<PAGE>
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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________
Commission File Number: 000-22339
RAMBUS INC.
(Exact name of registrant as specified in its charter)
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Delaware 94-3112828
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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 96,631,992 as of June 30, 2000.
<PAGE>
RAMBUS INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
as of June 30, 2000 and September 30, 1999................................. 1
Consolidated Condensed Statements of Operations
for the Three and Nine Months Ended June 30, 2000 and June 30, 1999........ 2
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended June 30, 2000 and June 30, 1999.................. 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................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........................ 16
Item 6. Exhibits and Reports on Form 8-K........................................... 16
Signature.............................................................................. 17
</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,
-------- -------------
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 28,261 $ 14,982
Marketable securities.............................................. 62,079 72,158
Accounts receivable................................................ 5,105 1,499
Prepaid and deferred taxes......................................... 3,197 7,579
Prepaids and other current assets.................................. 2,576 2,260
--------- --------
Total current assets............................................ 101,218 98,478
Property and equipment, net.......................................... 4,433 4,232
Marketable securities, less current portion.......................... 4,049 5,658
Restricted cash...................................................... 2,500 2,500
Deferred taxes, long-term............................................ 1,063 4,123
Other assets......................................................... 3,670 782
--------- --------
Total assets.................................................... $ 116,933 $115,773
========= ========
LIABILITIES
Current liabilities:
Accounts and taxes payable, accrued payroll and other liabilities.. $ 5,787 $ 4,425
Deferred revenue................................................... 22,395 32,279
--------- --------
Total current liabilities....................................... 28,182 36,704
Deferred revenue, less current portion............................... 8,951 17,505
--------- --------
Total liabilities............................................... 37,133 54,209
--------- --------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares
Issued and outstanding: no shares................................. -- --
Common stock, $.001 par value:
Authorized: 500,000,000 shares;
Issued and outstanding: 96,631,992 shares at June 30, 2000
and 94,810,672 shares at September 30, 1999....................... 97 24
Additional paid-in capital........................................... 257,104 78,574
Deferred stock-based compensation.................................... (599) --
Accumulated deficit.................................................. (176,757) (17,005)
Accumulated other comprehensive loss................................. (45) (29)
--------- --------
Total stockholders' equity...................................... 79,800 61,564
--------- --------
Total liabilities and stockholders' equity................... $ 116,933 $115,773
========= ========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
1
<PAGE>
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,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract revenues................................. $ 11,186 $ 8,830 $ 32,696 $ 24,723
Royalties......................................... 6,574 1,802 12,707 6,342
-------- -------- --------- --------
Total revenues................................. 17,760 10,632 45,403 31,065
-------- -------- --------- --------
Costs and expenses:
Cost of contract revenues......................... 2,908 3,944 9,457 8,531
Research and development.......................... 2,828 1,111 7,952 6,698
Marketing, general and administrative............. 6,205 3,520 14,668 9,783
Employee stock-related compensation expense....... -- -- 171,085 --
-------- -------- --------- --------
Total costs and expenses....................... 11,941 8,575 203,162 25,012
-------- -------- --------- --------
Operating income (loss)........................ 5,819 2,057 (157,759) 6,053
Other income, net................................... 1,296 900 3,460 3,569
-------- -------- --------- --------
Income (loss) before income taxes.............. 7,115 2,957 (154,299) 9,622
Provision for income taxes.......................... 2,491 956 5,453 3,557
-------- -------- --------- --------
Net income (loss).............................. $ 4,624 $ 2,001 $(159,752) $ 6,065
======== ======== ========= ========
Net income (loss) per share - basic................. $ 0.05 $ 0.02 $ (1.66) $ 0.07
======== ======== ========= ========
Net income (loss) per share - diluted............... $ 0.04 $ 0.02 $ (1.66) $ 0.06
======== ======== ========= ========
Number of shares used in per share calculations:
Basic............................................. 97,350 93,912 95,978 92,960
Diluted........................................... 108,859 100,152 95,978 99,876
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
2
<PAGE>
RAMBUS INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------
2000 1999
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $(159,752) $ 6,065
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash employee stock-related compensation.................... 169,878 --
Depreciation and amortization................................... 2,110 2,329
Amortization of deferred compensation........................... 403 --
Amortization of goodwill and other.............................. 178 (695)
Change in operating assets and liabilities:
Accounts receivable.......................................... (3,606) 38
Prepaid and deferred taxes................................... 7,442 5,449
Prepaids and other current assets............................ (316) 16
Other assets................................................. 267 91
Accounts and taxes payable, accrued payroll and other
liabilities................................................. 1,024 (544)
Deferred revenue............................................. (18,438) (9,658)
--------- ---------
Net cash provided by (used in) operating activities....... (810) 3,091
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment................................ (2,311) (2,733)
Purchases of marketable securities................................. (613,259) (992,235)
Maturities of marketable securities................................ 624,925 970,873
Acquired technology rights......................................... (1,334) --
Purchases of investments........................................... (2,000) (1,200)
Sales of investments............................................... -- 2,822
--------- ---------
Net cash provided by (used in) investing activities....... 6,021 (22,473)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock......................... 8,062 3,486
Principal payments on capital lease obligations.................... -- (130)
--------- ---------
Net cash provided by financing activities................. 8,062 3,356
--------- ---------
Effect of exchange rates on cash and cash equivalents................ 6 89
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 13,279 (15,937)
Cash and cash equivalents at beginning of period..................... 14,982 25,798
--------- ---------
Cash and cash equivalents at end of period........................... $ 28,261 $ 9,861
========= =========
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ -- $ 9
Taxes paid......................................................... $ 1,387 $ 337
Tax benefit of stock option exercises.............................. $ -- $ 3,148
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE>
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, 1999, included in the Company's 1999 Annual Report on Form 10-K.
2. Recent Accounting Pronouncements
In October 1999, the Company adopted American Institute of Certified Public
Accountants (AICPA) Statement of Position No. 98-9 (SOP 98-9), Modification of
SOP 97-2, "Software Revenue Recognition." 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 no vendor-specific objective evidence
("VSOE") of the fair values of all 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. Adoption of SOP 98-9 had no
material impact on the Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
In July 1999, the Financial Accounting Standards Board issued SFAS No. 137 (SFAS
137), "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of SFAS No. 133." SFAS 137 deferred the effective date of
SFAS 133 until the first fiscal quarter of fiscal years beginning after June 15,
2000. The Company does not currently hold derivative instruments or engage in
hedging activities. The Company expects the adoption of SFAS 133 and SFAS 137
will have no material impact on its financial statements and related
disclosures.
4
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
2. Recent Accounting Pronouncements (continued)
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements and is effective in the fourth quarter of all fiscal years beginning
after December 15, 1999. The impact of SAB 101 is not expected to be material
to the Company's operating results.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB Opinion No. 25. Among other
issues, FIN 44 clarifies (a) the definition of employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in the interpretation cover
specific events that occur after either December 15, 1998 or January 12, 2000.
To the extent that this interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effect of applying this interpretation are recognized on a
prospective basis from July 1, 2000. The Company is currently reviewing stock
grants to determine the impact, if any, that may arise from implementation of
FIN 44, although management does not expect the impact, if any, to be material
to the financial statements.
3. Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments and
unrealized gains and losses on marketable securities.
Comprehensive income (loss) is as follows (in thousands; unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)................................. $4,624 $2,001 $(159,752) $6,065
Other comprehensive income (loss):
Foreign currency translation adjustments........ (30) (18) 6 89
Unrealized gain (loss) on marketable securities. 3 -- (22) --
------ ------ --------- ------
Other comprehensive income (loss)................. (27) (18) (16) 89
Total comprehensive income (loss)................. $4,597 $1,983 $(159,768) $6,154
====== ====== ========= ======
</TABLE>
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated condensed balance sheets consists of cumulative foreign currency
translation adjustments and unrealized gains and losses on marketable
securities.
5
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
4. Contingent Warrants, Common Stock Equivalents, and Options
In January 1997, the Company granted a warrant to Intel Corporation for the
purchase of 4,000,000 shares of Rambus common stock (the "Intel warrant") at an
exercise price of $2.50 per share. The warrant will become exercisable only
upon the achievement of certain milestones by Intel relating to shipment volumes
of Rambus-based chipsets (the "Intel milestones"). The warrant will expire no
later than the eighth (8th) anniversary of its issuance. At the time that
achievement of the milestones becomes probable, a non-cash charge will be made
to the statement of operations based on the fair value of the warrant.
In October 1998, the Company's Board of Directors authorized an incentive
program in the form of warrants on a total of up to 1,600,000 shares of Rambus
common stock (the "DRAM incentive warrants") to be issued to various Rambus
Direct DRAM partners upon the achievement of certain product qualification and
volume production targets. The warrants, to be issued at the time the targets
are met, will have an exercise price of $2.50 per share and a life of five
years. They will vest and become exercisable on the same basis as the Intel
warrant, which will result in a non-cash charge to the statement of operations
based on the fair value of the warrants at the time the achievement of the Intel
milestones becomes probable. As of June 30, 2000, a total of 760,000 of these
warrants had been issued.
In the fourth quarter of fiscal 1999, the Company granted to its Chief
Executive Officer and to its President a combined total of 2,000,000 Common
Stock Equivalents (CSEs) and to its employees approximately 2,160,000 options to
purchase Rambus common stock for $2.50 per share. Vesting of these CSEs and
options was contingent upon the achievement of key indicators of success for
Rambus. Vesting for a portion of these CSEs and options was contingent on an
increase in the price of Rambus common stock to greater than $50 per share for
30 consecutive days. This target was achieved by the end of the second quarter
of fiscal 2000, and resulted in a $171.1 million employee stock-related
compensation charge taken in the same quarter. Except for a $1.2 million
employer payroll tax liability, this was a non-cash charge. The remaining CSEs
and options will vest on the same basis as the Intel and DRAM incentive
warrants, which will result in another almost entirely non-cash charge to the
statement of operations based on the fair value of the CSEs and options at the
time achievement of the Intel milestones becomes probable.
5. Income Taxes
The Company recorded a provision for income taxes of $2.5 million and $5.5
million in the third quarter and first nine months of fiscal 2000, respectively,
compared to a provision of $1.0 million and $3.6 million in the comparable
periods of fiscal 1999, respectively. The estimated federal and state combined
rates on pretax income, excluding non-cash employee stock-related compensation
expense, for the first nine months of fiscal 2000 and fiscal 1999 were 35% and
37%, respectively. The Company's effective tax rate differs from the statutory
rate due to the valuation allowance impact of timing differences related to the
recognition of contract revenues for tax and financial reporting purposes.
6
<PAGE>
RAMBUS INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
6. Acquired Technology Rights
In November 1999, the Company acquired rights to the intellectual property
assets of a network technology company for approximately $1.3 million in cash.
The value of these assets will be amortized over five years. As a part of this
transaction, the Company also committed to provide certain key employees of the
acquired company with $1.8 million of deferred cash and stock-based
compensation, subject to vesting. Such deferred compensation will be recognized
over the vesting terms, ranging from 2 to 4 years. Research and development
expenses include approximately $209,000 and $582,000 of such acquisition-related
expenses in the third quarter and first nine months of fiscal 2000,
respectively.
7. Net Income (Loss) Per Share
Net income (loss) 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 (loss) per
share. Basic net income (loss) 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 outstanding during the period. In periods
of net loss, common stock equivalents are excluded from the diluted loss per
share calculation since their effect is antidilutive. In the nine months ended
June 30, 2000, common stock equivalents totaling 10,842,534 are excluded from
the diluted loss per share calculation because they are antidilutive.
Net income (loss) 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,
------- -------
2000 1999 2000 1999
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Net income (loss)...................................... $ 4,624 $ 2,001 $(159,752) $ 6,065
======== ======== ========= =======
Weighted average common shares outstanding............. 97,350 93,912 95,978 92,960
Additional dilutive common stock equivalents........... 11,509 6,240 -- 6,916
-------- -------- --------- -------
Diluted shares outstanding............................. 108,859 100,152 95,978 99,876
======== ======== ========= =======
Net income (loss) per share - basic.................... $ 0.05 $ 0.02 $ (1.66) $ 0.07
======== ======== ========= =======
Net income (loss) per share - diluted.................. $ 0.04 $ 0.02 $ (1.66) $ 0.06
======== ======== ========= =======
</TABLE>
In March 2000, the Company's board of directors approved a four-for-one
split of Rambus' common stock, subject to stockholder approval of an increase in
authorized common stock. On May 23, 2000, the Company's stockholders approved
an increase in the Company's authorized shares of common stock to 500 million
shares. The stock began trading on a split-adjusted basis on June 15, 2000. All
references in the accompanying financial statements to earnings per share, the
number of common shares, contingent warrants, common stock equivalents, and
options, and the share price have been retroactively restated to reflect the
common stock split and the increase in authorized common stock.
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; 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 PlayStation2; 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 current
technology or new products; 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 1999 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, Percent
Three Months Ended Change
June 30, 2000 v.
---------------------
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Contract revenues.............................. 63.0% 83.1% 26.7%
Royalties...................................... 37.0 16.9 264.8
----- -----
Total revenues.............................. 100.0% 100.0% 67.0%
===== =====
Costs and expenses:
Cost of contract revenues...................... 16.4 37.1 (26.3)
Research and development....................... 15.9 10.5 154.5
Marketing, general and administrative.......... 34.9 33.1 76.3
----- -----
Total costs and expenses.................... 67.2 80.7 39.3
----- -----
Operating income................................. 32.8 19.3 182.9
Other income, net................................ 7.2 8.5 44.0
----- -----
Income before income taxes....................... 40.0 27.8 140.6
Provision for income taxes....................... 14.0 9.0 160.6
----- -----
Net income....................................... 26.0% 18.8% 131.1%
===== =====
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Percent of Total Revenues, Percent
Nine Months Ended Change
June 30, 2000 v.
---------------------
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Contract revenues.............................. 72.0% 79.6% 32.2%
Royalties...................................... 28.0 20.4 100.4
------- ------
Total revenues.............................. 100.0% 100.0% 46.2%
======= ======
Costs and Expenses:
Cost of contract revenues...................... 20.8 27.4 10.9
Research and development....................... 17.5 21.6 18.7
Marketing, general and administrative.......... 32.3 31.5 49.9
Employee stock-related compensation
expense............................. 376.9 -- *
------- ------
Total costs and expenses.................... 447.5 80.5 *
------- ------
Operating income (loss).......................... (347.5) 19.5 *
Other income, net................................ 7.6 11.5 (3.1)
------- ------
Income (loss) before income taxes................ (339.9) 31.0 *
Provision for income taxes....................... 12.0 11.5 53.3
------- ------
Net income (loss)................................ (351.9)% 19.5% *%
======= ======
</TABLE>
___________________
* Not meaningful
Revenues. Total revenues for the three and nine months ended June 30, 2000
increased 67.0% and 46.2% to $17.8 million and $45.4 million, respectively, over
the comparable three- and nine-month periods in the previous year. Contract
revenues increased 26.7% to $11.2 million (63.0% of total revenues) and 32.2% to
$32.7 million (72.0% of total revenues) in the third quarter and first nine
months of fiscal 2000, respectively, over the comparable periods of fiscal 1999.
The majority of the increase in contract revenues during the third quarter
represents recognition of the remaining revenue on contracts for which all
remaining obligations were terminated by mutual consent due to the licensees'
withdrawal from the commodity DRAM market. Such a termination results in the
cancellation of all obligations on RDRAM development for both parties. Since
all license and engineering payments already received are nonrefundable, the
balance of deferred revenue on these contracts was recognized upon termination
in the third quarter. Also contributing to the revenue increase for the first
nine months of fiscal 2000 was a change in management's estimate of certain
contract revenue recognition periods, which occurred in the fourth quarter of
fiscal 1999. Such periods are initially estimated based upon management's
judgment of the time over which the Company has an obligation to support its
licensees. As the new generation of Rambus technology went into production late
in fiscal 1999, a more accurate estimate of the remaining support period could
be made. To the extent the new estimated periods were less than the original
estimates, the amount of deferred revenue recognized in the first nine months of
fiscal 2000 was greater than in the comparable period of fiscal 1999. This
increase was partially offset by the ending of revenue recognition on contracts
for which the contract period had expired, including the Texas Instruments
("TI") DRAM contract. Each of the four quarters of fiscal 1999 included
approximately $900,000 of contract revenue from the TI DRAM contract. This
revenue was recognized on an accelerated basis due to the sale of TI's DRAM
business to Micron and was fully recognized by the end of fiscal 1999.
The Company anticipates continuing to book additional contracts, especially
contracts with existing licensees for newer versions of Rambus technology.
However, it is anticipated that contract
9
<PAGE>
revenues will decline over time as the value of contracts for which the revenue
recognition periods have expired exceeds the value of new contracts. The
Company's past success in signing licensees has reduced the number of potential
new licensees, which also contributes to the anticipated decline in contract
revenues.
Royalties in the third quarter and first nine months of fiscal 2000
increased 264.8% to $6.6 million (37.0% of total revenues) and 100.4% to $12.7
million (28.0% of total revenues), respectively, from the comparable periods of
fiscal 1999. The Company believes that much of its royalty revenue in each of
these fiscal 2000 periods resulted from shipments of Rambus ICs into the Sony
PlayStation2 market and, to a lesser extent, shipments of previous-generation
Rambus ICs for the Nintendo64 systems. In the third quarter of fiscal 2000, the
Company recognized the first significant royalties from the shipment of Rambus
ICs for use in desktop PCs and workstations.
Because of the use of its technology in these new markets, the Company
believes that royalties from Rambus ICs will become an increasing portion of its
revenues in the future. To date, a majority of the Company's royalties has been
derived from the sale of logic ICs incorporating Rambus ASIC cells (RACs) for
use in game consoles. 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 from
Rambus ICs, since a PC generally uses many more RDRAMs than does a game console.
The Company's royalty revenue is largely a function of the adoption of Rambus
technology by systems companies and the acceptance of the systems companies'
products by end users. The markets addressed by systems companies using Rambus
ICs, including those in the game console and PC businesses, are characterized by
extreme volatility, frequent new product introductions and rapidly shifting
consumer preferences, and there can be no assurance as to the unit volumes of
Rambus ICs that will be purchased in the future or the level of royalty-bearing
revenues that the Company will receive due to these applications. None of the
systems companies currently incorporating 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.
In the third quarter of fiscal 2000, the Company signed its first contracts
covering use of its patents for non-Rambus-compatible products: SDRAMs, DDR
SDRAMs and logic products which directly control these memories. No revenue
from these contracts is included in the results reported for the third quarter,
but the Company expects to begin reporting revenue from these contracts next
quarter.
As of June 30, 2000, the Company had 29 active licensees compared to 30
such licensees at June 30, 1999. Because all of the Company's revenues are
derived from its relatively small number of licensees, revenues tend to be
highly concentrated. In the third quarter and first nine months of fiscal 2000,
the Company's top five licensees accounted for 62% and 48% of total revenues,
respectively. In the third quarter and first nine months of fiscal 2000, Toshiba
accounted for 19% and 11% of total revenues, Fujitsu for 16% and 8%, Samsung for
13% and 6%, NEC for 4% and 10%, and Matsushita for 1% and 13%, respectively. 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.
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<PAGE>
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 2000,
international revenues comprised 81% and 77% 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.
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, 2000, $6.1 million of such nonrefundable, prepaid royalties had
offset initial royalties, and the Company had a balance of $200,000 remaining to
be offset against future royalties.
Substantially all of the license fees, engineering service fees and
nonrefundable, prepaid royalties 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, 2000, the Company's
deferred revenue was $31.3 million, substantially all of which is scheduled to
be recognized in varying amounts over the next four years.
Engineering Costs. Engineering costs, consisting of cost of contract
revenues and research and development expenses, increased 13.5% to $5.7 million
(32.3% of total revenue) and 14.3% to $17.4 million (38.3% of total revenue) in
the third quarter and first nine months of fiscal 2000, respectively, over the
comparable periods of fiscal 1999. The increase is primarily attributable to
engineering personnel added to support the launch of Rambus technology into the
PC main memory market, the Company's announced technology roadmap improvements,
and new initiatives in the communications market and chip-to-chip connections.
Cost of Contract Revenues. Cost of contract revenues as a percentage of
total revenues decreased to 16.4% in the third quarter of fiscal 2000 from 37.1%
in the comparable period of fiscal 1999, and decreased to 20.8% in the first
nine months of fiscal 2000 from 27.4% in the comparable period of fiscal 1999.
The decrease in cost of contract revenues as a percentage of total revenues in
the fiscal 2000 periods was related to a reduction in the engineering effort
required to support the launch and ramp of Rambus technology into the PC main
memory market as well as to the effect of the increase in the Company's
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.
Research and Development. Research and development expenses as a percentage
of total revenues increased to 15.9% in the third quarter of fiscal 2000 from
10.5% in the comparable period of fiscal 1999 as the Company was able to shift
engineering resources from support of the ramp into the PC market to development
of technology roadmap improvements as well as new chip connection activities.
For the first nine months of fiscal 2000, research and development expenses as a
percentage of total revenues decreased to 17.5% from 21.6% in the comparable
period of fiscal 1999, primarily due to the increase in the Company's revenues.
Research and development expenses include approximately $209,000 and $582,000 of
acquisition-related costs in the third quarter and first nine months of fiscal
2000, respectively. These acquisition costs relate to the Company's November
1999 purchase of a small company which was developing a SerDes cell for network
11
<PAGE>
applications. The acquisition was accounted for as a purchase, which resulted
in goodwill and deferred compensation costs that are being amortized over
periods ranging from 2 to 5 years. 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 increased 76.3% to $6.2 million and 49.9% to $14.7
million in the third quarter and first nine months of fiscal 2000, respectively,
from the comparable periods of fiscal 1999. The increase is primarily due to the
addition of administrative personnel to support legal enforcement of the
Company's patents and other intellectual property rights, increased legal fees
related to patent infringement actions against Hitachi, which were settled
during the quarter, and costs related to the Company's 10th anniversary
celebration. Marketing, general and administrative expenses represent 34.9% and
32.3% of total revenues for the three and nine months ended June 30, 2000,
respectively, compared with 33.1% and 31.5% in the same periods of fiscal 1999.
The percentage of total revenues was relatively flat from the fiscal 1999
periods to the fiscal 2000 periods due to offsetting increases in marketing,
general and administrative expenses and in revenues. The Company expects
marketing, general and administrative expenses to increase in the future as the
Company focuses additional resources upon marketing its technology, assisting
systems companies with adapting this technology to new generations of products,
and protecting its intellectual property rights through legal activities. The
rate of increase of, and the percentage of revenues represented by, marketing,
general and administrative expenses in the future will vary from period to
period based on the trade shows, advertising, legal and other marketing and
administrative activities undertaken and the change in sales, marketing and
administrative headcount in any given period, as well as the rate of change in
the Company's total revenues.
Employee Stock-Related Compensation Expense. As discussed below in the
section entitled "Contingent Warrants, Common Stock Equivalents, and Options," a
$171.1 million employee stock-related compensation charge was taken in the
second quarter of fiscal 2000 related to Common Stock Equivalents (CSEs) granted
to the Company's Chief Executive Officer and President and options granted to
the Company's employees.
Other Income, Net. Other income, net consists primarily of interest income
from the Company's short-term cash investments. Other income, net increased to
$1.3 million (7.2% of total revenues) in the third quarter of fiscal 2000 from
$0.9 million (8.5% of total revenues) in the comparable period of fiscal 1999
due to higher interest rates. In the first nine months of fiscal 2000, other
income decreased slightly to $3.5 million (7.6% of total revenues) from $3.6
million (11.5% of total revenues) in the comparable period of fiscal 1999
primarily due to a nonrecurring gain on the sale of a security in the fiscal
1999 period, which was almost entirely offset by the effect of higher interest
rates in the fiscal 2000 period.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $2.5 million and $5.5 million in the third quarter and first nine
months of fiscal 2000, respectively, compared to a provision of $1.0 million and
$3.6 million in the comparable periods of fiscal 1999, respectively. The
estimated federal and state combined rates on pretax income, excluding non-cash
employee stock-related compensation expense, for the first nine months of fiscal
2000 and fiscal 1999 were
12
<PAGE>
35% and 37%, respectively. The Company's effective tax rate differs from the
statutory rate due to the valuation allowance impact of timing differences
related to the recognition of contract revenues for tax and financial reporting
purposes.
Common Stock Split
In March 2000, the Company's board of directors approved a four-for-one
split of Rambus' common stock, subject to stockholder approval of an increase in
authorized common stock. On May 23, 2000, the Company's stockholders approved an
increase in the Company's authorized shares of common stock to 500 million
shares. The stock began trading on a split-adjusted basis on June 15, 2000. All
references in this Form 10-Q to earnings per share, the number of common shares,
contingent warrants, common stock equivalents, and options, and the share price
have been retroactively restated to reflect the common stock split and the
increase in authorized common stock.
Contingent Warrants, Common Stock Equivalents, and Options
In January 1997, the Company granted a warrant to Intel Corporation for the
purchase of 4,000,000 shares of Rambus common stock (the "Intel warrant") at an
exercise price of $2.50 per share. The warrant will become exercisable only
upon the achievement of certain milestones by Intel relating to shipment volumes
of Rambus-based chipsets (the "Intel milestones"). The warrant will expire no
later than the eighth (8th) anniversary of its issuance. At the time that
achievement of the milestones becomes probable, a non-cash charge will be made
to the statement of operations based on the fair value of the warrant.
In October 1998, the Company's Board of Directors authorized an incentive
program in the form of warrants on a total of up to 1,600,000 shares of Rambus
common stock (the "DRAM incentive warrants") to be issued to various Rambus
Direct DRAM partners upon the achievement of certain product qualification and
volume production targets. The warrants, to be issued at the time the targets
are met, will have an exercise price of $2.50 per share and a life of five
years. They will vest and become exercisable on the same basis as the Intel
warrant, which will result in a non-cash charge to the statement of operations
based on the fair value of the warrants at the time the achievement of the Intel
milestones becomes probable. As of June 30, 2000, a total of 760,000 of these
warrants had been issued.
In the fourth quarter of fiscal 1999, the Company granted to its Chief
Executive Officer and to its President a combined total of 2,000,000 Common
Stock Equivalents (CSEs) and to its employees approximately 2,160,000 options to
purchase Rambus common stock for $2.50 per share. Vesting of these CSEs and
options was contingent upon the achievement of key indicators of success for
Rambus. Vesting for a portion of these CSEs and options was contingent on an
increase in the price of Rambus common stock to greater than $50 per share for
30 consecutive days. This target was achieved by the end of the second quarter
of fiscal 2000, and resulted in a $171.1 million employee stock-related
compensation charge taken in the same quarter. Except for a $1.2 million
employer payroll tax liability, this was a non-cash charge. The remaining CSEs
and options will vest on the same basis as the Intel and DRAM incentive
warrants, which will result in another almost entirely non-cash charge to the
statement of operations based on the fair value of the CSEs and options at the
time achievement of the Intel milestones becomes probable.
The magnitude of these charges is a function of the current price of Rambus
common stock at the time the charges are taken. For example, if these warrants,
CSEs, and options were valued based upon a stock price of $100, the charge could
be $800 million or more. The charge, when and if taken, will be non-cash except
for payroll tax liabilities, which would likely be more than offset by cash
received by the Company upon exercise of the warrants and options.
13
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Liquidity and Capital Resources
As of June 30, 2000, the Company had cash and cash equivalents and
marketable securities of $96.9 million, including restricted cash of $2.5
million and a long-term marketable securities component of $4.0 million. As of
the same date, the Company had total working capital of $73.0 million, including
a short-term component of deferred revenue of $22.4 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 the Company expects to recognize over the next twelve months.
Without the short-term component of deferred revenue, working capital would have
been $95.4 million as of June 30, 2000.
The Company's operating activities used net cash of $810,000 in the first
nine months of fiscal 2000 compared to net cash provided of $3.1 million in the
comparable period of fiscal 1999. In the fiscal 2000 period, net cash used by
operating activities consisted mainly of a decrease in deferred revenue and an
increase in accounts receivable offset by the net loss adjusted for non-cash
items, and adjustments relating to income taxes. The decrease in deferred
revenue represents contract revenues recognized in the period in excess of new
contract billings.
The Company's investing activities provided net cash of $6.0 million in the
first nine months of fiscal 2000 compared to net cash used of $22.5 million in
the comparable period of fiscal 1999. Net cash provided by investing activities
in the fiscal 2000 period consisted of net maturities of marketable securities,
offset by costs of acquired technology rights and investments and purchases of
property and equipment.
Net cash provided by financing activities was $8.1 million in the first
nine months of fiscal 2000 compared to $3.4 million in the comparable period of
fiscal 1999. The primary source of net cash provided by financing activities was
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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company places its investments with
high credit issuers and by policy limits the amount of credit exposure to any
one issuer. As stated in its policy, the Company will ensure the safety and
preservation of its invested funds by limiting default risk and market risk.
The Company has no investments denominated in foreign country currencies and
therefore is not subject to foreign exchange risk.
The Company mitigates default risk by investing in high credit quality
securities and by positioning its portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer or guarantor.
The portfolio includes only marketable securities with active secondary or
resale markets to ensure portfolio liquidity.
The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at June 30, 2000.
<TABLE>
<CAPTION>
Average Rate
of Return at
Carrying June 30,
Value 2000
(in thousands) (annualized)
<S> <C> <C>
Investment portfolio:
--------------------
Cash equivalents....................................... $23,262 6.6%
Corporate notes and bonds.............................. 13,419 6.5%
Municipal notes and bonds.............................. 16,183 3.5%
United States government debt securities............... 36,526 6.3%
-------
Total investment portfolio.......................... $89,390
=======
</TABLE>
15
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
In January 2000, the Company filed suit in United States District Court
against Hitachi Ltd. for willful patent infringement. The Company subsequently
filed similar actions with the International Trade Commission and in Germany.
In June 2000, the Company settled all outstanding litigation with Hitachi. As a
result, Hitachi has been licensed to use Rambus intellectual property covering
fundamental aspects of high-speed memory interfaces which are currently being
implemented in Hitachi's SDRAM, Double Data Rate (DDR) SDRAM memory, and
Hitachi's controllers which directly interface with these types of memory. The
license agreement calls for an up-front payment and quarterly royalties, which
will be reflected in the Company's financial statements upon commencement of
receipt of such payments beginning in the fourth quarter of fiscal 2000.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Stockholders on May 23, 2000 (the
"Special Meeting"). At the Special Meeting, stockholders voted to approve an
amendment to the Company's Amended and Restated Certificate of Incorporation to
increase the number of shares of Common Stock, par value $.001 per share, which
the Company is authorized to issue from 60,000,000 shares to 500,000,000 shares.
Approval of this Proposal resulted in a four-for-one split of the Company's
Common Stock. The stockholders approved the proposal by the following votes:
Proposal Approval of the Company's Amended and Restated Certificate of
-------------------------------------------------------------
Incorporation:
-------------
Votes For Votes Against Abstentions
------------ ------------- -----------
20,105,072 601,078 10,725
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.13 Office Sublease, dated as of May 8, 2000, between Registrant
and Muse Prime Software, Inc.
27. Financial Data Schedule
(b) Reports on Form 8-K
On July 7, 2000, the Company filed a report on Form 8-K to describe
and to file as Exhibit 4.4 the Warrant No. 1-REV dated January 7, 1997
issued to Intel Corporation to purchase shares of the Registrant's
common stock.
Items 2, 3, and 5 are not applicable and have been omitted.
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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 9, 2000 By: /s/ Gary Harmon
---------------------- --------------------------------------
Gary Harmon,
Senior Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
17
