Rambus Inc.
RAMBUS INC (Form: 10-Q, Received: 11/02/2009 06:01:05)
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
FORM 10-Q
________________

         (Mark One)

 
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended September 30, 2009

OR

 
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from
to

Commission File Number: 000-22339
________________
 
RAMBUS INC.
(Exact name of registrant as specified in its charter)
________________

Delaware
94-3112828
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

4440 El Camino Real, Los Altos, CA 94022
(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code: (650) 947-5000
________________
 
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 R No £

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 £ No £

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 R
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £
 
(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 £ No R

The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 105,418,043 as of September 30, 2009.
 




RAMBUS INC.
TABLE OF CONTENTS

 
PAGE  
3
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements:
 
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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:

 
Outcome and effect of current and potential future intellectual property litigation;

 
Litigation expenses;

 
Resolution of the governmental agency matters involving us;

 
Protection of intellectual property;

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

 
Amounts owed under licensing agreements;

 
Terms of our licenses;

 
Indemnification and technical support obligations;

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

 
Research and development costs and improvements in technology;

 
Sources, amounts and concentration of revenue, including royalties;

 
Effective tax rates;

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

 
Product development;

 
Sources of competition;

 
Pricing policies of our licensees;

 
Success in renewing license agreements;

 
Operating results;

 
International licenses and operations, including our design facility in Bangalore, India;

 
Methods, estimates and judgments in accounting policies;

 
Growth in our business;

 
Acquisitions, mergers or strategic transactions;

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

 
Trading price of our Common Stock;

 
Internal control environment;

 
Corporate governance;


 
Accounting, tax, regulatory, legal and other outcomes and effects of the stock option investigation;

 
Consequences of the lawsuits related to the stock option investigation;

 
The level and terms of our outstanding debt;

 
Engineering, marketing and general and administration expenses;

 
Contract revenue;

 
Interest and other income, net;

 
Adoption of new accounting pronouncements;

 
Likelihood of paying dividends;

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

 
Restructuring activities.

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,” 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.


RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
 
September 30, 2009
   
December 31, 2008
 
   
(In thousands, except shares
 
   
and par value)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 367,291     $ 116,241  
Marketable securities
    131,192       229,612  
Accounts receivable
    754       1,503  
Prepaids and other current assets
    7,276       8,486  
Deferred taxes
    892       88  
Total current assets
    507,405       355,930  
Restricted cash
    648       632  
Deferred taxes, long-term
    1,069       1,857  
Intangible assets, net
    6,585       7,244  
Property and equipment, net
    15,941       22,290  
Goodwill
    4,454       4,454  
Other assets
    7,653       4,963  
Total assets
  $ 543,755     $ 397,370  
LIABILITIES
               
Current liabilities:
               
Accounts payable
  $ 11,162     $ 6,374  
Accrued salaries and benefits
    8,458       9,859  
Accrued litigation expenses
    6,220       14,265  
Income taxes payable
    406       638  
Other accrued liabilities
    5,576       3,178  
Convertible notes
    133,312        
Deferred revenue
    395       1,787  
Total current liabilities
    165,529       36,101  
Deferred revenue, non-current
          90  
Convertible notes
    109,333       125,474  
Long-term income taxes payable
    1,951       1,953  
Other long-term liabilities
    346       811  
Total liabilities
    277,159       164,429  
Commitments and contingencies
               
STOCKHOLDERS’ EQUITY
               
Convertible preferred stock, $.001 par value:
               
Authorized: 5,000,000 shares
               
Issued and outstanding: no shares at September 30, 2009 and December 31, 2008
           
Common stock, $.001 par value:
               
Authorized: 500,000,000 shares
               
Issued and outstanding: 105,418,043 shares at September 30, 2009 and 103,803,006 shares at December 31, 2008
    105       104  
Additional paid-in capital
    806,569       703,640  
Accumulated deficit
    (540,565 )     (471,672 )
Accumulated other comprehensive income
    487       869  
Total stockholders’ equity
    266,596       232,941  
Total liabilities and stockholders’ equity
  $ 543,755     $ 397,370  

See Notes to Unaudited Condensed Consolidated Financial Statements


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
   
(In thousands, except per share amounts)
 
Revenue:
                       
Royalties
  $ 26,898     $ 25,793     $ 77,826     $ 91,174  
Contract revenue
    976       3,635       4,365       13,707  
Total revenue
    27,874       29,428       82,191       104,881  
Costs and expenses:
                               
Cost of contract revenue*
    1,858       4,611       5,479       18,411  
Research and development*
    16,727       17,511       50,277       59,048  
Marketing, general and administrative*
    29,882       31,288       99,601       88,377  
Restructuring costs*
          4,024             4,024  
Impairment of intangible asset
          2,158             2,158  
Costs (recovery) of restatement and related legal activities
    68       392       (14,000 )     3,564  
Total costs and expenses
    48,535       59,984       141,357       175,582  
Operating loss
    (20,661 )     (30,556 )     (59,166 )     (70,701 )
Interest and other income, net
    891       2,704       3,504       10,207  
Interest expense
    (7,641 )     (3,002 )     (13,128 )     (8,834 )
Interest and other income (expense), net
    (6,750 )     (298 )     (9,624 )     1,373  
Loss before income taxes
    (27,411 )     (30,854 )     (68,790 )     (69,328 )
Provision for income taxes
    85       92       103       114,287  
Net loss
  $ (27,496 )   $ (30,946 )   $ (68,893 )   $ (183,615 )
Net loss per share:
                               
Basic
  $ (0.26 )   $ (0.29 )   $ (0.66 )   $ (1.75 )
Diluted
  $ (0.26 )   $ (0.29 )   $ (0.66 )   $ (1.75 )
Weighted average shares used in per share calculation
                               
Basic
    105,182       104,897       104,761       104,795  
Diluted
    105,182       104,897       104,761       104,795  
_____________________
*       Includes stock-based compensation:

Cost of contract revenue
  $ 283     $ 1,321     $ 906     $ 4,604  
Research and development
  $ 2,332     $ 3,326     $ 7,286     $ 10,997  
Marketing, general and administrative
  $ 5,134     $ 4,371     $ 15,826     $ 12,899  
Restructuring costs
  $     $ 547     $     $ 547  

See Notes to Unaudited Condensed Consolidated Financial Statements


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
 
Nine Months Ended
September 30,
 
 
 
2009
   
2008
 
   
(In thousands)
 
Cash flows from operating activities:
           
Net loss
  $ (68,893 )   $ (183,615 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Stock-based compensation
    24,018       28,500  
Depreciation
    8,039       8,440  
Impairment of investments
    164        
Amortization of intangible assets
    2,209       3,543  
Non-cash interest expense and amortization of convertible debt issuance costs
    10,958       8,834  
Deferred tax provision
    (16 )     113,829  
Impairment of intangible assets
          2,158  
Restructuring costs (non-cash)
          547  
Loss on disposal of property and equipment
          15  
Change in operating assets and liabilities:
               
Accounts receivable
    749       (510 )
Prepaids and other assets
    1,784       (92 )
Accounts payable
    4,878       (812 )
Accrued salaries and benefits and other accrued liabilities
    239       (1,663 )
Accrued litigation expenses
    (8,045 )     (12,598 )
Income taxes payable
    (234 )     (252 )
Deferred revenue
    (1,482 )     (394 )
(Decrease) increase in restricted cash
    (16 )     1,048  
Net cash used in operating activities
    (25,648 )     (33,022 )
Cash flows from investing activities:
               
Purchases of property and equipment
    (2,271 )     (8,197 )
Investment in non-marketable securities
    (2,000 )      
Acquisition of intangible assets
    (1,550 )     (300 )
Purchases of marketable securities
    (123,396 )     (304,574 )
Maturities of marketable securities
    221,434       327,326  
Proceeds from sale of marketable securities
          24,996  
Net cash provided by investing activities
    92,217       39,251  
Cash flows from financing activities:
               
Proceeds from issuance of convertible senior notes
    172,500        
Issuance costs related to the issuance of convertible senior notes
    (4,313 )      
Proceeds received from issuance of common stock under employee stock plans
    16,294       17,277  
Payments under installment payment arrangement
          (1,250 )
Repurchase and retirement of common stock
          (34,921 )
Net cash provided by (used in) financing activities
    184,481       (18,894 )
Effect of exchange rates on cash and cash equivalents
          60  
Net increase (decrease) in cash and cash equivalents
    251,050       (12,605 )
Cash and cash equivalents at beginning of period
    116,241       119,391  
Cash and cash equivalents at end of period
  $ 367,291     $ 106,786  

See Notes to Unaudited Condensed Consolidated Financial Statements


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 and the Current Report on Form 8-K filed on June 22, 2009 which reflects changes to the Company’s accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, due to a change in accounting principle. This change in accounting principle is required to be applied retrospectively to previously issued financial statements.

As of January 1, 2009, as noted above, the Company has changed its accounting for its zero coupon convertible senior notes due 2010 and has retrospectively adjusted the financial statements for the three years ended December 31, 2008. See Note 15 “Convertible Notes” for the impact of the adoption of this accounting change.

The Company has evaluated subsequent events through the date that the financial statements were issued on October 30, 2009.

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

Cash equivalents are highly liquid investments with original maturity of three months or less at the date of purchase. The Company maintains its cash balances with high quality financial institutions and has not experienced any material losses.

Marketable Securities

Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported, net of tax, in stockholders’ equity as part of accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest and other income, net. Realized gains and losses are recorded on the specific identification method and are included in interest and other income, net. The Company reviews its investments in marketable securities for possible other than temporary impairments on a regular basis. If any loss on investment is believed to be other than temporary, a charge will be recognized in operations. In evaluating whether a loss on a debt security is other than temporary, the Company considers the following factors: 1) the Company’s intent to sell the security, 2) if the Company intends to hold the security, whether or not it is more likely than not that the Company will be required to sell the security before recovery of the security’s amortized cost basis and 3) even if the Company intends to hold the security, whether or not the Company expects the security to recover the entire amortized cost basis. Due to the high credit quality and short term nature of the Company’s investments, there have been no other than temporary impairments recorded to date. The classification of funds between short-term and long-term is based on whether the securities are available for use in operations or other purposes.



Non-Marketable Securities

The Company has investments in non-marketable securities which are carried at cost. The Company monitors the investments for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The non-marketable securities are classified as other assets in the condensed consolidated balance sheets.

Fair Value of Financial Instruments

The amounts reported for cash equivalents, marketable securities, accounts receivable, accounts payable, and accrued liabilities are considered to approximate fair values based upon comparable market information available at the respective balance sheet dates. The Company adopted the fair value measurement statement, effective January 1, 2008 for financial assets and liabilities measured on a recurring basis. The statement applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. For the discussion regarding the impact of the adoption of the statement on the Company’s marketable securities, see Note 14, “Fair Value of Financial Instruments.” Additionally, the Company has adopted the fair value option for financial assets and financial liabilities statement, effective January 1, 2008. The Company has not elected the fair value option for financial instruments not already carried at fair value.

Recent Accounting Pronouncements

In September 2009, the Emerging Issues Task Force (the “EITF”) reached final consensus on the issue related to revenue arrangements with multiple deliverables. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. This issue is effective for the Company’s revenue arrangements entered into or materially modified on or after January 1, 2010. The Company will evaluate the impact of this issue on the Company’s financial statements when reviewing its new or materially modified revenue arrangements with multiple deliverables once this issue becomes effective.

In June 2009, the Financial Accounting Standards Board ("FASB") issued the FASB Accounting Standards Codification (“Codification”). The Codification is the single source for all authoritative Generally Accepted Accounting Principles ("GAAP") recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued a statement which improves financial reporting by enterprises involved with variable interest entities. This statement requires companies to perform an analysis to determine whether the company’s variable interest or interests give it a controlling financial interest in a variable interest entity. This statement will be effective as of the beginning of the annual reporting period that begins after November 15, 2009. The Company will evaluate the impact of this statement on the Company’s financial statements if it becomes applicable.

In June 2009, the FASB issued a statement which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets as well as the effects of a transfer on its financial position, financial performance, and cash flows and a transferor’s continuing involvement, if any, in transferred financial assets. The statement requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The statement will be effective as of the beginning of annual reporting period that begins after November 15, 2009.  The Company believes the adoption of this pronouncement will not have a material impact on the Company’s financial statements as the Company does not currently transfer its financial assets.

In May 2009, the FASB issued a statement which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard required the Company to disclose the date through which the Company has evaluated subsequent events and the basis for the date. This standard was effective for interim periods which ended after June 15, 2009. See Note 1, “Basis of Presentation,” for disclosure of the date to which subsequent events are disclosed.

In April 2009, the FASB issued a staff position and statement which amended a previous FASB statement related to required disclosures about the fair value of financial instruments for interim reporting periods. The new pronouncements were effective for interim reporting periods which ended after June 15, 2009. These new pronouncements have been incorporated into the disclosure related to the fair value of financial instruments as discussed in Note 14, “Fair Value of Financial Instruments.”

 
In April 2009, the FASB issued a staff position which provided additional guidance related to fair value measurements, when the volume and level of activity for the asset or liability has significantly decreased. The staff position was effective for interim and annual reporting periods which ended after June 15, 2009. The adoption of this staff position did not have a material impact on the Company’s financial statements. This new pronouncement has been incorporated into the disclosure related to the fair value of financial instruments as discussed in Note 14, “Fair Value of Financial Instruments.”
 
In April 2009, the FASB issued two staff positions which amended the other-than-temporary impairment guidance for debt and equity securities. These pronouncements were effective for interim and annual reporting periods which ended after June 15, 2009. The adoption of these staff positions did not have a material impact on the Company’s financial statements and are more fully disclosed in Note 6, “Marketable Securities.”

In February 2008, the FASB issued a staff position which amended a previous statement related to fair value measurement to remove certain leasing transactions from its scope. The staff position delayed the effective date to January 1, 2009 of the fair value measurement statement for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The provisions of the fair value measurement statement were adopted by the Company, as it applied to its financial instruments, effective beginning January 1, 2008 and the staff position, as it applies to nonfinancial investments, effective beginning January 1, 2009. The impact of adoption of the fair value measurement statement is discussed in Note 14, “Fair Value of Financial Instruments.”

3. Revenue Recognition

Overview

The Company recognizes revenue when persuasive evidence of an arrangement exists, it has delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. If any of these criteria are not met, the Company defers recognizing the revenue until such time as all criteria are met. Determination of whether or not these criteria have been met may require the Company to make judgments, assumptions and estimates based upon current information and historical experience.

The Company’s revenue consists of royalty revenue and contract revenue generated from agreements with semiconductor companies, system companies and certain reseller arrangements. Royalty revenue consists of patent license and technology license royalties. Contract revenue consist of fixed license fees, fixed engineering fees and service fees associated with integration of the Company’s chip interface products into its customers’ products. Contract revenue may also include support or maintenance. Reseller arrangements generally provide for the pass-through of a percentage of the fees paid to the reseller by the reseller’s customer for use of the Company’s patent and technology licenses. The Company does not recognize revenue for these arrangements until it has received notice of revenue earned by and paid to the reseller, accompanied by the pass-through payment from the reseller. The Company does not pay commissions to the reseller for these arrangements.

Many of the Company’s licensees have the right to cancel their licenses. In such arrangements, revenue is only recognized to the extent that is consistent with the cancellation provisions. Cancellation provisions within such contracts generally provide for a prospective cancellation with no refund of fees already remitted by customers for products provided and payment for services rendered prior to the date of cancellation. Unbilled receivables represent enforceable claims and are deemed collectible in connection with the Company’s revenue recognition policy.

Royalty Revenue

The Company recognizes royalty revenue upon notification by its licensees and when deemed collectible. The terms of the royalty agreements generally either require licensees to give the Company notification and to pay the royalties within 60 days of the end of the quarter during which the sales occur or are based on a fixed royalty that is due within 45 days of the end of the quarter. The Company has two types of royalty revenue: (1) patent license royalties and (2) technology license royalties.

Patent licenses. The Company licenses its broad portfolio of patented inventions to semiconductor and systems companies who use these inventions in the development and manufacture of their own products. Such licensing agreements may cover the license of part, or all, of the Company‘s patent portfolio. The Company generally recognizes revenue from these arrangements as amounts become due. The contractual terms of the agreements generally provide for payments over an extended period of time.

Technology licenses. The Company develops proprietary and industry-standard chip interface products, such as RDRAM and XDR that the Company provides to its customers under technology license agreements. These arrangements include royalties, which can be based on either a percentage of sales or number of units sold. The Company recognizes revenue from these arrangements upon notification from the licensee of the royalties earned and when collectability is deemed reasonably assured.



Contract Revenue

The Company generally recognizes revenue using percentage of completion for development contracts related to licenses of its interface solutions, such as XDR and FlexIO that involve significant engineering and integration services. For all license and service agreements accounted for using the percentage-of-completion method, the Company determines progress to completion using input measures based upon contract costs incurred. Part of these contract fees may be due upon the achievement of certain milestones, such as provision of certain deliverables by the Company or production of chips by the licensee. The remaining fees may be due on pre-determined dates and include significant up-front fees.

A provision for estimated losses on fixed price contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. If the Company determines that it is necessary to revise the estimates of the total costs required to complete a contract, the total amount of revenue recognized over the life of the contract would not be affected. However, to the extent the new assumptions regarding the total efforts necessary to complete a project were less than the original assumptions, the contract fees would be recognized sooner than originally expected. Conversely, if the newly estimated total efforts necessary to complete a project were longer than the original assumptions, the contract fees will be recognized over a longer period. As of September 30, 2009, we have accrued a liability of approximately $0.1 million related to estimated loss contracts.

If application of the percentage-of-completion method results in recognizable revenue prior to an invoicing event under a customer contract, the Company will recognize the revenue and record an unbilled receivable. Amounts invoiced to the Company’s customers in excess of recognizable revenue are recorded as deferred revenue. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or unbilled receivables in any given period.

The Company also recognizes revenue in accordance with software revenue recognition methods for development contracts related to licenses of its chip interface products that involve non-essential engineering services and post contract support (“PCS”). These software revenue recognition methods apply to all entities that earn revenue on products containing software, where software is not incidental to the product as a whole. Contract fees for the products and services provided under these arrangements are comprised of license fees and engineering service fees which are not essential to the functionality of the product. The Company rates for PCS and for engineering services are specific to each development contract and not standardized in terms of rates or length. Because of these characteristics, the Company does not have a sufficient population of contracts from which to derive vendor specific objective evidence for each of the elements.

Therefore, after the Company delivers the product, if the only undelivered element is PCS, the Company will recognize all revenue ratably over either the contractual PCS period or the period during which PCS is expected to be provided. The Company reviews assumptions regarding the PCS periods on a regular basis. If the Company determines that it is necessary to revise the estimates of the support periods, the total amount of revenue to be recognized over the life of the contract would not be affected.

4. Comprehensive Loss

The Company’s comprehensive loss consists of its net loss plus other comprehensive income (loss) consisting of foreign currency translation adjustments and unrealized losses on marketable securities, net of taxes.

The components of comprehensive loss, net of tax, are as follows:

 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In thousands)
 
2009
   
2008
   
2009
   
2008
 
Net loss
  $ (27,496 )   $ (30,946 )   $ (68,893 )   $ (183,615 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustments, net of tax
                      60  
Unrealized loss on marketable securities, net of tax
    (327 )     (1,112 )     (382 )     (1,865 )
Other comprehensive loss
    (327 )     (1,112 )     (382 )     (1,805 )
Total comprehensive loss
  $ (27,823 )   $ (32,058 )   $ (69,275 )   $ (185,420 )

5. Equity Incentive Plans and Stock-Based Compensation

Stock Option Plans

As of September 30, 2009, 7,628,030 shares of the 14,900,000 shares approved under the 2006 Plan remained available for grant which includes an increase of 6,500,000 shares approved by stockholders on April 30, 2009. The 2006 Plan is now the Company’s only plan for providing stock-based incentive compensation to eligible employees, executive officers and non-employee directors and consultants.



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, 2008
    2,556,984  
Increase in shares approved for issuance
    6,500,000  
Stock options granted
    (1,430,363 )
Stock options forfeited
    1,765,019  
Stock options expired under former plans
    (1,502,748 )
Nonvested equity stock and stock units granted (1)
    (299,862 )
Nonvested equity stock and stock units forfeited (1)
    39,000  
Total available for grant as of September 30, 2009
    7,628,030  
____________

(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.

General Stock Option Information

The following table summarizes stock option activity under the 1997, 1999 and 2006 Plans for the nine months ended September 30, 2009 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 30, 2009.
 
 
 
Options Outstanding
             
 
 
 
 
 
 
 
 
Number of
Shares
   
Weighted
Average
Exercise Price
Per Share
   
Weighted
Average
Remaining
Contractual
Term
   
 
Aggregate
Intrinsic
Value
 
   
(Dollars in thousands, except per share amounts)
 
Outstanding as of December 31, 2008
    16,573,739     $ 21.19              
Options granted
    1,430,363       8.92              
Options exercised
    (1,242,631 )     11.06              
Options forfeited
    (1,765,019 )     24.89              
Outstanding as of September 30, 2009
    14,996,452       20.42       5.46     $ 42,217  
Vested or expected to vest at September 30, 2009
    13,987,243       21.27       5.53       32,577  
Options exercisable at September 30, 2009
    9,994,465       22.83       4.63       22,610  
 
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at September 30, 2009, based on the $17.40 closing stock price of Rambus’ Common Stock on September 30, 2009 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 September 30, 2009 was 6,382,004 and 4,074,838, respectively.

As of September 30, 2009, there was $42.6 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 2.9 years. The total fair value of shares vested as of September 30, 2009 was $189.6 million.

Employee Stock Purchase Plans

Under the 2006 Employee Stock Purchase Plan (“ESPP”), the Company issued 254,748 shares at a price of $8.06 per share during the nine months ended September 30, 2009. The Company issued 146,633 shares at a price of $16.77 per share during the nine months ended September 30, 2008. As of September 30, 2009, 1,010,323 shares under the ESPP remained available for issuance. For the three and nine months ended September 30, 2009, the Company recorded compensation expense related to the ESPP of $0.5 million and $1.5 million, respectively. For the three and nine months ended September 30, 2008, the Company recorded compensation expense related to the ESPP of $0.3 million and $1.3 million, respectively. As of September 30, 2009, there was $0.2 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the ESPP. That cost is expected to be recognized over one month.




Stock-Based Compensation

Stock Options

For the nine months ended September 30, 2009 and 2008, 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.

During the three and nine months ended September 30, 2009, the Company granted 46,750 and 1,430,363 stock options, respectively, with an estimated total grant-date fair value of $0.6 million and $9.5 million, respectively. During the three and nine months ended September 30, 2009, the Company recorded stock-based compensation related to stock options of $6.0 million and $18.5 million, respectively.

During the three and nine months ended September 30, 2008, the Company granted 90,990 and 1,854,880 stock options, respectively, with an estimated total grant-date fair value of $1.0 million and $21.1 million, respectively. During the three and nine months ended September 30, 2008, the Company recorded stock-based compensation related to stock options of $8.6 million and $25.9 million, respectively.

The total intrinsic value of options exercised was $1.2 million and $6.2 million for the three and nine months ended September 30, 2009, respectively. The total intrinsic value of options exercised was $2.3 million and $12.5 million for the three and nine months ended September 30, 2008, 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 nine months ended September 30, 2009, proceeds from employee stock option exercises totaled approximately $13.7 million.

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 nine months ended September 30, 2009 and 2008 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
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Stock Option Plans
                       
Expected stock price volatility
    91 %     70 %     91-96 %     63-70 %
Risk free interest rate
    2.3 %     3.3 %     1.8-2.3 %     3.0-3.3 %
Expected term (in years)
    6.0       5.3       5.3 – 6.0       5.3  
Weighted-average fair value of stock options granted
  $ 12.14     $ 10.25     $ 6.63     $ 11.35  

 
 
Employee Stock Purchase Plan
 
 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Employee Stock Purchase Plan
                       
Expected stock price volatility
                92 %     58 %
Risk free interest rate
                0.3 %     1.7 %
Expected term (in years)
                0.5       0.5  
Weighted-average fair value of purchase rights granted under the purchase plan
              $ 4.97     $ 7.41  

No purchases were made under the Employee Stock Purchase Plans during the three months ended September 30, 2009 and 2008.



Nonvested Equity Stock and Stock Units

For the three and nine months ended September 30, 2009, the Company granted nonvested equity stock units to certain officers and employees, totaling 20,000 shares and 199,908 shares under the 2006 Plan, respectively. These awards have a service condition, generally a service period of four years. The nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.3 million and $1.8 million, respectively, for the three and nine months ended September 30, 2009.

For the three and nine months ended September 30, 2009, the Company recorded stock-based compensation expense of approximately $1.3 million and $4.0 million, respectively, related to all outstanding unvested equity stock grants. For the three and nine months ended September 30, 2008, the Company recorded stock-based compensation expense of approximately $0.6 million and $1.8 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 $9.4 million at September 30, 2009. This is expected to be recognized over a weighted average period of 2.4 years.

The following table reflects the activity related to nonvested equity stock and stock units for the nine months ended September 30, 2009:
 
 
 
Nonvested Equity Stock and Stock Units
 
 
 
Shares
   
Weighted- Average
Grant-Date
Fair Value
 
Nonvested at December 31, 2008
    821,064     $ 18.46  
Granted
    199,908       9.14  
Vested
    (176,500 )     19.94  
Forfeited
    (26,000 )     18.05  
Nonvested at September 30, 2009
    818,472     $ 15.87  

6. Marketable Securities

The Company invests its excess cash primarily in U.S. government agency and treasury notes, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years. On July 10, 2009, the Company issued an additional $22.5 million aggregate principal amount of 5% convertible senior notes due June 15, 2014 as a result of the underwriters exercising their overallotment option. See Note 15, “Convertible Notes,” for further discussion. The net cash received from the issuance of these convertible notes is included in cash, cash equivalents and marketable securities as of September 30, 2009.

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

 
 
 
September 30, 2009
 
 
 
(dollars in thousands)
 
Fair Value
   
 
Book Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Weighted
Rate of
Return
 
Money Market Funds
  $ 351,529     $ 351,529     $     $       0.13 %
Municipal Bonds and Notes
    1,005       1,000       5             3.85 %
U.S. Government Bonds and Notes
    96,635       96,034       609       (8 )     1.65 %
Corporate Notes, Bonds, and Commercial Paper
    44,051       43,881       195       (25 )     1.57 %
Total cash equivalents and marketable securities
    493,220       492,444       809       (33 )        
Cash
    5,263       5,263                      
Total cash, cash equivalents and marketable securities
  $ 498,483     $ 497,707     $ 809     $ (33 )        

   
December 31, 2008
 
 
 
(dollars in thousands)
 
 
Fair Value
   
 
Book Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Weighted
Rate of
Return
 
Money Market Funds
  $ 110,732     $ 110,732     $     $       0.90 %
Municipal Bonds and Notes
    1,000       1,000                   3.85 %
U.S. Government Bonds and Notes
    149,304       148,178       1,126             2.79 %
Corporate Notes, Bonds, and Commercial Paper
    79,308       79,275       197       (164 )     3.06 %
Total cash equivalents and marketable securities
    340,344       339,185       1,323       (164 )        
Cash
    5,509       5,509                      
Total cash, cash equivalents and marketable securities
  $ 345,853     $ 344,694     $ 1,323     $ (164 )        



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

 
 
(dollars in thousands)
 
September 30,
2009
   
December 31,
2008
 
Cash equivalents
  $ 362,028     $ 110,732  
Short term marketable securities
    131,192       229,612  
Total cash equivalent and marketable securities
    493,220       340,344  
Cash
    5,263       5,509  
Total cash, cash equivalents and marketable securities
  $ 498,483     $ 345,853  

The Company continues to invest in high quality, highly liquid debt securities that mature within three years. 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. As of September 30, 2009, marketable securities with a fair value of $33.8 million, which mature within one year had insignificant unrealized losses. The Company has considered all available evidence and determined that these unrealized losses are due to current market conditions. 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. 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 which could adversely impact its financial results.

The estimated fair value of cash equivalents and marketable securities classified by date of contractual maturity and the associated unrealized gain, net, at September 30, 2009 and December 31, 2008 are as follows:

 
 
As of
   
Unrealized Gains, net
 
 
 
 
September 30,
2009
   
December 31,
2008
   
September 30,
2009
   
December 31,
2008
 
   
(In thousands)
 
Contractual maturity:
                       
Due within one year
  $ 448,946     $ 223,458     $ 526     $ 345  
Due from one year through three years
    44,274       116,886       250       814  
    $ 493,220     $ 340,344     $ 776     $ 1,159  

The unrealized gains, net, were insignificant in relation to the Company’s total available-for-sale portfolio. The unrealized gains, net, can be primarily attributed to a combination of market conditions as well as the demand for and duration of the Company’s U.S. government bonds and notes. See Note 14, “Fair Value of Financial Instruments,” for fair value discussion regarding the Company’s cash equivalents and marketable securities.

7. Commitments and Contingencies

On February 1, 2005, the Company issued $300.0 million aggregate principal amount of zero coupon convertible senior notes (the “2010 Notes”) due February 1, 2010 to Credit Suisse First Boston LLC and Deutsche Bank Securities as initial purchasers who then sold the convertible notes to institutional investors. The Company has elected to pay the principal amount of the 2010 Notes in cash when they are due. Subsequently, the Company repurchased a total of $163.1 million face value of the outstanding 2010 Notes in 2005 and 2008. The aggregate principal amount of the 2010 Notes outstanding as of September 30, 2009 was $137.0 million, offset by an unamortized debt discount of $3.6 million. The debt discount is currently being amortized over the remaining 4 months until maturity of the 2010 Notes, see Note 15, “Convertible Notes,” for additional details.

On June 29, 2009, the Company entered into an Indenture (the “Indenture”) by and between the Company and U.S. Bank, National Association, as trustee, relating to the issuance by the Company of $150.0 million aggregate principal amount of 5% convertible senior notes due June 15, 2014 (the “2014 Notes”). On July 10, 2009, an additional $22.5 million in aggregate principal amount of 2014 Notes were issued as a result of the underwriters exercising their overallotment option. The aggregate principal amount of the 2014 Notes outstanding as of September 30, 2009 was $172.5 million, offset by unamortized debt discount of $63.2 million in the accompanying condensed consolidated balance sheets. The debt discount is currently being amortized over the remaining 57 months until maturity of the 2014 Notes on June 15, 2014. See Note 15, “Convertible Notes,” for additional details.


As of September 30, 2009, the Company’s material contractual obligations are (in thousands):

 
 
 
   
Payments Due by Year
 
 
 
 
Total
   
Remainder
of 2009
   
2010
   
2011
   
2012
   
2013
   
Thereafter
 
Contractual obligations(1)
                                         
Operating leases
  $ 10,287     $ 1,960     $ 6,882     $ 897     $ 548     $     $  
Convertible notes
    309,450             136,950                         172,500  
Total
  $ 319,737     $ 1,960     $ 143,832     $ 897     $ 548     $     $ 172,500  
____________

(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $10.3 million, including $8.4 million recorded as a reduction of long-term deferred tax assets and $1.9 million in long-term income taxes payable, as of September 30, 2009. 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.

Rent expense was approximately $1.5 million and $4.7 million for the three and nine months ended September 30, 2009, respectively. Rent expense was approximately $1.7 million and $5.2 million for the three and nine months ended September 30, 2008, respectively.

Deferred rent, included primarily in other long-term liabilities, was approximately $0.7 million and $1.1 million as of September 30, 2009 and December 31, 2008, respectively.

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 and directors. As of September 30, 2009, the Company had made payments of approximately $10.9 million on their behalf, including $0.1 million in the three months ended September 30, 2009. The Company received approximately $5.3 million from the former officers related to their settlement agreements with the Company in connection with the derivative and class action lawsuits which was comprised of approximately $4.5 million in cash received in the first quarter of 2009 as well as approximately 163,000 shares of the Company’s stock with a value of approximately $0.8 million in the fourth quarter of 2008. As of September 30, 2009, the Company has received $12.3 million from insurance settlements related to the defense of the Company, its directors and its officers which were recorded under costs (recovery) of restatement and related legal activities in the condensed consolidated statements of operations. As of September 30, 2008, the Company had made payments of approximately $6.8 million on their behalf, including $0.4 million in the quarter ended September 30, 2008. These payments made by the Company and the repayments by the former officers to the Company were recorded under costs (recovery) of restatement and related legal activities in the condensed consolidated statements of operations.
 
8. Stockholders' Equity
 
Share Repurchase Program

In October 2001, the Company’s Board of Directors (the “Board”) approved a share repurchase program of its Common Stock, principally to reduce the dilutive effect of employee stock options. To date, the Board has approved the authorization to repurchase up


to 19.0 million shares of the Company’s outstanding Common Stock over an undefined period of time. During the nine months ended September 30, 2009, the Company did not repurchase any Common Stock. As of September 30, 2009, the Company had repurchased a cumulative total of approximately 16.8 million shares of its Common Stock with an aggregate price of approximately $233.8 million since the commencement of this program. As of September 30, 2009, there remained an outstanding authorization to repurchase approximately 2.2 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 cost of the shares repurchased exceeds the average original proceeds per share received from the issuance of Common Stock.

9. Income Taxes
 
The effective tax rate for the three months ended September 30, 2009 was 0.3% which is lower than the U.S. statutory tax rate applied to the Company’s net loss primarily due to a full valuation allowance on its U.S. net deferred tax assets, foreign income taxes and state income taxes, partially offset by refundable research and development tax credits. The effective tax rate for the three months ended September 30, 2008 was 0.3% which was lower than the U.S. statutory tax rate applied to the Company’s net loss primarily due to the establishment of a full valuation allowance on its U.S. net deferred tax assets.

As of September 30, 2009, the Company’s condensed consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $152.6 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 September 30, 2009, a valuation allowance of $150.6 million has been recorded against the 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 reversal of the valuation allowance.

The Company maintains liabilities for uncertain tax benefits within its non-current 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 September 30, 2009, the Company had $10.3 million of unrecognized tax benefits, including $7.5 million recorded as a reduction of long-term deferred tax assets, which is net of approximately $0.9 million of federal tax benefit, and including $1.9 million in long-term income taxes payable. If recognized, approximately $0.7 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, 2008, the Company had $9.6 million of unrecognized tax benefits, including $6.9 million recorded as a reduction of long-term deferred tax assets, which is net of approximately $0.8 million of federal tax benefits, and including $1.9 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 (benefit). At September 30, 2009 and December 31, 2008, an insignificant amount of interest and penalties are included in long-term income taxes payable.

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is currently under a payroll examination by the Internal Revenue Service ("IRS") for the years ended December 31, 2004 and 2005. The Company is also under examination by the California Franchise Tax Board for the fiscal year ended March 31, 2003 and the years ended December 31, 2003 and 2004. Although the outcome of any tax audit is uncertain, the Company believes it has adequately provided for any additional taxes that may be required to be paid as a result of such examinations. If the Company determines that no payment will ultimately be required, the reversal of these tax liabilities may result in tax benefits being recognized in the period when that conclusion is reached. However, if an ultimate tax assessment exceeds the recorded tax liability for that item, an additional tax provision may need to be recorded. The impact of such adjustments in the Company’s tax accounts could have a material impact on the consolidated results of operations in future periods.



The Company is subject to examination by the IRS for tax years ended 2006 through 2008. The Company is also subject to examination by the State of California for tax years ended 2005 through 2008. In addition, any R&D credit and net operating loss carryforwards 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 jurisdictions for various periods.

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 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.

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

 
 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
   
(In thousands, except per share amounts)
 
Numerator:
                       
Net loss
  $ (27,496 )   $ (30,946 )   $ (68,893 )   $ (183,615 )
Denominator:
                               
Weighted average shares used to compute basic EPS
    105,182       104,897       104,761       104,795  
Dilutive potential shares from stock options, ESPP and nonvested equity stock and stock units
                       
Weighted average shares used to compute diluted EPS
    105,182       104,897       104,761       104,795  
Net loss per share:
                               
Basic
  $ (0.26 )   $ (0.29 )   $ (0.66 )   $ (1.75 )
Diluted
  $ (0.26 )   $ (0.29 )   $ (0.66 )   $ (1.75 )

For the three and nine months ended September 30, 2009, approximately 14.0 million shares that would be issued upon the conversion of the convertible notes were excluded from the calculation of earnings per share because the conversion price was higher than the average market price of the Common Stock during this period. For the three and nine months ended September 30, 2008, approximately 5.9 million shares that would be issued upon the conversion of the contingently issuable convertible notes were excluded from the calculation of earnings per share because the conversion price was higher than the average market price of the Common Stock during this period. For the three months ended September 30, 2009 and 2008, options to purchase approximately 9.3 million and 11.9 million shares, respectively, and for the nine months ended September 30, 2009 and 2008, options to purchase approximately 12.7 million and 10.5 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 September 30, 2009 and 2008, an additional 2.2 million and 2.7 million shares, respectively, and for the nine months ended September 30, 2009 and 2008, an additional 1.3 million and 3.4 million shares, respectively, including nonvested equity stock and stock units, that would be dilutive have been excluded from the weighted average dilutive shares because there was a net loss for the period.
 
11. Business Segments, Exports and Major Customers
 
The Company operates in a single industry segment, the design, development and licensing of chip interface technologies and architectures. Five customers accounted for 25%, 15%, 14%, 13% and 12%, respectively, of revenue in the three months ended September 30, 2009. Five customers accounted for 23%, 13%, 13%, 13% and 10%, respectively, of revenue in the three months ended September 30, 2008. Six customers accounted for 25%, 15%, 14%, 12%, 11% and 10%, respectively, of revenue in the nine months ended September 30, 2009. Six customers accounted for 20%, 14%, 12%, 11%, 10% and 10%, respectively, of revenue in the nine months ended September 30, 2008. The Company expects that its revenue concentration will decrease over the long term as the Company licenses new customers.
 
The Company sells its chip interfaces and licenses to customers in the Far East, North America, and Europe. Revenue from customers in the following geographic regions was recognized as follows:

 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In thousands)
 
2009
   
2008
   
2009
   
2008
 
Japan
  $ 22,574     $ 23,279     $ 66,455     $ 83,839  
North America
    4,856       5,857       14,748       18,518  
Taiwan
    31       10       72       532  
Korea
    359       102       730       541  
Singapore
          114       43       288  
Europe
    54       66       143       1,163  
    $ 27,874     $ 29,428     $ 82,191     $ 104,881  

At September 30, 2009, of the $15.9 million of total property and equipment, approximately $13.7 million are located in the United States, $1.8 million are located in India and $0.4 million are located in other foreign locations. At December 31, 2008, of the $22.3 million of total property and equipment, approximately $19.3 million are located in the United States, $2.4 million are located in India and $0.6 million are located in other foreign locations.

12. Amortizable Intangible Assets

The components of the Company’s intangible assets as of September 30, 2009 and December 31, 2008 were as follows:

 
 
As of September 30, 2009
 
 
 
 
Gross Carrying
Amount
   
Accumulated
Amortization
   
Net Carrying
Amount
 
   
(In thousands)
 
Patents
  $ 11,491     $ (6,528 )   $ 4,963  
Intellectual property
    10,384       (10,170 )     214  
Customer contracts and contractual relationships
    4,000       (2,592 )     1,408  
Existing technology
    2,700       (2,700 )      
Non-competition agreement
    100       (100 )      
Total intangible assets
  $ 28,675     $ (22,090 )   $ 6,585  

   
As of December 31, 2008
 
 
 
 
Gross Carrying
Amount
   
Accumulated
Amortization
   
Net Carrying
Amount
 
   
(In thousands)
 
Patents
  $ 9,941     $ (5,527 )   $ 4,414  
Intellectual property
    10,384       (9,527 )     857  
Customer contracts and contractual relationships
    4,000       (2,224 )     1,776  
Existing technology
    2,700       (2,503 )     197  
Non-competition agreement
    100       (100 )      
Total intangible assets
  $ 27,125     $ (19,881 )   $ 7,244  

Amortization expense for intangible assets for the three and nine months ended September 30, 2009 was $0.7 million and $2.2 million, respectively. Amortization expense for intangible assets for the three and nine months ended September 30, 2008 was $0.8 million and $3.5 million, respectively.

During the three months ended March 31, 2009, the company purchased patents related to mobile memory and other applications in an asset acquisition from Inapac Technology, Inc for approximately $1.6 million.



The estimated future amortization expense of intangible assets as of September 30, 2009 was as follows (amounts in thousands):

 
Years Ending December 31:
 
Amount
 
2009 (remaining 3 months)
  $ 683  
2010
    1,743  
2011
    1,414  
2012
    1,143  
2013
    1,122  
Thereafter
    480  
    $ 6,585  

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. On January 19, 2009, Hynix filed a motion for reconsideration of the court’s unclean hands order and for summary judgment on the ground that the decision by the Delaware court in the pending Micron-Rambus litigation (described below) should be given preclusive effect. In its motion Hynix requested alternatively that the court’s unclean hands order be certified for appeal and that the remainder of the case be stayed. Rambus filed an opposition to Hynix’s motion on January 26, 2009, and a hearing was held on January 30, 2009. On February 3, 2009, the court denied Hynix’s motions and restated its conclusions that Rambus had not anticipated litigation until late 1999 and that Hynix had not demonstrated any prejudice from any alleged destruction of evidence.

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. Specifically, the jury found that each of the ten selected patent claims was supported by the written description, and was not anticipated or rendered obvious by prior art; therefore, none of the patent claims was invalid. The jury also found that Hynix infringed all eight of the patent claims for which the jury was asked to determine infringement; the court had previously determined on summary judgment that Hynix infringed the other two claims at issue in the trial. On July 14, 2006, the court granted Hynix’s motion for a new trial on the issue of damages unless Rambus agreed to a reduction of the total jury award to approximately $134 million. The court found that the record supported a maximum royalty rate of 1% for SDR SDRAM and 4.25% for DDR SDRAM, which the court applied to the stipulated U.S. sales of infringing Hynix products through December 31, 2005. On July 27, 2006, Rambus elected remittitur of the jury’s award to approximately $134 million. On August 30, 2006, the court awarded Rambus prejudgment interest for the period June 23, 2000 through December 31, 2005. Hynix filed a motion on July 7, 2008 to reduce the amount of remitted damages and any supplemental damages that the court may award, as well as to limit the products that could be affected by any injunction that the court may grant, on the grounds of patent exhaustion. Following a hearing on August 29, 2008, the court denied Hynix’s motion. In separate orders issued December 2, 2008, January 16, 2009, and January 27, 2009, the court denied Hynix’s post-trial motions for judgment as a matter of law and new trial on infringement and validity.

On June 24, 2008, the court heard oral argument on Rambus’ motion to supplement the damages award and for equitable relief related to Hynix’s infringement of Rambus patents. On February 23, 2009, the court issued an order (1) granting Rambus’ motion for supplemental damages and prejudgment interest for the period after December 31, 2005, at the same


rates ordered for the prior period; (2) denying Rambus’ motion for an injunction; and (3) ordering the parties to begin negotiations regarding the terms of a compulsory license regarding Hynix’s continued manufacture, use, and sale of infringing devices.

The third phase of the Hynix-Rambus trial involved Hynix’s affirmative JEDEC-related antitrust and fraud allegations against Rambus. On April 24, 2007, the court ordered a coordinated trial of certain common JEDEC-related claims alleged by the manufacturer parties (i.e., Hynix, Micron, Nanya and Samsung) and defenses asserted by Rambus in Hynix v Rambus, Case No. C 00-20905 RMW, and three other cases pending before the same court ( 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, each described in further detail below). On December 14, 2007, the court excused Samsung from the coordinated trial based on Samsung’s agreement to certain conditions, including trial of its claims against Rambus by the court within six months following the conclusion of the coordinated trial. 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. Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their burden of proving that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important representations that it did not have any intellectual property pertaining to the work of JEDEC and intended or reasonably expected that the representations would be heard by or repeated to others including Hynix, Micron or Nanya; (3) Rambus uttered deceptive half-truths about its intellectual property coverage or potential coverage of products compliant with synchronous DRAM standards then being considered by JEDEC by disclosing some facts but failing to disclose other important facts; or (4) JEDEC members shared a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed motions for a new trial and for judgment on certain of their equitable claims and defenses. A hearing on those motions was held on May 1, 2008. A further hearing on the equitable claims and defenses was held on May 27, 2008. On July 24, 2008, the court issued an order denying Hynix, Micron, and Nanya’s motions for new trial.

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. The court concluded (among other things) that (1) Rambus did not have an obligation to disclose pending or anticipated patent applications and had sound reasons for not doing so; (2) the evidence supported the jury’s finding that JEDEC members did not share a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard; (3) the written JEDEC disclosure policies did not clearly require members to disclose information about patent applications and the intent to file patent applications in the future; (4) there was no clearly understood or legally enforceable agreement of JEDEC members to disclose information about patent applications or the intent to seek patents relevant to standards being discussed at JEDEC; (5) during the time Rambus attended JEDEC meetings, Rambus did not have any patent application pending that covered a JEDEC standard, and none of the patents in suit was applied for until well after Rambus resigned from JEDEC; (6) Rambus’ conduct at JEDEC did not constitute an estoppel or waiver of its rights to enforce its patents; (7) Hynix, Micron, and Nanya failed to carry their burden to prove their asserted waiver and estoppel defenses not directly based on Rambus’ conduct at JEDEC; (8) the evidence did not support a finding of any material misrepresentation, half truths or fraudulent concealment by Rambus related to JEDEC upon which Nanya relied; (9) the manufacturers failed to establish that Rambus violated unfair competition law by its conduct before JEDEC; (10) the evidence related to Rambus’ patent prosecution did not establish that Rambus unduly delayed in prosecuting the claims in suit; (11) Rambus did not unreasonably delay bringing its patent infringement claims; and (12) there is no basis for any unclean hands defense or unenforceability claim arising from Rambus’ conduct.

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. Post-judgment interest will accrue at the statutory rate. In addition, the judgment orders Hynix to pay Rambus 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. On April 9, 2009, Rambus submitted its cost bill in the amount of approximately $0.85 million. On March 24, 2009, Hynix filed a motion under Rule 62 seeking relief from the requirement that it post a supersedeas bond in the full amount of the final judgment in order to stay its execution pending an appeal. Rambus filed a brief opposing Hynix’s motion on April 10, 2009. A hearing on Hynix’s motion was heard on May 8, 2009. On May 14, 2009, the court granted Hynix’s motion in part and ordered that execution of the judgment be stayed on the condition that, within 45 days, Hynix post a supersedeas bond in the amount of $250 million and provide Rambus with documentation establishing a lien in Rambus’ favor on property owned by Hynix in Korea in the amount of the judgment not covered by the supersedeas bond. The Court also ordered that Hynix pay the ongoing royalties set forth in the final judgment into an escrow account to be arranged by the parties; the escrowed funds would be released only upon agreement of the


parties or further order of the court. Hynix posted the $250 million supersedeas bond on June 26, 2009. The parties are continuing to work on establishing the lien and the escrow arrangement.

On April 6, 2009, Hynix filed its notice of appeal. On April 17, 2009, Rambus filed its notice of cross appeal. Hynix filed a motion to dismiss Rambus’ cross-appeal on July 1, 2009, and Rambus filed an opposition to Hynix’s motion on July 15, 2009. On July 23, 2009, Rambus and Hynix filed a joint motion to assign this appeal to the same panel hearing the appeal in the Micron Delaware case (discussed below) and to coordinate oral arguments of the two appeals. On August 17, 2009, the Federal Circuit issued an order 1) granting the joint motion to coordinate oral arguments of the two appeals; and 2) denying Hynix’s motion to dismiss Rambus’ cross-appeal. On August 31, 2009, Hynix filed its opening brief. Rambus’ opening and answering briefs are not yet due.

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 July 24, 2009, Rambus filed a motion to assign this appeal to the same panel hearing the appeal in the Hynix case (discussed above) and to coordinate oral arguments of the two appeals. On August 8, 2009, Micron filed an opposition to Rambus’ motion to coordinate. On August 17, 2009, the Federal Circuit issued an order granting Rambus’ motion to coordinate oral arguments of the two appeals. On August 28, 2009, Micron filed its answering brief. On October 14, 2009, Rambus filed its reply brief. Oral argument has yet to be scheduled.

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. Micron has denied Rambus’ allegations and is alleging counterclaims for violations of federal antitrust laws, unfair trade practices, equitable estoppel, fraud and negligent misrepresentation in connection with Rambus’ participation in JEDEC. Micron seeks a declaration of monopolization by Rambus, injunctive relief, compensatory and punitive damages, attorneys’ fees, and a declaratory judgment of invalidity, unenforceability, and noninfringement of the 14 patents in suit.

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. Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their burden of


proving that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important representations that it did not have any intellectual property pertaining to the work of JEDEC and intended or reasonably expected that the representations would be heard by or repeated to others including Hynix, Micron or Nanya; (3) Rambus uttered deceptive half-truths about its intellectual property coverage or potential coverage of products compliant with synchronous DRAM standards then being considered by JEDEC by disclosing some facts but failing to disclose other important facts; or (4) JEDEC members shared a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed motions for a new trial and for judgment on certain of their equitable claims and defenses. A hearing on those motions was held on May 1, 2008. A further hearing on the equitable claims and defenses was held on May 27, 2008. On July 24, 2008, the court issued an order denying Hynix, Micron, and Nanya’s motions for new trial.

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. The court concluded (among other things) that (1) Rambus did not have an obligation to disclose pending or anticipated patent applications and had sound reasons for not doing so; (2) the evidence supported the jury’s finding that JEDEC members did not share a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard; (3) the written JEDEC disclosure policies did not clearly require members to disclose information about patent applications and the intent to file patent applications in the future; (4) there was no clearly understood or legally enforceable agreement of JEDEC members to disclose information about patent applications or the intent to seek patents relevant to standards being discussed at JEDEC; (5) during the time Rambus attended JEDEC meetings, Rambus did not have any patent application pending that covered a JEDEC standard, and none of the patents in suit was applied for until well after Rambus resigned from JEDEC; (6) Rambus’ conduct at JEDEC did not constitute an estoppel or waiver of its rights to enforce its patents; (7) Hynix, Micron, and Nanya failed to carry their burden to prove their asserted waiver and estoppel defenses not directly based on Rambus’ conduct at JEDEC; (8) the evidence did not support a finding of any material misrepresentation, half truths or fraudulent concealment by Rambus related to JEDEC upon which Nanya relied; (9) the manufacturers failed to establish that Rambus violated unfair competition law by its conduct before JEDEC; (10) the evidence related to Rambus’ patent prosecution did not establish that Rambus unduly delayed in prosecuting the claims in suit; (11) Rambus did not unreasonably delay bringing its patent infringement claims; and (12) there is no basis for any unclean hands defense or unenforceability claim arising from Rambus’ conduct.

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 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

On September 11, 2000, Rambus filed suit against Micron in multiple European jurisdictions for infringement of its European patent, EP 0 525 068 (the “’068 patent), which was later revoked. Additional suits were filed pertaining to a second Rambus patent, EP 1 022 642 (the “’642 patent”) and a third Rambus patent, EP 1 004 956 (the “’956 patent”). Rambus’ suit against Micron for infringement of the ’642 patent in Mannheim, Germany, has not been active. The Mannheim court issued an Order of Cost with respect to the ’068 proceeding requiring Rambus to reimburse Micron attorneys fees in the amount of $0.45 million. This amount has since been paid. One proceeding in Italy relating to the ’642 patent was adjourned at a hearing on June 15, 2007, each party bearing its own costs. Two other proceedings in Italy relating to the ’956 patent remain ongoing.



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 and Samsung was 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, Samsung 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 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 court subsequently excused Samsung from the coordinated trial on December 14, 2007, based on Samsung’s agreement to certain conditions, including trial of its claims against Rambus within six months following the conclusion of the coordinated trial. 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. Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their burden of proving that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important representations that it did not have any intellectual property pertaining to the work of JEDEC and intended or reasonably expected that the representations would be heard by or repeated to others including Hynix, Micron or Nanya; (3) Rambus uttered deceptive half- truths about its intellectual property coverage or potential coverage of products compliant with synchronous DRAM standards then being considered by JEDEC by disclosing some facts but failing to disclose other important facts; or (4) JEDEC members shared a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed motions for a new trial and for judgment on certain of their equitable claims and defenses. A hearing on those motions was held on May 1, 2008. A further hearing on the equitable claims and defenses was held on May 27, 2008. On July 24, 2008, the court issued an order denying Hynix, Micron, and Nanya’s motions for new trial.

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. The court concluded (among other things) that (1) Rambus did not have an obligation to disclose pending or anticipated patent applications and had sound reasons for not doing so; (2) the evidence supported the jury’s finding that JEDEC members did not share a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard; (3) the written JEDEC disclosure policies did not clearly require members to disclose information about patent applications and the intent to file patent applications in the future; (4) there was no clearly understood or legally enforceable agreement of JEDEC members to disclose information about patent applications or the intent to seek patents relevant to standards being discussed at JEDEC; (5) during the time Rambus attended JEDEC meetings, Rambus did not have any patent application pending that covered a JEDEC standard, and none of the patents in suit was applied for until well after Rambus resigned from JEDEC; (6) Rambus’ conduct at JEDEC did not constitute an estoppel or waiver of its rights to enforce its patents; (7) Hynix, Micron, and Nanya failed to carry their burden to prove their asserted waiver and estoppel defenses not directly based on Rambus’ conduct at JEDEC; (8) the evidence did not support a finding of any material misrepresentation, half truths or fraudulent concealment by Rambus related to JEDEC upon which Nanya relied; (9) the manufacturers failed to establish that Rambus violated unfair competition law by its conduct before JEDEC; (10) the evidence related to Rambus’ patent prosecution did not establish that Rambus unduly delayed in prosecuting the claims in suit; (11) Rambus did not unreasonably delay bringing its patent infringement claims; and (12) there is no basis for any unclean hands defense or unenforceability claim arising from Rambus’ conduct.

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 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’ 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, Samsung, 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.

Samsung Litigation

U.S District Court in the Northern District of California

On June 6, 2005, Rambus filed a patent infringement suit against Samsung in the U.S. District Court  the Northern District of California alleging that Samsung’s SDRAM and DDR SDRAM parts infringe 9 of Rambus’ patents. Samsung has denied Rambus’ claims and asserted counterclaims for non-infringement, invalidity and unenforceability of the patents, violations of various antitrust and unfair competition statutes, breach of license, and breach of duty of good faith and fair dealing. Samsung has also counterclaimed that Rambus aided and abetted breach of fiduciary duty and intentionally interfered with Samsung’s contract with a former employee by knowingly hiring a former Samsung employee who allegedly misused proprietary Samsung information. Rambus has denied Samsung’s counterclaims.

As explained above, the court ordered a coordinated trial 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 court subsequently excused Samsung from the coordinated trial on December 14, 2007, based on Samsung’s agreement to certain conditions, including trial of its claims against Rambus within six months following the conclusion of the coordinated trial (see below). 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 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’ 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, Samsung filed a motion for summary judgment on the ground that the Delaware Order should be given preclusive effect. Rambus filed an opposition brief to this 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.

On August 11, 2008, the court granted summary judgment in Rambus’ favor on Samsung’s claims for aiding and abetting a breach of fiduciary duty, intentional interference with contract, and certain aspects of Samsung’s unfair competition claim. On September 16, 2008, the court entered a stipulation and order of dismissal with prejudice of certain of Samsung’s claims and defenses (including those based on Rambus’ alleged JEDEC conduct) and Rambus’ defenses corresponding to Samsung’s claims. A bench trial on the remaining claims and defenses that are unique to Samsung (breach of license, breach of duty of good faith and fair dealing, and estoppel based on those claims), as well as Samsung’s claims and defenses related to its allegations that Rambus spoliated evidence, was held between September 22 and October 1, 2008. On April 27, 2009, the court issued Findings of Fact and Conclusions of Law holding that:  (1) the parties’ 2000 SDR/DDR license agreement did not cover DDR2 and future generation products; (2) the license did not entitle Samsung to most favored licensee benefits in any renewal or subsequent agreement; (3) Rambus did not fail to negotiate an extension or renewal license in good faith, and Samsung would not have been entitled to damages for any such failure;


(4) Samsung’s equitable estoppel defense failed; (5) Rambus breached the license by not offering Samsung the benefit to which it was entitled under the license (for the second quarter of 2005 only) of the royalty in the March 2005 settlement agreement between Rambus and Infineon; (6) Rambus failed to prove that Samsung breached certain audit provisions in the license, and therefore Rambus’ termination of the license less than one month before it was due to expire was improper; and (7) Rambus’ actions did not cause the parties’ failure to reach agreement on an extension or renewal of the license. No decision has been issued to date regarding Samsung’s spoliation allegations.

Federal Trade Commission Complaint

On June 19, 2002, the FTC filed a complaint against Rambus. The FTC alleged that through Rambus’ action and inaction at JEDEC, Rambus violated Section 5 of the FTC Act in a way that allowed Rambus to obtain monopoly power in — or that by acting with intent to monopolize it created a dangerous probability of monopolization in — synchronous DRAM technology markets. The FTC also alleged that Rambus’ action and practices at JEDEC constituted unfair methods of competition in violation of Section 5 of the FTC Act. As a remedy, the FTC sought to enjoin Rambus’ right to enforce patents with priority dates prior to June 1996 as against products made pursuant to certain existing and future JEDEC standards.

On February 17, 2004, the FTC Chief Administrative Law Judge issued his initial decision dismissing the FTC’s complaint against Rambus on multiple independent grounds (the “Initial Decision”). The FTC’s Complaint Counsel appealed this decision.

On August 2, 2006, the FTC released its July 31, 2006, opinion and order reversing and vacating the Initial Decision and determining that Rambus violated Section 5 of the Federal Trade Commission Act. Following further briefing and oral argument on issues relating to remedy, the FTC released its opinion and order on remedy on February 5, 2007. The remedy order set the maximum royalty rate that Rambus could collect on the manufacture, use or sale in the United States of certain JEDEC-compliant parts after the effective date of the Order. The order also mandated that Rambus offer a license for these products at rates no higher than the maximums set by the FTC, including a further cap on rates for the affected non-memory products. The order further required Rambus to take certain steps to comply with the terms of the order and applicable disclosure rules of any standard setting organization of which it may become a member.

The FTC’s order explicitly did not set maximum rates or other conditions with respect to Rambus’ royalty rates for DDR2 SDRAM, other post-DDR JEDEC standards, or for non-JEDEC-standardized technologies such as those used in RDRAM or XDR DRAM.

On March 16, 2007, the FTC issued an order granting in part and denying in part Rambus’ motion for a stay of the remedy pending appeal. The March 16, 2007 order permitted Rambus to acquire rights to royalty payments for use of the patented technologies affected by the February 2 remedy order during the period of the stay in excess of the FTC-imposed maximum royalty rates on SDRAM and DDR SDRAM products, provided that funds above the maximum allowed rates be either placed into an escrow account to be distributed, or payable pursuant a contingent contractual obligation, in accordance with the ultimate decision of the court of appeals. In an opinion accompanying its order, the FTC clarified that it intended its remedy to be “forward-looking” and “prospective only,” and therefore unlikely to be construed to require Rambus to refund royalties already paid or to restrict Rambus from collecting royalties for the use of its technologies during past periods.

On April 27, 2007, the FTC issued an order granting in part and denying in part Rambus’ petition for reconsideration of the remedy order. The FTC’s order and accompanying opinion on Rambus’ petition for reconsideration clarified the remedy order in certain respects. For example, (1) the FTC explicitly stated that the remedy order did not require Rambus to make refunds or prohibit it from collecting royalties in excess of maximum allowable royalties that accrue up to the effective date of the remedy order; (2) the remedy order was modified to specifically permit Rambus to seek damages in litigation up to three times the specified maximum allowable royalty rates on the ground of willful infringement and any allowable attorneys’ fees; and (3) under the remedy order, licensees were permitted to pay Rambus a flat fee in lieu of running royalties, even if such an arrangement resulted in payments above the FTC’s rate caps in certain circumstances.

Rambus appealed the FTC’s liability and remedy orders to the U. S. Court of Appeals for the District of Columbia (the “CADC”). Oral argument was heard February 14, 2008. On April 22, 2008, the CADC issued an opinion which requires vacatur of the FTC’s orders. The CADC held that the FTC failed to demonstrate that Rambus’ conduct was exclusionary, and thus failed to establish its allegation that Rambus unlawfully monopolized any relevant market. The CADC’s opinion set aside the FTC’s orders and remanded the matter to the FTC for further proceedings consistent with the opinion. Regarding the chance of further proceedings on remand, the CADC expressed serious concerns about the strength of the evidence relied on to support some of the FTC’s crucial findings regarding


the scope of JEDEC’s patent disclosure policies and Rambus’ alleged violation of those policies. On August 26, 2008, the CADC denied the FTC’s petition to rehear the case en banc. On October 16, 2008, the FTC issued an order explicitly authorizing Rambus to receive amounts above the maximum rates allowed by the FTC’s now-vacated order payable pursuant to any contingent contractual obligation.

On November 24, 2008, the FTC filed a petition seeking review of the CADC decision by the U. S. Supreme Court. Rambus filed an opposition to the FTC’s petition on January 23, 2009, and the FTC filed a reply on February 4, 2009. On February 23, 2009, the United States Supreme Court denied the FTC’s petition. On May 12, 2009, the Commission issued an order dismissing the complaint, finding that further litigation in this matter would not be in the public interest.

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. The European Commission sent Rambus a further request for information on December 22, 2006, which Rambus answered on January 26, 2007. 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 June 12, 2009, the European Commission announced that it has reached a tentative settlement with Rambus to resolve the pending case. Under the proposed resolution, the Commission would make no finding of liability relative to JEDEC-related charges, and no fine would be assessed against Rambus. In addition, Rambus would commit 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.  In accordance with European Commission antitrust procedures, interested third parties were invited to submit comments on the proposed Commitment to the European Commission within one month of the announcement. The comment period has expired, but no final decision has issued to date. Under the proposed resolution, which is still subject to revision, Rambus would offer licenses with maximum royalty rates for five-year worldwide licenses of 1.5% for DDR2, DDR3, GDDR3 and GDDR4 SDRAM memory types. Certain integrated DRAM manufacturers licensed under the proposed Commitment and offering a full line of DRAMs   would be entitled to a royalty holiday for those older types, subject to compliance with the terms of the license. In addition, Rambus would offer 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 would be valid for a period of five years from the adoption date of the Commitment decision. All royalty rates would be applicable to future shipments only and does not affect liability, if any, for damages or royalties that accrued up to the time of the license grant.

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.

A hearing on Rambus’ motion for summary judgment on the grounds that Micron’s cross-complaint is barred by the statute of limitations was held on August 1, 2008. At the hearing, the San Francisco court granted Rambus’ motion as to Micron’s first cause of action (alleged violation of California’s Cartwright Act) and continued the motion as to Micron’s second and third causes of action (alleged violation of unfair business practices act and alleged intentional interference with prospective economic advantage). No further order has issued on Rambus’ motion.



On November 25, 2008, Micron, Samsung, and Hynix filed eight motions for summary judgment on various grounds. On January 26, 2009, Rambus filed briefs in opposition to all eight motions. A hearing on these motions for summary judgment was held on March 4-6, March 16-17, and June 29, 2009. The court denied all eight motions. On June 17 and June 22, 2009, Micron, Samsung, and Hynix filed petitions requesting that the court of appeal issue writs directing the trial court to vacate two orders denying motions for summary judgment and enter orders granting the motions. In separate summary orders dated July 27 and August 13, 2009, the court of appeal denied the two petitions. On August 24, 2009, Micron, Samsung, and Hynix filed a petition requesting that the California Supreme Court review the court of appeals’ denial of one of their petitions. On October 22, 2009, the California Supreme Court denied the petition.

On March 10, 2009, defendants filed motions requesting that Rambus’ case be dismissed on the ground that the Delaware Order should be given preclusive effect. Rambus filed a brief opposing this request. The parties filed further briefs on the preclusive effect, if any, of the Delaware Order on April 3 and April 17, 2009. The parties submitted briefs on their allegations regarding alleged spoliation of evidence on April 20, 2009. A hearing on these issues was held on April 27 and June 1, 2009, at the conclusion of which the court denied defendants’ motion for issue preclusion and terminating sanctions. On June 19, 2009, Micron and Samsung filed petitions requesting that the court of appeal issue writs directing the trial court to vacate its order denying defendants’ motion for issue preclusion and terminating sanctions and enter an order granting the motion. Hynix filed a similar petition on June 23, 2009. On July 6, 2009, the court of appeal denied all three of these petitions. On July 16, 2009, Samsung and Micron filed petitions requesting that the California Supreme Court review the court of appeals’ denial of their petitions. On September 9, 2009, the California Supreme Court denied these petitions.

Trial is scheduled to begin on January 11, 2010.

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.

On May 31, 2006, the first of three shareholder derivative actions was filed in the U.S. District Court for the Northern District of California against Rambus (as a nominal defendant) and certain current and former executives and board members. These actions have been consolidated for all purposes under the caption, In re Rambus Inc. Derivative Litigation, Master File No. C-06-3513-JF (N.D. Cal.), and Howard Chu and Gaetano Ruggieri were appointed lead plaintiffs. The consolidated complaint, as amended, alleges violations of certain federal and state securities laws as well as other state law causes of action. The complaint seeks disgorgement and damages in an unspecified amount, unspecified equitable relief, and attorneys’ fees and costs.

On August 22, 2006, another shareholder derivative action was filed in Delaware Chancery Court against Rambus (as a nominal defendant) and certain current and former executives and board members ( Bell v. Tate et al. , 2366-N (Del. Chancery)). On May 16, 2008, this case was dismissed pursuant to a notice filed by the plaintiff.

On October 18, 2006, the Board of Directors formed a Special Litigation Committee (the “SLC”) to evaluate potential claims or other actions arising from the stock option granting activities. The Board of Directors appointed J. Thomas Bentley, Chairman of the Audit Committee, and Abraham Sofaer, a retired federal judge and Chairman of the Legal Affairs Committee, both of whom joined the Rambus Board of Directors in 2005, to comprise the SLC.

On August 24, 2007, the final written report setting forth the findings of the SLC was filed with the court. As set forth in its report, the SLC determined that all claims should be terminated and dismissed against the named defendants in In re Rambus Inc. Derivative Litigation with the exception of claims against named defendant Ed Larsen, who served as Vice President, Human Resources from September 1996 until December 1999, and then Senior Vice President, Administration until July 2004. The SLC entered into settlement agreements with certain former officers of Rambus. These settlements are conditioned upon the dismissal of the claims asserted against these individuals in In re Rambus Inc. Derivative Litigation . The aggregate value of the settlements to Rambus exceeds $5.3 million in cash as well as substantial additional value to Rambus relating to the relinquishment of claims to over 2.7 million stock options. The SLC stated its intention to assert control over the litigation. The conclusions and recommendations of the SLC are subject to review by the court. On October 5, 2007, Rambus filed a motion to terminate in accordance with the SLC’s recommendations. Pursuant to the parties’ agreement, that motion was taken off calendar.


On August 30, 2007, another shareholder derivative action was filed in the U.S. District Court for the Southern District of New York against Rambus (as a nominal defendant) and PricewaterhouseCoopers LLP ( Francl v. PricewaterhouseCoopers LLP et al. , No. 07-Civ. 7650 (GBD)). On November 21, 2007, the New York court granted PricewaterhouseCoopers LLP’s motion to transfer the action to the Northern District of California.

The parties have settled In re Rambus Inc. Derivative Litigation and Francl v. PricewaterhouseCoopers LLP et al. , No. 07-Civ. 7650 (GBD). The settlement provided for a payment by Rambus of $2.0 million and dismissal with prejudice of all claims against all defendants, with the exception of claims against Ed Larsen, in these actions. The $2.0 million was accrued for during the quarter ended June 30, 2008 within accrued litigation expenses. A final approval hearing was held on January 16, 2009, and an order of final approval was entered on January 20, 2009.

On July 17, 2006, the first of six class action lawsuits was filed in the U.S. District Court for the Northern District of California against Rambus and certain current and former executives and board members. These lawsuits were consolidated under the caption, In re Rambus Inc. Securities Litigation , C-06-4346-JF (N.D. Cal.). The settlement of this action was preliminarily approved by the court on March 5, 2008. Pursuant to the settlement agreement, Rambus paid $18.3 million into a settlement fund on March 17, 2008. Some alleged class members requested exclusion from the settlement. A final fairness hearing was held on May 14, 2008. That same day the court entered an order granting final approval of the settlement agreement and entered judgment dismissing with prejudice all claims against all defendants in the consolidated class action litigation.

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. Following several rounds of motions to dismiss, 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. Rambus’ motion to dismiss the amended complaint was heard on September 12, 2008. 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. Plaintiffs’ filed their opening brief on April 13, 2009. Rambus opposed on May 29, 2009, and plaintiffs filed a reply brief on June 12, 2009. No date has been set for oral argument.

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 November 24, 2008, Rambus filed a motion to dismiss or, in the alternative, stay this case in light of the first-filed federal action. On January 12, 2009, Rambus filed a demurrer to plaintiffs’ complaint on the ground that it was barred by the doctrine of claim preclusion. A hearing on Rambus’ motions was held on February 27, 2009. The court granted Rambus’ motion to stay the case pending the outcome of the appeal in the federal action and denied the remainder of the motions without prejudice.

On August 25, 2008, an amended complaint was filed by certain individuals and entities in Santa Clara County Superior Court against Rambus, certain current and former executives and board members, and PricewaterhouseCoopers LLP ( Steele et al. v. Rambus Inc. et al. , Case No. 1-08-CV-113682). The amended complaint alleges violations of certain California state securities statues as well as fraud and negligent misrepresentation. On October 10, 2008, Rambus filed a demurrer to the amended complaint. A hearing was held on January 9, 2009. On January 12, 2009, the court sustained Rambus’ demurrer without prejudice. Plaintiffs filed a second amended complaint on February 13, 2009, containing the same causes of action as the previous complaint. On March 17, 2009, Rambus filed a demurrer to the second amended complaint. A hearing was held on May 22, 2009. On May 26, 2009, the court sustained in part and overruled in part Rambus’ demurrer. On June 5, 2009, Rambus filed an answer denying plaintiffs’ remaining allegations. Discovery is ongoing.

NVIDIA Litigation

U.S District Court in the Northern District of California

 
On July 10, 2008, Rambus filed suit against NVIDIA Corporation (“NVIDIA”) in the U.S. District Court for the Northern District of California alleging that NVIDIA’s products with memory controllers for at least the SDR, DDR, DDR2, DDR3, GDDR and GDDR3 technologies infringe 17 patents. On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement against NVIDIA under U.S. Patent Nos. 6,493,789 and 6,496,897, accordingly 15 patents remain in suit. On December 30, 2008, the court granted NVIDIA’s motion to stay this case as to Rambus’ claims that NVIDIA’s products infringe nine patents that are also the subject of proceedings in front of the International Trade Commission (described below), and denied NVIDIA’s motion to stay the remainder of Rambus’ patent infringement claims. Certain limited discovery is proceeding, and a case management conference is scheduled for February 12, 2010.
 
On July 11, 2008, one day after Rambus filed suit, NVIDIA filed its own action against Rambus in the U.S. District Court for the Middle District of North Carolina alleging that Rambus committed antitrust violations of the Sherman Act; committed antitrust violations of North Carolina law; and engaged in unfair and deceptive practices in violation of North Carolina law. NVIDIA seeks injunctive relief, damages, and attorneys’ fees and costs. This case has been transferred and consolidated into Rambus’ patent infringement case. Rambus filed a motion to dismiss NVIDIA’s claims prior to transfer of the action to California, and no decision has issued to date.

International Trade Commission

On November 6, 2008, Rambus filed a complaint with the U. S. International Trade Commission (the “ITC”) requesting the commencement of an investigation pertaining to NVIDIA products. The complaint seeks an exclusion order barring the importation, sale for importation, or sale after importation of products that infringe nine Rambus patents from the Ware and Barth families of patents. The accused products include NVIDIA products that incorporate DDR, DDR2, DDR3, LPDDR, GDDR, GDDR2, and GDDR3 memory controllers, including graphics processors, and media and communications processors. The complaint names NVIDIA as a proposed respondent, as well as companies whose products incorporate accused NVIDIA products and are imported into the United States. Additional respondents include: Asustek Computer Inc. and Asus Computer International, BFG Technologies, Biostar Microtech and Biostar Microtech International Corp., Diablotek Inc., EVGA Corp., G.B.T. Inc. and Giga-Byte Technology Co., Hewlett-Packard, MSI Computer Corp. and Micro-Star International Co., Palit Multimedia Inc. and Palit Microsystems Ltd., Pine Technology Holdings, and Sparkle Computer Co.

On December 4, 2008, the ITC instituted the investigation. A hearing on claim construction was held on March 24, 2009, and a claim construction order issued on June 22, 2009. On June 5, 2009, Rambus moved to withdraw from the investigation four of the asserted patents and certain claims of a fifth asserted patent in order to simplify the investigation, streamline the final hearing, and conserve Commission resources. A final hearing before the administrative law judge was held from October 13, 2009 through October 20, 2009. The administrative law judge’s decision is due January 22, 2010.

Potential Future Litigation

In addition to the litigation described above, participants in the DRAM and controller markets 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. 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.

14. Fair Value of Financial Instruments

The fair value measurement statement defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would transact, and the Company considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.


The Company’s financial instruments are measured and recorded at fair value, except for the cost method investment. The Company’s non-financial assets, such as goodwill, intangible assets, and property, plant and equipment, are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

Fair Value Hierarchy
 
The fair value measurement statement requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurement be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

The Company uses unadjusted quotes to determine fair value. The financial assets in Level 1 include money market funds.

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

The Company uses observable pricing inputs including benchmark yields, reported trades, and broker/dealer quotes. The financial assets in Level 2 include U.S. government bonds and notes, corporate notes, commercial paper and municipal bonds and notes.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The financial assets in Level 3 include a cost investment whose value is determined using inputs that are both unobservable and significant to the fair value measurements.

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 our cash equivalents and marketable securities by the above pricing levels as of September 30, 2009:

 
 
As of September 30, 2009
 
 
 
 
 
 
(in thousands)
 
 
 
 
Total
   
Quoted
market
prices in
active
markets
(Level 1)
   
Significant
other
observable
inputs
(Level 2)
   
 
Significant
unobservable
inputs
(Level 3)
 
Cash equivalents
  $ 362,028     $ 362,028     $     $  
Marketable securities
    131,192             131,192        
Total available-for-sale securities
  $ 493,220     $ 362,028     $ 131,192     $  

In addition, the Company made a cost investment of $2.0 million in non-marketable securities during the three months ended September 30, 2009. As the investment was made in the current period, the cost of the investment approximates the fair value of the investment. The Company will monitor the investment for other-than-temporary impairment and record appropriate reductions in carrying value when necessary.



The following table presents the financial instruments that are measured and carried at fair value on a nonrecurring basis as of September 30, 2009:

   
As of September 30, 2009
             
 
(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 Three Months Ended September 30, 2009
   
Impairment Charges for the Nine Months Ended September 30, 2009
 
Investment in non-marketable securities
  $ 2,000     $     $     $ 2,000     $     $  

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure as of September 30, 2009 and December 31, 2008:

 
 
As of September 30, 2009
   
As of December 31, 2008
 
 
(in thousands)
 
Face
Value
   
Carrying
Value
   
Fair Value
   
Face
Value
   
Carrying
Value
   
Fair Value
 
Zero Coupon Convertible Senior Notes due 2010
  $ 136,950     $ 133,312     $ 140,203     $ 136,950     $ 125,474     $ 125,493  
5% Convertible Senior Notes due 2014
    172,500       109,333       206,967                    
Total Convertible notes
  $ 309,450     $ 242,645     $ 347,170     $ 136,950     $ 125,474     $ 125,493  

The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes. As discussed in Note 15, “Convertible Notes,” the convertible notes are carried at face value of $309.5 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.

15. Convertible Notes

In May 2008, the FASB issued a staff position which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. The staff position specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflects the issuer’s non-convertible debt borrowing rate when interest costs are recognized in subsequent periods. The debt component was determined based on a binomial lattice model. The equity component, recorded as additional paid-in capital, represents the difference between the proceeds from the issuance of the convertible notes and the fair value of the liability, net of deferred taxes, as of the date of issuance. Both of the Company’s convertible notes satisfy the criteria for accounting under the staff position. The staff position was effective for the Company’s fiscal year beginning January 1, 2009, and retrospective application is required for all periods presented. The Company accounted for this change in accounting principle by retrospectively adjusting its prior period financial statements to reflect the impact of the staff position on its zero coupon convertible senior notes due 2010. The Company’s historical annual financial statements, including the consolidated condensed statement of operations for the three months ended September 30, 2008, were retrospectively adjusted for the adoption of the staff position in the Current Report on Form 8-K filed with the SEC on June 22, 2009.

The following adjustments to reflect the retrospective application of the staff position on the zero coupon convertible senior notes due 2010 have been made to the previously reported consolidated condensed statement of operations which were not included in the Current Report on Form 8-K filed with the SEC on June 22, 2009 based on the periods presented therein.

   
Nine months ended September 30, 2008
 
 
 
 
As previously
reported
   
Adjustments
   
As adjusted
 
   
(In thousands, except per share amounts)
 
Interest expense
  $     $ (8,834 )   $ (8,834 )
Net loss before income taxes
  $ (60,494 )   $ (8,834 )   $ (69,328 )
Provision for (benefit from) income taxes
    124,748       (10,461 )     114,287  
Net income (loss)
  $ (185,242 )   $ 1,627     $ (183,615 )
Net income (loss) per share: Basic
  $ (1.77 )   $ 0.02     $ (1.75 )
Net income (loss) per share: Diluted
  $ (1.77 )   $ 0.02     $ (1.75 )




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

 
(dollars in thousands)
 
As of
September  30, 2009
   
As of
December 31, 2008
 
Zero Coupon Convertible Senior Notes due 2010
  $ 136,950     $ 136,950  
5% Convertible Senior Notes due 2014
    172,500        
Total principal amount of convertible notes
    309,450       136,950  
Unamortized discount
    (66,805 )     (11,476 )
Total convertible notes
  $ 242,645     $ 125,474  
Less current portion
    (133,312 )      
Total long-term convertible notes
  $ 109,333     $ 125,474  

5% Convertible Senior Notes due 2014. On June 29, 2009, the Company issued $150.0 million aggregate principal amount of 5% convertible senior notes due June 15, 2014. As of the date of issuance, the Company determined that the liability component of the 2014 Notes was approximately $92.4 million and the equity component was approximately $57.6 million. On July 10, 2009, an additional $22.5 million of the 2014 Notes were issued as a result of the underwriters exercising their overallotment option. As of the date of issuance of the $22.5 million 2014 Notes, the Company determined that the liability component was approximately $14.3 million and the equity component was approximately $8.2 million. The unamortized discount related to the 2014 Notes is being amortized to interest expense using the effective interest method over five years through June 2014.

The Company will pay cash interest at an annual rate of 5% of the principal amount at issuance, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2009. Issuance costs were approximately $5.1 million of which $3.2 million is related to the liability portion, which is being amortized to interest expense over five years (the expected term of the debt), and $1.9 million is related to the equity portion. The 2014 Notes are the Company’s general unsecured obligation, ranking equal in right of payment to all of the Company’s existing and future senior indebtedness, including the 2010 Notes, and are senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated to the 2014 Notes.

The 2014 Notes are convertible into shares of the Company’s Common Stock at an initial conversion rate of 51.8 shares of Common Stock per $1,000 principal amount of 2014 Notes. This is equivalent to an initial conversion price of approximately $19.31 per share of common stock. Holders may surrender their 2014 Notes for conversion prior to March 15, 2014 only under the following circumstances: (i) during any calendar quarter beginning after the calendar quarter ending September 30, 2009, and only during such calendar quarter, if the closing sale price of the Common Stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter, (ii) during the five business day period after any 10 consecutive trading day period in which the trading price per $1,000 principal amount of 2014 Notes for each trading day of such 10 consecutive trading day period was less than 98% of the product of the closing sale price of the Common Stock for such trading day and the applicable conversion rate, (iii) upon the occurrence of specified distributions to holders of the Common Stock, (iv) upon a fundamental change of the Company as specified in the Indenture governing the 2014 Notes, or (v) if the Company calls any or all of the 2014 Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date. On and after March 15, 2014, holders may convert their 2014 Notes at any time until the close of business on the third business day prior to the maturity date, regardless of the foregoing circumstances.

Upon conversion of the 2014 Notes, the Company will pay (i) cash equal to the lesser of the aggregate principal amount and the conversion value of the 2014 Notes and (ii) shares of the Company’s Common Stock for the remainder, if any, of the Company’s conversion obligation, in each case based on a daily conversion value calculated on a proportionate basis for each trading day in the 20 trading day conversion reference period as further specified in the Indenture.

The Company may not redeem the 2014 Notes at its option prior to June 15, 2012. At any time on or after June 15, 2012, the Company will have the right, at its option, to redeem the 2014 Notes in whole or in part for cash in an amount equal to 100% of the principal amount of the 2014 Notes to be redeemed, together with accrued and unpaid interest, if any, if the closing sale price of the Common Stock for at least 20 of the 30 consecutive trading days immediately prior to any date the Company gives a notice of redemption is greater than 130% of the conversion price on the date of such notice.

Upon the occurrence of a fundamental change, holders may require the Company to repurchase some or all of their 2014 Notes for cash at a price equal to 100% of the principal amount of the 2014 Notes being repurchased, plus accrued and unpaid interest, if any. In addition, upon the occurrence of certain fundamental changes, as that term is defined in the Indenture, the Company will, in certain circumstances, increase the conversion rate for 2014 Notes converted in connection with such fundamental changes by a specified number of shares of Common Stock, not to exceed 15.5401 per $1,000 principal amount of the 2014 Notes.


The following events are considered “Events of Default” under the Indenture which may result in the acceleration of the maturity of the 2014 Notes:

 
(1)
default in the payment when due of any principal of any of the 2014 Notes at maturity, upon redemption or upon exercise of a repurchase right or otherwise;

 
(2)
default in the payment of any interest, including additional interest, if any, on any of the 2014 Notes, when the interest becomes due and payable, and continuance of such default for a period of 30 days;

 
(3)
the Company’s failure to deliver cash or cash and shares of Common Stock (including any additional shares deliverable as a result of a conversion in connection with a make-whole fundamental change) when required to be delivered upon the conversion of any 2014 Note;

 
(4)
default in the Company’s obligation to provide notice of the occurrence of a fundamental change when required by the Indenture;

 
(5)
the Company’s failure to comply with any of its other agreements in the 2014 Notes or the Indenture (other than those referred to in clauses (1) through (4) above) for 60 days after the Company’s receipt of written notice to the Company of such default from the trustee or to the Company and the trustee of such default from holders of not less than 25% in aggregate principal amount of the 2014 Notes then outstanding;

 
(6)
the Company’s failure to pay when due the principal of, or acceleration of, any indebtedness for money borrowed by the Company or any of its subsidiaries in excess of $30,000,000 principal amount, if such indebtedness is not discharged, or such acceleration is not annulled, by the end of a period of ten days after written notice to the Company by the trustee or to the Company and the trustee by the holders of at least 25% in aggregate principal amount of the 2014 Notes then outstanding; and

 
(7)
certain events of bankruptcy, insolvency or reorganization relating to the Company or any of its material subsidiaries (as defined in the Indenture).

If an event of default, other than an event of default in clause (7) above with respect to the Company occurs and is continuing, either the trustee or the holders of at least 25% in aggregate principal amount of the 2014 Notes then outstanding may declare the principal amount of, and accrued and unpaid interest, including additional interest, if any, on the 2014 Notes then outstanding to be immediately due and payable. If an event of default described in clause (7) above occurs with respect to the Company the principal amount of and accrued and unpaid interest, including additional interest, if any, on the 2014 Notes will automatically become immediately due and payable.

Zero Coupon Convertible Senior Notes due 2010. On February 1, 2005, the Company issued $300.0 million aggregate principal amount of zero coupon convertible senior notes due February 1, 2010 to Credit Suisse First Boston LLC and Deutsche Bank Securities as initial purchasers who then sold the 2010 Notes to institutional investors. The 2010 Notes are convertible at any time prior to the close of business on the maturity date into cash in an amount equal to the lesser of:

 
(1)
the principal amount of each note to be converted and

 
(2)
the “conversion value,” which is equal to (a) the applicable conversion rate, multiplied by (b) the applicable stock price, as defined.

If the conversion value is greater than the principal amount of each note, (as defined) represented by the excess of conversion value, the Company, at its option, may deliver net shares, cash, or a combination of cash and shares of its Common Stock, with a value equal to the net shares.

The initial conversion price is $26.84 per share of Common Stock (which represents an initial conversion rate of 37.2585 shares of the Company’s Common Stock per $1,000 principal amount of 2010 Notes). The initial conversion price is subject to certain adjustments, as specified in the indenture governing the 2010 Notes.


Upon the retrospective application of the staff position which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, the Company determined that the liability component of the 2010 Notes was $200.3 million and the equity component was $99.7 million. Subsequently, the Company repurchased $140.0 million and $23.1 million face value of the outstanding 2010 Notes in 2005 and 2008, respectively.

The remaining 2010 Notes liability is classified as a current liability at September 30, 2009 since the notes are due February 1, 2010.

Additional paid-in capital at September 30, 2009 and December 31, 2008 includes $47.9 million related to the remaining equity component of the 2010 Notes. Additional paid-in capital at September 30, 2009 includes $63.9 million related to the equity component of the 2014 Notes.

As of September 30, 2009, the if-converted value of the outstanding 2010 Notes and 2014 Notes is less than the principal amount of the notes. Therefore, the classification of the entire equity component for both the 2010 Notes and 2014 Notes in permanent equity is appropriate as of September 30, 2009.

Interest expense related to the notes for the three and nine months ended September 30, 2009 was as follows:

 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2009