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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 000-22339
RAMBUS INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Delaware 94-3112828
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
- --------------------------------------------------------------------------------
ADDRESS
2465 Latham Street, Mountain View, CA 94040
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (650) 944-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [x] No [-]
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, was 23,108,157 as of December 31, 1998.
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RAMBUS INC.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of December 31, 1998 and September 30, 1998........... 1
Consolidated Condensed Statements of Operations
for the Three Months Ended December 31, 1998
and December 31, 1997.................................... 2
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended December 31, 1998
and December 31, 1997.................................... 3
Notes to Unaudited Consolidated Condensed Financial
Statements............................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.............................................. 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 15
Signature ......................................................... 16
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1998 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 31,900 $ 25,798
Marketable securities.............................................. 54,431 53,913
Accounts receivable................................................ 2,033 1,913
Prepaid and deferred taxes......................................... 8,212 7,829
Prepaids and other current assets.................................. 2,024 2,340
-------- --------
Total current assets............................................ 98,600 91,793
Property and equipment, net.......................................... 3,788 3,989
Marketable securities, less current portion.......................... 5,093 8,357
Investments.......................................................... 398 1,251
Other assets......................................................... 5,576 5,597
-------- --------
Total assets.................................................... $113,455 $110,987
======== ========
LIABILITIES
Current liabilities:
Accounts and taxes payable, accrued payroll and other liabilities $ 3,191 $ 3,428
Current portion of:
Capital lease obligations........................................ 76 130
Deferred revenue................................................. 27,519 28,617
-------- --------
Total current liabilities....................................... 30,786 32,175
Deferred revenue, less current portion............................... 35,845 37,020
-------- --------
Total liabilities............................................... 66,631 69,195
-------- --------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares
Issued and outstanding: no shares................................. -- --
Common stock, $.001 par value:
Authorized: 60,000,000 shares;
Issued and outstanding: 23,108,157 shares at December 31,
1998 and 22,925,885 shares at September 30, 1998.................. 23 23
Additional paid-in capital........................................... 70,446 67,617
Accumulated deficit.................................................. (23,668) (25,723)
Accumulated other comprehensive income, net.......................... 23 (125)
-------- --------
Total stockholders' equity...................................... 46,824 41,792
-------- --------
Total liabilities and stockholders' equity................... $113,455 $110,987
======== ========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
1
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RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
December 31,
------------
1998 1997
---- ----
Revenues:
<S> <C> <C>
Contract revenues.................................................. $ 7,948 $ 6,676
Royalties.......................................................... 2,626 2,714
------- -------
Total revenues.................................................. 10,574 9,390
------- -------
Costs and expenses:
Cost of contract revenues.......................................... 2,102 1,641
Research and development........................................... 3,089 2,806
Marketing, general and administrative.............................. 2,970 2,823
------- -------
Total costs and expenses........................................ 8,161 7,270
------- -------
Operating income................................................ 2,413 2,120
Other income, net.................................................... 1,012 471
------- -------
Income before income taxes...................................... 3,425 2,591
Provision for income taxes........................................... 1,370 1,036
------- -------
Net income...................................................... $ 2,055 $ 1,555
======= =======
Net income per share................................................. $ 0.09 $ 0.07
======= =======
Net income per share assuming dilution.............................. $ 0.08 $ 0.06
======= =======
Number of shares used in per share calculations:
Basic.............................................................. 23,034 22,467
======= =======
Assuming dilution.................................................. 24,874 24,310
======= =======
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
2
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RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 2,055 $ 1,555
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................................... 759 673
Deferred taxes.................................................. -- 465
Other........................................................... 11 514
Change in operating assets and liabilities:
Accounts receivable.......................................... (120) 318
Prepaid taxes................................................ 1,226 (2,624)
Prepaids and other current assets............................ 316 52
Other assets................................................. 21 81
Accounts and taxes payable, accrued payroll and other
liabilities................................................. (248) (3,442)
Deferred revenue............................................. (2,273) (4,802)
--------- ---------
Net cash provided by (used in) operating activities....... 1,747 (7,210)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment................................. (487) (672)
Proceeds from sale of property and equipment....................... -- 1
Purchases of marketable securities................................. (641,726) (151,816)
Maturities of marketable securities................................ 644,472 142,940
Purchase of investments............................................ -- (1,000)
Sale of investments................................................ 782 --
--------- ---------
Net cash provided by (used in) investing activities....... 3,041 (10,547)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock......................... 1,220 1,086
Principal payments on capital lease obligations.................... (54) (110)
--------- ---------
Net cash provided by financing activities................. 1,166 976
--------- ---------
Foreign currency translation adjustment.............................. 148 (57)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 6,102 (16,838)
Cash and cash equivalents at beginning of period..................... 25,798 20,641
--------- ---------
Cash and cash equivalents at end of period........................... $ 31,900 $ 3,803
========= =========
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ 4 $ 20
Income taxes paid.................................................. $ 147 $ 6,459
Tax benefit of stock option exercises.............................. $ 1,609 $ 2,236
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
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RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated condensed financial statements include the
accounts of the Company and its wholly owned subsidiary, Rambus K.K., located in
Tokyo, Japan. All intercompany accounts and transactions have been eliminated in
the accompanying consolidated condensed financial statements.
In the opinion of management, the consolidated condensed financial
statements include all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position and results of operations for
each interim period shown. Interim results are not necessarily indicative of
results for a full year.
The consolidated condensed financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (SEC) applicable to interim financial information. Certain
information and footnote disclosures included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted in
these interim statements pursuant to such SEC rules and regulations. The
information included in this Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto, for the year ended
September 30, 1998, included in the Company's 1998 Annual Report on Form 10-K.
2. Recent Accounting Pronouncements
In October 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130 (SFAS 130), "Reporting Comprehensive Income." The disclosures
required by this statement appear in Note 4.
In October 1998, the Company adopted Financial Accounting Standards Board
Statement No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information." 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." Because the
Company operates in one segment, the requirements of SFAS 131 have no effect on
the Company's current reporting and disclosures.
In October 1998, the Company adopted American Institute of Certified Public
Accountants (AICPA) Statement of Position No. 97-2 (SOP 97-2), "Software Revenue
Recognition," as amended by Statement of Position 98-4, "Deferral of the
Effective Date of Certain Provisions of SOP 97-2," effective January 1, 1998.
Adoption of SOP 97-2, as amended, had no material impact on the Company's
results of operations.
4
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RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
2. Recent Accounting Pronouncements (Continued)
In December 1998, AcSEC released Statement of Position No. 98-9,
Modification of SOP 97-2, "Software Revenue Recognition," with Respect to
Certain Transactions (SOP 98-9). SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence (VSOE) of
the fair values of all of the undelivered elements that are not accounted for by
means of long-term contract accounting, (2) VSOE of fair value does not exist
for one or more of the delivered elements, and (3) all revenue recognition
criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of
each delivered element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain passages of
SOP 97-2 became effective December 15, 1998. All other provisions of SOP 98-9
will be effective for transactions that are entered into in fiscal years
beginning after March 15, 1999. Retroactive application is prohibited. The
Company is evaluating the requirements of SOP 98-9 and the effects, if any, on
the Company's current revenue recognition policies.
3. Net Income Per Share
Earnings per share is computed in accordance with Financial Accounting
Standards Board Statement No. 128 (SFAS 128), "Earnings Per Share," which
requires the presentation of basic and diluted earnings per share. Basic
earnings per share is calculated using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
using the weighted average number of common shares and common stock equivalents,
if dilutive, outstanding during the period. Net income per share is calculated
as follows (in thousands, except per share data; unaudited):
<TABLE>
<CAPTION>
Three Months Ended
------------------
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Net income........................................................... $ 2,055 $ 1,555
======= =======
Weighted average common shares outstanding........................... 23,034 22,467
Additional dilutive common stock equivalents......................... 1,840 1,843
------- -------
Diluted shares outstanding........................................... 24,874 24,310
======= =======
Net income per share - basic......................................... $ 0.09 $ 0.07
======= =======
Net income per share - diluted....................................... $ 0.08 $ 0.06
======= =======
</TABLE>
5
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RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
4. Comprehensive Income
In October 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130 (SFAS 130), "Reporting Comprehensive Income." Comprehensive
income is defined as the change in equity from transactions and other events and
circumstances excluding transactions resulting from investments by owners and
distributions to owners. For the Company, the primary difference between net
income and comprehensive income results from foreign currency translation
adjustments.
Comprehensive income for the three months ended December 31, 1998 and 1997
is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Net income................................................................. $2,055 $1,555
Other comprehensive income:
Foreign currency translation adjustments................................ 148 (57)
------ ------
Other comprehensive income................................................. 148 (57)
Total comprehensive income................................................. $2,203 $1,498
====== ======
</TABLE>
The accumulated balances of other comprehensive income as of December 31,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
------------------------ ------------------------
Foreign Foreign
Currency Currency
Translation Translation
Adjustments Total Adjustments Total
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Beginning balance................................ $ (125) $ (125) $ (35) $ (35)
Current period change............................ 148 148 (57) (57)
------ ------ ------ ------
Ending balance................................... $ 23 $ 23 $ (92) $ (92)
====== ====== ====== ======
</TABLE>
5. 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, was fully written down by the
Company.
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.
6
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RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
5. Related Party Transactions (Continued)
In December 1998, in connection with the sale of Chromatic, the Company
received $782,000 in exchange for all shares of Preferred Stock. The Company
reduced the carrying value of the investment to net realizable value during
fiscal year 1998 such that no gain or loss was recorded at the date of sale.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The forward-looking statements contained in this discussion and analysis
involve risks and uncertainties which could cause future actual results to
differ materially. Such risks include 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; future dependence upon the PC main
memory market and Intel; the loss of any strategic relationships with systems
companies or licensees; announcements or introductions of new technologies or
products by the Company or the Company's competitors; delays, lack of cost-
competitiveness or other problems in the introduction or performance of
enhancements or future generations of the Company's 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, licensees' and
system companies' development and product introduction schedules and levels of
expenditure on research and development and marketing; personnel changes,
particularly those involving engineering and technical personnel; costs
associated with protecting the Company's intellectual property; changes in
Company strategies; foreign exchange rate fluctuations or other changes in the
international business climate; and general economic trends. A more detailed
discussion of risks faced by the Company is set forth in the Company's 1998
Annual Report on Form 10-K filed with the SEC.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items reflected in the Company's
consolidated condensed statements of operations and the percentage change of
such items between periods:
<TABLE>
<CAPTION>
Percent of Total Revenues,
Three Months Ended Percent
December 31, Change,
------------------------------------- 1998 v.
1998 1997 1997
-------- -------- ----------
<S> <C> <C> <C>
Revenues:
Contract revenues........................... 75.2% 71.1% 19.1%
Royalties................................... 24.8 28.9 (3.2)
------ ------
Total revenues........................... 100.0% 100.0% 12.6
====== ======
Costs and Expenses:
Cost of contract revenues................... 19.9 17.5 28.1
Research and development.................... 29.2 29.9 10.1
Marketing, general and administrative....... 28.1 30.0 5.2
------ ------
Total costs and expenses................. 77.2 77.4 12.3
------ ------
Operating income.............................. 22.8 22.6 13.8
Other income, net............................. 9.6 5.0 114.9
------ ------
Income before income taxes.................... 32.4 27.6 32.2
Provision for income taxes.................... 13.0 11.0 32.2
------ ------
Net income.................................... 19.4% 16.6% 32.2
====== ======
</TABLE>
8
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Revenues. Total revenues for the three months ended December 31, 1998
increased 12.6% to $10.6 million over the comparable three-month period in the
previous year. Contract revenues increased 19.1% to $7.9 million (75.2% of total
revenues) in the first quarter of fiscal 1999 from $6.7 million (71.1% of total
revenues) in the comparable period of fiscal 1998. The majority of the increase
in contract revenues was due to accelerated revenue recognition on the balance
of deferred revenue in the Texas Instruments ("TI") DRAM contract over the four
quarters in fiscal 1999. This acceleration, necessitated by the sale of TI's
DRAM business to Micron, resulted in contract revenue during the quarter of
approximately $700,000 more than the amount of revenue which would have been
recognized had such a sale not occurred. The balance of the increase in
contract revenues was a result of the Company entering into contracts with new
licensees and additional contracts with current licensees for new developments
and implementations, in excess of the ending of revenue recognition on contracts
for which the contract period had expired. The Company expects that contract
revenues will decline gradually in the future due to the expiration of the time
period for revenue recognition on contracts booked previously, and also due to
the Company's past success in signing licensees which reduces the potential
number of new licensees.
Royalties in the first quarter of fiscal 1999 decreased 3.2% to $2.6
million (24.8% of total revenues) from $2.7 million (28.9% of total revenues) in
the comparable period of fiscal 1998. However, royalties increased $357,000, or
15.7%, from $2.3 million in the prior quarter. The Company believes that much of
the fluctuation in its quarterly royalty revenue is due to seasonal variations
in the shipments of Rambus ICs for use in the Nintendo 64 home video game,
although it is becoming more difficult to trace royalties to a particular
application due to an increase in both the number of applications for Rambus ICs
and the number of licensees paying royalties to Rambus. The Company believes
that its Nintendo royalties peak in the December quarter, and it is likely that
royalties from this source were less in the fiscal 1999 period than in the
comparable period of fiscal 1998. In addition, royalty revenue in the quarter
was affected adversely by a steep decline in DRAM prices over the previous year,
and by below-expected sales of Rambus ICs by Cirrus Logic and licensees of
Chromatic Research.
As Rambus ICs are incorporated into additional applications, the Company
believes that royalties will become an increasing portion of revenues over the
long term. In particular, the Company anticipates that substantial additional
royalties should be generated when the first Rambus-based ICs for PC main memory
applications reach the market, expected later this year. However, until that
time the Company's royalties are likely to decline as the demand for Nintendo 64
units decreases seasonally and sales by Cirrus Logic and licensees of Chromatic
Research for PC graphics and multimedia applications fail to materialize as
originally forecast. Nintendo faces intense competitive pressure in the home
video game market, and both Cirrus Logic and Chromatic Research have recently
ended development of their current lines of Rambus-based products. The markets
addressed by systems companies using Rambus ICs are characterized by extreme
volatility, frequent new product introductions and rapidly shifting consumer
preferences, and there can be no assurance as to the unit volumes of Rambus ICs
that will be purchased in the future or the level of royalty-bearing revenues
that the Company will receive due to these applications. None of the systems
companies currently incorporating Rambus interface technology into their
products is contractually obligated to continue using Rambus ICs. Given the
concentration of royalties from a limited number of sources, however, it is
likely that royalties will continue to vary greatly from quarter to quarter.
As of December 31, 1998, the Company had a total of 31 active licensees of
which 29 were licensed for next-generation Direct Rambus technology. On a
comparable basis, the Company had
9
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20 active licensees at December 31, 1997. Because all of the Company's revenues
are derived from its relatively small number of licensees, revenues tend to be
highly concentrated. In the first quarter of fiscal 1999, the Company's top five
licensees accounted for 49% of total revenues. During this period, NEC
accounted for 17% of total revenues, TI for 11% and Intel for 10%. 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, the volumes and prices at which the licensees sell Rambus ICs to
systems companies in any given period and the royalty rates on those sales.
To date, companies based in Japan and Korea have accounted for most of the
Company's revenues, and for the substantial majority of its international
revenues. In the first quarter of fiscal 1999, international revenues comprised
64% of total revenues. The Company expects that revenues derived from
international licensees will continue to represent a significant portion of its
total revenues in the future. All of the revenues from international licensees
to date have been denominated in United States dollars.
While a significant 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 are based on sales of Rambus ICs by licensees
to system companies primarily located in the United States, Japan and, to a
lesser extent, Taiwan.
In a few cases, the Company has received nonrefundable, prepaid royalties
which offset the earliest royalty payments otherwise due from the licensee. As
of December 31, 1998, $3.6 million of such nonrefundable, prepaid royalties had
offset initial royalties, and the Company had a balance of $3.2 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 December 31, 1998, the
Company's deferred revenue was $63.4 million, substantially all of which is
scheduled to be recognized in varying amounts over the next five years.
Engineering Costs. Engineering costs, consisting of cost of contract
revenues and research and development expenses, increased 16.7% to $5.2 million
(49.1% of total revenue) in the first quarter of fiscal 1999 from $4.4 million
(47.4% of total revenue) in the comparable period of fiscal 1998 due primarily
to an increase in engineering personnel.
Cost of Contract Revenues. Cost of contract revenues as a percentage of
total revenues increased to 19.9% in the first quarter of fiscal 1999 from 17.5%
in the comparable period of fiscal 1998. The increase in cost of contract
revenues as a percentage of total revenues was a result of an increase in the
proportion of the Company's engineering costs attributable to the implementation
of its technology for licensee-specific processes, partially offset by the
effect of the Company's growth
10
<PAGE>
in revenues. The Company believes that the level of cost of contract revenues
will 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. In particular, the Company expects to incur additional
expenses, some of which will be classified as cost of contract revenues, over
the next few quarters to help enable the anticipated ramp of Rambus ICs into the
PC main memory market later this year.
Research and Development. Research and development expenses as a
percentage of total revenues decreased to 29.2% in the first quarter of fiscal
1999 from 29.9% in the comparable period of fiscal 1998. The decrease in
research and development expenses as a percentage of total revenues was a result
of the Company's growth in revenues and a decrease in the proportion of
engineering costs attributable to work on the Direct Rambus interface design.
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
research and development headcount in any given period, as well as the rate of
change in the Company's total revenues.
Marketing, General and Administrative. Marketing, general and
administrative expenses increased 5.2% to $3.0 million in the first quarter of
fiscal 1999 primarily due to additional administrative and facility costs. As a
percentage of total revenue, marketing, general and administrative expenses
decreased to 28.1% in the first quarter of fiscal 1999 from 30.0% in the
comparable period in fiscal 1998 due to the increased revenue base. The Company
expects to incur additional expenses, some of which will be associated with
applications engineering assistance to PC OEMs and thus will be classified as
marketing expense, over the next few quarters to help enable the anticipated
ramp of Rambus ICs into the PC main memory market later this year. 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, applications engineering and other sales and
marketing activities undertaken and the change in sales, marketing and
administrative headcount in any given period, as well as the rate of change in
the Company's total revenues.
Other Income. Other income consists primarily of interest income from the
Company's short-term cash investments, offset by interest expense on equipment
leases. Other income increased to $1.0 million (9.6% of total revenues) in the
first quarter of fiscal 1999 from $471,000 (5.0% of total revenues) in the
comparable period of fiscal 1998 primarily due to a $500,000 reserve taken in
the fiscal 1998 period to reduce long-term investments to net realizable value
as well as higher interest income on a higher average invested balance of cash
equivalents and marketable securities in the fiscal 1999 period.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $1.4 million in the first quarter of fiscal 1999 compared to a
provision of $1.0 million recorded in the first quarter of fiscal 1998. The
provision for both years was based on an estimated federal and state combined
rate of 40% on income before income taxes.
At December 31, 1998 the Company had gross deferred tax assets of
approximately $27 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
11
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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.
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
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 DRAM partners upon the
achievement of certain product qualification and volume production targets
associated with the introduction of Direct Rambus technology. The warrants, to
be issued at the time the targets are met, will have an exercise price of $10
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
The Company had cash and cash equivalents and marketable securities of
$91.4 million as of December 31, 1998 and total working capital of $67.8
million, including a short-term component of deferred revenue of $27.5 million.
Deferred revenue represents the excess of cash received and due from licensees
over revenue recognized on license contracts, and the short-term component
represents the amount of this deferred revenue which will be recognized over the
next twelve months. Without the short-term component of deferred revenue,
working capital would have been $95.3 million as of December 31, 1998.
The Company's operating activities provided net cash of $1.7 million in the
first three months of fiscal 1999 compared to a net cash use of $7.2 million in
the first three months of fiscal 1998. In the first three months of fiscal 1999,
net cash provided by operating activities consisted mainly of net income,
depreciation and amortization, and a decrease in prepaid items partially offset
by decreases in accrued liabilities and deferred revenue. The decrease in
prepaid items was primarily associated with expensing previously-paid insurance
premiums and software maintenance, tax benefits due to employee option activity,
and adjustments to the Company's tax accounts at December 31, 1998. The decrease
in accrued liabilities was primarily the result of a reduction in payroll
withholding due to the semi-annual purchase of Company stock under the employee
stock purchase plan, and the decrease in deferred revenue was due to revenues
recognized on contracts in excess of new contract billings.
Net cash provided by investing activities was $3.0 million in the first
three months of fiscal 1999 compared to usage of $10.5 million in the first
three months of fiscal 1998. Net cash provided by investing activities in the
fiscal 1999 period consisted of net maturities of marketable securities and sale
of investments, net of equipment purchases.
12
<PAGE>
Net cash provided by financing activities was $1.2 million in the first
three months of fiscal 1999 compared to $1.0 million in the first three months
of fiscal 1998. Net cash provided by financing activities in the fiscal 1999
period was primarily due to sales of the Company's common stock pursuant to
employee stock 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 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 December
31, 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.
13
<PAGE>
Item 3. 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.
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 December 31, 1998.
<TABLE>
<CAPTION>
Average Rate
Of Return at
Carrying December 31,
Value 1998
(in thousands) (annualized)
Investment portfolio:
<S> <C> <C>
Cash equivalents.................................................. $26,834 4.7%
Corporate and municipal notes and bonds........................... 39,688 4.6%
United States government debt securities.......................... 16,995 5.6%
Foreign debt securities........................................... 1,841 5.6%
Certificates of deposit........................................... 1,000 5.8%
-------
Total investment portfolio..................................... $86,358
=======
</TABLE>
14
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAMBUS INC.
Date: January 29, 1999 By: /s/ Gary Harmon
------------------------------ -----------------------------------
Gary Harmon,
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
16
<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,900
<SECURITIES> 54,431
<RECEIVABLES> 2,043
<ALLOWANCES> (10)
<INVENTORY> 0
<CURRENT-ASSETS> 98,600
<PP&E> 13,743
<DEPRECIATION> (9,955)
<TOTAL-ASSETS> 113,455
<CURRENT-LIABILITIES> 30,786
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 46,801
<TOTAL-LIABILITY-AND-EQUITY> 113,455
<SALES> 10,574
<TOTAL-REVENUES> 10,574
<CGS> 2,102
<TOTAL-COSTS> 2,102
<OTHER-EXPENSES> 6,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 3,425
<INCOME-TAX> 1,370
<INCOME-CONTINUING> 2,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,055
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
