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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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________
Commission File Number: 000-22339
RAMBUS INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Delaware 94-3112828
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
- --------------------------------------------------------------------------------
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 23,548,606 as of June 30, 1999.
<PAGE>
RAMBUS INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
--------------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of June 30, 1999 and September 30, 1998................................. 1
Consolidated Condensed Statements of Operations
for the Three and Nine Months ended June 30, 1999 and June 30, 1998........ 2
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended June 30, 1999 and June 30, 1998.................. 3
Notes to Unaudited Consolidated Condensed Financial Statements............. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 7
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
</TABLE>
<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>
June 30, September 30,
----------------- ----------------
1999 1998
----------------- ----------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 9,861 $ 25,798
Marketable securities.............................................. 73,402 53,913
Accounts receivable................................................ 1,875 1,913
Prepaid and deferred taxes......................................... 5,966 7,829
Prepaids and other current assets.................................. 2,324 2,340
-------- --------
Total current assets............................................ 93,428 91,793
Property and equipment, net.......................................... 4,535 3,989
Marketable securities, less current portion.......................... 10,230 8,357
Investments.......................................................... 200 1,251
Other assets......................................................... 5,068 5,597
-------- --------
Total assets.................................................... $113,461 $110,987
======== ========
LIABILITIES
Current liabilities:
Accounts and taxes payable, accrued payroll and other liabilities $ 2,902 $ 3,428
Current portion of:
Capital lease obligations........................................ -- 130
Deferred revenue................................................. 25,621 28,617
-------- --------
Total current liabilities....................................... 28,523 32,175
Deferred revenue, less current portion............................... 30,358 37,020
-------- --------
Total liabilities............................................... 58,881 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: 23,548,606 shares at June 30,1999
and 22,925,885 shares at September 30, 1998...................... 23 23
Additional paid-in capital........................................... 74,251 67,617
Accumulated deficit.................................................. (19,658) (25,723)
Accumulated other comprehensive loss, net............................ (36) (125)
-------- --------
Total stockholders' equity...................................... 54,580 41,792
-------- --------
Total liabilities and stockholders' equity................... $113,461 $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 Nine Months Ended
---------------------------- ----------------------------
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues............................ $ 8,830 $ 7,535 $24,723 $21,333
Royalties.................................... 1,802 1,625 6,342 6,868
------- ------- ------- -------
Total revenues............................ 10,632 9,160 31,065 28,201
Costs and expenses:
Cost of contract revenues.................... 3,944 2,490 8,531 6,439
Research and development..................... 1,111 2,183 6,698 7,152
Marketing, general and administrative........ 3,520 2,687 9,783 8,458
------- ------- ------- -------
Total costs and expenses.................. 8,575 7,360 25,012 22,049
------- ------- ------- -------
Operating income.......................... 2,057 1,800 6,053 6,152
Other income, net.............................. 900 1,018 3,569 2,244
------- ------- ------- -------
Income before income taxes................ 2,957 2,818 9,622 8,396
Provision for income taxes..................... 956 1,123 3,557 3,354
------- ------- ------- -------
Net income................................ $ 2,001 $ 1,695 $ 6,065 $ 5,042
======= ======= ======= =======
Net income per share........................... $0.09 $0.07 $0.26 $0.22
======= ======= ======= =======
Net income per share - assuming dilution....... $0.08 $0.07 $0.24 $0.21
======= ======= ======= =======
Number of shares used in per share calculations:
Basic........................................ 23,478 22,797 23,240 22,639
Assuming dilution............................ 25,038 24,360 24,969 24,329
</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>
Nine Months Ended
June 30,
------------------------------------
1999 1998
------------------ ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 6,065 $ 5,042
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 2,329 2,056
Deferred taxes.................................................. 2,711 (4,293)
Other........................................................... (695) 655
Change in operating assets and liabilities:
Accounts receivable.......................................... 38 (4,650)
Prepaid taxes................................................ 2,738 (332)
Prepaids and other current assets............................ 16 (769)
Other assets................................................. 91 536
Accounts and taxes payable, accrued payroll and other
liabilities................................................. (544) 235
Deferred revenue............................................. (9,658) 13,822
--------- ---------
Net cash provided by operating activities................. 3,091 12,302
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment................................. (2,733) (1,834)
Proceeds from sale of property and equipment....................... -- 6
Purchases of marketable securities................................. (992,235) (201,894)
Maturities of marketable securities................................ 970,873 197,018
Purchases of investments........................................... (1,200) (1,100)
Sales of investments............................................... 2,822 --
--------- ---------
Net cash used in investing activities..................... (22,473) (7,804)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock......................... 3,486 2,843
Principal payments on capital lease obligations.................... (130) (317)
--------- ---------
Net cash provided by financing activities................. 3,356 2,526
--------- ---------
Foreign currency translation adjustment.............................. 89 (104)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. (15,937) 6,920
Cash and cash equivalents at beginning of period..................... 25,798 20,641
--------- ---------
Cash and cash equivalents at end of period........................... $ 9,861 $ 27,561
========= =========
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ 9 $ 45
Income taxes paid.................................................. $ 337 $ 7,151
Tax benefit of stock option exercises.............................. $ 3,148 $ 3,673
</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.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." This standard
requires companies to capitalize qualifying computer software costs which are
incurred during the application development stage and amortize them over the
software's estimated useful life. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The Company is currently evaluating the
impact of SOP 98-1 on its financial statements and related disclosures.
3. Net Income Per Share
Net income 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 net income per share. Basic net
income per share is calculated using the weighted average number of common
shares outstanding during the period. Diluted net income 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 Nine Months Ended
June 30, June 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Net income............................................. $ 2,001 $ 1,695 $ 6,065 $ 5,042
======= ======= ======= =======
Weighted average common shares outstanding............. 23,478 22,797 23,240 22,639
Additional dilutive common stock equivalents........... 1,560 1,563 1,729 1,690
------- ------- ------- -------
Diluted shares outstanding............................. 25,038 24,360 24,969 24,329
======= ======= ======= =======
Net income per share - basic........................... $ 0.09 $ 0.07 $ 0.26 $ 0.22
======= ======= ======= =======
Net income per share - diluted......................... $ 0.08 $ 0.07 $ 0.24 $ 0.21
======= ======= ======= =======
</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 (loss) is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net income........................................ $2,001 $1,695 $6,065 $5,042
Other comprehensive income (loss):
Foreign currency translation adjustments........ (18) (28) 89 (104)
------ ------ ------ ------
Other comprehensive income (loss)................. (18) (28) 89 (104)
------ ------ ------ ------
Total comprehensive income........................ $1,983 $1,667 $6,154 $4,938
====== ====== ====== ======
</TABLE>
Accumulated other comprehensive loss presented in the accompanying
consolidated condensed balance sheets consists of cumulative foreign currency
translation adjustments.
6
<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; delays, lack of cost-
competitiveness or other problems in the introduction or performance of Rambus
ICs or products which include Rambus ICs including, but not limited to, RDRAMs,
Intel Rambus-based chipsets and the Sony PlayStation II; 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 tables set 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:
7
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<TABLE>
<CAPTION>
Percent of Total Revenues,
Three Months Ended Percent
June 30, Change,
------------------------------------- 1999 v.
1999 1998 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
Revenues:
Contract revenues............................. 83.1% 82.3% 17.2%
Royalties..................................... 16.9 17.7 10.9
------ ------
Total revenues............................. 100.0% 100.0% 16.1
====== ======
Costs and expenses:
Cost of contract revenues..................... 37.1 27.2 58.4
Research and development...................... 10.5 23.8 (49.1)
Marketing, general and administrative......... 33.1 29.3 31.0
------ ------
Total costs and expenses................... 80.7 80.3 16.5
------ ------
Operating income................................ 19.3 19.7 14.3
Other income, net............................... 8.5 11.1 (11.6)
------ ------
Income before income taxes...................... 27.8 30.8 4.9
Provision for income taxes...................... 9.0 12.3 (14.9)
------ ------
Net income...................................... 18.8% 18.5% 18.1
====== ======
</TABLE>
<TABLE>
<CAPTION>
Percent of Total Revenues,
Nine Months Ended Percent
June 30, Change,
------------------------------------- 1999 v.
1999 1998 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
Revenues:
Contract revenues............................. 79.6% 75.6% 15.9%
Royalties..................................... 20.4 24.4 (7.7)
------ ------
Total revenues............................. 100.0% 100.0% 10.2
====== ======
Costs and expenses:
Cost of contract revenues..................... 27.4 22.8 32.5
Research and development...................... 21.6 25.4 (6.3)
Marketing, general and administrative......... 31.5 30.0 15.7
------ ------
Total costs and expenses................... 80.5 78.2 13.4
------ ------
Operating income................................ 19.5 21.8 (1.6)
Other income, net............................... 11.5 8.0 59.0
------ ------
Income before income taxes...................... 31.0 29.8 14.6
Provision for income taxes...................... 11.5 11.9 6.1
------ ------
Net income...................................... 19.5% 17.9% 20.3
====== ======
</TABLE>
Revenues. Total revenues for the three and nine months ended June 30, 1999
increased 16.1% and 10.2% to $10.6 million and $31.1 million, respectively, over
the comparable three- and nine-month periods in the previous year. Contract
revenues increased 17.2% to $8.8 million (83.1% of total revenues) and 15.9% to
$24.7 million (79.6% of total revenues) in the third quarter and first nine
months of fiscal 1999, respectively, over the comparable periods 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 each of the first three quarters of fiscal 1999 of approximately
$700,000 more than the amount of revenue which would have been recognized had
such a sale not occurred. In
8
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addition, third quarter revenues included approximately $500,000 of deferred
revenue recognized on a contract terminated by the Company due to the
nonperformance of a licensee. Other pending consolidations and product changes
in the DRAM industry may result in similar accelerated recognition of deferred
revenue in the future due to contract terminations.
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 on contracts for which the revenue recognition period had
expired. In general, the Company expects that contract revenues will decline
over time due to the expiration of the 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. However,
in the short term contract revenues may temporarily increase due to a
combination of the kind of accelerated revenue recognition mentioned above and
potential revisions to contract revenue recognition periods. Such periods are
initially estimates based on management's judgment of the time period over which
the Company has an obligation to support its licensees. As the new generation of
RDRAMs goes into production, a more accurate estimate of remaining support can
be made. To the extent the new estimated period is less than the original
estimate there will be a temporary increase in the amount of deferred revenue
recognized.
Royalties in the third quarter and first nine months of fiscal 1999
increased 10.9% to $1.8 million (16.9% of total revenues) and decreased 7.7% to
$6.3 million (20.4% of total revenues), respectively, compared to the comparable
periods of fiscal 1998. 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 video game system, 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. In addition, royalty revenue in the fiscal 1999
periods was affected adversely by a steep decline in DRAM prices from the
previous year, and by a decline in royalties from PC graphics applications due
to the abandonment of that business by licensees Cirrus Logic and 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 and the Sony PlayStation II goes into production.
However, until that time the Company's royalties are unlikely to increase since
the demand for Nintendo 64 units will likely decrease seasonally and there are
no new major sources for royalties in the interim. The markets addressed by
systems companies such as Nintendo which are 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, it is likely that
royalties will continue to vary greatly from quarter to quarter.
As of June 30, 1999, the Company had a total of 30 active licensees for
the newest generation of Rambus technology compared to 23 such licensees at June
30, 1998. Because all of the Company's revenues are derived from its relatively
small number of licensees, revenues tend to be highly
9
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concentrated. In the third quarter and first nine months of fiscal 1999, the
Company's top five licensees accounted for 41% and 44% of total revenues,
respectively. During these same periods, NEC accounted for 9% and 13% of total
revenues, respectively; TI for 11% and 11%; and Intel for 10% and 11%. 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, Korea and Taiwan have accounted for
most of the Company's revenues, and for the substantial majority of its
international revenues. In the third quarter and first nine months of fiscal
1999, international revenues comprised 54% and 58% of total revenues,
respectively. The Company expects that revenues derived from international
licensees will continue to represent a significant portion of its total revenues
in the future. All of the revenues from international licensees to date have
been denominated in United States dollars.
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 June 30, 1999, $3.6 million of such nonrefundable, prepaid royalties had
offset initial royalties, and the Company had a balance of $2.7 million
remaining to be offset against future royalties.
Substantially all of the license fees, engineering service fees and
nonrefundable, prepaid royalties are bundled together as contract fees because
the Company generally does not provide or price these components separately. The
contracts also generally include rights to upgrades and enhancements.
Accordingly, Rambus recognizes contract revenues ratably over the period during
which post-contract customer support is expected to be provided. The excess of
contract fees received over contract revenue recognized is shown on the
Company's balance sheet as "deferred revenue." As of June 30, 1999, the
Company's deferred revenue was $56.0 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 8.2% to $5.1 million
(47.6% of total revenue) and 12.1% to $15.2 million (49.0% of total revenue) in
the third quarter and first nine months of fiscal 1999, respectively, over the
comparable periods of fiscal 1998 due primarily to an increase in engineering
personnel.
Cost of Contract Revenues. As anticipated, cost of contract revenues as a
percentage of total revenues increased in the third quarter of fiscal 1999. Cost
of contract revenues was 37.1% in the third quarter of fiscal 1999 up from 27.2%
in the comparable period of fiscal 1998, and 27.4% in the first nine months of
fiscal 1999 up from 22.8% in the comparable period of fiscal 1998. The
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increase in cost of contract revenues as a percentage of total revenues for
these periods was a result of additional effort by the Company in helping its
licensees prepare for increased production volumes in anticipation of the ramp
of Rambus ICs into the PC main memory market later this calendar year. It is
likely that the relatively high percentage of cost of contract revenues will
continue until this ramp is substantially underway. The Company believes that
the general 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.
Research and Development. Research and development expenses as a
percentage of total revenues decreased to 10.5% in the third quarter of fiscal
1999 from 23.8% in the comparable period of fiscal 1998, and decreased to 21.6%
in the first nine months of fiscal 1999 from 25.4% in the first nine months of
fiscal 1998. The decrease in research and development expenses as a percentage
of total revenues for these periods was a direct result of the increased work
with licensees on the ramp of Rambus ICs into the PC main memory market
mentioned above, as the Company temporarily transferred some engineering
personnel from R&D activities to help in the ramp. Until the ramp is
substantially underway, R&D will likely continue at an unusually low level.
After such time, however, the Company expects research and development expenses
to increase 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 increased 31.0% to $3.5 million and 15.7% to $9.8
million in the third quarter and first nine months of fiscal 1999, respectively,
over the comparable periods of fiscal 1998 primarily due to additional costs
associated with applications engineering assistance to PC OEMs to help enable
the anticipated ramp of Rambus ICs into the PC main memory market later this
year. 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, consisting primarily of interest income from
the Company's short-term cash investments, decreased to $900,000 (8.5% of total
revenues) in the third quarter of fiscal 1999 from $1.0 million (11.1% of total
revenues) in the comparable period of fiscal 1998 due to lower interest rates.
In the first nine months of fiscal 1999, other income increased to $3.6 million
(11.5% of total revenues) from $2.2 million (8.0% of total revenues) in the
comparable period of fiscal 1998 primarily due to the combination of a $713,000
net gain on the sale of a security in the fiscal 1999 period and $600,000 in
reserves taken in the fiscal 1998 period to reduce long-term investments to net
realizable value.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $956,000 in the third quarter of fiscal 1999 compared to $1.1 million
in the third fiscal quarter of 1998, and $3.6 million in the first nine months
of fiscal 1999 compared to $3.4 million in the first nine months of fiscal 1998.
The provision for the fiscal 1998 periods was based on an estimated federal and
state combined rate of 40% on income before income taxes. In the third quarter
of fiscal 1999, the year-to-
11
<PAGE>
date rate was adjusted to 37% based on the Company's estimate of its effective
tax rate for the full fiscal year.
At June 30, 1999 the Company had gross 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.
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 for 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 the newest generation of Rambus technology.
These warrants, to be issued at the time the targets are met, have an exercise
price of $10 per share and a life of five years. They vest and become
exercisable on the same basis as the Intel warrant, which will result in a
charge to the statement of operations at the time of achievement of the Intel
milestones based on the fair value of the warrants. As of June 30, 1999 a total
of 30,000 of these warrants had been issued.
Liquidity and Capital Resources
The Company had cash and cash equivalents and marketable securities of
$93.5 million as of June 30, 1999 and total working capital of $64.9 million,
including a short-term component of deferred revenue of $25.6 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 $90.5 million as of June 30, 1999.
The Company's operating activities provided net cash of $3.1 million in
the first nine months of fiscal 1999 compared to $12.3 million in the first nine
months of fiscal 1998. In the fiscal 1999 period, net cash provided by operating
activities consisted mainly of net income, depreciation and amortization, and a
decrease in prepaid and deferred taxes partially offset by a reduction in
deferred revenue. The decrease in deferred revenue was due to revenues
recognized on contracts in excess of new contract billings.
Net cash used in investing activities was $22.5 million in the first nine
months of fiscal 1999 compared to $7.8 million in the first nine months of
fiscal 1998. Net cash used in investing activities in the fiscal 1999 period
consisted of net purchases of marketable securities and equipment, partially
offset by net sales of investments.
12
<PAGE>
Net cash provided by financing activities was $3.4 million in the first
nine months of fiscal 1999 compared to $2.5 million in the comparable period 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 assessed the readiness of its internal
computer systems and outside services for handling the Year 2000, and the
remediation process is underway. The Company believes that its internal computer
systems and outside services will be Year 2000 compliant and that the risk of
major disruption from these systems and services due to Year 2000 issues is
minimal. Through June 30, 1999, the Company has not incurred any significant
costs to ensure its internal computer systems and outside services 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 and outside services to have a
material impact on the Company's financial position or results of operations.
However, the Company could be negatively affected to the extent that Year 2000
problems at its licensees or their customers could affect the shipment of Rambus
ICs and the payment of royalties to the Company. Such effects on its licensees
or their customers 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 or their customers, and therefore, there
can be no assurance that the Company's licensees or their customers will be Year
2000 compliant or, in any event, that the Company will not be negatively
affected from Year 2000 issues.
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 June 30, 1999.
<TABLE>
<CAPTION>
Average Rate
Of Return at
Carrying June 30,
Value 1999
(in thousands) (annualized)
Investment portfolio:
<S> <C> <C>
Cash equivalents................................................ $ 7,139 3.5%
Corporate and municipal notes and bonds......................... 55,643 3.5%
United States government debt securities........................ 27,989 5.1%
-------
Total investment portfolio................................... $90,771
=======
</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: August 12, 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 INFORMATIN 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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 9,861
<SECURITIES> 73,402
<RECEIVABLES> 1,885
<ALLOWANCES> (10)
<INVENTORY> 0
<CURRENT-ASSETS> 93,428
<PP&E> 15,018
<DEPRECIATION> (10,483)
<TOTAL-ASSETS> 113,461
<CURRENT-LIABILITIES> 28,523
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 54,557
<TOTAL-LIABILITY-AND-EQUITY> 113,461
<SALES> 31,065
<TOTAL-REVENUES> 31,065
<CGS> 8,531
<TOTAL-COSTS> 8,531
<OTHER-EXPENSES> 16,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,622
<INCOME-TAX> 3,557
<INCOME-CONTINUING> 6,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,065
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.24
</TABLE>
