Item 1. BUSINESS
We are a fabless semiconductor company that designs, develops and markets specialized semiconductor memory and integrated semiconductor solutions that are used in many markets for a wide range of applications. We pioneered the integration of ferroelectric materials into semiconductor products, which enabled the development of a new class of nonvolatile memory, called ferroelectric random access memory (F-RAM). F-RAM products merge the advantages of multiple memory technologies into a single device that retains information without a power source, can be read from and written to at very fast speeds, written to many times, consumes low amounts of power, and can simplify the design of electronic systems. We believe that the characteristics of our technology are conducive to close customer relationships, long application lifecycles and the potential for higher-margin sales than are typical of commodity semiconductor memory products.
We also integrate wireless communication capabilities as well as analog and mixed-signal functions such as microprocessor supervision, tamper detection, timekeeping, and power failure detection into our devices. This has enabled classes of products that address the growing market need for more functional, efficient and cost-effective semiconductor products.
Our revenue is derived from the sale of our products and from license, development and royalty arrangements entered into with a limited number of established semiconductor manufacturers. Product sales have been made to various customers for use in a variety of applications including utility meters, office equipment, automobiles, electronics, telecommunications, disk array controllers, and industrial control devices, among others.
2011 Product Highlights and Other Achievements
We announced our W-Family of F-RAM memory products. Devices in the W-Family offer a wide operating voltage range and performance enhancements including a 25% to 50% reduction in active current compared to competing memory devices.
The company’s MaxArias Wireless Memory products were recognized with Electronic Products China magazine’s “Product of the Year” and Application of Electronic Technique (AET) magazine’s “2010 Top Product” award.
We announced upgrades to our family of Processor Companion products targeted at the high-volume, processor-based electronics system market. Our upgraded Processor Companion integrates a precise Real-Time Clock (RTC) and offers competitive advantages for leading-edge electronics manufacturers that seek to reduce part inventory, lower bill-of-material cost, reduce manufacturing steps and potential points of failure, as well as decrease board space.
Taiwan-based King Yuan Electronics Co., LTD (KYEC) was selected to expand the assembly and test capacity for our entire line of F-RAM products. KYEC’s global leadership in semiconductor assembly and test services provides us with additional back-end production capabilities to satisfy customer demand for F-RAM products.
Pre-qualification samples were announced of a 64-Kilobit (Kb) F-RAM product built on our new manufacturing line at IBM Corporation, in Burlington, Vermont. We are sampling two families of 5-volt serial F-RAM devices in 4K, 16K and 64K densities that are being built on the new manufacturing line.
Financial Information by Segment
Our operations are conducted through one business segment, our semiconductor business. Our semiconductor business designs, develops, markets, and manufactures specialized semiconductor memories and integrated semiconductor solutions.
See Part II. Item 8. Financial Statements and Supplementary Data - Note 11 of the Notes to Consolidated Financial Statements for certain geographic financial information concerning our business.
2011 Overview of Business
In January 2011, the Chief Executive Officer (“CEO”) and Chief Operating Officer (“COO”) resigned and our Board of Directors appointed our former Chief Financial Officer (“CFO”) to the position of CEO. At that time, we commenced a search for a new CFO and also appointed a vice president of customer satisfaction, with responsibilities for directing our quality assurance program, as well as managing our product and test engineering organizations. The Company’s executive management began focusing on improving business process management systems, which included increasing the sophistication of our product design methodologies, implementing a capable product realization process, and establishing high-quality manufacturing and supply chain management processes.
During the first quarter of 2011, we shipped the remaining product inventory that was built by our prior Japanese foundry, and continued to transition our product manufacturing to our established US foundry. As we made the transition to our established foundry, our products were supply constrained, leading to product allocations and increases in past due backlog. To ease the supply constraints, we rapidly secured greater wafer output from our established foundry, which significantly increased the number of devices we were able to build throughout the year to satisfy our past due backlog.
While we were transitioning our product manufacturing to our established foundry, we also made solid progress toward establishing a new wafer foundry for commercial production. Process improvements during the first quarter at the new wafer foundry allowed us to sample the first pre-qualification devices to customers.
During the second quarter of 2011, the Company’s revenue grew as wafer production and test capacity were increased. With the increased manufacturing capacity, the Company established a plan to fully resolve its supply constraints before the end of 2011. A new CFO was appointed in April 2011.
As we demonstrated our ability to deliver products and manage the challenges of our foundry transition, we began focusing on further strengthening our operational capabilities. We implemented a comprehensive ongoing program of process review and continual improvements that were designed to attain and maintain operational excellence across the company. This included reducing product costs, improving demand forecasting, increasing on-time deliveries, and accelerating product launches.
As a result of our efforts earlier in the year, revenue grew to a record level during the third quarter of 2011, which was driven by increased product shipments to customers as we reduced our past due backlog, executed our capacity expansion plan and continued to resolve our wafer manufacturing, product assembly and test-related supply constraints.
In August, 2011, we appointed a new vice president of worldwide sales with 29 years of semiconductor sales management, engineering, marketing and quality assurance experience. In October 2011, our CFO resigned and we appointed our controller as Interim CFO. We also named a new vice president of marketing, with 10 years of semiconductor industry experience, to lead the company’s global marketing team with overall responsibility for product line marketing, applications and technical support.
The fourth quarter of 2011 marked the completion of the foundry transition we began a year earlier. As anticipated, we satisfied our remaining past due backlog as we resolved our supply constraints. However, the pace of new orders slowed as a result of weak industry conditions. We reduced spending and wafer production during the fourth quarter
and took further cost reduction measures to ensure that we remained financially sound. Despite the reductions, we expect to continue investing in revenue generating opportunities, driving new product development, and continuing to strengthen resources for an anticipated business upturn in 2012.
General Industry Background
Semiconductor products are typically classified as analog, digital, or mixed signal. Analog semiconductors are devices that have the ability to sense continuous real-world parameters like voltage, flow, pressure, temperature, velocity, and time. Digital semiconductors, such as memories, store or process information via circuit-based on and off switches. Digital semiconductors store, process and manipulate data once the analog components have conditioned the inputs or signals. Mixed-signal semiconductors are integrated products that combine analog and digital circuit functions into a single device and are generally considered the most specialized and complex type of semiconductors in the market.
Memory Market
Virtually all electronic systems incorporate semiconductor memory to enable and enhance performance. The primary performance characteristics of memory devices include: speed (the amount of time it takes to read and write data from and to the device); density (how much data can be stored in the device); power consumption, (how much power a device consumes when reading or writing data); endurance (how many times data can be written onto a memory device before it wears out); and volatility (whether or not the device can retain data without power and without refreshing). Volatile memory products rely on a random access memory (RAM) architecture, which requires a constant power source to retain data but allows data to be written and re-written quickly onto the device. The most common volatile memories on the market today are dynamic random access memories (DRAM), which are favored by designers for their density, and static random access memories (SRAM), which are favored because of their speed.
Nonvolatile memories were originally designed using a read only memory (ROM) architecture, which allows data to be written once and retained even when the power is turned off or lost. Technology advances in ROM-based memories now allow data to be written and erased multiple times as well as to retain data without a power source. Despite these advances, ROM-based devices’ write operations require a significant amount of power, are slow, and degrade relatively quickly. Among the more advanced ROM-based devices on the market today are electrically erasable programmable read only memory (EEPROM) and FLASH memory. EEPROM is a low density nonvolatile memory solution that is generally used because of its low cost. FLASH memory is used because of its very low cost per bit and high density data storage capability. Despite their relative low cost, EEPROM and FLASH suffer from the performance disadvantages of ROM-based memory.
In an effort to create a nonvolatile memory with high read/write speeds, a hybrid memory, called battery-backed SRAM (BBSRAM) was created. While BBSRAMs allow higher speed data storage, the battery attachment makes the device larger in size, more expensive, and introduces battery-related reliability, lifetime and adverse environmental issues.
EEPROM, FLASH, and BBSRAMs are used by system designers and are more or less standardized. As is the case with most commodities, price is the main differentiator. While these products are widely produced and incorporated in many applications, technical limitations such as write speed, power consumption, endurance and ease of use prevent one or more of these nonvolatile memory devices from being implemented in certain situations.
Due to the large market for semiconductor memory products and the technical limitations of existing nonvolatile memory products, a market opportunity for alternative memory technologies has evolved. This has made F-RAM the most commercially successful of the alternative nonvolatile memory technologies. Other technologies, such as magnetic random access memory (MRAM), have begun selling commercially, and ovonics and molecular memory are still in their early stages of development and have yet to demonstrate commercial viability and achieve market acceptance.
Integration Trend - Mixed-Signal Devices
In a typical system design, analog inputs are gathered by sensing devices and then conditioned for use by digital circuits. Once the analog inputs are converted into digital data by analog-to-digital conversion circuitry, digital devices such as memory are used to manipulate and store the data, which is used to achieve a desired result or function in the system.
Until recently, analog and digital functions were performed by stand-alone components that worked alongside each other within the system. Due to the increasing complexity of products, the advancement of product features and the desire among original equipment manufacturers to decrease the size and cost of electronic systems, the market has progressed toward integrating analog and digital components into stand-alone mixed-signal semiconductor devices. Analog products that are commonly integrated into an electronic system include temperature sensors, op amps, and regulators. This analog circuitry operates in conjunction with digital devices such as memories. Mixed-signal devices are typically designed to control or perform very specific tasks in a system. Advances in process technology and design capabilities now allow the integration of analog and digital devices into a single device by either embedding the functions onto a single chip or by combining them in a multi-chip package. Integrating functions in a single device has enabled lower overall system costs while increasing functionality and reducing board space requirements. As a result, many integrated semiconductor solutions generally recognize longer product life cycles and relatively higher product margins.
Wireless RFID Connectivity
RFID (Radio Frequency Identification) is used mainly for contactless data transfer. RFID is easily integrated with other technologies to optimize data capture and exchange. RFID uses radio frequency waves to transfer data between a reader and a tag. As the tag enters the RF field, the RF signal powers the tag or turns it on. The tag then transmits the ID and data that has been programmed to the reader. RFID readers (also called Interrogators) translate the radio frequency information into digital information that can be read by software on the host computer. The computer determines the required actions and instructs the reader, which in turn transmits data back to the tag. RFID technologies are quickly expanding in logistics, supply chain, and asset tracking applications in almost every conceivable area around the globe.
Our Products
We design, develop and market specialized semiconductor memory and integrated semiconductor solutions used by customers for a wide range of applications in the metering, computing and information systems, automotive, communications, consumer and industrial, scientific and medical markets. Our product portfolio is comprised of stand-alone memory products and integrated products.
We pioneered the use of ferroelectric technology to produce nonvolatile semiconductor memory products in commercial volumes. Our products have distinct advantages over incumbent nonvolatile memory devices. F-RAM products combine the nonvolatile data storage capability of ROM with the benefits of RAM, which include a high number of read and write cycles, high-speed read and write cycles, and low power consumption. Since demonstrating our first product, we have expanded our F-RAM product line to include various interfaces and densities, which include industry-standard serial and parallel interfaces; industry standard package types; and 4-kilobit (kb), 16-kb, 64-kb, 256-kb, 1-megabit (Mb), 2Mb, 4Mb, and 8Mb densities.
Memory Products
Our serial and parallel memories contain industry-standard interfaces that are widely used in electronic applications. System designers use serial memories to collect data due to their relative low cost. Serial memories require fewer connections to the host system, and because they have a small package footprint, occupy less space on a circuit board. They are slower than other types of memory because they deliver data serially through a single port, which can require a system’s processor to wait longer for the data from the memory. Our serial F-RAM devices are faster than serial EEPROM devices because the fast write speed of F-RAM allows more frequent data transfers over the serial bus to the processor in a given period of time.
Our parallel F-RAM products are drop-in replacements for battery-backed SRAM products (BBSRAM). F-RAM parallel products offer features and data retention comparable to BBSRAMs, but without the requirement of a battery, which increases system reliability, reduces board space and avoids the adverse environmental effects of batteries. Parallel memory devices transfer data faster than serial memories because they can deliver data through several ports simultaneously. Although parallel memory devices are larger and more costly than serial memory devices, they are well suited for high-performance applications due to their inherent high read and write speed capability.
Integrated Mixed-Signal Products
Our integrated F-RAM products, called processor companions, are single-chip solutions that replace a number of individual system components to reduce cost and board space. The processor companion family is the most integrated F-RAM product line developed to date and provides on a single chip the most commonly needed system functions for a variety of applications. Processor companions typically combine nonvolatile F-RAM with analog and mixed-signal circuitry such as a real-time clock (RTC), a processor supervisor, and other commonly needed peripheral functions. Our processor Companion products are available in a variety of memory density and mixed-signal feature configurations. Processor companions are used in similar applications to our serial and parallel F-RAM memory technologies but provide more of the system’s functions with a single device.
Wireless Memory Products
Our wireless memory products can be read from and written to via wireless connections to a host system. We surveyed the current broad market for semiconductor products that use memory and concluded that a new class of F-RAM enabled wireless memories could capitalize on the emerging need for high-performance mobile data collection and storage. Wireless capabilities can be added to F-RAM memory through the integration of standardized wireless protocols such as those used for radio frequency identification (RFID) applications.
As the range and sensitivity of RFID technologies has dramatically improved, the technology has rapidly expanded into logistics, supply chain, and asset tracking applications. Along with this expansion has come the requirement for more data to be stored on the mobile tags within the system. Thus far, only a few suppliers have offered tags that offer higher memory capabilities. Most of these solutions are limited to only a few hundred more bits of data storage than the traditional RFID tags provide. A few tags may have up to a few thousand bits of memory but suffer from the slow performance of EEPROM memory technology. Due to the slow nature of reading and writing to EEPROM-based tags, which can range up to tens of seconds, tag users and vendors have not developed and marketed such higher memory tags using standard EEPROM. Combining F-RAM memory technology with standardized RFID communication protocols enables new applications/possibilities in the high memory RFID market.
Markets
Select Nonvolatile Memory and Integrated Semiconductor Applications
Meters
Computing and Information Systems
Electric, Gas, Waste
RAID systems
Taxi
Printers and copiers
Flow
Printer cartridges Servers
Postage
Network attached storage
Automated Meter Reading
Storage area networks
Automotive
Industrial, Scientific and Medical
Restraint systems
Medical instruments
Smart airbag systems
Test equipment
Auto Body controls
Motor controls
Car radio/DVD/Navigation systems
Home automation
Instrumentation clusters
RFID data logging
Our engineering team has helped many customers develop leading-edge products that benefit from our F-RAM products’ unique technological characteristics, such as fast write speeds, high write endurance, low power, and accelerated time-to-market. The following application examples illustrate the use of our products in certain markets.
Automotive - Electronic systems and semiconductor content in automobiles has increased significantly in recent years with the advent of more sophisticated safety, entertainment, body control, and telematics systems. In addition, the sensor count in automobiles has grown significantly over the past few years, which requires processing and storing more data than ever before.
Metering - The need to monitor power usage has become increasingly important for utility companies as fuel prices have increased significantly over the past few years. Worldwide, there is a significant demand for systems that efficiently distribute power to areas of high demand. These trends have given rise to the need for more sophisticated digital metering products that can constantly track and report power usage data for utility companies. As a result of our success in supplying F-RAM products for one of the world’s largest digital metering installations, we believe that F-RAM products are becoming more widely accepted in time-of-use and automated meter reading applications.
Computing - Computing applications for our products have increased significantly in recent years as we have focused on uses for our products in multi-function printers and copiers, laser and inkjet printers and hard disk array controllers. The high write endurance of our F-RAM products is the primary reason multi-function printer and copier manufacturers use F-RAM products in their products, while the fast write capability and ability to store information quickly upon power-down is the primary reason hard disk array controller manufacturers use our products.
Industrial, Scientific and Medical - The industrial, scientific and medical market provides a large opportunity for F-RAM products because it is characterized by applications that are subject to unique and demanding operating environments. F-RAM products are well suited for these applications due to their inherent high reliability features like high endurance and their low power consumption.
Wireless - To answer the need for higher performance wireless memory devices, we have developed a family of products, named the MaxArias product line, which features F-RAM memory with wireless RFID access using a standard UHF EPCglobal Class-1 Generation-2 protocol. The MaxArias family is ideal for applications spanning many industries including aircraft/industrial manufacturing, inventory control, maintenance tracking, building security, electronic toll collection, pharmaceutical tracking, and product authentication, among others.
Manufacturing
As a fabless semiconductor manufacturer, we design and develop new products for production by contracted manufacturing partners. Outsourcing manufacturing to our foundry partners enables us to avoid the large capital expenditures that would otherwise be required to manufacture our products in commercial volumes.
In 1999, we entered into a manufacturing agreement with Fujitsu Limited for the supply of our F-RAM products with an initial term of five years with automatic one-year renewals. The agreement required Fujitsu to provide us with a two-year advance notice of any change in its ability or intention to supply product wafers to us. In October 2009, Fujitsu notified us of their intent to discontinue the manufacture of our F-RAM products in March of 2010 and agreed to hold inventory to satisfy our product delivery requirements through the first quarter of 2011. We have since transitioned the manufacturing of most of the products previously made by Fujitsu to our US-based foundries at Texas Instruments Incorporated (TI) and IBM Corporation. We no longer rely on Fujitsu for the manufacture of our products.
In 2007, we entered into a commercial manufacturing agreement with TI to manufacture our F-RAM memory products, which was amended in 2011. Under the TI manufacturing agreement, we provide design, testing and other activities associated with product development efforts, and TI provides foundry services for a minimum period of two years with one year automatic renewal periods. In the event we or TI notifies the other party of its desire to terminate the manufacturing agreement for convenience, then the agreement shall terminate two years following such notice of termination. The manufacturing agreement also contains obligations for us with respect to minimum orders and negotiated pricing.
In February 2009, the Company and IBM entered into an agreement in which IBM provides F-RAM manufacturing services to us on a purchase order basis. The Company and IBM also entered into an Inbound Equipment and Program Loan Agreement, pursuant to which we loan specialized equipment to IBM to manufacture products for us. IBM has provided us with facility design and fit up, tool installation and tool qualification services in support of IBM’s manufacture of our F-RAM products. We have provided tools, peripheral equipment, technology and specifications required for IBM’s manufacture of our products. We have also provided our F-RAM technology and engineering expertise to IBM to assist in the integration and process development of our F-RAM products. The term of the agreement extends through December 31, 2016, subject to earlier termination under certain conditions. On December 31, 2009, we entered into an agreement supplementing the previously disclosed Custom Sales Agreement with IBM. This agreement provides for the supply of equipment and services by IBM and the Company in connection with IBM’s manufacture of products for us in future periods and schedules our payments for equipment we are to supply and for IBM’s manufacturing services. This project continues to be behind schedule, but pre-qualification product samples and a custom device built on the IBM manufacturing line are currently shipping to customers.
We subcontract with domestic and non-U.S. companies to assemble, package and test our manufactured products. Assembly and testing services performed by such subcontractors are conducted in accordance with processes designed by us or the third-party manufacturers and are implemented under the supervision of our product engineers or such third-party manufacturers.
Patents and Proprietary Rights
We rely on a combination of patents, copyrights, trademarks and trade secrets to establish and protect our intellectual property rights. We hold 87 United States patents covering key aspects of our products and technology. These patents will expire at various times between November 2012 and August 2029. We have applied for 25 additional United States patents covering certain aspects of our products and technology. We have also taken steps to apply for patents in jurisdictions outside the U.S. on our products and technology. We hold 6 non-U.S. issued patents and have one non-U.S. patent application pending. One non-U.S. patent is co-owned with Mitsubishi Materials Corporation.
Our patents cover some of the critical aspects of F-RAM technology, which we believe is a significant deterrent to other companies commercializing ferroelectric-based memory and integrated products that do not have a license to produce products with our technologies. We use our technological and engineering expertise to develop proprietary technologies for high quality, technologically advanced products that meet the complex and diverse needs of our customers. Our engineers have specific know-how in F-RAM technology-based product design.
We have licensed our F-RAM technology to several companies, including Fujitsu, Toshiba, Samsung Electronics Company, Ltd. (Samsung), Infineon, NEC, Rohm Semiconductor, and TI. We also have cross-licensing arrangements with National Semiconductor and Symetrix Corporation. Some of these licensing arrangements provide us with the right under certain conditions to call on the licensee’s manufacturing capacity as well as to receive royalty payments, while others include only royalty provisions.
Customers
We serve direct customers worldwide, including leading original equipment manufacturers (OEMs) and subcontract manufacturers in a broad range of industries. Additionally, our distributors sell to customers worldwide, through which we indirectly serve a broad base of customers.
Our sales regions include the Americas, Europe, Asia/Pacific and Japan. We believe that we are not particularly vulnerable to regional economic fluctuations in a specific part of the world. For fiscal years 2011 and 2010, based upon product shipment destination, international sales comprised approximately 90% and 88%, respectively, of our net revenue.
For fiscal year 2011, approximately 41% of our total product sales revenue was generated by five customers. One customer represented 11% of our total product sales revenue and no other customers contributed more than 10% of our total product sales revenue. Our top customers include authorized distributors that sell to a variety of end customers.
Sales and Marketing
In addition to our Colorado Springs, Colorado headquarters facility and our California design and engineering facility, we employ full-time sales and customer service personnel throughout the US, Canada, Japan, United Kingdom, South Korea, Singapore, Taiwan and China. We have approximately 50 regionally-based channel partners that include manufacturing representatives and a global network of distributors to service and support our customers. These regionally-focused firms work with our sales and field applications teams to identify new customers, solve customer problems, and provide technical support and other services to our customers. For the year ended December 31, 2011, approximately 80% of our product sales were through our distributor network, while direct customers accounted for approximately 20% of our revenue.
Competition
The semiconductor industry and, in particular, the semiconductor memory products business is intensely competitive. We compete with numerous domestic and foreign companies. Our products primarily compete on the basis of product price in relation to product functionality. We may be at a disadvantage in competing with many of our competitors, which have significantly greater financial, technical, manufacturing and marketing resources, as well as more diverse product lines that can provide cash flow during downturns in the semiconductor industry.
We consider our F-RAM products to be competitive with other nonvolatile memory devices such as EEPROM, BBSRAM, and MRAM products. Although FLASH memory products are a class of nonvolatile memory, we do not compete with FLASH due to its relatively higher storage capacity and lower cost per bit, as compared to F-RAM. Nonvolatile memory products are manufactured and marketed by major corporations possessing wafer manufacturing and integrated circuit production facilities such as ST-Microelectronics N.V., Atmel Corporation, Cypress Semiconductor Corporation, and by specialized product companies, such as Intersil Corporation, Maxim Integrated and Integrated Silicon Solution Inc.
Our licensees may market products that compete with our F-RAM products. Most of our licensees have the right to manufacture and sell F-RAM products; however, with the exception of Fujitsu, we are not aware of any licensees that market competitive F-RAM products. Our recent supply constraints made us more vulnerable to competition from Fujitsu on some products that are near functional equivalents to products we sell. Under our agreements with Rohm, Toshiba, Fujitsu, Samsung, Infineon, NEC, National Semiconductor, Symetrix Corporation and TI, we granted each of those companies a non-exclusive license to F-RAM technology, which includes the right to manufacture and sell products using F-RAM technology. Most of these license agreements provide for the continuation of the license rights to our technology and know-how after expiration or termination of the agreements.
Competition affecting our F-RAM products may also come from emerging alternative nonvolatile technologies such as phase change memory or other developing technologies.
Research and Development
We use our technological and engineering expertise to develop proprietary technologies for high quality, technologically advanced products that meet the complex and diverse needs of our customers. We intend to continue leveraging and expanding our technological and engineering expertise to develop new proprietary technologies and expand our product offerings.
We continue to make additional investments in research and development for technologies and products. Current research and development activities are focused on expanding our product offerings and securing additional foundry capacity and technology nodes to meet our future needs.
We seek to maintain our leadership role in F-RAM technology development by working in cooperation with leading semiconductor manufacturers to further the development of our proprietary F-RAM technology. We are presently engaged in F-RAM technology manufacturing or process development programs with TI and IBM Corporation.
Research and development expenses were $18.3 million in 2011 and $17.0 million in 2010.
Environmental Compliance
Federal, state and local regulations impose various environmental compliance measures on the discharge of chemicals and gases used in our prototype manufacturing and research and development processes. We believe that the risk of a future failure or violation is remote due to the nature of our current operations and the nature of the substances we use in our testing and failure analysis at our facility. We believe we have taken all necessary steps to ensure that our activities comply with all applicable environmental rules and regulations.
We are subject to laws and regulations relating to the use of and human exposure to hazardous materials. These regulations include the European Union’s Restrictions on Hazardous Substances (“RoHS”), Directive on Waste Electrical and Electronic Equipment (“WEEE”), and the directive on End of Life for Vehicles (“ELV”); California’s SB20 and SB50 which mimic RoHS; and China’s WEEE adopted by the State Development and Reform Commission. New electrical and electronic equipment sold in the European Union may not exceed specified concentration levels of any of the six RoHS substances, including lead, unless the equipment falls outside the scope of RoHS or unless one of the RoHS exemptions is satisfied. Our products as manufactured contain lead, but in ceramic form (the “ferroelectric memory capacitor”), and are at levels below the threshold concentration levels specified by RoHS and similar directives.
Employees
As of February 29, 2012, we had approximately 137 employees, including 38 in research and development, 50 in manufacturing, 32 in marketing and sales, and 17 in administration. None of our employees are represented by a collective bargaining agreement, nor have we ever experienced any work stoppage. None of our non-executive employees currently have employment contracts or post-employment non-competition agreements. We believe that our employee relations are good.
Available Information
Ramtron International Corporation is a Delaware corporation and was originally incorporated in 1984. We make available financial information, news releases and other information on our website at www.ramtron.com (such information and other information contained on our website is not part of this Annual Report on Form 10-K). Such reports are available free of charge on our website as soon as practicable after we file such reports and amendments with or furnish them to the Securities and Exchange Commission (SEC). In addition, our filings are available on the website of the SEC via the EDGAR database, where our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are filed. In addition, such reports are also available free of cost by contacting Investor Relations, 1850 Ramtron Drive, Colorado Springs, Colorado 80921. Stockholders can also obtain such reports directly from the SEC at no charge at the SEC’s website (www.sec.gov) or by visiting the SEC’s Public Reference room in Washington, D.C. or by calling the SEC at 1-800-732-0330.
Item 1A.
Item 1A. RISK FACTORS
As previously discussed, our actual results could differ materially from our forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed below. These and many other factors described in this report could adversely affect our operations, performance and financial condition.
Our achievement of sustained profitability is uncertain.
We recognized a net loss of $1.8 million for the year ended December 31, 2011, and had net income for the year ended December 31, 2010 of $1.6 million. Our ability to generate a profit from ongoing operations in future periods
is subject to significant risks and uncertainties, including, but not limited to, our ability to successfully sell our products at prices that are sufficient to cover our operating costs, to enter into additional technology development and license arrangements, to obtain sufficient contract manufacturing capacity and, if necessary, to raise additional financing to fund our growth. There is no guarantee that we will be successful in reducing these risks.
We have spent substantial amounts of money in developing our products and in our efforts to obtain commercial manufacturing capabilities for those products. At December 31, 2011, our accumulated deficit was $219 million. Our ability to increase revenue and achieve profitability in the future will depend substantially on our ability to increase sales of our products by gaining new customers and increasing sales to our existing customers, our success in reducing manufacturing costs, while increasing our contract manufacturing capacity, our ability to significantly increase sales of existing products, and our success in introducing and profitably selling new products.
We may need to raise additional funds to finance our operations.
In view of our expected future working capital requirements in connection with the fabrication and sale of our specialized memory and integrated semiconductor products, as well as our projected research and development and other operating expenditures, we may be required to seek additional equity or debt financing. We cannot be sure that any additional financing or other sources of capital will be available to us on acceptable terms, or at all. The inability to obtain additional financing when needed would have a material adverse effect on our business, financial condition and operating results, which could adversely affect our ability to continue our business operations. Under our existing financing arrangements, we would be required to obtain approval from our current lender, Silicon Valley Bank (SVB), for any additional debt financing. If additional equity financing is obtained, any issuance of common or preferred stock or convertible securities to obtain funding would result in dilution of our existing stockholders’ interests.
We are subject to certain covenants related to our bank loan and line of credit and such covenants may be challenging to the Company.
We are required to comply with certain covenants under our loan agreement, as amended, and our line of credit, including requirements to maintain a minimum EBITDA and maintain certain liquidity ratios, and restrictions on certain business actions without the consent of SVB. SVB may require new and more restrictive covenants in the future, with increased costs to the Company. If we are not able to comply with such covenants at a point of time in the future, our outstanding loan balance will become due and payable immediately, our existing line of credit could be cancelled, and unless we are able to obtain a waiver from the bank for such covenant violations, our business, financial condition and results of operations would be harmed.
If we fail to vigorously protect our intellectual property, our competitive position may suffer.
Our future success and competitive position depend in part upon our ability to develop additional and maintain existing proprietary technology used in our products. We protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and employee and third party non-disclosure and assignment agreements. We cannot provide assurances that any of our pending patent applications will be approved or that any of the patents that we own will not be challenged, invalidated or circumvented by others or be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage.
Policing the unauthorized use of our intellectual property is difficult and costly, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. In addition, we cannot be certain that we will be able to prevent other parties from designing and marketing semiconductor products or that others will not independently develop or otherwise acquire the same or substantially equivalent technologies as ours.
We may be subject to intellectual property infringement claims by others that result in costly litigation and could harm our business and ability to compete. Our industry is characterized by the existence of a large number of patents, as well as frequent claims and related litigation regarding these patents and other intellectual property rights. In
particular, many leading semiconductor memory companies have extensive patent portfolios with respect to manufacturing processes, product designs, and semiconductor memory technology, including ferroelectric memory and wireless communication technologies. We may be involved in litigation to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity of property rights of others, or to defend against claims of invalidity. This type of litigation can be expensive, regardless of whether we win or lose. Also, we cannot be certain that third parties will not make a claim of infringement against us or against our licensees in connection with their use of our technology. In the event of claims of infringement against our licensees with respect to our technology, we may be required to indemnify our licensees, which could be very costly. Any claims, even those without merit, could be time consuming to defend, result in costly litigation and diversion of technical and management personnel, or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us or one of our semiconductor manufacturing licensees in connection with our use of our technology would harm our business and result in significant cash expense to us to cover litigation costs, as well as the reduction of future license revenue.
Catastrophic events causing system failures may disrupt our business.
We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and our Web site for our development, marketing, operational, support, hosted services and sales activities. A disruption or failure of these systems in the event of a major earthquake, fire, flood, telecommunications failure, cyber-attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, delays in our product development, breaches of data security and loss of critical data, and could prevent us from fulfilling our customers’ orders. We have developed certain disaster recovery plans and certain backup systems to reduce the potentially adverse effect of such events, but a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.
Earthquakes, other natural disasters and power shortages or interruptions may damage our business.
If a major earthquake, power outage or other natural disaster occurs that damages our contract manufacturers’ facilities or restricts their operations, or interrupts our suppliers’ or customers’ communications, our business, financial condition and results of operations would be materially adversely affected. A major earthquake or other natural disaster near one or more of our major suppliers could disrupt the operations of those suppliers, which could limit the supply of our products and harm our business.
Our future success depends in part on a relatively small number of key employees.
Our future success depends, among other factors, on the continued service of our key technical and management personnel and on our ability to continue to attract and retain qualified employees. We are particularly dependent on the highly skilled design, process, materials and testing engineers involved in the development and oversight of the manufacture of our semiconductor products and processes. The competition for these personnel is intense, and the loss of key employees, including our executive officers, or our inability to attract additional qualified personnel in the future, could have both an immediate and a long-term adverse effect on us.
In January 2011, our former CEO and COO both resigned. Our former CFO was appointed as CEO. A replacement CFO was hired in April 2011 and later resigned in October 2011. At that time our controller was appointed as interim CFO. We are conducting an executive search for a new CFO and do not intend to name a replacement COO. In March 2011, we appointed a vice president of customer satisfaction, responsible for directing the quality assurance program as well as managing the product and test engineering organizations. In June 2011, our former chief marketing officer resigned and we appointed a new vice president of worldwide sales in August 2011, to oversee our worldwide sales organization for all product lines. In addition, we appointed a vice president of marketing in October 2011. If we experience further turnover in our key management personnel, we may incur additional expenses and our operating results may be materially and adversely affected.
General economic trends and other factors, including another worldwide credit crisis, may negatively affect our business.
Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our operating results.
Our products are complex and any defects in our products may result in liability claims, an increase in our costs and a reduction in our revenue.
Our products are complex and may contain defects, particularly when first introduced or as new versions are released or defects may result from the manufacturing process employed by our foundries. We develop integrated semiconductor products containing functions in addition to memory, thereby increasing the overall complexity of our products. We rely primarily on our in-house testing personnel to design test operations and procedures to detect any defects prior to delivery of our products to our customers. However, we rely on both in-house personnel and subcontractors to perform our testing. Because our products are manufactured by third parties and involve long lead times, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers if problems occur in the manufacture or operation or performance of our products. These defects also could cause us to incur significant re-engineering or production costs, divert the attention of our engineering personnel from our new product development efforts and cause significant customer relations issues and damage to our business reputation. Any defects could require product replacement, cost of remediation, or recall of products, or we could be obligated to accept product returns. Any of the foregoing could cause us to incur substantial costs and harm our business. A defect or failure in our product could cause failure in our customer’s end-product, so we could face product liability claims for property damage, lost profits damages, or consequential damages that are disproportionately higher than the revenue and profits we receive from the products involved. There can be no assurance that any insurance we maintain will sufficiently protect us from any such claims.
We depend on a small number of suppliers for the supply of our products and the success of our business may be dependent on our ability to maintain and expand our relationships with foundries and other suppliers.
We currently rely on foundry services from TI and IBM for commercial manufacturing of our F-RAM products. Our foundry agreements with TI and with IBM may not be renewed at the end of the contract term or negotiation of new contract terms may not be acceptable. In this event, the engagement of alternative foundry services will become necessary, which would require capital investment and related cash funding, and would likely result in our inability to fill our customers’ orders. In addition, we rely on a small number of other contract manufacturers and foundries to manufacture our other products. Reliance on a limited number of foundries involves several risks, including capacity constraints or delays in the timely delivery of our products, reduced control over delivery schedules and the cost of our products, variations in manufacturing yields, dependence on the foundries for quality assurance, and the potential loss of production and a slowdown in filling our orders due to seismic activity, other force majeure events and other factors beyond our control, including increases in the cost of the wafers we purchase from our foundries.
Although we continuously evaluate sources of supply and may seek to add additional foundry capacity in the future, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. Because our products require the foundries to make specified modifications to their standard process technologies and integrate our ferroelectric materials into their processes, transitioning the manufacturing of our products to other foundries or other facilities of an existing foundry may require process design changes and substantial lead time. Any delay resulting from such transition could negatively affect product performance, delivery, and yields or increase manufacturing costs.
We are also subject to the risks of service disruptions, raw material shortages, or increased prices affecting our foundry suppliers, which could also result in additional costs or charges to us.
We also rely on domestic and international subcontractors for packaging and testing of products, and are subject to risks of disruption of these services and possible quality problems. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on our revenue and results of operations.
We cannot provide any assurance that foundry or packaging and testing services will be available to us on terms and conditions, and at the times, acceptable to us. If we are unable to obtain foundry and packaging and testing services meeting our needs, we may be unable to produce products at the times and for the costs we anticipate and our relationships with our customers may be harmed and financial condition and results of operations may be adversely affected.
We are a relatively small company with limited resources, compared to some of our current and potential competitors, and we may not be able to compete effectively and increase our market share.
Our nonvolatile memory and integrated semiconductor products, which presently account for a substantial portion of our revenue, compete against products offered by current and potential competitors with longer operating histories, significantly greater financial and personnel resources, better name recognition and a larger base of customers than we have. In addition, many of our competitors have their own facilities for the production of semiconductor memory components or have recently added significant production capacity. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours. In addition, some of our current and potential competitors have already established supplier or joint development relationships with the decision makers at our current or potential customers. These competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products. These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business. Competition could force us to decrease our prices, reduce our sales, lower our gross profits or decrease our market share, any of which could have a material adverse effect on our revenues and results of operations. Our competitors include companies such as ST Microelectronics, Everspin Technologies, Cypress Semiconductor, Microchip Technology, Atmel, Fujitsu, TI, and Maxim Integrated, that produce or may produce products that compete with our current products and may compete with our future products. Our ability to compete with these and other competitors will depend on a number of factors, including our ability to continue to recruit and retain qualified engineers and other employees, our ability to introduce new and competitive products in a timely manner, the availability of foundry, packaging and testing services for our products to meet our customers’ demands, effective utilization and protection of our intellectual property rights, and general economic and regulatory conditions.
Emerging technologies and standards may pose a threat to the competitiveness of our products.
Competition affecting our F-RAM products may also come from alternative nonvolatile technologies such as magnetic random access memory or phase change memory, or other developing technologies. We cannot provide assurance that we will be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins or respond effectively to new technological changes or product announcements by our competitors. In addition, we may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our competitors or customers may offer new products based on new technologies, new industry standards or end-user or customer requirements, including products that have the potential to replace, or provide lower-cost or higher-performance alternatives to, our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable.
A memory technology other than F-RAM nonvolatile memory technology, such as the competitive technologies mentioned above, may be adopted or become generally accepted in integrated semiconductor products, or in stand-alone memory products, and our competitors may be in a better financial and marketing position than we are to influence such adoption or acceptance. The adoption or acceptance of such alternative memory technology could also render our existing and future products obsolete or unmarketable. Additionally, the inability to supply customer orders with our F-RAM products on a timely basis may also cause those customers to sample or purchase alternative memory products, and thereafter choose to continue using such alternative products even after our F-RAM product supply availability returns.
Our research and development efforts are focused on a limited number of new technologies and products, and any delay in the development, or the abandonment, of these technologies or products by industry participants, or their failure to achieve market acceptance, could compromise our competitive position.
Our F-RAM semiconductor memory and integrated semiconductor products are used as components in electronic devices in various markets. As a result, we have devoted and expect to continue to devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future. Our research and development expense, for the year ended December 31, 2011, was $18.3 million, or 28% of our total revenue.
If we do not accurately anticipate new technologies and standards, or if the products that we develop based on new technologies and standards fail to achieve market acceptance, our competitors may be better positioned to satisfy market demand than us. Furthermore, if markets for new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products or lower selling prices, or both, than we currently anticipate, which would adversely affect our revenue and gross profits. We cannot be certain that any products we may develop based on new technologies or for new standards will achieve market acceptance. If we experience difficulties in manufacturing our existing products on our established or new manufacturing lines, we may have to commit our design and R&D resources to resolving those issues, which may delay the development of new products and compromise our competitive market position.
If we do not continually develop new products that achieve market acceptance, our revenue may decline.
We need to develop new products and new process and manufacturing technologies. We believe that our ability to compete in the markets in which we expect to sell our F-RAM based integrated semiconductor products will depend, in part, on our ability to produce products that address customer needs efficiently and in a cost-effective manner and also our ability to incorporate effectively other semiconductor functions with our F-RAM products. Our inability to successfully develop and have manufactured new products would harm our ability to compete and have a negative impact on our operating results.
If we fail to introduce new products in a timely manner or are unable to manufacture such products successfully, or if our customers do not successfully introduce new systems or products incorporating our products, or if market demand for our new products does not develop as anticipated, our business, financial condition and results of operations could be seriously harmed.
Our expansion into new products and markets may be unsuccessful.
We plan to introduce new products into new markets in the future. We do not have experience in the markets our new products will address and these products may not achieve acceptance in those markets because they do not solve a substantial market need or are not competitively priced. Even if our new products achieve substantial market penetration, we may not be able to produce them in sufficient quantities or at prices that will enable us to generate profits for several years. The introduction of new products into new markets also increases the demands on our management and key employees, who may fail to manage those demands successfully. Our introduction of new products may be unsuccessful or delayed, which would result in a reduction in projected revenue from such new products.
We depend on IBM and Texas Instruments, our only F-RAM product contract manufacturers, to supply components of the new products, and, if the new products are ordered in substantial quantities, or, if for any other reason, those contract manufacturers are not able timely to supply sufficient components for the new products, our new products may be unsuccessful in the markets, which would result in our not achieving expected revenue from the new products.
We compete in certain markets with some of our F-RAM technology licensees, which may reduce our product sales.
We have licensed the right to fabricate and sell products based on our F-RAM technology and memory architecture to certain independent semiconductor device manufacturers. Fujitsu and TI, who are currently licensed to use our F-RAM technology, market certain F-RAM memory products that compete with certain of our F-RAM products. Some of our licensees have suspended or terminated their F-RAM initiatives, while others may still be pursuing a possible F-RAM based technology initiative or product development without our knowledge. We expect manufacturers that develop products based on our technology to sell such products worldwide. We are entitled to royalties from sales of F-RAM products by some but not all of these licensees, and we have the right under certain of our licensing agreements to negotiate an agreement for a portion of the licensee’s F-RAM product manufacturing capacity. TI may, however, give the development and manufacture of their own F-RAM products a higher priority than ours. Any competition in the marketplace from F-RAM products manufactured and marketed by our licensees could reduce our product sales and harm our operating results.
We may not be able to replace our expected revenue from significant customers, which could adversely affect our business.
Our success depends upon continuing relationships with significant customers who, directly or indirectly, purchase significant quantities of our products. For the year ended December 31, 2011, approximately 41% of our total product sales revenue was generated by five customers. Our top customers include our distributors. Any reduction of product sales to our significant customers, without a corresponding increase in revenue from existing and new customers, may result in significant decreases in our revenue, which would harm our cash flows, operating results and financial condition. We cannot assure that we would be able to replace these relationships in a timely manner or at all.
Our product allocations and inability to fulfill all of our customers’ orders on a timely basis during the first half of 2011 may have caused certain customers to seek substitute products from our competitors, or to design-out our products and substitute alternative technologies and systems. If any of our significant customers or a substantial number of our other customers find alternative suppliers or adopt alternative means of filling the need for our products, our future orders may be less than anticipated, which may result in increased inventories and decreasing revenues, which would materially and adversely affect our cash flows, operating results and financial condition.
In addition, approximately 80% of our product sales are through our distributor network. These distributors have a right of return for a percentage of their purchases and we could overstate our revenues if we underestimate the potential rate of returns.
We expect that international sales will continue to represent a significant portion of our product sales in the future. As a result, we are subject to a number of risks resulting from such operations.
International sales comprise a significant portion of our product sales, which exposes us to foreign political and economic risks. Such risks include political and economic instability and changes in diplomatic and trade relationships, foreign currency fluctuations, unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. Competitors based in the countries where we have substantial sales, such as Japan, may be able to supply products to customers in those countries more efficiently and at lower prices than we are able to. There can be no assurance that such factors will not adversely impact our results of operations in the future or require us to modify our current business practices.
Our business is also subject to risks generally associated with doing business with third-party manufacturers in non-U.S. jurisdictions including, but not limited to, government regulations and political and financial unrest, which may cause disruptions or delays in shipments to our customers or access to our inventories. Our business, financial condition and results of operations may be materially adversely affected by these or other factors related to our international operations.
We are subject to environmental laws that are subject to change and may restrict the marketability of certain of our products, which could adversely impact our financial performance or expose us to future liabilities.
We are subject to laws and regulations relating to the use of and human exposure to hazardous materials. Our failure to comply with these laws and regulations could subject us to future liabilities or result in the limitation or suspension of the sale or production of product, including without limitation, products that do not meet the various regulations relating to use of lead-free components in products. Our products as manufactured contain lead, but in ceramic form (the “ferroelectric memory capacitor”) and are at levels below the threshold concentration levels specified by RoHS and similar directives. However, these directives are still subject to amendment and such changes may be unfavorable to our products. Any supply of products that infringe applicable environmental laws may subject us to penalties, customer litigation or governmental sanctions, which may result in significant costs to us, which could adversely impact our results of operations.
Our business operations are also subject to strict environmental regulations and legal uncertainties, which could impose unanticipated requirements on our business in the future and subject us to liabilities.
Federal, state and local regulations impose various environmental controls on the discharge of chemicals and gases used in the manufacturing processes of our third-party foundry and contract manufacturers. Compliance with these regulations can be costly. Increasing public attention has been focused on the environmental impact of semiconductor operations. Any changes in environmental rules and regulations may impose the need for additional investments in capital equipment and the implementation of compliance programs in the future.
Any failure by us or our foundries or contract manufacturers to comply with present or future environmental rules and regulations regarding the discharge of hazardous substances could subject us to serious liabilities or cause our foundries or contract manufacturers to suspend manufacturing operations, which could seriously harm our business, financial condition and results of operations.
In addition to the costs of complying with environmental, health and safety requirements, in the future we may incur costs defending against environmental litigation brought by government agencies and private parties. We may be defendants in lawsuits brought by parties in the future alleging environmental damage, personal injury or property damage. A significant judgment against us could harm our business, financial condition and results of operations.
Our stock price is extremely volatile and you may not be able to resell your shares at or above the price you paid.
The market price of our common stock has fluctuated widely in recent periods and is likely to continue to be volatile. A number of other factors and contingencies can affect the market price for our common stock, including the following:
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actual or anticipated variations in our operating results;
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the low daily trading volume of our stock, which has in recent years traded at prices below $5 per share;
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announcements of technological innovations or new products by us or our competitors;
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competition, including pricing pressures and the potential impact of competitors’ products on our sales;
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conditions or trends in the semiconductor memory products industry;
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unexpected design or manufacturing difficulties;
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any announcement of potential design or manufacturing defects in our products;
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changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;
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announcements by us or our competitors of acquisitions, strategic partnerships or joint ventures; and additions or departures of our senior management; and
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one shareholder owning approximately 9% of our outstanding common stock, the sale of which could affect the stock price.
In addition, in recent years the stock market in general, and shares of technology companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of these technology companies. These broad market and industry fluctuations may harm the market price of our common stock, regardless of our operating results.
Provisions in our certificate of incorporation and preferred shares rights agreement may have anti-takeover effects and could affect the price of our common stock.
Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the voting powers, designations, preferences and relative rights, qualifications, limitations or restrictions of the preferred stock, without any vote or action by our stockholders. Our authority to issue preferred stock with rights preferential to those of our common stock could be used to discourage attempts by others to obtain control of or acquire us, including an attempt in which the potential purchaser offers to pay a per share price greater than the current market price for our common stock, by making those attempts more difficult or costly to achieve. In addition, we may seek in the future to obtain new capital by issuing shares of preferred stock with rights preferential to those of our common stock. This provision could limit the price that investors might be willing to pay in the future for our common stock.
We also entered into a preferred shares rights agreement with Citicorp N.A., as rights agent on April 19, 2001, which gives our stockholders certain rights that would likely delay, defer or prevent a change of control of us in a transaction not approved by our board of directors. On July 1, 2007, Computershare Trust Company, N.A. assumed these duties as rights agents. On March 2, 2011, the rights agreement was amended and its expiration extended to April 19, 2016.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
We own a building in Colorado Springs, Colorado, which serves as our world headquarters and principal executive offices. The building has a testing facility to support research and development, prototype manufacturing, advanced materials development and customer quality assurance and failure analysis support. The building is encumbered.
Our leased space within the United States is located in California.
Our leased space outside the United States is located in the United Kingdom, Japan, Canada, China, Taiwan, and Korea.
We believe that our existing facilities are adequate for our needs in the foreseeable future. If additional leased space is required in the future, we believe such leased space suitable for our needs is readily available.
Item 3.
Item 3. LEGAL PROCEEDINGS
In June 2009, the Company received a summons by the trustee in the bankruptcy of Finmek S.p.A. and its affiliates (Finmek) to appear before the Padua, Italy court overseeing the bankruptcy. The claims of the trustee in bankruptcy are that payments totaling approximately $2.8 million made to the Company for products shipped to Finmek prior to its bankruptcy filing in May 2004 are recoverable based on an alleged awareness of the Finmek affiliates’ insolvency at the time the payments were made. After the first hearing in 2010 and the second in 2011, all parties will submit their final motions in 2013. We intend to vigorously contest the trustee’s claims. We are unable to estimate a range of possible liability, if any, that we may incur as a result of the trustee’s claims and have not recorded any expense or liability in the consolidated financial statements as of December 31, 2011.
Item 4.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
Our common stock trades on the Nasdaq Global Market under the symbol “RMTR.” The following table sets forth the 2011 and 2010 quarterly ranges of the high and low intraday sales prices for the common stock as reported on the Nasdaq Global Market.
Record Holders
As of March 6, 2012, there were approximately 1,050 record holders of our common stock.
Dividend Policy
We have not paid any dividends since our inception and do not intend to pay any cash dividends in the foreseeable future. We intend to retain any earnings to finance operations.
Pursuant to our Amended and Restated Loan and Security Agreement dated August 18, 2009, as amended, with Silicon Valley Bank, we will not pay any dividends without Silicon Valley Bank’s prior written consent for so long as the bank has an obligation to lend and there are any outstanding obligations by the Company.
Common Stock Repurchases
(1) Represents shares withheld from vested restricted stock and restricted stock units to satisfy the minimum withholding requirement for federal and state taxes.
Item 6.
Item 6. SELECTED FINANCIAL DATA
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto and other financial data included elsewhere herein. Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, and, as such, are based on current expectations and are subject to certain risks and uncertainties. You should not place undue reliance on these forward-looking statements for reasons including those risks discussed under Part I-Item 1A “Risk Factors” and elsewhere in this Form 10-K. Forward-looking statements may be identified by the use of forward-looking words or phrases such as “will,” “may,” “believe,” “expect,” “intend,” “anticipate,” “could,” “should,” “plan,” “estimate,” “targeting,” and “potential,” or other similar words. The information included in this Form 10-K is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Significant Estimates. The preparation of our consolidated financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires us to make estimates and judgments that affect the amounts reported in our financial statements and accompanying notes. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we re-evaluate our judgments and estimates including those related to bad debts and sales returns and allowances, inventories, long-lived assets, intangible assets, income taxes, accrued expenses, stock compensation accruals, and other contingencies. We base our estimates and judgments on our historical experience, market trends, financial forecasts and projections and on other assumptions that we believe are reasonable under the circumstances, and apply them on a consistent basis. Any factual errors or errors in these estimates and judgments may have a material impact on our financial condition and operating results.
Recognition of Revenue. Revenue from product sales to direct customers and distributors is recognized upon shipment as we generally do not have any post-shipment obligations and allow limited rights of return to certain customers. In the event a situation occurs to create a post-shipment obligation, we would defer revenue recognition until the specific obligation was satisfied. We defer recognition of sales to distributors when we are unable to make a reasonable estimate of product returns, or due to insufficient historical product return information. The revenue recorded is dependent upon estimates of expected customer returns and sales discounts based upon both historical data and management estimates.
Revenue from licensing programs is recognized over the period we are required to provide services under the terms of the agreement. Revenue from research and development activities that are funded by customers is recognized as the services are performed. Revenue from royalties is recognized upon the notification to us of shipment of product from our technology license partners to direct customers.
Inventory Valuation/Scrap. We write-down our inventory, with a resulting increase in our scrap expense, for estimated obsolescence or lack of marketability for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Allowance for Doubtful Accounts and Returns. We seek to maintain a stringent credit approval process although our management must make significant judgments in assessing our customers’ ability to pay at the time of shipment. Despite this assessment, from time to time, customers are unable to meet their payment obligations. If we are aware of a customer’s inability to meet its financial obligations to us, we record an allowance to reduce the receivable to the
amount we believe we will be able to collect from the customer. For all other customers, we record an allowance based upon the amount of time the receivables are past due and collection attempts. If actual accounts receivable collections differ from these estimates, an adjustment to the allowance may be necessary with a resulting effect on operating expense. We continue to monitor customers’ credit worthiness, and use judgment in establishing the estimated amounts of customer receivables that will ultimately not be collected.
An allowance for sales returns is established based on historical and current trends in product returns and customer rebates. Our distributors have a right to return products under certain conditions. We recognize revenue on shipments to distributors at the time of shipment, along with a reserve for estimated returns based on historical data and future estimates. Also, certain distributors are granted rebates if specific end customers purchase our products. We estimate these rebates at the time of sale and record a related allowance. At December 31, 2011 and 2010, the Company’s reserve for sales returns was $2,300,000 and $1,784,000, respectively.
Deferred Income Taxes. As part of the process of preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to estimate our income taxes on a consolidated basis. We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts recorded in the consolidated financial statements, and for operating loss and tax credit carryforwards. Realization of the recorded deferred tax assets depends upon the generation of sufficient taxable income in future years to obtain benefit from the reversal of net deductible temporary differences and from tax credit and operating loss carryforwards. A valuation allowance is provided to the extent that management deems it more likely than not that the net deferred tax assets will not be realized. The amount of deferred tax assets considered realizable is subject to adjustment up or down in future periods if estimates of future taxable income are changed. Future adjustments could materially affect our financial results and, among other effects, could cause us not to achieve our projected results.
In assessing the potential to realize our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced.
Long-lived Assets. We review the carrying values of long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Under current standards, the assets must be carried at historical cost if the projected cash flows from their use will recover their carrying amounts on an undiscounted basis and without considering interest. However, if projected cash flows are less than their carrying value, the long-lived assets must be reduced to their estimated fair value. Considerable judgment is required to project such cash flows and, if required, estimate the fair value of the impaired long-lived asset. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash flows.
Share-based Payment Assumptions. We estimate volatility, forfeitures, and expected term of our options granted based upon historical data. All of these variables have an effect on the estimated fair value of our share-based awards.
RESULTS OF OPERATIONS
Overview
Our total revenue for the year ended December 31, 2011 was $66.4 million. In 2011, 99% of our revenue was derived from sales of our products and 1% of our revenue was derived from customer-sponsored research and development programs, royalties and other income.
In 2011, we introduced 10 new products, which included stand-alone memories, integrated products and a custom integrated circuit device.
Financial Highlights for the Year Ended December 31, 2011
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Total revenue in 2011 was $66.4 million, which was a decrease of 5% from $70.2 million in 2010.
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Total product revenue in 2011 was $65.6 million, which was a decrease of 5% from $69.4 million in 2010.
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Product gross margin in 2011 was 50%, compared to 51% in 2010.
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2011 results include non-cash, stock-based compensation expense of $1.9 million and an income tax benefit of $1.0 million.
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By region, sales in 2011 were as follows: Asia Pacific (42% of sales), Americas (14% of sales), Japan (20% of sales), and Europe (24% of sales). These sales are based on the location of the design program that uses the Company’s devices.
2012 Financial Outlook
The following statements are based on our current expectations of results for the first quarter and full-year 2012. These statements are forward looking, and actual results may differ materially from those set forth in these statements. We intend to continue our policy of not updating forward-looking statements other than in publicly available documents, even if experience or future changes show that anticipated results or events will not be realized.
In light of the near-term demand weakness that the semiconductor industry is facing, and the corresponding cautiousness on the part of our distributors, we believe that the first quarter of 2012 will be down sequentially from the fourth quarter of 2011 and will be the low point for the year.
However, we expect to remain EBITDA positive and expect EPS to be slightly negative to break even for the first quarter. For the remainder of the 2012 fiscal year, we expect revenue to improve sequentially and anticipate that we will be EBITDA positive and achieve GAAP net income for the full year.
For full-year 2012, we are currently targeting:
•
Total revenue of approximately $70 million with a gross product margin of 52%;
•
Total operating expenses of 46% of total revenue. By expense line item, sales and marketing to be 14% of total revenue, research and development to be 23% of total revenue, and general and administrative to be 9% of total revenue;
•
GAAP net income of approximately $0.03 per share for the full-year 2012.
2012 Business Outlook
During 2012 management plans to:
•
Introduce a family of low-energy F-RAM memory products;
•
Introduce an upgrade to our wireless memory product;
•
Introduce the Company’s first secure memory product;
•
Introduce the Company’s first system-on-chip platform product.
RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2011 AS COMPARED TO DECEMBER 31, 2010
Revenue
2011 to 2010:
Product revenue was $65.6 million, which was a decrease of $3.8 million from 2010. This decrease was due primarily to our supply chain issues that impacted our revenue for the first half of 2011. We believe these constraints are now resolved and will not be a factor in 2012.
Average Selling Price (ASP) increased 10% from full-year 2011 to full-year 2010. This increase was due to high-volume sales in 2010 of a custom built device for our printer cartridge business, which had a relatively lower average selling price compared to our other products. In 2010 the custom device accounted for approximately 17% of our units shipped, and there were no sales of this product in 2011.
Other revenue, consisting of license and development fees and royalty income, was $791,000, which was a 2% decrease from $805,000 in 2010. For 2012, we expect a significant decrease in other revenue, as a technology licensing agreement that we entered into 10 years ago will expire in the first quarter of 2012.
Cost of Product Sales
2011 to 2010:
Cost of product sales was $33.0 million in 2011, which was a decrease of approximately $900,000 from 2010. The decrease was primarily due to a $3.8 million decrease in product sales on a relatively flat gross margin from year to year. In addition, the company sold a higher percentage of lower density products in 2011, which have a lower gross margin than our high density parts, thus contributing to the 1% gross margin decrease from the prior year.
Research and Development Expense
2011 to 2010:
Research and development expense was $18.3 million in 2011, which was an increase of $1.3 million from 2010. This increase was primarily due to increased engineering wafer costs associated with our IBM foundry in Burlington, Vermont.
Sales and Marketing Expense
2011 to 2010:
Sales and marketing expense was $9.8 million in 2011, which was an increase of $665,000 from 2010. This increase was primarily due to the hiring of sales and marketing management personnel, coupled with increased administrative costs at our foreign sales locations. Also contributing to this increase were severance payments made to our former chief marketing officer during 2011.
General and Administrative Expense
2011 to 2010:
General and administrative expenses were $7.3 million in 2011, which was an increase of $857,000 from 2010. This increase was due primarily to severance payments to our prior CEO in 2011, which were partially offset by reductions in variable compensation in connection with his resignation. Also contributing to this increase were additional executive search agency fees and outside consultant fees during 2011.
Other Non-Operating Income (Expense)
2011 to 2010:
Interest expense was $783,000 for 2011, which was a decrease of $27,000 from 2010. This decrease was due to lower average principal balances outstanding throughout 2011, compared to the year ending December 31, 2010.
Other expense was $12,000 for 2011, compared to $383,000 in 2010. During 2010, the Company scrapped obsolete assets with a net book value totaling approximately $473,000, which was offset by foreign currency transaction gains and interest income.
The Company recorded a $1,020,000 non-cash tax benefit for 2011, due to a net operating loss for the year. The income tax provision for 2010 was $931,000, which was an effective tax rate of 37% of our 2010 net income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Summary
Our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows for the year ended December 31, 2011 and 2010, are summarized as follows:
Cash Flow provided by (used for) Operating Activities
The net amount of cash used for operating activities during 2011 was $9.6 million. Cash was used to fund our working capital, which included a $18.7 million increase in inventory from the prior year. This increase was partially offset by an increase of $3.1 million in accounts payable and accrued liabilities and a $2.4 million decrease in our accounts receivable balances.
The net amount of cash provided by operating activities during 2010 was $5.4 million. This was due primarily to earnings from operations after adjusting for non-cash items and increases in accounts payable and accrued liabilities during 2010. This was offset in part by an increase in accounts receivable.
Cash Flow used for Investing Activities
The net amount of cash used for investing activities during 2011 was $3.8 million, which was primarily related to $3.6 million of purchases of test equipment throughout the year in order to resolve supply constraints in our back-end processing, coupled with other capital purchases throughout the year. This was offset by $1.5 million in proceeds from a sale-leaseback transaction.
The net amount of cash used for investing activities during 2010 was $6.8 million, which was related primarily to $6.6 million of capital purchases associated with our new foundry initiative. We began depreciating this machinery on a straight-line basis over ten years during the quarter ending December 31, 2011.
Cash Flow provided by Financing Activities
The net amount of cash provided by financing activities during 2011 was $8.2 million, which was primarily related to net proceeds of $9.8 million from our sale of common stock in August 2011, coupled with $1.7 million of proceeds received from employee stock option exercises. Partially offsetting these increases were debt service payments of $3.3 million.
The net amount of cash provided by financing activities during 2010 was $3.9 million. The primary source of cash was $6.0 million of proceeds from our term loan obtained in June 2010, partially offset by $2.4 million of payments on our outstanding debt.
Liquidity
Our future liquidity depends primarily on revenue, gross margins, control of operating expenses, management of our working capital and capital expenditures, and our ability to obtain financing. Based upon our expected future demand, current sales backlog and consumption of our inventory, we believe that we have sufficient resources from cash on hand, funds from operations, and availability under our secured line of credit facility to fund operations through at least the fourth quarter of 2013.
The Company had $4.7 million in cash and cash equivalents at December 31, 2011. We also have approximately $3.6 million available to us under our $5.5 million secured line of credit facility. As of December 31, 2011, we had no amounts outstanding under our secured line of credit facility.
Our cash and cash equivalents decreased by $5.2 million during 2011, primarily due to the funding of an $18.7 million increase in total inventories. The increase in inventories is related to the receipt of wafers ordered earlier in 2011, while we were managing our supply constraints and working to satisfy past due customer orders. As the semiconductor industry began to weaken toward the end of 2011, wafer orders were reduced during the fourth quarter of 2011, but some were non-cancellable, which caused the increase in our inventory at year-end. We are focusing on returning to desired inventory levels and converting the inventory into cash through product sales. If operating cash flow is not sufficient to fund these purchases, we will borrow funds against our line of credit facility with SVB and pursue other potentially available sources of cash. On February 29, 2012, we negotiated an extension of our line of credit facility through February 28, 2013.
At December 31, 2011 no amounts were outstanding under our secured revolving line of credit facility and we had availability of $3.6 million under this facility. The availability under this line of credit facility, which is measured on a monthly basis, could fluctuate as it is primarily based on eligible accounts receivable.
At December 31, 2011, we had outstanding capital commitments of approximately $100,000. Expenditures incurred for capital and engineering support for our IBM foundry project from inception to date have been approximately $31 million, and wafer production began on this line during 2011, with initial commercial shipments to customers in early 2012.
Our existing loan agreement with SVB requires SVB to approve any additional debt financing we may seek to obtain, other than specific approved debt, such as lease lines of credit. We may be required to seek additional debt or equity to repay our existing debt or execute our business strategy. Any issuance of equity securities to obtain additional funds would result in dilution of our existing stockholders’ interests.
Debt Instruments
On June 28, 2010, the Company and SVB executed a Second Amendment (the “Second Amendment”) to our Amended and Restated Loan and Security Agreement dated August 18, 2009 (the “Amended Loan Agreement”). The Amendment provides for a 4-year $6.0 million term loan with a fixed interest rate of 6.5% per annum. The maturity date for the term is June 28, 2014. Principal payments are fixed at $125,000 per month plus accrued interest.
We are required to comply with certain covenants under our line of credit and loan agreement, as amended, including requirements to maintain a minimum net worth and maintain certain leverage ratios, and restrictions on certain business actions, such as payment of cash dividends, without the consent of SVB. Our loss for the first quarter of 2011 would have prevented us from meeting our existing fixed charge coverage ratio at that time. Upon notifying SVB of the likelihood that we would violate the loan covenants, SVB waived compliance of this covenant along with our adjusted quick ratio for the first two quarters of 2011. They replaced these covenants with a minimum liquidity ratio measured monthly and minimum EBITDA measured on a quarterly basis. We met these revised covenants for the quarter ending March 31, 2011.
During June, 2011, the Company and SVB determined that we were not in compliance with our liquidity ratio covenant for the months of April and May of 2011. As a result, on June 30, 2011 the Company and SVB executed a Default Waiver and Fifth Amendment to the Company’s Amended Loan Agreement. SVB waived compliance with the liquidity ratio covenant for the months of April and May and adjusted the minimum liquidity ratio and EBITDA covenants. The amendment also provided for an increase in the working capital line of credit from $6.0 million to $7.5 million, a reduction of the letter of credit, foreign exchange and cash management services sublimits to $1,750,000, and a reduction of the borrowing base to be 50% of the outstanding balance of the Company’s existing term loan. In connection with the amendment, we also replaced our existing Export-Import (EX-IM) Loan Agreement with a new EX-IM Loan Agreement that guarantees advances of eligible foreign accounts.
On December 30, 2011 the Company and SVB executed an additional amendment to the Amended Loan Agreement to provide for a decrease of the total amount available under the revolving line from $7.5 million to $5.5 million, which is offset by the elimination of the letter of credit, foreign exchange and cash management services sublimits, which totaled approximately $1,900,000 as of December 31, 2011. This amendment also extended the maturity date to January 31, 2012, at which time the Company and SVB further extended the maturity date to February 29, 2012.
On February 29, 2012, the Company and SVB executed a new Amended and Restated Loan and Security Agreement, which extended the maturity of our revolving line of credit to February 28, 2013. As a result of this extension, the amount available under the line was increased from $5.5 million to $7.5 million. The borrowing base was adjusted to include eligible raw materials, work in process and finished goods inventory, capped at $1 million for domestic inventory and $3 million for export inventory, further capped by eligible accounts receivable limits. We are required to pay-down up to $1.25 million of our term loan during the first quarter of 2012, with a resultant reduction of principal payments over the remaining term of the loan.
At December 31, 2011 no amounts were outstanding under our secured revolving line of credit facility and we had availability of $3.6 million under this facility. The availability under this line of credit facility, which is measured on a monthly basis, could fluctuate as it is primarily based on eligible accounts receivable.
If we cannot sell and ship product consistently throughout the quarter, our borrowing base relating to accounts receivable could be materially impacted. If we cannot generate sufficient cash from operations or obtain a sufficient borrowing base on our secured line of credit facility, we may seek to obtain additional equity or debt financing. Additional debt financing would require approval from SVB in accordance with the covenants in our existing agreements.
We currently have six capital leases outstanding, totaling approximately $4.2 million, with terms between two and three years and effective interest rates between 9% and 10%. These leases have standby letters of credit in favor of four of the lessors for approximately $1.8 million.
In April 2004, we entered into a patent interference settlement agreement with National Semiconductor Corporation. We are required to pay National Semiconductor Corporation $250,000 annually through 2013. As of December 31, 2011, the present value of this promissory note is $478,000. We recorded this note at the discounted present value assuming an annualized discount rate of 5.75%. The face value of this note as of December 31, 2011 was $500,000.
On December 15, 2005, Ramtron LLC, our wholly-owned subsidiary, closed on a mortgage loan facility with American National Insurance Company. Ramtron LLC entered into a promissory note evidencing the loan with the principal amount of $4.2 million, with a maturity date of January 1, 2016, bearing interest at 6.17%. We are obligated to make monthly principal and interest payments of $30,500 until January 2016 and a balloon payment of $2,757,000 in January 2016. Ramtron LLC also entered into an agreement for the benefit of American National Insurance Company securing our real estate as collateral for the mortgage loan facility.
New Accounting Standards
The information required by this Item is provided in Part II. Item 8. Financial Statements and Supplementary Data-Note 1 of the Notes to Consolidated Financial Statements.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Ramtron International Corporation
Colorado Springs, Colorado
We have audited the accompanying consolidated balance sheets of Ramtron International Corporation and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended. We also have audited the Company’s internal control over financial reporting as of December 31, 2011, based upon the criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and the effectiveness of the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ramtron International Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
March 7, 2012
Denver, Colorado
RAMTRON INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
For the years ended December 31, 2011 and 2010
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
RAMTRON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2011 and 2010
(in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
RAMTRON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2011 and 2010
(in thousands, except par value amounts)
(1) Includes shares withheld from vested restricted stock and restricted stock units to satisfy the minimum withholding requirement for federal and state taxes.
See accompanying notes to consolidated financial statements.
RAMTRON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2011 and 2010
(in thousands)
See accompanying notes to consolidated financial statements.
RAMTRON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business. We are a fabless semiconductor company that designs, develops and markets specialized semiconductor memory and integrated semiconductor solutions, which are used in many markets for a wide range of applications. We pioneered the integration of ferroelectric materials into semiconductor products, which enabled the development of a new class of nonvolatile memory, called ferroelectric random access memory (F-RAM). F-RAM products merge the advantages of multiple memory technologies into a single device that retains information without a power source, can be read from and written to at very fast speeds, written to many times, consumes low amounts of power, and can simplify the design of electronic systems. In many cases, we are the sole provider of F-RAM enabled semiconductor products, which facilitates close customer relationships, long application lifecycles and the potential for high-margin sales.
We also integrate with our memory products wireless communication capabilities as well as analog and mixed-signal functions such as microprocessor supervision, tamper detection, timekeeping, and power failure detection functions into our devices. This has enabled new classes of products that address the growing market need for more functional, efficient and cost effective semiconductor products.
Our revenue is derived from the sale of our products and from license, development and royalty arrangements entered into with a limited number of established semiconductor manufacturers involving the development and sale of specific applications and products of the Company’s technologies. Product sales have been made to various customers for use in a variety of applications including utility meters, office equipment, automobiles, electronics, telecommunications, disk array controllers, and industrial control devices, among others.
The accompanying audited consolidated financial statements for the years ended December 31, 2011 and 2010 have been prepared from the books and records of Ramtron International Corporation (the “Company,” “we,” “our,” or “us”). The preparation of our consolidated financial statements and related disclosures are in conformity with generally accepted accounting principles in the United States. Certain amounts reporting in prior periods have been reclassified to conform to the current presentation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the carrying amounts of property, plant and equipment, and intangibles; valuation of allowances for receivables, inventories, returns associated primarily with our sales to distributors, and deferred income taxes; product liability accruals; and valuation of share-based payment arrangements, and fair value estimates used in our goodwill and intangible asset impairment tests. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Actual results could differ from those estimates.
Principles of Consolidation. The accompanying financial statements include the consolidation of accounts for the Company’s wholly owned subsidiaries, Ramtron LLC, Ramtron Canada, Inc., Ramtron Kabushiki Kaisha (Ramtron K.K.), Ramtron UK Limited, Ramtron Asia Ltd., Ramtron Asia Pte. Ltd, Ramtron Asia Pte. Ltd. - Taiwan Branch and Ramtron Korea Ltd. All significant inter-company accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. We consider all cash and highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable. Accounts receivable consists of amounts billed and currently due from customers. We extend credit to customers in the normal course of business and maintain an allowance for bad debts and an allowance for returns and discounts. The bad debt allowance is based upon specific customer collection issues. The allowance for returns and discounts is based primarily on historical experience and management estimates.
Inventories. Inventories are stated at the lower of cost or market value. Cost is determined using average costs. We write down inventory to net realizable value if lower than original cost.
Deferred Income Taxes. Deferred income taxes are recorded to reflect the tax consequences of differences between the tax basis of assets and liabilities and their financial reporting basis and operating loss and tax credit carry forwards. Refer to Note 9 for the types of differences that give rise to significant portions of deferred income tax assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are classified as a net current or non-current asset or liability based on the classification of the related asset or liability for financial reporting purposes. A deferred tax asset or liability that is not related to an asset or liability for financial reporting is classified according to the expected reversal date. We record a valuation allowance to reduce deferred tax assets to an amount we believe is more likely than not expected to be realized.
Property, Plant and Equipment. Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the respective assets and commence once the assets are ready for their intended use. Leased assets will be depreciated over their estimated useful lives. Assets are initially charged to construction in progress until they are ready for their intended use. Maintenance and repairs are expensed as incurred and improvements are capitalized.
Intangible Assets. Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives, ranging from 15 to 17 years, and reviewed for impairment when events or changes in circumstances indicate that the intangible asset may be impaired. The amounts capitalized for patents are primarily the cost of securing the patent. Expenditures incurred to renew or extend the life of intangible assets are expensed.
Impairment of Long-Lived Assets. Long-lived assets held and used and intangible assets subject to amortization are reviewed for impairment, whenever events or changes in circumstances indicate that carrying amounts of assets may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to the future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset calculated using a future discounted cash flow analysis. Considerable judgment is required to project such cash flows and, if required, estimate the fair value of the impaired long-lived asset.
Revenue Recognition. We recognize revenue from product sales when title transfers, the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable, which is generally at the time of shipment. In the event a situation occurs to create a post-shipment obligation, we would defer revenue recognition until the specific obligation was satisfied. We defer recognition of sales to distributors when we are unable to make a reasonable estimate of product returns due to insufficient historical product return information. The revenue recorded is dependent upon estimates of expected customer returns, rebates and sales discounts based upon both historical data and management estimates.
Revenue from licensing programs is recognized over the period we are required to provide services under the terms of the agreement. Revenue from research and development activities that are funded by customers are recognized as the services are performed.
At the time we enter into technology licensing agreements where we receive cash at the time of signing, we defer the revenue. We will then recognize revenue over the term of the agreement on a straight-line basis.
Revenue from royalties is recognized upon the notification to us of shipment of product from our technology license partners to direct customers.
Shipping and Handling Fees and Costs. The majority of our customers pay their freight charges. Freight charges billed are offset against selling expenses; the category where the freight expenses are charged. These charges are immaterial.
Warranty Costs. We make periodic provisions for expected warranty costs. Historically, warranty costs have been insignificant.
Advertising. We expense advertising costs as incurred. Advertising expenses for the years ended December 31, 2011 and 2010 were $58,000 and $95,000, respectively.
Stock-Based Compensation. At December 31, 2011, we had one stock-based compensation plan, which is more fully described in Note 8.
During the year ended December 31, 2011, we granted restricted stock units and awards with vesting periods of one to four years and a service condition. The restricted stock units and awards vest in equal annual installments, commencing on the anniversary date of the grant. Restricted stock units and awards are valued using the fair market value of our common stock as of the grant date. We recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period. Estimated forfeitures are reviewed periodically and changes to the estimated forfeitures are adjusted through current period earnings. The remaining unvested shares are subject to forfeiture and are restricted as to a sale or transfer up until the vest date.
During 2011, we also granted nonqualified stock options at an exercise price equal to the fair market value of our common stock on the grant date. We applied the Black-Scholes valuation method to compute the estimated fair value of the stock options and recognize compensation expense, net of estimated forfeitures, on a straight-line basis so that the award is fully expensed at the vesting date. Generally, stock options vest 25 percent on each anniversary of the grant date, are fully vested four years from the grant date, and have a contractual term of ten years.
Fair Value of Financial Instruments. The fair value of financial instruments are determined based on quoted market prices and market interest rates as of the end of the reporting period. Our financial instruments consist of cash and cash equivalents, short-term trade receivables, payables and long-term debt. The carrying values of cash and cash equivalents, and short-term trade receivables and payables approximate fair value due to their short-term nature.
New Accounting Standards. In June 2011, the FASB issued an accounting pronouncement that provides new guidance on the presentation of comprehensive income (FASB ASC Topic 220) in financial statements. Entities are required to present total comprehensive income either in a single, continuous statement of comprehensive income or in two separate, but consecutive, statements. Under the single-statement approach, entities must include the components of net income, a total for net income, the components of other comprehensive income and a total for comprehensive income. Under the two-statement approach, entities must report an income statement and, immediately following, a statement of other comprehensive income. The provisions for this pronouncement are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We do not expect this pronouncement to have a material effect on our consolidated financial statements.
NOTE 2. INVENTORIES
Inventories consist of the following as of December 31, 2011 and 2010:
(1) Long-term inventory relates to items that the Company does not forecast to sell within one year.
NOTE 3. OTHER CONSOLIDATED FINANCIAL STATEMENT DETAIL
Other Current Assets. Other current assets consist of the following as of December 31, 2011 and 2010:
Accrued Liabilities. Accrued liabilities consist of the following as of December 31, 2011 and 2010:
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
(1) Property under capital leases of $4.3 million for 2010 is included in construction in progress.
Depreciation expense for property, plant and equipment was $2,532,000 and $1,827,000 for 2011 and 2010, respectively.
NOTE 5. INTANGIBLE ASSETS
Intangible assets consist of:
Amortization expense for intangible assets was $253,000 and $251,000 in 2011 and 2010, respectively. Estimated amortization expense for intangible assets is $250,000 annually for the years ending 2012 through 2016 and a total of $1.4 million thereafter.
NOTE 6. LONG-TERM DEBT
Components of long-term debt are as follows:
On August 18, 2009, we executed an Amended and Restated Loan and Security Agreement (“Amended Loan Agreement”) with Silicon Valley Bank (“SVB”). The Amended Loan Agreement provided for a $6 million working capital line of credit with a $1.75 million sublimit for EXIM (Export-Import Bank qualified receivables) advances, $1.5 million sublimit for foreign accounts receivable, and a sublimit of $3 million for letters of credit and foreign exchange exposure and cash management services. The Amended Loan Agreement provides for interest at a floating rate equal to the SVB prime lending rate plus 1.75% to 2.25% per annum depending upon cash balances and loan availability maintained at SVB. Security for the Amended Loan Agreement includes all of the Company’s assets except for real estate and leased equipment. The Company draws upon the loan facility for working capital purposes as required.
On June 28, 2010, the Company and SVB executed a Second Amendment to the Amended Loan Agreement. This Amendment provided for a $6.0 million term loan with a fixed interest rate of 6.5% per annum. The term of the loan is four years with fixed principal payments of $125,000 per month plus accrued interest. We have used the proceeds from our term loan facility for working capital and to fund our capital requirements.
We are required to comply with certain covenants under our line of credit and loan agreement, as amended, including requirements to maintain a minimum net worth and maintain certain leverage ratios, and restrictions on certain business actions, such as payment of cash dividends, without the consent of Silicon Valley Bank (SVB). Our loss for the first quarter of 2011 would have prevented us from meeting our existing fixed charge coverage ratio at that time. Upon notifying SVB of the likelihood that we would violate the loan covenants, SVB waived compliance of this covenant along with our adjusted quick ratio for the first two quarters of 2011. They replaced these covenants with a minimum liquidity ratio measured monthly and minimum EBITDA measured on a quarterly basis. We met these revised covenants for the quarter ending March 31, 2011.
During June, 2011, the Company and SVB determined that the Company was not in compliance with its liquidity ratio covenant for the months of April and May of 2011. As a result, on June 30, 2011 the Company and SVB executed a Default Waiver and Fifth Amendment to the Amended Loan Agreement (“Fifth Amendment”). SVB
waived compliance with the liquidity ratio covenant for the months of April and May and adjusted the minimum liquidity ratio and EBITDA covenants. As of June 30, 2011, the Company was in compliance with these revised covenants. The Fifth Amendment also provided for an increase in the working capital line of credit from $6.0 million to $7.5 million, a reduction of the letter of credit, foreign exchange and cash management services sublimits to $1,750,000, and a reduction of the borrowing base to be 50% of the outstanding balance of the Company’s existing term loan. In connection with the Fifth Amendment, the Company also replaced its existing Export-Import (EX-IM) Loan Agreement with a new EX-IM Loan Agreement that guarantees advances of eligible foreign accounts. The Company’s borrowing base associated with EX-IM guarantee is the lessor of $7.5 million or up to 90% of EX-IM foreign accounts that are payable in US dollars, plus up to 65% of EX-IM eligible inventory. In addition, the expiration date of our revolving line of credit was extended from August 18, 2011 to October 31, 2011, and subsequently extended to December 31, 2011.
On December 30, 2011 the Company and SVB executed an Eighth Amendment to the Amended Loan Agreement to provide for a decrease of the total amount available under the revolving line from $7,500,000 to $5,500,000, which is offset by the elimination of the letter of credit, foreign exchange and cash management services sublimits, which totaled approximately $1,900,000 as of December 31, 2011. This amendment also extended the maturity date to January 31, 2012, at which time the Company and SVB executed the Ninth Amendment to further extend the maturity date to February 29, 2012.
On February 29, 2012, the Company and SVB executed a new Amended and Restated Loan and Security Agreement, which extended the maturity of our revolving line of credit to February 28, 2013. As a result of this extension, the amount available under the line was increased to $7.5 million from $5.5 million. The borrowing base was adjusted to include eligible raw materials, work in process and finished goods inventory, capped at $1 million for domestic inventory and $3 million for export inventory, further capped by eligible accounts receivable limits. We are required to pay-down up to $1.25 million of our term loan during the first quarter of 2012, with a resultant reduction of principal payments over the remaining term of the loan.
The net availability under our secured line of credit facility as of December 31, 2011 was $3.6 million. As of December 31, 2011 we had no amounts outstanding on the secured line of credit facility.
The Company currently has six capital leases outstanding totaling $4.2 million, with terms between two and three years and effective interest rates between 9% and 10%. Under these leases, we have standby letters of credit in favor of four of the lessors for approximately $1.8 million.
During 2011, the Company entered into a sales-leaseback transaction. We sold a piece of equipment for $1.5 million and leased this equipment back for a period of 30 months. We agreed to pay $48,000 per month, with a buy out option of no more than $300,000 at the end of the 30-month lease.
In April 2004, we entered into a patent interference settlement agreement with National Semiconductor Corporation. The Company is required to pay National Semiconductor Corporation $250,000 annually through 2013. As of December 31, 2011, the present value of this promissory note was $478,000. We discounted the note at 5.75%. The face value of this note as of December 31, 2011 was $500,000.
On December 15, 2005, the Company, through its subsidiary, Ramtron LLC, for which Ramtron International Corporation serves as sole member and sole manager, closed on its mortgage loan facility with American National Insurance Company. Ramtron LLC entered into a promissory note evidencing the loan with the principal amount of $4,200,000, with a maturity date of January 1, 2016, bearing interest at 6.17%. We are obligated to make monthly principal and interest payments of $30,500 until January 2016 and a balloon payment of $2,757,000 in January 2016. Ramtron LLC also entered into an agreement for the benefit of American National Insurance Company securing our real estate as collateral for the mortgage loan facility.
Payments of our outstanding promissory notes and leases are as follows as of December 31, 2011:
The carrying amounts and estimated fair values of our long-term debt, which are our only material financial instruments, are as follows:
The above fair values were estimated based on discounted future cash flows. Differences from carrying amounts are attributable to interest rate changes subsequent to when the transactions occurred.
NOTE 7. COMMITMENTS
Lease Commitments
The Company has commitments under non-cancelable operating leases expiring through 2014 for various equipment, software, and facilities. Minimum future annual lease payments for leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2011 are as follows:
Total rent expense on all operating leases was $2.1 million for each of the years ending December 31, 2011 and 2010.
Manufacturing Alliances
In 1999, we entered into a manufacturing agreement with Fujitsu Limited for the supply of our F-RAM products with an initial term of five years with automatic one-year renewals. The agreement required Fujitsu to provide us with a two-year advance notice of any change in its ability or intention to supply product wafers to us. In October 2009, Fujitsu notified us of their intent to discontinue the manufacture of our F-RAM products in March of 2010 and agreed to hold inventory to satisfy our product delivery requirements through the first quarter of 2011. We have since transitioned the manufacturing of the products previously made by Fujitsu to our US-based foundries at Texas Instrument and IBM Corporation. We no longer rely on Fujitsu for the manufacture of our products.
In 2007, the Company and TI entered into a commercial manufacturing agreement for F-RAM memory products, which was amended in 2011. The Company will provide design, testing and other activities associated with product development efforts, and TI will provide foundry services for a minimum period of two years with one year
automatic renewal periods. In the event a party so notifies the other party of its desire to terminate the manufacturing agreement for convenience, then the agreement shall terminate two years following such notice of termination. The manufacturing agreement also contains obligations for us with respect to minimum orders and negotiated pricing.
In February 2009, the Company and IBM entered into an agreement in which IBM provides F-RAM manufacturing services to us on a purchase order basis. The Company and IBM also entered into an Inbound Equipment and Program Loan Agreement, pursuant to which we loan specialized equipment to IBM to use in manufacturing products for us. IBM provides us with facility design and fit up, tool installation and tool qualification services in support of IBM’s manufacture of our F-RAM products. We provide tools, peripheral equipment, technology and specifications required for IBM’s manufacture of our products. We also provide our F-RAM technology and engineering expertise to IBM to assist in the integration and process development of our F-RAM products. The term of the agreement extends through December 31, 2016, subject to earlier termination under certain conditions. On December 31, 2009, we entered into an agreement supplementing the previously disclosed Custom Sales Agreement with IBM. This agreement provides for the supply of equipment and services by IBM and the Company in connection with IBM’s manufacture of products for us in future periods and schedules our payments for equipment we are to supply and for IBM’s manufacturing services. This project continues to be behind schedule, but product is currently shipping to customers that is sourced from the IBM factory.
NOTE 8. STOCK-BASED COMPENSATION
Stock-based Compensation Plans
We have one active stock option plan: the 2005 Incentive Award Plan (the “2005 Plan”). The expired 1995 Stock Option Plan and 1999 Stock Option Plan, as amended, are only relevant to grants outstanding under these plans or in respect of the 1995 Stock Option Plan, forfeitures that increase the available shares under the 2005 Plan. The 2005 Plan reserves a total of 6,603,544 shares of our common stock for issuance. In November 2009, the reserve under the 2005 Plan was increased by 1,603,544 shares of common stock. The additional shares were previously available for issuance under our 1995 Stock Option Plan, as such shares had not been issued, or were subject to awards under the 1995 Plan that had expired, were forfeited or became unexercisable for any reason, and were carried forward to and included in the reserve of shares available for issuance pursuant to the 2005 Plan in accordance with the terms of the 2005 Plan. The exercise price of all non-qualified stock options must be no less than 100% of the Fair Market Value on the effective date of the grant in 2005 Plans. The maximum term of each grant is ten years under the Plan. The 2005 Plan permits the issuance of incentive stock options, the issuance of restricted stock, and other types of awards. Restricted stock grants generally vest one to three years from the date of grant. Options granted become exercisable in full or in installments pursuant to the terms of each agreement evidencing options granted. The exercise of stock options and issue of restricted stock is satisfied by issuing authorized unissued common stock or treasury stock. As of December 31, 2011, we had not granted any incentive stock options.
The number of shares available for future grant under the 2005 plan was 939,019 as of December 31, 2011.
Total stock-based compensation recognized in our consolidated statements of income (loss) is as follows:
Income Statement Classifications
Stock Options
As of December 31, 2011, there was approximately $1.0 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested options granted to our employees and directors, which will be recognized over a weighted-average period of 3.0 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
For grants issued during 2011, the fair value for stock options was estimated at the date of grant using the Black-Scholes option pricing model, which requires management to make certain assumptions. Expected volatility was estimated based on the historical volatility of our stock over the past 6 years, which was the calculated expected term of our options over the past ten years, a period we considered a fair indicator of future exercises. We based the risk-free interest rate that we use in the option valuation model on U.S. Treasury Notes with remaining terms similar to the expected terms on the options. Forfeitures are estimated at the time of grant based upon historical experience. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model.
The assumptions used to value option grants for the years ended December 31, 2011 and 2010 are as follows:
The weighted average fair value per share of shares granted during the years ended December 31, 2011 and 2010 were $1.56 and $1.46, respectively.
The following table summarizes stock option activity related to our Plans for the year ended December 31, 2011:
The following table sets forth the exercise price range, number of shares, weighted average exercise price and remaining contractual lives by groups of options:
Options Outstanding:
Options Exercisable:
The intrinsic value is calculated as the difference between the market value as of December 31, 2011 and the exercise price of the options. The closing market value as of December 31, 2011 was $1.95 as reported by the Nasdaq Global Market.
Cash received from option exercises for the year ended December 31, 2011 was $1.8 million.
Restricted Stock
In 2011, we granted 1,057,000 shares of restricted stock at an average market value of $1.71 per share. These awards vest over periods of one to four years in equal annual installments based on continued service. As of December 31, 2011, there was approximately $1.5 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested restricted shares, which will be recognized over a weighted-average period of 2.45 years.
A summary of non-vested restricted shares during the year ended December 31, 2011 are as follows:
Restricted Stock Units
Restricted stock units represent rights to receive shares of common stock at a future date. There is no exercise price and no cash payment is required for receipt of restricted stock units on the shares issued in settlement of the award. The fair market value of the Company’s common stock at the time of the grants is amortized to expense on a straight-line basis over the vesting period.
A summary of the Company’s restricted stock units as of December 31, 2011 are as follows:
As of December 31, 2011, there was approximately $520,000 remaining in unrecognized compensation costs, adjusted for estimated forfeitures. The weighted-average recognition period is 1.84 years.
NOTE 9. INCOME TAXES
The sources of income (loss) before income taxes were as follows:
Income tax expense (benefit) attributable to income (loss) before income taxes consisted of:
Total income tax expense (benefit) from continuing operations differs from the amount computed by applying the statutory federal income (loss) tax rate of 35% to income before taxes. The reasons for this difference for the years ended December 31, were as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2011. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period do not meet our projected amounts.
Management has determined, based on all available evidence, it is more likely than not that deferred tax assets of approximately $6.0 million will be realized as of December 31, 2011. As of December 31, 2010, the Company determined, based on all available evidence, it is more likely than not that deferred tax assets of approximately $4.9 million would be realized.
The components of deferred income taxes are as follows:
As of December 31, 2011, the Company had a valuation allowance of approximately $24.4 million. As of December 31, 2010, the Company had a valuation allowance of approximately $23.7 million.
As of December 31, 2011, the Company had unrestricted Federal net operating loss carryforwards of approximately $63.3 million to reduce future taxable income, which expire as follows:
As of December 31, 2011, the Company had unrestricted research and development credits of approximately $2.5 million, which expire as follows:
During 2011, approximately $1.5 million of net operating losses expired unused. During 2010, we did not have any net operating losses expire.
We have Canadian net operating losses of approximately $4.5 million which we do not expect to utilize and which are fully reserved through the valuation allowance.
We have a requirement of reporting of taxes based on tax positions which meet a more likely than not standard and which are measured at the amount that is more likely than not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits. This standard also provides guidance on the presentation of tax matters and the recognition of potential IRS interest and penalties.
During 2008, we recognized approximately $1.26 million decrease in the deferred tax asset for unrecognized tax benefits. A reconciliation of the beginning and ending amounts of unrecognized tax liability were as follows:
The Company classifies penalty and interest expense related to income tax liabilities as an income tax expense. There are no interest and penalties recognized in the statement of operations or accrued on the balance sheet.
The Company files tax returns in the United States, in the states of California, Colorado, Texas and Vermont and in several foreign countries. The tax years 2008 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject, including 2007 in California.
NOTE 10. EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing reported income (loss) available to common stockholders by weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution assuming the issuance of common shares for all potentially dilutive common shares outstanding during the period. In periods where we record a net loss, all potentially dilutive securities, including warrants and stock options, would be anti-dilutive and thus, are excluded from diluted income (loss) per share.
The following table sets forth the calculation of net income (loss) per common share:
For the years ended December 31, 2011 and 2010, we had 3,962,000 and 2,638,000, respectively, of options that could cause future dilution to our common stockholders and which were not classified as outstanding common stock equivalents of the Company. These options were excluded from the earnings per common share calculation because their inclusion would have been anti-dilutive. We also had 1,237,000 restricted stock shares/units outstanding at December 31, 2011 that were anti-dilutive. These equity awards could become dilutive in the future if the average share price increases and we generate net income.
NOTE 11. SEGMENT AND GEOGRAPHIC CONCENTRATION
Our operations are conducted through one business segment. Our business develops, manufactures and sells ferroelectric nonvolatile random access memory products, integrated products, and licenses the technology related to such products.
For the years ended December 31, 2011 and 2010, sales to our largest customer and sales by geographic are as follows:
Sales by largest customers:
Geographic area net revenue:
At December 31, 2011 and 2010, property, plant and equipment (net) relating to operations in the United States and other countries are as follows (in thousands):
NOTE 12. DEFINED CONTRIBUTION PLAN:
The Company has a cash or deferred compensation plan (the “401(k) Plan”) intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), in which substantially all employees are participants. Participants in the 401(k) Plan may make maximum pretax contributions, subject to limitations imposed by the Code, of 100% of their compensation. The Company may make, at the Board of Directors’ discretion, an annual contribution on behalf of each participant. During 2011 and 2010, approximately $93,000 and $99,000 were charged to the various income statement classifications based upon the employee’s department classification for Company contributions under the 401(k) Plan, which were paid quarterly.
NOTE 13. CONTINGENCIES
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. We cannot be certain that third parties will not make a claim of infringement against us or against our semiconductor company licensees in connection with their use of our technology. Any claims, even those without merit, could be time consuming to defend, result in costly litigation and diversion of technical and management personnel, or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us or one of our semiconductor manufacturing licensees in connection with use of our technology could materially and adversely impact the Company’s results of operations.
In June 2009, the Company received a summons by the trustee in the bankruptcy of Finmek S.p.A. and its affiliates (Finmek) to appear before the Padua, Italy court overseeing the bankruptcy. The claims of the trustee in bankruptcy are that payments totaling approximately $2.8 million made to the Company for products shipped to Finmek prior to its bankruptcy filing in May 2004 are recoverable based on an alleged awareness of the Finmek affiliates’ insolvency at the time the payments were made. After the first hearing held in 2010 and the second hearing in 2011, in 2013 all parties will submit their final motions. We intend to vigorously contest the trustee’s claims. We are unable to estimate a range of possible liability, if any, that we may incur as result of the trustee’s claims and have not recorded any expense or liability in the consolidated financial statements as of December 31, 2011.
The Company is involved in other legal matters in the ordinary course of business. Although the outcomes of any such legal actions cannot be predicted, management believes that there are no pending legal proceedings against or involving the Company for which the outcome would likely to have a material adverse effect upon the Company’s financial position or results of operations.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures and Related CEO and CFO Certifications
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In connection with the preparation of this Annual Report on Form 10-K, as of December 31, 2011, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on this evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2011 based on the criteria established in a report entitled Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2011.
Our independent registered public accounting firm, Ehrhardt Keefe Steiner & Hottman PC, has issued an attestation report on our internal control over financial reporting. The report on the audit of internal control over financial reporting appears in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
Not Applicable.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our directors is incorporated by reference from the information contained under the caption “Election of Directors” to be included in our 2012 Proxy Statement for the 2012 Annual Meeting of Stockholders. Information regarding our audit committee members, including the designated audit committee financial expert, is incorporated by reference from the information contained under the caption “Audit Committee Members” to be included in our 2012 Proxy Statement and information regarding current executive officers, is incorporated by reference from the information contained under the caption “Executive Officers of the Registrant” to be included in our 2012 Proxy Statement for the 2012 Annual Meeting of Stockholders. Information regarding Section 16 reporting compliance is incorporated by reference from information contained under the caption “Executive Compensation-Section 16(a) Beneficial Ownership Reporting Compliance” to be included in our 2012 Proxy Statement.
Code of Conduct
We have adopted a Code of Conduct that applies to all of our directors, officers and employees. This code is publicly available on our web site at www.ramtron.com. Any substantive amendments to the code and any grant of waiver from a provision of the code requiring disclosure under applicable SEC or Nasdaq rules will be disclosed by us in a report on Form 8-K.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information contained under the captions “Executive Compensation” and “Director Compensation” to be included in our 2012 Proxy Statement.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the information contained under the caption “Security Ownership of Principal Stockholders and Management” and “Equity Compensation Plan Information” to be included in our 2012 Proxy Statement.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the information contained under the caption “Certain Transactions” and “Director Independence” to be included in our 2012 Proxy Statement.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the information contained under the caption “Ratification of Appointment of Independent Auditors” to be included in our 2012 Proxy Statement.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
See index to financial statements contained in Item 8 - Financial Statements and Supplementary Data
(2) Financial Statement Schedules:
All other schedules are omitted because they are not required, or not applicable, or because the required information is included in the financial statements or notes thereto.
(3) Exhibits. The Exhibits listed on the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this report.
INDEX TO EXHIBITS
Notes to Exhibits List:
* Confidential treatment has been granted or requested with respect to portions of this exhibit, and such confidential portions have been deleted and separately filed with the Securities and Exchange Commission.
** Management compensatory plan or arrangement.
*** Submitted electronically herewith.
(1) Incorporated by reference to our Annual Report on Form 10-K (Commission File No. 0-17739) for the year ended December 31, 1996 filed with the Securities and Exchange Commission on March 26, 1997.
(2) Incorporated by reference to our Form S-1 Registration Statement (Registration No. 33-99898) filed with the Securities and Exchange Commission on December 1, 1995.
(3) Incorporated by reference to our Annual Report on Form 10-K (Commission File No. 0-17739) for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 29, 2000.
(4) Incorporated by reference to our Annual Report on Form 10-K (Commission File No. 0-17739) for the year ended December 31, 2000 filed with the Securities and Exchange Commission on March 30, 2001.
(5) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on May 9, 2001.
(6) Incorporated by reference to our Amendment No. 1 to Form 10-Q (Commission File No. 0-17739) for the quarter ended September 30, 2001 filed with the Securities and Exchange Commission on November 13, 2001, as amended on August 2, 2002.
(7) Incorporated by reference to our Annual Report on Form 10-K (Commission File No. 0-17739) for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 29, 2002, as amended on June 17, 2002.
(8) Incorporated by reference to our Form 10-Q (Commission File No. 0-17739) for the quarter ended June 30, 2004 filed with the Securities and Exchange Commission on August 12, 2004.
(9) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on September 21, 2005.
(10) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on December 21, 2005.
(11) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on January 5, 2006.
(12) Incorporated by reference to our Annual Report on Form 10-K (Commission File No. 0-17739) for the year ended December 31, 2006 filed with the Securities and Exchange Commission on February 21, 2007.
(13) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on April 4, 2007.
(14) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on May 1, 2007.
(15) Incorporated by reference to our Form 10-Q (Commission File No. 0-17739) for the quarter ended June 30, 2007 filed with the Securities and Exchange Commission on May 8, 2007.
(16) Incorporated by reference to our Annual Report on Form 10-K (Commission File No. 0-17739) for the year ended December 31, 2008 filed with the Securities and Exchange Commission on February 2, 2009.
(17) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on March 17, 2009.
(18) Incorporated by reference to our Form 10-Q (Commission File No. 0-17739) for the quarter ended March 31, 2009 filed with the Securities and Exchange Commission on May 8, 2009.
(19) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on June 29, 2009.
(20) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on August 24, 2009.
(21) Incorporated by reference to our Annual Report on Form 10-K (Commission File No. 0-17739) for the year ended December 31, 2009 filed with the Securities and Exchange Commission on February 18, 2010.
(22) Incorporated by reference to our Form 10-Q (Commission File No. 0-17739) for the quarter ended March 31, 2010 filed with the Securities and Exchange Commission on May 10, 2010.
(23) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on July 1, 2010.
(24) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on March 7, 2011.
(25) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on July 7, 2011.
(26) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on September 7, 2011.
(27) Incorporated by reference to our Form 10-Q/A (Commission File No. 0-17739) for the quarter ended September 30, 2011 filed with the Securities and Exchange Commission on November 4, 2011.
(28) Incorporated by reference to our Form 8-K (Commission File No. 0-17739) filed with the Securities and Exchange Commission on January 3, 2012.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2011 and 2010, (ii) Condensed Consolidated Balance Sheet at December 31, 2011 and December 31, 2010, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 and (iv) Notes to Condensed Consolidated Financial Statements. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 7, 2012.
RAMTRON INTERNATIONAL CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Eric A. Balzer and Gery E. Richards, his true and lawful attorneys-in-fact each acting alone, with full power of substitution and re-substitution, for him and in his name, place and stead in any and all capacities to sign any or all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.