XNAS:RMBS Rambus Inc Quarterly Report 10-Q Filing - 6/30/2012

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Table of Contents

 

 

 

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, 2012

 

OR

 

o         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.)

 

1050 Enterprise Way, Suite 700, Sunnyvale, CA 94089

(Address of principal executive offices) (zip code)

 

Registrant’s telephone number, including area code: (408) 462-8000

 


 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 110,696,401 as of June 30, 2012.

 

 

 



Table of Contents

 

RAMBUS INC.

TABLE OF CONTENTS

 

 

PAGE

Special Note Regarding Forward-Looking Statements

3

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements:

 

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

5

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011

6

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2012 and 2011

7

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

8

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3. Quantitative and Qualitative Disclosures about Market Risk

40

Item 4. Controls and Procedures

41

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

42

Item 1A. Risk Factors

42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3. Defaults Upon Senior Securities

57

Item 4. Mine Safety Disclosures

57

Item 5. Other Information

57

Item 6. Exhibits

57

Signature

58

Exhibit Index

59

 

2



Table of Contents

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements. These forward-looking statements include, without limitation, predictions regarding the following aspects of our future:

 

·             Success in the markets of our or our licensees’ products;

 

·             Sources of competition;

 

·             Research and development costs and improvements in technology;

 

·             Sources, amounts and concentration of revenue, including royalties;

 

·             Success in renewing license agreements;

 

·             Technology product development;

 

·             Outcome and effect of current and potential future intellectual property litigation and other significant litigation;

 

·             Acquisitions, mergers or strategic transactions and our related integration efforts;

 

·             Pricing policies of our licensees;

 

·             Deterioration of financial health of commercial counterparties and their ability to meet their obligations to us;

 

·             Engineering, marketing and general and administration expenses;

 

·             Contract revenue;

 

·             Operating results;

 

·             International licenses and operations;

 

·             Effects of changes in the economy and credit market on our industry and business;

 

·             Ability to identify, attract, motivate and retain qualified personnel;

 

·             Growth in our business;

 

·             Methods, estimates and judgments in accounting policies;

 

·             Adoption of new accounting pronouncements;

 

·             Effective tax rates;

 

·             Realization of deferred tax assets/release of deferred tax valuation allowance;

 

·             Trading price of our Common Stock;

 

·             Internal control environment;

 

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·             Corporate governance;

 

·             The level and terms of our outstanding debt;

 

·             Resolution of the governmental agency matters involving us;

 

·             Litigation expenses;

 

·             Protection of intellectual property;

 

·             Terms of our licenses and amounts owed under licensing agreements;

 

·             Indemnification and technical support obligations;

 

·             Issuances of our securities, which could involve restrictive covenants or be dilutive to our existing stockholders; and

 

·             Likelihood of paying dividends or repurchasing securities.

 

You can identify these and other forward-looking statements by the use of words such as “may,” “future,” “shall,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “projecting” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

 

Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A, “Risk Factors.” All forward-looking statements included in this document are based on our assessment of information available to us at this time. We assume no obligation to update any forward-looking statements.

 

4



Table of Contents

 

RAMBUS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(In thousands, except shares

 

 

 

and par value)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

152,584

 

$

162,244

 

Marketable securities

 

50,658

 

127,212

 

Accounts receivable

 

113

 

1,026

 

Prepaids and other current assets

 

7,309

 

8,096

 

Deferred taxes

 

2,798

 

2,798

 

Total current assets

 

213,462

 

301,376

 

Intangible assets, net

 

186,150

 

181,955

 

Goodwill

 

138,669

 

115,148

 

Property, plant and equipment, net

 

87,071

 

81,105

 

Deferred taxes, long-term

 

7,531

 

7,531

 

Other assets

 

7,791

 

6,539

 

Total assets

 

$

640,674

 

$

693,654

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

8,604

 

$

16,567

 

Accrued salaries and benefits

 

23,107

 

31,763

 

Accrued litigation expenses

 

9,861

 

10,502

 

Other accrued liabilities

 

9,764

 

6,479

 

Total current liabilities

 

51,336

 

65,311

 

Convertible notes, long-term

 

140,244

 

133,493

 

Long-term imputed financing obligation

 

45,785

 

43,793

 

Long-term income taxes payable

 

9,343

 

9,946

 

Other long-term liabilities

 

10,426

 

11,317

 

Total liabilities

 

257,134

 

263,860

 

 

 

 

 

 

 

Commitments and contingencies (Notes 7 and 13)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock, $.001 par value:

 

 

 

 

 

Authorized: 5,000,000 shares

 

 

 

 

 

Issued and outstanding: no shares at June 30, 2012 and December 31, 2011

 

 

 

Common stock, $.001 par value:

 

 

 

 

 

Authorized: 500,000,000 shares

 

 

 

 

 

Issued and outstanding: 110,696,401 shares at June 30, 2012 and 110,267,145 shares at December 31, 2011

 

111

 

110

 

Additional paid-in capital

 

1,063,495

 

1,049,716

 

Accumulated deficit

 

(679,749

)

(619,643

)

Accumulated other comprehensive loss

 

(317

)

(389

)

Total stockholders’ equity

 

383,540

 

429,794

 

Total liabilities and stockholders’ equity

 

$

640,674

 

$

693,654

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

5



Table of Contents

 

RAMBUS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

Revenue:

 

 

 

 

 

 

 

 

 

Royalties

 

$

55,723

 

$

60,970

 

$

117,766

 

$

120,205

 

Contract revenue

 

492

 

5,244

 

1,312

 

8,536

 

Total revenue

 

56,215

 

66,214

 

119,078

 

128,741

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue*

 

7,340

 

6,058

 

14,503

 

9,207

 

Research and development*

 

38,347

 

24,220

 

76,741

 

47,537

 

Marketing, general and administrative*

 

32,194

 

37,732

 

67,028

 

70,464

 

Costs of restatement and related legal activities

 

83

 

712

 

113

 

1,871

 

Gain from settlement

 

 

 

 

(6,200

)

Total operating costs and expenses

 

77,964

 

68,722

 

158,385

 

122,879

 

Operating income (loss)

 

(21,749

)

(2,508

)

(39,307

)

5,862

 

Interest income and other income (expense), net

 

89

 

135

 

187

 

299

 

Interest expense

 

(6,719

)

(6,124

)

(13,299

)

(12,112

)

Interest and other income (expense), net

 

(6,630

)

(5,989

)

(13,112

)

(11,813

)

Loss before income taxes

 

(28,379

)

(8,497

)

(52,419

)

(5,951

)

Provision for income taxes

 

3,837

 

2,088

 

7,687

 

8,864

 

Net loss

 

$

(32,216

)

$

(10,585

)

$

(60,106

)

$

(14,815

)

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.29

)

$

(0.10

)

$

(0.54

)

$

(0.14

)

Diluted

 

$

(0.29

)

$

(0.10

)

$

(0.54

)

$

(0.14

)

Weighted average shares used in per share calculation:

 

 

 

 

 

 

 

 

 

Basic

 

110,553

 

109,992

 

110,456

 

108,809

 

Diluted

 

110,553

 

109,992

 

110,456

 

108,809

 

 


*     Includes stock-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

5

 

$

286

 

$

15

 

$

409

 

Research and development

 

$

2,631

 

$

2,490

 

$

5,351

 

$

5,002

 

Marketing, general and administrative

 

$

3,579

 

$

4,253

 

$

7,575

 

$

8,908

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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RAMBUS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(32,216

)

$

(10,585

)

$

(60,106

)

$

(14,815

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities, net of tax

 

(22

)

34

 

72

 

33

 

Total comprehensive loss

 

$

(32,238

)

$

(10,551

)

$

(60,034

)

$

(14,782

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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RAMBUS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(60,106

)

$

(14,815

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Stock-based compensation

 

12,941

 

14,319

 

Depreciation

 

6,368

 

5,471

 

Amortization of intangible assets

 

15,559

 

5,981

 

Non-cash interest expense and amortization of convertible debt issuance costs

 

7,067

 

6,072

 

Deferred tax benefit

 

 

(49

)

Change in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable

 

913

 

2,386

 

Prepaid expenses and other assets

 

5,108

 

2,485

 

Accounts payable

 

(8,490

)

6,185

 

Accrued salaries and benefits and other accrued liabilities

 

(8,666

)

(15,143

)

Accrued litigation expenses

 

(641

)

3,575

 

Income taxes payable

 

(689

)

(1,020

)

Net cash provided by (used in) operating activities

 

(30,636

)

15,447

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of business, net of cash acquired

 

(46,278

)

(167,381

)

Purchases of marketable securities

 

(49,642

)

(94,172

)

Maturities of marketable securities

 

125,836

 

208,003

 

Purchases of property, plant and equipment

 

(8,348

)

(11,015

)

Acquisition of intangible assets

 

(1,625

)

 

Proceeds from sale of marketable security

 

 

11

 

Net cash provided by (used in) investing activities

 

19,943

 

(64,554

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds received from issuance of common stock under employee stock plans

 

1,170

 

7,953

 

Payments under installment payment arrangement

 

(121

)

(861

)

Principal payments against lease financing obligation

 

(16

)

(440

)

Proceeds from landlord for tenant improvements

 

 

6,997

 

Net cash provided by financing activities

 

1,033

 

13,649

 

Net decrease in cash and cash equivalents

 

(9,660

)

(35,458

)

Cash and cash equivalents at beginning of period

 

162,244

 

215,262

 

Cash and cash equivalents at end of period

 

$

152,584

 

$

179,804

 

 

 

 

 

 

 

Non-cash investing and financing activities during the period:

 

 

 

 

 

Property, plant and equipment received and accrued in accounts payable and other accrued liabilities

 

$

3,762

 

$

540

 

Non-cash obligation for property, plant and equipment

 

$

2,008

 

$

 

Common stock issued pursuant to acquisition

 

$

 

$

88,438

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

8



Table of Contents

 

RAMBUS INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Investments in entities with less than 20% ownership or in which the Company does not have the ability to significantly influence the operations of the investee are being accounted for using the cost method and are included in other assets.

 

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.

 

The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the 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 in Form 10-K for the year ended December 31, 2011.

 

Reclassifications

 

Certain prior year balances were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net loss for any of the periods presented.

 

2. Recent Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 will require the Company to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The new guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures are to be applied retrospectively for all comparative periods presented. The Company does not expect that this guidance will have an impact on its financial position, results of operations or cash flows as it is disclosure-only in nature.

 

In September 2011, the FASB amended its guidance to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendment became effective for the Company’s interim period ended March 31, 2012. The Company will apply this guidance in its fourth quarter of fiscal 2012 at the time it performs its annual goodwill test and does not expect that this guidance will materially impact the Company’s financial position or results of operations.

 

3. Settlement Agreement with Samsung

 

On January 19, 2010, the Company, Samsung and certain related entities of Samsung entered into a Settlement Agreement (the “Settlement Agreement”) to release all claims against each other with respect to all outstanding litigation between them and certain other potential claims. Pursuant to the Settlement Agreement, the Company and Samsung entered into a Semiconductor Patent License Agreement on January 19, 2010 (the “License Agreement”), under which Samsung licenses from the Company non-exclusive rights to certain Rambus patents and has agreed to pay the Company cash amounts equal to approximately $25.0 million per quarter, subject to certain adjustments and conditions related to their DRAM revenue. These payments commenced in the first quarter of 2010 and will conclude in the last quarter of 2014.

 

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The settlement with Samsung is a multiple element arrangement for accounting purposes. For a multiple element arrangement, the Company is required to determine the fair value of the elements. The Company considered several factors in determining the accounting fair value of the elements of the settlement with Samsung which included a third party valuation using an income approach, the Black-Scholes-Merton option pricing model and a residual approach (collectively the “Fair Value”). The total gain from settlement related to the settlement with Samsung of $133.0 million was recognized through the end of the first quarter of 2011, of which $6.2 million was recognized in the first quarter of 2011. The gain from settlement represents the Fair Value of the cash consideration allocated to the resolution of the antitrust litigation settlement and the residual value of other elements.

 

4. Acquisitions

 

Unity Semiconductor Corporation

 

On February 3, 2012, the Company completed its acquisition of a privately-held company, Unity Semiconductor Corporation (“Unity”), by acquiring all issued and outstanding shares of capital stock of Unity. Pursuant to the merger agreement on February 3, 2012, a wholly-owned subsidiary of the Company merged with and into Unity, with Unity as the surviving corporation. Under the terms of the merger agreement, the purchase price was $35.0 million subject to certain adjustments which has been paid as of the end of the second quarter of 2012. In addition to the purchase consideration, the Company agreed to pay an aggregate of $5.0 million in retention bonuses to certain Unity employees over the next three years. The retention bonus payouts are subject to the condition of employment, and therefore, will be treated as compensation and expensed as incurred on a graded attribution basis. Of the purchase price, approximately $5.5 million in cash was deposited into an escrow account until August 3, 2013, subject to any claims, to fund any indemnification obligations to the Company following the consummation of the merger. The Company acquired Unity’s technology and a portfolio of non-volatile solid state memory patents. The solid state memory technology is a potential successor to the current NAND flash technology, or could be otherwise deployed in the growing non-volatile memory market. This memory technology has been designed to accelerate the commercialization of the Terabit generation of non-volatile memories. Devices using this technology are expected to achieve higher density, faster performance, lower manufacturing costs and greater data reliability than NAND Flash.  Unity is part of the Semiconductor Business Group (“SBG”) reportable segment. The Company incurred approximately $0.6 million in direct acquisition costs in connection with the acquisition which were expensed as incurred.

 

The purchase price allocation for the business acquired is based on management’s estimate of the fair value for purchase accounting purposes at the date of acquisition. The fair value of the assets acquired has been determined primarily by using valuation methods that discount the expected future cash flows to present value using estimates and assumptions determined by management, which is a level three fair value measurement. The Company performed a valuation of the net assets acquired as of the February 3, 2012 closing date. The purchase price from the business combination was allocated as follows:

 

 

 

Total

 

 

 

(in thousands)

 

Cash

 

$

182

 

Property and equipment

 

51

 

Other tangible assets

 

36

 

Identified intangible assets

 

19,280

 

Goodwill

 

15,451

 

Total

 

$

35,000

 

 

The goodwill arising from the acquisition is primarily attributed to synergies related to the combination of new and complementary technologies of the Company and the assembled workforce of Unity. This goodwill is not expected to be deductible for tax purposes.

 

The identified intangible assets assumed in the acquisition of Unity were recognized as existing technology based upon their fair values as of the acquisition date. The purchased intangible assets have an estimated average useful life of 10 years from the date of acquisition.

 

Other Acquisition Activities

 

For the six months ended June 30, 2012, the Company entered into one additional business combination and two patent and existing technology acquisitions for $13.2 million, which resulted in approximately $8.1 million of goodwill, $4.1 million of intangible assets (weighted average useful life of 6 years) and $1.0 million of other assets. These acquisitions are part of the “All Other” reportable segment.

 

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The condensed consolidated financial statements include the operating results of these businesses from the date of acquisition. The acquired assets did not generate any revenue during the reported periods. Pro forma results of operations for these business combinations have not been presented because their effects were not significant to the Company’s financial results.

 

5. Equity Incentive Plans and Stock-Based Compensation

 

As of June 30, 2012, 4,000,832 shares of the 21,400,000 shares approved under the 2006 Equity Incentive Plan (the “2006 Plan”) remain available for grant which included an increase of 6,500,000 shares approved by stockholders on April 26, 2012. The 2006 Plan is now the Company’s only plan for providing stock-based incentive awards to eligible employees, executive officers, non-employee directors and consultants; however, the 1997 Stock Option Plan (the “1997 Plan”) and the 1999 Non-statutory Stock Option Plan (the “1999 Plan”) will continue to govern awards previously granted under those plans.

 

A summary of shares available for grant under the Company’s plans is as follows:

 

 

 

Shares Available
for Grant

 

Shares available as of December 31, 2011

 

2,812,876

 

Increase in shares approved for issuance

 

6,500,000

 

Stock options granted (2) 

 

(5,002,200

)

Stock options forfeited (3)

 

375,468

 

Stock options expired under former plans

 

(23,462

)

Nonvested equity stock and stock units granted (1)

 

(689,846

)

Nonvested equity stock and stock units forfeited (1)

 

27,996

 

Total available for grant as of June 30, 2012

 

4,000,832

 

 


(1)  For purposes of determining the number of shares available for grant under the 2006 Plan against the maximum number of shares authorized, each restricted stock granted reduces the number of shares available for grant by 1.5 shares and each restricted stock forfeited increases shares available for grant by 1.5 shares.

 

(2)  Amount includes shares granted from the stock option exchange program (discussed below).

 

(3)  Amount excludes shares surrendered from the stock option exchange program (discussed below) as the shares are no longer available for grant.

 

Stock Option Exchange Program

 

On April 26, 2012, at the 2012 Annual Meeting of Stockholders, the Company’s stockholders approved a one-time stock option exchange program (“option exchange”) for the employees other than the Company’s named executive officers, senior vice presidents and members of its Board of Directors, which allowed employees to surrender certain outstanding stock options for cancellation in exchange for the grant of new replacement options to purchase a lesser number of shares having an exercise price equal to the fair market value of the Company’s common stock on the replacement grant date. On June 22, 2012, the Company completed this offer. A total of 333 eligible employees participated in the option exchange. Pursuant to the terms and conditions of the option exchange, the Company accepted for exchange options totaling 6,449,255, representing approximately 87% of the total number of options eligible for exchange. All surrendered options were canceled effective as of the expiration of the option exchange, and immediately thereafter, in exchange therefore, the Company granted new options with an exercise price of $5.63 per share (representing the closing price of its common stock on June 22, 2012, as reported on the NASDAQ Global Select Market) to purchase an aggregate of 2,840,986 shares of common stock under the 2006 Plan. New options have a new contractual term of the longer of the original remaining contractual term of the surrendered options or five years, and generally will vest over a three-year period from the date of grant, with one-third of the shares vesting on the first year anniversary of the grant date and the remaining shares vesting monthly for the 24 months thereafter.  The fair value of the new options granted was measured as the total of the unrecognized compensation cost of the original options surrendered and the incremental compensation cost of the new options granted. The incremental compensation cost of the new options granted was measured as the excess of the fair value of the new options granted over the fair value of the original options immediately before cancellation. As a result of the option exchange, the total incremental compensation cost of the new options was approximately $1.0 million. The total remaining unrecognized compensation cost related to the original options of $19.9 million and the incremental compensation cost of the new options granted of $1.0 million will be combined with it and recognized over the three years requisite service period. Of the $20.9 million compensation cost related to the new options, $0.1 million was recognized for the three and six months ended June 30, 2012.

 

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Table of Contents

 

General Stock Option Information

 

The following table summarizes stock option activity under the 1997 Plan, 1999 Plan and 2006 Plan for the six months ended June 30, 2012 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of June 30, 2012.

 

 

 

Options Outstanding

 

 

 

 

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price
Per Share

 

Weighted
Average
Remaining
Contractual
Term (years)

 

Aggregate
Intrinsic
Value

 

 

 

(Dollars in thousands, except per share amounts)

 

Outstanding as of December 31, 2011

 

14,587,596

 

$

19.73

 

 

 

 

 

Options granted

 

5,002,200

 

6.28

 

 

 

 

 

Options exercised

 

(116,959

)

4.24

 

 

 

 

 

Options forfeited

 

(375,468

)

15.92

 

 

 

 

 

Options surrendered in stock option exchange program

 

(6,449,255

)

21.11

 

 

 

 

 

Outstanding as of June 30, 2012

 

12,648,114

 

13.96

 

5.91

 

$

546

 

Vested or expected to vest at June 30, 2012

 

11,923,566

 

14.30

 

5.78

 

499

 

Options exercisable at June 30, 2012

 

6,261,967

 

19.48

 

3.85

 

156

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at June 30, 2012, based on the $5.74 closing stock price of Rambus’ Common Stock on June 29, 2012 on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of June 30, 2012 was 3,047,748 and 145,475, respectively.

 

Employee Stock Purchase Plan

 

Under the 2006 Employee Stock Purchase Plan (“ESPP”), the Company issued 163,398 shares at a price of $4.21 per share during the six months ended June 30, 2012. The Company issued 146,034 shares at a price of $16.50 per share during the six months ended June 30, 2011. As of June 30, 2012, 1,644,566 shares under the ESPP remain available for issuance which includes an increase of 1,500,000 shares approved by stockholders on April 26, 2012.

 

Stock-Based Compensation

 

For the six months ended June 30, 2012 and 2011, the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. In addition, the Company sponsors an ESPP, whereby eligible employees are entitled to purchase Common Stock semi-annually, by means of limited payroll deductions, at a 15% discount from the fair market value of the Common Stock as of specific dates.

 

Stock Options

 

During the three and six months ended June 30, 2012, Rambus granted 3,065,198 and 5,002,200 stock options (including options granted in the stock option exchange program), respectively, with an estimated total grant-date fair value of $21.6 million and $29.1 million, respectively. During the three and six months ended June 30, 2012, Rambus recorded stock-based compensation expense related to stock options of $4.0 million and $8.3 million, respectively.

 

During the three and six months ended June 30, 2011, Rambus granted 78,510 and 1,712,211 stock options, respectively, with an estimated total grant-date fair value of $0.6 million and $18.3 million, respectively. During the three and six months ended June 30, 2011, Rambus recorded stock-based compensation expense related to stock options of $5.0 million and $10.2 million, respectively.

 

As of June 30, 2012, there was $38.2 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 3.2 years. The total fair value of shares vested as of June 30, 2012 was $84.3 million.

 

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The total intrinsic value of options exercised was $0.1 million and $0.2 million for the three and six months ended June 30, 2012, respectively. The total intrinsic value of options exercised was $1.9 million and $4.0 million for the three and six months ended June 30, 2011, respectively. Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.

 

During the six months ended June 30, 2012, net proceeds from employee stock option exercises totaled approximately $0.5 million.

 

Employee Stock Purchase Plan

 

For the three and six months ended June 30, 2012, the Company recorded compensation expense related to the ESPP of $0.6 million and $1.3 million, respectively. For the three and six months ended June 30, 2011, the Company recorded compensation expense related to the ESPP of $0.4 million and $0.8 million, respectively. As of June 30, 2012, there was $0.8 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the ESPP. That cost is expected to be recognized over four months.

 

There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the three and six months ended June 30, 2012 and 2011 calculated in accordance with accounting for share-based payments.

 

Valuation Assumptions

 

The fair value of stock awards is estimated as of the grant date using the Black-Scholes-Merton (“BSM”) option-pricing model assuming a dividend yield of 0% and the additional weighted-average assumptions as listed in the following tables:

 

 

 

Stock Option Plans

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Stock Option Plans

 

 

 

 

 

 

 

 

 

Expected stock price volatility

 

68

%

50

%

60-68

%

50-52

%

Risk free interest rate

 

0.9

%

2.6

%

0.7-0.9

%

2.6-2.8

%

Expected term (in years)

 

5.7

 

6.1

 

5.6 –5.7

 

6.0 - 6.1

 

Weighted-average fair value of stock options granted to employees

 

$

3.41

 

$

8.58

 

$

3.83

 

$

10.71

 

 

 

 

Employee Stock Purchase Plan

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

 

Expected stock price volatility

 

63

%

56

%

63

%

56

%

Risk free interest rate

 

0.2

%

0.1

%

0.2

%

0.1

%

Expected term (in years)

 

0.5

 

0.5

 

0.5

 

0.5

 

Weighted-average fair value of purchase rights granted under the purchase plan

 

$

1.61

 

$

5.96

 

$

1.61

 

$

5.96

 

 

Nonvested Equity Stock and Stock Units

 

The Company grants nonvested equity stock units to officers, employees and directors. During the three and six months ended June 30, 2012, the Company granted nonvested equity stock units totaling 36,526 and 459,897 shares under the 2006 Plan, respectively. These awards have a service condition, generally a service period of four years, except in the case of grants to directors, for which the service period is one year. For the three and six months ended June 30, 2012, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.2 million and $3.3 million, respectively. The Company occasionally grants nonvested equity stock units to its employees with vesting subject to the achievement of certain performance conditions. During the three and six months ended June 30, 2012 and 2011, the achievement of certain performance conditions for certain performance equity stock units was considered probable, and as a result, the Company recognized stock-based compensation expense related to these performance stock units for all periods; the aggregate amounts were not significant.

 

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For the three and six months ended June 30, 2012, the Company recorded stock-based compensation expense of approximately $1.5 million and $3.3 million, respectively, related to all outstanding unvested equity stock grants. For the three and six months ended June 30, 2011, the Company recorded stock-based compensation expense of approximately $1.6 million and $3.3 million, respectively, related to all outstanding unvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately $8.0 million at June 30, 2012. This is expected to be recognized over a weighted average period of 2.3 years.

 

The following table reflects the activity related to nonvested equity stock and stock units for the six months ended June 30, 2012:

 

Nonvested Equity Stock and Stock Units

 

Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

Nonvested at December 31, 2011

 

763,510

 

$

18.02

 

Granted

 

459,897

 

7.13

 

Vested

 

(193,599

)

18.91

 

Forfeited

 

(18,664

)

15.14

 

Nonvested at June 30, 2012

 

1,011,144

 

12.95

 

 

6. Marketable Securities

 

Rambus invests its excess cash and cash equivalents primarily in U.S. government sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years.  As of June 30, 2012 and December 31, 2011, all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than one year.

 

All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:

 

 

 

As of June 30, 2012

 

(Dollars in thousands)

 

Fair Value

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Weighted
Rate of
Return

 

Money market funds

 

$

136,846

 

$

136,846

 

$

 

$

 

0.01

%

Corporate notes, bonds and commercial paper

 

55,657

 

55,685

 

 

(28

)

0.18

%

Total cash equivalents and marketable securities

 

192,503

 

192,531

 

 

(28

)

 

 

Cash

 

10,739

 

10,739

 

 

 

 

 

Total cash, cash equivalents and marketable securities

 

$

203,242

 

$

203,270

 

$

 

$

(28

)

 

 

 

 

 

As of December 31, 2011

 

(Dollars in thousands)

 

Fair Value

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Weighted
Rate of
Return

 

Money market funds

 

$

127,559

 

$

127,559

 

$

 

$

 

0.01

%

Corporate notes, bonds and commercial paper

 

137,108

 

137,208

 

 

(100

)

0.29

%

Total cash equivalents and marketable securities

 

264,667

 

264,767

 

 

(100

)

 

 

Cash

 

24,789

 

24,789

 

 

 

 

 

Total cash, cash equivalents and marketable securities

 

$

289,456

 

$

289,556

 

$

 

$

(100

)

 

 

 

Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(Dollars in thousands)

 

Cash equivalents

 

$

141,845

 

$

137,455

 

Short term marketable securities

 

50,658

 

127,212

 

Total cash equivalents and marketable securities

 

192,503

 

264,667

 

Cash

 

10,739

 

24,789

 

Total cash, cash equivalents and marketable securities

 

$

203,242

 

$

289,456

 

 

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Table of Contents

 

The Company continues to invest in highly rated, highly liquid debt securities. The Company holds all of its marketable securities as available-for-sale, marks them to market and regularly reviews its portfolio to ensure adherence to its investment policy and to monitor individual investments for risk analysis, proper valuation and unrealized losses that may be other than temporary.

 

The estimated fair value of cash equivalents and marketable securities classified by the length of time that the securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011 are as follows:

 

 

 

As of

 

Gross Unrealized Loss

 

 

 

June 30,
2012

 

December 31,
2011

 

June 30,
2012

 

December 31,
2011

 

 

 

(In thousands)

 

Less than one year

 

 

 

 

 

 

 

 

 

Corporate notes, bonds and commercial paper

 

$

52,808

 

$

137,107

 

$

(28

)

$

(100

)

 

The unrealized loss at June 30, 2012 was insignificant in relation to the Company’s total available-for-sale portfolio. The unrealized loss can be primarily attributed to a combination of market conditions as well as the demand for and duration of the corporate notes and bonds. The Company has no intent to sell, there is no requirement to sell and the Company believes that it can recover the amortized cost of these investments. The Company has found no evidence of impairment due to credit losses in its portfolio. Therefore, these unrealized losses were recorded in other comprehensive income (loss). However, the Company cannot provide any assurance that its portfolio of cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.

 

See Note 14, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.

 

7. Commitments and Contingencies

 

As of June 30, 2012, the Company’s material contractual obligations are (in thousands):

 

 

 

Total

 

Remainder
of 2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Contractual obligations (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Imputed financing obligation (2)

 

$

57,725

 

$

3,365

 

$

6,827

 

$

6,997

 

$

7,168

 

$

7,348

 

$

26,020

 

Leases

 

9,985

 

2,868

 

1,663

 

1,576

 

1,471

 

1,049

 

1,358

 

Software licenses (3)

 

3,521

 

3,082

 

359

 

80

 

 

 

 

Acquisition retention bonuses (4)

 

40,723

 

 

19,114

 

19,113

 

2,496

 

 

 

Convertible notes

 

172,500

 

 

 

172,500

 

 

 

 

Interest payments related to convertible notes

 

17,250

 

4,313

 

8,625

 

4,312

 

 

 

 

Total

 

$

301,704

 

$

13,628

 

$

36,588

 

$

204,578

 

$

11,135

 

$

8,397

 

$

27,378

 

 


(1)       The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $16.0 million including $7.0 million recorded as a reduction of long-term deferred tax assets and $9.0 million in long-term income taxes payable, as of June 30, 2012. As noted below in Note 9, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.

 

(2)       With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the contractual obligations table and the amount reflected on the Condensed Consolidated Balance Sheets are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. Additionally, the amount includes the amended Ohio lease and the amended Sunnyvale lease.

 

(3)       The Company has commitments with various software vendors for non-cancellable license agreements generally having terms longer than one year. The above table summarizes those contractual obligations as of June 30, 2012 which are also presented on the Company’s Condensed Consolidated Balance Sheet under current and other long-term liabilities.

 

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Table of Contents

 

(4)       In connection with recent acquisitions, the Company is obligated to pay retention bonuses to certain employees and contractors, subject to certain eligibility and acceleration provisions including the condition of employment.  The remaining $33.3 million of CRI retention bonuses payable on June 3, 2013 and 2014 will be paid in cash or stock at the Company’s election.

 

Rent expense was approximately $1.2 million and $1.9 million for the three and six months ended June 30, 2012, respectively. Rent expense was approximately $0.7 million and $1.3 million for the three and six months ended June 30, 2011, respectively.

 

Deferred rent of $0.7 million as of June 30, 2012 was included primarily in other long-term liabilities. Deferred rent of $0.5 million as of December 31, 2011 was included primarily in other long-term liabilities.

 

Indemnifications

 

The Company enters into standard license agreements in the ordinary course of business. Although the Company does not indemnify most of its customers, there are times when an indemnification is a necessary means of doing business. Indemnifications cover customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to the Company’s products. The maximum amount of indemnification the Company could be required to make under these agreements is generally limited to fees received by the Company.

 

Several securities fraud class actions, private lawsuits and shareholder derivative actions were filed in state and federal courts against certain of the Company’s current and former officers and directors related to the stock option granting actions. As permitted under Delaware law, the Company has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s term in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has a director and officer insurance policy that reduces the Company’s exposure and enables the Company to recover a portion of future amounts to be paid. As a result of these indemnification agreements, the Company continues to make payments on behalf of current and former officers. As of June 30, 2012, the Company had made cumulative payments of approximately $32.0 million on their behalf, including $0.1 million in the quarter ended June 30, 2012. As of June 30, 2011, the Company had made cumulative payments of approximately $17.6 million on their behalf, including $0.7 million in the quarter ended June 30, 2011. These payments were recorded under costs of restatement and related legal activities in the condensed consolidated statements of operations.

 

8.  Stockholders’ Equity and Contingently Redeemable Common Stock

 

Share Repurchase Program

 

During the six months ended June 30, 2012, the Company did not repurchase any shares of its Common Stock under its share repurchase program. As of June 30, 2012, the Company had repurchased a cumulative total of approximately 26.3 million shares of its Common Stock with an aggregate price of approximately $428.9 million since the commencement of the program in 2001. As of June 30, 2012, there remained an outstanding authorization to repurchase approximately 5.2 million shares of the Company’s outstanding Common Stock.

 

The Company records stock repurchases as a reduction to stockholders’ equity. The Company records a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the price of the shares repurchased exceeds the average original proceeds per share received from the issuance of Common Stock.

 

9. Income Taxes

 

During the three and six months ended June 30, 2012, the Company calculated its interim tax provision to record taxes incurred by the U.S. entity on a discrete basis because the Company is projecting losses in which a tax benefit cannot be recognized in accordance with FASB Accounting Standards Codification (“ASC”) 740, Income Taxes. The Company recorded a provision for income taxes of $3.8 million and $2.1 million for the three months ended June 30, 2012 and 2011, and $7.7 million and $8.9 million for the six months ended June 30, 2012 and 2011, respectively. The provision for income taxes for the three and six months ended June 30, 2012 and 2011, is primarily comprised of withholding taxes and other foreign taxes based upon income earned during the period with no tax benefit recorded for the loss jurisdictions.

 

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Table of Contents

 

During the three and six months ended June 30, 2012, the Company paid withholding taxes of $3.7 million and $8.1 million, respectively. During the three and six months ended June 30, 2011, the Company paid withholding taxes of $4.1 million and $8.2 million, respectively.  As the Company continues to maintain a valuation allowance against its U.S. deferred assets, the Company’s tax provision is based primarily on the withholding taxes, other foreign taxes and current state taxes.

 

As of June 30, 2012, the Company’s condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately $149.3 million, which consists of net operating loss carryovers, tax credit carryovers, depreciation and amortization, employee stock-based compensation expenses and certain liabilities, partially reduced by deferred tax liabilities associated with the convertible debt instruments that may be settled in cash upon conversion, including partial cash settlements. As of June 30, 2012, a full valuation allowance has been recorded against the U.S. deferred tax assets. During the six months ended June 30, 2012, the Company did not significantly change its deferred tax assets. Management periodically evaluates the realizability of the Company’s net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is solely dependent on the Company’s ability to generate sufficient future taxable income during periods prior to the expiration of tax statutes to fully utilize these assets. The Company intends to maintain the valuation allowance until sufficient positive evidence exists to support its reversal.

 

The Company maintains liabilities for uncertain tax positions within its long-term income taxes payable accounts. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.

 

As of June 30, 2012, the Company had approximately $16.0 million of unrecognized tax benefits, including $7.0 million recorded as a reduction of long-term deferred tax assets and $9.0 million in long-term income taxes payable. If recognized, approximately $2.2 million would be recorded as an income tax benefit. No benefit would be recorded for the remaining unrecognized tax benefits as the recognition would require a corresponding increase in the valuation allowance. As of December 31, 2011, the Company had $16.6 million of unrecognized tax benefits, including $7.0 million recorded as a reduction of long-term deferred tax assets and $9.6 million in long-term income taxes payable.

 

Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.

 

The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. At June 30, 2012 and December 31, 2011, an insignificant amount of interest and penalties are included in long-term income taxes payable.

 

Rambus files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is subject to examination by the Internal Revenue Service (“IRS”) for tax years ended 2009 through 2011. The Company is also subject to examination by the State of California for tax years ended 2008 through 2011. In addition, any research and development credit carry forward or net operating loss carry forward generated in prior years and utilized in these or future years may also be subject to examination by the IRS and the State of California. The Company is also subject to examination in various other foreign jurisdictions, including India, for various periods.

 

The Company’s future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.

 

10. Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the

 

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employees, the amount of excess tax benefits that would be recognized in equity if the instrument was exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported. For the first eight months of 2011, the Company reported approximately 4.8 million shares issued to Samsung as contingently redeemable common stock (“CRCS”) due to the contractual put rights associated with those shares. As such, the Company used the two-class method for reporting earnings per share for 2011.

 

The following table sets forth the computation of basic and diluted loss per share:

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

 

 

CRCS*

 

Other CS**

 

CRCS*

 

Other CS**

 

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Allocation of undistributed earnings

 

$

 

$

(32,216

)

$

(461

)

$

(10,124

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

110,553

 

4,788

 

105,204

 

Basic and diluted net loss per share

 

$

 

$

(0.29

)

$

(0.10

)

$

(0.10

)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

 

 

CRCS*

 

Other CS**

 

CRCS*

 

Other CS**

 

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Allocation of undistributed earnings

 

$

 

$

(60,106

)

$

(652

)

$

(14,163

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

110,456

 

4,788

 

104,021

 

Basic and diluted net loss per share

 

$

 

$

(0.54

)

$

(0.14

)

$

(0.14

)

 


*            CRCS — Contingently Redeemable Common Stock

**          Other CS — Common Stock other than CRCS

 

For the three months ended June 30, 2012 and 2011, options to purchase approximately 12.5 million and 11.5 million shares, respectively, and for the six months ended June 30, 2012 and 2011, options to purchase approximately 11.9 million and 10.0 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense. For the three months ended June 30, 2012 and 2011, an additional 6.3 million and 2.1 million shares, respectively, and for the six months ended June 30, 2012 and 2011, an additional 6.5 million and 2.4 million shares, respectively, potentially dilutive shares have been excluded from the weighted average dilutive shares because there were net losses for the periods.

 

11.  Business Segments and Major Customers

 

SBG was considered a reportable segment as it met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining immaterial operating segments were combined and shown under “All Other.”

 

The Company evaluates the performance of its segments based on segment direct operating income (loss). Segment direct operating income (loss) does not include the allocation of any corporate support functions (including human resources, facilities, legal, finance, information technology, corporate development, general administration, corporate licensing and marketing expenses, advanced technology development, and costs of restatement and related legal activities) to the segments. Additionally, certain expenses are not allocated to the operating segments because they are managed at the corporate level and they are not considered in evaluating the segments’ operating performance. Such unallocated corporate level expenses include stock-based compensation expenses, depreciation and amortization expenses, and certain bonus and acquisition expenses. The “Reconciling Items” category includes these unallocated corporate support function expenses as well as corporate level expenses. The presentation of the three and six months ended June 30, 2011 segment data has been updated accordingly to conform with the current segment direct operating income (loss) definition.

 

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The table below presents reported segment revenues and reported segment direct operating income (loss).

 

 

 

For the Three Months Ended June 30, 2012

 

For the Six Months Ended June 30, 2012

 

 

 

SBG

 

All Other

 

Total

 

SBG

 

All Other

 

Total

 

 

 

(In thousands)

 

(In thousands)

 

Revenues

 

$

52,138

 

$

4,077

 

$

56,215

 

$

109,226

 

$

9,852

 

$

119,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment direct operating income (loss)

 

$

39,063

 

$

(5,585

)

$

33,478

 

$

82,668

 

$

(9,016

)

$

73,652

 

Reconciling items

 

 

 

 

 

(55,227

)

 

 

 

 

(112,959

)

Total operating loss

 

 

 

 

 

$

(21,749

)

 

 

 

 

$

(39,307

)

Interest and other expense, net

 

 

 

 

 

(6,630

)

 

 

 

 

(13,112

)

Loss before income taxes

 

 

 

 

 

$

(28,379

)

 

 

 

 

$

(52,419

)

 

 

 

For the Three Months Ended June 30, 2011

 

For the Six Months Ended June 30, 2011

 

 

 

SBG

 

All Other

 

Total

 

SBG

 

All Other

 

Total

 

 

 

(In thousands)

 

(In thousands)

 

Revenues

 

$

65,775

 

$

439

 

$

66,214

 

$

128,151

 

$

590

 

$

128,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from settlement

 

$

 

$

 

$

 

$

6,200

 

$

 

$

6,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment direct operating income (loss)

 

$

54,929

 

$

(4,224

)

$

50,705

 

$

111,371

 

$

(7,818

)

$

103,553

 

Reconciling items

 

 

 

 

 

(53,213

)

 

 

 

 

(97,691

)

Total operating income (loss)

 

 

 

 

 

$

(2,508

)

 

 

 

 

$

5,862

 

Interest and other expense, net

 

 

 

 

 

(5,989

)

 

 

 

 

(11,813

)

Loss before income taxes

 

 

 

 

 

$

(8,497

)

 

 

 

 

$

(5,951

)

 

The Company’s chief operating decision authority resides with the senior executive management team, which does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.

 

Revenue from the Company’s major customers representing 10% or more of total revenue for the three and six months ended June 30, 2012 and 2011, respectively, were as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Customer 

 

2012

 

2011

 

2012

 

2011

 

Customer A

 

38

%

38

%

38

%

34

%

Customer B

 

*

 

13

%

*

 

13

%

Customer C

 

*

 

12

%

10

%

12

%

 


* Customer accounted for less than 10% of total revenue in the period

 

Rambus licenses its technologies and patents to customers in multiple geographic regions. Revenue from customers in the following geographic regions was recognized as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

South Korea

 

$

21,468

 

$

25,074

 

$

44,715

 

$

44,218

 

Japan

 

15,902

 

26,649

 

33,471

 

56,250

 

USA

 

15,280

 

14,303

 

31,469

 

27,802

 

Canada

 

1,872

 

166

 

3,851

 

294

 

Asia-Other

 

750

 

15

 

3,500

 

163

 

Europe

 

943

 

7

 

2,072

 

14

 

Total

 

$

56,215

 

$

66,214

 

$

119,078

 

$

128,741

 

 

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12. Amortizable Intangible Assets and Goodwill

 

Amortizable Intangible Assets

 

The components of the Company’s intangible assets as of June 30, 2012 and December 31, 2011 were as follows:

 

 

 

 

 

As of June  30, 2012

 

 

 

Useful Life

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

 

 

(In thousands)

 

Patents

 

3 to 10 years

 

$

30,193

 

$

(14,979

)

$

15,214

 

Customer contracts and contractual relationships

 

1 to 10 years

 

32,650

 

(11,254

)

21,396

 

Existing technology

 

3 to 10 years

 

178,470

 

(29,122

)

149,348

 

Non-compete agreements

 

3 years

 

300

 

(108

)

192

 

Intellectual property

 

4 years

 

10,384

 

(10,384

)

 

Total intangible assets

 

 

 

$

251,997

 

$

(65,847

)

$

186,150

 

 

 

 

 

 

As of December 31, 2011

 

 

 

Useful Life

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

 

 

(In thousands)

 

Patents

 

3 to 10 years

 

$

28,643

 

$

(12,997

)

$

15,646

 

Customer contracts and contractual relationships

 

1 to 10 years

 

33,550

 

(7,148

)

26,402

 

Existing technology

 

3 to 7 years

 

159,350

 

(19,685

)

139,665

 

Non-compete agreements

 

3 years

 

400

 

(158

)

242

 

Intellectual property

 

4 years

 

10,384

 

(10,384

)

 

Total intangible assets

 

 

 

$

232,327

 

$

(50,372

)

$

181,955

 

 

Amortization expense for intangible assets for the three and six months ended June 30, 2012 was $7.9 million and $15.6 million, respectively. Amortization expense for intangible assets for the three and six months ended June 30, 2011 was $4.0 million and $6.0 million, respectively.

 

The favorable contracts (included in customer contracts and contractual relationships) are acquired patent licensing agreements where the Company has no performance obligations. Cash received from these acquired favorable contracts will reduce the favorable contract intangible asset. As of June 30, 2012 and December 31, 2011, the net balance of the favorable contract intangible assets is $6.3 million and $9.9 million, respectively.

 

The estimated future amortization expense of intangible assets as of June 30, 2012 was as follows (amounts in thousands):

 

Years Ending December 31:

 

Amount

 

2012 (remaining 6 months)

 

$

18,453

 

2013

 

34,916

 

2014

 

30,774

 

2015

 

30,124

 

2016

 

29,169

 

Thereafter

 

42,714

 

 

 

$

186,150

 

 

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Goodwill

 

The following table presents goodwill balances and adjustments to those balances for each of the reportable segments for the six months ended June 30, 2012:

 

 

 

December 31,

 

Additions to

 

June 30,

 

Reportable Segment:

 

2011

 

Goodwill (1)

 

2012

 

 

 

(In thousands)

 

SBG

 

$

4,454

 

$

15,451

 

$

19,905

 

All Other

 

110,694

 

8,070

 

118,764

 

Total

 

$

115,148

 

$

23,521

 

$

138,669

 

 


(1)   The additions to goodwill resulted from two business combinations in the first quarter of 2012. See Note 4, “Acquisitions” for further details.

 

No goodwill was impaired as of June 30, 2012 and December 31, 2011.

 

13. Litigation and Asserted Claims

 

Hynix Litigation

 

U.S District Court of the Northern District of California

 

On August 29, 2000, Hynix (formerly Hyundai) and various subsidiaries filed suit against Rambus in the U.S. District Court for the Northern District of California. The complaint, as amended and narrowed through motion practice, asserts claims for fraud, violations of federal antitrust laws and deceptive practices in connection with Rambus’ participation in a standards setting organization called JEDEC, and seeks a declaratory judgment that the Rambus patents-in-suit are unenforceable, invalid and not infringed by Hynix, compensatory and punitive damages, and attorneys’ fees. Rambus denied Hynix’s claims and filed counterclaims for patent infringement against Hynix.

 

The case was divided into three phases. In the first phase, Hynix tried its unclean hands defense beginning on October 17, 2005 and concluding on November 1, 2005. In its January 4, 2006 Findings of Fact and Conclusions of Law, the court held that Hynix’s unclean hands defense failed. Among other things, the court found that Rambus did not adopt its document retention policy in bad faith, did not engage in unlawful spoliation of evidence, and that while Rambus disposed of some relevant documents pursuant to its document retention policy, Hynix was not prejudiced by the destruction of Rambus documents.

 

The second phase of the Hynix-Rambus trial — on patent infringement, validity and damages — began on March 15, 2006, and was submitted to the jury on April 13, 2006. On April 24, 2006, the jury returned a verdict in favor of Rambus on all issues and awarded Rambus a total of approximately $307 million in damages, excluding prejudgment interest. The damages award was later remitted to approximately $134 million.

 

The third phase of the Hynix-Rambus case, involving Hynix’s affirmative JEDEC-related antitrust and fraud allegations, was part of a coordinated trial involving Rambus, Hynix, Micron and Nanya.  It began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims submitted to the jury. On March 3, 2009, the court issued an order rejecting Hynix, Micron, and Nanya’s equitable claims and defenses that had been tried during the coordinated trial.

 

On March 10, 2009, the court entered final judgment against Hynix in the amount of approximately $397 million as follows: approximately $134 million for infringement through December 31, 2005; approximately $215 million for infringement from January 1, 2006 through January 31, 2009; and approximately $48 million in pre-judgment interest (with post-judgment interest to accrue at the statutory rate). The court denied Rambus’s request for an injunction against Hynix but awarded costs to Rambus in the amount of approximately $0.76 million. Pursuant to the judgment, Hynix paid into an escrow account the awarded costs plus royalties on net sales for U.S. infringement after January 31, 2009 and before April 18, 2010 of 1% for SDR SDRAM and 4.25% for DDR DDR2, DDR3, GDDR, GDDR2 and GDDR3 SDRAM memory devices. Hynix posted a bond in the full amount of the judgment plus accrued post-judgment interest.

 

On April 6, 2009, Hynix filed its notice of appeal. On April 17, 2009, Rambus filed its notice of cross appeal. Oral argument was coordinated with the appeal in the Micron Delaware case (discussed below) and held on April 5, 2010. Oral argument was reheard by an expanded panel of five judges on October 6, 2010. On May 13, 2011, the Federal Circuit issued its opinion (1) concluding that the district court erred in applying too narrow a standard of reasonable foreseeability and vacating the district court’s findings of fact and conclusions of law regarding spoliation; (2) affirming the district court’s decisions on Hynix’s JEDEC-related waiver and estoppel defenses; (3) affirming the district court’s claim construction order; (4) affirming the district court’s order denying Hynix’s motion for judgment as a matter of law or for a new trial on the basis of written description; (5) affirming the district court’s order denying Hynix’s motion for a new trial on the basis of obviousness; and (6) affirming the district court’s grant of Hynix’s motion for summary

 

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Table of Contents

 

judgment for the claims at issue in Rambus’s cross-appeal. The Federal Circuit vacated the district court’s final judgment and remanded the case to the district court for further proceedings consistent with the Federal Circuit’s opinions in the Micron and Hynix cases. On July 29, 2011, the Federal Circuit denied the parties’ petitions for rehearing. On February 21, 2012, the United States Supreme Court denied Hynix’s petition seeking review of the Federal Circuit decision.

 

On remand, the parties filed briefs on issues related to unclean hands, costs awarded to Hynix by the Federal Circuit, the bond Hynix posted in the amount of the now-vacated judgment, and the escrowed funds. A hearing on these issues was held on December 16, 2011. In an order dated January 11, 2012, the court released Hynix’s obligation to maintain a supersedeas bond and denied Hynix’s request to lift Hynix’s obligations with respect to escrowed funds. On March 21, 2012, the court issued an order taxing Rambus approximately $8.1 million for Hynix’s bond premiums, filing fees, and transcript costs.  On April 25, 2012, the court issued an order releasing the funds Hynix had paid into the aforementioned escrow account. No decision on unclean hands has issued to date.

 

Micron Litigation

 

U.S District Court in Delaware: Case No. 00-792-SLR

 

On August 28, 2000, Micron filed suit against Rambus in the U.S. District Court for Delaware. The suit asserts violations of federal antitrust laws, deceptive trade practices, breach of contract, fraud and negligent misrepresentation in connection with Rambus’ participation in JEDEC. Micron seeks a declaration of monopolization by Rambus, compensatory and punitive damages, attorneys’ fees, a declaratory judgment that eight Rambus patents are invalid and not infringed, and the award to Micron of a royalty-free license to the Rambus patents. Rambus has filed an answer and counterclaims disputing Micron’s claims and asserting infringement by Micron of 12 U.S. patents.

 

This case has been divided into three phases in the same general order as in the Hynix 00-20905 action: (1) unclean hands; (2) patent infringement; and (3) antitrust, equitable estoppel, and other JEDEC-related issues. A bench trial on Micron’s unclean hands defense began on November 8, 2007 and concluded on November 15, 2007. The court ordered post-trial briefing on the issue of when Rambus became obligated to preserve documents because it anticipated litigation. A hearing on that issue was held on May 20, 2008. The court ordered further post-trial briefing on the remaining issues from the unclean hands trial, and a hearing on those issues was held on September 19, 2008.

 

On January 9, 2009, the court issued an opinion in which it determined that Rambus had engaged in spoliation of evidence by failing to suspend general implementation of a document retention policy after the point at which the court determined that Rambus should have known litigation was reasonably foreseeable. The court issued an accompanying order declaring the 12 patents in suit unenforceable against Micron (the “Delaware Order”). On February 9, 2009, the court stayed all other proceedings pending appeal of the Delaware Order. On February 10, 2009, judgment was entered against Rambus and in favor of Micron on Rambus’ patent infringement claims and Micron’s corresponding claims for declaratory relief. On March 11, 2009, Rambus filed its notice of appeal. Rambus filed its opening brief on July 2, 2009. On August 28, 2009, Micron filed its answering brief. On October 14, 2009, Rambus filed its reply brief. Oral argument was coordinated with the appeal in the Hynix case (discussed above) and held on April 5, 2010. Oral argument was reheard by an expanded panel of five judges on October 6, 2010. On May 13, 2011, the Federal Circuit issued its opinion affirming the district court’s determination that Rambus spoliated documents, vacating the district court’s dismissal sanction (including the district court’s determination of bad faith and prejudice), and remanding the case to the district court for further consideration consistent with its opinion. On June 27, 2011, Rambus filed a petition for rehearing and rehearing en banc with respect to the issues of spoliation, bad faith, and prejudice. On July 29, 2011, the Federal Circuit denied Rambus’s petition.

 

On remand, the parties filed simultaneous briefs on November 9 and December 21, 2011, on the unclean hands-related issues of bad faith, prejudice, and sanction. A hearing on these issues was held on January 26, 2012. No decision has issued to date.

 

U.S. District Court of the Northern District of California

 

On January 13, 2006, Rambus filed suit against Micron in the U.S. District Court for the Northern District of California. Rambus alleges that 14 Rambus patents are infringed by Micron’s DDR2, DDR3, GDDR3, and other advanced memory products. Rambus seeks compensatory and punitive damages, attorneys’ fees, and injunctive relief.

 

As explained above, the court ordered a coordinated trial (without Samsung) of certain common JEDEC-related claims and defenses asserted in Hynix v Rambus, Case No. C 00-20905 RMW, Rambus Inc. v. Samsung Electronics Co. Ltd. et al., Case No. 05-02298 RMW, Rambus Inc. v. Hynix Semiconductor Inc., et al., Case No. 05-00334, and Rambus Inc. v. Micron Technology, Inc., et

 

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Table of Contents

 

al., Case No. C 06-00244 RMW. The coordinated trial involving Rambus, Hynix, Micron and Nanya began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims. On March 3, 2009, the court issued an order rejecting Hynix, Micron, and Nanya’s equitable claims and defenses that had been tried during the coordinated trial.

 

On July 10, 2008, the court issued its claim construction order relating to the Farmwald/Horowitz patents in suit and denied Hynix, Micron, Nanya, and Samsung’s (collectively, the “Manufacturers”) motions for summary judgment of noninfringement and invalidity based on their proposed claim construction. The court issued claim construction orders relating to the Ware patents in suit on July 25 and August 27, 2008, and denied the Manufacturers’ motion for summary judgment of noninfringement of certain claims. On September 4, 2008, at the court’s direction, Rambus elected to proceed to trial on 12 patent claims, each from the Farmwald/Horowitz family. On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement against the Manufacturers under the Ware patents in suit (U.S. Patent Nos. 6,493,789 and 6,496,897), and each party’s claims relating to those patents were dismissed with prejudice. On November 21, 2008, the court entered an order clarifying certain aspects of its July 10, 2008, claim construction order. On November 24, 2008, the court granted Rambus’ motion for summary judgment of direct infringement with respect to claim 16 of Rambus’ U.S. Patent No. 6,266,285 by the Manufacturers’ DDR2, DDR3, gDDR2, GDDR3, GDDR4 memory chip products (except for Nanya’s DDR3 memory chip products). In the same order, the court denied the remainder of Rambus’ motion for summary judgment of infringement.

 

On January 19, 2009, Micron filed a motion for summary judgment on the ground that the Delaware Order should be given preclusive effect. Rambus filed an opposition to Micron’s motion on January 26, 2009, and a hearing was held on January 30, 2009. On February 3, 2009, the court entered a stay of this action pending resolution of Rambus’ appeal of the Delaware Order.

 

European Patent Infringement Cases

 

In 2001, Rambus filed suit against Micron in Mannheim, Germany, for infringement of European patent, EP 1 022 642. That suit has not been active. Two proceedings in Italy remain active.  One relates to Rambus’s claim that Micron is infringing European patent, EP 1 004 956.  The court in this proceeding has found the ‘956 patent valid but not infringed.  The court also dismissed Micron’s claims for unfair competition based on JEDEC as well as abuse of process.  Any appeals are due by December 27, 2012. The second case in Italy involves Micron’s purported claim resulting from a seizure of evidence in Italy in 2000 carried out by Rambus pursuant to a court order.  The court in this proceeding dismissed Micron’s claim.  Micron has appealed this decision to the Italian Supreme Court.

 

DDR2, DDR3, gDDR2, GDDR3, GDDR4 Litigation (“DDR2”)

 

U.S District Court in the Northern District of California

 

On January 25, 2005, Rambus filed a patent infringement suit in the U.S. District Court for the Northern District of California court against Hynix, Infineon, Nanya, and Inotera. Infineon and Inotera were subsequently dismissed from this litigation as was Samsung which had been added as a defendant. Rambus alleges that certain of its patents are infringed by certain of the defendants’ SDRAM, DDR, DDR2, DDR3, gDDR2, GDDR3, GDDR4 and other advanced memory products. Hynix and Nanya have denied Rambus’ claims and asserted counterclaims against Rambus for, among other things, violations of federal antitrust laws, unfair trade practices, equitable estoppel, and fraud in connection with Rambus’ participation in JEDEC.

 

As explained above, the court ordered a coordinated trial (without Samsung) of certain common JEDEC-related claims and defenses asserted in Hynix v Rambus, Case No. C 00-20905 RMW, Rambus Inc. v. Samsung Electronics Co. Ltd. et al., Case No. 05-02298 RMW, Rambus Inc. v. Hynix Semiconductor Inc., et al., Case No. 05-00334, and Rambus Inc. v. Micron Technology, Inc., et al., Case No. C 06-00244 RMW. The coordinated trial involving Rambus, Hynix, Micron and Nanya began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims.

 

On March 3, 2009, the court issued an order rejecting Hynix, Micron, and Nanya’s equitable claims and defenses that had been tried during the coordinated trial.

 

In these cases (except for the Hynix 00-20905 action), a hearing on claim construction and the parties’ cross-motions for summary judgment on infringement and validity was held on June 4 and 5, 2008. On July 10, 2008, the court issued its claim construction order relating to the Farmwald/Horowitz patents in suit and denied the Manufacturers’ motions for summary judgment of noninfringement

 

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Table of Contents

 

and invalidity based on their proposed claim construction. The court issued claim construction orders relating to the Ware patents in suit on July 25 and August 27, 2008, and denied the Manufacturers’ motion for summary judgment of noninfringement of certain claims. On September 4, 2008, at the court’s direction, Rambus elected to proceed to trial on 12 patent claims, each from the Farmwald/Horowitz family. On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement against the Manufacturers under U.S. Patent Nos. 6,493,789 and 6,496,897, and each party’s claims relating to those patents were dismissed with prejudice. On November 21, 2008, the court entered an order clarifying certain aspects of its July 10, 2008, claim construction order. On November 24, 2008, the court granted Rambus’s motion for summary judgment of direct infringement with respect to claim 16 of Rambus’s U.S. Patent No. 6,266,285 by the Manufacturers’ DDR2, DDR3, gDDR2, GDDR3, GDDR4 memory chip products (except for Nanya’s DDR3 memory chip products). In the same order, the court denied the remainder of Rambus’s motion for summary judgment of infringement.

 

On January 19, 2009, Nanya and Hynix filed motions for summary judgment on the ground that the Delaware Order should be given preclusive effect. Rambus filed opposition briefs to these motions on January 26, 2009, and a hearing was held on January 30, 2009. On February 3, 2009, the court entered a stay of this action pending resolution of Rambus’ appeal of the Delaware Order.

 

European Commission Competition Directorate-General

 

On or about April 22, 2003, Rambus was notified by the European Commission Competition Directorate-General (Directorate) (the “European Commission”) that it had received complaints from Infineon and Hynix. Rambus answered the ensuing requests for information prompted by those complaints on June 16, 2003. Rambus obtained a copy of Infineon’s complaint to the European Commission in late July 2003, and on October 8, 2003, at the request of the European Commission, filed its response. On August 1, 2007, Rambus received a statement of objections from the European Commission. The statement of objections alleges that through Rambus’ participation in the JEDEC standards setting organization and subsequent conduct, Rambus violated European Union competition law. Rambus filed a response to the statement of objections on October 31, 2007, and a hearing was held on December 4 and 5, 2007.

 

On December 9, 2009, the European Commission announced that it had reached a final settlement with Rambus to resolve the pending case. Under the terms of the settlement, the Commission made no finding of liability, and no fine will be assessed against Rambus. Rambus commits to offer licenses with maximum royalty rates for certain memory types and memory controllers on a forward-going basis (the “Commitment”). The Commitment is expressly made without any admission by Rambus of the allegations asserted against it. The Commitment also does not resolve any existing claims of infringement prior to the signing of any license with a prospective licensee, nor does it release or excuse any of the prospective licensees from damages or royalty obligations through the date of signing a license. Rambus offers licenses with maximum royalty rates for five-year worldwide licenses of 1.5% for DDR2, DDR3, GDDR3 and GDDR4 SDRAM memory types. Qualified licensees will enjoy a royalty holiday for SDR and DDR DRAM devices, subject to compliance with the terms of the license. In addition, Rambus offers licenses with maximum royalty rates for five-year worldwide licenses of 1.5% per unit for SDR memory controllers through April 2010, dropping to 1.0% thereafter, and royalty rates of 2.65% per unit for DDR, DDR2, DDR3, GDDR3 and GDDR4 memory controllers through April 2010, then dropping to 2.0%. The Commitment to license at the above rates remains valid for a period of five years from December 9, 2009. All royalty rates are applicable to future shipments only and do not affect liability, if any, for damages or royalties that accrued up to the time of the license grant.

 

On March 25, 2010, Hynix filed appeals with the General Court of the European Union purporting to challenge the settlement and the European Commission’s rejection of Hynix’s complaint. No decision has issued to date on Hynix’s appeal.

 

Superior Court of California for the County of San Francisco

 

On May 5, 2004, Rambus filed a lawsuit against Micron, Hynix, Infineon and Siemens in San Francisco Superior Court (the “San Francisco court”) seeking damages for conspiring to fix prices (California Bus. & Prof. Code §§ 16720 et seq.), conspiring to monopolize under the Cartwright Act (California Bus. & Prof. Code §§ 16720 et seq.), intentional interference with prospective economic advantage, and unfair competition (California Bus. & Prof. Code §§ 17200 et seq.). This lawsuit alleges that there were concerted efforts beginning in the 1990s to deter innovation in the DRAM market and to boycott Rambus and/or deter market acceptance of Rambus’ RDRAM product. Subsequently, Infineon and Siemens were dismissed from this action (as a result of a settlement with Infineon) and three Samsung-related entities were added as defendants and later dismissed (as a result of a settlement with Samsung).

 

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A jury trial against Micron and Hynix began on June 20, 2011. On September 21, 2011, the jury began deliberations. On November 16, 2011, the jury returned a verdict in favor of Hynix and Micron and against Rambus by a tally of 9-3. Judgment was entered by the Court on February 15, 2012. Rambus filed a notice of appeal on April 3, 2012.

 

On February 15, 2012, Micron and Hynix filed memoranda of costs seeking to recover approximately $1.6 million and $3.0 million, respectively, in alleged costs from Rambus. A hearing on costs was held on June 29, 2012. At the hearing, the court indicated that costs recoverable from Rambus by Micron and Hynix would be reduced to $520,000 and $350,000, respectively. An order has not yet been entered. The Company has accrued $0.9 million related to these costs as of June 30, 2012.

 

Stock Option Investigation Related Claims

 

On May 30, 2006, the Audit Committee commenced an internal investigation of the timing of past stock option grants and related accounting issues. Several class action, derivative, and private shareholder suits were subsequently filed, all of which (with one exception described below) have been dismissed or settled.

 

On March 1, 2007, a pro se lawsuit was filed in the Northern District of California by two alleged Rambus shareholders against Rambus, certain current and former executives and board members, and PricewaterhouseCoopers LLP (Kelley et al. v. Rambus, Inc. et al. C-07-01238-JF (N.D. Cal.)). This action was consolidated with a substantially identical pro se lawsuit filed by another purported Rambus shareholder against the same parties. The consolidated complaint against Rambus alleges violations of federal and state securities laws, and state law claims for fraud and breach of fiduciary duty. On April 17, 2008, the court dismissed all claims with prejudice except for plaintiffs’ claims under sections 14(a) and 18(a) of the Securities and Exchange Act of 1934 as to which leave to amend was granted. On June 2, 2008, plaintiffs filed an amended complaint containing substantially the same allegations as the prior complaint although limited to claims under sections 14(a) and 18(a) of the Securities and Exchange Act of 1934. On December 9, 2008, the court granted Rambus’ motion and entered judgment in favor of Rambus. Plaintiffs filed a notice of appeal on December 15, 2008. On June 16, 2010, the United States Court of Appeals for the Ninth Circuit issued a decision affirming the judgment in favor of Rambus.

 

On September 11, 2008, the same pro se plaintiffs filed a separate lawsuit in Santa Clara County Superior Court against Rambus, certain current and former executives and board members, and PricewaterhouseCoopers LLP (Kelley et al. v. Rambus, Inc. et al., Case No. 1-08-CV-122444). The complaint alleges violations of certain California state securities statues as well as fraud and negligent misrepresentation based on substantially the same underlying factual allegations contained in the pro se lawsuit filed in federal court. On October 31, 2010, the plaintiffs filed a second amended complaint. On December 2, 2010, Rambus filed a demurrer to plaintiffs’ second amended complaint on the ground that it is barred by the doctrine of claim preclusion, among other things. On May 12, 2011, the court sustained Rambus’ demurrer without leave to amend. Judgment in favor of Rambus was entered on June 15, 2011. On August 10, 2011, plaintiffs filed a notice of appeal.  Briefing is complete and no date has been set for oral argument.

 

Broadcom, Freescale, LSI, MediaTek, and STMicroelectronics Litigation

 

International Trade Commission 2010 Investigation

 

On December 1, 2010, Rambus filed a complaint with the ITC requesting the commencement of an investigation and seeking an exclusion order barring the importation, sale for importation, or sale after importation of products that incorporate at least DDR, DDR2, DDR3, LPDDR, LPDDR2, mobile DDR, GDDR, GDDR2, and GDDR3 memory controllers from Broadcom, Freescale, LSI, MediaTek and STMicroelectronics that infringe patents from the Barth family of patents, and products having certain peripheral interfaces, including PCI Express interfaces, DisplayPort interfaces, and certain Serial AT Attachment (“SATA”) and Serial Attached SCSI (“SAS”) interfaces, from Broadcom, Freescale, LSI and STMicroelectronics that infringe patents from the Dally family of patents.  The complaint names, among others, Broadcom, Freescale, LSI, MediaTek and STMicroelectronics as respondents, as well as companies whose products incorporate those companies’ accused products and are imported into the United States, including Asustek Computer Inc. and Asus Computer International Inc., Audio Partnership Plc, Cisco Systems, Garmin International, G.B.T. Inc., Giga-Byte Technology Co. Ltd., Gracom Technologies LLC, Hewlett-Packard Company, Hitachi GST, Motorola, Inc., Oppo Digital, Inc., and Seagate Technology. As described more fully above, the complaint also names NVIDIA and certain companies whose products incorporate accused NVIDIA products with certain peripheral interfaces, including PCI Express and DisplayPort peripheral interfaces, and seeks to bar their importation, sale for importation, or sale after importation.  On December 29, 2010, the ITC instituted the investigation. On June 20, 2011, the administrative law judge granted a joint motion by Rambus and Freescale to terminate the investigation as to Freescale pursuant to the parties’ settlement agreement. A final hearing before the administrative law judge was held October 12-20, 2011.  On January 17, 2012, the administrative law judge granted a joint motion by Rambus and Broadcom to terminate the investigation as to Broadcom pursuant to the parties’ settlement agreement.

 

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On March 2, 2012, the administrative law judge issued an initial determination that there was no violation of section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. § 1337.  As a threshold matter, the administrative law judge determined that: a licensing-based domestic industry existed for the asserted Dally and Barth patents; that the accused LSI, STMicro, MediaTek products literally infringe all asserted claims of each asserted Barth patent, and that LSI, STMicro, and MediaTek induce infringement and contribute to the infringement of the asserted Barth claims; that the accused LSI and STMicro patents products literally infringe all asserted claims of both asserted Dally patents that are still in suit, and that LSI and STMicro induce infringement and contribute to the infringement of the asserted Dally claims; the Barth patents and the Dally patents are not invalid for failure to satisfy the written description or definiteness requirement under 35 U.S.C. § 112, nor are they unenforceable due to prosecution laches or patent misuse; Rambus had standing to assert the Dally patents; Rambus was not equitably estopped from asserting the Dally patents and the Barth patents; the asserted Barth patents are not unenforceable due to inequitable conduct, and not invalid for failure to satisfy the utility requirement under 35 U.S.C. § 101; the asserted patents are invalid due to anticipation and obviousness; and the Barth patents are unenforceable due to unclean hands.

 

On March 19, 2012, the parties filed petitions asking the full Commission to review certain aspects of the initial determination. On May 3, 2012, the ITC granted a joint motion by Rambus and MediaTek to terminate the investigation as to MediaTek pursuant to the parties’ settlement agreement. On May 3, 2012, the ITC also determined that it would review the final initial determination issued by the administrative law judge in its entirety. On May 18, 2012, Rambus, the Office of Unfair Import Investigations, and the remaining respondents submitted briefs responding to the ITC’s questions contained in its notice to review the initial determination. On June 1, 2012, Rambus, the Office of Unfair Import Investigations, and the remaining respondents submitted reply briefs.

 

On July 25, 2012, the ITC issued the notice of its determination to terminate the investigation with a finding of no violation for the following reasons: all of the asserted patent claims are invalid due to anticipation or obviousness, except for certain Dally claims that include multiple-transmitters for which the ITC determined there was no infringement; Rambus did not demonstrate the existence of a domestic industry for both the Barth and Dally patents; the Barth patents are unenforceable under the doctrine of unclean hands; and the Barth patents are exhausted as to one respondent. The determinations, including non-dispositive findings not recited above, will be set forth more fully at a later date in the ITC’s opinion. No indication of when the opinion would issue was given. Rambus’s notice of appeal is not yet due.

 

U.S District Court in the Northern District of California

 

On December 1, 2010, Rambus filed complaints against Broadcom, Freescale, LSI, MediaTek and STMicroelectronics in the U.S. District Court for the Northern District of California alleging that 1) products that incorporate at least DDR, DDR2, DDR3, LPDDR, LPDDR2, mobile DDR, GDDR, GDDR2, and GDDR3 memory controllers from Broadcom, Freescale, LSI, MediaTek and STMicroelectronics infringe patents from the Barth family of patents; 2) those same products and products from those companies that incorporate SDR memory controllers infringe patents from the Farmwald-Horowitz family; and 3) products having certain peripheral interfaces, including PCI Express, DisplayPort, and certain SATA and SAS interfaces, from Broadcom, Freescale, LSI and STMicroelectronics infringe patents from the Dally family of patents. On June 7, 2011, Rambus’s complaint against Freescale was dismissed pursuant to the parties’ settlement agreement. On January 24, January 26, and March 1, 2011, LSI, Broadcom, and STMicroelectronics filed their respective answers denying Rambus’s allegations and asserting counterclaims seeking declarations of non-infringement and invalidity, and unenforceability with respect to at least certain of the patents in suit. Rambus filed answers denying the allegations in LSI’s, Broadcom’s, and STMicroelectronics’s counterclaims on February 14, February 16, and March 22, 2011, respectively. On March 7, 2011, MediaTek filed an answer denying Rambus’s allegations. Broadcom, MediaTek, STMicroelectornics, and LSI filed motions to stay their respective actions. On June 13, 2011, the Court granted in part the motions to stay and denied them as to certain patents not overlapping with patents asserted in the ITC 2010 investigation. On December 29, 2011, Rambus’s complaint against Broadcom was dismissed pursuant to the parties’ settlement agreement. On March 20, 2011, Rambus’s complaint against MediaTek was dismissed pursuant to the parties’ settlement agreement. Discovery is ongoing and a claim construction hearing is currently scheduled for August 29, 2012.

 

Potential Future Litigation

 

In addition to the litigation described above, companies continue to adopt Rambus technologies into various products. Rambus has notified many of these companies of their use of Rambus technology and continues to evaluate how to proceed on these matters.

 

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There can be no assurance that any ongoing or future litigation will be successful. Rambus spends substantial company resources defending its intellectual property in litigation, which may continue for the foreseeable future given the multiple pending litigations. The outcomes of these litigations, as well as any delay in their resolution, could affect Rambus’ ability to license its intellectual property in the future.

 

The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies. A reasonably possible loss in excess of amounts accrued is not significant to the financial statements.

 

14. Fair Value of Financial Instruments

 

The Company tests the pricing inputs by obtaining prices from two different sources for the same security on a sample of its portfolio. The Company has not adjusted the pricing inputs it has obtained. The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of June 30, 2012 and December 31, 2011:

 

 

 

As of June 30, 2012

 

 

 

Total

 

Quoted
Market
Prices in
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(In thousands)

 

Money market funds

 

$

136,846

 

$

136,846

 

$

 

$

 

Corporate notes, bonds and commercial paper

 

55,657

 

 

55,657

 

 

Total available-for-sale securities

 

$

192,503

 

$

136,846

 

$

55,657

 

$

 

 

 

 

As of December 31, 2011

 

 

 

Total

 

Quoted
Market
Prices in
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(In thousands)

 

Money market funds

 

$

127,559

 

$

127,559

 

$

 

$

 

Corporate notes, bonds and commercial paper

 

137,108

 

 

137,108

 

 

Total available-for-sale securities

 

$

264,667

 

$

127,559

 

$

137,108

 

$

 

 

The Company monitors the investment for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The Company made an investment of $2.0 million in a non-marketable equity security of a private company during the third quarter of 2009. The Company evaluated the fair value of the investment in the non-marketable security as of June 30, 2012 and determined that there were no events that caused a decrease in its fair value below the carrying cost.

 

The following table presents the financial instruments that are measured and carried at cost on a nonrecurring basis as of June 30, 2012 and December 31, 2011:

 

 

 

As of June 30, 2012

 

(in thousands)

 

Carrying
Value

 

Quoted
market
prices in
active
markets
(Level 1)

 

Significant
other
observable
inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

Impairment
charges for the
six months
ended

June 30,
2012

 

Investment in non-marketable securities

 

$

2,000

 

$

 

$

 

$

2,000

 

$

 

 

 

 

As of December 31, 2011

 

(in thousands)

 

Carrying
Value

 

Quoted
market
prices in
active
markets
(Level 1)

 

Significant
other
observable
inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

Impairment
charges for the
year

ended
December 31,
2011

 

Investment in non-marketable securities

 

$

2,000

 

$

 

$

 

$

2,000

 

$

 

 

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For the three and six months ended June 30, 2012 and 2011, there were no transfers of financial instruments between different categories of fair value.

 

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure as of June 30, 2012 and December 31, 2011:

 

 

 

As of June 30, 2012

 

As of December 31, 2011

 

(in thousands)

 

Face
Value

 

Carrying
Value

 

Fair Value

 

Face
Value

 

Carrying
Value

 

Fair Value

 

5% Convertible Senior Notes due 2014

 

$

172,500

 

$

140,244

 

$

171,960

 

$

172,500

 

$

133,493

 

$

170,289

 

 

The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes which is a level two measurement. As of June 30, 2012, the convertible notes are carried at face value of $172.5 million less any unamortized debt discount. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and other payables, approximates fair value due to their short maturities.

 

The Company monitors its investments for other than temporary losses by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, reductions in carrying values when necessary and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other than temporary loss is reported under “Interest and other income (expense), net” in the condensed consolidated statement of operations. For the three and six months ended June 30, 2012, the Company has not incurred any impairment loss on its investments.

 

15. Convertible Notes

 

The Company’s convertible notes are shown in the following table:

 

(Dollars in thousands)

 

As of June 30,
2012

 

As of December 31,
 2011

 

5% Convertible Senior Notes due 2014 (the “2014 Notes”)

 

$

172,500

 

$

172,500

 

Unamortized discount

 

(32,256

)

(39,007

)

Total convertible notes

 

$

140,244

 

$

133,493

 

Less current portion

 

 

 

Total long-term convertible notes

 

$

140,244

 

$

133,493

 

 

Interest expense related to the notes for the three and six months ended June 30, 2012 and 2011 was as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

2014 Notes coupon interest at a rate of 5%

 

$

2,156

 

$

2,156

 

$

4,313

 

$

4,312