| RAMBUS INC Item 1A Risk Factors We face current and potential adverse determinations in litigation stemming from our efforts to protect and enforce our patents and intellectual property, which could broadly impact our intellectual property rights, distract our management and cause a substantial decline in our revenues and stock price |
| We seek to diligently protect our intellectual property rights |
| In connection with the extension of our licensing program to SDRAM-compatible and DDR-compatible products in 2000-01, we became involved in litigation related to such efforts |
| As of February 21, 2005, we are in litigation with four such potential SDRAM-compatible and DDR-compatible licensees |
| In each of these cases, we have claimed infringement of our patents while the potential licensees have generally sought damages and a determination that our patents at suit are invalid and not infringed |
| These potential licensees have also relied or may rely upon defenses and counterclaims (some not yet formally asserted) that our patents are unenforceable based on various allegations concerning our alleged conduct in the 1990s and early 2000s, including that we engaged in document spoliation, litigation misconduct and/or acted improperly during our 1991-96 participation in the JEDEC standard setting organization |
| For example, Hynix has now broadened its counterclaims to attempt to include our 1990s relationship with Intel and our alleged disparagement of DDR and SDRAM products in the 1990s and early 2000s |
| By way of further example, Micron, Hynix, Samsung and Nanya have alleged that we have unclean hands based on alleged litigation misconduct and document spoliation, allegations that overlap with those successfully used by Infineon to obtain the early 2005 dismissal of our patent claims in the our case against Infineon in Virginia |
| Although we recently defeated Hynix’s similar unclean hands and spoliation claims, Hynix has sought a new trial on these issues or permission to appeal the court’s decision |
| There can be no assurance that such claims will not again be successfully used to defeat or limit our patent or other claims |
| There can be no assurance that parties will not succeed with such claims or counterclaims against us or that they will not in some other way establish broad defenses against our patents, achieve conflicting results, or otherwise avoid or delay paying what we believe to be appropriate royalties for the use of our patents or that the pending litigations and other circumstances will not reach a point where we elect to compromise for less than what we now believe to be fair consideration |
| Among other things, there can be no assurance that we will succeed in negotiating future settlements or licenses on terms better than those recently extended in our Infineon settlement |
| There can be no assurances that the circumstances under which we negotiated our Infineon settlement will turn out to be significantly different from the circumstances of future cases and future settlements, although we currently believe that significant differences do exist |
| Any of these matters, whether or not determined in our favor or settled by us, is costly, may cause delays, will tend to discourage future design partners, will tend to impair adoption of our existing technologies and diverts the efforts and attention of our management and technical personnel from other business operations |
| Furthermore, any adverse determination or other resolution in litigation could result in our losing certain rights beyond the rights at issue in a particular case, including, among other things: our being effectively barred from suing others for violating certain or all of our intellectual property rights; our patents being held invalid or unenforceable; our being subjected to significant liabilities; our being required to seek licenses from third parties; our being prevented from licensing our patented technology; or our being required to renegotiate with current licensees on a temporary or permanent basis |
| An acquisition of all of Infineon’s DRAM operations could make it more difficult for us to obtain royalty rates we believe are appropriate and could reduce the number of companies in our antitrust litigation Our license with Infineon, which was part of our settlement, provides for the extension of certain benefits under that license to a successor in interest that, under certain conditions, acquires all of Infineon‘s DRAM operations |
| If such an acquisition were to occur, such successor would be entitled to the extension of such 10 ______________________________________________________________________ [38]Table of Contents benefits, including the ability to pay a royalty calculated by multiplying the Infineon rate by the percentage increase in DRAM volume represented by the successor company’s combined operations |
| Such an extension of benefits could also make it more difficult for us to obtain the royalty rates we believe are appropriate from the market as a whole |
| Such an extension of benefits would, in addition, also operate to extend a release of claims to such successor, thus reducing the number of companies to which we believe we are entitled to look for compensation for the antitrust injury alleged by us in our pending San Francisco antitrust action |
| An adverse resolution by or with a governmental agency, such as the Federal Trade Commission or the European Commission, could result in severe limitations on our ability to protect and license our intellectual property, and would cause our revenues to decline substantially |
| If there were an adverse determination by, or other resolution with, a government agency, it may limit our ability to enforce our intellectual property rights or to obtain licenses, which would cause our revenues to decline substantially |
| For example, in June 2002, the FTC filed a complaint against us alleging, among other things, that we had failed to disclose certain patents and patent applications during our participation in the establishment of SDRAM standards with JEDEC and that we should be precluded from enforcing our intellectual property rights in patents with a priority date prior to June 1996 |
| Although the initial decision in the FTC proceeding supported our position and dismissed the complaint, that initial decision has been appealed by the FTC staff and may be reversed by the FTC or subject to some future compromise given developments in that case or the totality of circumstances we face |
| Among other things, the FTC has recently permitted a partial re-opening of the record |
| The European Commission has directed inquiries to us relating to similar topics |
| If proceedings by one of these agencies, or any other governmental agency, result in a resolution that could limit our ability to enforce or license our intellectual property, our revenues could decline substantially |
| In addition, on January 13, 2005, an opposition board of the European Patent Office revoked our European Patent Nodtta 004956, and issued its written decision on February 9, 2005 |
| We are appealing this decision to an appellate panel of the European Patent Office |
| While this result still leaves us with additional issued patents in Europe relating to one or both of SDRAM and DDR SDRAM memory products, there are similar pending opposition proceedings with respect to some of those patents as well |
| If a sufficient number of such patents are similarly impaired or revoked, our ability to enforce or license our intellectual property would be significantly impaired and this could cause our revenues to decline substantially |
| If we are unable to successfully protect our inventions through the issuance and enforcement of patents, our operating results could be adversely affected |
| We have an active program to protect our proprietary inventions through the filing of patents |
| There can be no assurance, however, that: • any current or future US or foreign patent applications will be approved; • our issued patents will protect our intellectual property and not be challenged by third parties; • the validity of our patents will be upheld; • our patents will not be declared unenforceable; • the patents of others will not have an adverse effect on our ability to do business; • the Congress or the US Courts or foreign countries will not change the nature or scope of rights afforded patents or patent owners or alter in an adverse way the process for seeking patents; or • others will not independently develop similar or competing chip interfaces or design around any patents that may be issued to us |
| If any of the above were to occur, our operating results could be adversely affected |
| 11 ______________________________________________________________________ [39]Table of Contents Our inability to protect and own the intellectual property created by us would cause our business to suffer |
| We rely primarily on a combination of license, development and nondisclosure agreements, trademark, trade secret and copyright law, and contractual provisions to protect our other, non-patentable intellectual property rights |
| If we fail to protect these intellectual property rights, our licensees and others may seek to use our technology without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation |
| The growth of our business depends in large part on the applicability of our intellectual property to the products of third party manufacturers, and our ability to enforce intellectual property rights against them |
| In addition, effective trade secret protection may be unavailable or limited in certain foreign countries |
| Although we intend to protect our rights vigorously, if we fail to do so, our business will suffer |
| We might experience payment disputes for amounts owed to us under our licensing agreements, and this may harm our results of operations |
| Many of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis |
| While licenses with such terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, and potentially detrimental to our ongoing business relationship with our licensees |
| We have implemented a royalty audit program, which consists of periodic royalty audits of our major licensees, using accounting firms that are independent of our independent registered public accounting firm, PricewaterhouseCoopers LLP We have performed royalty audits from time to time but we primarily rely on the accuracy of the reports from licensees without independently verifying the information in them |
| Our failure to audit our licensees’ books and records may result in us receiving more or less royalty revenues than we are entitled to under the terms of our license agreements |
| The result of such royalty audits could result in an increase, as a result of a licensee’s underpayment, or decrease, as a result of a licensee’s overpayment, to previously reported royalty revenues |
| Such adjustments are recorded in the period they are determined |
| Any adverse material adjustments resulting from royalty audits or dispute resolutions may result in us missing analyst estimates and causing our stock price to decline |
| Royalty audits may also trigger disagreements over contract terms with our licensees and such disagreements could hamper customer relations, divert the efforts and attention of our management from normal operations and impact our business operations and financial condition |
| If market leaders do not adopt our chip interface products, our results of operation could decline |
| An important part of our strategy is to penetrate markets for chip interfaces by working with leaders in those markets |
| This strategy is designed to encourage other participants in those markets to follow such leaders in adopting our chip interfaces |
| If a high profile industry participant adopts our chip interfaces but fails to achieve success with its products or adopts and achieves success with a competing chip interface, our reputation and sales could be adversely affected |
| In addition, some industry participants have adopted, and others may in the future adopt, a strategy of disparaging our memory solutions adopted by their competitors or a strategy of otherwise undermining the market adoption of our solutions |
| By way of example, we target system companies to adopt our chip interface technologies, particularly those that develop and market high volume business and consumer products such as PCs and video game consoles |
| We are subject to many risks beyond our control that influence whether or not a particular system company will adopt our chip interfaces, including, among others: • competition faced by a system company in its particular industry; • the timely introduction and market acceptance of a system company’s products; • the engineering, sales and marketing and management capabilities of a system company; • technical challenges unrelated to our chip interfaces faced by a system company in developing its products; 12 ______________________________________________________________________ [40]Table of Contents • the financial and other resources of the system company; • the supply of semiconductors from our licensees in sufficient quantities and at commercially attractive prices; • the ability to establish the prices at which the chips containing our chip interfaces are made available to system companies; and • the degree to which our licensees promote our chip interfaces to a system company |
| Our strategy also includes gaining acceptance of our technology in high volume consumer applications, including video game consoles, such as the Sony PlayStation^®2, digital TVs and set top boxes |
| There can be no assurance that consumer products that currently use our technology will continue to do so, nor can there be any assurance that the consumer products that incorporate our technology will be successful in generating expected royalties, nor can there be any assurance that any of our technologies selected for licensing will be implemented in a commercially developed or distributed product |
| If any of these events occur and market leaders do not successfully adopt our technologies, our strategy may not be successful and, as a result, our results of operations could decline |
| Our revenue is concentrated in a few customers, and if we lose any of these customers, our revenues may decrease substantially |
| For the twelve months ended December 31, 2005, 2004 and 2003, revenues from our top five licensees accounted for approximately 73prca, 74prca and 75prca of our revenues, respectively |
| For the twelve months ended December 31, 2005, revenues from Intel, Elpida, Toshiba and Matsushita each accounted for greater than 10prca of our total revenues |
| For the twelve months ended December 31, 2004, revenues from Intel, Toshiba and Elpida each accounted for greater than 10prca of our total revenues |
| For the twelve months ended December 31, 2003, revenues from Intel, Toshiba and Samsung each accounted for greater than 10prca of our total revenues |
| We recently entered into agreements with Infineon and AMD, which are expected to account for a significant percentage of our revenues in 2006 |
| We may continue to experience significant revenue concentration for the foreseeable future |
| Substantially all of our licensees, including Intel, have the right to cancel their licenses |
| Failure to renew licenses and/or the loss of any of our top five licensees would cause revenues to decline substantially |
| Intel is our largest customer and is an important catalyst for the development of new memory and logic chip interfaces in the semiconductor industry |
| The patent cross-license agreement expires in September 2006, at which time, Intel will have a paid up license for the use of all of our patents claiming priority prior to September 2006 |
| Intel has the right to cancel the agreement with us prior to the expiration of the contract |
| We have other licenses with Intel, in addition to the patent cross-license agreement, for the development of serial link chip interfaces |
| If we do not replace the revenues we previously received under the Intel contract, our results of operations may decline significantly |
| In addition, some of our commercial agreements require us to provide certain customers with the lowest royalty rate that we provide to other customers for similar technologies, volumes and schedules |
| These clauses may limit our ability to effectively price differently among our customers, to respond quickly to market forces, or otherwise to compete on the basis of price |
| The particular licensees which account for revenue concentration have varied from period to period as a result of the addition of new contracts, expiration of existing contracts, industry consolidation, the expiration of deferred revenue schedules under existing contracts, and the volumes and prices at which the licensees have recently sold licensed semiconductors to system companies |
| These variations are expected to continue in the foreseeable future, although we anticipate that revenue will continue to be concentrated in a limited number of licensees |
| 13 ______________________________________________________________________ [41]Table of Contents We are in negotiations with licensees to renew SDRAM and DDR-compatible contracts |
| Two licensees are on interim agreements which will expire this year and one licensee is on an extension which expires this year |
| We are also in negotiations with new potential licensees |
| We expect SDRAM and DDR-compatible royalties will continue to vary from period to period based on our success in renewing existing license agreements and adding new licensees, as well as the level of variation in our licensees’ reported shipment volumes, sales price and mix, offset in part by the proportion of licensee payments that are fixed |
| If we are unsuccessful in renewing any of our SDRAM and DDR-compatible contracts, our results of operations may decline significantly |
| Some of our revenue is subject to the pricing policies of our licensees over whom we have no control |
| We have no control over our licensees’ pricing of their products and there can be no assurance that licensee products using or containing our chip interfaces will be competitively priced or will sell in significant volumes |
| One important requirement for our memory chip interfaces is for any premium in the price of memory and controller chips over alternatives to be reasonable in comparison to the perceived benefits of the chip interfaces |
| If the benefits of our technology do not match the price premium charged by our licensees, the resulting decline in sales of products incorporating our technology could harm our operating results |
| We face intense competition that may cause our results of operations to suffer |
| The semiconductor industry is intensely competitive and has been impacted by price erosion, rapid technological change, short product life cycles, cyclical market patterns and increasing foreign and domestic competition |
| Some semiconductor companies have developed and support competing logic chip interfaces including their own serial link chip interfaces and parallel bus chip interfaces |
| We also face competition from semiconductor and intellectual property companies who provide their own DDR memory chip interface technology and solutions |
| In addition, most DRAM manufacturers, including our RDRAM and XDR licensees, produce versions of DRAM such as SDRAM, DDRx (where the “x” is a number that represents a version) and GDDRx (where the “x” is a number that represents a version) which compete with RDRAM and XDR chips |
| We believe that our principal competition for memory chip interfaces may come from our licensees and prospective licensees, some of which are evaluating and developing products based on technologies that they contend or may contend will not require a license from us |
| In addition, our competitors are also taking a system approach similar to ours in seeking to solve the application needs of system companies |
| Many of these companies are larger and may have better access to financial, technical and other resources than we possess |
| JEDEC has standardized what they call an extension of DDR, known as DDR2 |
| JEDEC is also standardizing what they describe as an extension of DDR that they refer to as DDR3 and a FB-DIMM standard |
| Other efforts are underway to create other products including those sometimes referred to as GDDR4 and GDDR5, as well as new ways to integrate products such as system-in-package DRAM To the extent that these alternatives might provide comparable system performance at lower or similar cost than RDRAM and XDR memory chips, or are perceived to require the payment of no or lower royalties, or to the extent other factors influence the industry, our licensees and prospective licensees may adopt and promote alternative technologies |
| Even to the extent we determine that such alternative technologies infringe our patents, there can be no assurance that we would be able to negotiate agreements that would result in royalties being paid to us without litigation, which could be costly and the results of which would be uncertain |
| In the industry standard and proprietary serial link chip interface business, we face additional competition from semiconductor companies that sell discrete transceiver chips for use in various types of systems, from semiconductor companies that develop their own serial link chip interfaces, as well as from competitors, such as ARM and Synopsys, who license similar serial link chip interface products and digital controllers |
| At the 10 Gb/s speed, competition will also come from optical technology sold by system and semiconductor companies |
| There are standardization efforts under way or completed for serial links from standard bodies such as PCI-SIG and OIF We may face increased competition from these types of consortia in the future that could negatively impact our serial link chip interface business |
| 14 ______________________________________________________________________ [42]Table of Contents In the FlexIO processor bus chip interface business, we face additional competition from semiconductor companies who develop their own parallel bus chip interfaces, as well as competitors who license similar parallel bus chip interface products |
| We may also see competition from industry consortia or standard setting bodies that could negatively impact our FlexIO processor bus chip interface business |
| As with our memory chip interface products, to the extent that competitive alternatives to our serial or parallel logic chip interface products might provide comparable system performance at lower or similar cost, or are perceived to require the payment of no or lower royalties, or to the extent other factors influence the industry, our licensees and prospective licensees may adopt and promote alternative technologies, which could negatively impact our memory and logic chip interface business |
| If for any of these reasons we cannot effectively compete in these primary market areas, our results of operations could suffer |
| Future revenues are difficult to predict for several reasons, including our lengthy and costly licensing cycle, and our failure to predict revenues accurately may cause us to miss analysts’ estimates and result in our stock price declining |
| Because our licensing cycle is a lengthy process, the accurate prediction of future revenues from new licenses is difficult |
| By way of example, the process of persuading system companies to adopt our chip interface technologies can be lengthy and, even if adopted, there can be no assurance that our chip interfaces will be used in a product that is ultimately brought to market, achieves commercial acceptance or results in significant royalties to us |
| In addition, engineering services are dependent upon the varying level of assistance desired by licensees and, therefore, revenue from these services is also difficult to predict |
| We employ two methods of contract revenue accounting based upon the state of the technology licensed, the dollar magnitude of the program and the ability to estimate work required over the contract period |
| We use ratable revenue recognition for mature technologies that require insignificant support after delivery of the technology |
| This method results in expenses associated with a particular contract to be recognized as incurred over the contract period, whereas contract fees associated with the contract are recognized ratably over the period during which the post contract customer support is expected to be provided |
| We also use percentage-of-completion accounting for contracts that may require significant development and support over the contract term |
| There can be no assurance that we can accurately estimate the amount of resources required to complete projects, or that we will have, or be able to expend, sufficient resources required to complete a project |
| Furthermore, there can be no assurance that the product development schedule for these projects will not be changed or delayed |
| All of these factors make it difficult to predict future licensing revenue and may result in us missing analysts’ estimates which would likely cause our stock price to decline |
| The price of our common stock may fluctuate significantly, which may make it difficult for holders to resell their shares when desired or at attractive prices |
| Our common stock is quoted on the NASDAQ National Market under the symbol “RMBS” The trading price of our common stock has been subject to wide fluctuations which may continue in the future in response to, among other things, the following: • any progress, or lack of progress, real or perceived, in the development of products that incorporate our chip interfaces; • our signing or not signing new licensees; • new litigation or developments in current litigation including adverse litigation results such as an adverse outcome to us in the Hynix proceedings; • announcements of our technological innovations or new products by us, our licensees or our competitors; 15 ______________________________________________________________________ [43]Table of Contents • positive or negative reports by securities analysts as to our expected financial results; and • developments with respect to patents or proprietary rights and other events or factors |
| In addition, the equity markets have experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated or disproportionate to the operating performance of such companies |
| These broad market fluctuations may adversely affect the market price of our common stock, which may make it difficult for holders to resell their shares when desired or at attractive prices |
| Since many of our revenue components fluctuate and are difficult to predict, and our expenses are largely independent of revenues in any particular period, it is difficult for us to accurately forecast revenues and profitability |
| Factors other than those set forth above that could cause our operating results to fluctuate include: • semiconductor and system companies’ acceptance of our chip interface products; • the loss of any strategic relationships with system companies or licensees; • semiconductor or system companies discontinuing major products incorporating our chip interfaces; • the unpredictability of the timing of any litigation expenses; • changes in our chip and system company customers’ development schedules and levels of expenditure on research and development; • our licensees terminating or failing to make payments under their current contracts or seeking to modify such contracts; and • changes in our strategies, including changes in our licensing focus and/or possible acquisitions of companies with business models different from our own |
| In the twelve months ended December 31, 2005, 2004 and 2003 royalties accounted for 83prca, 83prca and 87prca of our total revenues, respectively, and we believe that royalties will continue to represent a majority of total revenues for the foreseeable future |
| Royalties are recognized in the quarter in which we receive a report from a licensee regarding the sale of licensed chips in the prior quarter; however, royalties are only recognized if collectibility is reasonably assured |
| Some royalties are also dependent upon fluctuating sales volumes and prices of licensed chips that include our technology, all of which are beyond our ability to control or assess in advance |
| In addition, royalty revenues are affected by the seasonal shipment patterns of systems incorporating our chip interface products, or by a system company change in its source of licensed chips, and the new source’s different royalty rates |
| As a result of these uncertainties and effects being outside of our control, royalty revenues are difficult to predict and make accurate financial forecasts difficult to achieve, which could cause our stock price to become volatile and decline |
| FASB’s adoption of Statement 123(R) will cause, and changes to existing accounting pronouncements or taxation rules or practices may cause, adverse revenue fluctuations, affect our reported results of operations or how we conduct our business |
| In December 2004, FASB issued Statement 123(R), “Share Based Payment |
| ” On April 14, 2005, the SEC announced the adoption of a new rule that amended the compliance dates for SFAS Nodtta 123(R) |
| Under this new rule, companies are allowed to implement SFAS Nodtta 123(R) starting in the first quarter of fiscal year 2006 |
| SFAS Nodtta 123(R) will require us to measure compensation costs for all stock based compensation (including stock options and our employee stock purchase plan, as currently constructed) at fair value and take a compensation charge equal to that value |
| Also, a change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective |
| Other new accounting pronouncements or taxation rules and varying interpretations of 16 ______________________________________________________________________ [44]Table of Contents accounting pronouncements or taxation practice have occurred and may occur in the future |
| This change to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |
| If we cannot respond to rapid technological change in the semiconductor industry by developing new innovations in a timely and cost effective manner, our operating results will suffer |
| The semiconductor industry is characterized by rapid technological change, with new generations of semiconductors being introduced periodically and with ongoing improvements |
| We derive most of our revenue from our chip interface technologies that we have patented |
| We expect that this dependence on our fundamental technology will continue for the foreseeable future |
| The introduction or market acceptance of competing chip interfaces that render our chip interfaces less desirable or obsolete would have a rapid and material adverse effect on our business, results of operations and financial condition |
| The announcement of new chip interfaces by us could cause licensees or system companies to delay or defer entering into arrangements for the use of our current chip interfaces, which could have a material adverse effect on our business, financial results and condition of operations |
| We are dependent on the industry to develop test solutions that are adequate to test our chip interfaces and to supply such test solutions to our customers and us |
| Our continued success depends on our ability to introduce and patent enhancements and new generations of our chip interface technologies that keep pace with other changes in the semiconductor industry and which achieve rapid market acceptance |
| We must continually devote significant engineering resources to addressing the ever increasing need for higher speed chip interfaces associated with increases in the speed of microprocessors and other controllers |
| The technical innovations that are required for us to be successful are inherently complex and require long development cycles, and there can be no assurance that our development efforts will ultimately be successful |
| In addition, these innovations must be: • Completed before changes in the semiconductor industry render them obsolete; • available when system companies require these innovations; and • sufficiently compelling to cause semiconductor manufacturers to enter into licensing arrangements with us for these new technologies |
| Finally, significant technological innovations generally require a substantial investment before their commercial viability can be determined |
| By way of example, our XDR and FlexIO chip interfaces and the manufacturing processes to incorporate them are new and complex, which may lead to technology and product development scheduling risks and there remains significant contract work to be completed, therefore percentage of completion accounting is used for these licenses |
| There can be no assurance that we have accurately estimated the amount of resources required to complete the projects, or that we will have, or be able to expend, sufficient resources required for these types of projects |
| In addition, there is market risk associated with these products, and there can be no assurance that unit volumes, and their associated royalties, will occur |
| If our technology fails to capture or maintain a portion of the high volume consumer market, our business results could suffer |
| If we cannot successfully respond to rapid technological changes in the semiconductor industry by developing new products in a timely and cost effective manner our operating results will suffer |
| Any dispute regarding our intellectual property may require us to indemnify certain licensees, the cost of which could severely hamper our business operations and financial condition |
| In any potential dispute involving our patents or other intellectual property, our licensees could also become the target of litigation |
| While we generally do not indemnify our licensees, some of our license agreements provide limited indemnities, some require us to provide technical support and information to a licensee that is involved in litigation involving use of our technology, and we may agree to indemnify others in the future |
| Our support and indemnification obligations could result in substantial expenses |
| In addition to the time and expense 17 ______________________________________________________________________ [45]Table of Contents required for us to supply such support or indemnification to our licensees, a licensee’s development, marketing and sales of licensed semiconductors could be severely disrupted or shut down as a result of litigation, which in turn could severely hamper our business operations and financial condition |
| We may not be able to satisfy the requirements under the Infineon settlement and license agreement that would require Infineon to pay us up to an additional dlra100dtta0 million in royalty payments |
| On March 21, 2005, we entered into a settlement and license agreement with Infineon (and its former parent Siemens) which, among other things, requires Infineon to pay to us aggregate royalties of dlra50dtta0 million in quarterly installments of dlra5dtta9 million, which started on November 15, 2005 |
| The settlement and license agreement further provides that if we enter into licenses with certain other DRAM manufacturers, Infineon will be required to make additional royalty payments to us which may aggregate up to dlra100dtta0 million |
| We may not succeed in entering into these additional license agreements necessary to trigger Infineon’s obligations under the settlement and license agreement to pay to us additional royalty payments, thereby reducing the value of the settlement and license agreement to us |
| We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, and to defend our intellectual property |
| We have indebtedness |
| On February 1, 2005, we issued dlra300dtta0 million aggregate principal amount of zero coupon senior convertible notes due February 1, 2010, of which dlra160dtta0 million remains outstanding as of February 21, 2006 |
| The degree to which we are leveraged could have important consequences, including, but not limited to, the following: • our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited; • a substantial portion of our cash flow from operations will be dedicated to the payment of the principal of our indebtedness as we are required to pay the principal amount of the convertible notes in cash when due; • if we elect to pay any premium on the convertible notes with shares of our common stock or we are required to pay a “make-whole” premium with our shares of common stock, our existing stockholders’ interest in us would be diluted; and • we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions |
| A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of the debt under such instruments and in some cases acceleration of debt under other instruments that may contain cross-default or cross-acceleration provisions |
| If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness, however, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing |
| There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us |
| Our business has experienced periods of rapid growth that have placed, and may continue to place, significant demands on our managerial, operational and financial resources |
| In order to manage this growth, we must continue to improve and expand our management, operational and financial systems and controls |
| We also need to continue to expand, train and manage our employee base |
| We cannot assure you that we will be able to 18 ______________________________________________________________________ [46]Table of Contents timely and effectively meet demand and maintain the quality standards required by our existing and potential customers and licensees |
| If we ineffectively manage our growth or are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed |
| We may make future acquisitions or enter into mergers, strategic transactions or other arrangements that could cause our business to suffer |
| We may continue to make investments in companies, products or technologies or enter into mergers, strategic transactions or other arrangements |
| If we buy a company or a division of a company, we may experience difficulty integrating that company or division’s personnel and operations, which could negatively affect our operating results |
| In addition: • the key personnel of the acquired company may decide not to work for us; • we may experience additional financial and accounting challenges and complexities in areas such as tax planning, cash management and financial reporting; • our ongoing business may be disrupted or receive insufficient management attention; • we may not be able to recognize the cost savings or other financial benefits we anticipated; and • our increasing international presence resulting from acquisitions may increase our exposure to foreign political, currency and tax risks |
| In connection with future acquisitions or mergers, strategic transactions or other arrangements, we may incur substantial expenses regardless of whether the transaction occurs |
| We may also incur non-cash charges in connection with a merger, acquisition, strategic transaction or other arrangement |
| In addition, we may be required to assume the liabilities of the companies we acquire |
| By assuming the liabilities, we may incur liabilities such as those related to intellectual property infringement or indemnification of customers of acquired businesses for similar claims, which could materially and adversely affect our business |
| We may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve restrictive covenants or be dilutive to our existing stockholders |
| A substantial portion of our revenues is derived from sources outside of the United States and these revenues are subject to risks related to international operations that are often beyond our control |
| For the twelve months ended December 31, 2005, 2004 and 2003, revenues from our sales to international customers constituted approximately 71prca, 69prca and 64prca of our total revenues, respectively |
| We currently have international operations in India (design), Japan (sales development), Taiwan (sales development) and Germany (sales development) |
| As a result of our continued focus on international markets, we expect that future revenues derived from international sources will continue to represent a significant portion of our total revenues |
| To date, all of the revenues from international licensees have been denominated in US dollars |
| However, to the extent that such licensees’ sales to systems companies are not denominated in US dollars, any royalties which are based as a percentage of the customers sales, that we receive as a result of such sales could be subject to fluctuations in currency exchange rates |
| In addition, if the effective price of licensed semiconductors sold by our foreign licensees were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed semiconductors could fall, which in turn would reduce our royalties |
| We do not use derivative instruments to hedge foreign exchange rate risk |
| Our international operations and revenues are subject to a variety of risks which are beyond our control, including: • export controls, tariffs, import and licensing restrictions and other trade barriers; • profits, if any, earned abroad being subject to local tax laws and not being repatriated to the United States or, if repatriation is possible, limited in amount; 19 ______________________________________________________________________ [47]Table of Contents • changes to tax codes and treatment of revenues from international sources, including being subject to foreign tax laws and potentially being liable for paying taxes in that foreign jurisdiction; • foreign government regulations and changes in these regulations; • social, political and economic instability; • lack of protection of our intellectual property rights by jurisdictions in which we may do business to the same extent as the laws of the United States; • changes in diplomatic and trade relationships; • cultural differences in the conduct of business both with licensees and in conducting business in our international facilities and international sales offices; • operating centers outside the United States, such as our Bangalore design center; and • hiring, maintaining and managing a workforce remotely and under various legal systems |
| We and our licensees are subject to many of the risks described above with respect to companies which are located in different countries, particularly home video game console and PC manufacturers located in Asia and elsewhere |
| There can be no assurance that one or more of the risks associated with our international operations could not result in a material adverse effect on our business, financial condition or results of operations |
| If we are unable to attract and retain qualified personnel, our business and operations could suffer |
| Our success is dependent upon our ability to identify, attract, motivate and retain qualified personnel who can enhance our existing technologies and introduce new technologies |
| Competition for qualified personnel, particularly those with significant industry experience, is intense |
| We are also dependent upon our senior management personnel, many of whom have worked together for us for many years |
| The loss of the services of any of our senior management personnel, or key sales personnel in critical markets, or critical members of staff, or of a significant number of our engineers could be disruptive to our development efforts or business relationships and could cause our business and operations to suffer |
| Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and the NASDAQ National Market rules, are creating uncertainty for companies such as ours |
| These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed |
| Although we have complied with the certification and attestation requirements under Section 404 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2005, we may not be able to continue to meet such requirements annually and our failure to satisfy these requirements could adversely affect our financial results and the price of our common stock |
| While we have evaluated our internal controls over financial reporting as of December 31, 2005 and complied with the management certification and our Independent Register Public Accounting Firm attestation 20 ______________________________________________________________________ [48]Table of Contents requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in connection with this Form 10-K for the year ended December 31, 2005, we may not continue to meet such certification and attestation requirements annually |
| If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, or if our independent registered public accounting firm is unable to attest to the evaluation, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NASDAQ National Market, which could adversely affect our financial results and the market price of our common stock |
| Our operations are subject to risks of natural disasters, acts of war, terrorism or widespread illness at our domestic and international locations, any one of which could result in a business stoppage and negatively affect our operating results |
| Our business operations depend on our ability to maintain and protect our facility, computer systems and personnel, which are primarily located in the San Francisco Bay area |
| The San Francisco Bay area is in close proximity to known earthquake fault zones |
| Our facility and transportation for our employees are susceptible to damage from earthquakes and other natural disasters such as fires, floods and similar events |
| Should an earthquake or other catastrophes, such as fires, floods, power loss, communication failure or similar events disable our facilities, we do not have readily available alternative facilities from which we could conduct our business, which stoppage could have a negative effect on our operating results |
| Acts of terrorism, widespread illness and war could also have a negative effect at our international and domestic facilities |
| Our restated certificate of incorporation and bylaws, our stockholder rights plan, and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock |
| Our restated certificate of incorporation, our bylaws, our stockholder rights plan and Delaware law contain provisions that might enable our management to discourage, delay or prevent change in control |
| In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock |
| Among these provisions are: • our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock; • our board of directors is staggered into two classes, only one of which is elected at each annual meeting; • stockholder action by written consent is prohibited; • nominations for election to our board of directors and the submission of matters to be acted upon by stockholders at a meeting are subject to advance notice requirements; • certain provisions in our bylaws and certificate of incorporation such as notice to stockholders, the ability to call a stockholder meeting, advanced notice requirements and the stockholders acting by written consent may only be amended with the approval of stockholders holding 66^ 2/3prca of our outstanding voting stock; • the ability of our stockholders to call special meetings of stockholders is prohibited; and • our board of directors is expressly authorized to make, alter or repeal our bylaws |
| In addition, the provisions in our stockholder rights plan could make it more difficult for a potential acquirer to consummate an acquisition of our company |
| We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15prca or more of our outstanding voting stock, the person is an “interested stockholder” and may not engage in any “business combination” with us for a period of three years from the time the person acquired 15prca or more of our outstanding voting stock |