Rambus Inc.
RAMBUS INC (Form: 10-Q, Received: 10/29/2012 13:43:13)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
ý       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-22339
_______________________________
RAMBUS INC.
(Exact name of registrant as specified in its charter)
_______________________________
Delaware
 
94-3112828
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
1050 Enterprise Way, Suite 700, Sunnyvale, CA 94089
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (408) 462-8000
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
 
Accelerated filer  o
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý
The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 110,879,633 as of September 30, 2012 .


Table of Contents

RAMBUS INC.
TABLE OF CONTENTS
 
 
PAGE
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:
Success in the markets of our or our licensees’ products;
Sources of competition;
Research and development costs and improvements in technology;
Sources, amounts and concentration of revenue, including royalties;
Success in renewing license agreements;
Technology product development;
Outcome and effect of current and potential future intellectual property litigation and other significant litigation;
Dispositions, acquisitions, mergers or strategic transactions and our related integration efforts;
Write-down of assets;
Pricing policies of our licensees;
Changes in our strategy and business model;
Deterioration of financial health of commercial counterparties and their ability to meet their obligations to us;
Engineering, marketing and general and administration expenses;
Contract revenue;
Operating results;
International licenses and operations;
Effects of changes in the economy and credit market on our industry and business;
Ability to identify, attract, motivate and retain qualified personnel;
Growth in our business;
Methods, estimates and judgments in accounting policies;
Adoption of new accounting pronouncements;
Effective tax rates;
Realization of deferred tax assets/release of deferred tax valuation allowance;
Trading price of our Common Stock;
Internal control environment;
Corporate governance;
The level and terms of our outstanding debt;
Resolution of the governmental agency matters involving us;
Litigation expenses;
Protection of intellectual property;
Terms of our licenses and amounts owed under license agreements;
Indemnification and technical support obligations;

3

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Issuances of our securities, which could involve restrictive covenants or be dilutive to our existing stockholders; and
Likelihood of paying dividends or repurchasing securities.
You can identify these and other forward-looking statements by the use of words such as “may,” “future,” “shall,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “projecting” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A, “Risk Factors.” All forward-looking statements included in this document are based on our assessment of information available to us at this time. We assume no obligation to update any forward-looking statements.


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RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
September 30,
2012
 
December 31,
2011
 
(In thousands, except shares
and par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
152,206

 
$
162,244

Marketable securities
54,880

 
127,212

Accounts receivable
452

 
1,026

Prepaids and other current assets
9,759

 
8,096

Deferred taxes
1,807

 
2,798

Total current assets
219,104

 
301,376

Intangible assets, net
160,408

 
181,955

Goodwill
124,969

 
115,148

Property, plant and equipment, net
84,255

 
81,105

Deferred taxes, long-term
7,575

 
7,531

Other assets
5,514

 
6,539

Total assets
$
601,825

 
$
693,654

LIABILITIES &   STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
7,841

 
$
16,567

Accrued salaries and benefits
29,785

 
31,763

Accrued litigation expenses
10,035

 
10,502

Other accrued liabilities
13,448

 
6,479

Total current liabilities
61,109

 
65,311

Convertible notes, long-term
143,875

 
133,493

Long-term imputed financing obligation
45,878

 
43,793

Long-term income taxes payable
9,383

 
9,946

Other long-term liabilities
10,754

 
11,317

Total liabilities
270,999

 
263,860

Commitments and contingencies (Notes 7 and 13)


 


Stockholders’ equity:
 

 
 

Convertible preferred stock, $.001 par value:
 

 
 

Authorized: 5,000,000 shares
 

 
 

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

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 110,879,633 shares at September 30, 2012 and 110,267,145 shares at December 31, 2011
111

 
110

Additional paid-in capital
1,068,871

 
1,049,716

Accumulated deficit
(737,847
)
 
(619,643
)
Accumulated other comprehensive loss
(309
)
 
(389
)
Total stockholders’ equity
330,826

 
429,794

Total liabilities and stockholders’ equity
$
601,825

 
$
693,654

See Notes to Unaudited Condensed Consolidated Financial Statements

5

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RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share amounts)
Revenue:
 

 
 

 
 

 
 

Royalties
$
57,361

 
$
96,216

 
$
175,127

 
$
216,421

Contract revenue
169

 
4,047

 
1,481

 
12,583

Total revenue
57,530

 
100,263

 
176,608

 
229,004

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of revenue*
7,529

 
7,425

 
22,032

 
16,632

Research and development*
30,674

 
32,318

 
107,415

 
79,855

Marketing, general and administrative*
24,255

 
48,952

 
91,283

 
119,416

Restructuring charges
6,622

 

 
6,622

 

Impairment of goodwill and long-lived assets
35,471

 

 
35,471

 

Costs of restatement and related legal activities
79

 
832

 
192

 
2,703

Gain from settlement

 

 

 
(6,200
)
Total operating costs and expenses
104,630

 
89,527

 
263,015

 
212,406

Operating income (loss)
(47,100
)
 
10,736

 
(86,407
)
 
16,598

Interest income and other income (expense), net
(12
)
 
172

 
175

 
471

Interest expense
(7,121
)
 
(6,350
)
 
(20,420
)
 
(18,462
)
Interest and other income (expense), net
(7,133
)
 
(6,178
)
 
(20,245
)
 
(17,991
)
Income (loss) before income taxes
(54,233
)
 
4,558

 
(106,652
)
 
(1,393
)
Provision for income taxes
3,865

 
4,080

 
11,552

 
12,944

Net income (loss)
$
(58,098
)
 
$
478

 
$
(118,204
)
 
$
(14,337
)
Net income (loss) per share:
 

 
 

 
 

 
 

Basic
$
(0.52
)
 
$
0.00

 
$
(1.07
)
 
$
(0.13
)
Diluted
$
(0.52
)
 
$
0.00

 
$
(1.07
)
 
$
(0.13
)
Weighted average shares used in per share calculation:
 

 
 

 
 

 
 

Basic
110,826

 
112,334

 
110,580

 
109,997

Diluted
110,826

 
115,552

 
110,580

 
109,997

_________________________________________
*    Includes stock-based compensation:
Cost of revenue
$
5

 
$
90

 
$
20

 
$
499

Research and development
$
2,221

 
$
2,775

 
$
7,572

 
$
7,777

Marketing, general and administrative
$
2,863

 
$
4,354

 
$
10,438

 
$
13,262

See Notes to Unaudited Condensed Consolidated Financial Statements

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RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2012
 
2011
 
2012
 
2011
Net income (loss)
 
$
(58,098
)
 
$
478

 
$
(118,204
)
 
$
(14,337
)
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Unrealized gain (loss) on marketable securities, net of tax
 
8

 
(79
)
 
80

 
(46
)
Total comprehensive income (loss)
 
$
(58,090
)
 
$
399

 
$
(118,124
)
 
$
(14,383
)
See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  
 
Nine Months Ended
 
September 30,
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net loss
$
(118,204
)
 
$
(14,337
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Impairment of goodwill and long-lived assets
35,471

 

Stock-based compensation
18,030

 
21,538

Depreciation
9,583

 
8,588

Amortization of intangible assets
23,535

 
12,908

Non-cash interest expense and amortization of convertible debt issuance costs
10,856

 
9,326

Deferred tax benefit
(39
)
 
(3,413
)
Non-cash acquisition of patents

 
(3,000
)
Change in operating assets and liabilities, net of effects of acquisitions:
 

 
 

Accounts receivable
574

 
2,823

Prepaid expenses and other assets
6,744

 
5,550

Accounts payable
(9,171
)
 
12,559

Accrued salaries and benefits and other accrued liabilities
4,009

 
(9,475
)
Accrued litigation expenses
(467
)
 
5,770

Income taxes payable
(665
)
 
2,174

Net cash provided by (used in) operating activities
(19,744
)
 
51,011

Cash flows from investing activities:
 

 
 

Acquisition of business, net of cash acquired
(46,278
)
 
(167,381
)
Purchases of marketable securities
(77,562
)
 
(94,189
)
Maturities of marketable securities
149,486

 
254,322

Purchases of property, plant and equipment
(15,802
)
 
(14,950
)
Acquisition of intangible assets
(1,700
)
 
(210
)
Proceeds from sale of marketable security

 
11

Net cash provided by (used in) investing activities
8,144

 
(22,397
)
Cash flows from financing activities:
 

 
 

Proceeds received from issuance of common stock under employee stock plans
1,728

 
9,482

Payments under installment payment arrangement
(149
)
 
(861
)
Principal payments against lease financing obligation
(17
)
 
(453
)
Proceeds from landlord for tenant improvements

 
8,800

Payment to redeem contingently redeemable common stock pursuant to the settlement agreement with Samsung

 
(100,000
)
Net cash provided by financing activities
1,562

 
(83,032
)
Net decrease in cash and cash equivalents
(10,038
)
 
(54,418
)
Cash and cash equivalents at beginning of period
162,244

 
215,262

Cash and cash equivalents at end of period
$
152,206

 
$
160,844

 
 
 
 
Non-cash investing and financing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other accrued liabilities
$
2,686

 
$
1,194

Non-cash obligation for property, plant and equipment
$
2,008

 
$

Common stock issued pursuant to acquisition
$

 
$
88,438

See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents

RAMBUS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Investments in entities with less than 20% ownership or in which the Company does not have the ability to significantly influence the operations of the investee are being accounted for using the cost method and are included in other assets.
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended December 31, 2011 .
Reclassifications
Certain prior year balances were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net income (loss) for any of the periods presented.

2. Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 will require the Company to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The new guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures are to be applied retrospectively for all comparative periods presented. The Company does not expect that this guidance will have an impact on its financial position, results of operations or cash flows as it is disclosure-only in nature.
In September 2011, the FASB amended its guidance to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendment became effective for the Company’s interim period ended March 31, 2012. This guidance did not materially impact the Company’s financial position or results of operations.

3. Settlement Agreement with Samsung
On January 19, 2010, the Company, Samsung and certain related entities of Samsung entered into a Settlement Agreement (the “Settlement Agreement”) to release all claims against each other with respect to all outstanding litigation between them and certain other potential claims. Pursuant to the Settlement Agreement, the Company and Samsung entered into a Semiconductor Patent License Agreement on January 19, 2010 (the “License Agreement”), under which Samsung licenses from the Company non-exclusive rights to certain Rambus patents and has agreed to pay the Company cash amounts equal to approximately $25.0 million per quarter, subject to certain adjustments and conditions related to their DRAM revenue. These payments commenced in the first quarter of 2010 and will conclude in the last quarter of 2014.
The settlement with Samsung is a multiple element arrangement for accounting purposes. For a multiple element arrangement, the Company is required to determine the fair value of the elements. The Company considered several factors in determining the accounting fair value of the elements of the settlement with Samsung which included a third party valuation

9


using an income approach, the Black-Scholes-Merton option pricing model and a residual approach (collectively the “Fair Value”). The total gain related to the settlement with Samsung of $133.0 million was recognized through the end of the first quarter of 2011, of which $6.2 million was recognized in the first quarter of 2011. The gain from settlement represents the Fair Value of the cash consideration allocated to the settlement of the antitrust litigation and the residual value of other elements.

4. Acquisitions
Unity Semiconductor Corporation
On February 3, 2012, the Company completed its acquisition of a privately-held company, Unity Semiconductor Corporation (“Unity”), by acquiring all issued and outstanding shares of capital stock of Unity. Pursuant to the merger agreement on February 3, 2012, a wholly-owned subsidiary of the Company merged with and into Unity, with Unity as the surviving corporation. Under the terms of the merger agreement, the purchase price was $35.0 million subject to certain post-closing adjustments to the purchase price which were applied as of the end of the second quarter of 2012. In addition to the purchase consideration, the Company agreed to pay an aggregate of $5.0 million in retention bonuses to certain Unity employees over the next three years . The retention bonus payouts are subject to the condition of employment, and therefore, will be treated as compensation and expensed as incurred on a graded attribution basis. Of the purchase price, approximately $5.5 million in cash was deposited into an escrow account until August 3, 2013 to fund any indemnification obligations to the Company following the consummation of the merger. The Company acquired Unity’s technology and a portfolio of non-volatile solid state memory patents. The solid state memory technology is a potential successor to the current NAND flash technology, or could be otherwise deployed in the growing non-volatile memory market. This memory technology has been designed to accelerate the commercialization of the Terabit generation of non-volatile memories. Devices using this technology are expected to achieve higher density, faster performance, lower manufacturing costs and greater data reliability than NAND Flash.  Unity is part of the Semiconductor Business Group (“SBG”) reportable segment. The Company incurred approximately $0.6 million in direct acquisition costs in connection with the acquisition which were expensed as incurred.
The purchase price allocation for the business acquired is based on management’s estimate of the fair value for purchase accounting purposes at the date of acquisition. The fair value of the assets acquired has been determined primarily by using valuation methods that discount the expected future cash flows to present value using estimates and assumptions determined by management, which is a level three fair value measurement. The Company performed a valuation of the net assets acquired as of the February 3, 2012 closing date. The purchase price from the business combination was allocated as follows:
 
Total
 
(in thousands)
Cash
$
182

Property and equipment
51

Other tangible assets
36

Identified intangible assets
19,280

Goodwill
15,451

Total
$
35,000


The goodwill arising from the acquisition is primarily attributed to synergies related to the combination of new and complementary technologies of the Company and the assembled workforce of Unity. This goodwill is not expected to be deductible for tax purposes.
The identified intangible assets assumed in the acquisition of Unity were recognized as existing technology based upon their fair values as of the acquisition date. The purchased intangible assets have an estimated average useful life of 10 years from the date of acquisition.
Other Acquisition Activities
For the nine months ended September 30, 2012 , the Company entered into one additional business combination and two patent and technology acquisitions for $13.2 million to expand the Company's existing technology, which resulted in approximately $8.1 million of goodwill, $4.1 million of intangible assets (weighted average useful life of 6 years ) and $1.0 million of other assets. The business combination is part of the Mobile Technology Division (“MTD”) reporting unit which is part of the "All Other" reportable segment.
The condensed consolidated financial statements include the operating results of these businesses from the date of

10


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

5. Equity Incentive Plans and Stock-Based Compensation
As of September 30, 2012 , 2,217,785 shares of the 21,400,000 shares approved under the 2006 Equity Incentive Plan (the “2006 Plan”) remain available for grant which included an increase of 6,500,000 shares approved by stockholders on April 26, 2012. The 2006 Plan is now the Company’s only plan for providing stock-based incentive awards to eligible employees, executive officers, non-employee directors and consultants; however, the 1997 Stock Option Plan (the “1997 Plan”) and the 1999 Non-statutory Stock Option Plan (the “1999 Plan”) will continue to govern awards previously granted under those plans.
A summary of shares available for grant under the Company’s plans is as follows:
 
Shares Available
  for Grant
Shares available as of December 31, 2011
2,812,876

Increase in shares approved for issuance
6,500,000

Stock options granted (1) 
(7,592,911
)
Stock options forfeited (2)
1,201,539

Stock options expired under former plans
(101,562
)
Nonvested equity stock and stock units granted (3)
(760,130
)
Nonvested equity stock and stock units forfeited (3)
157,973

Total available for grant as of September 30, 2012
2,217,785

_________________________________________
(1)
Amount includes 2,840,986 shares that were granted from the stock option exchange program (discussed below).
(2)
Amount excludes 6,449,255 shares that were surrendered from the stock option exchange program (discussed below) as the shares are no longer available for grant.
(3)
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.
Stock Option Exchange Program
On April 26, 2012, at the 2012 Annual Meeting of Stockholders, the Company’s stockholders approved a one-time stock option exchange program (“option exchange”) for the employees other than the Company’s named executive officers, senior vice presidents and members of its Board of Directors, which allowed employees to surrender certain outstanding stock options for cancellation in exchange for the grant of new replacement options to purchase a lesser number of shares having an exercise price equal to the fair market value of the Company’s common stock on the replacement grant date. On June 22, 2012, the Company completed this offer. A total of 333 eligible employees participated in the option exchange. Pursuant to the terms and conditions of the option exchange, the Company accepted for exchange options totaling 6,449,255 , representing approximately 87% of the total number of options eligible for exchange. All surrendered options were canceled effective as of the expiration of the option exchange, and immediately thereafter, in exchange therefore, the Company granted new options with an exercise price of $5.63 per share (representing the closing price of its common stock on June 22, 2012, as reported on the NASDAQ Global Select Market) to purchase an aggregate of 2,840,986 shares of common stock under the 2006 Plan. New options have a new contractual term of the longer of the original remaining contractual term of the surrendered options or five years, and generally will vest over a three -year period from the date of grant, with one-third of the shares vesting on the first year anniversary of the grant date and the remaining shares vesting monthly for the twenty-four months thereafter.  The fair value of the new options granted was measured as the total of the unrecognized compensation cost of the original options surrendered and the incremental compensation cost of the new options granted. The incremental compensation cost of the new options granted was measured as the excess of the fair value of the new options granted over the fair value of the original options immediately before cancellation. As a result of the option exchange, the total incremental compensation cost of the new options was approximately $1.0 million . The total remaining unrecognized compensation cost related to the original options of $19.9 million and the incremental compensation cost of the new options granted of $1.0 million will be recognized over the three years requisite service period.

11


General Stock Option Information
The following table summarizes stock option activity under the 1997 Plan, 1999 Plan and 2006 Plan for the nine months ended September 30, 2012 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 30, 2012 .
 
Options Outstanding
 
 
 
 
 
Number of
  Shares
 
Weighted
  Average
  Exercise Price
  Per Share
 
Weighted
  Average
  Remaining
  Contractual
  Term (years)
 
Aggregate
  Intrinsic
  Value
 
(Dollars in thousands, except per share amounts)
Outstanding as of December 31, 2011
14,587,596

 
$
19.73

 
 
 
 

Options granted
7,592,911

 
5.83

 
 
 
 

Options exercised
(221,934
)
 
4.44

 
 
 
 

Options forfeited
(1,201,539
)
 
11.74

 
 
 
 

Options surrendered in stock option exchange program
(6,449,255
)
 
21.11

 
 
 
 

Outstanding as of September 30, 2012
14,307,779

 
12.64

 
6.22
 
$
1,506

Vested or expected to vest at September 30, 2012
12,492,826

 
13.48

 
5.84
 
1,173

Options exercisable at September 30, 2012
6,386,017

 
19.29

 
3.66
 


Included in stock options granted during the nine months ended September 30, 2012 are 1,745,000 stock options that contain a market condition. These options vest in three years if specified stock prices are achieved. The fair values of the options granted with a market condition were calculated using a binomial valuation model, which estimates the potential outcome of reaching the market condition based on simulated future stock prices. As of September 30, 2012 , there were 1,485,000 stock options outstanding that require the Company to achieve minimum market conditions in order for the options to become exercisable. No options containing market conditions were outstanding as of December 31, 2011 .
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at September 30, 2012 , based on the $5.54 closing stock price of Rambus’ Common Stock on September 28, 2012 on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of September 30, 2012 was 1,123,424 and 0 , respectively.
Employee Stock Purchase Plan
Under the 2006 Employee Stock Purchase Plan (“ESPP”), the Company issued 169,398 shares at a price of $4.21 per share during the nine months ended September 30, 2012 . The Company issued 146,034 shares at a price of $16.50 per share during the nine months ended September 30, 2011 . As of September 30, 2012 , 1,644,566 shares under the ESPP remain available for issuance which includes an increase of 1,500,000 shares approved by stockholders on April 26, 2012.
Stock-Based Compensation
For the nine months ended September 30, 2012 and 2011 , the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. In addition, the Company sponsors an ESPP, whereby eligible employees are entitled to purchase Common Stock semi-annually, by means of limited payroll deductions, at a 15% discount from the fair market value of the Common Stock as of specific dates.
Stock Options
During the three and nine months ended September 30, 2012 , the Company granted 2,590,711 and 7,592,911 stock options (including options granted in the stock option exchange program and options granted that contain a market condition), respectively, with an estimated total grant-date fair value of $3.2 million and $32.3 million , respectively. During the three and nine months ended September 30, 2012 , Rambus recorded stock-based compensation expense related to stock options of $3.6 million and $11.9 million , respectively.
During the three and nine months ended September 30, 2011 , the Company granted 487,550 and 2,199,761 stock options, respectively, with an estimated total grant-date fair value of $4.6 million and $22.9 million , respectively. During the three and

12


nine months ended September 30, 2011 , Rambus recorded stock-based compensation expense related to stock options of $5.0 million and $15.2 million , respectively.
As of September 30, 2012 , there was $31.3 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 3.0 years. The total fair value of shares vested as of September 30, 2012 was $84.7 million .
The total intrinsic value of options exercised was $0.1 million and $0.2 million for the three and nine months ended September 30, 2012 , respectively. The total intrinsic value of options exercised was $1.7 million and $5.7 million for the three and nine months ended September 30, 2011 , respectively. Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.
During the nine months ended September 30, 2012 , net proceeds from employee stock option exercises totaled approximately $1.0 million .
Employee Stock Purchase Plan
For the three and nine months ended September 30, 2012 , the Company recorded compensation expense related to the ESPP of $0.6 million and $1.9 million , respectively. For the three and nine months ended September 30, 2011 , the Company recorded compensation expense related to the ESPP of $0.5 million and $1.3 million , respectively. As of September 30, 2012 , 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.
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, 2012 and 2011 calculated in accordance with accounting for share-based payments.
Valuation Assumptions
The fair value of stock awards is estimated as of the grant date using the Black-Scholes-Merton (“BSM”) option-pricing model assuming a dividend yield of 0% and the additional weighted-average assumptions as listed in the following tables:
The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted that contain only service conditions in the periods presented:
 
Stock Option Plans
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Stock Option Plans
 

 
 

 
 

 
 

Expected stock price volatility
65
%
 
75
%
 
60-68%

 
50-75%

Risk free interest rate
0.6
%
 
2.3
%
 
0.6-0.9%

 
2.3-2.8%

Expected term (in years)
5.5

 
6.1

 
5.5-5.7

 
6.0-6.1

Weighted-average fair value of stock options granted to employees
$
3.06

 
$
9.48

 
$
3.61

 
$
10.43

During the three months ended September 30, 2012, the Company granted 1,745,000 stock options that contain a market condition. The fair values of the options granted with a market condition were calculated using a binomial valuation model, which estimates the potential outcome of reaching the market condition based on simulated future stock prices. The weighted-average fair value associated with these market condition options was immaterial.

13


 
Employee Stock Purchase Plan
 
 
Nine Months Ended
 
 
September 30,
 
 
2012
 
2011
Employee Stock Purchase Plan
 
 

 
 

Expected stock price volatility
 
63
%
 
56
%
Risk free interest rate
 
0.2
%
 
0.1
%
Expected term (in years)
 
0.5

 
0.5

Weighted-average fair value of purchase rights granted under the purchase plan
 
$
1.61

 
$
5.96

____________________________________
No shares were issued under the Employee Stock Purchase Plans during the three months ended September 30, 2012 and 2011.
Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three and nine months ended September 30, 2012 , the Company granted nonvested equity stock units totaling 46,856 and 506,753 shares under the 2006 Plan, respectively. These awards have a service condition, generally a service period of four years , except in the case of grants to directors, for which the service period is one year . For the three and nine months ended September 30, 2012 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.2 million and $3.5 million , respectively. The Company occasionally grants nonvested equity stock units to its employees with vesting subject to the achievement of certain performance conditions. During the three and nine months ended September 30, 2012 and 2011 , the achievement of certain performance conditions for certain performance equity stock units was considered probable, and as a result, the Company recognized stock-based compensation expense related to these performance stock units for all periods; the aggregate amounts were not significant.
For the three and nine months ended September 30, 2012 , the Company recorded stock-based compensation expense of approximately $1.0 million and $4.3 million , respectively, related to all outstanding unvested equity stock grants. For the three and nine months ended September 30, 2011 , the Company recorded stock-based compensation expense of approximately $1.8 million and $5.1 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 $5.7 million at September 30, 2012 . This is expected to be recognized over a weighted average period of 2.4 years years.
The following table reflects the activity related to nonvested equity stock and stock units for the nine months ended September 30, 2012 :
Nonvested Equity Stock and Stock Units
 
Shares
 
Weighted-
  Average
  Grant-Date
  Fair Value
Nonvested at December 31, 2011
 
763,510

 
$
18.02

Granted
 
506,753

 
6.95

Vested
 
(312,099
)
 
18.31

Forfeited
 
(105,315
)
 
13.52

Nonvested at September 30, 2012
 
852,849

 
11.88


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

14


All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:
 
 
As of September 30, 2012
(Dollars in thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
118,508

 
$
118,508

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
56,886

 
56,906

 

 
(20
)
 
0.21
%
Total cash equivalents and marketable securities
 
175,394

 
175,414

 

 
(20
)
 
 

Cash
 
31,692

 
31,692

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
207,086

 
$
207,106

 
$

 
$
(20
)
 
 

 
 
As of December 31, 2011
(Dollars in thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
127,559

 
$
127,559

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
137,108

 
137,208

 

 
(100
)
 
0.29
%
Total cash equivalents and marketable securities
 
264,667

 
264,767

 

 
(100
)
 
 

Cash
 
24,789

 
24,789

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
289,456

 
$
289,556

 
$

 
$
(100
)
 
 


Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
 
September 30,
2012
 
December 31,
2011
 
(Dollars in thousands)
Cash equivalents
$
120,514

 
$
137,455

Short term marketable securities
54,880

 
127,212

Total cash equivalents and marketable securities
175,394

 
264,667

Cash
31,692

 
24,789

Total cash, cash equivalents and marketable securities
$
207,086

 
$
289,456


The Company continues to invest in highly rated, highly liquid debt securities. The Company holds all of its marketable securities as available-for-sale, marks them to market and regularly reviews its portfolio to ensure adherence to its investment policy and to monitor individual investments for risk analysis, proper valuation and unrealized losses that may be other than temporary.
The estimated fair value of cash equivalents and marketable securities classified by the length of time that the securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011 are as follows:
 
Fair Value
 
Gross Unrealized Loss
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Less than one year
 

 
 

 
 

 
 

Corporate notes, bonds and commercial paper
$
46,384

 
$
137,107

 
$
(20
)
 
$
(100
)

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

15


adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.
See Note 14, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.

7. Commitments and Contingencies
As of September 30, 2012 , the Company’s material contractual obligations are as follows (in thousands):
 
Total
 
Remainder   of 2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter
Contractual obligations (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

Imputed financing obligation (2)
$
56,181

 
$
1,682

 
$
6,825

 
$
6,994

 
$
7,165

 
$
7,345

 
$
26,170

Leases and other contractual obligations (3)
12,561

 
5,132

 
1,818

 
1,660

 
1,544

 
1,049

 
1,358

Software licenses (4)
2,545

 
2,106

 
359

 
80

 

 

 

Acquisition retention bonuses (5)
40,723

 
2,770

 
18,207

 
18,206

 
1,540

 

 

Convertible notes
172,500

 

 

 
172,500

 

 

 

Interest payments related to convertible notes
17,250

 
4,313

 
8,625

 
4,312

 

 

 

Total
$
301,760

 
$
16,003

 
$
35,834

 
$
203,752

 
$
10,249

 
$
8,394

 
$
27,528

_________________________________________
(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $17.2 million including $8.0 million recorded as a reduction of long-term deferred tax assets and $9.2 million in long-term income taxes payable as of September 30, 2012 . As noted below in Note 9, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
(2)
With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the contractual obligations table and the amount reflected on the Condensed Consolidated Balance Sheets are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. Additionally, the amount includes the amended Ohio lease and the amended Sunnyvale lease.
(3)
Leases and other contractual obligations include the Company's current commitment to purchase intellectual property from Elpida Memory, Inc.
(4)
The Company has commitments with various software vendors for non-cancellable license agreements generally having terms longer than one year. The above table summarizes those contractual obligations as of September 30, 2012 which are also presented on the Company’s Condensed Consolidated Balance Sheet under current and other long-term liabilities.
(5)
In connection with recent acquisitions, the Company is obligated to pay retention bonuses to certain employees and contractors, subject to certain eligibility and acceleration provisions including the condition of employment.  The remaining $33.3 million of Cryptography Research, Inc. ("CRI") retention bonuses payable on June 3, 2013 and 2014 will be paid in cash or stock at the Company’s election. The portion to be paid in 2012 in the table above includes payments to be made to employees who were affected by the restructuring during the third quarter of 2012. See Note 16, "Restructuring Charges" for further details.
Rent expense was approximately $1.3 million and $3.2 million for the three and nine months ended September 30, 2012 , respectively. Rent expense was approximately $0.7 million and $2.0 million for the three and nine months ended September 30, 2011 , respectively.
Deferred rent of $0.7 million as of September 30, 2012 was included primarily in other long-term liabilities. Deferred rent of $0.5 million as of December 31, 2011 was included primarily in other long-term liabilities.
Indemnification
The Company enters into standard license agreements in the ordinary course of business. Although the Company does not

16


indemnify most of its customers, there are times when an indemnification is a necessary means of doing business. Indemnification covers customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement or any other claim by any third party arising as result of the applicable agreement with the Company. 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 primarily former officers and some current officers. As of September 30, 2012 , the Company had made cumulative payments of approximately $32.1 million on their behalf, including $0.1 million in the quarter ended September 30, 2012 . As of September 30, 2011 , the Company had made cumulative payments of approximately $18.4 million on their behalf, including $0.8 million in the quarter ended September 30, 2011 . These payments were recorded under costs of restatement and related legal activities in the condensed consolidated statements of operations.

8.   Stockholders’ Equity
Share Repurchase Program
During the nine months ended September 30, 2012 , the Company did not repurchase any shares of its Common Stock under its share repurchase program. As of September 30, 2012 , the Company had repurchased a cumulative total of approximately 26.3 million shares of its Common Stock with an aggregate price of approximately $428.9 million since the commencement of the program in 2001. As of September 30, 2012 , there remained an outstanding authorization to repurchase approximately 5.2 million shares of the Company’s outstanding Common Stock.
The Company records stock repurchases as a reduction to stockholders’ equity. The Company records a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the price of the shares repurchased exceeds the average original proceeds per share received from the issuance of Common Stock.

9. Income Taxes
During the three and nine months ended September 30, 2012 , the Company calculated its interim tax provision to record taxes incurred by the U.S. entity on a discrete basis because the Company is projecting losses in which a tax benefit cannot be recognized in accordance with FASB Accounting Standards Codification (“ASC”) 740, Income Taxes. The Company recorded a provision for income taxes of $3.9 million and $4.1 million for the three months ended September 30, 2012 and 2011 , and $11.6 million and $12.9 million for the nine months ended September 30, 2012 and 2011 , respectively. The provision for income taxes for the three and nine months ended September 30, 2012 and 2011 , is primarily comprised of withholding taxes and other foreign taxes based upon income earned during the period with no tax benefit recorded for the loss jurisdictions.
During the three and nine months ended September 30, 2012 , the Company paid withholding taxes of $3.7 million and $11.8 million , respectively. During the three and nine months ended September 30, 2011 , the Company paid withholding taxes of $4.1 million and $12.3 million , respectively.  As the Company continues to maintain a valuation allowance against its U.S. deferred assets, the Company’s tax provision is based primarily on the withholding taxes, other foreign taxes and current state taxes.
As of September 30, 2012 , the Company’s condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately $195.9 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, 2012 , a full valuation allowance has been recorded against the U.S. deferred tax assets. During the nine months ended September 30, 2012 , the Company increased its deferred tax assets from $149.3 million to approximately $195.9 million with a corresponding increase to the valuation allowance related to its U.S. deferred tax assets. This increase of the deferred tax asset and corresponding valuation allowance is primarily related to the increase in temporary

17


differences, net operating losses, and an increase in tax credits, including foreign tax and research and development credits. Management periodically evaluates the realizability of the Company's net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is solely dependent on the Company's ability to generate sufficient future taxable income during periods prior to the expiration of tax statutes to fully utilize these assets. The Company intends to maintain the valuation allowance until sufficient positive evidence exists to support its reversal.
The Company maintains liabilities for uncertain tax positions within its long-term income taxes payable accounts. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.
As of September 30, 2012 , the Company had approximately $17.2 million of unrecognized tax benefits, including $8.0 million recorded as a reduction of long-term deferred tax assets and $9.2 million in long-term income taxes payable. If recognized, approximately $2.2 million would be recorded as an income tax benefit. No benefit would be recorded for the remaining unrecognized tax benefits as the recognition would require a corresponding increase in the valuation allowance. As of December 31, 2011 , the Company had $16.6 million of unrecognized tax benefits, including $7.0 million recorded as a reduction of long-term deferred tax assets and $9.6 million in long-term income taxes payable.
Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. At September 30, 2012 and December 31, 2011 , an insignificant amount of interest and penalties are included in long-term income taxes payable.
Rambus files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is subject to examination by the Internal Revenue Service (“IRS”) for tax years ended 2009 through 2011. The Company is also subject to examination by the State of California for tax years ended 2008 through 2011. In addition, any research and development credit carry forward or net operating loss carry forward generated in prior years and utilized in these or future years may also be subject to examination by the IRS and the State of California. The Company is also subject to examination in various other foreign jurisdictions, including India, for various periods.
The Company's future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.

10. Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instrument was exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported. For the first eight months of 2011, the Company reported approximately 4.8 million shares issued to Samsung as contingently redeemable common stock (“CRCS”) due to the contractual put rights associated with those shares. As such, the Company used the two-class method for reporting earnings per share for the first eight months of 2011.

18


The following table sets forth the computation of basic and diluted loss per share:
 
Three Months Ended September 30,
 
2012
 
2011
 
(In thousands, except per share amounts)
 
CRCS*
 
Other CS**
 
CRCS*
 
Other CS**
Basic net income (loss) per share:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Allocation of undistributed earnings
$

 
$
(58,098
)
 
$
11

 
$
467

Denominator:
 

 
 

 
 

 
 

Weighted-average common shares outstanding

 
110,826

 
4,788

 
109,784

Basic net income (loss) per share
$

 
$
(0.52
)
 
$
0.00

 
$
0.00

 
 
 
 
 
 
 
 
Diluted net income (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Allocation of undistributed earnings for basic computation
$

 
$
(58,098
)
 
$
11

 
$
467

Reallocation of undistributed earnings

 

 

 

Allocation of undistributed earnings for diluted computation
$

 
$
(58,098
)
 
$
11

 
$
467

Denominator:
 
 
 
 
 
 
 
Number of shares used in basic computation

 
110,826

 
4,788

 
109,784

Dilutive potential shares from stock options, ESPP, convertible notes, CRI retention bonuses and nonvested equity stock and stock units

 

 

 
3,218

Number of shares used in diluted computation

 
110,826

 
4,788

 
113,002

Diluted net income (loss) per share
$

 
$
(0.52
)
 
$
0.00

 
$
0.00


 
Nine Months Ended September 30,
 
2012
 
2011
 
(In thousands, except per share amounts)
 
CRCS*
 
Other CS**
 
CRCS*
 
Other CS**
Basic and diluted net loss per share:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Allocation of undistributed earnings
$

 
$
(118,204
)
 
$
(526
)
 
$
(13,811
)
Denominator:
 

 
 

 
 

 
 

Weighted-average common shares outstanding

 
110,580

 
4,788

 
105,963

Basic and diluted net loss per share
$

 
$
(1.07
)
 
$
(0.11
)
 
$
(0.13
)
_________________________________________
*      CRCS — Contingently Redeemable Common Stock
**      Other CS — Common Stock other than CRCS
For the three months ended September 30, 2012 and 2011 , options to purchase approximately 13.4 million and 13.1 million shares, respectively, and for the nine months ended September 30, 2012 and 2011 , options to purchase approximately 13.3 million and 11.8 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, 2012 , an additional 6.9 million shares, and for the nine months ended September 30, 2012 and 2011 , an additional 7.0 million and 2.5 million shares, respectively, potentially dilutive shares have been excluded from the weighted average dilutive shares because there were net losses for the periods.


19


11.   Business Segments and Major Customers
In the third quarter of 2012, the Company announced the creation of a new internal organizational structure with three business units: (1) Memory and Interfaces Division; (2) Cryptography Research, Inc.; and (3) Lighting and Display Technologies ("LDT"). The engineering design teams and other strategic initiatives will be consolidated under Dr. Martin Scott, who will take the new role of chief technology officer. The Company is still in the process of evaluating if any changes will be required to its current chief operating decision maker ("CODM"), which is comprised of the executive management team, as well as the financial information that will be regularly reviewed for resource allocation and performance assessment. The Company expects to finalize these changes in the fourth quarter of 2012. For the third quarter of 2012, the Company's CODM reviewed segment information on the same basis as the previous quarter and only SBG is considered a reportable segment as it met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining immaterial operating segments were combined and shown under “All Other.”

The Company evaluates the performance of its segments based on segment direct operating income (loss). Segment direct operating income (loss) does not include the allocation of any corporate support functions (including human resources, facilities, legal, finance, information technology, corporate development, general administration, corporate licensing and marketing expenses, advanced technology development, and costs of restatement and related legal activities) to the segments. Additionally, certain expenses are not allocated to the operating segments because they are managed at the corporate level and they are not considered in evaluating the segments’ operating performance. Such unallocated corporate level expenses include stock-based compensation expenses, depreciation and amortization expenses, any impairment or restructuring charges and certain bonus and acquisition expenses. The “Reconciling Items” category includes these unallocated corporate support function expenses as well as corporate level expenses.
The table below presents reported segment revenues and reported segment direct operating income (loss).
 
For the Three Months Ended September 30, 2012
 
For the Nine Months Ended September 30, 2012
 
SBG
 
All Other
 
Total
 
SBG
 
All Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
54,043

 
$
3,487

 
$
57,530

 
$
163,269

 
$
13,339

 
$
176,608

 
 
 
 
 
 
 
 
 
 
 
 
Segment direct operating income (loss)
$
44,180

 
$
(5,071
)
 
$
39,109

 
$
126,848

 
$
(14,087
)
 
$
112,761

Reconciling items
 

 
 

 
(86,209
)
 
 

 
 

 
(199,168
)
Total operating loss
 

 
 

 
$
(47,100
)
 
 

 
 

 
$
(86,407
)
Interest and other expense, net
 

 
 

 
(7,133
)
 
 

 
 

 
(20,245
)
Loss before income taxes
 

 
 

 
$
(54,233
)
 
 

 
 

 
$
(106,652
)
 
For the Three Months Ended September 30, 2011
 
For the Nine Months Ended September 30, 2011
 
SBG
 
All Other
 
Total
 
SBG
 
All Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
84,628

 
$
15,635

 
$
100,263

 
$
212,779

 
$
16,225

 
$
229,004

 
 
 
 
 
 
 
 
 
 
 
 
Gain from settlement
$

 
$

 
$

 
$
6,200

 
$

 
$
6,200

Segment direct operating income
$
74,105

 
$
8,491

 
$
82,596

 
$
185,476

 
$
673

 
$
186,149

Reconciling items
 

 
 

 
(71,860
)
 
 

 
 

 
(169,551
)
Total operating income
 

 
 

 
$
10,736

 
 

 
 

 
$
16,598

Interest and other expense, net
 

 
 

 
(6,178
)
 
 

 
 

 
(17,991
)
Income (loss) before income taxes
 

 
 

 
$
4,558

 
 

 
 

 
$
(1,393
)

The Company’s CODM does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.

20


Revenue from the Company’s major customers representing 10% or more of total revenue for the three and nine months ended September 30, 2012 and 2011 , respectively, were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
Customer 
 
2012
 
2011
 
2012
 
2011
 
Customer A
 
38
%
 
25
%
 
38
%
 
30
%
 
Customer B
 
*

 
25
%
 
*

 
11
%
 
Customer C
 
*

 
12
%
 
*

 
*

 
Customer D
 
*

 
*

 
*

 
11
%
 
Customer E
 
*

 
*

 
10
%
 
11
%
 
_________________________________________
*    Customer accounted for less than 10% of total revenue in the period
Rambus licenses its technologies and patents to customers in multiple geographic regions. Revenue from customers in the following geographic regions was recognized as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2012
 
2011
 
2012
 
2011
South Korea
 
$
21,648

 
$
24,641

 
$
66,363

 
$
68,859

Japan
 
17,347

 
19,899

 
50,818

 
76,149

USA
 
14,309

 
42,096

 
45,778

 
69,897

Canada
 
1,983

 
12,463

 
5,835

 
12,758

Asia-Other
 
750

 
167

 
4,250

 
330

Europe
 
1,493

 
997

 
3,564

 
1,011

Total
 
$
57,530

 
$
100,263

 
$
176,608

 
$
229,004


12. Goodwill and Long-lived Assets
Q3 2012 Impairment
In August 2012, as a result of the change in business strategy for the LDT reporting unit, the Company revised its projected cash flows for LDT, triggering an interim impairment analysis for goodwill and long-lived assets. The decline in the projected cash flows for LDT resulted from a change in business strategy with less focus on the higher margin display technology licensing and an increased focus on its general lighting technologies.
The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. As noted above, the Company tested for impairment its long-lived assets in LDT as of August 31, 2012. The Company determined its long-lived asset group to be its LDT reporting unit comprising primarily finite-lived intangible assets and property, plant and equipment.
The Company records an impairment charge on the long-lived assets if it determines that their carrying value may not be recoverable. The carrying value is not recoverable if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. When the Company determines that the carrying value of the long-lived assets may not be recoverable, the Company measures the potential impairment based on a projected discounted cash flow method using a discount rate determined by its management to be commensurate with the risk inherent in its current business model. An impairment loss is recognized only if the carrying amount of the long-lived assets as a group is not recoverable and the carrying amount exceeds its fair value. The impairment charge is recorded to reduce the pre-impairment carrying amount of the long-lived assets based on the relative carrying amount of those assets, though not to reduce the carrying amount of an asset below its fair value.
As a result of the recoverability test, the Company concluded that its LDT asset group was not able to recover the carrying amount of its LDT assets. Determining the fair value of an asset group unit is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 fair value inputs, including current replacement costs, revenue growth rates and operating margins, and discount rates, among others. Accordingly, the Company was required to make various

21


estimates in determining the fair values of the LDT asset group. Due to the highly customized nature of the LDT manufacturing equipment, the Company primarily utilized the cost approach to estimate the fair value of its property, plant and equipment. To determine the estimated fair value of its property, plant and equipment, adjustment factors, including cost trend factors, were applied to each individual asset's original cost in order to estimate current replacement cost. The current replacement cost was then adjusted for estimated deductions to recognize the effects of deterioration and obsolescence from all causes, as well as indirect costs such as installation. Where appropriate, the Company utilized a market approach to estimate the fair value of its property, plant and equipment. This approach included the identification of market prices in actual transactions for similar assets based on asking prices for assets currently available for sale, as well as obtaining and reviewing certain direct market values based quoted prices with manufacturers and secondary market participants for similar equipment. Upon completion of this analysis, the Company recorded an impairment charge of $5.8 million and $0.6 million for building improvements and software in its LDT asset group, respectively.
The estimated fair value of the purchased intangible assets was determined based on the income approach, using Level 3 fair value inputs, as it was deemed to be the most indicative of the Company's fair value in an orderly transaction between market participants. Under the income approach the Company determined fair value based on the estimated future cash flows resulting from the licensing of the technology underlying the intangible assets. The estimated cash flows in the income approach were discounted by an estimated weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Upon completion of this analysis, the Company recorded an impairment charge of $15.4 million in the third quarter of 2012 related to purchased intangible assets.
Accordingly a long-lived asset impairment charge aggregating to $21.8 million was included in "Impairment of goodwill and long-lived assets" in the Unaudited Condensed Consolidated Statements of Operations.
The Company performs its impairment analysis of goodwill on an annual basis during fourth quarter of the year unless conditions arise that warrant a more frequent evaluation. As noted above, the Company performed an event-driven interim impairment analysis of goodwill as of August 31, 2012.
Goodwill is allocated to the various reporting units, namely SBG, CRI, LDT and MTD, which are also operating segments. The goodwill impairment test involves a two-step process. In the first step, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, the Company must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired by a market participant in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.
The Company estimated the fair value of all the reporting units using the income approach which was determined using Level 3 fair value inputs. The utilization of the income approach to determine fair value requires estimates of future operating results and cash flows discounted using an estimated discount rate. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows. Certain estimates used in the income approach involve information from businesses with developing revenue models and limited financial history, which increase the risk of differences between the projected and actual performance. One of the key assumptions used in applying the income approach includes discount rates which ranged from 20% to 35% depending on the reporting units' overall risk profile relative to other guideline companies, the reporting units' respective industry as well as the visibility of future expected cash flows.
Upon the completion of the goodwill impairment analysis as of August 31, 2012, the Company recorded a non-cash goodwill impairment charge of $13.7 million . The goodwill impairment charge is included in “Impairment of goodwill and long-lived assets” in the accompanying Unaudited Condensed Consolidated Statements of Operations.
It is reasonably possible that the businesses could perform significantly below the Company's expectations or a deterioration of market and economic conditions could occur. This would adversely impact the Company's ability to meet its projected results, which could cause the goodwill in any of its reporting units or long-lived assets in any of its asset groups to become impaired. Significant differences between these estimates and actual cash flows could materially affect the Company's future financial results. If the MTD and LDT reporting units are not successful in commercializing new business arrangements, or if the Company is unsuccessful in signing new license agreements or renewing its existing license agreements for the SBG and CRI reporting units, the revenue and income for these reporting units could adversely and materially deviate from their historical trends and could cause goodwill or long-lived assets to become impaired. If the Company determines that its goodwill or long-lived assets are impaired, it would be required to record a non-cash charge that could have a material adverse

22


effect on its results of operations and financial position.
Goodwill
The following table presents goodwill balances and adjustments to those balances for each of the reportable segments for the nine months ended September 30, 2012 :
Reportable Segment:
 
December 31,
2011
 
Additions to Goodwill (1)
 
Impairment Charge of Goodwill(2)
 
September 30,
2012
 
 
(In thousands)
SBG
 
$
4,454

 
$
15,451

 
$

 
$
19,905

All Other
 
110,694

 
8,070

 
(13,700
)
 
105,064

Total
 
$
115,148

 
$
23,521

 
$
(13,700
)
 
$
124,969

_________________________________________
(1)
The additions to goodwill resulted from two business combinations in the first quarter of 2012. See Note 4, “Acquisitions” for further details.
(2)
The Company recorded a non-cash goodwill impairment charge of $13.7 million related to the LDT reporting unit as discussed above.

Intangible Assets
The components of the Company’s intangible assets as of September 30, 2012 and December 31, 2011 were as follows:
 
 
 
As of September 30, 2012
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology(1)
3 to 10 years
 
$
181,431

 
$
(40,766
)
 
$
140,665

Customer contracts and contractual relationships
1 to 10 years
 
32,650

 
(13,074
)
 
19,576

Non-compete agreements
3 years
 
300

 
(133
)
 
167

Intellectual property
4 years
 
10,384

 
(10,384
)
 

Total intangible assets
 
 
$
224,765


$
(64,357
)
 
$
160,408

 
 
 
As of December 31, 2011
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
187,993

 
$
(32,682
)
 
$
155,311

Customer contracts and contractual relationships
1 to 10 years
 
33,550

 
(7,148
)
 
26,402

Non-compete agreements
3 years
 
400

 
(158
)
 
242

Intellectual property
4 years
 
10,384

 
(10,384
)
 

Total intangible assets
 
 
$
232,327

 
$
(50,372
)
 
$
181,955

_________________________________________
(1)
The Company recorded a non-cash intangible impairment charge of $15.4 million related to the LDT group as discussed above which has been netted from the gross carrying amount and accumulated amortization for existing technology.

Amortization expense for intangible assets for the three and nine months ended September 30, 2012 was $8.0 million and $23.5 million , respectively. Amortization expense for intangible assets for the three and nine months ended September 30, 2011 was $6.9 million and $12.9 million , respectively.
The favorable contracts (included in customer contracts and contractual relationships) are acquired patent licensing agreements where the Company has no performance obligations. Cash received from these acquired favorable contracts will

23


reduce the favorable contract intangible asset. As of September 30, 2012 and December 31, 2011 , the net balance of the favorable contract intangible assets is $5.2 million and $9.9 million , respectively.
The estimated future amortization expense of intangible assets as of September 30, 2012 was as follows (amounts in thousands):
Years Ending December 31:
Amount
2012 (remaining 3 months)
$
8,202

2013
31,451

2014
27,310

2015
26,660

2016
25,766

Thereafter
41,019

 
$
160,408



13. Litigation and Asserted Claims
Hynix Litigation
U.S District Court of the Northern District of California
On August 29, 2000, Hynix (formerly Hyundai) and various subsidiaries filed suit against Rambus in the U.S. District Court for the Northern District of California. The complaint, as amended and narrowed through motion practice, asserts claims for fraud, violations of federal antitrust laws and deceptive practices in connection with Rambus’ participation in a standards setting organization called JEDEC, and seeks a declaratory judgment that the Rambus patents-in-suit are unenforceable, invalid and not infringed by Hynix, compensatory and punitive damages, and attorneys’ fees. Rambus denied Hynix’s claims and filed counterclaims for patent infringement against Hynix.
The case was divided into three phases. In the first phase, Hynix tried its unclean hands defense beginning on October 17, 2005 and concluding on November 1, 2005. In its January 4, 2006 Findings of Fact and Conclusions of Law, the court held that Hynix’s unclean hands defense failed. Among other things, the court found that Rambus did not adopt its document retention policy in bad faith, did not engage in unlawful spoliation of evidence, and that while Rambus disposed of some relevant documents pursuant to its document retention policy, Hynix was not prejudiced by the destruction of Rambus documents.
The second phase of the Hynix-Rambus trial — on patent infringement, validity and damages — began on March 15, 2006, and was submitted to the jury on April 13, 2006. On April 24, 2006, the jury returned a verdict in favor of Rambus on all issues and awarded Rambus a total of approximately $307 million in damages, excluding prejudgment interest. The damages award was later remitted to approximately $134 million .
The third phase of the Hynix-Rambus case, involving Hynix’s affirmative JEDEC-related antitrust and fraud allegations, was part of a coordinated trial involving Rambus, Hynix, Micron and Nanya.  It began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims submitted to the jury. On March 3, 2009, the court issued an order rejecting Hynix, Micron, and Nanya’s equitable claims and defenses that had been tried during the coordinated trial.
On March 10, 2009, the court entered final judgment against Hynix in the amount of approximately $397 million as follows: approximately $134 million for infringement through December 31, 2005; approximately $215 million for infringement from January 1, 2006 through January 31, 2009; and approximately $48 million in pre-judgment interest (with post-judgment interest to accrue at the statutory rate). The court denied Rambus’s request for an injunction against Hynix but awarded costs to Rambus in the amount of approximately $0.76 million . Pursuant to the judgment, Hynix paid into an escrow account the awarded costs plus royalties on net sales for U.S. infringement after January 31, 2009 and before April 18, 2010 of 1% for SDR SDRAM and 4.25% for DDR DDR2, DDR3, GDDR, GDDR2 and GDDR3 SDRAM memory devices. Hynix posted a bond in the full amount of the judgment plus accrued post-judgment interest.
On April 6, 2009, Hynix filed its notice of appeal. On April 17, 2009, Rambus filed its notice of cross appeal. Oral argument was coordinated with the appeal in the Micron Delaware case (discussed below) and held on April 5, 2010. Oral argument was reheard by an expanded panel of five judges on October 6, 2010. On May 13, 2011, the Federal Circuit issued its opinion (1) concluding that the district court erred in applying too narrow a standard of reasonable foreseeability and vacating the district court’s findings of fact and conclusions of law regarding spoliation; (2) affirming the district court’s decisions on

24


Hynix’s JEDEC-related waiver and estoppel defenses; (3) affirming the district court’s claim construction order; (4) affirming the district court’s order denying Hynix’s motion for judgment as a matter of law or for a new trial on the basis of written description; (5) affirming the district court’s order denying Hynix’s motion for a new trial on the basis of obviousness; and (6) affirming the district court’s grant of Hynix’s motion for summary judgment for the claims at issue in Rambus’s cross-appeal. The Federal Circuit vacated the district court’s final judgment and remanded the case to the district court for further proceedings consistent with the Federal Circuit’s opinions in the Micron and Hynix cases. On July 29, 2011, the Federal Circuit denied the parties’ petitions for rehearing. On February 21, 2012, the United States Supreme Court denied Hynix’s petition seeking review of the Federal Circuit decision.
On remand, the parties filed briefs on issues related to unclean hands, costs awarded to Hynix by the Federal Circuit, the bond Hynix posted in the amount of the now-vacated judgment, and the escrowed funds. A hearing on these issues was held on December 16, 2011. In an order dated January 11, 2012, the court released Hynix’s obligation to maintain a supersedeas bond and denied Hynix’s request to lift Hynix’s obligations with respect to escrowed funds. On March 21, 2012, the court issued an order taxing Rambus approximately $8.1 million for Hynix’s bond premiums, filing fees, and transcript costs.  On April 25, 2012, the court issued an order releasing the funds Hynix had paid into the aforementioned escrow account.
On September 21, 2012, the court issued its unclean hands decision, finding that Rambus destroyed documents at a time litigation was reasonably foreseeable and engaged in spoliation of evidence. Although the court found that Rambus did not deliberately destroy documents it knew to be damaging, the court concluded that Rambus nonetheless spoliated evidence in bad faith or at least willfully. The court further found that Hynix was not prejudiced in any of its invalidity defenses but that Hynix was arguably prejudiced by Rambus' possible destruction of JEDEC related documents. Because the asserted patents were otherwise valid and Rambus did not intentionally destroy particular damaging documents, the court declined to apply unclean hands as a complete defense to Rambus' patent infringement claims. Instead, the court concluded that the appropriate sanction was to strike from the record evidence supporting a royalty in excess of a reasonable, non-discriminatory royalty. Accordingly, the court ordered the parties to submit briefs on what a reasonable and non-discriminatory royalty would be for the patents in suit. Such briefing is currently pending.
On October 17, 2012, Hynix filed a motion seeking summary judgment of invalidity based on certain adverse rulings of invalidity by the Board of Patent Appeals and Interferences in reexamination proceedings involving two of the ten asserted patent claims and certain other claims in related Farmwald-Horowitz patents. In the alternative, Hynix seeks a new trial on invalidity and damages or a stay of the case pending resolution of the reexaminations. Rambus' response is not yet due.
Micron Litigation
U.S District Court in Delaware: Case No. 0-792-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 0-20905 action: (1) unclean hands; (2) patent infringement; and (3) antitrust, equitable estoppel, and other JEDEC-related issues. A bench trial on Micron’s unclean hands defense began on November 8, 2007 and concluded on November 15, 2007. The court ordered post-trial briefing on the issue of when Rambus became obligated to preserve documents because it anticipated litigation. A hearing on that issue was held on May 20, 2008. The court ordered further post-trial briefing on the remaining issues from the unclean hands trial, and a hearing on those issues was held on September 19, 2008.
On January 9, 2009, the court issued an opinion in which it determined that Rambus had engaged in spoliation of evidence by failing to suspend general implementation of a document retention policy after the point at which the court determined that Rambus should have known litigation was reasonably foreseeable. The court issued an accompanying order declaring the 12 patents in suit unenforceable against Micron (the “Delaware Order”). On February 9, 2009, the court stayed all other proceedings pending appeal of the Delaware Order. On February 10, 2009, judgment was entered against Rambus and in favor of Micron on Rambus’ patent infringement claims and Micron’s corresponding claims for declaratory relief. On March 11, 2009, Rambus filed its notice of appeal. Rambus filed its opening brief on July 2, 2009. On August 28, 2009, Micron filed its answering brief. On October 14, 2009, Rambus filed its reply brief. Oral argument was coordinated with the appeal in the Hynix case (discussed above) and held on April 5, 2010. Oral argument was reheard by an expanded panel of five judges on October 6, 2010. On May 13, 2011, the Federal Circuit issued its opinion affirming the district court’s determination that Rambus spoliated documents, vacating the district court’s dismissal sanction (including the district court’s determination of bad

25


faith and prejudice), and remanding the case to the district court for further consideration consistent with its opinion. On June 27, 2011, Rambus filed a petition for rehearing and rehearing en banc with respect to the issues of spoliation, bad faith, and prejudice. On July 29, 2011, the Federal Circuit denied Rambus’s petition.
On remand, the parties filed simultaneous briefs on November 9 and December 21, 2011, on the unclean hands-related issues of bad faith, prejudice, and sanction. A hearing on these issues was held on January 26, 2012. No decision has issued to date.
U.S. District Court of the Northern District of California
On January 13, 2006, Rambus filed suit against Micron in the U.S. District Court for the Northern District of California. Rambus alleges that 14 Rambus patents are infringed by Micron’s DDR2, DDR3, GDDR3, and other advanced memory products. Rambus seeks compensatory and punitive damages, attorneys’ fees, and injunctive relief.
As explained above, the court ordered a coordinated trial (without Samsung) of certain common JEDEC-related claims and defenses asserted in Hynix v Rambus , Case No. C 0-20905RMW, Rambus Inc. v. Samsung Electronics Co. Ltd. et al. , Case No. 5-2298RMW, Rambus Inc. v. Hynix Semiconductor Inc., et al. , Case No. 5-334, and Rambus Inc. v. Micron Technology, Inc., et al. , Case No. C 6-244RMW. The coordinated trial involving Rambus, Hynix, Micron and Nanya began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims. On March 3, 2009, the court issued an order rejecting Hynix, Micron, and Nanya’s equitable claims and defenses that had been tried during the coordinated trial.
On July 10, 2008, the court issued its claim construction order relating to the Farmwald/Horowitz patents in suit and denied Hynix, Micron, Nanya, and Samsung’s (collectively, the “Manufacturers”) motions for summary judgment of noninfringement and invalidity based on their proposed claim construction. The court issued claim construction orders relating to the Ware patents in suit on July 25 and August 27, 2008, and denied the Manufacturers’ motion for summary judgment of noninfringement of certain claims. On September 4, 2008, at the court’s direction, Rambus elected to proceed to trial on 12 patent claims, each from the Farmwald/Horowitz family. On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement against the Manufacturers under the Ware patents in suit (U.S. Patent Nos. 6,493,789 and 6,496,897), and each party’s claims relating to those patents were dismissed with prejudice. On November 21, 2008, the court entered an order clarifying certain aspects of its July 10, 2008, claim construction order. On November 24, 2008, the court granted Rambus’ motion for summary judgment of direct infringement with respect to claim 16 of Rambus’ U.S. Patent No. 6,266,285 by the Manufacturers’ DDR2, DDR3, gDDR2, GDDR3, GDDR4memory chip products (except for Nanya’s DDR3memory chip products). In the same order, the court denied the remainder of Rambus’ motion for summary judgment of infringement.
On January 19, 2009, Micron filed a motion for summary judgment on the ground that the Delaware Order should be given preclusive effect. Rambus filed an opposition to Micron’s motion on January 26, 2009, and a hearing was held on January 30, 2009. On February 3, 2009, the court entered a stay of this action pending resolution of Rambus’ appeal of the Delaware Order.
European Patent Infringement Cases
In 2001, Rambus filed suit against Micron in Mannheim, Germany, for infringement of European patent, EP 1 22 642. That suit has not been active. Two proceedings in Italy remain active.  One relates to Rambus’s claim that Micron is infringing European patent, EP 1 4 956.  The court in this proceeding has found the ‘956 patent valid but not infringed.  The court also dismissed Micron’s claims for unfair competition based on JEDEC as well as abuse of process.  Any appeals are due by December 27, 2012. The second case in Italy involves Micron’s purported claim resulting from a seizure of evidence in Italy in 2000 carried out by Rambus pursuant to a court order.  The court in this proceeding dismissed Micron’s claim.  Micron has appealed this decision to the Italian Supreme Court.
DDR2, DDR3, gDDR2, GDDR3, GDDR4 Litigation (“DDR2”)
U.S District Court in the Northern District of California
On January 25, 2005, Rambus filed a patent infringement suit in the U.S. District Court for the Northern District of California court against Hynix, Infineon, Nanya, and Inotera. Infineon and Inotera were subsequently dismissed from this litigation as was Samsung which had been added as a defendant. Rambus alleges that certain of its patents are infringed by certain of the defendants’ SDRAM, DDR, DDR2, DDR3, gDDR2, GDDR3, GDDR4 and other advanced memory products. Hynix and Nanya have denied Rambus’ claims and asserted counterclaims against Rambus for, among other things, violations of federal antitrust laws, unfair trade practices, equitable estoppel, and fraud in connection with Rambus’ participation in JEDEC.
As explained above, the court ordered a coordinated trial (without Samsung) of certain common JEDEC-related claims and

26


defenses asserted in Hynix v Rambus , Case No. C 0-20905RMW, Rambus Inc. v. Samsung Electronics Co. Ltd. et al. , Case No. 5-2298RMW, Rambus Inc. v. Hynix Semiconductor Inc., et al. , Case No. 5-334, and Rambus Inc. v. Micron Technology, Inc., et al. , Case No. C 6-244RMW. The coordinated trial involving Rambus, Hynix, Micron and Nanya began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims.
On March 3, 2009, the court issued an order rejecting Hynix, Micron, and Nanya’s equitable claims and defenses that had been tried during the coordinated trial.
In these cases (except for the Hynix 0-20905 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’s motion for summary judgment of direct infringement with respect to claim 16 of Rambus’s U.S. Patent No. 6,266,285 by the Manufacturers’ DDR2, DDR3, gDDR2, GDDR3, GDDR4memory chip products (except for Nanya’s DDR3memory chip products). In the same order, the court denied the remainder of Rambus’s motion for summary judgment of infringement.
On January 19, 2009, Nanya and Hynix filed motions for summary judgment on the ground that the Delaware Order should be given preclusive effect. Rambus filed opposition briefs to these motions on January 26, 2009, and a hearing was held on January 30, 2009. On February 3, 2009, the court entered a stay of this action pending resolution of Rambus’ appeal of the Delaware Order.
European Commission Competition Directorate-General
On or about April 22, 2003, Rambus was notified by the European Commission Competition Directorate-General (Directorate) (the “European Commission”) that it had received complaints from Infineon and Hynix. Rambus answered the ensuing requests for information prompted by those complaints on June 16, 2003. Rambus obtained a copy of Infineon’s complaint to the European Commission in late July 2003, and on October 8, 2003, at the request of the European Commission, filed its response. On August 1, 2007, Rambus received a statement of objections from the European Commission. The statement of objections alleges that through Rambus’ participation in the JEDEC standards setting organization and subsequent conduct, Rambus violated European Union competition law. Rambus filed a response to the statement of objections on October 31, 2007, and a hearing was held on December 4 and 5, 2007.
On December 9, 2009, the European Commission announced that it had reached a final settlement with Rambus to resolve the pending case. Under the terms of the settlement, the Commission made no finding of liability, and no fine will be assessed against Rambus. Rambus commits to offer licenses with maximum royalty rates for certain memory types and memory controllers on a forward-going basis (the “Commitment”). The Commitment is expressly made without any admission by Rambus of the allegations asserted against it. The Commitment also does not resolve any existing claims of infringement prior to the signing of any license with a prospective licensee, nor does it release or excuse any of the prospective licensees from damages or royalty obligations through the date of signing a license. Rambus offers licenses with maximum royalty rates for five -year worldwide licenses of 1.5% for DDR2, DDR3, GDDR3 and GDDR4 SDRAM memory types. Qualified licensees will enjoy a royalty holiday for SDR and DDR DRAM devices, subject to compliance with the terms of the license. In addition, Rambus offers licenses with maximum royalty rates for five-year worldwide licenses of 1.5% per unit for SDR memory controllers through April 2010, dropping to 1.0% thereafter, and royalty rates of 2.65% per unit for DDR, DDR2, DDR3, GDDR3 and GDDR4 memory controllers through April 2010, then dropping to 2.0% . The Commitment to license at the above rates remains valid for a period of five years from December 9, 2009. All royalty rates are applicable to future shipments only and do not affect liability, if any, for damages or royalties that accrued up to the time of the license grant.
On March 25, 2010, Hynix filed appeals with the General Court of the European Union purporting to challenge the settlement and the European Commission’s rejection of Hynix’s complaint. No decision has issued to date on Hynix’s appeal.
Superior Court of California for the County of San Francisco
On May 5, 2004, Rambus filed a lawsuit against Micron, Hynix, Infineon and Siemens in San Francisco Superior Court (the “San Francisco court”) seeking damages for conspiring to fix prices (California Bus. & Prof. Code §§ 16720 et seq. ), conspiring to monopolize under the Cartwright Act (California Bus. & Prof. Code §§ 16720 et seq. ), intentional interference

27


with prospective economic advantage, and unfair competition (California Bus. & Prof. Code §§ 17200 et seq. ). This lawsuit alleges that there were concerted efforts beginning in the 1990s to deter innovation in the DRAM market and to boycott Rambus and/or deter market acceptance of Rambus’ RDRAM product. Subsequently, Infineon and Siemens were dismissed from this action (as a result of a settlement with Infineon) and three Samsung-related entities were added as defendants and later dismissed (as a result of a settlement with Samsung).
A jury trial against Micron and Hynix began on June 20, 2011. On September 21, 2011, the jury began deliberations. On November 16, 2011, the jury returned a verdict in favor of Hynix and Micron and against Rambus by a tally of 9-3. Judgment was entered by the Court on February 15, 2012.
On February 15, 2012, Micron and Hynix filed memoranda of costs seeking to recover approximately $1.6 million and $3.0 million , respectively, in alleged costs from Rambus. A hearing on costs was held on June 29, 2012. At the hearing, the court indicated that costs recoverable from Rambus by Micron and Hynix would be reduced to $520,000 and $350,000 , respectively. An order has not yet been entered. The Company has accrued $0.9 million related to these costs as of September 30, 2012 .
Rambus filed a notice of appeal on April 3, 2012 and briefing is currently pending.
Stock Option Investigation Related Claims
On May 30, 2006, the Audit Committee commenced an internal investigation of the timing of past stock option grants and related accounting issues. Several class action, derivative, and private shareholder suits were subsequently filed, all of which (with one exception described below) have been dismissed or settled.
On March 1, 2007, a pro se lawsuit was filed in the Northern District of California by two alleged Rambus shareholders against Rambus, certain current and former executives and board members, and PricewaterhouseCoopers LLP ( Kelley et al. v. Rambus, Inc. et al. C-7-1238-JF (N.D. Cal.)). This action was consolidated with a substantially identical pro se lawsuit filed by another purported Rambus shareholder against the same parties. The consolidated complaint against Rambus alleges violations of federal and state securities laws, and state law claims for fraud and breach of fiduciary duty. On April 17, 2008, the court dismissed all claims with prejudice except for plaintiffs’ claims under sections 14(a) and 18(a) of the Securities and Exchange Act of 1934 as to which leave to amend was granted. On June 2, 2008, plaintiffs filed an amended complaint containing substantially the same allegations as the prior complaint although limited to claims under sections 14(a) and 18(a) of the Securities and Exchange Act of 1934. On December 9, 2008, the court granted Rambus’ motion and entered judgment in favor of Rambus. Plaintiffs filed a notice of appeal on December 15, 2008. On June 16, 2010, the United States Court of Appeals for the Ninth Circuit issued a decision affirming the judgment in favor of Rambus.
On September 11, 2008, the same pro se plaintiffs filed a separate lawsuit in Santa Clara County Superior Court against Rambus, certain current and former executives and board members, and PricewaterhouseCoopers LLP ( Kelley et al. v. Rambus, Inc. et al. , Case No. 1-8-CV-122444). The complaint alleges violations of certain California state securities statutes as well as fraud and negligent misrepresentation based on substantially the same underlying factual allegations contained in the pro se lawsuit filed in federal court. On October 31, 2010, the plaintiffs filed a second amended complaint. On December 2, 2010, Rambus filed a demurrer to plaintiffs’ second amended complaint on the ground that it is barred by the doctrine of claim preclusion, among other things. On May 12, 2011, the court sustained Rambus’ demurrer without leave to amend. Judgment in favor of Rambus was entered on June 15, 2011. On August 10, 2011, plaintiffs filed a notice of appeal and oral argument occurred on September 20, 2012 No decision has issued to date.
Broadcom, Freescale, LSI, MediaTek, and STMicroelectronics Litigation
International Trade Commission 2010 Investigation
On December 1, 2010, Rambus filed a complaint with the ITC requesting the commencement of an investigation and seeking an exclusion order barring the importation, sale for importation, or sale after importation of products that incorporate at least DDR, DDR2, DDR3, LPDDR, LPDDR2, mobile DDR, GDDR, GDDR2, and GDDR3memory controllers from Broadcom, Freescale, LSI, MediaTek and STMicroelectronics that infringe patents from the Barth family of patents, and products having certain peripheral interfaces, including PCI Express interfaces, DisplayPort interfaces, and certain Serial AT Attachment (“SATA”) and Serial Attached SCSI (“SAS”) interfaces, from Broadcom, Freescale, LSI and STMicroelectronics that infringe patents from the Dally family of patents.  The complaint names, among others, Broadcom, Freescale, LSI, MediaTek and STMicroelectronics as respondents, as well as companies whose products incorporate those companies’ accused products and are imported into the United States, including Asustek Computer Inc. and Asus Computer International Inc., Audio Partnership Plc, Cisco Systems, Garmin International, G.B.T. Inc., Giga-Byte Technology Co. Ltd., Gracom Technologies LLC, Hewlett-Packard Company, Hitachi GST, Motorola, Inc., Oppo Digital, Inc., and Seagate Technology. As described more fully above, the complaint also names NVIDIA and certain companies whose products incorporate accused NVIDIA products with certain peripheral interfaces, including PCI Express and DisplayPort peripheral interfaces, and seeks to

28


bar their importation, sale for importation, or sale after importation.  On December 29, 2010, the ITC instituted the investigation. On June 20, 2011, the administrative law judge granted a joint motion by Rambus and Freescale to terminate the investigation as to Freescale pursuant to the parties’ settlement agreement. A final hearing before the administrative law judge was held October 12-20, 2011.  On January 17, 2012, the administrative law judge granted a joint motion by Rambus and Broadcom to terminate the investigation as to Broadcom pursuant to the parties’ settlement agreement.
On March 2, 2012, the administrative law judge issued an initial determination that there was no violation of section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. § 1337.  As a threshold matter, the administrative law judge determined that: a licensing-based domestic industry existed for the asserted Dally and Barth patents; that the accused LSI, STMicro, MediaTek products literally infringe all asserted claims of each asserted Barth patent, and that LSI, STMicro, and MediaTek induce infringement and contribute to the infringement of the asserted Barth claims; that the accused LSI and STMicro patents products literally infringe all asserted claims of both asserted Dally patents that are still in suit, and that LSI and STMicro induce infringement and contribute to the infringement of the asserted Dally claims; the Barth patents and the Dally patents are not invalid for failure to satisfy the written description or definiteness requirement under 35 U.S.C. § 112, nor are they unenforceable due to prosecution laches or patent misuse; Rambus had standing to assert the Dally patents; Rambus was not equitably estopped from asserting the Dally patents and the Barth patents; the asserted Barth patents are not unenforceable due to inequitable conduct, and not invalid for failure to satisfy the utility requirement under 35 U.S.C. § 101; the asserted patents are invalid due to anticipation and obviousness; and the Barth patents are unenforceable due to unclean hands.
On March 19, 2012, the parties filed petitions asking the full Commission to review certain aspects of the initial determination. On May 3, 2012, the ITC granted a joint motion by Rambus and MediaTek to terminate the investigation as to MediaTek pursuant to the parties’ settlement agreement. On May 3, 2012, the ITC also determined that it would review the final initial determination issued by the administrative law judge in its entirety. On May 18, 2012, Rambus, the Office of Unfair Import Investigations, and the remaining respondents submitted briefs responding to the ITC’s questions contained in its notice to review the initial determination. On June 1, 2012, Rambus, the Office of Unfair Import Investigations, and the remaining respondents submitted reply briefs.
On July 25, 2012, the ITC issued the notice of its determination to terminate the investigation with a finding of no violation for the following reasons: all of the asserted patent claims are invalid due to anticipation or obviousness, except for certain Dally claims that include multiple-transmitters for which the ITC determined there was no infringement; Rambus did not demonstrate the existence of a domestic industry for both the Barth and Dally patents; the Barth patents are unenforceable under the doctrine of unclean hands; and the Barth patents are exhausted as to one respondent. The ITC's opinion setting forth its determinations issued on July 31, 2012. Rambus filed a notice of appeal on September 21, 2012.
U.S District Court in the Northern District of California
On December 1, 2010, Rambus filed complaints against Broadcom, Freescale, LSI, MediaTek and STMicroelectronics in the U.S. District Court for the Northern District of California alleging that 1) products that incorporate at least DDR, DDR2, DDR3, LPDDR, LPDDR2, mobile DDR, GDDR, GDDR2, and GDDR3 memory controllers from Broadcom, Freescale, LSI, MediaTek and STMicroelectronics infringe patents from the Barth family of patents; 2) those same products and products from those companies that incorporate SDR memory controllers infringe patents from the Farmwald-Horowitz family; and 3) products having certain peripheral interfaces, including PCI Express, DisplayPort, and certain SATA and SAS interfaces, from Broadcom, Freescale, LSI and STMicroelectronics infringe patents from the Dally family of patents. On June 7, 2011, Rambus’s complaint against Freescale was dismissed pursuant to the parties’ settlement agreement. On January 24, January 26, and March 1, 2011, LSI, Broadcom, and STMicroelectronics filed their respective answers denying Rambus’s allegations and asserting counterclaims seeking declarations of non-infringement and invalidity, and unenforceability with respect to at least certain of the patents in suit. Rambus filed answers denying the allegations in LSI’s, Broadcom’s, and STMicroelectronics’s counterclaims on February 14, February 16, and March 22, 2011, respectively. On March 7, 2011, MediaTek filed an answer denying Rambus’s allegations. Broadcom, MediaTek, STMicroelectornics, and LSI filed motions to stay their respective actions. On June 13, 2011, the Court granted in part the motions to stay and denied them as to certain patents not overlapping with patents asserted in the ITC 2010 investigation. On December 29, 2011, Rambus’s complaint against Broadcom was dismissed pursuant to the parties’ settlement agreement. On March 20, 2011, Rambus’s complaint against MediaTek was dismissed pursuant to the parties’ settlement agreement.
On September 26, 2012, the court issued a claim construction order. Discovery is ongoing and a case management conference has been set for November 15, 2012.
Potential Future Litigation
In addition to the litigation described above, companies continue to adopt Rambus technologies into various products. Rambus has notified many of these companies of their use of Rambus technology and continues to evaluate how to proceed on

29


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. A reasonably possible loss in excess of amounts accrued is not material to the financial statements.

14. Fair Value of Financial Instruments
The Company tests the pricing inputs by obtaining prices from two different sources for the same security on a sample of its portfolio. The Company has not adjusted the pricing inputs it has obtained. The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of September 30, 2012 and December 31, 2011 :
 
As of September 30, 2012
 
Total
 
Quoted
  Market
  Prices in
  Active
  Markets
  (Level 1)
 
Significant
  Other
  Observable
  Inputs
  (Level 2)
 
Significant
  Unobservable
  Inputs
  (Level 3)
 
(In thousands)
Money market funds
$
118,508

 
$
118,508

 
$

 
$

Corporate notes, bonds and commercial paper
56,886

 

 
56,886

 

Total available-for-sale securities
$
175,394

 
$
118,508

 
$
56,886

 
$

 
As of December 31, 2011
 
Total
 
Quoted
  Market
  Prices in
  Active
  Markets
  (Level 1)
 
Significant
  Other
  Observable
  Inputs
  (Level 2)
 
Significant
  Unobservable
  Inputs
  (Level 3)
 
(In thousands)
Money market funds
$
127,559

 
$
127,559

 
$

 
$

Corporate notes, bonds and commercial paper
137,108

 

 
137,108

 

Total available-for-sale securities
$
264,667

 
$
127,559

 
$
137,108

 
$

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