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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, 1998
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-22339
RAMBUS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 94-3112828
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2465 LATHAM STREET, MOUNTAIN VIEW, CA 94040
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 944-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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 November 30, 1998 was approximately $1.3
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 23,104,097 as of November 30, 1998.
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. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict; therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Factors
Affecting Future Results" on pages 5 through 11, as well as those noted in the
documents incorporated herein by reference. Unless required by law, the
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise. However, readers should carefully review the risk factors set forth
in other reports or documents the Company files from time to time with the
Securities and Exchange Commission, particularly the Quarterly Reports on Form
10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS
Rambus Inc. ("Rambus" or the "Company") designs, develops, licenses and
markets high-speed chip-to-chip interface technology to enhance the
performance and cost-effectiveness of computers, consumer electronics and
other electronic systems. The Company licenses semiconductor companies to
manufacture and sell memory and logic ICs incorporating Rambus interface
technology and markets its solution to systems companies to encourage them to
design Rambus interface technology into their products. The Company's
technology cost-effectively increases the data transfer rate, or "memory
bandwidth," allowing semiconductor memory devices to keep pace with faster
generations of processors and controllers and thus supports the accelerating
data transfer requirements of multimedia and other high-bandwidth
applications.
Rambus was incorporated in California in March 1990 and reincorporated in
Delaware in March 1997.
BACKGROUND
The performance of a computer or other electronic system is typically
constrained by the speed of its slowest element. In the past, that element was
the logic IC that controlled the system's specific functions and performed
calculations--the microprocessor. In recent years, however, new generations of
microprocessors and controllers have become substantially faster and more
powerful, and increasingly the bottleneck in system performance is becoming
the component that stores the instructions and data needed by the
microprocessors and controllers--the DRAM.
Since 1980, the typical operating frequency of mainstream microprocessors
has increased approximately 60 times from 5 MHz (million cycles per second) to
over 300 MHz. During this same period, the typical operating frequency of a
standard DRAM has increased by approximately ten times. This growing disparity
between the frequency of microprocessors and DRAMs is termed the "Performance
Gap."
While microprocessors have undergone both manufacturing and architectural
improvements, significant innovations for DRAMs have generally only occurred
on the manufacturing side. DRAM manufacturers have been successful in
increasing DRAM "density," or storage capacity, from roughly 1 Kbit (thousand
bits) to 64 Mbits (million bits) per chip, thereby reducing the number of
DRAMs required for a given amount of memory. However, corresponding
architectural improvements necessary to increase DRAM data transfer rates to
keep pace with increasing microprocessor speeds have not occurred.
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RAMBUS TECHNOLOGY
Rambus has created a revolutionary chip-to-chip interface architecture,
which allows data to be transferred through a simplified bus at significantly
higher frequencies than permitted by conventional technologies. Rambus has
focused the application of its interface technology on the Performance Gap and
licenses its interface technology to memory and logic semiconductor
manufacturers, which incorporate this interface technology into their IC
designs to supply systems companies with Rambus ICs. The key elements of the
Rambus interface are Rambus-based DRAMs ("RDRAMs"), Rambus ASIC cells ("RACs")
and the interconnecting circuitry known as the "Rambus Channel." While Rambus
technology can be used to address a wide variety of chip-to-chip data transfer
requirements, the largest immediate application is to connect logic circuits
to memory in home video games, PCs, workstations and other electronic systems.
Rambus interface technology currently allows data transfers of up to 600
megabytes per second between a logic IC and DRAMs by transferring data at a
frequency of 600 MHz over a byte-wide bus. System performance can be further
enhanced by applying Rambus interface technology to multiple channels on a
logic IC. For example, a Rambus-based logic IC can utilize four channels to
achieve data transfer of up to 2.4 gigabytes per second. In addition, Rambus
has developed an extension to the Rambus interface technology for 64 Mbit
generation RDRAMs, called "Direct Rambus". This technology,which is optimized
for PC main memory applications, is currently being sampled by Rambus
licensees. This technology increases the operating frequency of RDRAMs to 800
MHz and doubles the bus width to allow data transfers of up to 1.6 gigabytes
per second. There can be no assurance that the Direct Rambus samples referred
to in the preceding forward-looking statements will result in products
suitable for mass production. See "Factors Affecting Future Results--Future
Dependence upon PC Main Memory Market Segment and Intel" and "--Rapid
Technological Change; Reliance on Fundamental Technology; Importance of Timely
New Product Development."
TARGET MARKETS AND APPLICATIONS
The high-speed interface technology Rambus has developed is applicable to
data transfer between most semiconductor chips. The Company has chosen to
concentrate the application of its technology on the interface between logic
ICs and memory devices because of the acute performance needs and the relevant
market sizes. While Rambus interface technology is useful in providing
increased memory bandwidth in any electronic system, the Company believes that
the systems which will best utilize the high bandwidth provided by current
Rambus technology are the relatively high-volume, low-cost systems in which
the cost of the memory subsystems represents a significant portion of the
selling price. To date, the principal applications for the Company's
technology have been in the consumer multimedia, PC multimedia and workstation
multimedia markets. These areas accounted for the sale of approximately $495
million, $447 million and $11 million of Rambus ICs by Rambus licensees in
calendar 1997, 1996 and 1995, respectively.
In November 1996, Rambus entered into a development and license contract
with Intel. The contract provides for the parties to cooperate in the
development of a specification for Direct Rambus next-generation 64 Mbit
RDRAMs, which will be targeted at the PC main memory market segment. The
contract also calls for Intel to use reasonable best efforts to develop a PC
main memory controller designed for use with these RDRAMs. The Company
believes that Direct Rambus technology will offer superior bandwidth compared
to other solutions for PC main memory applications. However, these RDRAMs and
the Intel memory controllers are not scheduled for mass production until 1999,
and there can be no assurance that such devices will be successfully developed
or that, if developed, will be successful in penetrating the market segment
for PC main memory.
Other applications for the Company's technology include multifunction
peripheral controllers for use in combination fax/copier/scanner/laser
printers, consumer products such as digital televisions and networking
equipment such as high-speed Ethernet switches. There can be no assurance that
sales of such products will be meaningful.
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RAMBUS LICENSEES
Rambus licenses its technology on a nonexclusive and worldwide basis to
semiconductor manufacturers who sell Rambus ICs to systems companies which
have adopted Rambus technology. An important element of the Company's strategy
is to license its technology broadly in order to establish Rambus interface
technology as a standard and to provide systems companies with sources for
Rambus ICs from established semiconductor companies. Rambus provides licenses
to both DRAM manufacturers and logic IC manufacturers, who can license Rambus
interface technology for use in producing RDRAMs and/or logic ICs containing
RACs. At September 30, 1998, Rambus had a total of 29 licensees.
Rambus licensees include fourteen DRAM manufacturers which collectively
accounted for over 95% of worldwide DRAM sales in calendar 1997: Fujitsu,
Hitachi, Hyundai Electronics, IBM, LG Semicon, Micron Technology, Matsushita,
Mitsubishi, NEC, Oki Electric Industry, Samsung Electronics, Siemens, Toshiba
and Vanguard. At September 30, 1998, five of these licensees were in
production of RDRAMs and all were in development of next-generation Direct
RDRAMs. Rambus logic licensees include Advanced Micro Devices, Cirrus Logic,
Compaq, Fujitsu, IBM, Intel, LG Semicon, LSI Logic, NEC, S3, Texas Instruments
and Toshiba. At September 30, 1998, six of these licensees were in production
of logic ICs which include RACs.
RAMBUS BUSINESS MODEL AND STRATEGY
In order to establish Rambus interface technology as an industry standard,
the Company has adopted an innovative business model in which it neither
manufactures nor sells semiconductors incorporating the Company's technology.
The Company licenses its technology on a nonexclusive and worldwide basis to
semiconductor companies which manufacture and sell RDRAMs and logic ICs
containing RACs to systems companies which have adopted Rambus technology.
Systems companies are not required to obtain a Rambus license to incorporate
Rambus ICs into their products. However, an important part of the Company's
strategy is to maintain close ties to these systems companies in order to
encourage the adoption of Rambus technology.
The Rambus business model and strategy are designed to promote Rambus as an
industry standard, target leading systems companies in markets that the
Company believes represent the greatest potential for Rambus IC sales, provide
systems companies with multiple sources for RDRAMs, share research and
development efforts with licensees, maintain technology leadership, pursue a
system-level approach and generate revenue through a combination of contract
fees and royalties.
Contract fees have provided the majority of the capital needed to date by
the Company to develop its fundamental technology, and the Company believes
that its business model is well suited to continue funding future development.
However, there is no assurance that the Company's current partner licensees
will generate revenue, or that the Company will be able to add new license
contracts in the future, at levels sufficient to provide significant funding
for further development activities.
Royalties, which are generally a percentage of the revenues received by
licensees on their sales of Rambus ICs, are normally payable by a Rambus
licensee on sales occurring during the life of the Rambus patents being
licensed. For a typical systems application of Rambus technology, the Company
receives royalties from the sale of both logic ICs containing RACs and RDRAMs
as they are shipped by Rambus licensees. Royalty rates range up to a maximum
of approximately 2.5% for RDRAMs and a maximum of approximately 5% for logic
ICs, and in some cases may decline based on the passage of time or on the
total volume of Rambus ICs shipped. The exact rate and structure of a royalty
arrangement with a particular licensee depend on a number of factors,
including the amount of the license fee to be paid by the licensee and the
marketing and engineering commitment made by the licensee.
DESIGN AND MANUFACTURING
Rambus interface technology has been developed to allow semiconductor
companies to use familiar, widely-available design tools and conventional
techniques when designing their Rambus-enabled chips. A new Rambus
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licensee receives an implementation package from the Company which contains
all the information needed to develop a Rambus IC in the licensee's process.
There are separate implementation packages for RDRAMs and for RACs. An
implementation package includes a specification, a generalized circuit layout
database for the particular version of the RDRAM or RAC which the licensee
intends to develop, test parameter software and, for RDRAMs, a DRAM core
interface specification. Many licensees have contracted to have Rambus produce
the specific implementation required to optimize the generalized circuit
layout for the licensee's manufacturing process. In such cases, the licensee
provides specific design rules and transistor models which Rambus designers
use to integrate RDRAM or RAC circuits into the licensee's process. However,
Rambus anticipates that as licensees become more familiar with the Rambus
technology, they will be able to do more of the implementation work without
Rambus' assistance.
Rambus has developed its technology to be manufacturable using familiar,
industry-standard CMOS semiconductor processes. For this reason the Company
believes that the wafer fabrication yields of RDRAMs and logic products
containing RACs are consistent with those for similar products in the same
manufacturing facility. However, because of the extra Rambus interface
circuitry, an RDRAM chip is somewhat larger than a standard DRAM. Therefore, a
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. The target for this die size premium in the new Direct RDRAM
is 10% for the 64 Mbit generation. In addition, RDRAM manufacturers are
responsible for their own manufacturing processes and Rambus has no role in
the manufacture of RDRAMs. For example, Rambus has no influence on decisions
in regard to any process changes or on whether or when to "shrink" or
otherwise change a design to reduce the cost of the chips.
Current implementations of RDRAMs and Rambus logic ICs can be packaged in
widely available, inexpensive packaging. System companies connect RDRAMs to
Rambus logic ICs using normal printed circuit board ("PCB") materials and
manufacturing techniques. System companies are provided with detailed
specifications from Rambus on circuit board layout and construction. Circuit
boards can be fabricated and assembled using standard PCB techniques and
equipment.
In the Direct Rambus technology currently under development, RDRAMs will use
newer-generation chip scale packaging ("CSP") and will require high-speed
testers for a portion of the test procedure. While the Company feels that
packaging and testing costs for RDRAMs in mass production volumes will be no
greater than for current standard DRAMs, additional capital equipment will be
required and startup costs will be incurred by the manufacturers producing
Rambus DRAMs. In addition, new 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 will be accomplished in sufficient time
and at a sufficiently competitive price to allow the development of a mass
market for Rambus technology.
RESEARCH AND DEVELOPMENT
The ability of the Company to compete in the future will be substantially
dependent on its ability to advance its interface technology in order to meet
changing market needs. To this end, Company engineers are involved in
developing new versions of the Rambus interface technology which will allow
chip-to-chip data transfer at higher speeds as well as provide other
improvements. The Company has assembled a team of highly skilled engineers
whose activities are focused on further development of Rambus interface
technology as well as adaptation of current technology to specific licensees'
processes. Because of the complexity of these activities, the design and
development process at Rambus is a multi-disciplinary effort requiring
expertise in computer architecture, digital and analog circuit design and
layout, DRAM and logic semiconductor process characteristics, packaging, PCB
routing and high-speed testing techniques.
As of September 30, 1998, Rambus had 103 employees in its engineering
departments. Approximately two thirds of these employees have advanced
technical degrees. In fiscal 1998, 1997 and 1996, research and development
expenses were approximately $9.6 million, $9.8 million and $5.2 million,
respectively. In addition,
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because the Company's license agreements often call for engineering support by
Rambus, a substantial portion of the Company's total engineering costs has
been allocated to cost of contract revenues, even though these engineering
efforts have direct applicability to Rambus' technology development. The
Company expects that it will continue to invest substantial funds in research
and development activities. There can be no assurance that new versions of the
Rambus interface technology can be developed and introduced by the Company's
licensees in a timely fashion or that such new technology will be accepted by
the market. Moreover, the end markets for the Company's technology 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
(synchronous DRAMs) and SGRAMs (a version of the SDRAM for graphics
applications) which compete with RDRAMs. These companies are much larger and
have better access to financial, certain technical and other resources than
Rambus. Additional high-speed DRAMs have recently been introduced by other
semiconductor companies for specialized applications.
The Company believes that its success in establishing a new high-speed
memory interface has been due in part to the systems approach it has taken to
solving the application needs of companies in home video game, PC and other
electronic systems businesses. However, the Company believes competitors have
begun to take a similar approach. The Company believes that its principal
competition may come from its licensees and prospective licensees, many of
which are evaluating and developing products based on alternative
technologies. Some DRAM suppliers have begun to produce Double Data Rate
("DDR") SDRAMs, aimed at doubling the memory bandwidth from SDRAMs without
increasing the clock frequency. In addition, a consortium including both large
DRAM manufacturers and systems companies is promoting an alternative high-
speed interface standard called SLDRAM. To the extent that these alternative
technologies provide comparable system performance at lower or similar cost
than RDRAMs, or do not require the payment of comparable royalties, the
Company's licensees and prospective licensees may adopt and promote the
alternative technologies. There can be no assurance that the Company's future
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, certain
semiconductor companies are now marketing an IC which combines logic and DRAM
on the same chip. Such chips, called "embedded DRAM," eliminate the need for
any chip-to-chip interface and are primarily being used for graphics
applications. Embedded DRAMs are well suited for applications where component
space saving and power consumption are important, such as in the graphics
subsystems of notebook PCs. There can be no assurance that competition from
embedded DRAMs will not increase in the future.
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
The Company has an active program to protect its proprietary technology
through the filing of patents. At September 30, 1998, the Company held 44
United States patents on various aspects of its technology, with expiration
dates ranging from 2010 to 2016 and had applications pending for an additional
73 United States patents. The Company's United States patents do not prevent
the manufacture or sale of Rambus-based ICs abroad. At September 30, 1998, the
Company held eight foreign patents and had an additional 52 foreign patent
applications pending in Taiwan, Korea, Japan and various other jurisdictions.
In addition, the Company attempts to protect its trade secrets and other
proprietary information through agreements with licensees and systems
companies, proprietary information agreements with employees and consultants
and other security measures. The Company also relies on trademarks and trade
secret laws to protect its intellectual property.
Rambus believes that it is important to develop and maintain a uniform RDRAM
memory interface standard. The Company's contracts generally prevent a
licensee from using licensee-developed patented improvements related to Rambus
technology to block other licensees from using the improvements or requiring
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them to pay additional royalties related to their use of Rambus interface
technology. Specifically, the contracts generally require licensees to grant
to Rambus a royalty-free cross-license on patented licensee intellectual
property related to the implementation of Rambus interface technology, which
Rambus sublicenses to other licensees which have entered into similar
arrangements. Not all licensees have granted Rambus cross-licenses and there
is no assurance that such a blocking arrangement will not occur in the future.
SALES AND MARKETING
Consistent with the Company's business model, sales and marketing activities
are focused on developing relationships with potential licensees and on
participating with existing licensees in marketing, sales and technical
efforts directed to systems companies. In many cases, Rambus must dedicate
substantial resources to market to and support systems companies. The
Company's sales and marketing efforts include applications engineering and
other technical support for systems companies, as well as trade shows,
advertising and other traditional marketing activities.
EMPLOYEES
As of September 30, 1998 the Company had 147 employees, including four in
Japan. Of this total, 103 were in engineering, 31 were in marketing and sales,
and 13 were in finance and administration. Overall, approximately three
quarters of the Company's employees have technical degrees, and more than half
of the Company's employees have advanced technical degrees. The Company's
future success will largely be dependent on its ability to attract, retain and
motivate highly qualified technical and management personnel who are in great
demand in the semiconductor industry. The Company's employees are not
represented by any collective bargaining agreements and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are good.
FACTORS AFFECTING FUTURE RESULTS
Unpredictable and Fluctuating Operating Results. Because many of the
Company's revenue components fluctuate and are difficult to predict, and its
expenses are largely independent of revenues in any particular period, it is
difficult for the Company to accurately forecast revenues and profits or
losses. Historically, contract revenues have represented the largest portion
of the Company's revenues. The Company recognizes contract revenues ratably
over the period during which post-contract customer support is expected to be
provided. While this means that contract revenues from current licenses are
relatively predictable, accurate prediction of revenues from new licenses is
difficult because the development of a business relationship with a potential
licensee is a lengthy process, frequently spanning a year or more, and the
fiscal period in which a new license agreement will be entered into, if at
all, and the financial terms of such an agreement are difficult to predict. In
addition to license fees, contract revenues include fees for engineering
services, which are dependent upon the varying level of assistance desired by
licensees and, therefore, the revenue from these services is also difficult to
predict. Adding to the complexity of making accurate financial forecasts is
the fact that certain expenses associated with a particular contract are
typically front-end loaded, except for expenses associated with upgrades and
enhancements, whereas contract fees associated with that contract are
recognized ratably over the period during which the post-contract customer
support is expected to be provided.
Royalties accounted for 24% of total revenues in fiscal 1998. The Company
believes that royalties will represent an increasing portion of total revenue
in the future. Increasing royalty revenues will add to the difficulty in
making accurate financial forecasts. Such royalties are recognized in the
quarter in which the Company receives a report from a licensee regarding the
shipment of Rambus ICs in the prior quarter, and are dependent upon
fluctuating sales volumes and prices of chips containing Rambus technology,
all of which are beyond the Company's ability to control or assess in advance.
The Company believes that its continued success will be substantially
dependent upon royalties increasing at a rate which more than offsets
decreases in the recognition of deferred revenue under existing contracts as
their recognition periods expire, as well as the Company's ability to add new
licensees and to license new generations of its technology to its existing
licensees. Because a systems
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company can change its source of Rambus ICs at any time, and because the new
Rambus license source could have a considerable nonrefundable prepaid royalty
balance as well as different royalty rates, any such change by a systems
company, particularly one which accounts for substantial volumes of Rambus
ICs, could have a sudden and significant adverse effect on the Company's
revenues.
The Company's business is subject to a variety of additional risks that
could materially adversely affect quarterly and annual operating results,
including market acceptance of the Company's technology; systems companies'
acceptance of Rambus ICs produced by the Company's licensees; market
acceptance of the products of systems companies which have adopted the
Company's technology; the loss of any strategic relationships with systems
companies or licensees; announcements or introductions of new technologies or
products by the Company or the Company's competitors; delays or problems in
the introduction or performance of enhancements or future generations of the
Company's technology; fluctuations in the market price and demand for DRAMs
and logic ICs into which the Company's technology has been incorporated;
competitive pressures resulting in lower contract revenues or royalty rates;
changes in the Company's and system companies' development schedules and
levels of expenditure on research and development; personnel changes,
particularly those involving engineering and technical personnel; costs
associated with protecting the Company's intellectual property; changes in
Company strategies; foreign exchange rate fluctuations or other changes in the
international business climate; and general economic trends and other factors.
Volatility of Stock Price. The trading price of the Company's Common Stock
could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new products
by the Company, its licensees or its competitors, developments with respect to
patents or proprietary rights and other events or factors. The trading price
of the Company's Common Stock could also be subject to wide fluctuations in
response to the publication of reports and changes in financial estimates by
securities analysts, and it is possible that the Company's actual results in
one or more future periods will fall short of those estimates by securities
analysts. In addition, the equity markets have experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock.
History of Losses; No Assurance of Profitability. As of September 30, 1998,
the Company's accumulated deficit was approximately $26 million. While the
Company generated net income for the last eight consecutive quarters, it
incurred significant losses in each quarter of fiscal 1996 and prior fiscal
years. There can be no assurance that in the future the Company will be
profitable on a quarterly or annual basis.
Dependence upon Limited Number of Licensees. The Company neither
manufactures nor sells devices containing its interface technology. Rather,
the Company licenses its technology to semiconductor companies, which in turn
manufacture and sell Rambus ICs to systems companies which incorporate Rambus
technology into their products. The Company's strategy to become an industry
standard is dependent upon the Company's ability to make its technology widely
available to systems companies through multiple semiconductor manufacturers,
and there can be no assurance that the Company will be successful in
maintaining its relationships with its current licensees or in entering into
new relationships with additional licensees. The Company faces numerous risks
in successfully obtaining licensees on terms consistent with the Company's
business model, including, among others, the lengthy and expensive process of
building a relationship with a potential licensee before there is any
assurance of a license agreement with such party; persuading large
semiconductor companies to work with, to rely for critical technology on, and
to disclose proprietary manufacturing technology to, a smaller company such as
Rambus; persuading potential licensees to bear certain development costs
associated with Rambus technology and to make the necessary investment to
successfully produce Rambus ICs; and successfully transferring technical know-
how to licensees. In addition, there are a relatively limited number of larger
semiconductor companies to which the Company could license its interface
technology in a manner consistent with its business model. The Company
believes that its principal competition may come from its licensees and
prospective licensees, many of which are evaluating and developing products
based on alternative technologies.
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Dependence upon Systems Companies. Although sales of Rambus ICs to systems
companies which have adopted the Company's technology for their products are
not made directly by the Company, such sales directly affect the amount of
royalties received by the Company. Therefore, the Company's success is
substantially dependent upon the adoption of the Company's interface
technology by systems companies, particularly those which develop and market
high-volume business and consumer products such as home video games and PCs.
The Company is subject to many risks beyond its control that influence the
success or failure of a particular systems company, including among others
competition faced by the systems company in its particular industry; market
acceptance of the systems company's products; the engineering, sales and
marketing and management capabilities of the systems company; technical
challenges unrelated to Rambus technology faced by the systems company in
developing its products; and the financial and other resources of the systems
company. The process of persuading systems companies to adopt the Company's
technology can be lengthy and, even if adopted, there can be no assurance that
the Rambus technology will be used in a product that is ultimately brought to
market, achieves commercial acceptance or results in significant royalties to
the Company. Rambus must dedicate substantial resources to market to and
support systems companies, in addition to supporting the sales and marketing
and technical efforts of its licensees in promoting Rambus technology to
systems companies. To date, the Company has not charged systems companies for
technical support. Because the Company does not control the business practices
of its licensees, it has no ability to establish the prices at which its
technology is made available to systems companies or the degree to which its
licensees promote Rambus technology to systems companies.
No Assurance of Adoption of Rambus Technology as an Industry Standard. An
important part of the Company's strategy to become an industry standard is to
penetrate new markets by targeting leaders in those markets. This strategy is
designed to encourage other participants in those markets to follow such
leaders in adopting Rambus technology. Should a high profile industry
participant adopt Rambus technology for one or more of its products but fail
to achieve success with those products, other industry participants'
perception of Rambus technology could be adversely affected. Any such event
could reduce future sales of Rambus ICs. Likewise, were a market leader to
adopt and achieve success with a competing technology, the Company's
reputation and sales could be adversely affected. In addition, some industry
participants have adopted, and others may in the future adopt, a strategy of
disparaging the Rambus solution adopted by their competitors. Failure of the
Company's technology to be adopted as an industry standard would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Future Dependence upon PC Main Memory Market Segment and Intel. An important
part of the Company's strategy is to penetrate the market segment for PC main
memory. Rambus believes that PC main memory currently accounts for
approximately one-half of all DRAMs sold. In November 1996, Rambus signed a
development and license contract with Intel Corporation which provides for the
parties to cooperate in the development of a specification for an extension of
the RDRAM optimized for PC main memory applications. The contract also calls
for Intel to use reasonable best efforts to develop a PC main memory
controller designed for use with such RDRAMs. The anticipated development
period for the new RDRAM technology is at least two years and there are a
number of technological issues which must be successfully resolved prior to
implementation. There can be no assurance that Intel will successfully develop
a controller for use with RDRAMs in time to meet market requirements, or at
all. In addition, there can be no assurance that the market for high bandwidth
PC main memory products, as anticipated by Intel, will develop by 1999 or at
all. Under the contract, Intel can terminate its relationship with Rambus at
any time. Even if such development efforts are completed, there is no
assurance that RDRAMs will be built by the Company's licensees and purchased
by PC manufacturers in sufficient quantity to become a standard for PC main
memory. The Company established an earlier relationship with Intel several
years ago, but Intel did not at that time pursue development relating to
Rambus technology. There can be no assurance that Intel's current emphasis or
priorities will not change in the future, resulting in less attention and
fewer resources being devoted to the current Rambus relationship. Although
certain aspects of the current relationship between the two companies are
contractual in nature, many important aspects depend on the continued
cooperation of the two companies. There can be no assurance that Rambus and
Intel will be able to work together successfully over an extended period of
time. In addition, there can be no assurance that Intel will not develop or
adopt competing technologies in the future.
8
<PAGE>
In the Direct Rambus technology currently under development for the PC main
memory market, RDRAMs will use newer-generation chip scale packaging ("CSP")
and will require high-speed testers for a portion of the test procedure.
Packaging and testing costs for RDRAMs in mass production volumes may be
slightly greater than for current standard DRAMs, additional capital equipment
will be required and startup costs will be incurred by the manufacturers
producing Rambus DRAMs. In addition, new 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 will be accomplished in
sufficient time and at a sufficiently competitive price to allow the
development of a mass market for Rambus technology.
Revenue Concentration. The Company is subject to revenue concentration risks
at both the licensee and the systems company levels. In fiscal 1998, 1997, and
1996, revenues from the Company's top five licensees accounted for
approximately 49%, 63% and 65% of the Company's revenues, respectively. In
fiscal 1998, 1997, and 1996 NEC accounted for approximately 22%, 29% and 11% of
revenues, respectively. In fiscal 1997, one other customer accounted for 10% of
revenues and in fiscal 1996, five other customers accounted for 15%, 14%, 13%,
12% and 11% of revenues. Because the revenues derived from various licensees
vary from period to period depending on the addition of new contracts, the
expiration of deferred revenue schedules under existing contracts and the
volumes and prices at which the licensees have recently sold Rambus ICs to
systems companies, the particular licensees which account for revenue
concentration have varied from period to period. These variations are expected
to continue in the foreseeable future although the Company anticipates that
revenue will continue to be concentrated in a limited number of licensees.
The royalties received by the Company are a function of the adoption of
Rambus technology at the systems company level. Systems companies purchase
semiconductors containing Rambus technology from Rambus licensees, and
generally do not have a direct contractual relationship with the Company. The
Company's licensees generally do not provide detail as to the identity of, or
volume of Rambus ICs purchased by, particular systems companies. As a result,
the Company faces difficulty in analyzing the extent to which its future
revenues will be dependent upon particular systems companies. However, the
Company believes that sales from its licensees to Nintendo have accounted for a
substantial portion of royalties in the past and will continue to do so in
fiscal 1999. Nintendo faces intense competitive pressure in the video game
market, which is characterized by extreme volatility, frequent new product
introductions and rapidly shifting consumer preferences, and there can be no
assurance as to the unit volumes of Rambus ICs that will be purchased by
Nintendo in the future or the level of royalty-bearing revenues that the
Company's licensees will receive from Nintendo.
Besides the Nintendo business, the Company believes its potential to generate
royalties in fiscal 1999 will be dependent on, among others, sales of
multimedia controller chips by Cirrus Logic and Chromatic Research. Cirrus and
Chromatic have both recently announced major reductions in their activities in
this area, and none of these companies is under any obligation to continue
using Rambus technology in its current product or to incorporate Rambus
technology into its future products. There can be no assurance that a
significant number of other systems companies will adopt the Company's
technology or that the Company's dependence upon particular systems companies
will decrease in the future.
Reliance upon DRAM Market; Declines in DRAM Price and Unit Volume per
System. To date, a majority of the Company's royalties has been derived from
the sale of logic ICs incorporating RACs. If the Company is successful in its
strategy to penetrate the PC main memory market, the Company expects that
royalties from the sale of RDRAMs will eventually account for the largest
portion of royalties. Royalties on RDRAMs are based on the volumes and prices
of RDRAMs manufactured and sold by the Company's licensees. The royalties
received by the Company therefore are influenced by many of the risks faced by
the DRAM market in general, including constraints on the volumes shipped during
periods of shortage and reduced average selling prices. The DRAM market is
intensely competitive and generally is characterized by declining average
selling prices over the life of a generation of chips. Such price decreases,
and the corresponding decreases in per unit royalties received by the Company,
can be sudden and dramatic. Compounding the effect of price decreases is the
fact
9
<PAGE>
that, under certain of the Company's license agreements, royalty rates decrease
as a function of time or volume. With the introduction of each new generation
of higher density RDRAMs, the Company generally expects higher prices resulting
in higher royalties per device, but with correspondingly fewer devices required
per system. There can be no assurance that decreases in DRAM prices or in the
Company's royalty rates will not have a material adverse effect on the
Company's business, results of operations and financial condition. There can be
no assurance that the Company will be successful in maintaining or increasing
its share of any market.
Rapid Technological Change; Reliance on Fundamental Technology; Importance of
Timely New Product Development. The semiconductor industry is characterized by
rapid technological change, with new generations of semiconductors being
introduced periodically and with ongoing evolutionary improvements. Since
beginning operations in 1990, the Company has derived all of its revenue from
its interface technology and expects that this dependence on its fundamental
technology will continue for the foreseeable future. Accordingly, broad
acceptance of the Company's interface technology is critical to the Company's
future success. The introduction or market acceptance of competing technology
which renders the Company's interface technology less desirable or obsolete
would have a rapid and material adverse effect on the Company's business,
results of operations and financial condition. The announcement of new products
by the Company, such as the Direct Rambus technology which is under
development, could cause licensees or systems companies to delay or defer
entering into arrangements for the use of the Company's technology, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's operating results will depend to a significant extent on its
ability to introduce enhancements and new generations of its interface
technology which keep pace with other changes in the semiconductor industry and
which achieve rapid market acceptance. The Company must continually devote
significant engineering resources to addressing the ever-increasing need for
memory bandwidth associated with increases in the speed of microprocessors and
other controllers. Technical innovations of the type that will be required for
the Company to be successful are inherently complex and require long
development cycles, and there can be no assurance that the Company's
development efforts will ultimately be successful. In addition, these
innovations must be completed before changes in the semiconductor industry have
rendered them obsolete, must be available when systems companies require these
innovations, and must be sufficiently compelling to cause semiconductor
manufacturers to enter into licensing arrangements with Rambus for the new
technology. There can be no assurance that Rambus will be able to meet these
requirements. Moreover, significant technological innovations generally require
a substantial investment before their commercial viability can be determined.
There can be no assurance that the Company will have the financial resources
necessary to fund future development, that the Company's licensees will
continue to share certain research and development costs with the Company as
they have in the past, or that revenues from enhancements or new generations of
the Company's technology, even if successfully developed, will exceed the costs
of development.
Competition. The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change, short product life
cycles, cyclical market patterns and increasing foreign and domestic
competition. Most major DRAM manufacturers, including Rambus licensees, produce
higher-frequency versions of standard DRAMs such as SDRAMs and SGRAMs which
compete with RDRAMs. These companies are much larger and have better access to
financial, certain technical and other resources than Rambus. Additional high-
speed DRAMs have recently been introduced by other semiconductor companies for
specialized applications.
The Company believes that its 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. In addition, a consortium including both large DRAM manufacturers
and systems companies is promoting an alternative high-speed interface standard
called SLDRAM. To the extent that these alternative technologies provide
comparable system performance at lower or
10
<PAGE>
similar cost than RDRAMs, or do not require the payment of comparable
royalties, the Company's licensees and prospective licensees may adopt and
promote the alternative technologies. There can be no assurance that the
Company's future competition will not have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
certain semiconductor companies are now marketing an IC which combines logic
and DRAM on the same chip. Such chips, called "embedded DRAM," eliminate the
need for any chip-to-chip interface and are primarily being used for graphics
applications. Embedded DRAMs are well suited for applications where component
space saving and power consumption are important, such as in the graphics
subsystems of notebook PCs. There can be no assurance that competition from
embedded DRAMs will not increase in the future.
Limited Protection of Intellectual Property; Likelihood of Potential
Litigation. While the Company has an active program to protect its proprietary
technology through the filing of patents, there can be no assurance that the
Company's pending United States or foreign patent applications or any future
United States or foreign patent applications will be approved, that any issued
patents will protect the Company's intellectual property or will not be
challenged by third parties, or that the patents of others will not have an
adverse effect on the Company's ability to do business. Furthermore, there can
be no assurance that others will not independently develop similar or competing
technology or design around any patents that may be issued to the Company.
The Company attempts to protect its trade secrets and other proprietary
information through agreements with licensees and systems companies,
proprietary information agreements with employees and consultants and other
security measures. The Company also relies on trademarks and trade secret laws
to protect its intellectual property. Despite these efforts, there can be no
assurance that others will not gain access to the Company's trade secrets, or
that the Company can meaningfully protect its intellectual property. In
addition, effective trade secret protection may be unavailable or limited in
certain foreign countries. Although the Company intends to protect its rights
vigorously, there can be no assurance that such measures will be successful.
Rambus believes that it is important to develop and maintain a uniform RDRAM
memory interface standard. The Company's contracts generally prevent a licensee
from using licensee-developed patented improvements related to Rambus
technology to block other licensees from using the improvements or requiring
them to pay additional royalties related to their use of Rambus interface
technology. Specifically, the contracts generally require licensees to grant to
Rambus a royalty-free cross-license on patented licensee intellectual property
related to the implementation of Rambus interface technology, which Rambus
sublicenses to other licensees that have entered into similar arrangements. Not
all licensees have granted Rambus cross-licenses, and there is no assurance
that such a blocking arrangement will not occur in the future.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. While the Company has not
received formal notice of any infringement of the rights of any third party,
questions of infringement in the semiconductor field involve highly technical
and subjective analyses. Litigation may be necessary in the future to enforce
the Company's patents and other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity,
and there can be no assurance that the Company would prevail in any future
litigation. Any such litigation, whether or not determined in the Company's
favor or settled by the Company, would be costly and would divert the efforts
and attention of the Company's management and technical personnel from normal
business operations, which would have a material adverse effect on the
Company's business, financial condition and results of operations. Adverse
determinations in litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
licensing its technology, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
In any potential dispute involving the Company's patents or other
intellectual property, the Company's licensees could also become the target of
litigation. While the Company generally does not indemnify its licensees, some
of its license agreements require the Company to provide technical support and
information to a
11
<PAGE>
licensee which is involved in litigation involving use of Rambus technology.
The Company is bound to indemnify certain licensees under the terms of certain
license agreements, and the Company may agree to indemnify others in the
future. The Company's support and indemnification obligations could result in
substantial expenses to the Company. In addition to the time and expense
required for the Company to supply such support or indemnification to its
licensees, a licensee's development, marketing and sales of Rambus ICs could be
severely disrupted or shut down as a result of litigation, which in turn could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risks Associated with International Licenses. To date, companies based in
Japan and Korea have accounted for the majority of the Company's revenues. In
fiscal 1998, 1997, and 1996, international revenues constituted approximately
73%, 80% and 86% of the Company's total revenues, respectively. The Company
expects that revenues derived from international licensees will continue to
represent a significant portion of its total revenues in the future. All of the
revenues from international licensees have to date been denominated in United
States dollars. However, to the extent that such licensees' sales to systems
companies are not denominated in United States dollars, any royalties that the
Company receives as a result of such sales could be subject to fluctuations in
currency exchange rates. In addition, if the effective price of Rambus ICs sold
to the Company's foreign licensees were to increase as a result of fluctuations
in the exchange rate of the relevant currencies, demand for Rambus ICs could
fall, which in turn would reduce the Company's royalties. The Company does not
use derivative instruments to hedge foreign exchange rate risk. In addition,
international operations and demand for the products of the Company's licensees
are subject to a variety of risks, including tariffs, import restrictions and
other trade barriers, changes in regulatory requirements, longer accounts
receivable payment cycles, adverse tax consequences, export license
requirements, foreign government regulation, political and economic instability
and changes in diplomatic and trade relationships. In particular, the laws of
certain countries in which the Company currently licenses or may in the future
license its technology require significant withholding taxes on payments for
intellectual property, which the Company may not be able to offset fully
against its United States tax obligations. The Company is subject to the
further risk of the tax authorities in those countries recharacterizing certain
engineering fees as license fees, which could result in increased tax
withholdings and penalties. The Company's licensees are subject to many of the
risks described above with respect to systems companies which are located in
different countries, particularly video game and PC manufacturers located in
Asia and elsewhere. There can be no assurance that one or more of the risks
associated with international licenses of the Company's technology will not
have a direct or indirect material adverse effect on the Company's business,
financial condition and results of operations. Moreover, the laws of certain
foreign countries in which the Company's technology is or may in the future be
licensed may not protect the Company's intellectual property rights to the same
extent as the laws of the United States, thus increasing the possibility of
infringement of the Company's intellectual property.
Dependence on Key Personnel. The Company's success depends to a significant
extent on its ability to identify, attract, motivate and retain qualified
technical, sales, marketing, finance and executive personnel. Because the
future success of the Company is dependent upon its ability to continue
enhancing and introducing new generations of such technology, the Company is
particularly dependent upon its ability to identify, attract, motivate and
retain qualified engineers with the requisite educational background and
industry experience. Competition for qualified engineers, particularly those
with significant industry experience, is intense. The Company is also dependent
upon its senior management personnel, most of whom have worked together at the
Company for several years. The loss of the services of any of the senior
management personnel or a significant number of the Company's engineers could
be disruptive to the Company's development efforts or business relationships
and could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company generally does not enter into
employment contracts with its employees and does not maintain key person life
insurance.
Management of Expanded Operations. The Company is not experienced in managing
rapid growth. The Company may not be equipped to successfully manage any future
periods of rapid growth or expansion, which could be expected to place a
significant strain on the Company's limited managerial, financial, engineering
and
12
<PAGE>
other resources. The Company's licensees and systems companies rely heavily on
the Company's technological expertise in designing, testing and manufacturing
products incorporating the Company's interface technologies. Relationships
with new licensees or systems companies generally require significant
engineering support. As a result, any increases in adoption of the Company's
technology will increase the strain on the Company's resources, particularly
the Company's engineers. Any delays or difficulties in the Company's research
and development process caused by these factors or others could make it
difficult for the Company to develop future generations of its interface
technology and to remain competitive. In addition, the rapid rate of hiring
new employees could be disruptive and adversely affect the efficiency of the
Company's research and development process. The rate of the Company's future
expansion, if any, in combination with the complexity of the technology
involved in the Company's licensee-based business model, may demand an
unusually high level of managerial effectiveness in anticipating, planning,
coordinating and meeting the operational needs of the Company as well as the
needs of the licensees and systems companies. Additionally, the Company may be
required to reorganize its managerial structure in order to more effectively
respond to the needs of customers. Given the small pool of potential licensees
and target systems companies, the adverse effect on the Company resulting from
a lack of effective management in any of these areas will be magnified.
Inability to manage the expansion of the Company's business would have a
material adverse effect on its business, financial condition and results of
operations.
Impact of Year 2000. To the extent permitted by law, the disclosure included
in this paragraph is intended to constitute Year 2000 readiness disclosure
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
As part of the transfer of technology to its licensees, the Company provides
information in the form of implementation packages which include
specifications, circuit layout databases, test parameter software and, in the
case of RDRAMs, core interface specifications. Such information is not date
sensitive and therefore not subject to Year 2000 problems. Since the Company
does not sell any other kind of product, internal Year 2000 issues are
confined to its engineering design and administrative systems. The Company has
a plan in place to evaluate such systems, which are generally provided by
third parties, and the Company is currently working with these vendors to
ascertain and resolve potential problems associated with the processing of
date sensitive information. Based on preliminary information received from
certain of the vendors, the Company believes that its internal computer
systems will be Year 2000 compliant and that the risk of major disruption from
these systems due to Year 2000 issues is minimal. However, the Company has not
verified the accuracy of such preliminary information. Additionally, the
Company could be negatively affected to the extent that Year 2000 problems at
its licensees could affect the shipment of Rambus ICs and the payment of
royalties to the Company. Such affects on its licensees could cause the
Company to miss quarterly analysts estimates of its revenue and profits. The
Company has no way of analyzing the probability of year 2000 problems at its
licensees, and therefore, there can be no assurance that the Company's
licensees will be Year 2000 compliant or, in any event, that the Company will
not be negatively affected from Year 2000 issues. Through September 30, 1998,
the Company has not incurred any significant costs to ensure its internal
computer systems are Year 2000 compliant, other than software purchases and
upgrades which were purchased in the Company's normal course of business. The
Company does not expect the cost of implementation for its internal computer
systems to have a material impact on the Company's financial position or
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. The Company also leases
space in Tokyo for an office which provides sales and technical support to
systems companies in Japan. The Company believes that it will not have
difficulty in securing additional facilities if required.
ITEM 3. LEGAL PROCEEDINGS
The Company has no current or threatened legal proceedings or claims.
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 1998.
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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 42
of this Report 10-K.
As of November 30, 1998, there were 508 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
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
OPERATIONS:
- -----------
<S> <C> <C> <C> <C> <C>
Total revenues.................... $ 37,864 $26,015 $11,270 $ 7,364 $ 5,000
Operating income (loss)........... 7,967 1,954 (4,568) (6,053) (6,197)
Net income (loss)................. 6,788 1,981 (4,415) (7,020) (6,629)
Net income (loss) per share--
assuming dilution................ $ 0.28 $ 0.09 $ (0.78) $ (1.33) $ (1.40)
<CAPTION>
FINANCIAL POSITION (AT YEAR END):
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Total assets...................... $110,987 $87,878 $12,868 $18,307 $ 8,395
Total debt (capital lease
obligations)..................... 130 512 1,297 1,616 1,655
Stockholders' equity (deficit).... 41,792 26,661 (12,144) (7,936) (10,006)
</TABLE>
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 March 1990, Rambus has been engaged in the development
of high-speed chip-to-chip interface technology which can be used to enhance
the performance and cost-effectiveness of consumer electronics, computer
systems and other electronic systems. The Company neither manufactures nor
sells semiconductors incorporating the Company's technology. Rather, the
Company licenses its technology on a nonexclusive and worldwide basis to
semiconductor companies which manufacture and sell RDRAMs and logic ICs
containing RACs to systems companies which have adopted Rambus technology.
Systems companies are not required to obtain a Rambus license to incorporate
Rambus ICs into their products.
Revenues. The Company's revenues consist of contract fees and royalties.
Contract fees are comprised of license fees, engineering service fees and
nonrefundable, prepaid royalties, and represented approximately 76% of the
Company's revenues in fiscal 1998 and 78% in fiscal 1997. The Company's
contracts generally require a licensee to pay a contract fee to Rambus
typically ranging from a few hundred thousand dollars for a narrow license
covering a single logic product to millions of dollars for a license with
broad coverage of Rambus
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<PAGE>
technology. Part of these fees may be due upon the achievement of certain
milestones, such as provision of certain deliverables by Rambus or production
of chips by the licensee. All contract fees are nonrefundable.
In a few cases, the Company has received nonrefundable, prepaid royalties
which offset the earliest royalty payments otherwise due from the licensee. As
of September 30, 1998, $3.5 million of such nonrefundable, prepaid royalties
had offset initial royalties, and the Company had a balance of $3.3 million
remaining to be offset against future royalties.
Substantially all of the license fees, engineering service fees and
nonrefundable, prepaid royalties are bundled together as contract fees because
the Company generally does not provide or price these components separately.
The contracts also generally include rights to upgrades and enhancements.
Accordingly, Rambus recognizes contract revenues ratably over the period
during which post-contract customer support is expected to be provided. The
excess of contract fees received over contract revenue recognized is shown on
the Company's balance sheet as "deferred revenue." As of September 30, 1998,
the Company's deferred revenue was $65.6 million, substantially all of which
is scheduled to be recognized in varying amounts over the next five years.
Royalties, which are generally a percentage of the revenues received by a
licensee on its sales of the Company's ICs, are normally payable by the
licensee on sales occurring during the life of the Company's patents being
licensed. For a typical application of the Company's technology, the Company
receives royalties from the sale of both RDRAMs and logic ICs containing RACs.
Royalty rates range up to a maximum of approximately 2.5% for RDRAMs and a
maximum of approximately 5% for logic ICs, and in some cases may decline based
on the passage of time or on the total volume of the Company's ICs shipped by
a licensee. The exact rate and structure of a royalty arrangement with a
particular licensee depend on a number of factors, including the amount of the
contract fee paid by the licensee and the marketing and engineering commitment
made by the licensee.
Rambus recognizes royalties from a licensee in the quarter in which it
receives the report detailing shipments of Rambus ICs by such licensee in the
prior quarter. The Company believes that royalties will become an increasing
portion of revenues over the long term. To date, a majority of the Company's
royalties has been derived from the sale of logic ICs incorporating RACs. If
the Company is successful in its strategy to penetrate the PC main memory
market segment, the Company expects that royalties from the sale of RDRAMs
will eventually account for the largest portion of royalties.
As of September 30, 1998, the Company had 29 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 1998, 1997
and 1996 revenues from the top five licensees accounted for approximately 49%,
63% and 65% of the Company's revenues, respectively. In fiscal 1998, 1997, and
1996 NEC accounted for approximately 22%, 29% and 11% of revenues,
respectively. In fiscal 1997, one other customer accounted for 10% of revenues
and in fiscal 1996, five other customers accounted for 15%, 14%, 13%, 12% and
11% 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 a function of the adoption of
Rambus technology by systems companies and the acceptance of the systems
companies' products by end users. The Company generally does not have a direct
contractual relationship with systems companies, and the royalty reports
submitted by the Company's licensees generally do not disclose the identity
of, or unit volume of Rambus ICs purchased by, particular systems companies.
As a result, it is difficult for the Company to predict the extent to which
its future revenues will be dependent upon particular systems companies.
To date, companies based in Japan and Korea have accounted for the majority
of the Company's revenues. In fiscal 1998, 1997, and 1996, international
revenues constituted approximately 73%, 80% and 86% of the Company's total
revenues, respectively. The Company expects that revenues derived from
international licensees
15
<PAGE>
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.
While a substantial portion of the Company's revenue is derived from Asian
sources, the Company does not consider itself to be abnormally vulnerable to
problems in the economies of Asian countries. A substantial portion of future
contract revenues will be based on nonrefundable payments of license and
engineering fees which have already been received from Asian and other
licensees but not yet recognized. Royalties generally are based on sales of
Rambus ICs by licensees to system companies located in the United States,
Japan and, to a lesser extent, Taiwan. The Company is not aware of any
significant current or planned future sales of Rambus ICs to system companies
located in any other Asian countries.
Expenses. Since the Company's inception in March 1990, its engineering costs
(which consist of cost of contract revenues and research and development
expenses) and marketing, general and administrative expenses have continually
increased as the Company has added personnel and ramped up its activities in
these areas. Engineering costs and marketing, general and administrative
expenses generally have decreased as a percentage of revenues throughout this
period due to the relatively rapid revenue base expansion which the Company
experienced as it began entering into license agreements. The Company intends
to continue making significant expenditures associated with engineering,
marketing, 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 increase or decrease as a percentage of
revenues will be substantially dependent upon the rate at which the Company's
revenues change.
Engineering costs are allocated between cost of contract revenues and
research and development expenses. Cost of contract revenues is determined
based on the portion of engineering costs which have been incurred during the
period for the adaptation of Rambus interface technology for specific licensee
processes. The balance of engineering costs, incurred for general development
of Rambus technology, is charged to research and development. In a given
period, the allocation of engineering costs between these two components is a
function of the timing of development and implementation cycles. As a
generation of technology matures from the development stage through
implementation, the majority of engineering costs shifts from research and
development expenses to cost of contract revenues. Engineering costs are
recognized as incurred and do not correspond to the recognition of revenues
under the related contracts.
Marketing, general and administrative expenses include salaries, travel
expenses and costs associated with trade shows, advertising, finance and other
marketing and administrative efforts. Costs of technical support for systems
companies, including applications engineering, are also charged to marketing,
general and administrative expense. Consistent with the Company's business
model, sales and marketing activities are focused on developing relationships
with potential licensees and on participating with existing licensees in
marketing, sales and technical efforts directed to systems companies. In many
cases, Rambus must dedicate substantial resources to 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 near-term future
periods.
Taxes. The Company reports certain items of income and expense for financial
statement purposes in different years than they are reported in the tax
return. Specifically, the Company reports contract fees and royalties when
received for tax purposes, as required by tax law. For financial reporting
purposes, the Company records revenues from contract fees over the period
post-contract support is expected to be provided. Accordingly, the Company's
net operating loss for tax purposes is less than the cumulative operating
deficit recorded for financial statement purposes.
16
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Contract revenues....................................... 75.9% 77.6% 99.4%
Royalties............................................... 24.1 22.4 0.6
----- ----- -----
Total revenues........................................ 100.0% 100.0% 100.0%
===== ===== =====
Costs and expenses:
Cost of contract revenues............................... 23.7 21.1 42.8
Research and development................................ 25.5 37.7 46.3
Marketing, general and administrative................... 29.8 33.7 51.4
----- ----- -----
Total costs and expenses.............................. 79.0 92.5 140.5
----- ----- -----
Operating income (loss)................................... 21.0 7.5 (40.5)
Other income, net......................................... 8.9 5.2 3.9
----- ----- -----
Income (loss) before income taxes......................... 29.9 12.7 (36.6)
Provision for income taxes................................ 12.0 5.1 2.6
----- ----- -----
Net income (loss)......................................... 17.9% 7.6% (39.2)%
===== ===== =====
</TABLE>
Revenues. Revenues were $37.9 million, $26.0 million and $11.3 million in
fiscal 1998, 1997 and 1996, respectively. Contract revenues increased 80.2% to
$20.2 million in fiscal 1997 and increased 42.3% to $28.7 million in fiscal
1998 as a result of the Company's entering into contracts with new licensees
and additional contracts with current licensees for new developments,
especially for development of Direct Rambus.
The Company recorded its first significant royalties in fiscal 1997, a total
of $5.8 million or 22.4% of total revenues. In fiscal 1998, royalties
increased 56.8% to $9.1 million or 24.1% of total revenues. In both periods
royalties were primarily from NEC and, the Company believes, were largely
based on sales of Rambus ICs for use in the Nintendo 64 home video game
system. The Company anticipates that its potential to generate royalties in
fiscal 1999 is dependent on, among others, system sales by Nintendo and sales
by Cirrus Logic and Chromatic Research of logic ICs incorporating RACs for PC
graphics and multimedia applications. Nintendo faces intense competitive
pressure in the home video game market, which is characterized by extreme
volatility, seasonal fluctuations, frequent new product introductions and
rapidly shifting consumer preferences, and there can be no assurance as to the
unit volumes of Rambus ICs that will be purchased by Nintendo in the future or
the level of royalty-bearing revenues that the Company's licensees will
receive from Nintendo. Cirrus and Chromatic have both recently announced major
reductions in their activities in this area, and none of these companies is
under any obligation to continue using Rambus technology in its current
products or to incorporate Rambus technology into its future products.
Engineering Costs. Engineering costs, consisting of cost of contract
revenues and research and development expenses, were $18.6 million, $15.3
million and $10.0 million, which represented 49.2%, 58.8% and 89.1% of
revenues, in fiscal 1998, 1997 and 1996, respectively. The increase in
engineering costs was due primarily to an increase in engineering personnel,
and the decrease as a percentage of revenues was primarily the result of the
Company's growth in revenues.
Cost of Contract Revenues. Cost of contract revenues was $9.0 million, $5.5
million, and $4.8 million, which represented 23.7%, 21.1% and 42.8% of
revenues, in fiscal 1998, 1997 and 1996, respectively. Cost of contract
revenues increased 13.9% in fiscal 1997 compared to fiscal 1996 due to the
need for the Company to
17
<PAGE>
support several additional licensees. The decrease in cost of contract revenues
as a percentage of revenues from fiscal 1996 to fiscal 1997 was primarily the
result of the Company's growth in revenues. In fiscal 1998, cost of contract
revenues increased 63.7% to $9.0 million, and increased as a percentage of
revenues primarily due to the transition of Direct Rambus technology from the
design to the implementation stage. 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 $9.6
million, $9.8 million and $5.2 million, which represented 25.5%, 37.7% and
46.3% of revenues, in fiscal 1998, fiscal 1997 and fiscal 1996, respectively.
Research and development expenses increased 88.1% in fiscal 1997 compared to
fiscal 1996 due to development efforts related to a new generation of 64 Mbit
RDRAMs and associated RACs, including the development of Direct Rambus. The
higher costs were primarily due to increased engineering personnel. In fiscal
1998, however, research and development expenses decreased 1.7% compared to
1997, and decreased as a percentage of total revenues, as the major portion of
design work on Direct Rambus was completed and engineering focus moved to
implementation of the technology. The Company expects research and development
expenses to increase over time as it enhances and improves its technology and
applies it to new generations of ICs. The rate of increase of, and the
percentage of revenues represented by, research and development expenses in the
future will vary from period to period based on the research and development
projects underway and the change in engineering headcount in any given period,
as well as the rate of change in the Company's total revenues.
Marketing, General and Administrative. Marketing, general and administrative
expenses were $11.3 million, $8.8 million and $5.8 million, which represented
29.8%, 33.7% and 51.4% of revenues, in fiscal 1998, 1997 and 1996,
respectively. The increase in absolute dollars was primarily due to a buildup
of the marketing and sales teams in both the U.S. and Japan as well as
increased costs associated with applications engineering and other technical
support provided to systems companies. The decrease in marketing, general and
administrative expenses as a percentage of revenues reflects the increased
revenue base. The Company expects marketing, general and administrative
expenses to increase in the future as the Company puts additional effort into
marketing its technology and assisting systems companies to adapt this
technology to new generations of products. The rate of increase of, and the
percentage of revenues represented by, marketing, general and administrative
expenses in the future will vary from period to period based on the trade
shows, advertising and other sales and marketing activities undertaken and the
change in sales, marketing and administrative headcount in any given period, as
well as the rate of change in the Company's total revenues.
Other Income, Net. Other income, net consists primarily of interest income
from the Company's short-term cash investments, offset by interest expense on
leases and other equipment financing. Other income, net was $3.4 million, $1.3
million and $439,000, which represented 8.9%, 5.2% and 3.9% of revenues, in
fiscal 1998, 1997 and 1996, respectively. The increase in absolute dollars was
due to interest on higher average marketable securities, cash and cash
equivalent balances, offset by interest associated with leased equipment. The
Company expects net other income to increase in the future due to additional
interest income on higher cash balances.
Provision for Income Taxes. The Company recorded a provision for income taxes
of $4.5 million in fiscal 1998, $1.3 million in fiscal 1997 and $286,000 in
fiscal 1996. Whereas the fiscal 1996 provision primarily represents foreign
withholding tax on license revenue, the 1997 and 1998 provisions were based on
an estimated federal and state combined rate of 40% on income before income
taxes.
At September 30, 1998 the Company had deferred tax assets of approximately
$28 million, primarily relating to the difference between tax and book
treatment of deferred revenue. The Company has established a partial valuation
allowance against its deferred tax assets due to the uncertainty surrounding
the realization of such assets. If it is determined that it is more likely than
not that the deferred tax assets are realizable, the valuation allowance will
be reduced.
18
<PAGE>
CONTINGENT WARRANTS
In January 1997 the Company granted a warrant to Intel Corporation for the
purchase of 1,000,000 shares of Rambus common stock at an exercise price of
$10.00 per share. The warrant will become exercisable only upon the
achievement of certain milestones by Intel, which will result in a charge to
the statement of operations at the time of achievement of the milestones based
on the fair value of the warrant.
In October 1998, the Company's Board of Directors authorized an incentive
program in the form of warrants on a total of up to 400,000 shares of Rambus
common stock to be issued to various Rambus Direct DRAM partners upon the
achievement of certain product qualification and volume production targets.
The warrants, to be issued at the time the targets are met, will have an
exercise price of $10.00 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 charge to the statement of operations at the time of achievement
of the Intel milestones based on the fair value of the warrants.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998 the Company had cash and cash equivalents and
marketable securities of $88.1 million, including a long-term component of
$8.4 million. As of the same date, the Company had total working capital of
$59.6 million, including a short-term component of deferred revenue of $28.6
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 revenue to be recognized over
the next twelve months. Without the short-term component of deferred revenue,
working capital would have been $88.2 million at September 30, 1998.
The Company's operating activities provided net cash of $16.3 million and
$31.9 million in fiscal 1998 and 1997, respectively, and used net cash of $3.5
million in fiscal 1996. Cash used by operations in fiscal 1996 was due to the
net loss, adjusted for non-cash items, and a decrease in deferred revenue
offset by a decrease in accounts receivable. Cash generated by operations in
fiscal 1998 and 1997 was primarily the result of increases in deferred revenue
and net income adjusted for non-cash items, offset by net payments, provisions
and adjustments relating to income taxes. The increase in deferred revenue for
both years was due to new billings on license contracts in excess of revenues
recognized thereon.
Net cash used in investing activities was $14.4 million and $47.2 million in
fiscal 1998 and fiscal 1997, respectively; net cash provided by investing
activities was $3.9 million in fiscal 1996. Investing activities have
consisted primarily of net purchases of marketable securities and purchases of
property and equipment.
Net cash provided by financing activities were $3.4 million and $35.2
million in fiscal 1998 and fiscal 1997, respectively; net cash used in
financing activities was $546,000 in fiscal 1996. Net cash used in financing
activities in fiscal 1996 consisted of principal payments on capital leases
offset by proceeds from the sale of common stock. Net cash provided by
financing activities in fiscal 1997 was primarily due to completion of the
Company's initial public offering of its common stock. Net cash provided by
financing activities in fiscal 1998 was primarily due to proceeds from the
sale of common stock under the Company's Employee Stock Purchase and Option
plans.
The Company presently anticipates that existing cash balances will be
adequate to meet its cash needs for at least the next 12 months.
IMPACT OF YEAR 2000
To the extent permitted by law, the disclosure included in this paragraph is
intended to constitute Year 2000 readiness disclosure within the meaning of
the Year 2000 Information and Readiness Disclosure Act. As part of the
transfer of technology to its licensees, the Company provides information in
the form of implementation packages which include specifications, circuit
layout databases, test parameter software and, in the case of
19
<PAGE>
RDRAMs, core interface specifications. Such information is not date sensitive
and therefore not subject to Year 2000 problems. Since the Company does not
sell any other kind of product, internal Year 2000 issues are confined to its
engineering design and administrative systems. The Company has a plan in place
to evaluate such systems, which are generally provided by third parties, and
the Company is currently working with these vendors to ascertain and resolve
potential problems associated with the processing of date sensitive
information. Based on preliminary information received from certain of the
vendors, the Company believes that its internal computer systems will be Year
2000 compliant and that the risk of major disruption from these systems due to
Year 2000 issues is minimal. However, the Company has not verified the
accuracy of such preliminary information. Additionally, the Company could be
negatively affected to the extent that Year 2000 problems at its licensees
could affect the shipment of Rambus ICs and the payment of royalties to the
Company. Such affects on its licensees could cause the Company to miss
quarterly analysts estimates of its revenue and profits. The Company has no
way of analyzing the probability of year 2000 problems at its licensees, and
therefore, there can be no assurance that the Company's licensees will be Year
2000 compliant or, in any event, that the Company will not be negatively
affected from Year 2000 issues. Through September 30, 1998, the Company has
not incurred any significant costs to ensure its internal computer systems are
Year 2000 compliant, other than software purchases and upgrades which were
purchased in the Company's normal course of business. The Company does not
expect the cost of implementation for its internal computer systems to have a
material impact on the Company's financial position or results of operations.
NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This statement establishes requirements
for disclosure of comprehensive income and will become effective for the
Company's 1999 fiscal year, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally represents
all changes in stockholders' equity except those resulting from investments or
contributions by stockholders. The Company is evaluating alternative formats
for presenting this information.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement supercedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131 will
become effective for the Company's 1999 fiscal year and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 97-2 (SOP 97-2), "Software Revenue
Recognition," which supercedes SOP 91-1. SOP 97-2 will become effective for
transactions entered into beginning in the Company's 1999 fiscal year.
Retroactive application of the provisions of SOP 97-2 is prohibited. The
Company does not expect SOP 97-2 to materially impact the Company's results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's 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.
20
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
AVERAGE RATE
OF RETURN AT
SEPTEMBER 30,
CARRYING VALUE 1998
(IN THOUSANDS) (ANNUALIZED)
MARKETABLE SECURITIES: -------------- -------------
<S> <C> <C>
Cash equivalents............................... $23,104 5.0%
Corporate notes and bonds...................... 39,402 5.7%
United States government debt and securities... 16,989 5.7%
Foreign debt securities........................ 4,879 6.0%
Certificates of deposit and commercial paper... 1,000 5.8%
-------
Total marketable securities.................. $85,374
=======
</TABLE>
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.
21
<PAGE>
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 1999 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, 1998.
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 1999
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, 1998.
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 1999
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, 1998.
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 1999 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, 1998.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant and
Report of PricewaterhouseCoopers LLP, Independent Accountants, are
included herewith:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants........ 25
Consolidated Balance Sheets as of September 30, 1998 and 1997........ 26
Consolidated Statements of Operations for the years ended September
30, 1998, 1997, and 1996............................................. 27
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended September 30, 1998, 1997, and 1996....................... 28
Consolidated Statements of Cash Flows for the years ended September
30, 1998, 1997, and 1996............................................. 29
Notes to Consolidated Financial Statements........................... 30
Consolidated Supplementary Financial Data............................ 42
(a)(2)FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts........................ 44
</TABLE>
This financial statement schedule of the Company for each of the years
ended September 30, 1998, 1997 and 1996 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.
(a)(3)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
3.1(3) Amended and Restated Certificate of Incorporation of
Registrant filed May 29, 1997.
3.2(1) Amended and Restated Bylaws of Registrant dated February 28,
1997.
4.1(1) Form of Registrant's Common Stock Certificate.
4.2(1) Amended and Restated Information and Registration Rights
Agreement, dated as of January 7, 1997, between Registrant
and the parties indicated therein.
4.3(1) Form of Preferred Shares Rights Agreement dated April 1,
1997.
4.4(1) Common Stock Purchase Warrant dated January 7, 1997.
10.1(1) Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.
10.2(1) (2) Semiconductor Technology License Agreement, dated as of July
4, 1991, between Registrant and NEC Corporation.
10.2.1(1) (2) Amendment No. 1 to Semiconductor Technology License
Agreement, dated as of April 28, 1995, between Registrant and
NEC Corporation.
10.2.2(1) (2) Supplement No. 1 to Semiconductor Technology License
Agreement, dated as of February 25, 1993, between Registrant
and NEC Corporation.
10.2.3(1) (2) Supplement No. 2 to Semiconductor Technology License
Agreement, dated as of July 28, 1994, between Registrant and
NEC Corporation.
10.2.4(1) (2) Supplement No. 4 to Semiconductor Technology License
Agreement, dated as of August 31, 1995, between Registrant
and NEC Corporation.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.2.5(1) (2) Supplement No. 5 to Semiconductor Technology License
Agreement, dated as of November 14, 1994, between Registrant
and NEC Corporation.
10.2.6(1) (2) Supplement No. 6 to Semiconductor Technology License
Agreement, dated as of December 27, 1994, between Registrant
and NEC Corporation.
10.2.7(1) (2) Supplement No. 8 to Semiconductor Technology License
Agreement, dated as of September 27, 1996, between
Registrant and NEC Corporation.
10.2.8(1) (2) Supplement No. 9 to Semiconductor Technology License
Agreement, dated as of September 10, 1996, between
Registrant and NEC Corporation.
10.2.9(1) (2) Supplement No. 10 to Semiconductor Technology License
Agreement, dated as of February 27, 1997, between Registrant
and NEC Corporation.
10.2.10(1) (2) Supplement No. 11 to Semiconductor Technology License
Agreement, dated as of March 4, 1997, between Registrant and
NEC Corporation.
10.2.11(3) TRAC Addendum to Supplement No. 11 to Semiconductor
Technology License Agreement, dated as of April 23, 1997,
between Registrant and NEC Corporation.
10.2.12(3) Supplement No. 12 to Semiconductor Technology License
Agreement, dated as of September 26, 1997, between
Registrant and NEC Corporation.
10.4(1) (2) Semiconductor Technology License Agreement, dated as of
November 15, 1996, between Registrant and Intel Corporation.
10.4.1 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(1) 1997 Stock Plan and related forms of agreements.
10.7(1) 1997 Employee Stock Purchase Plan and related forms of
agreements.
10.8(1) Standard Office Lease, dated as of March 10, 1991, between
Registrant and South
Bay/Latham.
10.9(1) Form of Promissory Note between the Registrant and certain
executive officers.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
27.1 Financial Data Schedule.
</TABLE>
--------
(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
(b)REPORTS ON FORM 8-K
No Current Report on Form 8-K was filed in the fourth quarter ended
September 30, 1998.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
October 14, 1998
To the Board of Directors and Stockholders of
Rambus Inc. and Subsidiary
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the consolidated
financial position of Rambus Inc. and its subsidiary at September 30, 1998 and
1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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.
PricewaterhouseCoopers LLP
25
<PAGE>
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 25,798 $ 20,641
Marketable securities................................... 53,913 51,184
Accounts receivable, less allowance for doubtful
accounts of $10 in 1998 and 1997....................... 1,913 925
Prepaid and deferred taxes.............................. 7,829 5,974
Prepaids and other current assets....................... 2,340 2,033
--------- --------
Total current assets.................................. 91,793 80,757
Property and equipment, net............................... 3,989 4,338
Marketable securities, less current portion............... 8,357 --
Deferred taxes, less current portion...................... 4,720 1,001
Other assets.............................................. 2,128 1,782
--------- --------
Total assets.......................................... $ 110,987 $ 87,878
========= ========
LIABILITIES
Current liabilities:
Accounts payable........................................ $ 459 $ 378
Income taxes payable.................................... 12 3,292
Accrued salaries and benefits........................... 1,940 1,454
Other accrued liabilities............................... 1,017 1,042
Current portion of:
Capital lease obligations.............................. 130 382
Deferred revenue....................................... 28,617 24,473
--------- --------
Total current liabilities............................. 32,175 31,021
Capital lease obligations, less current portion........... -- 130
Deferred revenue, less current portion.................... 37,020 30,066
--------- --------
Total liabilities..................................... 69,195 61,217
--------- --------
Commitments (Note 7)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares;
Issued and outstanding: no shares at September 30, 1998
and September 30, 1997................................. -- --
Common stock, $.001 par value:
Authorized: 60,000,000 shares;
Issued and outstanding: 22,925,885 shares at September
30, 1998 and 22,310,499 shares at September 30, 1997... 23 22
Additional paid-in capital................................ 67,617 59,865
Stockholders' notes receivable............................ -- (680)
Accumulated deficit....................................... (25,723) (32,511)
Cumulative translation adjustment......................... (125) (35)
--------- --------
Total stockholders' equity............................ 41,792 26,661
--------- --------
Total liabilities and stockholders' equity.......... $ 110,987 $ 87,878
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Revenues:
Contract revenues................................ $28,727 $20,186 $ 11,205
Royalties........................................ 9,137 5,829 65
------- ------- --------
Total revenues................................. 37,864 26,015 11,270
------- ------- --------
Costs and expenses:
Cost of contract revenues........................ 8,988 5,491 4,821
Research and development......................... 9,649 9,815 5,218
Marketing, general and administrative............ 11,260 8,755 5,799
------- ------- --------
Total costs and expenses....................... 29,897 24,061 15,838
------- ------- --------
Operating income (loss)........................ 7,967 1,954 (4,568)
Interest and other income, net..................... 3,413 1,536 737
Interest expense................................... (52) (194) (298)
------- ------- --------
Income (loss) before income taxes.............. 11,328 3,296 (4,129)
Provision for income taxes......................... 4,540 1,315 286
------- ------- --------
Net income (loss).............................. $ 6,788 $ 1,981 $ (4,415)
======= ======= ========
Net income (loss) per share........................ $ 0.30 $ 0.10 $ (0.78)
======= ======= ========
Net income (loss) per share assuming dilution...... $ 0.28 $ 0.09 $ (0.78)
======= ======= ========
Number of shares used in per share calculations: .
Basic............................................ 22,704 19,548 5,687
======= ======= ========
Assuming dilution................................ 24,376 21,510 5,687
======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS' CUMULATIVE
--------------- -------------- PAID-IN NOTES ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT ADJUSTMENT TOTAL
------- ------ ------ ------ ---------- ------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,
1995.................... 11,297 $ 11 5,561 $ 6 $22,095 $ -- $(30,077) $ 29 $ (7,936)
Issuance of common
stock upon exercise of
options............... -- -- 212 -- 239 -- -- -- 239
Repurchase of common
stock for cash........ -- -- (14) -- (4) -- -- -- (4)
Foreign currency
translation
adjustments........... -- -- -- -- -- -- -- (28) (28)
Net loss............... -- -- -- -- -- -- (4,415) -- (4,415)
------- ----- ------ --- ------- ------ -------- ----- --------
Balances, September 30,
1996.................... 11,297 11 5,759 6 22,330 -- (34,492) 1 (12,144)
Issuance of common
stock upon initial
public offering, net
of issuance costs of
$3,832................ -- -- 3,163 3 34,114 -- -- -- 34,117
Issuance of common
stock upon exercise of
options............... -- -- 2,092 2 2,564 (1,047) -- -- 1,519
Conversion of preferred
stock to common stock (11,297) (11) 11,297 11 -- -- -- -- --
Repayments of
stockholders' notes
receivable -- -- -- -- -- 367 -- -- 367
Tax benefit of stock
option exercises -- -- -- -- 857 -- -- -- 857
Foreign currency
translation
adjustments -- -- -- -- -- -- -- (36) (36)
Net income............. -- -- -- -- -- -- 1,981 -- 1,981
------- ----- ------ --- ------- ------ -------- ----- --------
Balances, September 30,
1997.................... -- -- 22,311 22 59,865 (680) (32,511) (35) 26,661
Issuance of common
stock upon exercise of
options, net.......... -- -- 432 1 1,217 -- -- -- 1,218
Issuance of common
stock under Employee
Stock Purchase Plan... -- -- 183 -- 1,880 -- -- -- 1,880
Repayments of
stockholders' notes
receivable............ -- -- -- -- -- 680 -- -- 680
Issuance of warrant.... -- -- -- -- 568 -- -- -- 568
Tax benefit of stock
option exercises...... -- -- -- -- 4,087 -- -- -- 4,087
Foreign currency
translation
adjustments........... -- -- -- -- -- -- -- (90) (90)
Net income............. -- -- -- -- -- -- 6,788 -- 6,788
------- ----- ------ --- ------- ------ -------- ----- --------
Balances, September 30,
1998.................... -- $ -- 22,926 $23 $67,617 $ -- $(25,723) $(125) $ 41,792
======= ===== ====== === ======= ====== ======== ===== ========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 6,788 $ 1,981 $(4,415)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 2,835 2,070 1,194
Deferred taxes................................... (3,253) (5,974) --
Non-cash compensation expense for issuance of
warrant......................................... 568 -- --
Other............................................ 666 45 82
Change in operating assets and liabilities:
Accounts receivable............................. (988) (207) 488
Prepaid taxes................................... 1,768 -- --
Prepaids and other current assets............... (308) (1,160) (33)
Other assets.................................... (81) (1,414) 130
Accounts payable................................ 81 150 118
Income taxes payable............................ (3,280) 4,065 2
Accrued salaries and benefits................... 473 1,116 107
Other accrued liabilities....................... (57) 394 (173)
Deferred revenue................................ 11,098 30,861 (1,036)
-------- -------- -------
Net cash provided by (used in) operating
activities................................... 16,310 31,927 (3,536)
-------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment................ (2,229) (3,854) (1,952)
Proceeds from sale of property and equipment...... 6 4 467
Purchases of marketable securities................ (313,525) (279,222) (20,050)
Maturities of marketable securities............... 302,439 235,850 25,410
Purchase of investments........................... (1,150) -- --
-------- -------- -------
Net cash provided by (used in) investing
activities................................... (14,459) (47,222) 3,875
-------- -------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock........ 3,098 35,636 239
Repayments of stockholders' notes receivable...... 680 367 --
Repurchase of common stock........................ -- -- (4)
Proceeds from bank loans.......................... -- 794 --
Principal payments on bank loans.................. -- (794) --
Principal payments on capital lease obligations... (382) (773) (781)
-------- -------- -------
Net cash provided by (used in) financing
activities................................... 3,396 35,230 (546)
-------- -------- -------
Foreign currency translation adjustment............ (90) (36) (28)
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 5,157 19,899 (235)
Cash and cash equivalents at beginning of period... 20,641 742 977
-------- -------- -------
Cash and cash equivalents at end of period......... $ 25,798 $ 20,641 $ 742
======== ======== =======
Supplemental disclosure of cash flow information:
Interest paid..................................... $ 52 $ 194 $ 298
Taxes paid........................................ 8,874 4,224 286
License of technology for common stock............ -- 1,200 --
Issuance of stockholders' notes receivable........ -- 1,047 --
Tax benefit of stock option exercises............. 4,087 857 --
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
Rambus Inc. and Subsidiary (the Company) designs, develops, licenses and
markets high-speed chip-to-chip interface technology to enhance the
performance and cost-effectiveness of computers, consumer electronics, and
other electronic systems. The Company licenses semiconductor companies to
manufacture and sell memory and logic ICs incorporating Rambus interface
technology and markets its solution to systems companies to encourage them to
design Rambus interface technology into their products.
The Company was incorporated in California in March 1990 and reincorporated
in Delaware in March 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Rambus K.K., located in Tokyo,
Japan. All intercompany accounts and transactions have been eliminated in the
accompanying consolidated financial statements. Identifiable assets and
revenues of the subsidiary are not significant. 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 nonexclusive technology agreements with
semiconductor licensees. These agreements provide a license to use the
Company's proprietary technology and to receive engineering implementation
services, customer support, and enhancements.
The Company delivers to a new licensee an implementation package which
contains all information needed to develop a Rambus chip in the licensee's
process. An implementation package includes a specification, a generalized
circuit layout database software for the particular version of the chip which
the licensee intends to develop, test parameter software and, for memory
chips, a core interface specification. Test parameters are the programs that
test the Rambus technology embedded in the customer's product. Many licensees
have contracted to have Rambus provide the specific engineering implementation
services required to optimize the generalized circuit layout for the
licensee's manufacturing process. The contracts also provide for the right to
receive ongoing customer support which includes technical advice on chip
specifications, enhancements, debugging and testing.
The Company recognizes revenue consistent with Statement of Position 91-1,
Software Revenue Recognition ("SOP"). This SOP applies to all entities that
earn revenue on products containing software, where software is not incidental
to the product as a whole.
Contract fees for the services provided under these agreements are comprised
of license fees, engineering service fees and nonrefundable, prepaid
royalties. Contract fees are bundled together as the total price of the
agreement does not vary as a result of inclusion or exclusion of services.
Accordingly, the revenues from such contract fees are recognized ratably over
the period during which the post-contract customer support is expected to be
provided independent of the payment schedules under the contract, including
milestones. This period
30
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
represents the estimated life of the technology which was initially eight
years and is currently five years. At the time the Company begins to recognize
revenue under the contract, the remaining obligations, as defined by the SOP,
are no longer significant. These remaining obligations are primarily to keep
the product updated and include activities such as responding to inquiries and
periodic customer meetings. Historically the product life has been less than
the contract life. However, the Company defers 5% of the contract value to
meet any insignificant obligations arising under those contracts subsequent to
product life. At September 30, 1998 and 1997, the amounts included in deferred
revenue to meet these obligations were $3.6 million and $2.4 million,
respectively.
Part of these contract fees may be due upon the achievement of certain
milestones, such as provision of certain deliverables by the Company or
production of chips by the licensee. The remaining fees are due on pre-
determined dates and include significant up-front fees.
The Company recognizes royalties upon notification of sale by its licensees.
The terms of the royalty agreements generally require licensees to give
notification to the Company and to pay royalties within 60 days of the end of
the quarter during which the sales take place.
Research and Development
Costs incurred in research and development are expensed as incurred.
Software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when a product is
available for general release to customers. The Company has not capitalized
any software development costs since such costs have not been significant.
Income Taxes
The Company accounts for income taxes under the liability method whereby
deferred tax asset or liability account balances are calculated at the balance
sheet date using current laws and rates in effect. Research and development
credits are accounted for using the flow-through method.
Computation of Net Income (Loss) Per Share
In October 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (SFAS 128), which requires the presentation of
basic and diluted earnings (loss) per share. Basic earnings (loss) per share
is calculated using the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share is calculated using the
weighted average number of common share and common stock equivalents, if
dilutive, outstanding during the period. Net income (loss) per share has been
computed in accordance with SFAS 128 and all prior period net income (loss)
per share data presented has been restated to conform with SFAS 128.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized for its stock plans. The Company provides additional pro
forma disclosures as required under Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." See
Note 9.
31
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, net of tax, reported in
stockholders' equity (deficit). The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity,
both of which are included in interest income. Realized gains and losses are
recorded on the specific identification method.
Fair Value of Financial Instruments
The amounts reported for cash equivalents, receivables and other financial
instruments are considered to approximate fair values based upon comparable
market information available at the respective balance sheet dates.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over estimated useful lives of three to five years. Leasehold
improvements and property under capital leases are amortized on a straight-
line basis over the shorter of their estimated useful lives or the terms of
the leases. Upon disposal, assets and related accumulated depreciation are
removed from the accounts and the related gain or loss is included in results
from operations.
Foreign Currency Translation
The functional currency for the Company's foreign operation in Japan is the
Japanese yen. The translation from the Japanese yen to U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using the weighted
average exchange rate during the period. Adjustments resulting from such
translation are reflected as a separate component of stockholders' equity.
Gains or losses resulting from foreign currency transactions are included in
the results of operations.
New Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This statement establishes requirements
for disclosure of comprehensive income and will become effective for the
Company's 1999 fiscal year, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally represents
all changes in stockholders' equity except those resulting from investments or
contributions by stockholders. The Company is evaluating alternative formats
for presenting this information.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim financial
32
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement supercedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 will become effective for the
Company's 1999 fiscal year and requires that comparative information from
earlier years be restated to conform to the requirements of this standard. The
Company is evaluating the requirements of SFAS 131 and the effects, if any, on
the Company's current reporting and disclosures.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 97-2 (SOP 97-2), "Software Revenue
Recognition," which supercedes SOP 91-1. SOP 97-2 will become effective for
transactions entered into beginning in the Company's 1999 fiscal year.
Retroactive application of the provisions of SOP 97-2 is prohibited. The
Company does not expect SOP 97-2 to materially impact the Company's results of
operations.
3. BUSINESS RISKS AND CREDIT CONCENTRATION
The Company operates in the intensely competitive semiconductor industry,
which has been characterized by price erosion, rapid technological change,
short product life cycles, cyclical market patterns and heightened foreign and
domestic competition. Significant technological changes in the industry could
adversely affect operating results.
The Company markets and sells its technology to a narrow base of customers
and generally does not require collateral. At September 30, 1998, three
customers accounted for 26%, 16% and 10% of accounts receivable. At September
30, 1997, three customers accounted for 53%, 28% and 11% of accounts
receivable.
As of September 30, 1998 and 1997, 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):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1998 1997
------- -------
<S> <C> <C>
Corporate notes and bonds................................... $39,402 $31,412
United States government debt securities.................... 16,989 14,801
Foreign debt securities..................................... 4,879 --
Certificates of deposit and commercial paper................ 1,000 4,971
------- -------
$62,270 $51,184
======= =======
</TABLE>
33
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MARKETABLE SECURITIES (CONTINUED)
All marketable securities classified as current have scheduled maturities of
less than one year. At September 30, 1998 and 1997, the cost of marketable
securities represents the fair value of the securities, and there are no
unrealized holding gains or losses.
5. PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1998 1997
------ ------
<S> <C> <C>
Computer equipment........................................... $6,762 $5,617
Computer software............................................ 4,895 4,211
Furniture and fixtures....................................... 1,170 1,062
Leasehold improvements....................................... 429 371
------ ------
13,256 11,261
Less accumulated depreciation and amortization............... (9,267) (6,923)
------ ------
$3,989 $4,338
====== ======
</TABLE>
Depreciation and amortization expense was approximately $ 2,550,000,
$1,857,000 and $1,148,000 in the years ended September 30, 1998, 1997 and
1996.
Property and equipment under capital leases included above is comprised of
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1998 1997
------ -------
<S> <C> <C>
Computer equipment......................................... $ 296 $ 873
Furniture and fixtures..................................... 248 344
------ -------
544 1,217
Less accumulated amortization.............................. (495) (895)
------ -------
$ 49 $ 322
====== =======
</TABLE>
6. CAPITAL LEASE OBLIGATIONS
The Company has leased equipment under capital lease obligations maturing
through fiscal year 1999. The lease agreements require the Company to maintain
liability and property insurance.
At September 30, 1998, future minimum annual payments due under the capital
lease obligations are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR:
------------
<S> <C>
1999................................................................... $137
Less amount representing interest...................................... (7)
----
Total minimum payments due in one year................................. $130
====
</TABLE>
34
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS AND COMMITMENTS TO THE COMPANY'S FOUNDERS
The Company leases its office facilities under operating lease agreements
that expire through February 2005. Upon expiration of the leases, the Company
has an option to renew for one five-year term at the then fair market rate.
The Company is responsible for taxes, insurance and utilities related to the
leased facilities. As of September 30, 1998, aggregate future minimum payments
under the leases are (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR:
------------
<S> <C>
1999................................................................. $1,014
2000................................................................. 1,034
2001................................................................. 804
2002................................................................. 736
2003................................................................. 758
Thereafter........................................................... 1,095
------
Total minimum lease payments......................................... $5,441
======
</TABLE>
Rent expense was approximately $1,309,000, $987,000 and $736,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
Rambus Partners
In September 1992, the Company entered into agreements to pay certain cash
amounts to its founders for certain patent rights and technology. The total
amounts paid to the founders under these agreements were approximately
$244,000 in each of the fiscal years 1997 and 1996 and no amounts in fiscal
1998. The associated deferred amounts to the founders totaling $10,000 and
$233,000 at September 30, 1998 and 1997, respectively, are classified in other
current assets except for $10,000 of the September 30, 1997 balance which is
classified in other assets.
8. 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 May 1997, all of the then outstanding
preferred shares were automatically converted into common stock concurrent
with the closing of the initial public offering.
As of September 30, 1998 and 1997, the total shares held by employees that
were subject to repurchase was 390,509 and 708,243, respectively.
Stock Option Plans
In March 1990, the Company adopted the 1990 Stock Plan under which 2,657,143
shares of common stock were reserved for issuance. Incentive stock options may
be granted with exercise prices of no less than fair market value, and
nonqualified stock options may be granted with exercise prices of no less than
85% of the fair market value of the common stock on the grant date, as
determined by the Board of Directors. 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.
35
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
In May 1997, the 1990 Stock Plan was terminated and the 1997 Stock Plan was
adopted. The 1997 Stock Plan authorizes the issuance of incentive stock
options and nonstatutory stock options to employees and nonstatutory stock
options to directors, employees or paid consultants of the Company. The
Company has reserved 1,000,000 shares of common stock for issuance under the
plan. The plan expires ten years after adoption, and the Board of Directors or
a committee designated by the Board of Directors has the authority to
determine to whom options will be granted, the number of shares, the vesting
period and the exercise price (which generally cannot be less than 100% of the
fair market value at the date of grant for incentive stock options). The
options are exercisable at times and in increments as specified by the Board
of Directors, and expire not more than ten years from date of grant.
A summary of activity under all stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
OPTIONS NUMBER WEIGHTED
AVAILABLE OF AVERAGE EXERCISE
FOR GRANT SHARES PRICE PER SHARE
---------- ---------- ----------------
<S> <C> <C> <C>
Outstanding at September 30, 1995..... 342,214 3,026,355 $ 0.68
Shares reserved....................... 1,000,000 -- --
Options granted....................... (347,500) 347,500 $ 3.84
Options exercised..................... -- (197,667) $ 1.08
Options canceled...................... 70,738 (70,738) $ 1.12
---------- ----------
Outstanding at September 30, 1996..... 1,065,452 3,105,450 $ 1.00
Shares reserved....................... 1,000,000 -- --
Options granted....................... (1,411,350) 1,411,350 $14.37
Options exercised..................... -- (2,092,428) $ 1.22
Options canceled...................... 20,000 (20,000) $ 8.00
---------- ----------
Outstanding at September 30, 1997..... 674,102 2,404,372 $ 8.55
Shares reserved....................... 440,000 -- --
Shares repurchased.................... 2,837 -- --
Options terminated under 1990 Plan.... (182,425) -- --
Options granted....................... (1,125,900) 1,125,900 $47.98
Options exercised..................... -- (435,202) $ 2.81
Options canceled...................... 333,586 (333,586) $45.72
---------- ----------
Outstanding at September 30, 1998..... 142,200 2,761,484 $21.10
========== ==========
</TABLE>
The following table summarizes information about outstanding and exercisable
options as of September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.25 -- $ 1.00 579,868 6.21 $ 0.83 579,868 $ 0.83
$ 3.00 -- $ 5.00 578,265 7.70 4.31 578,265 4.31
$ 7.00 -- $12.00 557,051 8.53 9.61 320,051 7.85
$36.38 -- $49.00 657,100 9.68 45.21 5,312 43.79
$49.88 -- $66.13 389,200 9.36 52.14 3,535 55.55
--------- ---------
2,761,484 8.26 $21.12 1,487,031 $ 3.98
========= =========
</TABLE>
36
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
As of September 30, 1998, a total of 2,908,684 shares of common stock were
reserved for issuance under all stock option plans. As of September 30, 1998,
options for the purchase of 476,266 shares were exercisable without being
subject to repurchase by the Company. As of September 30, 1997 and September
30, 1996, 1,964,372 and 1,385,519 common stock options were exercisable,
respectively.
Employee Stock Purchase Plan
In May 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 400,000 shares of common stock for issuance
under the Purchase Plan. The Purchase Plan authorizes the granting of stock
purchase rights to eligible employees during two-year offering periods with
exercise dates approximately every six months. The first offering period
commenced in May 1997 and will end on the last trading day in the period
ending April 30, 1999. Shares are purchased through employee payroll
deductions at purchase prices equal to 85% of the lesser of the fair market
value of the Company's common stock at either the first day of each offering
period or the date of purchase. For the year ended September 30, 1998, the
Company issued 183,021 shares under the Purchase Plan at an average price of
$10.27 per share.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its stock plans. Accordingly, no compensation expense has been recognized for
its stock-based compensation plans. If the Company had recognized compensation
expense based upon the fair value of stock option awards, including shares
issued under the Purchase Plan (collectively called "options"), at the grant
date consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," the Company's net income (loss) and net income (loss) per share
would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Net income (loss) as reported.......................... $6,788 $1,981 $(4,415)
Net income (loss) pro forma............................ $5,299 $1,386 $(4,509)
Net income (loss) per share as reported................ $ 0.30 $ 0.10 $ (0.78)
Net income (loss) per share pro forma.................. $ 0.23 $ 0.07 $ (0.79)
Net income (loss) per share assuming dilution as
reported.............................................. $ 0.28 $ 0.09 $ (0.78)
Net income (loss) per share assuming dilution pro
forma................................................. $ 0.22 $ 0.06 $ (0.79)
</TABLE>
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:
<TABLE>
<CAPTION>
STOCK
STOCK OPTION PLANS PURCHASE PLAN
----------------------------- -------------
1998 1997 1996 1998
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Expected stock price volatility.... 82% 71% 71% 82%
Risk-free interest rate............ 5.1% 6.2% 5.9% 5.2%
Expected life of options........... 4.4 years 4.5 years 4.5 years 0.5 years
</TABLE>
37
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted-average fair value of stock options granted during the years
ended September 30, 1998, 1997 and 1996 is $31.28, $8.79 and $2.12,
respectively. The weighted-average fair value of purchase rights granted under
the Purchase Plan during the year ended September 30, 1998 and 1997 is $4.65
and $4.53, respectively. Fair value is calculated using the Black-Scholes
option valuation model.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options.
The effects of applying SFAS 123 on the pro forma disclosures for the years
ending September 30, 1998, 1997 and 1996 are not likely to be representative
of the effects on pro forma disclosures in future years. 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 1,000,000 shares of common stock of the Company at a
purchase price of $10.00 per share. This warrant will become exercisable only
upon the achievement of certain specified performance milestones, resulting in
a charge to the statement of operations at the time of achievement of these
milestones based on the fair value of the warrant.
In June 1998, the Company issued a warrant to purchase 25,000 shares of
common stock of the Company at a price of $36.64 per share to LG Semicon. 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, has been charged to expenses in the Company's
consolidated statements of operations for the year ended September 30, 1998.
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Profit Sharing Plan (the "Plan") qualified under
Section 401(k) of the Internal Revenue Code of 1986. Each eligible employee
may elect to contribute up to 20% of the employee's annual compensation to the
Plan. The Company, at the discretion of its Board of Directors, may match
employee contributions to the Plan but has not done so for the years ended
September 30, 1998, 1997 and 1996.
38
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The provision for income taxes comprises (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1998 1997 1996
------ ------ ----
<S> <C> <C> <C>
Foreign withholding tax:
Current............................................... $1,225 $1,498 $270
Federal:
Current............................................... 3,941 4,335 --
Deferred.............................................. (2,830) (5,999) --
State:
Current............................................... 2,627 2,458 16
Deferred.............................................. (423) (977) --
------ ------ ----
$4,540 $1,315 $286
====== ====== ====
</TABLE>
The Company's effective tax rate on pretax income differs from the U.S.
federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
Expense (benefit) at U.S. federal statutory rate........ 35.0% 34.0% (34.0)%
Tax losses not currently benefited...................... -- -- 34.0
Expense at state statutory rate......................... 5.7 5.7 --
Nondeductible amortization.............................. 1.0 2.7 --
R&D credit.............................................. (6.2) (15.1) --
Change in valuation allowance........................... 12.6 12.7 --
Foreign withholding tax................................. -- -- 6.5
FSC benefit............................................. (8.4) -- --
Other................................................... 0.3 -- 0.4
---- ----- -----
40.0% 40.0% 6.9%
==== ===== =====
</TABLE>
The components of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred revenue......................................... $26,416 $21,725
Depreciation and amortization expense.................... 1,081 391
Other liabilities and reserves........................... 654 1,444
------- -------
Total deferred tax asset............................... 28,151 23,560
Deferred tax liability:
Deferred royalty cost.................................... (4) (95)
Valuation allowance........................................ (17,918) (16,489)
------- -------
Deferred tax assets, net................................. $10,229 $ 6,976
======= =======
</TABLE>
39
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES (CONTINUED)
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.
11. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Net income (loss)....................................... $6,788 $1,981 $(4,415)
====== ====== =======
Weighted average common shares outstanding.............. 22,704 19,548 5,687
Additional dilutive common stock equivalents............ 1,672 1,672 --
------ ------ -------
Diluted shares outstanding.............................. 24,376 21,510 5,687
====== ====== =======
Net income (loss) per share--basic...................... $ 0.30 $ 0.10 $ (0.78)
====== ====== =======
Net income (loss) per share--diluted.................... $ 0.28 $ 0.09 $ (0.78)
====== ====== =======
</TABLE>
12. RELATED PARTY TRANSACTIONS
Chromatic Research Inc. In February 1994, the Company licensed its interface
technology to Chromatic Research, Inc. ("Chromatic"), an entity in which the
Company holds a minority interest and has members of the board of directors in
common. Under the terms of the license, Rambus received 626,053 shares of
Chromatic Series B Preferred Stock (representing 5% of the then outstanding
shares of Chromatic) and continuing royalties. The initial valuation of the
Chromatic stock, approximately $626,000, has been fully written down by the
Company. Revenue recognized as license fees under this agreement was $119,000
in each of the years ended September 30, 1998, 1997 and 1996. As of September
30, 1998 and 1997, the remaining balance of license fees of approximately
$81,000 and $200,000, respectively, is included in deferred revenue.
In December 1997, the Company made a cash investment in Chromatic of
$1,000,000 and received 142,857 shares of Series I Preferred Stock.
13. BUSINESS SEGMENTS, EXPORTS AND MAJOR CUSTOMERS
The Company operates in a single industry segment.
One customer accounted for 22% of revenues in the year ended September 30,
1998. Two customers accounted for 29% and 10% of revenues in the year ended
September 30, 1997. Six customers accounted for 14%, 15%, 11%, 11%, 13% and
12% of revenues in the year ended September 30, 1996.
40
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. BUSINESS SEGMENTS, EXPORTS AND MAJOR CUSTOMERS (CONTINUED)
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):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Far East................................................ $25,837 $20,638 $ 9,692
North America........................................... 10,218 5,076 1,578
Europe.................................................. 1,809 301 --
------- ------- -------
$37,864 $26,015 $11,270
======= ======= =======
</TABLE>
41
<PAGE>
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED SUPPLEMENTARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEARS BY QUARTER
-------------------------------------------------------
1998 1997
--------------------------- ---------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract revenues..... $7,394 $7,535 $7,122 $6,676 $6,344 $5,375 $4,401 $4,066
Royalties............. 2,269 1,625 2,529 2,714 1,472 1,399 1,533 1,425
------ ------ ------ ------ ------ ------ ------ ------
Total revenues...... 9,663 9,160 9,651 9,390 7,816 6,774 5,934 5,491
------ ------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of contract
revenues............. 2,549 2,490 2,308 1,641 1,601 1,494 1,359 1,037
Research and
development.......... 2,497 2,183 2,163 2,806 2,935 2,512 2,105 2,263
Marketing, general and
administrative....... 2,802 2,687 2,948 2,823 2,347 2,263 2,057 2,088
------ ------ ------ ------ ------ ------ ------ ------
Total costs and
expenses........... 7,848 7,360 7,419 7,270 6,883 6,269 5,521 5,388
Operating income........ 1,815 1,800 2,232 2,120 933 505 413 103
Interest and other
income, net............ 1,117 1,018 755 471 843 374 80 45
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 2,932 2,818 2,987 2,591 1,776 879 493 148
Provision for income
taxes.................. 1,186 1,123 1,195 1,036 710 352 197 56
------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $1,746 $1,695 $1,792 $1,555 $1,066 $ 527 $ 296 $ 92
====== ====== ====== ====== ====== ====== ====== ======
Net income per share--
diluted................ $ 0.07 $ 0.07 $ 0.07 $ 0.06 $ 0.04 $ 0.02 $ 0.01 $ 0.01
====== ====== ====== ====== ====== ====== ====== ======
Shares used in per share
calculations........... 24,536 24,360 24,316 24,310 24,274 22,403 20,196 19,971
Stock prices:
High.................. $66.25 $61.50 $54.81 $61.25 $86.75 $53.00 N/A N/A
Low................... $47.75 $35.75 $38.69 $40.06 $44.25 $22.50 N/A N/A
</TABLE>
42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Rambus Inc. and Subsidiary
Our audits of the consolidated financial statements referred to in our
report dated October 14, 1998 which appears in this Annual Report on Form 10-K
of Rambus Inc. and Subsidiary also included an audit of the Financial
Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion,
this Financial Statement Schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 14, 1998
43
<PAGE>
RAMBUS INC. AND SUBSIDIARY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
VALUATION ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
FOR THE YEAR ENDED: PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------- ------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
September 30, 1996...... $ 8 -- -- -- $ 8
September 30, 1997...... $ 8 $ 2 -- -- $10
September 30, 1998...... $10 -- -- -- $10
VALUATION ALLOWANCE FOR DEFERRED TAX ASSET
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
FOR THE YEAR ENDED: PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------- ------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
September 30, 1996...... $14,426 $1,645 -- -- $16,071
September 30, 1997...... $16,071 $ 418 -- -- $16,489
September 30, 1998...... $16,489 $1,429 -- -- $17,918
</TABLE>
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RAMBUS INC.
Date: December 8, 1998 /s/ Gary Harmon
By:
------------------------------------
Gary Harmon,
Vice President, Finance and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Geoff Tate President, Chief Executive December 8, 1998
____________________________________ Officer
Geoff Tate and Director (Principal Executive
Officer)
/s/ Gary Harmon Vice President, Finance and Chief December 8, 1998
____________________________________ Financial Officer (Principal
Gary Harmon Financial and Accounting Officer)
/s/ William Davidow Chairman of the Board of December 8, 1998
____________________________________ Directors
William Davidow
/s/ Bruce Dunlevie Director December 8, 1998
____________________________________
Bruce Dunlevie
/s/ P. Michael Farmwald Director December 8, 1998
____________________________________
P. Michael Farmwald
/s/ Charles Geschke Director December 8, 1998
____________________________________
Charles Geschke
/s/ Mark Horowitz Director December 8, 1998
____________________________________
Mark Horowitz
</TABLE>
45
<PAGE>
EXHIBIT 10.4.1
AMENDMENT NO. 1 TO
SEMICONDUCTOR TECHNOLOGY LICENSE AGREEMENT
This Amendment No. 1 (the "Amendment") to the parties' Semiconductor
Technology License Agreement is entered into as of the date last entered below
by and between Rambus Inc., a Delaware corporation with principal offices at
2465 Latham Street, Mountain View, California 94040 ("Rambus") and Intel
Corporation, a Delaware corporation with a place of business at 2200 Mission
College Boulevard, Santa Clara, California 95052 ("Intel").
WHEREAS, on November 15, 1996 the parties entered into a Semiconductor
Technology License Agreement (the "License Agreement"); and
WHEREAS, the parties desire to amend the License Agreement to include
increased commitments from Intel and modification of the termination rights of
both parties;
NOW, THEREFORE, the parties agree that the License Agreement is amended to
include the following:
1. Capitalized terms used but not defined herein shall have the meaning
specified therefor in the License Agreement.
2. A new Section 4.9 is added to the License Agreement as follows:
"4.9 Additional Intel Obligations.
----------------------------
(a) Intel will use its continuing best efforts in marketing, public
relations, and engineering to make the Rambus-D DRAM the primary
DRAM for PC main memory applications through December 31, 2002;
and
(b) Intel will communicate to the top (10) DRAM manufacturers,
Intel's intention to support the Rambus-D Interface Technology
in its integrated circuits for low end workstation, performance
desktop, and basic PC platforms."
3. A new Section 9.3(c)(i)-(iii) is added to the License Agreement as follows:
"(i) In the event that Rambus terminates this Agreement after
December 31, 2002 pursuant to Section 9.2(b)(iii), and
only if prior to January 1, 2003 Intel has Sold more than
ten million (10,000,000) units of Rambus Logic Chips
which directly control PC main memory, then, subject to
Section 9.3(c)(ii) below, Intel shall retain a Residuals
Patent License. Any integrated circuit where each RD-AC
is not primarily intended to communicate with Rambus
DRAMs is not considered an integrated circuit that
controls main memory for purposes of this Section
9.3(c)(i).
<PAGE>
(ii) (A) If Intel fails to perform its obligations pursuant
to Section 4.9 above, then Rambus may notify Intel
(the "Notice") not later than December 31, 2002 of
such failure and upon such Notice, Intel's rights
pursuant to Section 9.3(c)(i) shall terminate. Upon
such Notice, Rambus shall notify and provide Intel,
via the disclosure process noted hereafter, a
confidential copy of all Rambus patent applications
filed and unissued as of such Notice date, within
ten (10) business days of such Notice; this shall
be limited to claims, of Rambus patents, which
pertain to Intel Residuals. The disclosure shall be
made to an agreed third party and the use of the
disclosure shall only be to facilitate Intel's
avoidance of infringement of patents issuing on
these applications.
(B) In the event of termination of Intel's rights
pursuant to Section 9.3(c)(ii)(A) and upon later
termination of this Agreement by Rambus pursuant to
Section 9.2(b)(iii), Intel shall retain a Residuals
Patent License for Other Logic Chips (as defined
in Section 4 of Amendment No. 1 to this
Agreement) which were taped out as of the date of
the Notice, provided that this license shall be
limited to those Rambus patents, within the
Rambus Intellectual Property Rights and the
Additional Rambus Rights, in existence as of the
date of such Notice. In such event, Rambus
covenants not to sue Intel under any patent
issuing from any patent application not disclosed
to Intel as required under Section 9.3(c)(ii)(A)
above.
(iii) For the purposes of this section, "Residuals Patent
License" means a license, under Rambus patents within the
Rambus Intellectual Property Rights and the Additional
Rambus Rights, to use "Intel Residuals" to design, make,
have made (subject to Section 2.1 (b)), use, import,
offer to Sell, and Sell Other Logic Chips (as defined in
Section 4 of Amendment No. I to this Agreement), alone or
incorporated into modules, boards, and systems, provided,
however, that no license is granted pursuant to this
section with respect to any intellectual property rights
of Rambus licensees which are licensed to Rambus in
connection with the licensee's Rambus interface
technology license agreement with Rambus. In the event of
a dispute regarding the scope of Intel's rights pursuant
to any Residuals Patent License, Intel shall have the
burden of proving that the disputed item is an "Intel
Residual". For purposes of this section, the term "Intel
Residuals" means any information that is retained in the
unaided memories of Intel's employees as a
-2-
<PAGE>
result of access to Rambus Confidential Information
pursuant to the terms of this Agreement. An employee's
memory is unaided if the employee has not intentionally
memorized the Confidential Information for the purpose of
retaining and subsequently using or disclosing it."
4. For purposes only of Sections 9.3(c) (ii) and (iii) newly added to the
License Agreement under this Amendment, "Other Logic Chip" is further
defined with respect to Section 1.14 of the License Agreement not to
include, inter alia, any integrated circuit that either (A) includes a
memory interface, other than a Cache Memory Interface, that infringes any
Rambus patent or other Rambus intellectual property right; (B) includes
substantial portions of the RD-AC; or (C) can communicate with any
Compatible integrated circuit through such RD-AC.
5. Except for the termination of Intel's rights pursuant to Section 9.3(c)(i)
above, noted in Section 9.3(c)(ii) above, Rambus hereby waives any other
remedies it may have with respect to Intel's failure to perform Intel's
obligation pursuant to Section 4.9 above. This shall not, however, affect
any other rights Rambus may have for breach by Intel of any provision of
the License Agreement other than Section 4.9 thereof, notwithstanding that
such breach may also constitute a breach of said Section 4.9.
6. Except as set forth herein, the License Agreement shall remain unmodified
and in full force and effect in accordance with its terms.
RAMBUS INC. INTEL CORPORATION
By: /s/ Geoff Tate By: /s/ Patrick P. Gelsinger
------------------------------ ---------------------------------
Print Name: Geoff Tate Print Name: Patrick P. Gelsinger
---------------------- -------------------------
Title: President Title: V.P., General Manager
--------------------------- ------------------------------
Date: 7/7/98 Date: 7/10/98
---------------------------- -------------------------------
-3-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Rambus Inc. on Form S-8 (File No.'s 333-67457, 333-38855 and 333-28597) of
our reports dated October 14, 1998, on our audits of the consolidated
financial statements and financial statement schedule of Rambus Inc. and
Subsidiary as of September 30, 1998 and 1997 and for the years ended September
30, 1998, 1997, and 1996, which reports are included in this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 25,798
<SECURITIES> 53,913
<RECEIVABLES> 1,923
<ALLOWANCES> (10)
<INVENTORY> 0
<CURRENT-ASSETS> 91,793
<PP&E> 13,256
<DEPRECIATION> (9,267)
<TOTAL-ASSETS> 110,987
<CURRENT-LIABILITIES> 32,175
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 41,769
<TOTAL-LIABILITY-AND-EQUITY> 110,987
<SALES> 37,864
<TOTAL-REVENUES> 37,864
<CGS> 8,988
<TOTAL-COSTS> 8,988
<OTHER-EXPENSES> 20,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> 11,328
<INCOME-TAX> 4,540
<INCOME-CONTINUING> 6,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,788
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.28
</TABLE>
