Rambus Inc.
RAMBUS INC (Form: 10-Q, Received: 10/25/2013 15:55:53)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
ý       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 112,706,137 as of September 30, 2013 .


Table of Contents

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

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;
Impairment of goodwill and long-lived 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)

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

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
307,961

 
$
148,984

Marketable securities
58,396

 
54,346

Accounts receivable
1,597

 
529

Prepaids and other current assets
6,038

 
10,529

Deferred taxes
288

 
788

Total current assets
374,280

 
215,176

Intangible assets, net
132,448

 
153,173

Goodwill
116,899

 
124,969

Property, plant and equipment, net
72,772

 
86,905

Deferred taxes, long-term
4,806

 
4,458

Other assets
3,801

 
3,131

Total assets
$
705,006

 
$
587,812

LIABILITIES &   STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
5,967

 
$
7,918

Accrued salaries and benefits
30,336

 
23,992

Accrued litigation expenses
1,020

 
9,822

Convertible notes, short-term
159,731

 

Other accrued liabilities
7,293

 
12,402

Total current liabilities
204,347

 
54,134

Convertible notes, long-term
108,316

 
147,556

Long-term imputed financing obligation
39,685

 
45,919

Long-term income taxes payable
6,497

 
6,533

Other long-term liabilities
3,039

 
12,076

Total liabilities
361,884

 
266,218

Commitments and contingencies (Notes 10 and 15)


 


Stockholders’ equity:
 

 
 

Convertible preferred stock, $.001 par value:
 

 
 

Authorized: 5,000,000 shares
 

 
 

Issued and outstanding: no shares at September 30, 2013 and December 31, 2012

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 112,706,137 shares at September 30, 2013 and 111,525,021 shares at December 31, 2012
113

 
112

Additional paid-in capital
1,121,259

 
1,075,761

Accumulated deficit
(777,950
)
 
(753,979
)
Accumulated other comprehensive loss
(300
)
 
(300
)
Total stockholders’ equity
343,122

 
321,594

Total liabilities and stockholders’ equity
$
705,006

 
$
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share amounts)
Revenue:
 

 
 

 
 

 
 

Royalties
$
71,013

 
$
57,361

 
$
194,244

 
$
175,127

Contract and other revenue
2,281

 
169

 
3,835

 
1,481

Total revenue
73,294

 
57,530

 
198,079

 
176,608

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of revenue*
8,958

 
7,529

 
22,857

 
22,032

Research and development*
27,553

 
30,674

 
91,178

 
107,415

Marketing, general and administrative*
18,698

 
24,255

 
57,937

 
91,283

Gain from sale of intellectual property

 

 
(1,388
)
 

Costs of restatement and related legal activities

 
79

 
19

 
192

Restructuring charges
1,129

 
6,622

 
3,335

 
6,622

Impairment of goodwill and long-lived assets
8,070

 
35,471

 
8,070

 
35,471

Gain from settlement
(179
)
 

 
(179
)
 

Total operating costs and expenses
64,229

 
104,630

 
181,829

 
263,015

Operating income (loss)
9,065

 
(47,100
)
 
16,250

 
(86,407
)
Interest income and other income (expense), net
66

 
(12
)
 
(1,373
)
 
175

Interest expense
(8,552
)
 
(7,121
)
 
(23,290
)
 
(20,420
)
Interest and other income (expense), net
(8,486
)
 
(7,133
)
 
(24,663
)
 
(20,245
)
Income (loss) before income taxes
579

 
(54,233
)
 
(8,413
)
 
(106,652
)
Provision for income taxes
6,304

 
3,865

 
15,558

 
11,552

Net loss
$
(5,725
)
 
$
(58,098
)
 
$
(23,971
)
 
$
(118,204
)
Net loss per share:
 

 
 

 
 

 
 

Basic
$
(0.05
)
 
$
(0.52
)
 
$
(0.21
)
 
$
(1.07
)
Diluted
$
(0.05
)
 
$
(0.52
)
 
$
(0.21
)
 
$
(1.07
)
Weighted average shares used in per share calculation:
 

 
 

 
 

 
 

Basic
112,640

 
110,826

 
112,144

 
110,580

Diluted
112,640

 
110,826

 
112,144

 
110,580

_________________________________________
*    Includes stock-based compensation:
Cost of revenue
$
7

 
$
5

 
$
12

 
$
20

Research and development
$
1,630

 
$
2,221

 
$
5,166

 
$
7,572

Marketing, general and administrative
$
1,726

 
$
2,863

 
$
6,707

 
$
10,438

See Notes to Unaudited Condensed Consolidated Financial Statements

6

Table of Contents

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

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2013
 
2012
 
2013
 
2012
Net loss
 
$
(5,725
)
 
$
(58,098
)
 
$
(23,971
)
 
$
(118,204
)
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Unrealized gain (loss) on marketable securities, net of tax
 
(4
)
 
8

 

 
80

Total comprehensive loss
 
$
(5,729
)
 
$
(58,090
)
 
$
(23,971
)
 
$
(118,124
)
See Notes to Unaudited Condensed Consolidated Financial Statements

7

Table of Contents

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

 
 

Net loss
$
(23,971
)
 
$
(118,204
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Stock-based compensation
11,885

 
18,030

Depreciation
11,566

 
9,583

Amortization of intangible assets
21,420

 
23,535

Non-cash interest expense and amortization of convertible debt issuance costs
13,369

 
10,856

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

 


Impairment of goodwill and long-lived assets
8,070

 
35,471

Deferred tax benefit
605

 
(39
)
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
(1,068
)
 
574

Prepaid expenses and other assets
5,898

 
6,744

Accounts payable
(399
)
 
(9,171
)
Accrued salaries and benefits and other accrued liabilities
(8,787
)
 
3,968

Accrued litigation expenses
(8,802
)
 
(467
)
Income taxes payable
380

 
(665
)
Net cash provided by (used in) operating activities
30,831

 
(19,785
)
Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(5,942
)
 
(15,802
)
Acquisition of intangible assets
(2,500
)
 
(1,700
)
Purchases of marketable securities
(101,596
)
 
(77,562
)
Maturities of marketable securities
97,300

 
149,486

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
(10,488
)
 
8,144

Cash flows from financing activities:
 
 
 
Proceeds from issuance of convertible senior notes
138,000

 

Issuance costs related to the issuance of convertible senior notes
(3,603
)
 

Proceeds received from issuance of common stock under employee stock plans
4,610

 
1,728

Principal payments against lease financing obligation
(119
)
 
(17
)
Payments under installment payment arrangement
(84
)
 
(149
)
Net cash provided by financing activities
138,804

 
1,562

Effect of exchange rate changes on cash and cash equivalents
(170
)
 
41

Net increase (decrease) in cash and cash equivalents
158,977

 
(10,038
)
Cash and cash equivalents at beginning of period
148,984

 
162,244

Cash and cash equivalents at end of period
$
307,961

 
$
152,206

 
 
 
 
Non-cash investing and financing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other accrued liabilities
$
252

 
$
2,686

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 (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.
For the three and nine months ended September 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.”
Reclassifications
Certain prior periods' amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net loss for any of the periods presented.

2. Summary of Significant Accounting Policies
Revenue Recognition
Overview
Rambus recognizes revenue when persuasive evidence of an arrangement exists, Rambus has delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. If any of these criteria are not met, Rambus defers recognizing the revenue until such time as all criteria are met. Determination of whether or not these criteria have been met may require the Company to make judgments, assumptions and estimates based upon current information and historical experience.
Certain revenue contracts consist of service fees associated with integration of Rambus' solutions into its customers’ products and fees associated with providing training, evaluation and test equipment to its customers. Under the accounting guidance, if the deliverables have standalone value upon delivery, Rambus accounts for each deliverable separately. When

9


multiple deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. Rambus determines the relative selling price for a deliverable based on its best estimate of selling price (“BESP”). Rambus has determined that vendor-specific objective evidence of selling price for each deliverable is not available as there lacks a consistent number of standalone sales and third-party evidence is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. Rambus determined BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include discounting practices, the size and volume of transactions, the customer demographic, the geographic area where services are sold, price lists, go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by management, taking into consideration the go-to-market strategy. As the go-to-market strategies evolve, Rambus may modify its pricing practices in the future, which could result in changes in relative selling prices. In most cases, the relative values of the undelivered components are not material to the overall arrangement and are typically delivered within twelve months after the core product has been delivered. In such agreements, selling price is determined for each component and any difference between the total of the separate BESP and total contract consideration (i.e. discount) is allocated pro-rata across each of the components in the arrangement.
Rambus’ revenue consists of royalty revenue and contract and other revenue derived from MID, CRI and LDT operating segments. Royalty revenue consists of patent license and solutions license royalties. Contract and other revenue consists of fixed license fees, fixed engineering fees and service fees associated with integration of Rambus’ technology solutions into its customers’ products as well as sale of LED edge-lit products.
Royalty Revenue
Rambus recognizes royalty revenue upon notification by its customers and when deemed collectible. The terms of the royalty agreements generally either require customers to give Rambus notification and to pay the royalties within 60 days of the end of the quarter during which the sales occur or are based on a fixed royalty that is due within 45 days of the end of the quarter. Many of Rambus’ customers have the right to cancel their licenses. In such arrangements, revenue is only recognized to the extent that is consistent with the cancellation provisions. Cancellation provisions within such contracts generally provide for a prospective cancellation with no refund of fees already remitted by customers for products provided and payment for services rendered prior to the date of cancellation. Rambus has two types of royalty revenue: (1) patent license royalties and (2) solutions license royalties.
Patent licenses - Rambus licenses its broad portfolio of patented inventions to companies who use these inventions in the development and manufacture of their own products. Such licensing agreements may cover the license of part, or all, of Rambus' patent portfolio. The contractual terms of the agreements generally provide for payments over an extended period of time. For the licensing agreements with fixed royalty payments, Rambus generally recognizes revenue from these arrangements as amounts become due. For the licensing agreements with variable royalty payments which can be based on either a percentage of sales or number of units sold, Rambus earns royalties at the time that the customers’ sales occur. Rambus’ customers, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter. As Rambus is unable to estimate the customers’ sales in any given quarter to determine the royalties due to Rambus, it recognizes royalty revenues based on royalties reported by customers during the quarter and when other revenue recognition criteria are met.
In addition, Rambus may enter into certain settlements of patent infringement disputes. The amount of consideration received upon any settlement (including but not limited to past royalty payments, future royalty payments and punitive damages) is allocated to each element of the settlement based on the fair value of each element. In addition, revenues related to past royalties are recognized upon execution of the agreement by both parties, provided that the amounts are fixed or determinable, there are no significant undelivered obligations and collectability is reasonably assured. Rambus does not recognize any revenues prior to execution of the agreement since there is no reliable basis on which it can estimate the amounts for royalties related to previous periods or assess collectability. Elements that are related to royalty revenue in nature (including but not limited to past royalty payments and future royalty payments) will be recorded as royalty revenue in the consolidated statements of operations. Elements that are not related to royalty revenue in nature (including but not limited to punitive damage and settlement) will be recorded as gain from settlement which is reflected as a separate line item within the operating expenses section in the consolidated statements of operations.
Solutions licenses - Rambus develops proprietary and industry-standard products that it provides to its customers under solutions license agreements. These arrangements include royalties, which can be based on either a percentage of sales or number of units sold. Rambus earns royalties on such licensed products sold worldwide by its customers at the time that the customers’ sales occur. Rambus’ customers, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter. As Rambus is unable to estimate the customers’ sales in any given quarter to determine the

10


royalties due to Rambus, it recognizes royalty revenues based on royalties reported by customers during the quarter and when other revenue recognition criteria are met.
Contract and Other Revenue
Rambus generally recognizes revenue using percentage of completion for development contracts related to licenses of its solutions that involve significant engineering and integration services. For agreements accounted for using the percentage-of-completion method, Rambus determines progress to completion using input measures based upon contract costs incurred. Part of these contract fees may be due upon the achievement of certain milestones, such as provision of certain deliverables by Rambus or production of chips by the customer. The remaining fees may be due on pre-determined dates and include significant up-front fees.
A provision for estimated losses on fixed price contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. If the Company determines that it is necessary to revise the estimates of the total costs required to complete a contract, the total amount of revenue recognized over the life of the contract would not be affected. However, to the extent the new assumptions regarding the total efforts necessary to complete a project are less than the original assumptions, the contract fees would be recognized sooner than originally expected. Conversely, if the newly estimated total efforts necessary to complete a project are longer than the original assumptions, the contract fees will be recognized over a longer period.
Rambus recognizes revenue from the sale of LED edge-lit products when risk of loss and title have transferred to customers, provided all other revenue recognition criteria have been met. Revenue from distributors is recognized on the shipment or delivery of the related products, provided all other revenue recognition criteria have been met. The Company's agreements with these distributors have terms which are generally consistent with the standard terms and conditions for the sale of the Company's products to end users, and do not provide for product rotation or pricing allowances. The Company accrues for warranty based on the standard market experience.

3. 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 accounting standards update 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 impact 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 were not material.

4. 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.

11


The following table sets forth the computation of basic and diluted net loss per share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Basic and diluted net loss per share:
 
(In thousands, except per share amounts)
Numerator:
 
 

 
 

 
 
 
 
Net Loss
 
$
(5,725
)
 
$
(58,098
)
 
$
(23,971
)
 
$
(118,204
)
Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
112,640

 
110,826

 
112,144

 
110,580

Basic and diluted net loss per share
 
$
(0.05
)
 
$
(0.52
)
 
$
(0.21
)
 
$
(1.07
)
For the three months ended September 30, 2013 and 2012 , options to purchase approximately 5.9 million and 13.4 million shares, respectively, and for the nine months ended September 30, 2013 and 2012 , options to purchase approximately 10.2 million and 13.3 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense. For the three months ended September 30, 2013 and 2012 , an additional 3.4 million and 6.9 million potentially dilutive shares, respectively, and for the nine months ended September 30, 2013 and 2012 , an additional 3.7 million and 7.0 million potentially dilutive shares, respectively, have been excluded from the weighted average dilutive shares because there were net losses for the periods.

5. Intangible Assets and Goodwill
Goodwill
During the third quarter of 2013, the Company curtailed its immersive media platform spending and redirected some of its resources to other strategic programs. Under generally accepted accounting principles, when indicators of potential impairment are identified, companies are required to conduct a review of the carrying amounts of goodwill and other long-lived assets to determine if impairment exists. The Company conducted this impairment review as a result of the change of its strategy related to the immersive media platform. As a result of this impairment review, the Company recorded $8.1 million of impairment of goodwill related to the Mobile Technology Division (“MTD”) reporting unit which is part of the CTO reportable segment. This impairment was reflected in impairment of goodwill and long-lived assets in the condensed consolidated statements of operations. The Company estimated the fair value of MTD reporting unit using the income approach which was determined using Level 3 fair value inputs. The utilization of the income approach to determine fair value requires estimates of future operating results and cash flows discounted using an estimated discount rate. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows. Certain estimates used in the income approach involve information from a business with developing revenue models and limited financial history, which increase the risk of differences between the projected and actual performance.
The following table presents goodwill balances and adjustments to those balances for each of the reportable segments for the nine months ended September 30, 2013 :
Reportable Segment:
 
December 31,
2012
 
Additions to Goodwill
 
Impairment Charge of Goodwill
 
September 30,
2013
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$

 
$
19,905

CTO
 
8,070

 

 
(8,070
)
 

All Other
 
96,994

 

 

 
96,994

Total
 
$
124,969

 
$

 
$
(8,070
)
 
$
116,899



12


 
 
As of
 
 
September 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

 
$
(21,770
)
 
$
116,899

Intangible Assets
The components of the Company’s intangible assets as of September 30, 2013 and December 31, 2012 were as follows:
 
 
 
As of September 30, 2013
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
195,345

 
$
(77,105
)
 
$
118,240

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

 
(18,509
)
 
14,141

Non-compete agreements
3 years
 
300

 
(233
)
 
67

Total intangible assets
 
 
$
228,295


$
(95,847
)
 
$
132,448

 
 
 
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 months ended September 30, 2013, the Company did not purchase any intangible assets. The Company also reclassified certain intangible assets with a gross carrying amount of $2.0 million to assets-held-for-use. These assets were previously classified as assets-held-for-sale within prepaids and other current assets in the condensed consolidated balance sheet. During the nine months ended September 30, 2013 , the Company purchased intellectual property of $2.5 million , which was recorded as intangible assets on the condensed consolidated balance sheets. During the three months ended September 30, 2013, the Company did not sell any intangible assets. During the nine months ended September 30, 2013 , the Company sold portfolios of its intellectual property covering lighting technologies for $2.3 million and the related gain was recorded as gain from sale of intellectual property in the condensed consolidated statements of operations.
During the nine months ended September 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.
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 reduces the favorable contract intangible asset. For the three months ended September 30, 2013 and 2012 , the Company received $0.9 million and $1.1 million related to the favorable contracts, respectively. For the nine months ended September 30, 2013 and 2012 , the Company received $2.2 million and $4.7 million related to the favorable contracts, respectively. As of September 30, 2013 and December 31, 2012 , the net balance of the favorable contract intangible assets was $2.6 million and $4.8 million , respectively.
Amortization expense for intangible assets for the three and nine months ended September 30, 2013 was $7.4 million and $21.4 million , respectively. Amortization expense for intangible assets for the three and nine months ended September 30, 2012 was $8.0 million and $23.5 million , respectively.

13


The estimated future amortization expense of intangible assets as of September 30, 2013 was as follows (amounts in thousands):
Years Ending December 31:
Amount
2013 (remaining 3 months)
$
9,352

2014
28,266

2015
27,115

2016
26,081

2017
24,625

Thereafter
17,009

 
$
132,448


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 LDT reporting unit is 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.

6.   Segments and Major Customers
For the three and nine months ended September 30, 2013 and 2012 , 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 and any product sales. Beginning in the third quarter of 2013, the Company bifurcated royalty payments that it received from SK hynix between revenue and gain from settlement, which was reflected as a credit to operating expenses. The Company has combined revenue from its customers, including SK hynix, and the gain from the SK hynix settlement as customer licensing income to reflect the total amounts received from all of its customers for the periods presented. In addition, customer licensing income includes other patent royalties received but not recognizable as revenue and proceeds from sale of intellectual property. In certain periods presented, certain patent royalties received from a customer were not recognized as revenue as not all revenue recognition criteria were met. 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 and nine months ended September 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 nine months ended September 30, 2013 and 2012 , respectively.

14


 
For the Three Months Ended September 30, 2013
 
For the Nine Months Ended September 30, 2013
 
MID
 
CTO
 
All Other
 
Total
 
MID
 
CTO
 
All Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
66,103

 
$

 
$
7,191

 
$
73,294

 
$
175,233

 
$

 
$
22,846

 
$
198,079

Other patent royalties received
179

 

 
850

 
1,029

 
5,179

 

 
4,479

 
9,658

Customer licensing income
$
66,282

 
$

 
$
8,041

 
$
74,323

 
$
180,412

 
$

 
$
27,325

 
$
207,737

Segment operating expenses
7,730

 
6,530

 
11,475

 
25,735

 
26,001

 
21,462

 
33,765

 
81,228

Segment operating income (loss)
$
58,552

 
$
(6,530
)
 
$
(3,434
)
 
$
48,588

 
$
154,411

 
$
(21,462
)
 
$
(6,440
)
 
$
126,509

Reconciling items
 

 
 
 
 

 
(39,523
)
 
 

 
 
 
 

 
(110,259
)
Operating income
 

 
 
 
 

 
$
9,065

 
 

 
 
 
 

 
$
16,250

Interest and other income (expense), net
 

 
 
 
 

 
(8,486
)
 
 

 
 
 
 

 
(24,663
)
Income (loss) before income taxes
 

 
 
 
 

 
$
579

 
 

 
 
 
 

 
$
(8,413
)

 
For the Three Months Ended September 30, 2012
 
For the Nine Months Ended September 30, 2012
 
MID
 
CTO
 
All Other
 
Total
 
MID
 
CTO
 
All Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
54,044

 
$

 
$
3,486

 
$
57,530

 
$
163,269

 
$

 
$
13,339

 
$
176,608

Other patent royalties received
3,750

 

 
1,125

 
4,875

 
3,750

 

 
4,740

 
8,490

Customer licensing income
$
57,794

 
$

 
$
4,611

 
$
62,405

 
$
167,019

 
$

 
$
18,079

 
$
185,098

Segment operating expenses
7,147

 
6,801

 
7,247

 
21,195

 
28,741

 
21,169

 
23,435

 
73,345

Segment operating income (loss)
$
50,647

 
$
(6,801
)
 
$
(2,636
)
 
$
41,210

 
$
138,278

 
$
(21,169
)
 
$
(5,356
)
 
$
111,753

Reconciling items
 

 
 
 
 

 
(88,310
)
 
 

 
 
 
 

 
(198,160
)
Operating loss
 

 
 
 
 

 
$
(47,100
)
 
 

 
 
 
 

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

 
 
 
 

 
(7,133
)
 
 

 
 
 
 

 
(20,245
)
Loss before income taxes
 

 
 
 
 

 
$
(54,233
)
 
 

 
 
 
 

 
$
(106,652
)
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 nine months ended September 30, 2013 and 2012 , respectively, was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Customer 
 
2013
 
2012
 
2013
 
2012
Customer A
 
31
%
 
38
%
 
34
%
 
38
%
Customer B
 
16
%
 
*

 
*

 
*

Customer C
 
10
%
 
*

 
*

 
*

Customer D
 
*

 
*

 
*

 
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:

15


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2013
 
2012
 
2013
 
2012
South Korea
 
$
34,343

 
$
21,648

 
$
78,871

 
$
66,363

USA
 
15,880

 
14,309

 
56,555

 
45,778

Japan
 
15,943

 
17,347

 
42,812

 
50,818

Europe
 
4,098

 
1,493

 
11,658

 
3,564

Canada
 
2,280

 
1,983

 
5,928

 
5,835

Asia-Other
 
750

 
750

 
2,255

 
4,250

Total
 
$
73,294

 
$
57,530

 
$
198,079

 
$
176,608


7. Marketable Securities
Rambus invests its excess cash and cash equivalents primarily in U.S. government sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years.  As of September 30, 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 September 30, 2013
(In thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
295,211

 
$
295,211

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
58,396

 
58,406

 

 
(10
)
 
0.14
%
Total cash equivalents and marketable securities
 
353,607

 
353,617

 

 
(10
)
 
 

Cash
 
12,750

 
12,750

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
366,357

 
$
366,367

 
$

 
$
(10
)
 
 

 
 
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
 
September 30,
2013
 
December 31,
2012
 
(In thousands)
Cash equivalents
$
295,211

 
$
129,569

Short term marketable securities
58,396

 
54,346

Total cash equivalents and marketable securities
353,607

 
183,915

Cash
12,750

 
19,415

Total cash, cash equivalents and marketable securities
$
366,357

 
$
203,330



16


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

 
 

 
 

 
 

Corporate notes, bonds and commercial paper
$
50,369

 
$
51,819

 
$
(10
)
 
$
(15
)

The gross unrealized loss at September 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 8, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.

8. Fair Value of Financial Instruments
The Company reviews the pricing inputs by obtaining prices from a different source for the same security on a sample of its portfolio. The Company has not adjusted the pricing inputs it has obtained. The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of September 30, 2013 and December 31, 2012 :
 
As of September 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
$
295,211

 
$
295,211

 
$

 
$

Corporate notes, bonds and commercial paper
58,396

 

 
58,396

 

Total available-for-sale securities
$
353,607

 
$
295,211

 
$
58,396

 
$

 
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

 
$



17


The following table presents the financial instruments that are measured on a nonrecurring basis as of September 30, 2013 :
(in thousands)
Nine months ended September 30, 2013
 
Quoted market prices in active markets (Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
 
Impairment charges for the nine months ended September 30, 2013
Investment in non-marketable securities
$
600

 
$

 
$

 
$
600

 
$
1,400

 
 
 
 
 
 
 
 
 
 
The Company monitors its investments for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. 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 September 30, 2013 and 2012 and the nine months ended September 30, 2012, the Company did not incur any impairment loss on its investments. For the nine months ended September 30, 2013, the Company recorded an impairment charge related to its non-marketable equity security of a private company as described below.
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. During the second quarter of 2013, the Company evaluated the fair value of the investment in the non-marketable equity security, and based on the information provided by the private company at that time, 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 second quarter of 2013 and the nine months ended September 30, 2013 . There were no impairment charges related to the investment during the third quarter of 2013. Additionally, the Company cannot provide any assurance that its non-marketable equity security will not be further impacted by adverse changes 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 nine months ended September 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 September 30, 2013 and December 31, 2012 :
 
 
As of September 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 (the "2014 Notes")
 
$
172,500

 
$
159,731

 
$
177,137

 
$
172,500

 
$
147,556

 
$
172,716

1.125% Convertible Senior Notes due 2018 (the "2018 Notes")
 
138,000

 
108,316

 
143,922

 

 

 


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 9, "Convertible Notes," as of September 30, 2013 , the 2014 Notes and 2018 Notes are carried at their face value of $172.5 million and $138.0 million , respectively, 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.

9. Convertible Notes
The Company’s convertible notes are shown in the following table:

18


(In thousands)
 
As of September 30, 2013
 
As of December 31, 2012
5% Convertible Senior Notes due 2014
 
$
172,500

 
$
172,500

1.125% Convertible Senior Notes due 2018
 
138,000

 

Total principal amount of convertible notes
 
$
310,500

 
$
172,500

 
 
 
 
 
Unamortized discount - 2014 Notes
 
$
(12,769
)
 
$
(24,944
)
Unamortized discount - 2018 Notes
 
(29,684
)
 

Total unamortized discount
 
$
(42,453
)
 
$
(24,944
)
 
 
 
 
 
Total convertible notes
 
$
268,047

 
$
147,556

Less current portion
 
159,731

 

Total long-term convertible notes
 
$
108,316

 
$
147,556

During the second quarter of 2013, the 2014 Notes were reclassified from a long-term liability to a short-term liability as they will be due on June 15, 2014.

1.125% Convertible Senior Notes due 2018. On August 16, 2013, the Company issued $138.0 million aggregate principal amount of 1.125% convertible senior notes pursuant to an indenture (the "Indenture") by and between the Company and U.S. Bank, National Association as the trustee. The 2018 Notes will mature on August 15, 2018 (the "Maturity Date"), subject to earlier repurchase or conversion. In accounting for the 2018 Notes at issuance, the Company separated the 2018 Notes into liability and equity components pursuant to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. As of the date of issuance, the Company determined that the liability component of the 2018 Notes was $107.7 million and the equity component of the 2018 Notes was $30.3 million . The fair value of the liability component was estimated using an interest rate for a similar instrument without a conversion feature. The unamortized discount related to the 2018 Notes is being amortized to interest expense using the effective interest method over five years through August 2018.

The Company will pay cash interest at an annual rate of 1.125% of the principal amount at issuance, payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2014. The Company incurred transaction costs of approximately $3.6 million related to the issuance of 2018 Notes. In accounting for these costs, the Company allocated the costs to the liability and equity components in proportion to the allocation of proceeds from the issuance of the 2018 Notes to such components. Transaction costs allocated to the liability component of $2.8 million were recorded as deferred offering costs in other assets and are being amortized to interest expense using the effective interest method over five years (the expected term of the debt). The transaction costs allocated to the equity component of $0.8 million were recorded as additional paid-in capital. The 2018 Notes are the Company's general unsecured obligations, ranking equally in right of payment to all of Rambus’ existing and future senior unsecured indebtedness, including the 2014 Notes, and senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated to the 2018 Notes.

The 2018 Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 82.8329 shares of common stock per $1,000 principal amount of 2018 Notes, subject to adjustment in certain events. This is equivalent to an initial conversion price of approximately $12.07 per share of common stock. Holders may surrender their 2018 Notes for conversion prior to the close of business day immediately preceding May 15, 2018 only under the following circumstances: ( 1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during such calendar quarter), if the closing sale price of the common stock for 20 or more trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 130% of the conversion price per share of common stock on the last trading day of the preceding calendar quarter; (2) during the five business day period after any five consecutive trading day period (the ‘‘measurement period’’) in which the trading price (as defined below) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of the Company's common stock and the conversion rate on each such trading day; (3) upon the occurrence of specified distributions to holders of the Company's common stock; or (4) upon the occurrence of specified corporate events. On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the Maturity Date, holders may convert their notes at any time, regardless of the foregoing circumstances. If a holder elects to convert its 2018 Notes in connection with certain fundamental changes, as that term is defined in the Indenture, that occur prior to the Maturity Date, the Company will, in certain circumstances, increase the

19


conversion rate for 2018 Notes converted in connection with such fundamental changes by a specified number of shares of common stock.

Upon conversion of the 2018 Notes, the Company will pay cash up to the aggregate principal amount of the notes to be converted and pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, in respect of the remainder, if any, of the Company's conversion obligation in excess of the aggregate principal amount of the notes being converted, as specified in the Indenture.

The Company may not redeem the 2018 Notes at its option prior to the Maturity Date, and no sinking fund is provided for the 2018 Notes.

Upon the occurrence of a fundamental change, holders may require the Company to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The following events are considered events of default under the Indenture which may result in the acceleration of the maturity of the 2018 Notes:

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

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

(3) the Company's failure to deliver cash or cash and shares of the Company's common stock (including any additional shares deliverable as a result of a conversion in connection with a make-whole fundamental change, as defined in the Indenture) when required by the Indenture;

(4) default in the Company's obligation to provide notice of the occurrence of a fundamental change, make-whole fundamental change or distribution to holders of the Company's common stock when required by the Indenture;

(5) the Company's failure to comply with any of the Company's other agreements in the notes or the Indenture (other than those referred to in clauses (1) through (4) above) for 60 days after the Company's receipt of written notice to the Company of such default from the trustee or to the Company and the trustee of such default from holders of not less than 25% in aggregate principal amount of the 2018 Notes then outstanding;

(6) the Company's failure to pay when due the principal of, or acceleration of, any indebtedness for money borrowed by the Company or any of the Company's material subsidiaries in excess of $40,000,000 principal amount, if such indebtedness is not discharged, or such acceleration is not annulled, for a period of 30 days after written notice thereof is delivered to the Company by the trustee or to the Company and the trustee by the holders of 25% or more in aggregate principal amount of the notes then outstanding without such failure to pay having been cured or waived, such acceleration having been rescinded or annulled (if applicable) and such indebtedness not having been paid or discharged; and

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

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

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

20


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

 
$
2,156

 
$
6,469

 
$
6,469

2014 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 11.7%
4,416

 
3,789

 
12,650

 
10,856

2018 Notes coupon interest at a rate of 1.125%
$
194

 
$

 
$
194

 
$

2018 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 5.5%
$
719

 
$

 
$
719

 
$

Total interest expense on convertible notes
$
7,485

 
$
5,945

 
$
20,032

 
$
17,325


10. Commitments and Contingencies
As of September 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)
$
41,712

 
$
1,452

 
$
5,874

 
$
6,010

 
$
6,156

 
$
6,302

 
$
15,918

Leases and other contractual obligations
9,086

 
1,458

 
2,931

 
2,104

 
1,235

 
1,018

 
340

Software licenses (3)
4,019

 
40

 
3,109

 
497

 
373

 

 

Acquisition retention bonuses (4)
19,345

 
1,059

 
17,593

 
693

 

 

 

Convertible notes
310,500

 

 
172,500

 

 

 

 
138,000

Interest payments related to convertible notes
16,388

 
4,895

 
5,865

 
1,553

 
1,553

 
1,553

 
969

Total
$
401,050

 
$
8,904

 
$
207,872

 
$
10,857

 
$
9,317

 
$
8,873

 
$
155,227

_________________________________________
(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 September 30, 2013 . As noted below in Note 14, “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 September 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 $0.6 million and $2.4 million for the three and nine months ended September 30, 2013 , respectively. Building lease expense was approximately $1.3 million and $3.2 million for the three and nine months ended September 30, 2012 , respectively. Deferred rent of $1.5 million and $0.8 million as of September 30, 2013 and December 31, 2012 , respectively, were included primarily in other long-term liabilities.

21


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 Company generally attempts to limit the maximum amount of indemnification that the Company could be required to make under these agreements, to the amount of fees received by the Company.
Several securities fraud class actions, private lawsuits and shareholder derivative actions were filed in state and federal courts against certain of the Company’s current and former officers and directors related to the stock option granting actions. As permitted under Delaware law, the Company has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s term in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has a director and officer insurance policy that reduces the Company’s exposure and enables the Company to recover a portion of future amounts to be paid. As a result of these indemnification agreements, the Company continues to make payments on behalf of primarily former officers and some current officers. As of September 30, 2013 , the Company had made cumulative payments of approximately $32.2 million on their behalf, with no payments made in the quarter ended September 30, 2013 . As of September 30, 2012 , the Company had made cumulative payments of approximately $32.1 million on their behalf, including $0.1 million in the quarter ended September 30, 2012 . These payments were recorded under costs of restatement and related legal activities in the condensed consolidated statements of operations.

11. Equity Incentive Plans and Stock-Based Compensation
As of September 30, 2013 , 2,270,044 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
(1,897,887
)
Stock options forfeited
2,330,448

Stock options expired under former plans
(625,369
)
Nonvested equity stock and stock units granted (1)
(524,844
)
Nonvested equity stock and stock units forfeited (1)
258,537

Total available for grant as of September 30, 2013
2,270,044

_________________________________________
(1)
For purposes of determining the number of shares available for grant under the 2006 Plan against the maximum number of shares authorized, each share of restricted stock granted reduces the number of shares available for grant by 1.5 shares and each share of 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 nine months ended September 30, 2013 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 30, 2013 .

22


 
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
1,897,887

 
5.80

 
 
 
 

Options exercised
(268,493
)
 
6.84

 
 
 
 

Options forfeited
(2,330,448
)
 
12.10

 
 
 
 

Outstanding as of September 30, 2013
12,393,761

 
11.98

 
5.61
 
$
26,070

Vested or expected to vest at September 30, 2013
11,652,306

 
12.34

 
5.45
 
23,406

Options exercisable at September 30, 2013
6,562,258

 
16.87

 
3.49
 
5,877


No stock options that contain a market condition were granted during the three and nine months ended September 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 September 30, 2013 and December 31, 2012 , there were 1,445,000 and 1,535,000 stock options outstanding, respectively, 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 September 30, 2013 , based on the $9.40 closing stock price of Rambus’ common stock on September 30, 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 September 30, 2013 was 7,645,637 and 2,268,480 , 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 nine months ended September 30, 2013 . The Company issued 169,398 shares at a price of $4.21 per share during the nine months ended September 30, 2012 . As of September 30, 2013 , 430,243 shares under the ESPP remain available for issuance. On September 27, 2013, the Company filed a Registration Statement on Form S-8, registering 1,500,000 additional shares under the ESPP in connection with the commencement of the next subscription period under the ESPP. Issuance of these additional shares will be subject to shareholder approval amending the ESPP to increase the number of shares reserved for issuance by 1,500,000 shares at the Company’s next annual meeting of shareholders in April 2014.
Stock-Based Compensation
For the nine months ended September 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 nine months ended September 30, 2013 , the Company granted 141,575 and 1,897,887 stock options, respectively, with an estimated total grant-date fair value of $0.6 million and $4.7 million , respectively. During the three and nine months ended September 30, 2013 , the Company recorded stock-based compensation expense related to stock options of $2.5 million and $8.1 million , respectively.
During the three and nine months ended September 30, 2012 , the Company granted 2,590,711 and 7,592,911 stock options (including options granted in the stock option exchange program and options granted that contain a market condition), respectively, with an estimated total grant-date fair value of $3.2 million and $32.3 million , respectively. During the three and nine months ended September 30, 2012 , the Company recorded stock-based compensation expense related to stock options of $3.6 million and $11.9 million , respectively.
As of September 30, 2013 , there was $20.4 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

23


recognized over a weighted-average period of 2.4 years. The total fair value of shares vested as of September 30, 2013 was $71.8 million .
The total intrinsic value of options exercised was $0.6 million and $0.7 million for the three and nine months ended September 30, 2013 , respectively. The total intrinsic value of options exercised was $0.1 million and $0.2 million for the three and nine months ended September 30, 2012 , respectively. Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.
During the nine months ended September 30, 2013, net proceeds from employee stock option exercises totaled approximately $1.8 million .
Employee Stock Purchase Plan
For the three and nine months ended September 30, 2013 , the Company recorded compensation expense related to the ESPP of $0.4 million and $1.4 million , respectively. For the three and nine months ended September 30, 2012 , the Company recorded compensation expense related to the ESPP of $0.6 million and $1.9 million , respectively. As of September 30, 2013 , there was $0.1 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the ESPP. That cost is expected to be recognized over one month.
There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the three and nine months ended September 30, 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Stock Option Plans
 

 
 

 
 

 
 

Expected stock price volatility
45
%
 
65
%
 
45-47%

 
60-68%

Risk free interest rate
1.5
%
 
0.6
%
 
0.8-1.5%

 
0.6-0.9%

Expected term (in years)
5.5

 
5.5

 
5.4-5.5

 
5.5 –5.7

Weighted-average fair value of stock options granted to employees
$
4.00

 
$
3.06

 
$
2.48

 
$
3.61

 
 
Employee Stock Purchase Plan
 
 
Nine Months Ended
 
 
September 30,
 
 
2013
 
2012
Employee Stock Purchase Plan
 
 

 
 

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

 
0.5

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

 
$
1.61

 
 
 
 
 
_______________________
No shares were issued under the Employee Stock Purchase Plan during the three months ended September 30, 2013 and 2012.


24


Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three and nine months ended September 30, 2013 , the Company granted nonvested equity stock units totaling 44,944 and 349,896 shares under the 2006 Plan, respectively. During the three and nine months ended September 30, 2012 , the Company granted nonvested equity stock units totaling 46,856 and 506,753 shares under the 2006 Plan, respectively. These awards have a service condition, generally a service period of four years , except in the case of grants to directors, for which the service period is one year . For the three and nine months ended September 30, 2013 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.4 million and $2.1 million , respectively. For the three and nine months ended September 30, 2012 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.2 million and $3.5 million , respectively. The Company occasionally grants nonvested equity stock units to its employees with vesting subject to the achievement of certain performance conditions. During the