addition, on August 7, 2000, the Company filed suit in Mannheim, Germany
against Infineon for infringement of one European patent. The suits seek
injunctions to halt the sale, manufacture and use of Infineon SDRAM and DDR
SDRAM memory devices that infringe the Rambus patents. On September 25, 2000,
Infineon filed counterclaims against the Company in the U.S. case (USDC
Virginia Civil Action No.: 3:00CV524) seeking a declaratory judgment that the
two asserted patents are invalid and not infringed and further claiming
contributory infringement by the Company of two Infineon U.S. patents. In
addition, Infineon also asserts breach of contract and fraud claims in
connection with the Company's participation in an industry standards-setting
group known as JEDEC. The Infineon counterclaims seek damages based on the
alleged contributory infringement, injunctions to halt future infringement,
punitive damages based on the alleged fraud and the award to Infineon of a
royalty-free license to the Rambus patents. On October 13, 2000, the Company
filed a motion to dismiss the Infineon breach of contract and fraud
counterclaims. A decision on this motion is
13
pending. The Company disputes all of Infineon's counterclaims and intends to
pursue its claims and defend against the counterclaims vigorously. The U.S.
case is currently in the discovery phase. In the German case, trial has been
scheduled for December 22, 2000.
On August 28, 2000, Micron Technology, Inc. ("Micron") filed suit against
the Company in the U.S. District Court in Delaware (USDC Delaware Civil Action
No.: 00-792-RRM). The suit asserts violations of federal antitrust laws,
deceptive trade practices, breach of contract, fraud and negligent
misrepresentation in connection with the Company's participation in JEDEC.
Based on these allegations, the suit seeks a declaration of monopolization by
the Company, compensatory and punitive damages, a declaratory judgment that
eight Rambus patents are invalid and not infringed and the award to Micron of a
royalty-free license to the Rambus patents. On September 18, 2000, the Company
filed two separate motions to dismiss this lawsuit. A decision on these motions
is pending; no discovery has yet occurred in this case. The Company disputes
all of Micron's claims and intends to defend the lawsuit vigorously.
In September 2000, the Company filed suit against Micron in Germany, France,
Great Britain and Italy for infringement of a European patent. The French and
Italian actions included court-sanctioned seizure of documents, samples and
mask sets from Micron facilities. These suits are all in their early phases,
although trial has been scheduled in the German case for February 16, 2001.
On August 29, 2000, Hyundai Electronics Industries Co., Ltd. ("Hyundai") and
various subsidiaries filed suit against the Company in the U.S. District Court
for the Northern District of California (USDC Northern District of California
Case No.: 00-20905 PVT). The suit asserts breach of contract in connection with
the Company's participation in JEDEC and seeks a declaratory judgment that
eleven Rambus patents are invalid and not infringed by Hyundai. On October 23,
2000, the Company filed a motion to transfer this lawsuit to the U.S. District
Court for the Eastern District of Virginia. A decision on this motion is
pending; no discovery has yet occurred in this case. The Company disputes
Hyundai's claims and intends to defend the lawsuit vigorously.
In September 2000, the Company filed suit against Hyundai in Germany, France
and Great Britain for infringement of a European patent. The French action
included court-sanctioned seizure of documents and samples from a Hyundai
facility. These suits are all in their early phases, although trial has been
scheduled in the German case for February 16, 2001.
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 2000.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is listed on the Nasdaq National Market under the
symbol "RMBS." The quarterly high and low prices as reported by Nasdaq are
included in the table "Consolidated Supplementary Financial Data" on page 49 of
this Report 10-K.
As of October 31, 2000, there were 673 holders of record of the Company's
common stock. Because many of the shares of the Company's 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.
Item 6. Selected Consolidated Financial Data
Net income (loss) per share calculations have been retroactively restated to
reflect a four-for-one split of Rambus' common stock effective June 15, 2000.
Year Ended September 30,
---------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- ------- --------
(in thousands except per share data)
Operations:
Total revenues................. $ 72,311 $ 43,370 $ 37,864 $26,015 $ 11,270
Operating income (loss)........ (143,508) 9,499 7,967 1,954 (4,568)
Net income (loss).............. (106,127) 8,718 6,788 1,981 (4,415)
Net income (loss) per share-
diluted....................... $ (1.10) $ 0.09 $ 0.07 $ 0.02 $ (0.20)
Financial Position (at year
end):
Total assets................... $ 219,631 $115,773 $110,987 $87,878 $ 12,868
Total debt (capital lease
obligations).................. -- -- 130 512 1,297
Stockholders' equity
(deficit)..................... 162,322 61,564 41,792 26,661 (12,144)
15
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussion contains forward-looking statements, including
without limitation the Company's expectations regarding revenues, expenses and
results of operations. The Company's actual results may differ significantly
from those projected in the forward-looking statements. Factors that might
cause future actual results to differ materially from the Company's recent
results or those projected in the forward-looking statements include, but are
not limited to, those discussed in "Factors Affecting Future Results" and
below. The Company assumes no obligation to update the forward-looking
statements or such factors.
Overview
Since its founding in 1990, Rambus has been engaged in the development of
high-speed chip-to-chip interface technology. The Company neither manufactures
nor sells semiconductors but, rather, licenses its technology on a nonexclusive
and worldwide basis to semiconductor companies which manufacture memory and
logic ICs incorporating Rambus interface technology. These ICs are sold to
systems companies to enhance the performance and cost-effectiveness of consumer
electronics, computer systems and other electronic systems. Systems companies
are not required to obtain a Rambus license to incorporate Rambus technology
into their products.
Revenues. The Company generates revenues from two types of licenses. The
first, for technology which is fully compatible with the Rambus standard
("RDRAM-compatible licenses"), allows semiconductor manufacturers to
manufacture and sell RDRAMs and logic ICs containing Rambus ASIC cells ("RACs")
to systems companies which have adopted Rambus technology. The second type of
license ("SDRAM-compatible licenses"), covers the use of Rambus patents and
other intellectual property in non-Rambus ICs, specifically in synchronous DRAM
("SDRAM") and double data-rate ("DDR") SDRAM memory devices and logic ICs which
control such memory.
Revenues from RDRAM-compatible licenses consist of contract fees and
royalties. Contract fees from RDRAM-compatible licenses are comprised of
license fees, engineering service fees and nonrefundable, prepaid royalties,
and represented approximately 55% of the Company's total revenues in fiscal
2000, 82% in 1999, and 76% in 1998. The Company's RDRAM-compatible licenses
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 accordance with the terms of a few RDRAM-compatible licenses, the Company
received nonrefundable, prepaid royalties which offset the earliest royalty
payments otherwise due from the licensee. As of September 30, 2000, $6.1
million of such nonrefundable, prepaid royalties had offset initial royalties,
and the Company had a balance of $200,000 remaining to be offset against future
royalties. Substantially all of the license fees, engineering service fees and
nonrefundable, prepaid royalties from RDRAM-compatible licenses are bundled
together as contract fees because the Company generally does not provide or
price these components separately. These 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 revenue
recognized is shown on the Company's balance sheet as deferred revenue.
SDRAM-compatible licenses also generally provide for the payment of license
fees as well as quarterly royalties. However, there are no upgrades,
enhancements or other customer support provided for these licenses. The license
fees, which generally are millions of dollars, include compensation for use of
Rambus patents from the time the Company notifies the licensee of potential
infringement. Accordingly, Rambus classifies these fees as royalty revenues
which are recognized ratably over the five-year contract period. The excess of
SDRAM-compatible license fees received over royalty revenue recognized is shown
on the Company's balance sheet as
16
deferred revenue. As of September 30, 2000, the Company's deferred revenue from
both RDRAM-compatible and SDRAM-compatible licenses was $48.3 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
licensees on their sales of licensed ICs, are normally payable quarterly by a
Rambus licensee on sales occurring during the life of the Rambus patents being
licensed in the case of RDRAM-compatible licenses, and over a five year
contract period in the case of SDRAM-compatible licenses. 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. For a
typical systems application of Rambus technology, the Company receives
royalties from the sale of both licensed logic ICs and DRAMs 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 associated
Rambus logic ICs, and in some cases may decline based on the passage of time or
on the total volume of Rambus ICs shipped. In the case of SDRAM-compatible
licenses, the royalty rates for SDRAMs and associated controllers are generally
less than the comparable RDRAM-compatible rates, and for DDR and associated
controllers the rates are generally higher. 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, in the
case of RDRAM-compatible licenses, the marketing and engineering commitment
made by the licensee.
As of September 30, 2000, the Company had 28 RDRAM-compatible licensees and
four SDRAM-compatible licensees. Because all of the Company's revenues are
derived from its relatively small number of licensees, the Company's revenues
tend to be highly concentrated. In fiscal 2000, 1999, and 1998, revenues from
the Company's top five licensees accounted for approximately 54%, 47% and 49%
of the Company's revenues, respectively. In fiscal 2000, 1999, and 1998 NEC
accounted for approximately 13%, 11% and 22% of revenues, respectively. Also in
fiscal 2000, Toshiba and Samsung accounted for 15% and 11% of revenues,
respectively. In fiscal 1999, two other licensees accounted for 11% and 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 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 partially 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.
In fiscal 2000, 1999, and 1998, international revenues constituted 82%, 60%
and 73% 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 to date have been denominated in United States
dollars.
Expenses. Since the Company's inception in 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, general and administration, and expects that these costs and
expenses will continue to be a significant percentage of revenues in future
periods. Whether such expenses
17
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 RDRAM-
compatible 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, legal, 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 the
marketing and support of 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 future periods.
Taxes. The Company reports certain items of income and expense for financial
reporting 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 RDRAM-compatible contract fees over the period
post-contract customer support is expected to be provided and from SDRAM-
compatible license fees over the five-year contract period and records royalty
revenues upon notification from licensees. Thus, the Company recognizes revenue
earlier for tax than for financial reporting purposes. Accordingly, the
Company's net operating profit or loss for tax purposes may be more or less
than the amount recorded for financial reporting purposes.
18
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:
2000 1999 1998
------ ----- -----
Revenues:
Contract revenues...................................... 54.9% 81.5% 75.9%
Royalties.............................................. 45.1 18.5 24.1
------ ----- -----
Total revenues....................................... 100.0% 100.0% 100.0%
====== ===== =====
Costs and expenses:
Cost of contract revenues.............................. 16.7 28.2 23.7
Research and development............................... 15.9 18.7 25.5
Marketing, general and administrative.................. 29.2 31.2 29.8
Employee stock-related compensation expense............ 236.6 -- --
------ ----- -----
Total costs and expenses............................. 298.4 78.1 79.0
------ ----- -----
Operating income (loss).................................. (198.4) 21.9 21.0
Other income, net........................................ 6.5 10.0 8.9
------ ----- -----
Income (loss) before income taxes........................ (191.9) 31.9 29.9
Provision for (benefit from) income taxes................ (45.1) 11.8 12.0
------ ----- -----
Net income (loss)........................................ (146.8)% 20.1% 17.9%
====== ===== =====
Revenues. Revenues were $72.3 million, $43.4 million and $37.9 million in
fiscal 2000, 1999 and 1998, respectively. Contract revenues increased 12.2% to
$39.7 million in fiscal 2000 and increased 23.1% to $35.4 million in fiscal
1999. The majority of the increase in contract revenues in fiscal 2000
represents recognition of the remaining revenue on contracts for which all
remaining obligations were terminated by mutual consent due to the licensees'
withdrawal from the commodity DRAM market. Such a termination results in the
cancellation of all obligations on RDRAM development by both parties. Since all
license and engineering payments already received are nonrefundable, the
deferred revenue balance on these contracts of approximately $8.1 million was
recognized upon termination in fiscal 2000. Fiscal 1999 contract revenues
include approximately $500,000 of such previously deferred revenue from
cancellation of a contract by Rambus due to nonperformance of a licensee. Also
contributing to the revenue increase in both fiscal 2000 and fiscal 1999 was a
change in management's estimate of certain contract revenue recognition
periods, which occurred in the fourth quarter of fiscal 1999. Such periods are
initially estimated based upon management's judgment of the time over which the
Company has an obligation to support its RDRAM-compatible licensees. As the new
generation of RDRAM-compatible technology went into production late in fiscal
1999, a more accurate estimate of the remaining support period could be made.
To the extent the new estimated periods were less than the original estimates,
the amount of deferred revenue recognized in the fourth quarter of fiscal 1999
and in fiscal 2000 was greater than in the comparable periods of prior years.
In fiscal 2000, this increase was partially offset by the ending of revenue
recognition on contracts for which the contract period had expired, including
the Texas Instruments ("TI") DRAM contract. Fiscal 1999 included approximately
$3.6 million of contract revenue from the TI DRAM contract. This revenue was
recognized on an accelerated basis due to the sale of TI's DRAM business to
Micron Technology Inc. and was fully recognized by the end of fiscal 1999.
The Company anticipates continuing to book additional contracts, especially
contracts with existing licensees for newer versions of Rambus technology.
However, it is anticipated that contract revenues will decline over time as the
value of contracts for which the revenue recognition periods have expired
exceeds the value of new contracts. The Company's past success in signing
licensees has reduced the number of potential new licensees, which also
contributes to the anticipated decline in contract revenues.
19
In fiscal 2000, royalties increased 307% to $32.6 million, or 45.1% of total
revenues. Fiscal 2000 revenues include increased royalties from licensees'
shipments of RDRAMs and controllers that connect to RDRAMs (RDRAM-compatible
ICs) as well as the first ever royalties from licensees for the use of Rambus
intellectual property in SDRAMs, DDR SDRAMs and logic products which directly
control these memories (SDRAM-compatible ICs). The Company believes that fiscal
2000 royalties from RDRAM-compatible ICs were largely based upon shipments into
the desktop PC, workstation, and Sony PlayStation2 markets and, to a lesser
extent, shipments of previous-generation Rambus ICs for Nintendo64 systems. In
fiscal 1999, royalties decreased 12.3% to $8.0 million, or 18.5% of total
revenues. The Company believes that this decrease was a result of declining
sales and/or prices for the RDRAM-compatible ICs used by Nintendo as well as
steep price declines in the DRAM market. The Company anticipates that its
potential to generate RDRAM-compatible royalties in fiscal 2001 will be largely
dependent upon system sales by PC and workstation manufacturers and Sony. The
markets addressed by systems companies using Rambus ICs, including those in the
video game console and PC businesses, are characterized by extreme volatility,
frequent new product introductions and rapidly shifting consumer preferences,
and there can be no assurance as to the unit volumes of Rambus ICs that will be
purchased in the future or the level of royalty-bearing revenues that the
Company will receive due to these applications. None of the systems companies
currently incorporating RDRAM-compatible technology into their products is
contractually obligated to continue using Rambus ICs. Given the concentration
of royalties from a limited number of sources, it is likely that royalties will
continue to vary greatly from period to period.
Engineering Costs. Engineering costs, consisting of cost of contract
revenues and research and development expenses, were $23.6 million, $20.4
million and $18.6 million in fiscal 2000, 1999 and 1998, respectively, which
represented 32.6%, 46.9% and 49.2% of revenues in the same periods,
respectively. The increase in engineering costs was primarily attributable to
engineering personnel added to support the launch of RDRAM-compatible
technology into the PC main memory market, the Company's announced technology
roadmap improvements, and new initiatives in the communications market and
chip-to-chip connections. 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 were $12.1 million,
$12.2 million and $9.0 million, which represented 16.7%, 28.2% and 23.7% of
revenues, in fiscal 2000, 1999 and 1998, respectively. In fiscal 2000, cost of
contract revenues declined in terms of absolute dollars and as a percentage of
revenues due to a reduction in the engineering effort required to support the
launch and ramp of RDRAM-compatible technology into the PC main memory market
as well as the effect of the increase in revenues. In fiscal 1999, cost of
contract revenues increased 36.1% to $12.2 million, and increased as a
percentage of revenues, as the Company focused its engineering resources on the
ramp of RDRAM-compatible technology into the PC main memory market. 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.
Research and Development. Research and development expenses were $11.5
million, $8.1 million, and $9.6 million, which represented 15.9%, 18.7% and
25.5% of revenues, in fiscal 2000, 1999 and 1998, respectively. In fiscal 2000,
research and development expenses increased 41.6% compared to 1999 as the
Company was able to shift engineering resources from support of the PC market
ramp to development of technology roadmap improvements as well as new chip
connection activities. However, research and development expenses decreased as
a percentage of revenues in fiscal 2000 due to the increase in the Company's
revenues. Research and development expenses include approximately $802,000 of
deferred compensation costs and amortization related to the Company's fiscal
2000 purchase of the intellectual property assets of a small company
responsible for developing a SerDes cell for network applications. The
acquisition was accounted for as a purchase, which resulted in goodwill and
deferred compensation costs that are being amortized over periods ranging from
2 to 5 years. In fiscal 1999, research and development expenses decreased 15.8%
compared to 1998, and decreased as a percentage of total revenues, as
engineering resources were transferred to the support of Intel, RDRAM
licensees, PC OEMs and infrastructure providers on the ramp of RDRAM-compatible
technology into the PC main memory market. The Company expects research and
20
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 $21.1 million, $13.5 million and $11.3 million, which represented
29.2%, 31.2% and 29.8% of revenues, in fiscal 2000, 1999 and 1998,
respectively. The fiscal 2000 increase in absolute dollars was primarily due to
the addition of administrative personnel and legal fees to support enforcement
of the Company's patents and other intellectual property rights. The decrease
in marketing, general and administrative expenses as a percentage of revenues
in fiscal 2000 reflects the increased revenue base. The fiscal 1999 increase in
both absolute dollars and as a percentage of revenues 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 Company expects marketing, general
and administrative expenses to increase in the future as the Company focuses
additional resources upon protecting its intellectual property rights through
legal activities, marketing its technology, and assisting systems companies
with adapting this technology to new generations of products. The rate of
increase of, and the percentage of revenues represented by, marketing, general
and administrative expenses in the future will vary from period to period based
on the trade shows, advertising, legal and other marketing and administrative
activities undertaken and the change in sales, marketing and administrative
headcount in any given period, as well as the rate of change in the Company's
total revenues.
Employee Stock-Related Compensation Expense. As discussed below in the
section entitled "Contingent Warrants, Common Stock Equivalents, and Options,"
a $171.1 million employee stock-related compensation charge was taken in fiscal
2000 related to Common Stock Equivalents granted to the Company's Chief
Executive Officer and President and options granted to the Company's employees.
Other Income, Net. Other income, net consists primarily of interest income
from the Company's short-term cash investments. Other income, net was $4.7
million, $4.3 million and $3.4 million, which represented 6.5%, 10.0% and 8.9%
of revenues, in fiscal 2000, 1999 and 1998, respectively. The increase in
absolute dollars was due to the combination of higher interest rates and higher
invested balances. The Company expects interest income to increase in the
future due to higher cash balances.
Provision for (Benefit from) Income Taxes. The Company recorded an income
tax benefit of $32.7 million in fiscal 2000, and a provision for income taxes
of $5.1 million in fiscal 1999 and $4.5 million in fiscal 1998. In the fourth
quarter of fiscal 2000, the Company determined, based upon its continued and
growing profitability, that it would more likely than not be able to utilize
its deferred tax assets, and recorded a $38 million credit to income tax
expense to reduce the valuation allowance against the deferred tax assets. For
the 1999 and 1998 provisions, the estimated federal and state combined rate on
income before income taxes was 37% and 40%, respectively. The Company's
effective tax rate differs from the statutory rate due to timing differences
related to the recognition of contract and royalty revenues and expenses for
tax and financial reporting purposes.
At September 30, 2000, the Company had gross deferred tax assets of
approximately $76.9 million, primarily relating to the difference between tax
and book treatment of employee stock-related compensation expenses and deferred
revenue, and net operating losses. The deferred tax assets of approximately
$76.9 million, net of the valuation allowance of $5.9 million, as of September
30, 2000 represents management's estimate of those tax assets which it believes
will more likely than not (a probability of just over fifty percent) be
realized. The deferred tax asset valuation allowance is subject to periodic
adjustment as facts and circumstances warrant.
21
Common Stock Split
In March 2000, the Company's board of directors approved a four-for-one
split of Rambus' common stock, subject to stockholder approval of an increase
in authorized common stock. On May 23, 2000, the Company's stockholders
approved an increase in the Company's authorized shares of common stock to 500
million shares. The stock began trading on a split-adjusted basis on June 15,
2000. All references in this Form 10-K to earnings per share, the number of
common shares, contingent warrants, common stock equivalents, and options, and
the share price have been retroactively restated to reflect the common stock
split and the increase in authorized common stock.
Contingent Warrants, Common Stock Equivalents, and Options
In January 1997, the Company granted a warrant to Intel Corporation for the
purchase of 4,000,000 shares of Rambus common stock at an exercise price of
$2.50 per share (the "Intel warrant"). This warrant will become exercisable
only upon the achievement of certain milestones by Intel relating to shipment
volumes of Rambus-based chipsets (the "Intel milestones"). The warrant will
expire no later than the eighth (8th) anniversary of its issuance. At the time
that achievement of the milestones becomes probable, a non-cash charge will be
made to the statement of operations based on the fair value of the warrant.
In October 1998, the Company's Board of Directors authorized an incentive
program in the form of warrants for a total of up to 1,600,000 shares of Rambus
common stock (the "DRAM incentive warrants") to be issued to various Rambus
Direct DRAM partners upon the achievement of certain product qualification and
volume production targets. The warrants, issuable at the time the targets are
met, have an exercise price of $2.50 per share and a life of five years. They
will vest and become exercisable on the same basis as the Intel warrant, which
will result in a non-cash charge to the statement of operations based on the
fair value of the warrants at the time the achievement of the Intel milestones
becomes probable. As of September 30, 2000, a total of 1,160,000 of these
warrants had been issued.
In the fourth quarter of fiscal 1999, the Company granted to its Chief
Executive Officer and to its President a combined total of 2,000,000 Common
Stock Equivalents (CSEs) and to its employees approximately 2,160,000 options
to purchase Rambus common stock for $2.50 per share. Vesting of these CSEs and
options was contingent upon the achievement of key indicators of success for
Rambus. Vesting for a portion of these CSEs and options was contingent on an
increase in the price of Rambus common stock to greater than $50 per share for
30 consecutive days. This target was achieved by the end of the second quarter
of fiscal 2000, and resulted in a $171.1 million employee stock-related
compensation charge taken in the same quarter. Except for a $1.2 million
employer payroll tax liability, this was a non-cash charge. The remaining CSEs
and options will vest on the same basis as the Intel and DRAM incentive
warrants, which will result in another almost entirely non-cash charge to the
statement of operations based on the fair value of the CSEs and options at the
time achievement of the Intel milestones becomes probable.
The magnitude of these charges is a function of the current price of Rambus
common stock at the time the charges are taken. For example, if these warrants,
CSEs, and options were valued based upon a stock price of $100, the charge
could be $800 million or more. The charge, when and if taken, will be non-cash
except for payroll tax liabilities, which would likely be more than offset by
cash received by the Company upon exercise of the warrants and options.
Liquidity and Capital Resources
As of September 30, 2000 the Company had cash and cash equivalents and
marketable securities of $132.3 million, including restricted cash of $2.5
million and a long-term component of $7.5 million. As of the same date, the
Company had total working capital of $109.8 million, including a short-term
component of deferred revenue of $24.2 million. Deferred revenue represents the
excess of cash received from licensees over revenue recognized on license
contracts, and the short-term component represents the amount of this deferred
22
revenue expected to be recognized over the next twelve months. Without the
short-term component of deferred revenue, working capital would have been
$133.9 million at September 30, 2000.
The Company's operating activities provided net cash of $35.2 million, $4.1
million and $16.3 million in fiscal 2000, 1999 and 1998, respectively. Cash
generated by fiscal 2000 operations was primarily the result of net loss and
deferred taxes offset by non-cash items, primarily non-cash stock compensation
expense. Cash generated in 1999 was primarily from net income and income tax
adjustments, offset by a decrease in deferred revenue due to recognition of
contract revenues in excess of new billings. Cash generated in fiscal 1998 was
primarily the result of net income and increases in deferred revenue, offset by
net payments, provisions and adjustments relating to income taxes. The increase
in deferred revenue was due to new billings on license contracts in excess of
revenues recognized.
Net cash provided by investing activities was $2.2 million in fiscal 2000.
Net cash used in investing activities was $19.8 million and $14.4 million in
fiscal 1999 and 1998, respectively. Investing activities have consisted
primarily of net purchases and maturities of marketable securities and
purchases of property and equipment and investments.
Net cash provided by financing activities were $10.8 million, $4.7 million
and $3.4 million in fiscal 2000, 1999 and 1998, respectively. Proceeds from the
sale of common stock under the Company's Employee Stock Purchase and Option
plans are the primary source of net cash provided by financing activities.
The Company presently anticipates that existing cash balances will be
adequate to meet its cash needs for at least the next 12 months.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. In July 1999, the Financial Accounting Standards Board issued SFAS No.
137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of SFAS No. 133." SFAS 137 deferred the
effective date of SFAS 133 until the first fiscal quarter of fiscal years
beginning after June 15, 2000. The Company does not currently hold derivative
instruments or engage in hedging activities. The Company expects the adoption
of SFAS 133 and SFAS 137 in the first quarter of fiscal year 2001 will have no
material impact on its financial statements and related disclosures.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements and is effective in the fourth quarter of all fiscal years beginning
after December 15, 1999. The Company's accounting policies are consistent with
the requirements of SAB 101, so the implementation of SAB 101 in the fourth
quarter of fiscal year 2001 is not expected to have an impact on the Company's
operating results.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 is
effective for transactions occurring after July 1, 2000. The application of FIN
44 did not have a material impact on the Company's financial statements.
23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company places its investments with
high credit issuers and by policy limits the amount of credit exposure to any
one issuer. As stated in its policy, the Company will ensure the safety and
preservation of its invested funds by limiting default risk and market risk.
The Company has no investments denominated in foreign country currencies and
therefore is not subject to foreign exchange risk.
The Company mitigates default risk by investing in high credit quality
securities and by positioning its portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer or guarantor.
The portfolio includes only marketable securities with active secondary or
resale markets to ensure portfolio liquidity.
The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at September 30, 2000.
Average Rate
of Return at
September 30,
Carrying Value 2000
(in thousands) (annualized)
-------------- -------------
Marketable securities:
Cash equivalents................................. $ 49,995 6.6%
United States government debt securities......... 37,527 6.4%
Corporate notes and bonds........................ 9,520 7.0%
Municipal notes and bonds........................ 8,189 3.6%
Foreign debt securities.......................... 7,523 7.1%
Commercial paper................................. 3,916 6.6%
--------
Total marketable securities.................... $116,670
========
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.
24
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 2001 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, 2000.
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 2001 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, 2000.
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 2001
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, 2000.
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 2001 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, 2000.
25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
Page
----
The following consolidated financial statements of the Registrant and
Report of
PricewaterhouseCoopers LLP, Independent Accountants, are included
herewith:
Report of PricewaterhouseCoopers LLP, Independent Accountants............. 29
Consolidated Balance Sheets as of September 30, 2000 and 1999............. 30
Consolidated Statements of Operations for the years ended September 30,
2000, 1999, and 1998..................................................... 31
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended September 30, 2000, 1999, and 1998................... 32
Consolidated Statements of Cash Flows for the years ended September 30,
2000, 1999, and 1998..................................................... 33
Notes to Consolidated Financial Statements................................ 34
Consolidated Supplementary Financial Data................................. 49
(a) (2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts.............................. 50
This financial statement schedule of the Company for each of the years ended
September 30, 2000, 1999 and 1998 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.
26
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(a) (3) Exhibits
Exhibit
Number Description of Document
------- -----------------------
3.1(3) Amended and Restated Certificate of Incorporation of
Registrant filed May 29, 1997.
3.2(6) Amended and Restated Bylaws of Registrant dated October 20,
1999.
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(7) Warrant No. 1-REV dated January 7, 1997 issued to Intel
Corporation to purchase shares of the Registrant's common
stock.
10.1(1) Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.
10.4(1) (2) Semiconductor Technology License Agreement, dated as of
November 15, 1996, between Registrant and Intel Corporation.
10.4.1(4) Amendment No. 1 to Semiconductor Technology License
Agreement, dated as of July 10, 1998, between Registrant and
Intel Corporation.
10.5(1) 1990 Stock Plan, as amended, and related forms of agreements.
10.6(5) 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.
10.10(6) Office Lease, dated as of August 27, 1999, between Registrant
and Los Altos--El Camino Associates, LLC.
10.11(6) Common Stock Equivalent Agreement, dated as of October 20,
1999, between the Registrant and Geoff Tate.
10.12(6) Common Stock Equivalent Agreement, dated as of October 20,
1999, between the Registrant and David Mooring.
10.13(8) Office Sublease, dated as of May 8, 2000, between Registrant
and Muse Prime Software, Inc.
10.14(9) 1999 Nonstatutory Stock Option Plan.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
27.1 Financial Data Schedule.
- --------
(1) Incorporated by reference to Registration Statement No. 333-22885.
(2) Confidential treatment was granted with respect to certain portions of this
exhibit. Omitted portions were filed separately with the Securities and
Exchange Commission.
(3) Incorporated by reference to the Form 10-K filed on December 15, 1997.
27
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(a) (3) Exhibits (Continued)
(4) Incorporated by reference to the Form 10-K filed on December 9, 1998.
(5) Incorporated by reference to the Registration Statement on Form S-8 filed
December 22, 1999 (file no. 333-93427).
(6) Incorporated by reference to the Form 10-K filed on December 23, 1999.
(7) Incorporated by reference to the Form 8-K filed on July 7, 2000.
(8) Incorporated by reference to the Form 10-Q filed on August 9, 2000.
(9) Incorporated by reference to the Registration Statement on Form S-8 filed
October 27, 2000 (file no. 333-48730).
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the fourth quarter ended
September 30, 2000. Information regarding the item reported on is as follows:
July 7, 2000 The Company filed Exhibit 4.4 Warrant No. 1-REV dated January
7, 1997 issued to Intel Corporation to purchase shares of the
Registrant's common stock.
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Rambus Inc. and Subsidiary
In our opinion, the consolidated financial statements listed in the index
appearing under item 14 (a) (1) on page 26 present fairly, in all material
respects, the financial position of Rambus Inc. and its subsidiary at September
30, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2000, in conformity
with accounting principles generally accepted in the United States. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14 (a) (2) on page 26 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 18, 2000
29
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30,
----------------------------
2000 1999
------------- -------------
(in thousands, except share
and per share amounts)
ASSETS
------
Current assets:
Cash and cash equivalents....................... $ 63,093 $ 14,982
Marketable securities........................... 59,127 72,158
Accounts receivable, less allowance for doubtful
accounts of $10 in 2000 and 1999............... 68 1,499
Prepaid and deferred taxes...................... 17,661 7,579
Prepaids and other current assets............... 2,988 2,260
------------- -------------
Total current assets.......................... 142,937 98,478
Property and equipment, net...................... 6,724 4,232
Marketable securities, long-term................. 7,548 5,658
Restricted cash.................................. 2,500 2,500
Deferred taxes, long-term........................ 55,404 4,123
Other assets..................................... 4,518 782
------------- -------------
Total assets.................................. $ 219,631 $ 115,773
============= =============
LIABILITIES
-----------
Current liabilities:
Accounts payable................................ $ 1,850 $ 265
Income taxes payable............................ 74 --
Accrued salaries and benefits................... 3,504 3,090
Other accrued liabilities....................... 3,604 1,070
Deferred revenue................................ 24,155 32,279
------------- -------------
Total current liabilities..................... 33,187 36,704
Deferred revenue, less current portion........... 24,122 17,505
------------- -------------
Total liabilities............................. 57,309 54,209
------------- -------------
Commitments and contingencies (Notes 6, 7 and 13)
STOCKHOLDERS' EQUITY
--------------------
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares;
Issued and outstanding: no shares at September
30, 2000 and September 30, 1999................ -- --
Common stock, $.001 par value:
Authorized: 500,000,000 shares;
Issued and outstanding: 97,490,774 shares at
September 30, 2000 and 94,810,672 shares at
September 30, 1999............................. 97 95
Additional paid-in capital....................... 285,885 78,503
Deferred stock-based compensation................ (571) --
Accumulated deficit.............................. (123,132) (17,005)
Accumulated other comprehensive gain (loss)...... 43 (29)
------------- -------------
Total stockholders' equity.................. 162,322 61,564
------------- -------------
Total liabilities and stockholders'
equity.................................... $ 219,631 $ 115,773
============= =============
See Notes to Consolidated Financial Statements.
30
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
----------------------------
2000 1999 1998
--------- -------- -------
(in thousands, except per
share amounts)
Revenues:
Contract revenues.............................. $ 39,683 $ 35,353 $28,727
Royalties...................................... 32,628 8,017 9,137
--------- -------- -------
Total revenues............................... 72,311 43,370 37,864
--------- -------- -------
Costs and expenses:
Cost of contract revenues...................... 12,093 12,232 8,988
Research and development....................... 11,501 8,123 9,649
Marketing, general and administrative.......... 21,140 13,516 11,260
Employee stock-related compensation expense.... 171,085 -- --
--------- -------- -------
Total costs and expenses..................... 215,819 33,871 29,897
--------- -------- -------
Operating income (loss)...................... (143,508) 9,499 7,967
Interest and other income, net................... 4,714 4,346 3,413
Interest expense................................. -- (7) (52)
--------- -------- -------
Income (loss) before income taxes............ (138,794) 13,838 11,328
Provision for (benefit from) income taxes........ (32,667) 5,120 4,540
--------- -------- -------
Net income (loss)............................ $(106,127) $ 8,718 $ 6,788
========= ======== =======
Net income (loss) per share--basic............... $ (1.10) $ 0.09 $ 0.07
========= ======== =======
Net income (loss) per share--diluted............. $ (1.10) $ 0.09 $ 0.07
========= ======== =======
Number of shares used in per share calculations:
Basic.......................................... 96,487 93,328 90,816
========= ======== =======
Diluted........................................ 96,487 100,208 97,504
========= ======== =======
See Notes to Consolidated Financial Statements.
31
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
for the years ended September 30, 2000, 1999 and 1998
Accumulated
Common Stock Additional Deferred Stockholders' Other
------------- Paid-In Stock-Based Notes Accumulated Comprehensive
Shares Amount Capital Compensation Receivable Deficit Gain (Loss) Total
------ ------ ---------- ------------ ------------- ----------- ------------- --------
(in thousands)
Balances, September 30,
1997.................... 89,244 $ 89 $ 59,798 $ -- $(680) $ (32,511) $(35) $ 26,661
Components of
comprehensive income:
Net income............. -- -- -- -- -- 6,788 -- 6,788
Foreign currency
translation
adjustments............ -- -- -- -- -- -- (90) (90)
--------
Total comprehensive
income................ 6,698
--------
Issuance of common
stock upon exercise of
options, net........... 1,728 2 1,216 -- -- -- -- 1,218
Issuance of common
stock under Employee
Stock Purchase Plan.... 732 1 1,879 -- -- -- -- 1,880
Repayments of
stockholders' notes
receivable............. -- -- -- -- 680 -- -- 680
Issuance of warrant.... -- -- 568 -- -- -- -- 568
Tax benefit of stock
option exercises....... -- -- 4,087 -- -- -- -- 4,087
------ ---- -------- ----- ----- --------- ---- --------
Balances, September 30,
1998.................... 91,704 92 67,548 -- -- (25,723) (125) 41,792
Components of
comprehensive income:
Net income............. -- -- -- -- -- 8,718 -- 8,718
Foreign currency
translation
adjustments............ -- -- -- -- -- -- 201 201
Unrealized loss on
marketable securities.. -- -- -- -- -- -- (105) (105)
--------
Total comprehensive
income................ 8,814
--------
Issuance of common
stock upon exercise of
options, net........... 2,360 2 2,821 -- -- -- -- 2,823
Issuance of common
stock under Employee
Stock Purchase Plan.... 748 1 2,031 -- -- -- -- 2,032
Tax benefit of stock
option exercises....... -- -- 6,103 -- -- -- -- 6,103
------ ---- -------- ----- ----- --------- ---- --------
Balances, September 30,
1999.................... 94,812 95 78,503 -- -- (17,005) (29) 61,564
Components of
comprehensive income:
Net loss............... -- -- -- -- -- (106,127) -- (106,127)
Foreign currency
translation
adjustments............ -- -- -- -- -- -- (14) (14)
Unrealized gain on
marketable securities.. -- -- -- -- -- -- 86 86
--------
Total comprehensive
income................ (106,055)
--------
Issuance of common
stock upon exercise of
options, net........... 2,300 2 8,497 -- -- -- -- 8,499
Issuance of common
stock under Employee
Stock Purchase Plan.... 179 -- 2,257 -- -- -- -- 2,257
Issuance of common
stock from Common Stock
Equivalents............ 200 -- -- -- -- -- -- --
Stock-related
compensation charges... -- -- 169,878 -- -- -- -- 169,878
Deferred compensation.. -- -- 663 (663) -- -- -- --
Amortization of
deferred compensation.. -- -- -- 92 -- -- -- 92
Tax benefit of stock
option exercises....... -- -- 26,087 -- -- -- -- 26,087
------ ---- -------- ----- ----- --------- ---- --------
Balances, September 30,
2000.................... 97,491 $ 97 $285,885 $(571) $ -- $(123,132) $ 43 $162,322
====== ==== ======== ===== ===== ========= ==== ========
See Notes to Consolidated Financial Statements.
32
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
---------------------------------
2000 1999 1998
--------- ----------- ---------
(in thousands)
Cash flows from operating activities:
Net income (loss).......................... $(106,127) $ 8,718 $ 6,788
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Non-cash employee stock-related
compensation............................. 169,878 -- --
Non-cash compensation expense for issuance
of warrant............................... -- -- 568
Deferred taxes............................ (38,621) 4,759 (3,253)
Depreciation and amortization............. 3,243 3,127 2,835
Amortization of deferred compensation..... 557 -- --
Amortization of goodwill.................. 245 -- --
Other..................................... -- (531) 666
Change in operating assets and
liabilities:
Accounts receivable....................... 1,431 414 (988)
Prepaids and other current assets......... (728) 80 (308)
Other assets.............................. (647) 195 (81)
Accounts payable.......................... 1,585 (194) 81
Deferred and prepaid taxes and income
taxes payable............................ 3,419 2,179 (1,512)
Accrued salaries and benefits............. (51) 1,150 473
Other accrued liabilities................. 2,536 35 (57)
Deferred revenue.......................... (1,507) (15,853) 11,098
--------- ----------- ---------
Net cash provided by operating
activities.............................. 35,213 4,079 16,310
--------- ----------- ---------
Cash flows from investing activities:
Purchase of property and equipment......... (5,762) (3,292) (2,229)
Proceeds from sale of property and
equipment................................. 25 -- 6
Purchases of marketable securities......... (854,550) (1,118,281) (313,525)
Maturities of marketable securities........ 865,777 1,102,630 302,439
Acquired technology rights................. (1,334) -- --
Purchase of investments.................... (2,000) (1,200) (1,150)
Sale of investments........................ -- 2,822 --
Increase in restricted cash................ -- (2,500) --
--------- ----------- ---------
Net cash provided by (used in) investing
activities.............................. 2,156 (19,821) (14,459)
--------- ----------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common
stock..................................... 10,756 4,855 3,098
Repayments of stockholders' notes
receivable................................ -- -- 680
Principal payments on capital lease
obligations............................... -- (130) (382)
--------- ----------- ---------
Net cash provided by financing
activities.............................. 10,756 4,725 3,396
--------- ----------- ---------
Effect of exchange rates on cash and cash
equivalents................................ (14) 201 (90)
--------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents................................ 48,111 (10,816) 5,157
Cash and cash equivalents at beginning of
year....................................... 14,982 25,798 20,641
--------- ----------- ---------
Cash and cash equivalents at end of year.... $ 63,093 $ 14,982 $ 25,798
========= =========== =========
Supplemental disclosure of cash flow
information:
Interest paid.............................. $ -- $ 7 $ 52
Taxes paid................................. 5,975 408 8,874
Tax benefit of stock option exercises...... 26,087 6,103 4,087
Deferred compensation upon acquisition of
technology rights......................... 1,128 -- --
See Notes to Consolidated Financial Statements.
33
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-bandwidth chip connection technologies to enhance the performance
of computers, consumer electronics, and communications products. 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. Investments with less than 20%
ownership by the Company are recorded using the cost method.
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 two types of nonexclusive technology agreements
with semiconductor licensees. The first ("RDRAM-compatible license") is for
technology which is fully compatible with the Rambus standard, while the second
type of license ("SDRAM-compatible license") covers the use of Rambus patents
and other intellectual property in non-Rambus ICs.
RDRAM-compatible licenses allow a semiconductor manufacturer to use the
Company's proprietary technology and to receive engineering implementation
services, customer support, and enhancements. The Company delivers to a new
RDRAM-compatible licensee an implementation package which contains all
information needed to develop a chip incorporating Rambus technology 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 RDRAM-compatible licenses 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 on RDRAM-compatible licenses consistent with
American Institute of Certified Public Accountants (AICPA) Statement of
Position No. 98-9 (SOP 98-9), modification of SOP 97-2,
34
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies (Continued)
Revenue Recognition (continued)
"Software Revenue Recognition." 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. Revenue recognition periods are estimated
based on management's judgment of the time over which the Company expects to
support its licensees.
At the time the Company begins to recognize revenue under RDRAM-compatible
licenses, 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. 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 excess of contract
fees received over revenue recognized is shown on the balance sheet as deferred
revenue.
SDRAM-compatible licenses also generally provide for the payment of license
fees. However, there are no upgrades, enhancements or other customer support
provided for these licenses. The license fees include compensation for use of
Rambus patents from the time the Company notifies the licensee of potential
infringement. Accordingly, the Company classifies these fees as royalty
revenues which are recognized ratably over the five-year contract period.
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.
Computation of Net Income Per Share
Net income per share is calculated in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share" (SFAS 128), which
requires the presentation of basic and diluted earnings per share. Basic
earnings per share is calculated using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
using the weighted average number of common share and common stock equivalents,
if dilutive, outstanding during the period.
35
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies (Continued)
Common Stock Split
In March 2000, the Company's board of directors approved a four-for-one
split of Rambus' common stock, subject to stockholder approval of an increase
in authorized common stock. On May 23, 2000, the Company's stockholders
approved an increase in the Company's authorized shares of common stock to 500
million shares. The stock began trading on a split-adjusted basis on June 15,
2000. All references in this Form 10-K to earnings per share, the number of
common shares, warrants, common stock equivalents, and options, and the share
price have been retroactively restated to reflect the common stock split and
the increase in authorized common stock.
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." Stock options are generally granted
with exercise prices equivalent to fair market value, and no compensation cost
is recognized. When stock options are granted with exercise prices below fair
market value, employee stock-related compensation expense is recognized
accordingly. 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 7.
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.
Marketable Securities
Available-for-sale securities are carried at fair value, based on quoted
market prices, with the unrealized gains or losses reported in stockholders'
equity. 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 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.
36
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies (Continued)
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 included in stockholders' equity and comprehensive gain (loss).
Gains or losses resulting from foreign currency transactions are included in
the results of operations.
Segments
As defined by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company operates in one disclosable segment, using one measurement of
profitability for its business. The Company has sales outside the United
States, which are described in Note 13. All long-lived assets are maintained in
the United States.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments and
unrealized gains and losses on marketable securities. Other comprehensive gain
(loss) is presented in the statement of stockholders' equity and comprehensive
income.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. In July 1999, the Financial Accounting Standards Board issued SFAS No.
137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of SFAS No. 133." SFAS 137 deferred the
effective date of SFAS 133 until the first fiscal quarter of fiscal years
beginning after June 15, 2000. The Company does not currently hold derivative
instruments or engage in hedging activities. The Company expects the adoption
of SFAS 133 and SFAS 137 in the first quarter of fiscal year 2001 will have no
material impact on its financial statements and related disclosures.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements and is effective in the fourth quarter of all fiscal years beginning
after December 15, 1999. The Company's accounting policies are consistent with
the requirements of SAB 101, so the implementation of SAB 101 in the fourth
quarter of fiscal year 2001 is not expected to have an impact on the Company's
operating results.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 is
effective for transactions occurring after July 1, 2000. The application of FIN
44 did not have a material impact on the Company's financial statements.
37
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, litigation regarding
patent and other intellectual property rights, 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, 2000, three
customers accounted for 73%, 12% and 11% of accounts receivable. At September
30, 1999, two customers accounted for 67% and 17% of accounts receivable.
As of September 30, 2000 and 1999, 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 U.S. government agency and treasury
notes; corporate paper, notes, bonds and preferred stock; and municipal notes
and bonds that mature within eighteen months.
4. Marketable Securities
All marketable securities are classified as available-for-sale and are
summarized as follows (in thousands):
September 30,
--------------------
2000 1999
--------- ---------
United States government debt securities............ $ 37,527 $ 24,991
Corporate notes and bonds........................... 9,520 23,528
Municipal notes and bonds........................... 8,189 29,297
Foreign debt securities............................. 7,523 --
Commercial paper.................................... 3,916 --
--------- ---------
$ 66,675 $ 77,816
========= =========
Available-for-sale securities are carried at fair value. Gross unrealized
gains of approximately $30,000 are netted against gross unrealized losses of
approximately $49,000, net of tax, and are included as a component of
stockholders' equity and comprehensive income. Realized gains and losses,
declines in value judged to be other than temporary, and interest on
available-for-sale securities are included in interest income. All marketable
securities classified as current have scheduled maturities of less than one
year.
5. Property and Equipment, Net
Property and equipment, net is comprised of the following (in thousands):
September 30,
--------------------
2000 1999
--------- ---------
Computer equipment.................................. $ 9,215 $ 7,828
Computer software................................... 5,973 5,543
Furniture and fixtures.............................. 1,509 1,423
Leasehold improvements.............................. 592 589
Construction in process............................. 3,830 --
--------- ---------
21,119 15,383
Less accumulated depreciation and amortization...... (14,395) (11,151)
--------- ---------
$ 6,724 $ 4,232
========= =========
38
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization expense was approximately $2,752,000,
$2,985,000 and $2,550,000 in the years ended September 30, 2000, 1999 and 1998.
6. Lease Commitments
The Company leases its present office facilities in Mountain View,
California, under operating lease agreements. The Company is responsible for
taxes, insurance and utilities related to the leased facilities. The Company
plans to relocate its headquarters in late calendar 2000, and has entered into
an agreement to sublease the Mountain View facilities through the end of the
existing lease term in February 2005.
The Company has entered into an agreement to lease approximately 96,000
square feet of office space in a building currently under construction in Los
Altos, California. The Company plans to relocate its headquarters to the new
site upon completion in late calendar 2000. The lease has an initial term of
ten years with options to renew for an additional ten years, subject to certain
conditions. Rent obligations for the building commence upon occupancy or
substantial completion of construction, whichever occurs first. As part of this
lease transaction, the Company provided the lessor with a letter of credit
restricting $2.5 million of its cash as collateral for certain of the Company's
obligations under the lease. The cash is restricted as to withdrawal and is
managed by a third party subject to certain limitations under the Company's
investment policy. The letter of credit is subject to reduction to $1.2 million
on the first anniversary of rent commencement and to $0.6 million on the second
anniversary.
As of September 30, 2000, aggregate future minimum payments under the leases
are (in thousands):
Net
Fiscal Year: Leases Subleases Commitments
------------ ------- --------- -----------
2001........................................ $ 3,698 $ 2,122 $ 1,576
2002........................................ 4,682 2,893 1,789
2003........................................ 4,822 2,980 1,842
2004........................................ 4,960 3,069 1,891
2005........................................ 4,634 1,304 3,330
Thereafter.................................. 24,838 -- 24,838
------- ------- -------
Total minimum lease payments................ $47,634 $12,368 $35,266
======= ======= =======
Rent expense was approximately $1,516,000, $1,503,000, and $1,309,000 for
the years ended September 30, 2000, 1999 and 1998, respectively.
7. Stockholders' Equity
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 July 2000, the Company's Board of Directors agreed
to restate the exercise price to $600 per right in an Amended and Restated
Preferred Shares Rights Agreement.
As of September 30, 2000 and 1999, the total shares held by employees that
were subject to repurchase was 215,087 and 841,944, respectively.
39
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity (Continued)
Stock Option Plans
In March 1990, the Company adopted the 1990 Stock Plan under which
10,628,572 shares of common stock were reserved for issuance. Incentive stock
options were granted with exercise prices of no less than fair market value,
and nonqualified stock options could 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. 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.
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 4,000,000 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. In October 1999, the
1997 Stock Plan was revised to add the provision and ability of the Company to
grant Common Stock Equivalents, which are unfunded and unsecured rights to
receive shares in the future.
In October 1999, the Company adopted the 1999 Nonstatutory Stock Option
Plan, which authorizes the issuance of nonstatutory options to employees and
consultants. The Company has reserved 6,800,000 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, the expiration date, and the exercise price (which
generally is the fair market value at the date of grant).
40
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity (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, 1997..... 2,696,408 9,617,488 $ 2.14
Shares reserved....................... 1,760,000 -- --
Shares repurchased.................... 11,348 -- --
Options terminated under 1990 Plan.... (729,700) -- --
Options granted....................... (4,503,600) 4,503,600 $12.00
Options exercised..................... -- (1,740,808) $ 0.70
Options canceled...................... 1,334,344 (1,334,344) $11.43
---------- ----------
Outstanding at September 30, 1998..... 568,800 11,045,936 $ 5.28
Shares reserved....................... 3,431,200 -- --
Shares repurchased.................... 28,000 -- --
Options terminated under 1990 Plan.... (207,800) -- --
Options granted....................... (4,682,400) 4,682,400 $14.75
Options exercised..................... -- (2,386,420) $ 1.19
Options canceled...................... 1,095,552 (1,095,552) $10.99
---------- ----------
Outstanding at September 30, 1999..... 233,352 12,246,364 $ 9.19
Shares reserved....................... 10,366,648 -- --
Shares repurchased.................... 33,510 -- --
Options terminated under 1990 Plan.... (152,204) -- --
Options granted....................... (9,808,900) 9,808,900 $20.65
Options exercised..................... -- (2,334,304) $ 3.78
Options canceled...................... 706,382 (706,382) $ 9.35
---------- ----------
Outstanding at September 30, 2000..... 1,378,788 19,014,578 $15.73
========== ==========
41
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity (Continued)
Stock Option Plans (continued)
The following table summarizes information about outstanding and exercisable
options as of September 30, 2000:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 0.00--
$ 2.00 1,902,538 5.81 $ 1.22 1,862,538 $ 1.24
$ 2.50--
$ 3.00 2,527,594 8.41 2.65 706,146 2.50
$ 9.09--
$12.25 2,041,650 7.68 11.33 213,294 10.59
$ 12.47--
$ 13.75 2,265,593 8.00 13.35 195,004 13.61
$ 13.91--
$ 14.83 1,964,607 8.12 14.79 97,344 14.48
$ 14.94--
$ 15.66 860,329 8.41 15.32 259,369 15.30
$15.67 4,173,900 9.05 15.67 14,750 15.67
$ 15.78--
$ 37.66 2,590,367 9.53 31.96 55,952 17.42
$ 66.69--
$ 75.69 678,000 9.83 67.23 -- --
$77.36 10,000 9.97 77.36 -- --
---------- ---------
19,014,578 8.34 $15.73 3,404,397 $ 4.58
========== =========
As of September 30, 2000, a total of 20,393,366 shares of common stock were
reserved for issuance under all stock option plans. As of September 30, 2000,
1999 and 1998, options for the purchase of 2,892,852, 1,960,764 and 1,905,064
shares, respectively, were exercisable without being subject to repurchase by
the Company.
Employee Stock Purchase Plan
In May 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 1,600,000 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. 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. In fiscal 2000 and 1999, the
Company issued 179,300 and 748,712 shares, respectively, under the Purchase
Plan at an average price per share of $12.58 and $2.72, respectively.
42
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity (Continued)
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. Stock options are generally granted with exercise prices
equivalent to fair market value, and no compensation cost is recognized. When
stock options are granted with exercise prices below fair market value,
employee stock-related compensation expense is recognized accordingly. If the
Company had recognized compensation expense based upon the fair value of stock
option awards, including shares issued under the Purchase Plan (collectively
called "options"), at the grant date consistent with the methodology prescribed
under 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,
------------------------
2000 1999 1998
--------- ------ ------
Net income (loss) as reported......................... $(106,127) $8,718 $6,788
Net income (loss) pro forma........................... $(117,846) $5,413 $5,299
Net income (loss) per share--basic as reported........ $ (1.10) $ 0.09 $ 0.07
Net income (loss) per share--basic pro forma.......... $ (1.22) $ 0.06 $ 0.06
Net income (loss) per share--diluted as reported...... $ (1.10) $ 0.09 $ 0.07
Net income (loss) per share--diluted pro forma........ $ (1.22) $ 0.05 $ 0.05
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The fair value of the options 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 Stock Purchase Plan
----------------------------- -------------------
2000 1999 1998 2000 1999
--------- --------- --------- --------- ---------
Expected stock price
volatility................. 98% 82% 82% 95% 82%
Risk-free interest rate..... 6.2% 5.0% 5.1% 6.1% 4.7%
Expected life of options.... 4.8 years 4.1 years 4.4 years 0.5 years 0.5 years
The weighted-average fair value of stock options granted during the years
ended September 30, 2000, 1999 and 1998 is $19.97, $9.36, and $7.82,
respectively. The weighted-average fair value of purchase rights granted under
the Purchase Plan during the years ended September 30, 2000, 1999 and 1998 is
$12.95, $2.68 and $1.16, 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
ended September 30, 2000, 1999 and 1998 are not likely to be representative of
the effects on pro forma disclosures in future years.
43
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity (Continued)
Stock-Based Compensation (continued)
Because SFAS No. 123 is applicable only to options granted by the Company
subsequent to October 1, 1995, the pro forma effect will not be fully reflected
until 2001.
Warrants
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 4,000,000 shares of common stock of the Company at a
purchase price of $2.50 per share (the "Intel warrant"). This warrant will
become exercisable only upon the achievement of certain milestones by Intel
relating to shipment volumes of Rambus-based chipsets (the "Intel milestones").
The warrant will expire no later than the eighth (8th) anniversary of its
issuance. At the time that achievement of the milestones becomes probable, a
non-cash charge will be made to the statement of operations based on the fair
value of the warrant.
In June 1998, the Company issued a warrant to purchase 100,000 shares of
common stock of the Company at a price of $9.16 per share to an RDRAM partner.
This warrant, issued as part of a DRAM incentive program among the Company's
licensees, was immediately exercisable and expires seven years from date of
issue. The fair value of this warrant, calculated using the Black-Scholes
option pricing model, was charged to expense in the Company's consolidated
statements of operations for the year ended September 30, 1998.
In October 1998, the Company's Board of Directors authorized an incentive
program in the form of warrants for a total of up to 1,600,000 shares of Rambus
common stock (the "DRAM incentive warrants") to be issued to various RDRAM
partners upon the achievement of certain product qualification and volume
production targets. The warrants, to be issued at the time the targets are met,
have an exercise price of $2.50 per share and a life of five years. They vest
and become exercisable on the same basis as the Intel warrant, which will
result in a non-cash charge to the statement of operations based on the fair
value of the warrants at the time the achievement of the Intel milestones
becomes probable. As of September 30, 2000, a total of 1,160,000 of these
warrants had been issued.
Contingent Common Stock Equivalents and Options
In the fourth quarter of fiscal 1999, the Company granted to its Chief
Executive Officer and to its President a combined total of 2,000,000 Common
Stock Equivalents (CSEs) and to its employees approximately 2,160,000 options
to purchase Rambus common stock for $2.50 per share. Vesting of these CSEs and
options was contingent upon the achievement of key indicators of success for
Rambus. Vesting for a portion of these CSEs and options was contingent on an
increase in the price of Rambus common stock to greater than $50 per share for
30 consecutive days. This target was achieved by the end of the second quarter
of fiscal 2000, and resulted in a $171.1 million employee stock-related
compensation charge taken in the same quarter. Except for a $1.2 million
employer payroll tax liability, this was a non-cash charge. The remaining CSEs
and options will vest on the same basis as the Intel and DRAM incentive
warrants, which will result in another almost entirely non-cash charge to the
statement of operations based on the fair value of the CSEs and options at the
time achievement of the Intel milestones becomes probable.
44
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 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. For the year ended September 30, 2000, the
Company made matching contributions totaling $116,000. There were no matching
contributions for the years ended September 30, 1999 and 1998.
9. Income Taxes
The provision for (benefit from) income taxes comprises (in thousands):
Year Ended September 30,
-----------------------------
2000 1999 1998
--------- -------- --------
Foreign withholding tax:
Current..................................... $ 5,954 $ 369 $ 1,225
Federal:
Current..................................... -- (8) 3,941
Deferred.................................... (32,843) 4,115 (2,830)
State:
Current..................................... -- -- 2,627
Deferred.................................... (5,778) 644 (423)
--------- ------- --------
$ (32,667) $ 5,120 $ 4,540
========= ======= ========
The Company's effective tax rate on pretax income (loss) differs from the
U.S. federal statutory regular tax rate as follows:
Year Ended September 30,
-----------------------------
2000 1999 1998
--------- -------- --------
Expense at U.S. federal statutory rate........ (35.0)% 35.0% 35.0%
Expense at state statutory rate............... (5.9) 5.7 5.7
Nondeductible compensation expense............ 28.7 -- --
Nondeductible amortization.................... -- 0.4 1.0
R&D credit.................................... (1.9) (9.7) (6.2)
Change in valuation allowance................. (13.8) 10.8 12.6
FSC benefit................................... -- -- (8.4)
Other......................................... 4.4 (5.2) 0.3
--------- ------- --------
(23.5)% 37.0% 40.0%
========= ======= ========
45
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes (Continued)
The components of the net deferred tax assets are as follows (in thousands):
September 30,
-----------------
2000 1999
------- --------
Deferred tax assets:
Deferred revenue........................................ $19,489 $ 20,198
Depreciation and amortization expense................... 1,025 1,083
Other liabilities and reserves.......................... 595 1,006
Employee stock-related compensation expense............. 35,947 --
Net operating loss carryover............................ 16,431 2,701
Tax credits............................................. 3,394 1,974
------- --------
Total deferred tax asset.............................. 76,881 26,962
Valuation allowance....................................... (5,923) (21,491)
------- --------
Deferred tax assets, net.............................. $70,958 $ 5,471
======= ========
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.
The Company has net operating loss carryforwards of $43 million and $25
million for federal and state tax purposes, respectively. In addition, the
Company has federal and state research and experimentation tax credit
carryforwards of $2.5 million. The net operating loss carryforwards and tax
credits expire between 2004 and 2020. For federal and state tax purposes, the
Company's net operating loss carryforwards may be subject to an annual
limitation in the case of a greater than 50% change in stock ownership, as
defined by federal and state tax law.
10. Acquired Technology Rights
In November 1999, the Company acquired rights to the intellectual property
assets of a network technology company for approximately $3.1 million in cash
and stock-based compensation and other obligations, subject to vesting, to
certain key employees. The value of the intellectual property assets acquired
is being amortized over five years. Deferred compensation and other obligations
are being amortized over the vesting terms ranging from 2 to 4 years. Research
and development expenses include approximately $802,000 of such expenses in
fiscal 2000.
46
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Net Income Per Share
Net income (loss) per share is calculated as follows (in thousands, except
per share data):
Year Ended September 30,
---------------------------
2000 1999 1998
--------- -------- -------
Net income (loss)............................... $(106,127) $ 8,718 $ 6,788
========= ======== =======
Weighted average common shares outstanding...... 96,487 93,328 90,816
Additional dilutive common stock equivalents.... -- 6,880 6,688
--------- -------- -------
Diluted shares outstanding...................... 96,487 100,208 97,504
========= ======== =======
Net income (loss) per share--basic.............. $ (1.10) $ 0.09 $ 0.07
========= ======== =======
Net income (loss) per share--diluted............ $ (1.10) $ 0.09 $ 0.07
========= ======== =======
12. Business Segments, Exports and Major Customers
The Company operates in a single industry segment.
Three customers accounted for 15%, 13% and 11% of revenues in the year ended
September 30, 2000. Three customers accounted for 11%, 11% and 10% of revenues
in the year ended September 30, 1999. One customer accounted for 22% of
revenues in the year ended September 30, 1998.
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,
------------------------
2000 1999 1998
-------- ------- -------
Japan............................................... $ 38,415 $14,010 $18,556
United States....................................... 13,377 17,404 10,218
Korea............................................... 11,272 4,908 6,663
Taiwan.............................................. 5,333 4,461 618
Europe.............................................. 3,672 2,587 1,809
Israel.............................................. 242 -- --
-------- ------- -------
$ 72,311 $43,370 $37,864
======== ======= =======
13. Litigation and Asserted Claims
The Company operates in an industry that has experienced a substantial
amount of litigation regarding patent and other intellectual property rights.
From time to time, the Company has received, and may receive in the future,
communications alleging that its patents are invalid or that it is infringing
patents held by others. The Company is currently, and may in the future be,
involved in litigation with respect to alleged infringement by the Company of
another party's patents. In the future, the Company may be involved in
litigation to:
. Enforce its patents or other intellectual property rights.
. Protect its trade secrets and know-how.
47
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Litigation and Asserted Claims (Continued)
. Determine the validity or scope of the proprietary rights of others.
. Defend against claims of infringement or invalidity.
Such litigation has in the past and could in the future result in
substantial costs and diversion of management resources. Such litigation could
also result in payment of substantial damages and/or royalties or prohibitions
against utilization of essential technologies, and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On August 8, 2000, the Company filed suit in the U.S. District Court for the
Eastern District of Virginia against Infineon Technologies AG ("Infineon") and
its North American subsidiary for infringement of two U.S. patents. In
addition, on August 7, 2000, the Company filed suit in Mannheim, Germany
against Infineon for infringement of one European patent. The suits seek
injunctions to halt the sale, manufacture and use of Infineon SDRAM and DDR
SDRAM memory devices that infringe the Rambus patents. On September 25, 2000,
Infineon filed counterclaims against the Company in the U.S. case seeking a
declaratory judgment that the two asserted patents are invalid and not
infringed and further claiming contributory infringement by the Company of two
Infineon U.S. patents. In addition, Infineon also asserts breach of contract
and fraud claims in connection with the Company's participation in an industry
standards-setting group known as JEDEC. The Infineon counterclaims seek damages
based on the alleged contributory infringement, injunctions to halt future
infringement, punitive damages based on the alleged fraud and the award to
Infineon of a royalty-free license to the Rambus patents. On October 13, 2000,
the Company filed a motion to dismiss the Infineon breach of contract and fraud
counterclaims. A decision on this motion is pending. The Company disputes all
of Infineon's counterclaims and intends to pursue its claims and defend against
the counterclaims vigorously. The U.S. case is currently in the discovery
phase. In the German case, trial has been scheduled for December 22, 2000.
On August 28, 2000, Micron Technology, Inc. ("Micron") filed suit against
the Company in the U.S. District Court in Delaware. The suit asserts violations
of federal antitrust laws, deceptive trade practices, breach of contract, fraud
and negligent misrepresentation in connection with the Company's participation
in an industry standards-setting group known as JEDEC. Based on these
allegations, the suit seeks a declaration of monopolization by the Company,
compensatory and punitive damages, a declaratory judgment that eight Rambus
patents are invalid and not infringed and the award to Micron of a royalty-free
license to the Rambus patents. On September 18, 2000, the Company filed two
separate motions to dismiss this lawsuit. A decision on these motions is
pending; no discovery has yet occurred in this case. The Company disputes all
of Micron's claims and intends to defend the lawsuit vigorously.
In September 2000, the Company filed suits against Micron in Germany,
France, Great Britain and Italy for infringement of a European patent. These
suits are all in their early phases.
On August 29, 2000, Hyundai Electronics Industries Co., Ltd. ("Hyundai") and
various subsidiaries filed suit against the Company in the U.S. District Court
for the Northern District of California. The suit asserts breach of contract in
connection with the Company's participation in JEDEC and seeks a declaratory
judgment that eleven Rambus patents are invalid and not infringed by Hyundai.
No discovery has yet occurred in this case. The Company disputes Hyundai's
claims and intends to defend the lawsuit vigorously.
In September 2000, the Company filed suit against Hyundai in Germany, France
and Great Britain for infringement of a European patent. These suits are all in
their early phases.
While no assurance can be given regarding the outcome of these actions, the
Company believes that the final outcome of these matters will not have a
material effect on the Company's consolidated financial position or results of
operations. However, because of the nature and inherent uncertainties of
litigation, should the outcome of these actions be unfavorable, the Company may
be required to pay damages and other expenses, which could have a material
adverse effect on the Company's financial position and results of operations.
48
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED SUPPLEMENTARY FINANCIAL DATA
Fiscal years by quarter
-------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-------- ------- --------- ------- ------- ------- ------ -------
(in thousands, except per share amounts)
(Unaudited)
Revenues:
Contract revenues..... $ 6,987 $11,186 $ 12,191 $ 9,319 $10,630 $ 8,830 $7,945 $ 7,948
Royalties............. 19,921 6,574 3,503 2,630 1,675 1,802 1,914 2,626
-------- ------- --------- ------- ------- ------- ------ -------
Total revenues....... 26,908 17,760 15,694 11,949 12,305 10,632 9,859 10,574
-------- ------- --------- ------- ------- ------- ------ -------
Costs and expenses:
Cost of contract
revenues............. 2,666 2,908 3,018 3,501 3,701 3,944 2,485 2,102
Research and
development.......... 3,520 2,828 2,900 2,254 1,425 1,111 2,498 3,089
Marketing, general and
administrative....... 6,472 6,205 5,064 3,399 3,733 3,520 3,293 2,970
Employee stock-related
compensation
expense.............. -- -- 171,085 -- -- -- -- --
-------- ------- --------- ------- ------- ------- ------ -------
Total costs and
expenses............ 12,658 11,941 182,067 9,154 8,859 8,575 8,276 8,161
Operating income
(loss)................. 14,250 5,819 (166,373) 2,795 3,446 2,057 1,583 2,413
Interest and other
income, net............ 1,254 1,296 1,167 997 770 900 1,657 1,012
-------- ------- --------- ------- ------- ------- ------ -------
Income (loss) before
income taxes........... 15,504 7,115 (165,206) 3,792 4,216 2,957 3,240 3,425
Provision for (benefit
from) income taxes..... (38,121) 2,491 1,635 1,327 1,563 956 1,231 1,370
-------- ------- --------- ------- ------- ------- ------ -------
Net income (loss)....... $ 53,625 $ 4,624 $(166,841) $ 2,465 $ 2,653 $ 2,001 $2,009 $ 2,055
======== ======= ========= ======= ======= ======= ====== =======
Net income (loss) per
share-diluted.......... $ 0.49 $ 0.04 $ (1.75) $ 0.02 $ 0.03 $ 0.02 $ 0.02 $ 0.02
======== ======= ========= ======= ======= ======= ====== =======
Shares used in per share
calculations........... 110,049 108,859 95,557 100,681 101,164 100,152 99,920 99,496
Stock prices:
High.................. $ 109.69 $117.38 $ 111.27 $ 23.16 $ 28.81 $ 25.16 $27.38 $ 25.72
Low................... $ 66.69 $ 37.66 $ 17.25 $ 15.66 $ 14.77 $ 13.75 $15.31 $ 12.69
49
RAMBUS INC. AND SUBSIDIARY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Valuation allowance for doubtful accounts
Additions
Balance charged to Charged
at beginning costs and to other Balance at
For the year ended: of period expenses accounts Deductions end of period
- ------------------- ------------ ---------- -------- ---------- -------------
September 30, 1998... $10 -- -- -- $10
September 30, 1999... $10 -- -- -- $10
September 30, 2000... $10 -- -- -- $10
50
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: November 30, 2000
/s/ Gary Harmon
By: _________________________________
Gary Harmon,
Sr. Vice President, Finance,
Chief Financial Officer and
Secretary
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.
Signature Title Date
--------- ----- ----
/s/ Geoff Tate Chief Executive Officer November 30, 2000
______________________________________ and Director (Principal
Geoff Tate Executive Officer)
/s/ David Mooring President and Director November 30, 2000
______________________________________
David Mooring
/s/ Gary Harmon Sr. Vice President, November 30, 2000
______________________________________ Finance, Chief Financial
Gary Harmon Officer and Secretary
(Principal Financial and
Accounting Officer)
/s/ William Davidow Chairman of the Board of November 30, 2000
______________________________________ Directors
William Davidow
/s/ Bruce Dunlevie Director November 30, 2000
______________________________________
Bruce Dunlevie
/s/ P. Michael Farmwald Director November 30, 2000
______________________________________
P. Michael Farmwald
/s/ Charles Geschke Director November 30, 2000
______________________________________
Charles Geschke
/s/ Mark Horowitz Director November 30, 2000
______________________________________
Mark Horowitz