Rambus Inc.
RAMBUS INC (Form: 10-Q, Received: 04/26/2013 14:12:19)
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 March 31, 2013
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 o
 
Accelerated filer ý
 
 
 
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 111,641,153 as of March 31, 2013 .


Table of Contents

RAMBUS INC.
TABLE OF CONTENTS
 
 
PAGE
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements:
 

2

Table of Contents

NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements. These forward-looking statements include, without limitation, predictions regarding the following aspects of our future:
Success in the markets of our or our licensees’ products;
Sources of competition;
Research and development costs and improvements in technology;
Sources, amounts and concentration of revenue, including royalties;
Success in renewing license agreements;
Technology product development;
Outcome and effect of current and potential future intellectual property litigation and other significant litigation;
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

Table of Contents

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


4

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RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
March 31,
2013
 
December 31,
2012
 
(In thousands, except shares
and par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
157,215

 
$
148,984

Marketable securities
57,613

 
54,346

Accounts receivable
60

 
529

Prepaids and other current assets
9,038

 
10,529

Deferred taxes
788

 
788

Total current assets
224,714

 
215,176

Intangible assets, net
145,930

 
153,173

Goodwill
124,969

 
124,969

Property, plant and equipment, net
78,218

 
86,905

Deferred taxes, long-term
4,806

 
4,458

Other assets
3,029

 
3,131

Total assets
$
581,666

 
$
587,812

LIABILITIES &   STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
4,036

 
$
7,918

Accrued salaries and benefits
31,925

 
23,992

Accrued litigation expenses
10,256

 
9,822

Other accrued liabilities
7,954

 
12,402

Total current liabilities
54,171

 
54,134

Convertible notes, long-term
151,487

 
147,556

Long-term imputed financing obligation
39,685

 
45,919

Long-term income taxes payable
6,534

 
6,533

Other long-term liabilities
13,992

 
12,076

Total liabilities
265,869

 
266,218

Commitments and contingencies (Notes 9 and 14)


 


Stockholders’ equity:
 

 
 

Convertible preferred stock, $.001 par value:
 

 
 

Authorized: 5,000,000 shares
 

 
 

Issued and outstanding: no shares at March 31, 2013 and December 31, 2012

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 111,641,153 shares at March 31, 2013 and 111,525,021 shares at December 31, 2012
112

 
112

Additional paid-in capital
1,080,380

 
1,075,761

Accumulated deficit
(764,381
)
 
(753,979
)
Accumulated other comprehensive loss
(314
)
 
(300
)
Total stockholders’ equity
315,797

 
321,594

Total liabilities and stockholders’ equity
$
581,666

 
$
587,812

See Notes to Unaudited Condensed Consolidated Financial Statements

5

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RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  

 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(In thousands, except per
 share amounts)
Revenue:
 

 
 

Royalties
$
66,222

 
$
62,043

Contract revenue
644

 
820

Total revenue
66,866

 
62,863

Operating costs and expenses:
 

 
 

Cost of revenue*
5,249

 
7,163

Research and development*
32,848

 
38,394

Marketing, general and administrative*
25,105

 
34,834

Restructuring charges
2,206

 

Costs of restatement and related legal activities
17

 
30

Total operating costs and expenses
65,425

 
80,421

Operating income (loss)
1,441

 
(17,558
)
Interest income and other income (expense), net
(20
)
 
98

Interest expense
(7,312
)
 
(6,580
)
Interest and other income (expense), net
(7,332
)
 
(6,482
)
Loss before income taxes
(5,891
)
 
(24,040
)
Provision for income taxes
4,511

 
3,850

Net loss
$
(10,402
)
 
$
(27,890
)
Net loss per share:
 

 
 

Basic
$
(0.09
)
 
$
(0.25
)
Diluted
$
(0.09
)
 
$
(0.25
)
Weighted average shares used in per share calculation:
 

 
 

Basic
111,599

 
110,358

Diluted
111,599

 
110,358

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

 
$
10

Research and development
$
1,876

 
$
2,720

Marketing, general and administrative
$
3,072

 
$
3,996

See Notes to Unaudited Condensed Consolidated Financial Statements

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

 
 
Three Months Ended
 
 
March 31,
(In thousands)
 
2013
 
2012
Net loss
 
$
(10,402
)
 
$
(27,890
)
Other comprehensive income (loss):
 
 

 
 

Unrealized gain (loss) on marketable securities, net of tax
 
(14
)
 
94

Total comprehensive loss
 
$
(10,416
)
 
$
(27,796
)
See Notes to Unaudited Condensed Consolidated Financial Statements

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RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net loss
$
(10,402
)
 
$
(27,890
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Stock-based compensation
4,948

 
6,726

Depreciation
3,791

 
3,099

Amortization of intangible assets
7,040

 
7,616

Non-cash interest expense and amortization of convertible debt issuance costs
4,089

 
3,510

Deferred tax benefit
263

 

Non-cash restructuring
653

 

Gain on sale of assets
(1,282
)
 

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

 
 

Accounts receivable
469

 
298

Prepaid expenses and other assets
2,965

 
4,200

Accounts payable
(2,243
)
 
(9,565
)
Accrued salaries and benefits and other accrued liabilities
4,209

 
1,502

Accrued litigation expenses
434

 
306

Income taxes payable
378

 
(794
)
Net cash provided by (used in) operating activities
15,312

 
(10,992
)
Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(3,703
)
 
(3,043
)
Acquisition of intangible assets
(1,875
)
 
(250
)
Purchases of marketable securities
(36,699
)
 

Maturities of marketable securities
33,250

 
82,926

Proceeds from sale of assets
2,000

 

Acquisition of business, net of cash acquired

 
(42,397
)
Net cash provided by (used in) investing activities
(7,027
)
 
37,236

Cash flows from financing activities:
 
 
 
Payments under installment payment arrangement
(28
)
 

Principal payments against lease financing obligation
(26
)
 
(3
)
Proceeds received from issuance of common stock under employee stock plans

 
63

Net cash provided by (used in) financing activities
(54
)
 
60

Net increase in cash and cash equivalents
8,231

 
26,304

Cash and cash equivalents at beginning of period
148,984

 
162,244

Cash and cash equivalents at end of period
$
157,215

 
$
188,548

 
 
 
 
Non-cash investing and financing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other accrued liabilities
$
166

 
$
3,893

Non-cash obligation for property, plant and equipment
$

 
$
495

Intangible assets acquired under installment payment arrangement
$

 
$
1,050

Remaining purchase consideration for acquisition of business
$

 
$
3,881

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, 2012 .
Operating Segment Definitions
Operating segments are based upon Rambus' internal organization structure, the manner in which its operations are managed, the criteria used by its Chief Operating Decision Maker ("CODM") to evaluate segment performance and availability of separate financial information regularly reviewed for resource allocation and performance assessment.
The Company determined its CODM to be the Chief Executive Officer and determined its operating segments to be: (1) Memory and Interfaces Division ("MID"), which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research, Inc. ("CRI"), which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Lighting and Display Technologies ("LDT"), which focuses on the design, development and licensing of technologies for lighting and displays; and (4) CTO, which is a centralized research and development and business incubation organization that consolidates early-stage investments, longer-term research activities and worldwide engineering, including Mobile Technologies Division ("MTD").

2. Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. The new guidance became effective for the Company's interim period ended March 31, 2013. The Company adopted this guidance and the adoption did not have any impact on its financial position, results of operations or cash flows as the amounts reclassified out of accumulated other comprehensive income is not significant.
In July 2012, the FASB amended its guidance to simplify how an entity tests indefinite-lived intangible assets 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 impairment test. An entity no longer will be required to calculate the fair value of an indefinite-lived intangible asset 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, 2013. The Company adopted this guidance and the adoption did not have an impact on its financial position or results of operations as it does not have any indefinite-lived intangible assets.
In December 2011, the FASB issued 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 became effective for the Company's interim period ended March 31, 2013. The Company adopted this guidance and the adoption did not have any impact on its financial position, results of operations or cash flows as it is disclosure-only in nature.

9




3. Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instrument was exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported.
The following table sets forth the computation of basic and diluted loss per share:
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Basic and diluted net loss per share:
 
(In thousands, except per share amounts)
Numerator:
 
 

 
 

Net Loss
 
$
(10,402
)
 
$
(27,890
)
Denominator:
 
 
 
 
Weighted-average shares outstanding
 
111,599

 
110,358

Basic and diluted net loss per share
 
$
(0.09
)
 
$
(0.25
)
For the three months ended March 31, 2013 and 2012 , options to purchase approximately 12.9 million and 16.1 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 March 31, 2013 and 2012 , an additional 6.4 million and 5.4 million potentially dilutive shares, respectively, have been excluded from the weighted average dilutive shares because there were net losses for the periods.

4. Intangible Asset and Goodwill
Goodwill
The following table presents goodwill balances and adjustments to those balances for each of the reportable segments for the three months ended March 31, 2013 :
Reportable Segment:
 
December 31,
2012
 
Additions to Goodwill
 
Impairment Charge of Goodwill
 
March 31,
2013
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$

 
$
19,905

CTO
 
8,070

 

 

 
8,070

All Other
 
96,994

 

 

 
96,994

Total
 
$
124,969

 
$

 
$

 
$
124,969



10


 
 
As of
 
 
March 31, 2013
Reportable Segment:
 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Net Carrying Amount
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$
19,905

CTO
 
8,070

 

 
8,070

All Other
 
110,694

 
(13,700
)
 
96,994

Total
 
$
138,669

 
$
(13,700
)
 
$
124,969


Intangible Assets
The components of the Company’s intangible assets as of March 31, 2013 and December 31, 2012 were as follows:
 
 
 
As of March 31, 2013
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
192,881

 
$
(63,466
)
 
$
129,415

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

 
(16,252
)
 
16,398

Non-compete agreements
3 years
 
300

 
(183
)
 
117

Total intangible assets
 
 
$
225,831


$
(79,901
)
 
$
145,930

 
 
 
As of December 31, 2012
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
191,815

 
$
(57,240
)
 
$
134,575

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

 
(14,194
)
 
18,456

Non-compete agreements
3 years
 
300

 
(158
)
 
142

Total intangible assets
 
 
$
224,765

 
$
(71,592
)
 
$
153,173


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 reduce the favorable contract intangible asset. For the three months ended March 31, 2013 and 2012, the Company received $1.4 million and $2.4 million related to the favorable contracts, respectively. As of March 31, 2013 and December 31, 2012 , the net balance of the favorable contract intangible assets was $3.4 million and $4.8 million , respectively.
Amortization expense for intangible assets for the three months ended March 31, 2013 and 2012 was $7.0 million and $7.6 million , respectively.

The estimated future amortization expense of intangible assets as of March 31, 2013 was as follows (amounts in thousands):

11


Years Ending December 31:
Amount
2013 (remaining 9 months)
$
24,166

2014
27,492

2015
26,841

2016
25,974

2017
24,500

Thereafter
16,957

 
$
145,930



5.   Segments and Major Customers
For the quarters ended March 31, 2013 and 2012, only MID and CTO were reportable segments. The remaining other operating segments were combined and shown under “All Other”.
The Company evaluates the performance of its segments based on segment operating income (loss), which is defined as customer licensing income ("CLI") minus segment operating expenses. Segment operating expenses are comprised of direct operating expenses and the allocation of certain engineering expenses.
CLI is defined as total cash royalties received from its customers under its licensing agreements with them. In addition, customer licensing income includes other patent royalties received but not recognizable as revenue. In the first quarter of 2013, certain customer patent royalty payments were not recognized as revenue as not all revenue recognition criteria were met during the period.  Additionally, since the third quarter of 2011, the Company has received patent royalty payments from certain patent license agreements assumed in the acquisition of CRI which were treated as favorable contracts. Cash received from these acquired favorable contracts reduced the favorable contract intangible asset on the Company's balance sheet. The Company has combined these cash royalty payments as CLI to reflect the total amounts received from its customers.
Segment operating expenses do not include marketing, general and administrative expenses and the allocation of certain expenses managed at the corporate level, such as stock-based compensation, amortization, and certain bonus and acquisition costs. The “Reconciling Items” category includes these unallocated marketing, general and administrative expenses as well as corporate level expenses. The presentation of the three months ended March 31, 2012 segment data has been updated to conform with the 2013 segment operating income (loss) definition applied starting in the fourth quarter of 2012.
The tables below present reported segment operating income (loss) for the three months ended March 31, 2013 and 2012, respectively.
 
For the Three Months Ended March 31, 2013
 
MID
 
CTO
 
All Other
 
Total
 
(In thousands)
Revenues
$
59,674

 
$

 
$
7,192

 
$
66,866

Other patent royalties received
1,875

 

 
3,362

 
5,237

Customer licensing income
$
61,549

 
$

 
$
10,554

 
$
72,103

Segment operating expenses
8,924

 
7,858

 
10,075

 
26,857

Segment operating income (loss)
$
52,625

 
$
(7,858
)
 
$
479

 
$
45,246

Reconciling items
 

 
 
 
 

 
(43,805
)
Operating income
 

 
 
 
 

 
$
1,441

Interest and other income (expense), net
 

 
 
 
 

 
(7,332
)
Loss before income taxes
 

 
 
 
 

 
$
(5,891
)


12


 
For the Three Months Ended March 31, 2012
 
MID
 
CTO
 
All Other
 
Total
 
(In thousands)
Revenues
$
57,088

 
$

 
$
5,775

 
$
62,863

Other patent royalties received

 

 
2,414

 
2,414

Customer licensing income
$
57,088

 
$

 
$
8,189

 
$
65,277

Segment operating expenses
11,550

 
6,503

 
8,072

 
26,125

Segment operating income (loss)
$
45,538

 
$
(6,503
)
 
$
117

 
$
39,152

Reconciling items
 

 
 
 
 

 
(56,710
)
Operating loss
 

 
 
 
 

 
$
(17,558
)
Interest and other income (expense), net
 

 
 
 
 

 
(6,482
)
Loss before income taxes
 

 
 
 
 

 
$
(24,040
)
The CODM does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.
Revenue from the Company’s major customers representing 10% or more of total revenue for the three months ended March 31, 2013 and 2012 , respectively, were as follows:
 
 
Three Months Ended
 
 
March 31,
Customer 
 
2013
 
2012
Customer A
 
33
%
 
37
%
Customer B
 
15
%
 
*

Customer C
 
*

 
13
%
Customer D
 
10
%
 
10
%
_________________________________________
*    Customer accounted for less than 10% of total revenue in the period
Revenue from customers in the geographic regions based on the location of customers' headquarters is as follows:
 
 
Three Months Ended
 
 
March 31,
(In thousands)
 
2013
 
2012
USA
 
$
25,569

 
$
16,189

South Korea
 
22,025

 
23,247

Japan
 
14,609

 
17,569

Europe
 
2,127

 
1,129

Canada
 
1,786

 
1,979

Asia-Other
 
750

 
2,750

Total
 
$
66,866

 
$
62,863


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 March 31, 2013 and December 31, 2012 , all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than one year .

13


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 March 31, 2013
(Dollars in thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
139,768

 
$
139,768

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
58,614

 
58,638

 

 
(24
)
 
0.15
%
Total cash equivalents and marketable securities
 
198,382

 
198,406

 

 
(24
)
 
 

Cash
 
16,446

 
16,446

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
214,828

 
$
214,852

 
$

 
$
(24
)
 
 

 
 
As of December 31, 2012
(Dollars in thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
126,570

 
$
126,570

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
57,345

 
57,356

 
4

 
(15
)
 
0.17
%
Total cash equivalents and marketable securities
 
183,915

 
183,926

 
4

 
(15
)
 
 

Cash
 
19,415

 
19,415

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
203,330

 
$
203,341

 
$
4

 
$
(15
)
 
 


Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
 
As of
 
March 31,
2013
 
December 31,
2012
 
(Dollars in thousands)
Cash equivalents
$
140,769

 
$
129,569

Short term marketable securities
57,613

 
54,346

Total cash equivalents and marketable securities
198,382

 
183,915

Cash
16,446

 
19,415

Total cash, cash equivalents and marketable securities
$
214,828

 
$
203,330


The Company continues to invest in highly rated quality, highly liquid debt securities. As of March 31, 2013 , these
securities have a remaining maturity of less than one year. 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 March 31, 2013 and December 31, 2012 are as follows:
 
Fair Value
 
Gross Unrealized Loss
 
March 31,
2013
 
December 31,
2012
 
March 31,
2013
 
December 31,
2012
 
(In thousands)
Less than one year
 

 
 

 
 

 
 

Corporate notes, bonds and commercial paper
$
58,590

 
$
51,819

 
$
(24
)
 
$
(15
)

The gross unrealized loss at March 31, 2013 and December 31, 2012 was not material in relation to the Company’s total available-for-sale portfolio. The gross 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

14


of impairment due to credit losses in its portfolio. Therefore, these unrealized losses were recorded in other comprehensive income (loss). However, the Company cannot provide any assurance that its portfolio of cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.
See Note 7, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.

7. 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 March 31, 2013 and December 31, 2012 :
 
As of March 31, 2013
 
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
$
139,768

 
$
139,768

 
$

 
$

Corporate notes, bonds and commercial paper
58,614

 

 
58,614

 

Total available-for-sale securities
$
198,382

 
$
139,768

 
$
58,614

 
$

 
As of December 31, 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
$
126,570

 
$
126,570

 
$

 
$

Corporate notes, bonds and commercial paper
57,345

 

 
57,345

 

Total available-for-sale securities
$
183,915

 
$
126,570

 
$
57,345

 
$


The Company monitors the investment for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The Company made an investment of $2.0 million in a non-marketable equity security of a private company during 2009. The Company evaluated the fair value of the investment in the non-marketable security as of March 31, 2013 and determined that there were no events that caused a decrease in its fair value below the carrying cost.
The following table presents the financial instruments that are measured and carried at cost on a nonrecurring basis as of March 31, 2013 and December 31, 2012 :
 
 
As of March 31, 2013
(in thousands)
 
Carrying
  Value
 
Quoted
  market
  prices in
  active
  markets
  (Level 1)
 
Significant
  other
  observable
  inputs
  (Level 2)
 
Significant
  unobservable
  inputs
  (Level 3)
 
Impairment
charges for the
three months
ended   March 31,
  2013
Investment in non-marketable securities
 
$
2,000

 
$

 
$

 
$
2,000

 
$


15


 
 
As of December 31, 2012
(in thousands)
 
Carrying
  Value
 
Quoted
  market
  prices in
  active
  markets
  (Level 1)
 
Significant
  other
  observable
  inputs
  (Level 2)
 
Significant
  unobservable
  inputs
  (Level 3)
 
Impairment
charges for the
year
  ended
December 31,
2012
Investment in non-marketable securities
 
$
2,000

 
$

 
$

 
$
2,000

 
$


For the three months ended March 31, 2013 and 2012 , there were no transfers of financial instruments between different categories of fair value.
The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of March 31, 2013 and December 31, 2012 :
 
 
As of March 31, 2013
 
As of December 31, 2012
(in thousands)
 
Face
  Value
 
Carrying
  Value
 
Fair Value
 
Face
  Value
 
Carrying
  Value
 
Fair Value
5% Convertible Senior Notes due 2014
 
$
172,500

 
$
151,487

 
$
175,519

 
$
172,500

 
$
147,556

 
$
172,716


The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes which is a level two measurement. As discussed in Note 8, "Convertible Notes," as of March 31, 2013 , the convertible notes are carried at face value of $172.5 million less any unamortized debt discount. The carrying value of other financial instruments, including accounts receivable, accounts payable and other payables, approximates fair value due to their short maturities.
The Company monitors its investments for other than temporary losses by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, reductions in carrying values when necessary and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other than temporary loss is reported under “Interest and other income (expense), net” in the condensed consolidated statement of operations. For the three months ended March 31, 2013 and 2012 , the Company has not incurred impairment loss on its investments.

8. Convertible Notes
The Company’s convertible notes are shown in the following table:
(Dollars in thousands)
 
As of March 31, 2013
 
As of December 31, 2012
5% Convertible Senior Notes due 2014 (the “2014 Notes”)
 
$
172,500

 
$
172,500

Unamortized discount
 
(21,013
)
 
(24,944
)
Total convertible notes
 
$
151,487

 
$
147,556

Less current portion
 

 

Total long-term convertible notes
 
$
151,487

 
$
147,556


Interest expense related to the notes for the three months ended March 31, 2013 and 2012 was as follows:
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(In thousands)
2014 Notes coupon interest at a rate of 5%
$
2,157

 
$
2,157

2014 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 11.7%
4,089

 
3,510

Total interest expense on convertible notes
$
6,246

 
$
5,667


16



9. Commitments and Contingencies
As of March 31, 2013 , the Company’s material contractual obligations are as follows (in thousands):
 
Total
 
Remainder   of 2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
Contractual obligations (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

Imputed financing obligation (2)
$
44,553

 
$
4,683

 
$
5,873

 
$
6,011

 
$
6,156

 
$
6,302

 
$
15,528

Leases and other contractual obligations
8,006

 
1,902

 
1,906

 
1,791

 
1,049

 
1,018

 
340

Software licenses (3)
400

 
320

 
80

 

 

 

 

Acquisition retention bonuses (4)
36,509

 
16,873

 
18,151

 
1,485

 

 

 

Convertible notes
172,500

 

 
172,500

 

 

 

 

Interest payments related to convertible notes
12,937

 
8,625

 
4,312

 

 

 

 

Total
$
274,905

 
$
32,403

 
$
202,822

 
$
9,287

 
$
7,205

 
$
7,320

 
$
15,868

_________________________________________
(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $16.8 million including $10.6 million recorded as a reduction of long-term deferred tax assets and $6.2 million in long-term income taxes payable as of March 31, 2013 . As noted below in Note 13, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
(2)
With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the contractual obligations table and the amount reflected on the Condensed Consolidated Balance Sheets are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. Additionally, the amount includes the amended Ohio lease and the amended Sunnyvale lease.
(3)
The Company has commitments with various software vendors for non-cancellable license agreements generally having terms longer than one year. The above table summarizes those contractual obligations as of March 31, 2013 which are also presented on the Company’s Condensed Consolidated Balance Sheet under current and other long-term liabilities.
(4)
In connection with its recent acquisitions, the Company is obligated to pay retention bonuses to certain employees and contractors, subject to certain eligibility and acceleration provisions including the condition of employment.  The remaining $33.3 million of CRI retention bonuses payable on June 3, 2013 and 2014 can be paid in cash or stock at the Company’s election.
Building lease expense was approximately $0.9 million and $0.8 million for the three months ended March 31, 2013 and 2012 , respectively. Deferred rent of $1.6 million and $0.8 million as of March 31, 2013 and December 31, 2012 , respectively, were 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 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

17


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 March 31, 2013 , the Company had made cumulative payments of approximately $32.2 million on their behalf, including $17 thousand in the quarter ended March 31, 2013 . As of March 31, 2012 , the Company had made cumulative payments of approximately $31.9 million on their behalf, including $30 thousand in the quarter ended March 31, 2012 . These payments were recorded under costs of restatement and related legal activities in the condensed consolidated statements of operations.

10. Equity Incentive Plans and Stock-Based Compensation
As of March 31, 2013 , 1,385,873 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, 2012
2,729,159

Stock options granted
(1,619,437
)
Stock options forfeited
893,744

Stock options expired under former plans
(291,219
)
Nonvested equity stock and stock units granted (1)
(414,744
)
Nonvested equity stock and stock units forfeited (1)
88,370

Total available for grant as of March 31, 2013
1,385,873

_________________________________________
(1)
For purposes of determining the number of shares available for grant under the 2006 Plan against the maximum number of shares authorized, each restricted stock granted reduces the number of shares available for grant by 1.5 shares and each restricted stock forfeited increases shares available for grant by 1.5 shares.
General Stock Option Information
The following table summarizes stock option activity under the 1997 Plan, 1999 Plan and 2006 Plan for the three months ended March 31, 2013 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of March 31, 2013 .
 
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, 2012
13,094,815

 
$
12.79

 
 
 
 

Options granted
1,619,437

 
5.46

 
 
 
 

Options exercised

 

 
 
 
 

Options forfeited
(893,744
)
 
11.20

 
 
 
 

Outstanding as of March 31, 2013
13,820,508

 
12.03

 
6.44
 
$
1,898

Vested or expected to vest at March 31, 2013
12,533,217

 
12.48

 
6.21
 
1,549

Options exercisable at March 31, 2013
5,945,597

 
19.05

 
3.82
 
36


No stock options that contain a market condition were granted during the three months ended March 31, 2013 . 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 March 31, 2013 and

18


December 31, 2012 , there were 1,535,000 stock options outstanding that require the Company to achieve minimum market conditions in order for the options to become exercisable.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at March 31, 2013 , based on the $5.61 closing stock price of Rambus’ Common Stock on March 28, 2013 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 March 31, 2013 was 2,900,931 and 32,761 , respectively.
Employee Stock Purchase Plan
No purchases were made under the 2006 Employee Stock Purchase Plan (“ESPP”) during the three months ended March 31, 2013 and 2012 , respectively. As of March 31, 2013 , 1,082,515 shares under the ESPP remain available for issuance.
Stock-Based Compensation
For the three months ended March 31, 2013 and 2012 , 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 months ended March 31, 2013 and 2012 , the Company granted 1,619,437 and 1,937,002 stock options, respectively, with an estimated total grant-date fair value of $3.8 million and $7.5 million , respectively. During the three months ended March 31, 2013 and 2012 , Rambus recorded stock-based compensation expense related to stock options of $3.1 million and $4.3 million , respectively.
As of March 31, 2013 , there was $26.6 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2.8 years. The total fair value of shares vested as of March 31, 2013 was $76.3 million .
There were no options exercised during the three months ended March 31, 2013 . The total intrinsic value of options exercised was $39 thousand for the three months ended March 31, 2012 . 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.
Employee Stock Purchase Plan
For the three months ended March 31, 2013 and 2012 , the Company recorded compensation expense related to the ESPP of $0.5 million and $0.7 million , respectively. As of March 31, 2013 , 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 months ended March 31, 2013 and 2012 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 table below.
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.

19


 
Stock Option Plans
 
Three Months Ended
 
March 31,
 
2013
 
2012
Stock Option Plans
 

 
 

Expected stock price volatility
47
%
 
60
%
Risk free interest rate
0.9
%
 
0.7
%
Expected term (in years)
5.4

 
5.6

Weighted-average fair value of stock options granted to employees
$
2.33

 
$
3.88

No shares were issued under the ESPP during the three months ended March 31, 2013 and 2012.
Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three months ended March 31, 2013 and 2012 , the Company granted nonvested equity stock units totaling 276,496 and 423,371 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 months ended March 31, 2013 and 2012 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $1.5 million and $3.1 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 months ended March 31, 2013 and 2012 , the achievement of certain performance conditions for certain performance equity stock units was considered probable, and as a result, the Company recognized an immaterial amount of stock-based compensation expense related to these performance stock units for all periods.
For the three months ended March 31, 2013 and 2012 , the Company recorded stock-based compensation expense of approximately $1.3 million and $1.8 million , respectively, related to all outstanding unvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately $5.1 million at March 31, 2013 . This is expected to be recognized over a weighted average period of 2.2 years .
The following table reflects the activity related to nonvested equity stock and stock units for the three months ended March 31, 2013 :
Nonvested Equity Stock and Stock Units
 
Shares
 
Weighted-
  Average
  Grant-Date
  Fair Value
Nonvested at December 31, 2012
 
922,491

 
$
10.24

Granted
 
276,496

 
5.46

Vested
 
(178,666
)
 
14.02

Forfeited
 
(58,911
)
 
13.97

Nonvested at March 31, 2013
 
961,410

 
7.93


11.   Stockholders’ Equity
Share Repurchase Program
During the three months ended March 31, 2013 , the Company did not repurchase any shares of its Common Stock under its share repurchase program. As of March 31, 2013 , 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 March 31, 2013 , 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.


20


12. Restructuring Charges
During the third quarter of 2012, the Company initiated a restructuring program to reduce overall corporate expenses which is expected to improve future profitability by reducing spending on marketing, general and administrative programs and refining some of the Company's research and development efforts. In connection with this restructuring program, the Company estimates that it will incur aggregate costs of approximately $6.0 million to $10.0 million . During the three months ended March 31, 2013, the Company incurred restructuring charges of $2.2 million related primarily to the consolidation of certain facilities and the reduction in workforce, of which a majority was related to corporate support functions that impacted each of the Company's operating segments. The Company expects to substantially complete its restructuring activities by the second quarter of 2013. There were no restructuring charges during the three months ended March 31, 2012.

The following table summarizes the restructuring activities during the three months ended March 31, 2013:
 
 
Employee
Severance
and Related Benefits
 
Facilities
 
Total
 
 
(in thousands)
Balance at December 31, 2012
 
$
906

 
$

 
$
906

Charges
 
246

 
1,960

 
2,206

Payments
 
(623
)
 
(943
)
 
(1,566
)
Non-cash charge
 

 
(653
)
*
(653
)
Balance at March 31, 2013
 
$
529

 
364

 
$
893


*The non-cash charge of $653 thousand is related to the termination of the Company's financing obligation associated with abandoning a construction asset at one of its facilities.

13. Income Taxes
During the three months ended March 31, 2013 , 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 $4.5 million and $3.9 million for the three months ended March 31, 2013 and 2012 , respectively. The provision for income taxes for the three months ended March 31, 2013 and 2012 , 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 months ended March 31, 2013 and 2012 , the Company paid withholding taxes of $3.8 million and $4.4 million , respectively.
As of March 31, 2013 , the Company’s condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately $211.0 million , which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses and certain liabilities, partially reduced by deferred tax liabilities associated with the convertible debt instruments. As of March 31, 2013 , a full valuation allowance has been recorded against the U.S. deferred tax assets. During the three months ended March 31, 2013 , the Company did not significantly change its deferred tax assets.
Management periodically evaluates the realizability of the Company's net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is 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's forecasted future operating results are highly influenced by, among other factors, assumptions regarding the Company's (1) ability to achieve its forecasted revenue, (2) ability to effectively manage its expenses in line with its forecasted revenue and (3) general trends in the industries in which it operates.
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 March 31, 2013 , the Company had approximately $16.8 million of unrecognized tax benefits, including $10.6 million recorded as a reduction of long-term deferred tax assets and $6.2 million in long-term income taxes payable. If recognized, approximately $2.0 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

21


December 31, 2012 , the Company had $16.8 million of unrecognized tax benefits, including $10.6 million recorded as a reduction of long-term deferred tax assets and $6.2 million recorded 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 March 31, 2013 and December 31, 2012 , an immaterial amount of interest and penalties are included in long-term income taxes payable.
On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012, or ATRA. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts incurred through December 31, 2011. The ATRA extends the research credit for two years for qualified research expenditures incurred through the end of 2013. The extension of the research credit is retroactive and includes amounts incurred after 2011. There was no benefit to the Company of the restated research credit in the first quarter of 2013 due to the full valuation allowance.
Rambus files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service (“IRS”) for tax years before 2009. The Company is no longer subject to examination by the State of California for tax years before 2008. In addition, any research and development credit carryforward or net operating loss carryforward 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 IRS commenced an exam of the Company's 2010 through 2011 tax years during the first quarter of 2013. The Company is also subject to examination in various other foreign jurisdictions, including India, for various periods.
Additionally, 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.

14. Litigation and Asserted Claims
SK Hynix Litigation
U.S District Court of the Northern District of California
On August 29, 2000, SK Hynix (formerly Hyundai and Hynix) and various subsidiaries filed suit against Rambus in the U.S. District Court for the Northern District of California. The complaint 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 SK Hynix, compensatory and punitive damages, and attorneys' fees. Rambus denied SK Hynix's claims and filed counterclaims for patent infringement against SK Hynix. The case was divided into three phases: (1) unclean hands; (2) patent infringement; and (3) antitrust, equitable estoppel, and other JEDEC-related issues. Rambus prevailed in all three phases and judgment was entered against SK Hynix. On appeal, the Federal Circuit vacated the judgment and remanded the case back to the district court for further proceedings consistent with its unclean hands and spoliation opinions in the SK Hynix and Micron cases. SK Hynix was also awarded costs of appeal; The Company has accrued approximately $8.1 million related to those costs as of March 31, 2013.
On remand, the district court found that Rambus engaged in spoliation of evidence. Because the asserted patents were otherwise valid and Rambus did not intentionally destroy particular damaging documents, 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.
On December 19, 2012, the court held a hearing on the reasonable royalty motion; SK Hynix's motion for summary judgment of invalidity, new trial, or a stay of the case, and Rambus' motion to amend the unclean hands decision. No decisions have issued to date.
SK Hynix subsequently filed a motion for collateral estoppel based on the Micron spoliation decision on remand. On February 27, 2013, the district court issued notice that SK Hynix's motion has been submitted without oral argument from the parties.
Micron Litigation

22


U.S District Court in Delaware: Case No. 00-792-SLR
On August 28, 2000, Micron filed suit against Rambus in the U.S. District Court for Delaware. The suit asserts violations of federal antitrust laws, deceptive trade practices, breach of contract, fraud and negligent misrepresentation in connection with Rambus' participation in JEDEC. Micron seeks a declaration of monopolization by Rambus, compensatory and punitive damages, attorneys' fees, a declaratory judgment that eight Rambus patents are invalid and not infringed, and the award to Micron of a royalty-free license to the Rambus patents. Rambus has filed an answer and counterclaims disputing Micron's claims and asserting infringement by Micron of 12 U.S. patents. Micron prevailed on its unclean hands defense and judgment was entered against Rambus on the patent infringement claims. On appeal, the Federal Circuit remanded the case back to the district court for further proceedings consistent with its opinion.
On January 2, 2013, the court issued its decision finding that Rambus had spoliated documents in bad faith, that Micron's inequitable conduct defense and JEDEC-based claims and defenses related to patent misuse, antitrust, and unfair competition were prejudiced, and that the patents-in-suit are thus unenforceable against Micron. The court issued an order on January 24, 2013, directing judgment be entered against Rambus on the patent infringement claims in 30 days , and staying the remainder of the case pending appeal. Rambus filed a notice of appeal to the United States Court of Appeals for the Federal Circuit on March 27, 2013. Rambus' opening appellate brief is currently due to be filed in May 2013.
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. This case has been stayed since February 3, 2009.
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 related proceedings in Italy remain active.  One relates to Rambus' 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.  Micron did not appeal this decision so this case is now closed. 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. This case has been stayed since February 3, 2009.
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, which led to a statement of objections from the European Commission alleging that through Rambus' participation in the JEDEC standards setting organization and subsequent conduct, Rambus violated European Union competition law.
On December 9, 2009, the European Commission announced that it had reached a final settlement with Rambus to resolve the pending case. 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, conspiring to monopolize under the Cartwright Act, intentional interference with prospective economic advantage, and unfair competition. 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

23


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 November 16, 2011, the jury returned a verdict in favor of Hynix and Micron and against Rambus and judgment was entered by the Court on February 15, 2012. The court issued an order on January 29, 2013, awarding costs to Micron and Hynix of $520 thousand and $350 thousand , respectively. The Company has accrued $0.9 million related to these costs as of March 31, 2013.
Rambus filed a notice of appeal on April 3, 2012 and thereafter filed its opening brief on appeal on September 19, 2012. Defendants filed their responsive briefs on March 8, 2013. Rambus' reply brief is currently scheduled to be filed in May 2013.
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. 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 December 9, 2008, the court 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. 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. Judgment in favor of Rambus was entered on June 15, 2011. Plaintiffs appealed and the court of appeals issued an order affirming the judgment on December 14, 2012.
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. The complaint also names NVIDIA and certain companies whose products incorporate accused NVIDIA products with certain peripheral interfaces, including PCI Express and DisplayPort peripheral interfaces, and seeks to bar their importation, sale for importation, or sale after importation.  On December 29, 2010, the ITC instituted the investigation. On June 20, 2011, January 17, 2012, and March 19, 2012, respectively, the administrative law judge granted joint motions to terminate the investigation as to Freescale, Broadcom and Mediatek pursuant to the parties' settlement agreement. A final hearing before the administrative law judge was held October 12-20, 2011.
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. Rambus' opening brief is currently scheduled to be filed in May 2013.

24


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 March 20, 2011, June 7, 2011, and December 29, 2011, respectively, Rambus' complaint against MediaTek, Freescale and Broadcom was dismissed pursuant to the parties' settlement agreement. Rambus and LSI announced that they had entered into a settlement of their disputes on February 19, 2013.
On September 26, 2012, the court issued a claim construction order. At a December 20, 2012 case management conference, the court scheduled an unclean hands trial to start on August 26, 2013, and a patent trial to start on April 14, 2014.
Potential Future Litigation
In addition to the litigation described above, companies continue to adopt Rambus technologies into various products. Rambus has notified many of these companies of their use of Rambus technology and continues to evaluate how to proceed on these matters.
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 consolidated financial statements.

15. Related Party Transaction
On March 21, 2013, the Company entered into an agreement with L'Image Home Technologies L.P. (“LHT”) pursuant to which LHT will exclusively distribute, market and sell the Company's LED light bulbs in North America for an initial term of five years, subject to one automatic two -year extension. Christopher Gurreri, who is the president of LHT, is the brother-in-law of the Company's CEO, Dr. Black.  Under the terms of the agreement, the Company will sell the LED light bulbs to LHT and LHT will pay the Company certain administration fees. The Company expects the agreement to provide for payments in excess of $120 thousand per year, but the Company does not yet know the actual amount of such payments given the early stage of the agreement. In accordance with the Company's policies, including its policy regarding related party transactions, which is described in its proxy statement, the Company's entry into the LHT transaction was reviewed and approved in advance by its Audit Committee.  The agreement was negotiated on an arms-length basis and Dr. Black recused himself from the negotiations with respect thereto.


25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including any statements regarding trends in future revenue or results of operations, gross margin or operating margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning developments, performance or industry ranking; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “should,” “estimates,” “predicts,” “potential,” “continue,” “projecting” and similar expressions identify forward-looking statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect. As a result of the factors described herein, and in the documents incorporated herein by reference, including, in particular, those factors described under “Risk Factors,” we undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.
Rambus, RDRAM , XDR , FlexIO  and FlexPhase  are trademarks or registered trademarks of Rambus Inc. Other trademarks that may be mentioned in this quarterly report on Form 10-Q are the property of their respective owners.
Industry terminology, used widely throughout this report, has been abbreviated and, as such, these abbreviations are defined below for your convenience:
Differential Power Analysis
DPA
Double Data Rate
DDR
Dynamic Random Access Memory
DRAM
Graphics Double Data Rate
GDDR
Light Emitting Diodes
LED
Liquid Crystal Display
LCD
Peripheral Component Interconnect
PCI
Rambus Dynamic Random Access Memory
RDRAM
Single Data Rate
SDR
Synchronous Dynamic Random Access Memory
SDRAM
eXtreme Data Rate
XDR


26

Table of Contents

From time to time we will refer to the abbreviated names of certain entities and, as such, have provided a chart to indicate the full names of those entities for your convenience.
Advanced Micro Devices Inc.
AMD
Broadcom Corporation
Broadcom
Cooper Lighting, LLC
Cooper Lighting
Cryptography Research, Inc.
CRI
Elpida Memory, Inc.
Elpida
EchoStar Technologies L.L.C.

EchoStar
Freescale Semiconductor Inc.
Freescale
Fujitsu Limited
Fujitsu
General Electric Company
GE
Hynix Semiconductor, Inc.
Hynix
Infineon Technologies AG
Infineon
Inotera Memories, Inc.
Inotera
Intel Corporation
Intel
International Business Machines Corporation
IBM
Joint Electronic Device Engineering Councils
JEDEC
Lighting and Display Technology
LDT
LSI Corporation
LSI
Marvell International Ltd.
Marvell
MediaTek Inc.
MediaTek
Memory and Interfaces Division
MID
Micron Technologies, Inc.
Micron
Mobile Technology Division
MTD
Nanya Technology Corporation
Nanya
NVIDIA Corporation
NVIDIA
Panasonic Corporation
Panasonic
Renesas Electronics
Renesas
Samsung Electronics Co., Ltd.
Samsung
Sony Computer Electronics
Sony
ST Microelectronics N.V.
STMicroelectronics
Toshiba Corporation
Toshiba


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Business Overview
We are an innovative technology solutions company that brings invention to market. Unleashing the intellectual power of our world-class engineers and scientists in a collaborative and synergistic way, we invent, develop, offer and license solutions that challenge and enable our customers to create the future. While we are best known for creating superior semiconductor memory architectures, we are also developing world-changing products and services in security, advanced LED lighting and displays, and immersive mobile media. We believe we have established an unparalleled business platform and licensing platform that will continue to foster the development of new foundational technologies. In addition to licensing, we are creating new business opportunities through offering products and services where our goal is to perpetuate strong company operating performance and long-term stockholder value. We generate revenue by licensing our inventions and solutions and providing services to market-leading companies.
While we have historically focused our efforts on the development of technologies for electronics memory and chip interfaces, we have been expanding our portfolio of inventions and solutions to address additional markets in lighting, displays, chip and system security, digital media, as well as new areas within the semiconductor industry, such as imaging and non-volatile memory. We intend to continue our growth into new technology fields, consistent with our mission to create great value through our innovations and to make those technologies available through both our licensing and non-licensing business models. Key to our efforts, both in our current businesses and in any new area of diversification, will be hiring and retaining world-class inventors, scientists and engineers to lead the development of inventions and technology solutions for these fields of focus, and the management and business support personnel necessary to execute our plans and strategies.
We have four business units: (1) Memory and Interfaces Division, or MID, which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research, Inc., or CRI, which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Lighting and Display Technologies, or LDT, which focuses on the design, development and licensing of technologies for lighting and displays; and (4) Mobile Technologies Division, or MTD, which focuses on the design, development and licensing of multi-media solutions. A centralized research and development and business incubation organization ("CTO") has been formed to consolidate early-stage investments, including MTD and longer-term research activities and worldwide engineering. As of March 31, 2013, only MID and CTO were considered reportable segments as they 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”. For additional information concerning segment reporting, see Note 5, “Segments and Major Customers,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Our strategy is to evolve from providing primarily patent licenses to providing additional technology, products and services while creating and leveraging strategic synergies to increase revenue. We believe that the successful execution of this strategy requires an exceptional business model that relies on the skills and talent of our employees. Accordingly, we seek to hire and retain world-class scientific and engineering expertise in all of our fields of technological focus, as well as the executive management and operating personnel required to successfully execute our business strategy. In order to attract the quality of employees required for this business model, we have created an environment and culture that encourages, fosters and supports research, development and innovation in breakthrough technologies with significant opportunities for broad industry adoption. We believe we have created a compelling company for inventors and innovators who are able to work within a business model and platform that focuses on technology development to drive strong future growth.
As of March 31, 2013, our semiconductor, lighting, display, security and other technologies are covered by 1,486 U.S. and foreign patents. Additionally, we have 989 patent applications pending. Some of the patents and pending patent applications are derived from a common parent patent application or are foreign counterpart patent applications. We have a program to file applications for and obtain patents in the United States and in selected foreign countries where we believe filing for such protection is appropriate and would further our overall business strategy and objectives. In some instances, obtaining appropriate levels of protection may involve prosecuting continuation and counterpart patent applications based on a common parent application. We believe our patented innovations provide our customers with the ability to achieve improved performance, lower risk, greater cost-effectiveness and other benefits in their products and services.
Our inventions and technology solutions are offered to our customers through either a patent license or a solutions license. Today, our revenues are primarily derived from patent licenses, through which we provide our customers a license to use a portion of our broad portfolio of patented inventions. The license provides our customers with a defined right to use our innovations in the customer's own digital electronics products, systems or services, as applicable. The licenses may also define the specific field of use where our customers may use or employ our inventions in their products. License agreements are structured with fixed, variable or a hybrid of fixed and variable royalty payments over certain defined periods. Leading consumer product, semiconductor and system companies such as AMD, Broadcom, Elpida, Freescale, Fujitsu, GE, Intel, LSI, Panasonic, Renesas, Samsung and Toshiba have licensed our patents for use in their own products. We intend to expand our business strategy of monetizing our intellectual property to include the sale of selected intellectual property.

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We also offer our customers solutions licenses to support the implementation and adoption of our technology in their products or services. Our customers include leading companies such as Cooper Lighting, EchoStar, Elpida, GE, IBM, Panasonic, Samsung, Sony and Toshiba. Our solutions license offerings include a range of technologies for incorporation into our customers' products and systems. We also offer a range of services as part of our solutions licenses which can include know-how and technology transfer, product design and development, system integration, and other services. These solutions license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under solutions licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us.
The remainder of our revenue is contract services revenue which includes license fees and engineering services fees. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or account receivables in any given period.
We intend to continue making significant expenditures associated with engineering, marketing, general and administration and expect that these costs and expenses will continue to be a significant percentage of revenue in future periods. Whether such expenses increase or decrease as a percentage of revenue will be substantially dependent upon the rate at which our revenue or expenses change.
Executive Summary
During the first quarter of 2013, we signed license agreements with LSI and EchoStar. As a result of the patent license agreement with LSI, we settled all outstanding claims with LSI, including pending disputes related to our patented innovations. The license agreement with EchoStar allows EchoStar to deploy CRI's CryptoFirewall™ security core for use with its set-top box technologies to protect against TV signal theft.
Also during the first quarter of 2013, Marvell selected CRI's CryptoFirewall™ anti-counterfeiting technology for use in its consumable security chip which will provide advanced levels of security, authentication and/or secure usage tracking to verify system integrity.
In addition, during the first quarter of 2013, we sold a portfolio of patent assets covering display technologies to a subsidiary of Acacia Research Corporation. As part of this transaction, we received an initial upfront payment and expect to receive subsequent payments.
Research and development continues to play a key role in our efforts to maintain product innovations. Our engineering expenses in the aggregate for the three months ended March 31, 2013 decreased $7.5 million as compared to the same period in 2012 primarily due to decreased accrual of the retention bonuses related to past acquisitions of $3.4 million, decreased legal costs related to patent filings and prosecution costs of $0.9 million and a gain related to the sale of certain assets.
Marketing, general and administrative expenses in the aggregate for the three months ended March 31, 2013 decreased $9.7 million as compared to the same period in 2012 which included a decrease in litigation expenses related to ongoing major cases of $2.1 million. Non-litigation related marketing, general and administrative costs decreased in the first quarter of 2013 primarily due to decreased headcount related costs of $1.0 million, decreased funding for our 2013 corporate incentive plan ("CIP") of $1.0 million, decreased accrual of the retention bonuses related to past acquisitions of $1.1 million and decreased sales and marketing costs of $1.6 million.
Trends
There are a number of trends that may have a material impact on us in the future, including but not limited to, the evolution of memory technology, adoption of LEDs in general lighting, the use and adoption of our inventions or technologies and global economic conditions with the resulting impact on sales of consumer electronic systems.
We have a high degree of revenue concentration, with our top five customers representing approximately 70% and 74% of our revenue for three months ended March 31, 2013 and 2012, respectively. As a result of our settlement with Samsung in 2010, Samsung is expected to account for a significant portion of our ongoing licensing revenue. For the three months ended March 31, 2013, revenue from LSI, Renesas and Samsung accounted for 10% or more of our total revenue. For the three months ended March 31, 2012, revenue from NVIDIA, Renesas and Samsung each accounted for 10% or more of our total revenue. We expect to continue to experience significant revenue concentration for the foreseeable future.
The particular customers which account for revenue concentration have varied from period to period as a result of the addition of new contracts, expiration of existing contracts, renewals of existing contracts, industry consolidation and the volumes and prices at which the customers have recently sold to their customers. These variations are expected to continue in the foreseeable future.

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The semiconductor industry is intensely competitive and highly cyclical, limiting our visibility with respect to future sales. To the extent that macroeconomic fluctuations negatively affect our principal customers, the demand for our technology may be significantly and adversely impacted, and we may experience substantial period-to-period fluctuations in our operating results. In February 2012, Elpida, one of our top 10 customers by revenue for the past two years, commenced bankruptcy proceedings in Japan as a result of debt loads, competition and declining prices for memory chips. Additionally, our royalty revenue from certain customers in the DRAM market, such as Samsung and Elpida, are variable and are based on our customers' revenue up to two quarters in arrears.
The royalties we receive from our semiconductor customers are partly a function of the adoption of our technologies by system companies. Many system companies purchase semiconductors containing our technologies from our customers and do not have a direct contractual relationship with us. Our customers generally do not provide us with details as to the identity or volume of licensed semiconductors purchased by particular system companies. As a result, we face difficulty in analyzing the extent to which our future revenue will be dependent upon particular system companies. System companies face intense competitive pressure in their markets, which are characterized by extreme volatility, frequent new product introductions and rapidly shifting consumer preferences.
The display industry is also intensely competitive and highly cyclical. Since LED backlighting solutions are increasingly pervasive in LCD for computers, smartphones, tablets, game systems, high definition televisions and any user interface incorporating an active display, the trend towards higher resolution displays across these products requires more LEDs per system. The increased usage of LEDs is thereby creating a need for increased power efficiency since the LED backlight is the primary source of power consumption in many consumer electronics products including smartphones.
The highly fragmented general lighting industry is undergoing a fundamental shift from incandescent technology to cold cathode fluorescent lights and LED driven technology by the need to reduce energy consumption and to comply with government mandates. LED lighting typically saves energy costs as compared to existing installed lighting. Our LDT group's patents in LED edge lit lightguide technology also can be applied in the design of next generation LED lighting products. In January 2013, we announced the launch of a Rambus LED bulb as an additional product offering incorporating our LED technology. This is our first step in marching towards our goal of being a major player in the general lighting industry.
Global demand for effective security technologies continues to increase. In particular, highly integrated devices such as smart phones and tablets are increasingly used for applications requiring security such as mobile payments, content protection, corporate information and user data. Our CRI group is primarily focused on positioning its DPA countermeasures and CryptoFirewall™ technology solutions to capitalize on these trends and growing adoption among technology partners and customers.
Our revenue from companies headquartered outside of the United States accounted for approximately 62% and 74% of our total revenue for the three months ended March 31, 2013 and 2012, respectively. We expect that revenue derived from international customers will continue to represent a significant portion of our total revenue in the future. To date, all of the revenue from international customers have been denominated in U.S. dollars. However, to the extent that such customers’ sales to their customers are not denominated in U.S. dollars, any royalties that we receive as a result of such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of licensed products sold by our foreign customers were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed products could fall, which in turn would reduce our royalties. We do not use financial instruments to hedge foreign exchange rate risk.
For additional information concerning international revenue, see Note 5, “Segments and Major Customers,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Engineering costs in the aggregate and as a percentage of revenue decreased for the three months ended March 31, 2013 as compared to the same period in the prior year. In the near term, we expect engineering costs to be higher as we intend to continue to make investments in the infrastructure and technologies required to maintain our product innovation in semiconductor, lighting, security and other technologies.
Marketing, general and administrative expenses in the aggregate and as a percentage of revenue decreased for the three months ended March 31, 2013 as compared to the same period in the prior year. Historically, we have been involved in litigation stemming from the unlicensed use of our inventions. Our litigation expenses have been high in the past and difficult to predict, and future litigation expenses could be significant, volatile and difficult to predict. If we are successful in the litigation and/or related licensing, our revenue could be substantially higher in the future. If we are unsuccessful, our revenue may not grow or may decrease. Furthermore, our success in litigation matters pending before courts and regulatory bodies that relate to our intellectual property rights have impacted and will likely continue to impact our ability and the terms upon which we are able to negotiate new or renegotiate existing licenses for our technology. We may continue to pursue litigation against those companies that have infringed our patented technologies, which in turn may cause us to incur significant litigation

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expenses until such litigation is resolved. Additionally, in the near term, we expect our non-litigation marketing, general and administrative costs to be lower due to our restructuring plan undertaken during the third quarter of 2012.
Our investment in research and development projects, any continued pursuit of litigation and any lower revenue from our customers in the future will negatively affect our cash from operations.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items reflected in our unaudited condensed consolidated statements of operations:
 
Three Months Ended
 
March 31,
 
2013
 
2012
Revenue:
 

 
 

Royalties
99.0
 %
 
98.7
 %
Contract revenue
1.0
 %
 
1.3
 %
Total revenue
100.0
 %
 
100.0
 %
Operating costs and expenses:
 

 
 

Cost of revenue*
7.9
 %
 
11.4
 %
Research and development*
49.1
 %
 
61.1
 %
Marketing, general and administrative*
37.5
 %
 
55.4
 %
Restructuring charges
3.3
 %
 
 %
Costs of restatement and related legal activities
0.0
 %
 
0.0
 %
Total operating costs and expenses
97.8
 %
 
127.9
 %
Operating income (loss)
2.2
 %
 
(27.9
)%
Interest income and other income (expense), net
(0.1
)%
 
0.2
 %
Interest expense
(10.9
)%
 
(10.5
)%
Interest and other income (expense), net
(11.0
)%
 
(10.3
)%
Loss before income taxes
(8.8
)%
 
(38.2
)%
Provision for income taxes
6.7
 %
 
6.1
 %
Net loss
(15.5
)%
 
(44.3
)%
_________________________________________
*      Includes stock-based compensation:
Cost of revenue
%
 
0.0
%
Research and development
2.8
%
 
4.3
%
Marketing, general and administrative
4.6
%
 
6.4
%
 
 
Three Months
 
 
 
 
Ended March 31,
 
Change in
(Dollars in millions)
 
2013
 
2012
 
Percentage
Total Revenue
 
 

 
 

 
 

Royalties
 
$
66.3

 
$
62.1

 
6.7
 %
Contract revenue
 
0.6

 
0.8

 
(21.5
)%
Total revenue
 
$
66.9

 
$
62.9

 
6.4
 %

Royalty Revenue
Patent Licenses
Our patent royalties increased approximately $4.2 million to $61.9 million for the three months ended March 31, 2013 from $57.7 million for the same period in 2012. The increase was primarily due to the recognition of a one-time royalty revenue during the first quarter of 2013 from a patent license agreement with LSI to settle all outstanding claims.
We are in negotiations for licenses with prospective customers. We expect patent royalties will continue to vary from period

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to period based on our success in adding new customers, as well as the level of variation in our customers' reported shipment volumes, sales price and mix, offset in part by the proportion of customer payments that are fixed or hybrid in nature.
Solutions Licenses
Royalties from solutions licenses for the three months ended March 31, 2013 was $4.4 million which was relatively flat as compared to the revenue recognized during the same period in 2012.
In the future, we expect solutions royalties will vary from period to period based on our customers' shipment volumes, sales prices, and product mix.
Royalty Revenue by Reportable Segments
Royalty revenue from the MID reportable segment, which includes patent and solutions license royalties, increased approximately $3.2 million to $59.7 million for the three months ended March 31, 2013 from $56.5 million for the same period in 2012. The increase was primarily due to the recognition of one-time royalty revenue during the first quarter of 2013 from a patent license agreement with LSI.
Royalty revenue from the "All Other" reportable segment increased approximately $1.0 million to $6.6 million for the three months ended March 31, 2013 from $5.6 million for the same period in 2012. The increase was primarily due to the increased revenue from CRI.
Contract Revenue
Contract revenue decreased approximately $0.2 million to $0.6 million for the three months ended March 31, 2013 from $0.8 million for the same period in 2012. The decrease was primarily due to the reduction of signed technology development contracts.
We believe that contract revenue recognized will continue to fluctuate over time based on our ongoing contractual requirements, the amount of work performed, the timing of completing engineering deliverables, and the changes to work required, as well as new technology development contracts booked in the future.

Contract Revenue by Reportable Segments
Contract revenue from the MID reportable segment decreased approximately $0.6 million to $0.1 million for the three months ended March 31, 2013 from $0.7 million for the same period in 2012. The decrease was primarily due to the reduction of signed technology development contracts.
Contract revenue from the All Other reportable segment increased approximately $0.4 million to $0.5 million for the three months ended March 31, 2013 from $0.1 million for the same period in 2012. The increase was primarily due to the increased revenue from CRI.

Engineering costs:
 
 
Three Months Ended
 
 
 
 
March 31,
 
Change in
(Dollars in millions)
 
2013
 
2012
 
Percentage
Engineering costs
 
 

 
 

 
 

Cost of revenue
 
$
(1.1
)
 
$
0.2

 
NM*

Amortization of intangible assets
 
6.4

 
7.0

 
(8.0
)%
Stock-based compensation
 
0.0

 
0.0

 
 %
Total cost of revenue
 
5.3

 
7.2

 
(26.7
)%
Research and development
 
30.9

 
35.7

 
(13.2
)%
Stock-based compensation
 
1.9

 
2.7

 
(31.0
)%
Total research and development
 
32.8

 
38.4

 
(14.4
)%
Total engineering costs
 
$
38.1

 
$
45.6

 
(16.4
)%
______________________________________
*
NM — percentage is not meaningful

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Total engineering costs decreased for the three months ended March 31, 2013 as compared to the same period in 2012 primarily due to decreased accrual of the retention bonuses related to past acquisitions of $3.4 million, decreased legal costs related to patent filings and prosecution costs of $0.9 million, decreased stock-based compensation costs of $0.8 million and a gain related to the sale of certain assets.
In the near term, we expect engineering costs to be higher as we intend to continue to make investments in the infrastructure and technologies required to maintain our product innovation in semiconductor, lighting, security and other technologies.
Marketing, general and administrative costs:
 
 
Three Months Ended
 
 
 
 
March 31,
 
Change in
(Dollars in millions)
 
2013
 
2012
 
Percentage
Marketing, general and administrative costs
 
 

 
 

 
 

Marketing, general and administrative costs
 
$
20.0

 
$
26.7

 
(25.2
)%
Litigation expense
 
2.0

 
4.1

 
(50.2
)%
Stock-based compensation
 
3.1

 
4.0

 
(23.1
)%
Total marketing, general and administrative costs
 
$
25.1

 
$
34.8

 
(27.9
)%

Total marketing, general and administrative costs decreased for the three months ended March 31, 2013 as compared to the same period in 2012, which included a decrease in litigation expenses related to ongoing major cases of $2.1 million. Non-litigation related marketing, general and administrative costs decreased in the first quarter of 2013 primarily due to decreased headcount related costs of $1.0 million, decreased funding for our 2013 CIP of $1.0 million, decreased accrual of the retention bonuses related to past acquisitions of $1.1 million, decreased acquisition transaction related costs of $0.9 million, decreased consulting costs of $0.8 million, decreased travel costs of $0.8 million, decreased sales and marketing costs of $1.6 million and decreased stock-based compensation expense of $0.9 million, offset by increased severance costs of $0.8 million.
In the future, marketing, general and administrative costs will vary from period to period based on the trade shows, advertising, legal, acquisition and other marketing and administrative activities undertaken, and the change in sales, marketing and administrative headcount in any given period. In the near term, we expect our non-litigation marketing, general and administrative costs to decrease due to our restructuring plan undertaken during the third quarter of 2012. Litigation expenses are expected to vary from period to period due to the variability of litigation activities.
Restructuring charges:
 
 
Three Months Ended
 
 
 
 
March 31,
 
Change in
(Dollars in millions)
 
2013
 
2012
 
Percentage
Restructuring charges
 
$
2.2

 
$

 
NM*
______________________________________
*
NM — percentage is not meaningful
During the third quarter of 2012, we initiat