Rambus Inc.
RAMBUS INC (Form: 10-Q, Received: 07/29/2013 06:01:27)
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 June 30, 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 112,460,439 as of June 30, 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;
Refinancing debt;

3

Table of Contents

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


4

Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
June 30,
2013
 
December 31,
2012
 
(In thousands, except shares
and par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
155,276

 
$
148,984

Marketable securities
50,364

 
54,346

Accounts receivable
1,003

 
529

Prepaids and other current assets
8,694

 
10,529

Deferred taxes
788

 
788

Total current assets
216,125

 
215,176

Intangible assets, net
139,395

 
153,173

Goodwill
124,969

 
124,969

Property, plant and equipment, net
75,831

 
86,905

Deferred taxes, long-term
4,806

 
4,458

Other assets
1,718

 
3,131

Total assets
$
562,844

 
$
587,812

LIABILITIES &   STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
5,300

 
$
7,918

Accrued salaries and benefits
29,582

 
23,992

Accrued litigation expenses
1,673

 
9,822

Convertible notes, short-term
155,473

 

Other accrued liabilities
5,957

 
12,402

Total current liabilities
197,985

 
54,134

Convertible notes, long-term

 
147,556

Long-term imputed financing obligation
39,724

 
45,919

Long-term income taxes payable
6,483

 
6,533

Other long-term liabilities
4,117

 
12,076

Total liabilities
248,309

 
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 June 30, 2013 and December 31, 2012

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 112,460,439 shares at June 30, 2013 and 111,525,021 shares at December 31, 2012
112

 
112

Additional paid-in capital
1,086,944

 
1,075,761

Accumulated deficit
(772,225
)
 
(753,979
)
Accumulated other comprehensive loss
(296
)
 
(300
)
Total stockholders’ equity
314,535

 
321,594

Total liabilities and stockholders’ equity
$
562,844

 
$
587,812

See Notes to Unaudited Condensed Consolidated Financial Statements

5

Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share amounts)
Revenue:
 

 
 

 
 

 
 

Royalties
$
57,009

 
$
55,723

 
$
123,231

 
$
117,766

Contract revenue
910

 
492

 
1,554

 
1,312

Total revenue
57,919

 
56,215

 
124,785

 
119,078

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of revenue*
7,365

 
7,340

 
13,899

 
14,503

Research and development*
30,777

 
38,347

 
63,625

 
76,741

Marketing, general and administrative*
14,134

 
32,194

 
39,239

 
67,028

Gain from sale of intellectual property
(103
)
 

 
(1,388
)
 

Costs of restatement and related legal activities
2

 
83

 
19

 
113

Restructuring charges

 

 
2,206

 

Total operating costs and expenses
52,175

 
77,964

 
117,600

 
158,385

Operating income (loss)
5,744

 
(21,749
)
 
7,185

 
(39,307
)
Interest income and other income (expense), net
(1,419
)
 
89

 
(1,439
)
 
187

Interest expense
(7,426
)
 
(6,719
)
 
(14,738
)
 
(13,299
)
Interest and other income (expense), net
(8,845
)
 
(6,630
)
 
(16,177
)
 
(13,112
)
Loss before income taxes
(3,101
)
 
(28,379
)
 
(8,992
)
 
(52,419
)
Provision for income taxes
4,743

 
3,837

 
9,254

 
7,687

Net loss
$
(7,844
)
 
$
(32,216
)
 
$
(18,246
)
 
$
(60,106
)
Net loss per share:
 

 
 

 
 

 
 

Basic
$
(0.07
)
 
$
(0.29
)
 
$
(0.16
)
 
$
(0.54
)
Diluted
$
(0.07
)
 
$
(0.29
)
 
$
(0.16
)
 
$
(0.54
)
Weighted average shares used in per share calculation:
 

 
 

 
 

 
 

Basic
112,183

 
110,553

 
111,892

 
110,456

Diluted
112,183

 
110,553

 
111,892

 
110,456

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

 
$
5

 
$
5

 
$
15

Research and development
$
1,660

 
$
2,631

 
$
3,536

 
$
5,351

Marketing, general and administrative
$
1,909

 
$
3,579

 
$
4,981

 
$
7,575

See Notes to Unaudited Condensed Consolidated Financial Statements

6

Table of Contents

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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
(In thousands)
 
2013
 
2012
 
2013
 
2012
Net loss
 
$
(7,844
)
 
$
(32,216
)
 
$
(18,246
)
 
$
(60,106
)
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Unrealized gain (loss) on marketable securities, net of tax
 
18

 
(22
)
 
4

 
72

Total comprehensive loss
 
$
(7,826
)
 
$
(32,238
)
 
$
(18,242
)
 
$
(60,034
)
See Notes to Unaudited Condensed Consolidated Financial Statements

7

Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  
 
Six Months Ended
 
June 30,
 
2013
 
2012
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net loss
$
(18,246
)
 
$
(60,106
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Stock-based compensation
8,522

 
12,941

Depreciation
7,671

 
6,368

Amortization of intangible assets
14,037

 
15,559

Non-cash interest expense and amortization of convertible debt issuance costs
8,234

 
7,067

Impairment of investment in non-marketable equity security
1,400

 

Deferred tax benefit
875

 

Non-cash restructuring
653

 

Gain from sale of intellectual property
(1,388
)
 

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

 
 

Accounts receivable
(474
)
 
913

Prepaid expenses and other assets
3,163

 
5,108

Accounts payable
(865
)
 
(8,490
)
Accrued salaries and benefits and other accrued liabilities
(10,816
)
 
(8,666
)
Accrued litigation expenses
(8,149
)
 
(641
)
Income taxes payable
544

 
(689
)
Net cash provided by (used in) operating activities
5,161

 
(30,636
)
Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(5,309
)
 
(8,348
)
Acquisition of intangible assets
(2,500
)
 
(1,625
)
Purchases of marketable securities
(60,496
)
 
(49,642
)
Maturities of marketable securities
64,250

 
125,836

Proceeds from sale of intellectual property
2,250

 

Acquisition of businesses, net of cash acquired

 
(46,278
)
Net cash provided by (used in) investing activities
(1,805
)
 
19,943

Cash flows from financing activities:
 
 
 
Proceeds received from issuance of common stock under employee stock plans
3,054

 
1,170

Principal payments against lease financing obligation
(62
)
 
(16
)
Payments under installment payment arrangement
(56
)
 
(121
)
Net cash provided by financing activities
2,936

 
1,033

Net increase (decrease) in cash and cash equivalents
6,292

 
(9,660
)
Cash and cash equivalents at beginning of period
148,984

 
162,244

Cash and cash equivalents at end of period
$
155,276

 
$
152,584

 
 
 
 
Non-cash investing and financing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other accrued liabilities
$
112

 
$
3,762

Non-cash obligation for property, plant and equipment
$

 
$
2,008

See Notes to Unaudited Condensed Consolidated Financial Statements

8

Table of Contents

RAMBUS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Investments in entities with less than 20% ownership or in which the Company does not have the ability to significantly influence the operations of the investee are being accounted for using the cost method and are included in other assets.
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended December 31, 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 engineering, research and development and business incubation organization that consolidates early-stage investments, longer-term research activities and worldwide engineering, including Mobile Technologies Division ("MTD").
For the three and six months ended June 30, 2013 and 2012 , only MID and CTO were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining other operating segments were combined and shown under “All Other”.

2. Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU No. 2013-11 is a new accounting standard on the financial statement presentation of unrecognized tax benefits. The new standard provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new standard becomes effective for the Company on January 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company is currently assessing the impacts of this new standard.
In February 2013, the FASB issued 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 loss is not significant.

9


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.

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 net loss per share:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
Basic and diluted net loss per share:
 
(In thousands, except per share amounts)
Numerator:
 
 

 
 

 
 
 
 
Net Loss
 
$
(7,844
)
 
$
(32,216
)
 
$
(18,246
)
 
$
(60,106
)
Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
112,183

 
110,553

 
111,892

 
110,456

Basic and diluted net loss per share
 
$
(0.07
)
 
$
(0.29
)
 
$
(0.16
)
 
$
(0.54
)
For the three months ended June 30, 2013 and 2012 , options to purchase approximately 10.9 million and 12.5 million shares, respectively, and for the six months ended June 30, 2013 and 2012 , options to purchase approximately 11.2 million and 11.9 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense. For the three months ended June 30, 2013 and 2012 , an additional 4.0 million and 6.3 million potentially dilutive shares, respectively, and for the six months ended June 30, 2013 and 2012 , an additional 4.1 million and 6.5 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 six months ended June 30, 2013 :

10


Reportable Segment:
 
December 31,
2012
 
Additions to Goodwill
 
Impairment Charge of Goodwill
 
June 30,
2013
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$

 
$
19,905

CTO
 
8,070

 

 

 
8,070

All Other
 
96,994

 

 

 
96,994

Total
 
$
124,969

 
$

 
$

 
$
124,969


 
 
As of
 
 
June 30, 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 June 30, 2013 and December 31, 2012 were as follows:
 
 
 
As of June 30, 2013
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
193,345

 
$
(69,728
)
 
$
123,617

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

 
(16,964
)
 
15,686

Non-compete agreements
3 years
 
300

 
(208
)
 
92

Total intangible assets
 
 
$
226,295


$
(86,900
)
 
$
139,395

 
 
 
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


During the three and six months ended June 30, 2013 , the Company purchased intellectual property of $0.6 million and $2.5 million , respectively, which were recorded as intangible assets on the condensed consolidated balance sheets. During the three and six months ended June 30, 2013 , the Company sold portfolios of its intellectual property covering lighting technologies for $0.3 million and $2.3 million , respectively, and the related gain was recorded as gain from sale of intellectual property in the condensed consolidated statements of operations.
During the six months ended June 30, 2012 , the Company entered into various business combinations and technology asset acquisitions. These transactions had a total purchase price of $48.2 million . These transactions were completed to acquire patents and technology to expand the Company's existing technology for its MID and MTD groups.

11


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 June 30, 2013 and 2012 , the Company received an immaterial amount and $1.2 million related to the favorable contracts, respectively. For the six months ended June 30, 2013 and 2012 , the Company received $1.4 million and $3.6 million related to the favorable contracts, respectively. As of June 30, 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 and six months ended June 30, 2013 was $7.0 million and $14.0 million , respectively. Amortization expense for intangible assets for the three and six months ended June 30, 2012 was $7.9 million and $15.6 million , respectively.
The estimated future amortization expense of intangible assets as of June 30, 2013 was as follows (amounts in thousands):
Years Ending December 31:
Amount
2013 (remaining 6 months)
$
17,132

2014
27,599

2015
26,949

2016
26,081

2017
24,625

Thereafter
17,009

 
$
139,395


It is reasonably possible that the businesses could perform significantly below the Company's expectations or a deterioration of market and economic conditions could occur. This would adversely impact the Company's ability to meet its projected results, which could cause the goodwill in any of its reporting units or long-lived assets in any of its asset groups to become impaired. Significant differences between these estimates and actual cash flows could materially affect the Company's future financial results. If the MTD and LDT reporting units are not successful in commercializing new business arrangements, or if the Company is unsuccessful in signing new license agreements or renewing its existing license agreements for the MID and CRI reporting units, the revenue and income for these reporting units could adversely and materially deviate from their historical trends and could cause goodwill or long-lived assets to become impaired. If the Company determines that its goodwill or long-lived assets are impaired, the Company would be required to record a non-cash charge that could have a material adverse effect on its results of operations and financial position.

5.   Segments and Major Customers
For the three and six months ended June 30, 2013 and 2012 , only MID and CTO were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of 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 and proceeds from sale of intellectual property. 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 and six months ended June 30, 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 and six months ended June 30, 2013 and 2012 , respectively.

12


 
For the Three Months Ended June 30, 2013
 
For the Six Months Ended June 30, 2013
 
MID
 
CTO
 
All Other
 
Total
 
MID
 
CTO
 
All Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
49,456

 
$

 
$
8,463

 
$
57,919

 
$
109,131

 
$

 
$
15,654

 
$
124,785

Other patent royalties received
3,125

 

 
267

 
3,392

 
5,000

 

 
3,629

 
8,629

Customer licensing income
$
52,581

 
$

 
$
8,730

 
$
61,311

 
$
114,131

 
$

 
$
19,283

 
$
133,414

Segment operating expenses
9,347

 
7,074

 
12,215

 
28,636

 
18,272

 
14,932

 
22,289

 
55,493

Segment operating income (loss)
$
43,234

 
$
(7,074
)
 
$
(3,485
)
 
$
32,675

 
$
95,859

 
$
(14,932
)
 
$
(3,006
)
 
$
77,921

Reconciling items
 

 
 
 
 

 
(26,931
)
 
 

 
 
 
 

 
(70,736
)
Operating income
 

 
 
 
 

 
$
5,744

 
 

 
 
 
 

 
$
7,185

Interest and other income (expense), net
 

 
 
 
 

 
(8,845
)
 
 

 
 
 
 

 
(16,177
)
Loss before income taxes
 

 
 
 
 

 
$
(3,101
)
 
 

 
 
 
 

 
$
(8,992
)

 
For the Three Months Ended June 30, 2012
 
For the Six Months Ended June 30, 2012
 
MID
 
CTO
 
All Other
 
Total
 
MID
 
CTO
 
All Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
52,137

 
$

 
$
4,078

 
$
56,215

 
$
109,225

 
$

 
$
9,853

 
$
119,078

Other patent royalties received

 

 
1,201

 
1,201

 

 

 
3,615

 
3,615

Customer licensing income
$
52,137

 
$

 
$
5,279

 
$
57,416

 
$
109,225

 
$

 
$
13,468

 
$
122,693

Segment operating expenses
10,045

 
7,864

 
8,117

 
26,026

 
21,594

 
14,368

 
16,188

 
52,150

Segment operating income (loss)
$
42,092

 
$
(7,864
)
 
$
(2,838
)
 
$
31,390

 
$
87,631

 
$
(14,368
)
 
$
(2,720
)
 
$
70,543

Reconciling items
 

 
 
 
 

 
(53,139
)
 
 

 
 
 
 

 
(109,850
)
Operating loss
 

 
 
 
 

 
$
(21,749
)
 
 

 
 
 
 

 
$
(39,307
)
Interest and other income (expense), net
 

 
 
 
 

 
(6,630
)
 
 

 
 
 
 

 
(13,112
)
Loss before income taxes
 

 
 
 
 

 
$
(28,379
)
 
 

 
 
 
 

 
$
(52,419
)
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 and six months ended June 30, 2013 and 2012 , respectively, were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Customer 
 
2013
 
2012
 
2013
 
2012
Customer A
 
39
%
 
38
%
 
36
%
 
38
%
Customer B
 
*

 
*

 
*

 
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:

13


 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
(In thousands)
 
2013
 
2012
 
2013
 
2012
South Korea
 
$
22,502

 
$
21,468

 
$
44,527

 
$
44,715

USA
 
15,106

 
15,280

 
40,675

 
31,469

Japan
 
12,261

 
15,902

 
26,869

 
33,471

Europe
 
5,432

 
943

 
7,560

 
2,072

Canada
 
1,862

 
1,872

 
3,648

 
3,851

Asia-Other
 
756

 
750

 
1,506

 
3,500

Total
 
$
57,919

 
$
56,215

 
$
124,785

 
$
119,078


6. Marketable Securities
Rambus invests its excess cash and cash equivalents primarily in U.S. government sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years.  As of June 30, 2013 and December 31, 2012 , all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than one year .
All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:
 
 
As of June 30, 2013
(In thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
134,860

 
$
134,860

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
58,864

 
58,870

 

 
(6
)
 
0.11
%
Total cash equivalents and marketable securities
 
193,724

 
193,730

 

 
(6
)
 
 

Cash
 
11,916

 
11,916

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
205,640

 
$
205,646

 
$

 
$
(6
)
 
 

 
 
As of December 31, 2012
(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
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Cash equivalents
$
143,360

 
$
129,569

Short term marketable securities
50,364

 
54,346

Total cash equivalents and marketable securities
193,724

 
183,915

Cash
11,916

 
19,415

Total cash, cash equivalents and marketable securities
$
205,640

 
$
203,330



14


The Company continues to invest in highly rated quality, highly liquid debt securities. As of June 30, 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 June 30, 2013 and December 31, 2012 are as follows:
 
Fair Value
 
Gross Unrealized Loss
 
June 30,
2013
 
December 31,
2012
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Less than one year
 

 
 

 
 

 
 

Corporate notes, bonds and commercial paper
$
43,040

 
$
51,819

 
$
(6
)
 
$
(15
)

The gross unrealized loss at June 30, 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 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 June 30, 2013 and December 31, 2012 :
 
As of June 30, 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
$
134,860

 
$
134,860

 
$

 
$

Corporate notes, bonds and commercial paper
58,864

 

 
58,864

 

Total available-for-sale securities
$
193,724

 
$
134,860

 
$
58,864

 
$

 
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

 
$


15



The Company monitors its investments 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. Prior to the second quarter of 2013, the Company had not recorded any impairment charges related to this investment as there had been no events that caused a decrease in its fair value below the carrying cost. The Company evaluated the fair value of the investment in the non-marketable equity security as of June 30, 2013 , and based on the information provided by the private company, determined that there was a decrease in the security's fair value. The fair value of the non-marketable equity security was determined based on an income approach, using level 3 fair value inputs, as it was deemed to be the most indicative of the security's fair value. Accordingly, the Company recorded an impairment charge of $1.4 million within interest income and other income (expense), net, in the condensed consolidated statements of operations for the three and six months ended June 30, 2013 . Additionally, the Company cannot provide any assurance that its non-marketable equity security will not be further impacted by advers e c hanges in the general market conditions or deterioration in business prospects of the investee , which may require the Company in the future to record additional impairment charges which could adversely impact its financial results.
For the three and six months ended June 30, 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 June 30, 2013 and December 31, 2012 :
 
 
As of June 30, 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

 
$
155,473

 
$
177,784

 
$
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 June 30, 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 and six months ended June 30, 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:
(In thousands)
 
As of June 30, 2013
 
As of December 31, 2012
5% Convertible Senior Notes due 2014 (the “2014 Notes”)
 
$
172,500

 
$
172,500

Unamortized discount
 
(17,027
)
 
(24,944
)
Total convertible notes
 
$
155,473

 
$
147,556

Less current portion
 
155,473

 

Total long-term convertible notes
 
$

 
$
147,556

As of June 30, 2013, the 2014 Notes were reclassed from a long-term liability to a short-term liability as they will be due on June 15, 2014.

Interest expense related to the notes for the three and six months ended June 30, 2013 and 2012 was as follows:

16


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
2014 Notes coupon interest at a rate of 5%
$
2,156

 
$
2,156

 
$
4,313

 
$
4,313

2014 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 11.7%
4,145

 
3,557

 
8,234

 
7,067

Total interest expense on convertible notes
$
6,301

 
$
5,713

 
$
12,547

 
$
11,380


9. Commitments and Contingencies
As of June 30, 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)
$
43,253

 
$
2,993

 
$
5,874

 
$
6,010

 
$
6,156

 
$
6,302

 
$
15,918

Leases and other contractual obligations
7,309

 
1,288

 
1,874

 
1,740

 
1,049

 
1,018

 
340

Software licenses (3)
160

 
80

 
80

 

 

 

 

Acquisition retention bonuses (4)
19,506

 

 
18,203

 
1,303

 

 

 

Convertible notes
172,500

 

 
172,500

 

 

 

 

Interest payments related to convertible notes
8,625

 
4,313

 
4,312

 

 

 

 

Total
$
251,353

 
$
8,674

 
$
202,843

 
$
9,053

 
$
7,205

 
$
7,320

 
$
16,258

_________________________________________
(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $16.7 million including $10.6 million recorded as a reduction of long-term deferred tax assets and $6.1 million in long-term income taxes payable as of June 30, 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 June 30, 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 $16.9 million of CRI retention bonuses payable on June 3, 2014 can be paid in cash or stock at the Company’s election.
Building lease expense was approximately $0.9 million and $1.8 million for the three and six months ended June 30, 2013 , respectively. Building lease expense was approximately $1.2 million and $1.9 million for the three and six months ended June 30, 2012 , respectively. Deferred rent of $1.5 million and $0.8 million as of June 30, 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

17


intellectual property infringement or any other claim by any third party arising as result of the applicable agreement with the Company. The maximum amount of indemnification the Company could be required to make under these agreements is generally limited to fees received by the Company.
Several securities fraud class actions, private lawsuits and shareholder derivative actions were filed in state and federal courts against certain of the Company’s current and former officers and directors related to the stock option granting actions. As permitted under Delaware law, the Company has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s term in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has a director and officer insurance policy that reduces the Company’s exposure and enables the Company to recover a portion of future amounts to be paid. As a result of these indemnification agreements, the Company continues to make payments on behalf of primarily former officers and some current officers. As of June 30, 2013 , the Company had made cumulative payments of approximately $32.2 million on their behalf, including an immaterial amount made in the quarter ended June 30, 2013 . As of June 30, 2012 , the Company had made cumulative payments of approximately $32.0 million on their behalf, including $0.1 million in the quarter ended June 30, 2012 . 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 June 30, 2013 , 1,858,262 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
(1,756,312
)
Stock options forfeited
1,637,125

Stock options expired under former plans
(475,419
)
Nonvested equity stock and stock units granted (1)
(457,428
)
Nonvested equity stock and stock units forfeited (1)
181,137

Total available for grant as of June 30, 2013
1,858,262

_________________________________________
(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 six months ended June 30, 2013 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of June 30, 2013 .

18


 
Options Outstanding
 
 
 
 
 
Number of
  Shares
 
Weighted
  Average
  Exercise Price
  Per Share
 
Weighted
  Average
  Remaining
  Contractual
  Term (years)
 
Aggregate
  Intrinsic
  Value
 
(In thousands, except per share amounts)
Outstanding as of December 31, 2012
13,094,815

 
$
12.79

 
 
 
 

Options granted
1,756,312

 
5.51

 
 
 
 

Options exercised
(44,850
)
 
6.23

 
 
 
 

Options forfeited
(1,637,125
)
 
11.17

 
 
 
 

Outstanding as of June 30, 2013
13,169,152

 
12.04

 
5.93
 
$
21,033

Vested or expected to vest at June 30, 2013
12,273,266

 
12.47

 
5.68
 
18,444

Options exercisable at June 30, 2013
6,615,397

 
17.59

 
3.45
 
3,088


No stock options that contain a market condition were granted during the three and six months ended June 30, 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 June 30, 2013 and 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 June 30, 2013 , based on the $8.59 closing stock price of Rambus’ Common Stock on June 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 June 30, 2013 was 8,126,102 and 1,991,014 , respectively.
Employee Stock Purchase Plan
Under the 2006 Employee Stock Purchase Plan (“ESPP”), the Company issued 652,272 shares at a price of $4.28 per share during the six months ended June 30, 2013 . The Company issued 163,398 shares at a price of $4.21 per share during the six months ended June 30, 2012 . As of June 30, 2013 , 430,243 shares under the ESPP remain available for issuance.
Stock-Based Compensation
For the six months ended June 30, 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 and six months ended June 30, 2013 , the Company granted 136,875 and 1,756,312 stock options, respectively, with an estimated total grant-date fair value of $0.3 million and $4.1 million , respectively. During the three and six months ended June 30, 2013 , the Company recorded stock-based compensation expense related to stock options of $2.5 million and $5.6 million , respectively.
During the three and six months ended June 30, 2012 , the Company granted 3,065,198 and 5,002,200 stock options (including options granted in the stock option exchange program), respectively, with an estimated total grant-date fair value of $21.6 million and $29.1 million , respectively. During the three and six months ended June 30, 2012 , the Company recorded stock-based compensation expense related to stock options of $4.0 million and $8.3 million , respectively.
As of June 30, 2013 , there was $23.3 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of shares vested as of June 30, 2013 was $75.9 million .
The total intrinsic value of options exercised was $0.1 million and $0.1 million for the three and six months ended June 30, 2013 , respectively. The total intrinsic value of options exercised was $0.1 million and $0.2 million for the three and six months ended June 30, 2012 , respectively. 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.

19


Employee Stock Purchase Plan
For the three and six months ended June 30, 2013 , the Company recorded compensation expense related to the ESPP of $0.5 million and $1.0 million , respectively. For the three and six months ended June 30, 2012 , the Company recorded compensation expense related to the ESPP of $0.6 million and $1.3 million , respectively. As of June 30, 2013 , there was $0.7 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the ESPP. That cost is expected to be recognized over four months.
There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the three and six months ended June 30, 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.
 
Stock Option Plans
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Stock Option Plans
 

 
 

 
 

 
 

Expected stock price volatility
47
%
 
68
%
 
47
%
 
60-68%

Risk free interest rate
0.8
%
 
0.9
%
 
0.8-0.9%

 
0.7-0.9%

Expected term (in years)
5.4

 
5.7

 
5.4

 
5.6 –5.7

Weighted-average fair value of stock options granted to employees
$
2.61

 
$
3.41

 
$
2.35

 
$
3.83

 
Employee Stock Purchase Plan
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Employee Stock Purchase Plan
 

 
 

 
 

 
 

Expected stock price volatility
48
%
 
63
%
 
48
%
 
63
%
Risk free interest rate
0.1
%
 
0.2
%
 
0.1
%
 
0.2
%
Expected term (in years)
0.5

 
0.5

 
0.5

 
0.5

Weighted-average fair value of purchase rights granted under the purchase
plan
$
1.94

 
$
1.61

 
$
1.94

 
$
1.61

 
 
 
 
 
 
 
 
Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three and six months ended June 30, 2013 , the Company granted nonvested equity stock units totaling 28,456 and 304,952 shares under the 2006 Plan, respectively. During the three and six months ended June 30, 2012 , the Company granted nonvested equity stock units totaling 36,526 and 459,897 shares under the 2006 Plan, respectively. These awards have a service condition, generally a service period of four years , except in the case of grants to directors, for which the service period is one year . For the three and six months ended June 30, 2013 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.2 million and $1.7 million , respectively. For the three and six months ended June 30, 2012 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.2 million and $3.3 million , respectively. The Company occasionally grants nonvested equity stock units to its employees with vesting subject to the achievement of certain performance conditions. During the three and six months ended June 30, 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 immaterial amounts of stock-based compensation expense related to these performance stock units for all periods.

20


For the three and six months ended June 30, 2013 , the Company recorded stock-based compensation expense of approximately $0.6 million and $1.9 million , respectively, related to all outstanding unvested equity stock grants. For the three and six months ended June 30, 2012 , the Company recorded stock-based compensation expense of approximately $1.5 million and $3.3 million , respectively, related to all outstanding unvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately $4.3 million at June 30, 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 six months ended June 30, 2013 :
Nonvested Equity Stock and Stock Units
 
Shares
 
Weighted-
  Average
  Grant-Date
  Fair Value
Nonvested at December 31, 2012
 
922,491

 
$
10.24

Granted
 
304,952

 
5.51

Vested
 
(312,070
)
 
11.25

Forfeited
 
(120,753
)
 
11.80

Nonvested at June 30, 2013
 
794,620

 
7.79


11.   Stockholders’ Equity
Share Repurchase Program
During the six months ended June 30, 2013 , the Company did not repurchase any shares of its Common Stock under its share repurchase program. As of June 30, 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 June 30, 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.

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 June 30, 2013, there were no restructuring charges. During the six months ended June 30, 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. Since the inception of the program, the Company has incurred $9.5 million in restructuring related charges. The Company expects to substantially complete its restructuring activities by the end of 2013. There were no restructuring charges during the three and six months ended June 30, 2012 .

The following table summarizes the restructuring activities during the six months ended June 30, 2013 :

21


 
 
Employee
Severance
and Related Benefits
 
Facilities
 
Total
 
 
(In thousands)
Balance at December 31, 2012
 
$
906

 
$

 
$
906

Charges
 
246

 
1,960

 
2,206

Payments
 
(843
)
 
(1,216
)
 
(2,059
)
Non-cash charge
 

 
(653
)
*
(653
)
Balance at June 30, 2013
 
$
309

 
91

 
$
400


*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 and six months ended June 30, 2013 and 2012 , the Company calculated its interim tax provision to record taxes incurred by the U.S. entity on a discrete basis because the Company was 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 $4.7 million and $3.8 million for the three months ended June 30, 2013 and 2012 , respectively, and $9.3 million and $7.7 million for the six months ended June 30, 2013 and 2012 , respectively. The provision for income taxes for the three and six months ended June 30, 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 and six months ended June 30, 2013 , the Company paid withholding taxes of $3.8 million and $7.6 million , respectively. During the three and six months ended June 30, 2012 , the Company paid withholding taxes of $3.7 million and $8.1 million , respectively.
As of June 30, 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 June 30, 2013 , a full valuation allowance has been recorded against the U.S. 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 June 30, 2013 , the Company had approximately $16.7 million of unrecognized tax benefits, including $10.6 million recorded as a reduction of long-term deferred tax assets and $6.1 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 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 June 30, 2013 and December 31, 2012 , an immaterial amount of interest and penalties are included in long-term income taxes payable.
Rambus files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service (“IRS”) for tax years before 2009. The Company

22


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 had previously accrued approximately $8.1 million related to those costs.
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.
On June 11, 2013, Rambus and SK Hynix announced that they had entered into a settlement of all outstanding disputes between the parties, which is described in Note 15 "Agreement with SK Hynix". As a result of the settlement, the Company has reversed the cost accrual of $8.1 million referenced above, which was included in marketing, general and administrative expenses in the condensed consolidated statements of operations.
Micron Litigation
U.S District Court in Delaware: Case No. 00-792-SLR
On August 28, 2000, Micron filed suit against Rambus in the U.S. District Court for Delaware. The suit asserts violations of federal antitrust laws, deceptive trade practices, breach of contract, fraud and negligent misrepresentation in connection with Rambus' participation in JEDEC. Micron seeks a declaration of monopolization by Rambus, compensatory and punitive damages, attorneys' fees, a declaratory judgment that eight Rambus patents are invalid and not infringed, and the award to Micron of a royalty-free license to the Rambus patents. Rambus has filed an answer and counterclaims disputing Micron's claims and asserting infringement by Micron of 12 U.S. patents. 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,

23


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 July 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 SK Hynix, Infineon, Nanya, and Inotera. Infineon and Inotera were subsequently dismissed from this litigation as was Samsung, which previously 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. On June 11, 2013, Rambus and SK Hynix announced that they had entered into a settlement of all outstanding disputes between the parties.
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 SK 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, SK Hynix filed appeals with the General Court of the European Union purporting to challenge the settlement and the European Commission's rejection of SK Hynix's complaint.
On June 11, 2013, Rambus and SK Hynix announced that they had entered into a settlement of all outstanding disputes between the parties, which is described in Note 15 "Agreement with SK Hynix".
Superior Court of California for the County of San Francisco
On May 5, 2004, Rambus filed a lawsuit against Micron, SK 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 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 SK Hynix began on June 20, 2011. On November 16, 2011, the jury returned a verdict in favor of Micron and SK Hynix 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 SK Hynix of $520 thousand and $350 thousand , respectively.
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 filed its reply brief on July 12, 2013.

24


On June 11, 2013, Rambus and SK Hynix announced that they had entered into a settlement of all outstanding disputes between the parties, which is described in Note 15 "Agreement with SK Hynix". As a result of the settlement, the Company has reversed the cost accrual of $350 thousand referenced above, which was included in marketing, general and administrative expenses in the condensed consolidated statements of operations. Due to this reversal, as of June 30, 2013, $520 thousand of the awarded costs remained accrued.
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.